Several industry heads have suggested that more engagement is needed to ensure that the new best interests obligation does not put mortgage brokers at a competitive disadvantage or place consumers at risk.
On Thursday (28 November), Treasurer Josh Frydenberg tabled the new legislation that includes the “best interests duty” obligations placed on mortgage brokers and mortgage intermediaries and forbids mortgage brokers and mortgage intermediaries from accepting “conflicted remuneration”.
Several members of industry have tentatively welcomed the tabling of the bill, stating that the duty would provide brokers with an upper hand over the proprietary channel.
The managing director of the Finance Brokers Association of Australia, Peter White, told The Adviser: “There is certainly a very big value proposition for brokers going forward in that this new duty means that mortgage brokers are, unquestionably, acting in a consumer’s best interest. Brokers do this anyhow, but this bill just puts a regulatory validation on the great work brokers already do today. It will be something that they can actually publicly tout; they are working in the best interests of the client.
“You can’t say that about your banker. None of the banks can demonstrate that they are acting in the best interests of their clients. It was a lack of transparency that cracked the banks during for the royal commission. We need to be transparent. And this is what this [new duty] does,” Mr White continued.
“I actually think this is a great step to increase our market share.”
Sam White, executive chairman of Loan Market, echoed these sentiments, stating that he believes the incoming duty will “spur the next wave of growth for our industry, taking broker market share to up to 70 per cent as customers seek out brokers who act in their best interests rather than a branch manager who works in the interest of the bank”.
Likewise, Aussie’s chief customer officer, David Smith, particularly welcomed the changes in the legislation that “remove the potential for best interests duty and the conflicted remuneration provision to operate retrospectively”.
“This reflects the pragmatic and consultative approach taken by Treasury in working with industry to achieve both a positive and workable legislation,” he said.
Both Loan Market and Aussie noted that they are building processes and preparing changes to ensure their brokers meet the BID obligations and continue to provide good customer outcomes.
Ongoing work needed to even the playing field and protect consumers
However, while the industry has welcomed the sentiment behind the new duty, there remain some questions over the application of the law, given the legislation’s wording.
As many aggregator and association groups outlined in their responses to the draft legislation, the new bill only relates to credit assistance provided by a mortgage broker (those that carry on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property).
This wording could therefore create an uneven playing field as it would not apply to brokers or credit representatives that do not “carry on” a mortgage broking business (i.e. finance brokers) even if they offer mortgage broking services.
Connective director Mark Haron told The Adviser: “Consumers who use a broker [that] is not classified as a mortgage broker (but one who still writes the odd home loan), would probably expect that the broker would be acting in their best interests duty as they are getting a home loan, but that wouldn’t be the case.
“So, it’s creating an uneven playing field when it comes to the application of the best interests duty. My big concern is that there are some consumers that are going to be exposed to unscrupulous characters that are going to use this as a loophole to provide home loans and other consumer products and avoid having a best interests duty in the process,” he said.
Likewise, the CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said the association “remain[s] concerned that in some areas, the draft regulations governed by this legislation will not serve consumers’ interests or be aligned to government policy”. These concerns included that the best interests duty should “be regulating the activity, not the person”.
“When a consumer receives credit assistance from a broker in relation to a mortgage over residential property, they should expect the broker to be covered by the best interests duty. A broker activity test will ensure this is the case,” Mr Felton told members.
Both Mr Felton and Mr Haron also noted that the best interests obligation applies to credit assistance provided by mortgage brokers in relation to any credit contract (such as credit cards or personal loans), not just mortgages.
The MFAA head said this would “unnecessarily complicate the broker’s primary function of arranging an appropriate mortgage”.
Both he and Mr Haron added that the extension of the duty to other products could therefore have the unintended consequence of seeing mortgage brokers cease offering personal loan or credit card services, due to the added time and administrative burden – and instead refer these out to external parties (who will not be covered by the best interests duty).
“This is likely to incentivise brokers to stop providing credit assistance in relation to these products to avoid regulations they can’t reasonably meet, which is not a good outcome for consumers.
“If these ancillary products are to be included in the duty, it is essential that the application of the new rules to these products is subsidiary to the primary objective, which is to obtain an appropriate home loan,” Mr Felton said.
Meanwhile, the Connective director added: “Consumer groups have been lobbying for the best interests duty to apply to all consumer regulated lending a mortgage broker undertakes. Their argument is that, if a customer is going to a broker for a best interests duty on a home loan but not on the other products, that would be confusing for the customer.
“What the consumer groups have done is create a [situation where] they’ve left a whole bunch of people that are going to get home loans from a non-mortgage broker exposed, because they will not be covered by the best interests duty.
“I don’t believe that some of these consumer groups are necessarily acting in the consumers’ interest at all. They’re just wanting to attack and target mortgage brokers and they’re doing that and leaving the consumer – who they say they are trying to protect – exposed,” he said.
The MFAA highlighted other issues that it would also be seeking further clarity on: whether the duty only applies to the point in time when credit assistance is provided, or for the life of the loan; the potential for introducing a materiality threshold and “reasonable broker test” for refinancing; and further guidance on meeting the duty BID in both the regulations and/or ASIC regulatory guidance.
It is believed that the industry will continue to lobby for additional amendments to the bill as it goes through the Senate process.
Mr Felton concluded: “It is only once the final regulations have been released that we will be able to assess if the [issues] have been appropriately addressed.
“While there is a lot of detail here, we believe the overall progress we have made is positive and we are continuing to have open and constructive dialogue with Treasury and government to address the remaining issues with the common goal of improving consumer outcomes.”
The FBAA’s Peter White added: “One important thing to remember is that this bill has been tabled, it hasn’t been passed. So, we need to wait for it to be debated and for it to be passed before this comes into effect.
“In terms of the first reading, a lot of it is as expected, but there are some areas there that I think we need to spend a bit more time on.
“But at the end of the day, I think that the most important thing for brokers going forward is to use this as a positive sell.”
More guidance around how the best interests duty applies in practice is expected to be released by ASIC before the end of the year, which Mr Haron said would be “almost as crucial as what’s in the legislation”.
Loan Market’s Sam White said his group would “continue to work with ASIC, the MFAA and other industry leaders in understanding how the legislation will be interpreted and a framework developed”.