Commissioner Hayne has recommended that the law be amended to include a best interests duty for mortgage brokers in his long-awaited final report.
In his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed to the Governor-General on Friday (1 February) and publicly released on Monday (4 February), Commissioner Kenneth Hayne recommended that the Corporations Act be amended to include a best interests duty for mortgage brokers, with a civil penalty provision.
He explained that, currently, stating an opinion about a mortgage is not considered giving “financial product advice” or personal advice under Chapter 7 of the Corporations Act.
However, as mortgage brokers are considered “credit assistance providers” or “credit representatives” – either directly holding an Australian Credit Licence (ACL) or operating under the ACL of a mortgage aggregator – they do have obligations under the National Consumer Credit Protection (NCCP) Act 2009.
ACL holders, for example, are required to have in place “adequate arrangements to ensure that clients… are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives”.
But the commissioner questioned whether, in the absence of a best interests duty, there is a gap between what a borrower expects a broker to do and what they require a broker to do.
While he argued in the report that the best interests duty for financial advisers has not been effective in managing conflicts of interest (for example, in vertical integration), he suggested that mortgage brokers should still be bound by the same duty due to the “advisory role” they play, taking into account the borrower’s “objectives, financial situation and needs”.
“Borrowers look to mortgage brokers for advice about how to finance what is, for many borrowers, the most valuable asset they will buy in a single transaction. And brokers not only give advice about what they think is best for the borrower, they submit the loan application on the borrower’s behalf and, to the extent the terms are negotiable, negotiate the terms of the loan for the borrower,” the final royal commission report states.
He suggested that the best interests duty for mortgage brokers come into effect after “a sufficient period of transition”.
While the commissioner recommended introducing a bests interests duty similar to the one imposed on financial advisers, the Department of Treasury pointed out in a background paper to the Hayne royal commission that replicating the duty might not be effective given “differences between brokers and financial advisers, and the existence of responsible lending and other obligations.”
Noting that brokers in other countries have a best interests duty (such as the United Kingdom and New Zealand), the Treasury report said there may be an “in-principle case” for introducing a duty for brokers to act in the interests of their customers.
“While responsible lending obligations provide protection against customers being recommended loans that are too large or otherwise not suitable for them, the purpose of a positive duty would be to counteract incentives to, for example, recommend a particular lender and loan type because the commission available to the broker is higher or because the loan is an in-house or white label product,” the report states.
However, any such change would need “careful consideration” to ensure it “avoids unnecessary compliance costs”, according to the Department of Treasury.
The Australian Securities and Investments Commission (ASIC) in its own submission to the Hayne royal commission was in favour of introducing an additional best interests duty for brokers.
“The risks of poor outcomes from the payment of mortgage broker commissions could be mitigated by a combination of broker-specific responsible lending obligations (which would be in addition to existing responsible lending obligations for lenders), restrictions on, or a complete prohibition of, conflicted remuneration, and a best interests duty,” ASIC’s submission states.
Specifically, ASIC said that its view is that the content of this duty “should be expressed as a broad statement of principle, such as an obligation ‘to act in the best interests of the consumer in the selection and arranging of loans’ (i.e. it would have a broad application similar to the statutory obligation to act efficiently, honestly and fairly, and act as a guiding principle for the conduct of the broker across all their dealings with consumers)”.
Major banks also pointed out in their submissions to the royal commission that a “customer first duty” for the mortgage broking industry has already been crafted by the Combined Industry Forum (CIF), with National Australia Bank saying it “establishes a positive, objective, measurable test and, if appropriately applied, will result in an outcome that is in the interests of the customer”.
It additionally pointed out that the CIF’s customer first duty incorporates a “good customer outcome” definition that would hold the mortgage broking industry to a higher obligation than the current “not unsuitable” obligation.
The definition includes that the loan is of appropriate size and structure, meets the customer’s requirements and objectives, affordable for the customer, and applied for in compliance with responsive lending requirements.
Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.
Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.
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