Industry associations and broking industry stakeholders have reacted to the federal government’s newly proposed best interests duty.
Earlier this week, the Morrison government introduced the National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 – containing a new bests interests duty obligation on mortgage brokers, as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission.
The bill states that brokers “must act in the best interests of consumers when giving credit assistance in relation to credit contracts”, meaning:
- Where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts.
- Mortgage brokers and mortgage intermediaries must not accept conflicted remuneration – any benefit, whether monetary or non-monetary that could reasonably be expected to influence the credit assistance provided or could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary.
- Employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries.
As an extension to the best interests duty, the bill builds on remuneration reforms proposed by the Combined Industry Forum, which includes:
- requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount;
- banning campaign and volume-based commissions and payments; and
- capping soft dollar benefits.
The proposed regulations also limit the period over which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawbacks being passed on to consumers.
Industry stakeholders have largely welcomed the new draft bill and are in the process of consulting with brokers before sending submissions to Treasury.
Speaking to The Adviser, managing director of the Finance Brokers Association of Australia (FBAA) Peter White said that while he is not surprised by the contents of the draft bill – which is in line with the recommendations of the royal commission – he was surprised by the timing of the release.
“My concern is that originally this was a piece of work that could have extended to the second half of next year, so trying to push it in to be done before the end of this year, I hope, doesn't become a reckless exercise,” he said.
“The thing that we can’t afford is for the best interests duty to wind up being [a] waste of time [and] becomes a piece of work that isn’t properly structured due to narrow time frames and then needs amendment after amendment, which means it was poor legislation to start with.”
“The consequence of a breach of that framework is a civil penalty so it has to be right and if it’s not, it’s going to get objected to and there’s going to be a lot of push back.”
He added: “As much as the government would want to see this done by Christmas, I would hope that it’s not a fool’s journey and that we give it the appropriate amount of time it deserves to ensure that it has the best outcome for borrowers and for the industry.”
The FBAA head encouraged brokers to send submissions to Treasury during the consultation period.
CEO of the Mortgage and Finance Association of Australia (MFAA) Mike Felton also acknowledged the bill, noting that with the broking industry “systemically important to the Australian economy”, it is “appropriate” that the industry’s practices will be regularly reviewed by government and regulators.
Mr Felton told members that the industry association is currently seeking legal advice in relating to the provisions of the bill and would broadly consult with stakeholders before submitting recommendations to Treasury.
“We are in the process of arranging broker regulatory roundtables to talk through any potential unintended consequences identified and to garner further broker feedback,” he said.
“Aggregators will also be consulted through the MFAA’s National Aggregator Forum.
“As we gather feedback, we will be consulting with Treasury on any concerns, and the MFAA will be making a written submission to Treasury by 4 October 2019.”
Aussie Home Loans
Aussie Home Loans’ chief customer officer, David Smith, also welcomed the bill, adding that the brokerage has always sought to prioritise the needs of borrowers ahead of commercial interests.
“Aussie Home Loans has always put the best interests of customers as our major priority, and the bill is confirmation of this operating philosophy and system,” he said.
“Aussie welcomes the federal government’s recognition of brokers’ role in ensuring of competition in the home lending sector and the consultation it has had with Aussie and the rest of the industry before introducing the bill.”
He added:“Aussie has a panel of 24 lenders and we don’t favour one lender over another based on commercial factors, when providing our customers with a broad range of options in finding a right outcome for home loan financing.
“We look forward to consulting further with the federal government and regulators to ensure a great outcome for customers and mortgage brokers.”
While welcoming the draft bill, AFG CEO David Bailey said the industry has already taken steps to introduce clearer guidance relating to the obligations of a broker towards their borrowers via the Combined Industry Forum.
“Industry has already moved on defining ‘good customer outcomes’, and we see the formalisation of a ‘best interests’ duty as an extension of the work that is underway,” he said.
“We have always maintained that it is in a broker’s best interests to ensure the customer’s needs are placed first and foremost, without that focus a broker would not have a sustainable business.”
Mr Bailey also noted the industry’s work to reforming remuneration arrangements.
“Industry is well advanced on implementing these changes after a comprehensive industry-led process that started over two years ago,” he said.
He concluded: “We look forward to working with the government on the detail of the draft bill to ensure the effective force mortgage brokers deliver to competition, choice and lower borrowing costs is maintained.”
Executive chairman of Loan Market Sam White also welcomed the bill but stressed the need for clarity.
“We are keen to see clarity provided for brokers – if it’s too nebulous, the risk is that there is uncertainty,” he said.
“We’re working through the detail now and will be workshopping with brokers and the industry over the coming weeks in order to submit our recommendations to Treasury.”
Mr White added that Loan Market has sought to ensure that its business model is structured in a way that minimises risks of potential conflicts of interests.
“At Loan Market, we’ve always structured our business around putting the broker in a position where they do act in their client’s best interest – this has always been our client philosophy,” he said.
“These changes are another way of enshrining it into the laws that govern the broader industry and the reason why we have avoided structures and incentives such as differential splits for in-house products, conference incentives based on sales of in-house products, and volume incentives for individual brokers for writing specific products.”
He concluded: “This [bill] is a good move for the industry and for Australians. It will reinforce the benefits of working with a broker and be one of the catalysts that moves mortgage broker market share up from 55 per cent to beyond 70 per cent in the coming years.”
A Connective spokesperson has told The Adviser that the aggregator is currently consulting with its broker network to before lodging a submission to Treasury.
“Connective looks forward to working with Treasury and its industry partners during the consultation process in developing this new piece of legislation to ensure it is appropriate and workable for our industry,” the spokesperson said.
“Over the next couple of weeks, we will be reaching out to our brokers to seek their views on the proposed legislation as part of developing our response to the draft legislation.”
The consultation period is currently open and will close on 4 October.
The new provisions are scheduled for implementation by 1 July 2020.