A financial advisers association has issued a strong warning against the premature implementation of best interests duty reforms, calling on the federal government to extend the consultation process.
Treasury has released submissions from its first round of consultation on the federal government’s best interests duty bill.
Among the stakeholders to consult with Treasury regarding its proposed reforms was the Association of Financial Advisers (AFA), which has sought to provide guidance that draws on the experiences of the financial advice sector following the implementation of its own best interests duty.
In its submission, the AFA has urged the federal government to extend the consultation process for its mortgage broking reforms, stressing the importance of clarity regarding the specific obligations of stakeholders prior to implementation.
“Whilst it seems that it is easy to recommend that mortgage brokers be bound by a best interests duty, in reality it is much more complicated to implement such a recommendation,” the AFA stated.
“[The] experience with the application of the best interests duty for financial advisers should stand-out as a strong warning that this is much more difficult and complicated than would be suggested by a simple statement in a royal commission final report.”
The AFA noted that given that most home loans are originated through the broker channel, prospective reforms, including the best interests duty, should carefully examine the implications of changes to the law, which, as acknowledged by the royal commission, could affect “access to and the cost of financial services for consumers, for competition in the financial sector and for financial system stability”.
The AFA continued: “Until this is acknowledged and taken seriously, then it seems likely that we will continue to see this complete failure to follow due policy process.”
The association also pointed to page 72 of the royal commission’s final report, in which commissioner Kenneth Hayne stated that the best interests duty for mortgage brokers “is not an obligation that should affect the practices of lenders and, accordingly, it is not a change that should affect the price or the availability of credit”.
According to the AFA, such a statement has failed to recognise that recommendations like the best interests duty, which impact the cost of distribution of credit, “will also impact the availability of credit”.
“We would suggest that an honest assessment of the implications of this reform would require consideration of systems changes, process changes, documentation requirements, cost implications, mortgage broker and staff training, and audit processes,” the AFA added.
“Once again, we find it totally remarkable that there is no discussion of the implications of any of these factors.”
In light of its concerns over the hasty implementation of the best interests duty on mortgage brokers, the association has recommended that the commencement date be deferred from 1 July 2020, as currently proposed.
“In the context that this is unlikely to be legislated by the end of the year, this will leave a ridiculously short implementation time frame,” the AFA stated.
“Does the government seriously want to put 60 per cent of the home loan market in jeopardy by imposing a completely new obligation with no guidance, in an unachievable time frame?
“In our view, this is totally impractical.”
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 stakeholders have said would be “almost as crucial as what’s in the legislation”.