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Treasurer Josh Frydenberg has revealed that the government will “shortly” begin consulting the mortgage industry on the drafting of the new best interests duty for mortgage brokers.
In the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was publicly released in 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.
“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 reads.
The best interests duty would not change the responsible lending obligations for broker-originated loans.
A “customer first priority” for the mortgage broking industry has already been drafted by the Combined Industry Forum (CIF), which could be extended to include a “conflicts priority rule”. The industry has previously suggested that the CIF definition could form the backbone of the broker best interests duty.
Speaking to Loan Market brokers at the group’s Game On conference in Tasmania on Monday (12 August), Treasurer Josh Frydenberg outlined the importance of creating an appropriate duty for the industry.
He said: “For most mortgage brokers, acting in the best interest of their clients is something that you do, instinctively, every day.”
The Treasurer added that mortgage broking “relies on consumers being able to trust you” and that the government and industry’s “collective goal” should be to ensure that the introduction of a best interests duty “serves as an important signal to consumers that gives them even more confidence to engage with the sector, to seek out a mortgage broker to assist them with their borrowing or refinancing needs”.
“It is, of course, critically important that we get it right,” Mr Frydenberg continued.
“The duty should not impose an unreasonable compliance burden or leave it to a ticker box approach to servicing your clients.
“The duty will also need to be able to be applied in the context of responsible lending obligations without further restricting the availability of credit,” he said.
“For all these reasons, we will shortly begin our consultation with the sector on the drafting of the best interests duty, and I look forward to receiving input from your industry bodies and from the sector more generally,” he said.
It is expected that the consultation will launch in the next few weeks.
When asked when the changes, such as the best interests duty, would take effect, Mr Frydenberg said: “In terms of the changes that we’ve committed to, the 1 July 2020 is the date that we are working to.”
The Treasurer also revealed that it would be “working closely with stakeholders, including mortgage brokers, in developing the First Home Loan Deposit Scheme to ensure it is appropriately targeted and minimizes any red tape on eligible first home buyers accessing the scheme”.
Mr Frydenberg outlined that the Minister for Housing and Assistant Treasurer, Michael Sukkar, is leading this initiative and “will provide further details ahead of the scheme’s [commencement] at the start of next year”.
Government ‘understands the important of mortgage brokers’
The Treasurer went on to tell Loan Market brokers that the government “understand[s] the importance of mortgage brokers in supporting competition in the mortgage market and helping borrowers to access finance”.
He continued: “Our focus is on restoring trust in our financial system and delivering better outcomes for consumers while at the same time ensuring that [industry] can continue to be able to deliver the financial services they need and that credit remains accessible and affordable.”
However, Mr Frydenberg urged industry to take responsibility for its future, adding that the government has “given the industry an opportunity to show that they can meet the challenge in demonstrating that it can manage any conflicts that arise from the continuation of upfront and trailing commissions”.
“It is now up to you, the industry, through its own actions to rise to that challenge and to ensure that further changes are not required beyond those that we have already agreed to implement,” he said.
He concluded: “A key part of our economic plan going forward is restoring trust in our financial system and ensuring the best possible outcome for consumers. Mortgage brokers have a particularly important role to play. They are trusted by their community. They reach out into every part of our country. And the public trust you, the industry, with the most important economic decision of their life – whether they are buying a family home or an investment.
“So, I encourage and urge you to embrace this opportunity you have been given to ensure that your very, very important industry continues to prosper and survive.”
[Related: Treasurer backs brokers and calls for action]
