Best interests duty will ‘help’ broking industry

The draft bill contains a new principles-based best interests duty obligation on mortgage brokers, as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission.  

The exposure draft bill also makes changes to mortgage broker remuneration by: requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount and banning campaign and volume-based commissions and payments; and capping soft dollar benefits, among other changes.

It is expected that the new bill will come into force by 1 July 2020.

The role of clawback and trail

In Friday’s episode of Life Matters, titled “Mortgage brokers – are they worth it?”, Mr Mackenzie focused on broker commissions and their future and also sought to understand the impacts of the new best interests legislation being put into place.

Mr Mackenzie asked the FBAA director what kinds of commissions are being paid by lenders to brokers, whether trail commissions were in the best interests of customers and whether it was disincentivising brokers from providing alternative mortgage products to their clients at the annual review.

After clarifying the history and reason for paying trail, Mr White suggested the clawback provision (rather than trail) could be seen as a disincentive for brokers to suggest alternative products – as was identified by the Productivity Commission’s report into Competition in the Australian Financial System last year.

Mr White said: “I’ve been championing industry for at least 15 years to have clawbacks removed… The Productivity Commissioner identified this last year (and I sat on the public hearings for that) in regards that clawback could risk a potential disincentive for brokers to act in the best interests of their clients to move them from one lender to another.

“The simple, practical reality is that that actually doesn’t happen,” he added, “but the risk does stand there so that is very valid.” 

“The actual provision of having a clawback in place doesn’t disincent[ivise] a broker from doing the right thing by the client because the reality, at the end of the day, is that when the loan get refinanced somewhere else, they get another upfront fee, so the commission structure rolls again. So, what they lose from a clawback they actually get back from the upfront from the new loan and it nets itself out to neutral cost.”

Mark Humphery-Jenner, associate professor of finance at the University of New South Wales, was asked whether he believed it was currently difficult to understand commission fees being paid to brokers, to which he said that while “it is a little bit opaque with all these different type of fees or arrangements that exist” and can be “a little bit difficult to work out who is paying whom and when mortgage brokers are actually working in your best interests”, these were issues that the new regulatory framework was attempting to address.

However, he added that the brokers were already incentivised to work in their clients’ best interests as commissions paid by lenders are largely the same and that – as the majority of broker clients come from word-of-mouth referrals and repeat business – they do not want to “alienate existing clients”. 

He therefore suggested that the incentive to gain repeat business through good customer service was therefore a stronger incentive for brokers.

He continued: “Mortgage brokers are implicitly incentivised through the commercial realities of how they operate to act in your best interests in general terms.”

Both Mr White and Mr Humphery-Jenner welcomed the move to legislate against soft dollar benefits, with Mr White stating that volume and soft dollar payments had ceased in practice in industry several years ago, but that the regulation was just now catching up to enshrine this in law so was therefore “an after-event issue”.

Likewise, the UNSW associate professor noted that soft dollar benefits paid by lenders to brokers could be deemed to be a conflict of interest, and this was the reason why they have been filtered out of industry. 

He suggested that the new legislation was therefore formalising this change into law to “address and ameliorate those concerns to create additional confidence in the industry”.

“Even if brokers aren’t doing the wrong thing, making sure that the public has confidence that they are acting in your interests is really what the legislation is designed to do.”

When asked whether he believed that the federal government reforms around mortgage brokers, such as higher fines and the removal of soft dollar benefits, go “far enough”, Mr Humphery-Jenner said he believed the regulation around soft dollar benefits was “in general terms, solving a problem that perhaps was a fear that the community had but was perhaps a little bit overstated in some respects”.

“The mortgage broking industry in general terms is reasonably well run, and while there are fears that mortgage brokers don’t always act in clients’ best interests, oft times they are incentivised to do so just through the commercial realities of how they operate,” he said.

“So, the regulatory framework will add a lot of confidence to the industry and in many respects might actually help the industry by ensuring that consumers know that mortgage brokers will be acting in their best interests and backing up any violations with penalties. So, in broad terms, it does actually go a long distance towards satisfying any of the concerns that exist.”

The comments around the new best interests duty and legislative changes come following a consultation on the draft National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019, which several industry heads have said requires further clarification.

[Related: Trail ‘at risk’ in best interests duty bill]