Best Interests Duty Bill formally passed

The bill implements recommendations 4.7 and 4.2 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by amending the National Consumer Credit Protection Act 2009 (Credit Act) and the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (TCP Act).

It amends the Credit Act to:

• require mortgage brokers to act in the best interests of consumers; and

• address conflicted remuneration for mortgage brokers

The mortgage broker reforms only amend the Credit Act and do not apply to the provision of credit to businesses.

Best Interests Duty

The best interests duty and the responsible lending obligations are separate obligations that operate alongside each other and apply every time credit assistance regulated by the Credit Act is provided by a mortgage broker.

The obligations apply in relation to credit assistance provided by mortgage brokers in relation to any credit contract.

"This ensures that when mortgage brokers deal with consumers in relation to mortgages, the broker must act in the best interests of the consumer not only in relation to the mortgage but also in relation to any other credit contracts for which they provide credit assistance. Examples of other credit contracts in relation to which a mortgage broker may provide credit assistance include credit cards and personal loans that are packaged with the mortgage as well as unsecured credit for home renovation," the explanatory memorandum reads.

It goes on to outline that the new best interests requirements mean that there may be circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with. "For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s best interests," it reads. 

Conflicted Remuneration

The amendments also require credit representatives to give priority to the consumer’s interests if they know that there is a conflict between the interests of the consumer and their own interests.

A licensee must take reasonable steps to ensure that the credit representative complies with the ban on accepting conflicted remuneration. 

Any failures to meet the best interests or conflicted remuneration obligations will incur a maximum civil penalty of 5,000 penalty units (equating to $1,050,000).

The bill will formally become law once it receives royal assent and comes into force.

The new obligations will apply to mortgage brokers from 1 July 2020.

“The bill largely puts in place various recommendations of the Hayne RC – with one exception. The broad power to make regulations about what is, or is not, conflicted remuneration and the circumstances in which conflicted remuneration must not be accepted or given could seriously undermine the intention of recommendation 1.3 of the Hayne RC [royal commission],” this week’s Bill Digest reads.

Recommendation 1.3 was the call for the borrower, not the lender, to pay the mortgage broker a fee for acting in connection with home lending.

What the bill entails

Speaking in Senate on Wednesday night (5 February), Senator Richard Colbeck (Liberal Party senator for Tasmania) stated: “Schedule 3 of the bill introduces a best interests duty for mortgage brokers that will ensure that consumers’ interests are prioritised when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009.

“The government is also reforming mortgage broker remuneration, and the bill provides for a regulation making power to this end. The regulations will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount, ban campaign and volume-based commissions and payments, and cap soft dollar benefits.

“Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited. After careful consideration, the government decided to delay consideration of aspects of commissioner Hayne’s recommendations for mortgage brokers – namely, moving to a borrower-pays remuneration structure – until a review is carried out in three years’ time.

“That review will be conducted by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC). It will examine the impact of the recommendations that have been agreed to and implications for consumer outcomes and competition of moving to a borrower-pays remuneration structure for mortgage broking.

“Implementation of these reforms, as recommended by the royal commission, is a critical component of restoring trust and confidence in Australia’s financial system and is part of the Morrison government’s plan for a stronger economy.”

Treasurer Josh Frydenberg noted the passing of the legislation on Thursday, stating: “Through our actions since commissioner Hayne’s final report was released, the government has now implemented 24 commitments and has substantially progressed a further 35, which have been, or are currently being, consulted on ahead of their introduction.

“The government is taking action on all 76 recommendations contained in the final report of the royal commission and, in a number of important areas, is going further.

“Significant progress has been made in implementing our commitments, and we are on track to meet our accelerated implementation plan, which will see more than 50 commitments, close to 90 per cent, implemented or have legislation before Parliament by mid-2020,” he said.

Treasurer defends bill

Mr Frydenberg had previously dismissed calls for greater detail regarding the definition of “conflicted remuneration” to be included in the government’s proposed legislation.   

In December, the Senate’s standing committee for the scrutiny of bills called for the incoming best interests duty – proposed under the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019 – to be updated to clearly outline what constitutes conflicted remuneration and the circumstances in which it is banned.

The government’s proposed bill defined conflicted remuneration as any benefit, whether monetary or non-monetary, that is:

• given to a licensee, or a representative of a licensee, who provides credit assistance to consumers that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the credit assistance provided (including, therefore, the choice of credit contract or credit provider or the choice of whether to provide credit assistance or not); or
• given to a licensee, or a representative of a licensee, who acts as an intermediary and because of the nature of the benefit of the circumstances in which it is given, could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary.

However, the Senate’s standing committee for the scrutiny of bills was not satisfied with the current definition, arguing for the legislation to be amended to specifically outline what constitutes conflicted remuneration and the circumstances in which it is banned, unless a sound justification is provided. 

Mr Frydenberg’s response to the Senate committee has now been released, showing that he dismissed its call for further legislative detail.

Mr Frydenberg said the responsibility to provide such clarification should remain in the hands of regulatory bodies, which he claimed would be better equipped to “account for the variety of and complexity of benefits that may be given to mortgage brokers and mortgage aggregators” and the “variety of situations in which such payments may be given”.

“Under these circumstances, the ability that the regulation-making power provides for the regime to respond to changes in industry practice and to ensure that the new regime operates for the benefit of consumers is important,” Mr Frydenberg said.

The Treasurer added that legislative amendments to include further detail would not be justified, given that the bill includes provisions concerning other financial services professionals.

“If these matters were to be inserted into the National Consumer Credit Protection Act 2009 (the Act), they would insert, into an already complex statutory framework, a set of technical and specific provisions that would apply only to a relatively small group of persons,” he said.

“This would result in additional cost and unnecessary complexity for other users of the act.”

On civil penalties for breaches

In its criticism of the government’s legislation, the Senate committee also noted that its concerns regarding a perceived lack of clarity around the definition of conflicted remuneration were “further heightened” by the high civil penalties that can be imposed.

The bill proposes a civil penalty of 5,000 penalty units for breaches.

Mr Frydenberg acknowledged the committee’s concerns but stated that the penalties prescribed “represent maximum penalties” and would be “consistent with other civil penalty provisions in the act”.

“This is consistent with the scheme of the act, which holds these persons to high standards of accountability, in recognition of the responsibilities that accrue to holding a credit licence or to being authorised as a credit representative,” he added.

The industry is still awaiting guidance regarding the government’s proposals from the Australian Securities and Investments Commission, which was initially expected in late 2019.   

More to come.

[Related: Senate committee calls for best interests duty clarification]