BID changes could see brokers earning nothing on some loans

Previously, the duty was only legislated to cover mortgage brokers, as per the recommendation of the royal commission. However, the new proposals would see finance brokers writing consumer finance (such as car loans) under the obligation, too.

Several players in the industry – including broker associations CAFBA, FBAA and MFAA, as well as asset finance brokers – have told The Adviser that the changes Treasury has made to the best interests duty by extending the BID to all brokers writing consumer finance could have the unintended consequence of creating an unfair advantage to car dealers.

The conflicts priority rule issue

Building on these concerns, aggregation group Connective has also warned that further consideration and clarity is needed on how the conflicts priority rule (CPR) applies. 

This rule requires brokers to put the interests of the consumer ahead of their own, should a conflict arise.

According to Connective, the expanded BID could threaten the remuneration of brokers when writing consumer asset finance that are subject to flex commission structures.

In its consultation response, seen by The Adviser, the group said that while it was “generally supportive of the reforms to the consumer credit framework proposed” (namely by creating a level playing field among all brokers, removing the requirement to conduct a preliminary assessment, and providing guidance around what steps are necessary in assessing a consumer’s living expenses), it said that there were several areas that “may require further thought or consideration”.

As well as highlighting the point of sale exemption issues, Connective outlined that as the BID legislation was drafted primarily from a home loan perspective – but now applies to all forms of consumer credit – there are now issues with the interaction of the CPR and how it impacts broker remuneration for certain types of consumer asset finance.

Specifically, Connective said that the issue lies with flex commission products, which enable brokers to use their discretion to “flex down” or “dial down” the advertised interest rate of a lender by up to 2.00 per cent, in order to offer the customer a lower interest rate on their asset finance loan.

As outlined by the MFAA earlier this week, the regulators appear to back a position where brokers writing these loans would be obliged to “flex down” the commission to its lowest rate, in order to meet the conflicts priority rule under BID.

Connective stated: “Any flex down would directly reduce the broker’s commission (if the broker discounted the rate by the full 2.00 per cent, the broker would earn no upfront commission)... there is no trail commission with the products lenders offer the ability to flex down, so it is very rare that a broker would fully flex down the full 2.00 per cent.

“What concerns the broking industry is how the ability to flex down interacts with the CPR (which forms part of the new BID rules). 

“Arguably, if a broker was obliged to prioritise their customer’s interests ahead of their own, the broker would need to fully flex down the interest rate by the 2.00 per cent, resulting in the broker not earning any upfront commission for assisting on that credit product.”

The aggregation group also went on to outline that, as a growing number of lenders are introducing the ability to “flex down” as part of their offerings, this issue could become a much bigger problem. 

The group told Treasury: “Combine this with the broader application of BID and CPR to all finance brokers assisting on all consumer credit products and it may become uneconomical for a finance broker to assist consumers with products where they will be obliged to fully flex down the interest rate (and earn no upfront commission).”

While Connective acknowledged that finance brokers could implement the capped service fee (set by the lender and usually ranging between $990-$2,000 plus GST), this “would not sufficiently remunerate them for the amount of work required in order to assist their customer in a compliant manner” and “may push consumers towards going direct to lender (who are not subject to any best interests duty) or other sources where they do not receive the same level of protections (such as persons who operate under the point of sale exemption)”.

‘Horribly unfair to ask them to give up their remuneration’

Speaking to The Adviser, Connective’s group general counsel, Daniel Oh, said: “We think that to go and ask [brokers] to, basically, give up their remuneration for doing the work is just horribly unfair.

“Flex down does not operate within the residential lending space and therefore would not have been contemplated when the BID and CPR legislation was drafted.

“The original legislation was drafted with home loans in mind, and was drafted to accommodate, effectively, a home loan remuneration structure (i.e. an upfront and trail model where the upfront front is fairly commoditised and standard across the board).

“From a finance broker’s perspective, the upfront commission is a critical component of that broker’s remuneration for assisting a consumer obtain a [consumer asset finance] product.

“It would be grossly unfair if that broker were obliged to give up this remuneration to comply with rules we believe were not designed with this remuneration structure in mind.”

The head of Connective Asset Finance, Brent Starrenburg, told The Adviser that the issue could be far reaching, noting that approximately 25 per cent of the $1.6 billion written by brokers through Connective Asset Finance each year is for consumer finance with a flex down product.

Mr Starrenburg also outlined that it would create a situation where brokers may need to charge a fee to customers for these loans, which would “decimate” the industry.

“If I was a broker and say to the consumer: ‘I’m going to charge you $2,000 on top of your car loan to do this car loan for you and will take a few days to ensure I’m checking everything is in your best interests’, but the car dealer has turned around and said: ‘I’m not going to charge you an upfront fee but your monthly payments are going to be higher and you can drive away with the car today’, consumers will likely choose the latter. It will decimate this part of the industry.

“So, while we obviously support working in the best interests of the customer and making sure that they’re being protected, [the extended BID] needs to be clearer, it needs to be fairer... 

“This is an unfair situation for our asset brokers to be rolled up into, and it’s an unintended consequence. So, I think, I think a lot of clarity needs to be there and the dial down doesn't need to be touched,” the head of Connective Asset Finance said.

Connective’s response to Treasury’s consultation therefore concludes: “We ask that either Treasury or ASIC clarify that a finance broker is not obliged to discount the interest rate (where there is an ability to flex down) in order to comply with the CPR.

“It cannot be a good outcome for that consumer to obtain financing through the relevant car dealer’s finance desk (who are not subject to the NCCP due to the point-of-sale exemption) who could possibly be motivated to capture the sale for the dealership and is dealing with a consumer who just wants to drive home with their new car.

“It is difficult for a finance broker to compete against this when they are required to conduct processes and collect documentation in order to comply with their BID obligations (which is an imposition on the consumer and could delay the process of obtaining financing to purchase the car).

“Until the point-of-sale exemption is removed, this unfair playing field will remain and, from a consumer’s perspective, less protection afforded to them.”

[Related: Association heads call for POS conflict resolution]