Risks flagged amid lending policy changes

The new code, approved by the Australian Securities and Investments Commission (ASIC) in August 2018, include new protections for vulnerable customers, small businesses, guarantors and co-borrowers, with changes to take effect on 1 July 2019.

Several lenders, including NAB and Westpac, have informed brokers of their obligations to assist in meeting their obligations under the new code, which includes the provision of additional documentation to ensure clients are fully aware of the ramifications of the choices they make throughout the home loan application process.   

Echoing concerns raised by the managing director of the Finance Brokers Association of Australia (FBAA), Peter White, the CEO of the MFAA, Mike Felton, has also voiced his reservations on the matter.

Mr Felton particularly noted the lack of broker consultation involved in the implementation process, stating that the code’s requirements regarding vulnerable customers are being “interpreted and implemented in a piecemeal manner” by different lenders, with some also requiring declarations or attestations to be signed by brokers.

“While we support the objectives of the code, these new requirements come with significant unintended consequences that could create poor outcomes for customers, potential financial exclusion, risk for the broker and potentially far-reaching legal problems for all parties,” Mr Felton said.

“Under the new rules imposed by some lenders, brokers will be required to conduct an assessment of a customer’s potential vulnerability, and in some instances, sign a declaration on the broker disclosure that there are no signs of financial abuse.

“It is not clear what would happen in a case where a broker gets it wrong.”

The MFAA has sought interim legal advice from which it was informed that requiring brokers to report suspected financial abuse to lenders could be a breach of the broker/customer relationship and may raise privacy issues.

The industry association added that it would be “inappropriate” and “impractical” to impose a higher standard on brokers, given that brokers may not know about financial vulnerability unless they are told by the client themselves.  

The MFAA’s legal advice has also suggested that if a broker were to sign a declaration regarding whether there is abuse, it is likely that this activity would not fall within the occupation of a mortgage broker and would not be covered under a broker’s Professional Indemnity (PI) policy.

The MFAA has advised its broker members that they should not sign the declaration unless they feel “adequately equipped to make an assessment and determination in relation to these issues for that individual customer”.

The association added that if brokers sign the declaration, they must be aware of the implications if they make an error, as it is unlikely their PI will cover them.

“We are strongly aligned with the objective of the code, which is to create better customer outcomes,” Mr Felton continued.

“Brokers have a relationship with, and are the primary contact point for, approximately 60 per cent of all new mortgage customers and accordingly have a significant role to play in protecting vulnerable customers.

“However, mental health and domestic violence are complex areas. Brokers are not trained counsellors and therefore cannot be expected to perform psychological assessments.”  

He added: “In addition, requiring untrained people to question and assess potential abuse may cause further damage and abuse to the victim.

“These situations of abuse need to be treated extremely delicately and brokers are not equipped with the necessary skills.”

Mr Felton said the MFAA would work with the ABA to ensure that stakeholders adopt a “careful” approach to provisions of the new code concerning vulnerable customers.

The MFAA is seeking for the implementation date on provisions concerning vulnerable customers to be delayed, to provide the industry with enough time to work through the legal issues.

“The requirements of brokers must be reasonable and standardised across the industry to the greatest extent possible so that brokers can ensure they are able to comply,” Mr Felton said.

“We will need to work with the ABA and consult with industry to agree on a guidance document that details requirements and how brokers can reasonably meet them.

“This implementation will also require an appropriate, industry-wide education program for brokers, ‘best endeavours’ language on broker disclosures rather than attestations or declarations, and a realistic timeline for a phased approach.”

The MFAA CEO concluded by noting that the code must be implemented without “creating undue and additional legal risk for brokers”.

“We will continue to work with the ABA and with industry on this issue and are confident of an appropriate outcome, but it is clear to the MFAA that it will take time to implement the code in a sustainable and sensible manner, and there should be a realistic time frame to produce a standardised industry guidance and education so brokers have the best possible chance of meeting these new requirements in a manner that enhances the customer outcome.

“The MFAA will update the industry, regulators and stakeholders on our progress on this issue.”

[Related: Westpac introduces changes to lending policy]