Final call: Best interests duty submissions due today

The draft bill was introduced in late August and contains a new best interests duty obligation on mortgage brokers, as recommended by commissioner Kenneth Hayne in the final report of the banking royal commission.  

The proposed amendment to NCCP states that brokers “must act in the best interests of consumers when giving credit assistance in relation to credit contracts”, meaning:

• Where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts.
• Mortgage brokers and mortgage intermediaries must not accept conflicted remuneration – any benefit, whether monetary or non-monetary that could reasonably be expected to influence the credit assistance provided or could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary.
• Employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries.

The draft bill notes that the duty to act in the best interests of the consumer in relation to credit assistance is a “principle-based standard of conduct” and “does not prescribe conduct that will be taken to satisfy the duty in specific circumstances”.

“It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances,” the bill states.

The bill also states that the content of the duty “ultimately depends on the circumstances in which credit assistance is provided”.

Examples of such content cited in the draft bill include:

• Prior to the recommendation of a credit product, it could be expected that the mortgage broker consider a range of such products (including the features of those products) and inform the consumer of that range and the options it contains.
• Any recommendations made could be expected to be based on consumer benefits rather than benefits that may be realised by the broker (such as commissions).
• In cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.
• A broker would not suggest a white label home loan that has the same features as a branded product from the same lender but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product.
• During an annual review, a broker would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests.

In addition to the new best interests obligation, the draft bill requires a mortgage broker to “resolve conflicts of interests in the consumer’s favour”.

The bill states that “if the mortgage broker knows, or reasonably ought to know”, that there is a conflict between the interests of the consumer and the interests of the broker or a related party, the mortgage broker “must give priority to the consumer’s interests”.

Remuneration reform

The draft bill also builds on remuneration reforms proposed by the Combined Industry Forum, which includes:

• requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount;
• banning campaign and volume-based commissions and payments; and
• capping soft dollar benefits.

The proposed regulations also limit the period in which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawbacks being passed on to consumers.

Industry response

Broking industry stakeholders largely welcomed the draft bill.

CEO of the Mortgage & Finance Association of Australia Mike Felton noted that with the broking industry “systemically important to the Australian economy”, it is “appropriate” that the industry’s practices be regularly reviewed by government and regulators.

However, some stakeholders, including mortgage aggregators Connective, Loan Market and AFG, revealed that they’d use the consultation process to lobby for more equitable remuneration arrangements between lenders and brokers.

Connective director Mark Haron noted the impact of contrasting remuneration policies adopted by the lenders off the back of the CIF’s move to limit the upfront commission paid to brokers to the amount drawn down by borrowers (net of offset).

Mr Haron said that some lenders had opted to withhold the payment of commission for additional funds arranged by a broker, which are utilised by a borrower after a pre-determined period post-settlement.

The Connective director added that the disparity in the application of the CIF reforms had increased risks of “lender choice conflicts”, which could hinder compliance with the newly proposed best interests duty.

Loan Market executive chairman Sam White also noted his concerns with existing net of offset arrangements.  

Mr White called for an arrangement that better aligns with existing clawback provisions, which, under the federal government’s newly proposed bill, would limit the clawback period to two years.

The new provisions are scheduled for implementation by 1 July 2020.

[Related: Net of offset provisions should mirror clawback provisions]