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Using property developers as referral partners could be an ethical conflict of interest according to the MFAA and leading industry figures.
Speaking with The Adviser, MFAA CEO Phil Naylor said brokers entering into a referral agreement with developers need to ensure they are compliant with industry standards.
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“The big danger is that the broker may be putting themselves and the developer first, before the client,” he said.
“That’s why it’s so important under our code of practice, but also under the responsible lending provisions in the NCCP, that brokers have to be very careful to avoid a conflict of interest.”
The use of developers as referral partners is widespread in the industry and carries a high level of risk, Mortgage Choice CEO Michael Russell told The Adviser.
“To date, all Mortgage Choice franchisees are actually prohibited from referring their clients to property investment specialists and builders because of the risks associated,” he said.
However, Mr Russell did note there were opportunities.
“With proper client acknowledgment and disclosure, an approved panel of builders and developers and the addition of suitable professional indemnity insurance, these risks can be substantially mitigated," he said.
"This is what Mortgage Choice is presently working through for its investor clients.”
Legal experts agree that these types of referral partnerships are above board, provided brokers remain transparent.
Brokers should modify their finance broking contract to make it clear that they do not make representation about the value of the property or its future prospects, Gadens Lawyers senior partner Jon Denovan said.
“The broker must be careful not to favour the interests of the developer over the borrower.”
