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Brokers will be required to meet their best interests duty obligations when assessing the suitability of other credit products linked to a home loan, according to the regulator.
Last week, the Australian Securities and Investments Commission (ASIC) published its draft regulatory guide on best interests duty obligations imposed on mortgage brokers under the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers [2019 Measures]) Bill 2019.
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ASIC’s Consultation Paper 327 Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty (CP 327) – which is open for consultation over a four-week period – contains “high-level, principles-based” guidance around the steps a broker should take to ensure compliance with the best interests duty.
The steps are structured around the gathering of information, the consideration of product options, the presentation of the options to the consumer, and the final recommendation.
ASIC has also outlined other instances in which the duty would apply, which fall outside the primary responsibilities of a mortgage broker.
In accordance with paragraph 3.26 of the Best Interests Duty Bill, the regulator has stated that other credit products tied to a home loan – including credit cards and personal loans – which may come as part of a broader package, are also subject to the best interests duty.
“A consumer’s financial situation and personal circumstances may affect the suitability of different products within packages,” ASIC stated.
According to ASIC, recommendations to consumers should identify and consider, for each product within the package:
- how those products will meet the consumer’s needs, objectives, priorities and preferences; and
- whether (and why) suggesting the consumer take out that product would be in the consumer’s best interests.
As a result, the regulator noted that in forming a view as to whether a packaged product complies with the best interests duty, a broker should “compare the package to other packages available to the consumer” and to “standalone home loan products without other packaged credit products”.
“In some instances, it may be helpful for you to base your recommendations on an assessment of the package as a whole,” ASIC added.
Moreover, ASIC noted that brokers should not recommend a package to a consumer on the basis that it is “merely satisfactory”, but rather, should outline the reasons why selecting that package would be in the borrower’s best interests and “preferable to other packages that are available and non-packaged products”.
ASIC’s guidance comes despite strong opposition to the extension of the best interests duty to all credit products from industry stakeholders ahead of parliamentary approval of the bill.
Broking industry stakeholders, including CEO of the Mortgage & Finance Association of Australia Mike Felton and director of Connective Mark Haron, have called on policymakers to amend the bill to ensure that the duty applies to “the activity, not the person”.
Mr Felton observed: “This is likely to incentivise brokers to stop providing credit assistance in relation to these products to avoid regulations they can’t reasonably meet, which is not a good outcome for consumers.
“If these ancillary products are to be included in the duty, it is essential that the application of the new rules to these products is subsidiary to the primary objective, which is to obtain an appropriate home loan.”
ASIC is seeking public comment on the draft guidance by 20 March 2020 and intends to publish final guidance before the obligations commence on 1 July 2020.
[Related: ASIC applauded for BID guidance approach]
