‘Great unknown’ of how AFCA will view BID

Indeed, the figures, provided to The Adviser last week, show that in the period between 1 July 2020 and 31 December 2020, the authority received a total of 21,218 complaints about banking and finance products – but only 121 complaints related to mortgage brokers and 127 related to finance brokers.

However, speaking to The Adviser following a panel session on best interests duty at the Informa Responsible Lending Summit (alongside Mortgage Choice CEO Susan Mitchell and MFAA CEO Mike Felton), the group legal counsel for Connective, Daniel Oh, outlined that one of the “great unknowns” moving forward is how the body will treat complaints coming in about brokers now that the best interests duty (BID) is in effect.

While the legal duty has been in place for mortgage brokers since 1 January 2021, no data has yet been released about the number of complaints brought against brokers in this time. Mr Oh outlined that until such a time as a case is tested, brokers would therefore need to be vigilant about record-keeping to demonstrate compliance.

He told The Adviser: “Connective has always maintained the position that brokers were already operating at a best interest duty level pre-1 January 2021 – but now there are some formal disciplines that have been introduced as part of this duty about understanding needs and requirements, showing the product comparisons, and then actually explaining the rationale to the customer as to why they land them on a specific product or recommendation.”

However, while Mr Oh said that while the industry was largely supportive of the BID and that brokers had been operating at a BID-level even before the law came into effect, uncertainties surrounding how it will be tested were adding time and stress to a broker’s day.

“It’s evident that brokers are aware of the new rules, they’re trying really hard to comply, and they’re reaching out for help to have their queries answered, which has been fantastic. Our compliance team helpdesk tickets have gone through the roof and a lot of them are about broker running scenarios through my team,” he said.

“For example, we frequently see brokers ask: ‘My customer’s insisting on having Bank X, Y, Z – but they aren’t the cheapest – how do I deal with this? Should I be prioritising cost?’ Or they’re asking: ‘How do I deal with lender turnaround times?’ Given some of them have blown out recently, some are asking: ‘If my customer says they can get a same day turnaround in the branch, but it’s X days for me/brokers, should l be sending them to the branch?’”

The Connective lawyer said that while Connective’s stance is to generally follow the “priority pyramid” (first finding lenders available to the customer – then assessing the features that meet the needs and requirements of the borrower (including turnarounds) and then choosing the cheapest lenders after that), he said that each client needed to be assessed on an individual basis.

Mr Oh explained: “If a customer needs funds for the next week, so they can go with confidence to an auction to bid, then turnaround times are absolutely important. The ability to settle in time might be more important than having a loan 10-basis points cheaper on the interest rate. 

“But that might not be the case if a customer is not in a hurry, for example, if they’re refinancing.

“That’s why we welcome it being a principles-based regulation as opposed to safe harbour, because it recognises everyone’s situation is unique, individual circumstances, and you have to apply unique advice for each circumstance.”

However, Mr Oh acknowledged that, on average, best interests duty “hygiene” (or admin) meant that brokers are spending between 30-45 minutes more per loan opportunity.

Nevertheless, the aggregator group legal counsel said that this extra administrative burden was  necessary, given the uncertainty around how AFCA would treat BID complaints.

He elaborated: “The reality is that – while ASIC is the regulator, and they’re the ones who are responsible for implementing best interests duty – AFCA is effectively the unappealable court of law that is going to determine complaints, which are going to hit a broker’s pocket. 

“Anything post-1st January is now subject to the best interests duty, so it’s not actually going to be ASIC who’s going to determine whether a broker has met or not met their best interests duty, it’s AFCA. And we just don’t know how they’re going to determine these things,” he told The Adviser.

“ASIC have written RG 273, so they’ve given the guidance, but AFCA will actually be the ones who will be looking at complaints that arise, and applying them to RG 273 and determining whether a broker has met BID or not, should a complaint arise. So, that’s the big unknown at the moment.”

Mr Oh suggested: “If it’s a he-said/she-said argument with the customer, AFCA is usually going to side with the customer’s view if the broker hasn’t got written evidence or appropriate notes to support their position.

“That just shows it’s even more critical to spend the time doing it, especially as we enter into this slightly uncertain time as to how AFCA will apply best in interests duty to customer complaints.

“So, the thing we urge our brokers to do is to protect themselves with notes showing the product comparison and communications with their customers, or showing that if there are any conflicts, they’re in favour of their customers and putt their customers’ interests ahead of theirs.

“Because we just don’t know how [AFCA] are going to act in this situation, until the test case happens.”

He concluded: “Overall, though, while brokers are spending more time per file to ensure that they stay compliant, and recording all these things to protect themselves down the track (just in case these issues), in the past three months of BID, broker activity has been through the roof and market share is over 60 per cent.”

[Related: Bill to extend BID delayed again]