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The industry body has urged the government to touch up recent reforms made across reference checking, breach reporting and design and distribution obligations.
The Mortgage and Finance Association of Australia (MFAA) has made the policy suggestions in a submission to the Australian Law Reform Commission’s (ALRC) review into financial services legislation.
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The ALRC kicked off the inquiry last year, aiming to simplify the “complex” web of financial services laws, across legislation such as the Corporations Act, the ASIC Act and the National Consumer Credit Protection Act (NCCP).
The body had sought feedback from industry earlier this year, engaging with both the MFAA and the Finance Brokers Association of Australia (FBAA).
As such, the MFAA has made a few recommendations to the commission, including remediating gaps in the current framework.
It has its eye on recent reforms that have unfolded post-royal commission, which have added to the complexity of financial services law and resulted in “unintended consequences for the mortgage and finance broking industry”.
The MFAA has called for the following to improve the efficiency of recent reforms:
Reference checking protocol and breach reporting
The MFAA has said that the reference-checking protocol should be strengthened by ensuring that aggregators always form part of the process.
The protocol and legislation require licensees to undertake a reference check and share information on an individual who is seeking to be employed or authorised as a mortgage broker. This is meant to shed light on brokers’ performance history, particularly around compliance, conduct and risk management.
However, the MFAA believes problems can arise as many small-business mortgage brokers have their own licence and do not operate under the licence of an aggregator.
This can mean that an aggregator can be excluded from the reference-checking process and the broker can effectively provide their own reference.
“It is important to recognise that aggregators perform an important gatekeeper compliance function within the mortgage and finance broking industry,” the submission stated.
The same issue arises for breach reporting, where licensees are required to report any wrongdoings by a representative to ASIC. However, an aggregator is not always the licensee for a broker.
“Similar to our recommendations with respect to reference checking, we believe there is an opportunity to strengthen the legislation to ensure that aggregators have greater visibility of breaches reported to ASIC on brokers that hold their own licences,” the MFAA stated.
“For transparency we also believe it is important to share breach reports made about a broker with that broker if the sharing of that report does not jeopardise any ongoing investigation.”
MFAA chief executive Mike Felton has previously pointed to the issue, and engaged with Treasury on it.
Design and distribution obligations (DDOs)
DDOs require issuers and distributors of financial products to design financial products to meet the needs of consumers and to distribute their products in a targeted manner.
Financial advisers have been exempted from certain obligations under the DDO regime, as they already need to meet best interests duty – prioritising the best needs of their client above all else.
However, the MFAA has argued that while brokers are subject to best interests duty in the same way as advisers, the law effectively does not grant them the same exemptions from DDOs.
Previously, Mr Felton has said that as best interests duty is a more important obligation for brokers, they should not have to concern themselves with meeting the distribution requirements under DDOs.
“Financial advisers are exempt from meeting several obligations when providing personal advice to clients,” the submission stated.
“While the legislative and policy intent is to similarly exempt mortgage brokers from these obligations, because personal advice is not a concept in the NCCP, the law in this area needs to be amended.”
Credit definition and regulation
The MFAA has also suggested that the regulation of credit should be consolidated into a single act and there should be a single definition of credit throughout laws.
It noted the NCCP was “usefully split into the two parts”, the Credit Code, which dealt with matters around documentation and managing products and the main part of the NCCP, which dove into licensing.
Meanwhile the recent reforms such as breach reporting, DDOs, the “notify, investigate and remediate” obligations, deferred sales model for add-on insurances, anti-hawking and reference checking had been added through amendments to the NCCP and the Corporations Act.
“There is opportunity to streamline laws relating to credit through a single consolidated instrument without subject specific schedules,” the MFAA submission said.
However, the suggestion for a single definition of credit may mean it would need to extend to products that are covered by the Corporations and ASIC Acts, but not in the NCCP, including hire purchase agreements, finance leases, pawnbroking, guarantees, leases of real or personal property and letters of credit.
The MFAA has also suggested prioritising the digitisation of the Corporations Act and associated regulations, saying regtech could make it vastly more effective and efficient – with capabilities such as electronic tags to make rulebooks machine-readable and facilitate automated regulatory searches.
On Friday (17 June), the ALRC noted that it had received support from industry on its call to implement uniform definitions across laws, noting that they can make laws more complicated and affect how companies understand what is and isn’t out of regulatory parameters.
[Related: Web of definitions weighing down financial services law: ALRC]
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