The financial services regulator has lasered in on how mortgage brokers evaluate, present, and justify the cost of a recommended home loan. We explore how ASIC is quantifying ‘cost’.
The Australian Securities and Investments Commission (ASIC) has released its long-awaited review of how the industry is complying with the Best Interests Duty (BID), unpacking its position on how the broker channel is meeting its obligations.
A core focus of the landmark report, Mortgage brokers: Review of best interests duties and complaints handling practices, is on how brokers position loans when they are not the cheapest option available.
The comparison was between the recommended product and the cheapest loan on the broker’s shortlist, rather than a ranking of every home loan in the market.
ASIC framed its approach around finding the lowest-cost product that met the borrower’s needs, rather than treating price and suitability as separate considerations.
“An efficient and productive mortgage broker sector is one that matches consumers with products that fit their needs at the lowest available cost for given features," the report read.
While there has been long-standing contention over what constitutes the "cheapest loan" (although there have been examples of this set out in the explanatory materials of the legislation), ASIC has now revealed how it has evaluated this under the BID review.
According to ASIC’s guidance on meeting BID requirements, brokers are encouraged to present a minimum of three loan options to consumers - noting that a loan is unlikely to be in the consumer’s best interest if there is a cheaper loan that the broker could recommend that would meet the consumer’s non-cost needs and objectives.
However, in its review, ASIC noted that a variety of other factors (such as lender policies or loan approval times) can also be relevant when determining whether a loan is in the consumer’s best interest, but these should be documented accordingly.
The report described a filtering process that began with lenders accessible through the aggregator’s panel, then considered borrower eligibility under credit policies, required features and cost. Software generally measured cost through the interest and fees payable over the selected comparison period.
Brokers could also select products manually, including where their knowledge of lender policies or temporary offers identified an option that the software did not automatically capture.
Higher-cost recommendations were commonly linked to offset or redraw facilities, policies accommodating non-standard income or greater borrowing capacity, faster approvals, and preferences for an existing lender or its banking services.
To evaluate how brokers assessed product cost and suitability, the financial services regulator reviewed 7,000 documents from eight major aggregators (representing around two thirds of all credit representatives in Australia) covering the period 1 April 2023 to 31 March 2025.
These documents included 800 loan recommendations for where the broker did not recommend to the consumer the cheapest of the shortlisted loans available (seven of the eight aggregators revealed this happened in more than 20 per cent of cases), and 800 loan files where only one options was presented to the consumer (though aggregators suggested this only happened in an average of 6.8 per cent cases).
Each aggregator was asked to provide 100 recommendations in each category. These were selected types of recommendations requiring supporting explanations, rather than a random cross-section of all broker activity.
The broader figures supplied by aggregators were not drawn from identical populations: some included brokers with their own credit licences, while others covered only the group’s credit representatives.
In this data pack, ASIC collected comprehensive data on all compared products, including interest rates, loan purpose, fee structures, reversion rates, repayment frequency, projected total cost, and written justification.
The issues in assessing cost
When examining how licensees and software platforms calculated product cost, ASIC identified a major inconsistency across the sector.
Most credit licensees provided cost data based on the full 30-year term of the loan. However, some considered the cost over a shorter period, such as five years, to more closely reflect how long consumers tend to remain in a loan.
In some cases, the annual cost difference was minimal, and in others, it appeared the loan with the higher total cost was likely the cheaper loan over the short term due to lower introductory rates which reverted to a higher rate after a certain period.
Furthermore, ASIC uncovered critical data quality gaps within comparison software. Licensees had interest rate data for compared products, but were often uncertain whether the data reflected final discounted rates expected by the consumer. Because comparison software frequently required brokers to input agreed discounts or promotional cashbacks manually, aggregator systems sometimes failed to capture true net loan costs automatically.
Two of the eight groups could not readily extract total-cost figures for the compared products. This left them unable to measure cost differences across their loan portfolios or monitor those differences through anything other than manual checks.
The report also distinguished gaps in comparison records from the pricing borrowers actually received: an agreed lender discount could still reach the consumer even if the broker had not updated the comparison tool.
When assessing the cost of loans recommended by brokers for its review, ASIC standardised the sample data by converting total cost values into a five-year reference period (dividing 30-year total cost figures by six).
Nevertheless, ASIC noted that even a five-year reference window may overstate the actual costs incurred by borrowers who roll off introductory fixed or discounted rates and actively refinance to avoid higher reversion rates.
After calculating the cost over a five-year term, ASIC looked at the difference in costs between the lowest cost loan available and the loan recommended. It then evaluated the rationale behind the broker recommendation.
To ensure consistent calibration across all file samples, ASIC applied three formal evaluation criteria to assess broker file rationale when a recommended loan was not the cheapest option shortlisted. These were:
- No concerns: The documented rationale supporting the recommended loan was clear and reasonable.
- Some concerns: The documented rationale was specific to the consumer's circumstances, but could have better demonstrated how or why the recommended loan was in the consumer's best interests, even though it was not the cheapest option.
- Most concerns: There was no documented rationale for the recommendation, or the recommendation rationale was generic, inconsistent, or poor quality.
Concerns rise in tandem with cost differential
The regulator found a direct, inverse relationship between the size of the loan's cost difference and the broker's compliance quality: as the financial cost to the consumer increased, ASIC’s level of concern rose.
While nearly three-quarters of recommendations with a cost difference under $1,000 raised no concerns, nearly two-thirds of files involving cost differences over $20,000 triggered regulatory alarms due to generic justifications, template language, or a lack of detailed cost comparisons.
ASIC suggested this did not entail the rigorous, evidence-based justification required by the Best Interests Duty.
Indeed, the proportion of files triggering ASIC’s highest level of alarm jumped from 7.5 per cent for minor cost gaps to 43.9 per cent for cost gaps exceeding $20,000.
The cost charts covered 551 sampled recommendations for which cost data was available. Of the 41 recommendations with a projected additional five-year cost above $20,000, 18 attracted “most concerns”, nine attracted “some concerns” and 14 attracted “no concerns”.
The middle bands showed the same pattern. For cost differences of $1,000 to $5,000, 66.8 per cent attracted no concerns, 21.3 per cent some concerns and 11.9 per cent most concerns. For differences of $5,000 to $20,000, those figures were 45.4 per cent, 29.4 per cent and 25.2 per cent respectively.
These classifications measured the adequacy of the recorded justification; they were not reported as percentages of loans found to breach the best interests duty.
File reviewers identified recurring documentation deficiencies, including a complete failure to record reasons for recommendations, generic or non-specific rationale notes, a total lack of detailed cost comparison notes, or recommending a product as the "lowest cost option" when software comparison data explicitly showed alternative products were cheaper.
Other concerns included explanations that merely listed product features without establishing their relevance, and recommendations apparently inconsistent with the borrower’s stated preferences or requirements.
Some licensees acknowledged that recorded explanations fell short of their expectations, while others said their audits would identify weaknesses or that supporting information might be held elsewhere.
The report reads: “While a greater projected cost difference does not mean that a loan is not suitable for a consumer, as indicated in both figures, we had relatively more concerns with the adequacy of brokers' recommendations when the projected additional cost for the recommended loan was greater in relation to other loans compared by the broker."
To address these findings, ASIC has recommended that aggregators ensure their systems capture accurate information relevant to loan recommendations, including lender discounts, promotional offers, cashbacks and lender timeframes for processing loan applications.
ASIC also called for licensees to identify higher-cost recommendations lacking adequate explanations, rather than depending solely on periodic audits to uncover them.
“Licensees should ensure they can readily identify loan recommendations with limited or no recorded rationale and that are not for the cheapest loan compared," the report read.
The review found that none of the licensees used cost-comparison metrics to select brokers and files for review, despite using other risk indicators. ASIC called for periodic reassessment of those indicators and closer examination of the substance of recommendations, not just completion of required steps.
"Licensees should expect their representatives to provide additional evidence and justification when recommending a loan that will cost more than other available options," ASIC noted.
The regulator concluded:"While RG 273 notes that cost is not the only matter relevant to whether a loan is in a consumer's best interests, it also notes the importance of brokers demonstrating that consumers have a realistic possibility of deriving greater value from non-cost considerations such as features and timeliness.
“The greater the additional cost of a loan recommended by a broker, the greater the risk that the broker cannot demonstrate a consumer will realistically derive greater value from the recommended loan."
[Related: ASIC BID review puts broker files under sharp scrutiny]
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