Timing and application of new misconduct rules questioned

Among the proposals set to impact mortgage brokers is a new obligation to check references and share information on Australian credit licensees (ACL), as well as new breach reporting requirements and further measures about notifying and remediating customers where misconduct occurs.

Reaction to the draft legislation has been lukewarm so far, with several industry heads suggesting that while they welcome changes that create transparency, reduce the likelihood of bad apples entering the industry and increase trust in the sector, more detail is needed to understand how the law will apply in practice.

Additional questions are also now being asked regarding the time frames set out in the draft legislation, which is open for consultation until 28 February.

AFG

Mark Hewitt, AFG’s general manager of industry and partnership development, said that while the new obligations around reference checking and misconduct sounded “ominous”, he did not believe that the new obligations were “significantly higher than AFG’s current practice demands”.

“[T]he formalisation of them industry-wide will assist in customer protection,” Mr Hewitt said.

“We have been meeting with the regulators and will continue to do so to understand what this looks like in practical terms. 

“Importantly, we wish to ensure there are no unintended consequences from these changes and that the additional compliance obligations of ACL holders imposed by these proposed requirements are considered,” he added.

PLAN response

Speaking to The Adviser, PLAN CEO Anja Pannek noted that there was still “a way to go” before the proposed laws come into effect in April 2021.

While Ms Pannek welcomed the intention of the law (“to eradicate bad apples from the industry”), she said the exposure draft put forward an “interesting proposal” as it appeared to be “leveraging what you would see in an AFSL construct, where you have a financial adviser and a customer”, directly onto the broker market.

However, she warned that “the relationship between a broker, a client and a lender is very different to that of a financial adviser and their customer”.

“What we know is misconduct can occur as a result of the licensee, the customer, the broker or the lender. What we need to ensure is procedural fairness,” she said.

Ms Pannek also suggested that there were complexities with applying financial planning remediation arrangements to the mortgage broking industry, elaborating: “In an AFSL model, the customer has 100 per cent of the exposure under an arrangement where they are receiving advice. With a mortgage, some of the risk is held by the customer, most of it is held by the lender and then the broker is involved by providing credit advice.”

“The law also infers that a licensee must report the misconduct when they become aware of it. But there are many different parties in the mortgage value chain,” the PLAN CEO added.

Touching on the set time frames outlined in the draft legislation (i.e. reporting matters to ASIC within 30 days after the licensee reasonably knows the matter has arisen, reporting outcomes of investigations within 10 days, informing potentially affected customers of misconduct within 30 days, and remediating affected customers’ losses within 30 days), Ms Pannek suggested that some of the time frames were “concerning”.

“Would we end up with a burden of administration?” she asked. “That doesn’t go to the heart of what the legislation is intended for.”

“For example, let’s say that a lender discovers that a customer has a fraudulent payslip. Does that mean that the broker is reported for misconduct, or is the blame with the customer? We need to know the practicalities of that when it comes to what the government is proposing,” she outlined.

“We have concerns around the time frame of breach reporting and making sure it is achievable. There are likely to be civil penalties if things aren’t reported or remediated in time, so we want to ensure that we meet the law.”

Ms Pannek concluded: “What if a broker has met their NCCP ‘not unsuitable’ obligation but failed the best interests duty, what does that mean from a conduct breach perspective?

“The Combined Industry Forum gives us the platform to get cohesion among the industry about these issues and bring these regulations to life in a practical way that achieves the true intention of the law,” the CEO told The Adviser.

Purple Circle response

Speaking on behalf of Purple Circle, the group’s new compliance and risk manager, Tim Donahoo, welcomed that the draft regulations were “an attempt to deal with the persistent issue that has challenged the broking sector for many years: how to effectively prevent individuals who have behaved inappropriately with one employer/aggregator from resurfacing elsewhere and continuing to operate within the industry”.

Mr Donahoo said he had “always been surprised at how [reference checks] are not routinely sought and acted upon” and therefore welcomed a “more detailed and regimented” recruitment and evaluation process.

“The main challenge here will rest with the referee and how much detail it can and is willing to provide,” he added. 

“In those instances where inappropriate behaviour was strongly suspected or alleged, but not categorically proved or uncovered, is that to be disclosed in a reference check?” he asked.

“If a prospective new broker left somewhere in somewhat questionable circumstances but where no illegal or inappropriate behaviour was actually proven, this may count against the individual harshly when seeking a new role. How much detail will the referee be obliged to provide in the reference in such cases? This is a difficult matter when someone’s future livelihood is at stake, especially if the details about the behaviour in question are somewhat murky,” Mr Donahoo told The Adviser.

Touching on mandatory reporting obligations, Mr Donahoo said he supports this where “illegal or inappropriate behaviour” was found to have been committed, particularly as he believes there had been “a past reluctance to do this for fear of retribution where the matter has not been clear cut and fallen short of actual criminal acts”.

“Now aggregators/licensees will have no option,” he said. 

“Brokers will be aware that anything less than totally compliant behaviour will be reported to ASIC and their behaviour publicly scrutinised.”

However, Mr Donahoo also said he had concerns about the implications of needing to report the initiation of investigation of broker behaviour prior to any findings being reached. 

“Investigations can be initiated from multiple sources, some of which may be tenuous and ultimately found to be lacking any foundation. In such cases, it would appear to be unreasonable and unnecessary to lodge any notification of investigations until an adverse outcome has been determined,” he said. 

“Aggregators and licensees certainly should have robust investigation processes in place (and will have to under these proposals if they do not have such already) but these should be allowed to reach their outcomes before any notification is necessary. It is not clear what outcome is to be achieved by lodging notifications of investigations only.”

Mr Donahoo concluded: “Nonetheless, the clear message for brokers from these proposals is that their activities will come under a much closer level of scrutiny and that they will be significantly more accountable for any past indiscretions. One’s past will be far more likely to catch up with you if your record is not entirely clean.”

Smartline response

Likewise, Sam Boer, the CEO of Smartline, also questioned the reach of the draft legislation’s application.

“I think the intent is right. This goes to heart of trying to eliminate some of the more fringe elements out of industry,” he said.

“The operational issues around this, though, is: What’s the quantum? Mistakes happen, [mortgage broking] is a very manual system, and when someone reports something as a possible issue – and you have to report each and every issue – things could be misconstrued. 

“So we’re going to have a really sensible approach to how we implement those things, but the intent is absolutely right. So we will continue to work on how we implement those challenges,” Mr Boer commented.

Representatives from the FBAA, MFAA, Connective and Loan Market have also outlined their thoughts on the draft legislation, which can be read here.

The government expects to introduce the legislation in mid-2020.  

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[Related: New draft legislation tentatively welcomed]