From 1st July 2020, mortgage brokers will be subjected to a “best interests’ duty,” prioritizing consumer interests over their own. Brokers will have to inform their clients in writing as to what they have done to meet their requirements as well as to how many potential mortgages were considered rejected and the reason why.
However, The Australian Securities And Investment Commission (ASIC) proclaimed that the commencement date for these reforms would be deferred until 1st January 2021. Previously, similar reforms targeted at the financial advice industry had brought challenges, and as such, it’s expected that credit licensees and their representatives will need additional time for preparation. Until recently, no statutory duty was applicable to credit licensees.
Its critical for every mortgage broker (credit representative or credit licensee) to be well versed with the new applicable obligations which they’ll have to adhere to when they offer credit assistance to their clients. Additionally, credit licensees must also ensure that their representatives follow the necessary credit legislation.
The New Best Interest Obligations
In January of 2020, legislation was passed by the Federal Government that seeks to create a new duty for mortgage brokers. Mortgage brokers are to pursue the best interests of consumers, and if a conflict arises when offering credit assistance, consumer interests are to be prioritized.
According to ASIC, this means that the broker must not suggest a service or product to their clients that would entail them to receive higher remuneration unless it’s in their best interests. ASIC also recommends brokers to appraise what other brokers without a conflict of interest would do in the same scenario.
This new requirement comes as a response to one of the key recommendations of the Hayne royal commission into misconduct into financial services. The primary goal of this new legislation is to protect consumers.
However, it’s important to note that different obligations will be imposed on loan officers and mortgage brokers. The latter will be subjected to fiduciary like obligations, whereas the former will not. The same best interests’ duty is also applicable to financial advisers whether they offer advice on many or a single issuer’s products.
The term ‘mortgage broker’ as defined by the national credit legislation refers to a credit licensee or representative who offers credit assistance relating to credit contracts:
- Secured by mortgages over residential property
- Must be offered by more than one credit provider
However, it’s important to note that these reforms don’t affect loan officers hired by banks or other lenders. Other parties, such as mortgage managers, may not be affected by these reforms as well.
Additionally, volume and campaign-based commissions have also been banned. ASIC also specified that instead of prescriptive steps to be followed, a ‘principle-based approach’ would be initiated for compliance with the new duty.
In the case of breaches, a fine of more than $1million will be levied. Brokers are expected to examine every client’s particular circumstances, and if they don’t have a credit product or mortgage that matches their customer’s requirements, brokers are not to provide assistance.
The guide also lays down that it’ll be beneficial if the consumers are provided with a shortlist of options consisting of a recommended one, along with an explanation of why its recommended.
The guidelines from AISC also stipulates that the communication be made in writing, and the broker will have to keep a detailed record.
How Are The Best Interests Of Consumers Assessed?
According to the regulatory guide of ASIC, a consumer’s best interests can be assessed by:
- The price of the product, such as fees and charges, interest rate, and repayment size, must be given priority during the assessment process. However, its to be noted that the cost isn’t the only factor worth considering while assessing whether the recommended product is in the best interests of the client.
- If other non-cost factors affect the consumer’s best interests, brokers must carefully determine whether those factors or loan features can provide the consumer with the most benefit in comparison to other available options.
These new regulations have been widely hailed by experts and the public. The principle-based best interests’ duty and a huge penalty are some of the most stringent reforms that the federal government could have levied on the industry.
It’s expected that these new pieces of legislation will boost consumer trust and confidence in brokers. In a nutshell, brokers would have to prove to the AISC that their advice would leave their clients in a better position than otherwise would have. It’s all about the customer being better off as a result of your advice.