Shaping the future with confidence: Your business post-Financial Services Royal Commission
Mortgage brokers and financial advisers: like two peas in a pod?
Our colleagues Alexandra Mason and Keerthi Ravi have considered in some detail the findings of the Commissioner in relation to mortgage brokers in their article on consumer lending. Of interest, is Commissioner Hayne's desire to regulate mortgage brokers using principles and concepts that we have seen applied to the financial advice sector. In this article, we break down the parallels that the Commissioner has drawn for remuneration and duties and how this 'transplant' might look in practice.
The Commissioner recommended that trail commissions on new loans be abolished and the Government plans to do so with effect from 1 July 2020. However, the Commissioner also said that trail commission on existing loans should not be disturbed. This statement is a little surprising when you consider the Commissioner's antipathy towards grandfathered trail commissions paid to financial advisers. As discussed below, the Commissioner is keen for mortgage brokers to be regulated in a similar fashion to financial advisers, but that does not appear to extend to the treatment of grandfathered trail commissions.
The Commissioner also recommended that upfront commissions be abolished within two to three years and be replaced by fees paid by borrowers to brokers (although the cost could be capitalised into the loan). The Government did not accept this recommendation, with this perhaps being the most significant example of a divergence between the Commissioner's recommendation and the Government's response. However, the Government does propose to regulate upfront commissions, so that they can only apply to the amount drawn down (not the nominal loan amount – although not regulating the commission rate would seem to leave a gap), commission clawbacks are limited to two years from loan origination and the cost of commission clawbacks cannot be passed on to borrowers.
It is difficult to imagine the Commissioner being very pleased with the Government's response. The Commissioner says a number of times in his report that he does not like exceptions to rules that set down important principles. By allowing upfront commissions to continue (albeit subject to regulation) the Government will create a significant exception to the principle that advisers who should be acting for a customer should not receive incentives from third parties. And yet, in the context of financial advisers, it turns out that the Commissioner does not mind some other significant exceptions persisting for some years to come. As set out in our chapter on financial advice, the Commissioner has taken a cautious approach to commissions on general insurance and consumer credit insurance, recommending only that ASIC should consider whether these exceptions should be removed in two years' time.
The Commissioner recommended that, as a first step, the best interests duty that applies to financial advisers who provide personal advice to retail clients should be extended to mortgage brokers. It is not clear whether the duty, as extended, would or would not include the safe harbour available to financial advisers. Assuming it does, this recommendation would be unlikely to result in any great change.
However, the Commissioner went on to recommend that, as a second step, the broader regulatory framework that applies to financial advisers who give personal advice to retail clients should be extended to mortgage brokers. This recommendation would certainly result in very great changes. Mortgage brokers would become subject to the appropriate advice duty, the conflicts-priority duty, the requirement to give a statement of advice, and education requirements of the kind made by FASEA. These measures, viewed together, have resulted in very great change (albeit over a reasonably long period of time) to the financial advice industry and it is not clear why they would not have a similar effect on the mortgage broker industry. Think less advice from humans and more advice from computers.