No safe harbours for mortgage brokers in latest reforms

ACCC APRA ASIC Financial Services Financial Services Royal Commission

In brief 2 min read

Hot on the heels of its Implementation Roadmap, the Federal Government has released draft legislation introducing a best interests duty and banning conflicted remuneration for mortgage brokers. This affects not only mortgage brokers but the existing safe harbour for financial advisers.

Best interests duty introduced, conflicted remuneration banned

Hot on the heels of its Implementation Roadmap, the Government has released the exposure draft Bill introducing a best interests duty and banning conflicted remuneration for mortgage brokers.  The exposure draft regulations have also been released.  Submissions close on 4 October 2019.

The Bill says that mortgage brokers (but not lenders or mortgage intermediaries) must act in the best interests of the consumer in relation to credit assistance.  It also says that if the mortgage broker knows, or reasonably ought to know, about a conflict between the interests of the consumer and interests of the mortgage broker or an associate of the mortgage broker, the mortgage broker must give priority to the consumer's interests. 

This sounds a lot like the best interests duty of a financial adviser, but there is no safe harbour.  Financial advisers are deemed to have complied with their best interests duty if they take the steps set out in the law.  While we are not especially big fans of the safe harbour, it does tend to point advisers in the right direction.  The lack of a safe harbour for mortgage brokers does not bode well for the future prospects of the existing safe harbour for financial advisers.

The Bill says that mortgage brokers and mortgage intermediaries cannot accept, and credit providers cannot pay them, conflicted remuneration.  Conflicted remuneration is defined, very much like conflicted remuneration in the context of financial advice, as a benefit that could reasonably be expected to influence the credit assistance.  Again, this sounds a lot like the bans applying to financial advisers and, on the face of the Bill, would seem to ban commissions – upfront and trail.

But then one turns to the regulations.  It says that conflicted remuneration does not include a benefit given by a credit provider to a mortgage broker or intermediary that, among other things, is calculated as a percentage of an amount that is no more than the drawdown amount for the credit contract.  In short, lenders can continue paying commissions (upfront or ongoing) on loans, provided that the commission is based on the actual amount drawn down (not the approved loan amount).  There are some other conditions too.  Complying clawback arrangements can be included but are not required. Clawback periods of more than two years are not allowed because they are thought to add to the cost of switching products and therefore discourage shopping around sometime in the future.

The broad exclusions from the definition of conflicted remuneration perhaps explain why no grandfathering has been proposed.

A volume-based benefit is conflicted remuneration, but a volume-based benefit bears no resemblance to a volume-based benefit in the world of financial advice – it refers to benefits that depend in part on the total amount of credit available or total number of credit contracts issued to a class of consumers.   Similarly, 'campaign based benefits' will be conflicted remuneration (but good luck working out what that is). 

The law says that a person who chooses to act in the interests of another must not have a conflict of interest because their personal interest means that it is pretty hard for them to form an objective view about what is in the best interests of the other person.  That is the position that this Bill and regulations will place a mortgage broker in.