Attention all mortgage industry participants 4 min read
ASIC has released a consultation paper and draft regulatory guide (the Paper) setting out its proposals for guidance on the new mortgage broker best interests duty, which will commence on 1 July 2020. Various mortgage industry participants will need to consider how this will affect them, and prepare accordingly.
On 17 January 2020, the Federal Government passed legislation to create a new duty for mortgage brokers to act in the best interests of consumers and where there is a conflict to prioritise consumers' interests when providing credit assistance (the 'best interests obligations'). This legislation was in response to Recommendation 1.2 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) which recommended that mortgage brokers be subject to the same best interests duties as financial advisers. The best interests obligations will apply to a 'mortgage broker', a term which is now defined in the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) as:
a credit licensee or credit representative who carries on a business of providing credit assistance in relation to credit contracts offered by more than one credit provider that are secured by mortgages over residential property, and does not perform the obligations or exercise the rights of a credit provider in relation to the majority of those credit contracts.
This means the law will impose different obligations on mortgage brokers and loans officers. The former will have fiduciary-like obligations, the latter will not. We are not criticising this distinction; but we do note that the same model was rejected for financial advisers. For financial advisers the same best interests duty applies whether they are authorised to provide advice about one issuer's products (like the loans officer) or many (like the mortgage broker).
The best interests obligations apply to mortgage brokers in addition to the responsible lending obligations in the Credit Act (which also apply to licensees who provide credit assistance) and is 'principles based', meaning mortgage brokers subject to these obligations will need to determine how they will meet them. This differs to the financial advisers' best interests duty. Financial advisers can rely on the 'safe harbour' steps in the Corporations Act. If they comply with them, they are taken to have discharged their best interests duty. The safe harbour approach was criticised by Commissioner Hayne, although he did not recommend that it be removed. He did recommend that it be reviewed, and in the meantime, mortgage brokers will have no such option under the Credit Act.
In the Paper, ASIC is seeking information from mortgage brokers about their current practices, potentially to assist ASIC in determining what 'acting in the best interests of consumers' might look like for mortgage brokers, and to provide ASIC with examples to include in the regulatory guide.
The Royal Commission highlighted how mortgage brokers can encounter difficulties satisfying their responsible lending obligations when they don't understand how far they are expected to go down their path of inquiry and verification. We know it is somewhere along the spectrum between (1) collecting and verifying basic income and expenses and considering requirements and objectives; and (2) conducting a forensic investigation into a borrower's financial situation, lifestyle choices and whether the borrower is willing to compromise on one or both. This leaves significant room for variation and confusion.
A best interests duty might compound this. It is very likely that mortgage brokers acting in the best interests of a borrower (or are they clients?) will need to compare lending options for the borrower. Mortgage brokers may need to spend more time considering alternatives to taking the proposed loan or credit product, the positives and negatives of each option, and the financial and other implications of taking out a loan than they do under the responsible lending requirements. Options may not be as simple as three vanilla residential loans. In some situations, brokers may need to compare different classes of credit product, and possibly even different strategies such as downsizing, selling or renting. Features of each option could potentially include lifestyle factors, existing credit and even emotional factors. Financial considerations may need to be compared with non-financial considerations to assess which is 'best' for the borrower. Whatever is required, the mortgage broker's role will not be to sell a loan to a borrower for a bank.
Participants in the mortgage industry will need to consider how the best interests duty will affect them, and will need to prepare. For example:
- mortgage brokers will need upskilling; a policy or decision framework on which they assess difficult scenarios; and to better understand how far they need to go when considering what is best, and what do if that differs from what the borrower thinks is best;
- aggregators may need to consider additional training and procedures; and
- lenders may need to rethink the viability of bundled offerings, as bundling will subject non-residential credit to the best interest duty.
Remembering that the product design and distribution obligations (DDO) will now apply to retail credit, there may end up being overlap between the best interest duty and DDO suitability assessment.
ASIC has given one month to respond to the consultation paper (20 March). Let us know if you would like assistance, otherwise, we look forward to keeping you updated on the credit industry reforms through Unravelled.