Spotlight on responsible lending, duty of care and best interests

By Michelle Levy

Unravelled, by Michelle Levy

Dear clients and colleagues

You may have noticed we have been a bit quiet at Unravelled despite a few recent cases of interest. It is not because we weren't keenly watching – quite the opposite. These are significant matters and so, in light of Unravelled's reach, we thought it prudent to hold our horses for a bit - to let the dust settle. But now it is time for a few observations.

First, responsible lending. Despite quite a bit of scrutiny, Commissioner Hayne recommended no changes to the responsible lending laws in the National Consumer Credit Protection Act. In short, he said the 'not unsuitable' test was just that – not unsuitable (at least for the lender – he had quite different views for the mortgage broker). Hot on the heels of his recommendation, Justice Perram in ASIC v Westpac agreed, saying that the benefits of a lender considering a borrower's actual living expenses were 'highly contestable'.

Notwithstanding, ASIC has appealed and is pressing ahead with changes to Regulatory Guide 209. And wherever they end up, the design and distribution obligations will turn responsible lending on its head. Lenders will have to decide that a home loan is suitable for the customers to whom it is offered - a decision that will sit rather uneasily with the decision that the loan is not unsuitable for the customer. It will be even trickier for mortgage brokers who, if Commissioner Hayne's recommendations are implemented, will have to decide that the loan they recommend is in the best interests of the customer. I will come back to what that might mean, but first wanted to say that, without banning commissions for brokers (which the Government has announced it will not do), mortgage brokers will also find themselves in the rather compromised position of having a duty to act in the best interests of their client at the same time as being the beneficiary of the promise of a potentially handsome commission from the lender. As Commissioner Hayne found, a best interests duty is no match for conflicted remuneration.

All in all I think things are shaping up to be a bit of mess (and this is in an area where the Royal Commission did not identify any significant consumer detriment), which brings me to case number 2.

In APRA v Kelaher, Justice Jagot said that a superannuation trustee that had breached its duty (to exercise care, skill and diligence) was not entitled to be indemnified from fund assets. In doing so, she apparently accepted APRA's argument. Well, for those of you who are familiar with superannuation law, you will know that both (her Honour's views and APRA's argument) were something of a surprise. It is also a rather startling proposition for trustees and their members, who may have thought an operational risk reserve (which forms part of a fund's assets) was maintained precisely to provide the trustee with a source of money to compensate members if it breaches its duty of care (provided it hasn't been reckless or fraudulent). Happily (and not least for IOOF and its directors), Justice Jagot found that there was no breach of duty and, therefore, her Honour's comments are just that - only comments.

Finally, case number 3, financial product advice and the best interests duty. There is a great deal of confusion about what financial product advice is (and that is before one gets to the very difficult question of the difference between general advice and personal advice). There is also an important difference between information and financial product advice (including general advice) and, while it is true that information about a product can be provided in such a way that it amounts to a recommendation to buy the product (financial product advice), it continues to be the case that a product issuer can give information to their customers about their products without it being financial product advice. And when they do, it is very clear that that information is not personal advice, irrespective of whether the product issuer considers the customer's personal circumstances in providing that information. 

A product issuer that provides personalised information to their customer does not have a best interests duty under the Corporations Act. As to what is required by that duty - a few years ago Justice Moshinsky in ASIC v NSG Services said that while 'at first blush, the text [of the best interests duty] does not appear to support the proposition that [the duty] is concerned with the process or procedure involved in providing advice' the context [in particular the safe harbour steps], the legislative history and the explanatory memorandum all point in that direction. But, it would be premature to dismiss the 'first blush', and I think it would not be out of turn to return briefly to Justice Perram and say that what is required by the best interests duty is 'highly contestable'. This matters for financial advisers now; it might also matter for mortgage brokers soon.  

As always, we look forward to your comments.

Kind regards