‘Best-interest duty’ turns up heat on mortgage brokers
Consumer groups want to see coming major reforms in the troubled mortgage broking industry go further, calling for brokers to be required to inform their clients in writing what they have done to match their needs and how many potential mortgages are examined, ruled out and why.
From July 1, mortgage brokers will be subject to a "best-interests duty", where consumers' interests must be prioritised over their own.
Mike Felton, the chief executive of the Mortgage and Finance Association of Australia, said the new best-interests duty for mortgage brokers would drive the trust and confidence that consumers have in brokersCredit:Janie Barrett
The requirement was of the major recommendations of the Hayne royal commission into misconduct into financial services to help better protect consumers.
A law subjecting brokers to a best-interests duty passed in federal Parliament earlier this month but it did not specify how the duty is to apply, leaving it up to industry watchdog the Australian Securities and Investments Commission (ASIC) to decide how to it should work.
The legislation also bans campaign-based and volume-based commissions, where brokers earn a bonus for hitting sales targets of a particular lender.
ASIC released a consultation paper this week, alongside a draft of its regulatory guide, outlining what it proposes to include in final guidance to be released in May, in time for the July 1 start date.
The regulator says it intends to take a "principles-based approach," rather than prescriptive steps for mortgage brokers to follow, to ensure compliance with the duty, breaches of which carry a maximum fine of more than $1 million.
Brokers will be expected to investigate each client's personal circumstances and, if they do not have a mortgage or another credit product that matches the client's needs, not to provide assistance.
The guide says it would be "helpful" to present consumers with a shortlist of options, with one being recommended, as well as an explanation of why the mortgage is being given top billing.
ASIC's guidelines also stop short of requiring that communication to the client be made in writing, though the broker would have to maintain detailed records.
“We expect that evidence of compliance with the best-interests obligations will come predominantly from the brokers' records,” the draft regulatory guide said.
Erin Turner, head of campaigns at Choice, said consumers should receive a written statement outlining what the broker has done to meet their needs.
Katherine Temple, director of policy and campaigns at the Consumer Action Law Centre, said while she is "very supportive" of the best-interest duty, mortgage brokers should be able to clearly and simply explain to clients why they made their recommendation.
"It would certainly be best practice for that to be backed-up in writing," Ms Temple said.
Mike Felton, chief executive of the Mortgage and Finance Association of Australia, said a combination of a principled-based, best interests duty and a "massive" penalty for breaches are the "strongest reforms that the government could have put in place" for the industry.
"The best-interest duty will drive the trust and confidence that consumers have in brokers," he said.
Another royal commission recommendation – that brokers no longer receive commissions from lenders and that clients pay the broker up-front – was rejected by the Morrison government.
The government accepted arguments that if clients were asked to pay brokers out of their own pockets, fewer people would use brokers, which would favour the major banks, and small brokers would likely go out of business.
Broker commissions will be reviewed by the competition regulator and financial regulators in 2022.
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