The best Interest Duty: What it means for Australian Mortgage Brokers
The Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry (Royal Commission) made recommendations in its final report relating to mortgage brokers in Australia. As a result, mortgage brokers are required to comply with a statutory duty to act in the best interests of consumers.
On 6 February 2020, the Federal Government passed Legislation in response to recommendation 1.2 (best interest duty) made by the Royal Commission to:
- Create a duty for mortgage brokers to act in the bests interests of their consumers (BID); and
- Require mortgage brokers to prioritise their consumers’ interests when providing credit assistance (conflict priority rule).1
Collectively, these two obligations are now referred to as the Best Interest Duty (BID).
However, because of concerns raised by members of the Labor Party, senators and consumers groups, the Australian Treasurer has advised the government will delay the finalisation of the extension of the BID until after Senate’s inquiry reports back which is due in mid-March 2021.
Who does the BID effect?
Despite the BID extension being unlikely to receive royal assent before mid-March 2021, from 1 January 2021, mortgage brokers and, where relevant, other credit licensees, have been required to comply with the new obligations as previously legislated.2
The reforms do not apply to loan officers employed by banks or other lenders, and in some cases (where they may represent themselves as a lender), other parties such as mortgage managers.
When the duty applies
As summarised in ASIC’s new Regulatory Guide 273, if you are a mortgage broker, you are required to act in the bests interests of your client when providing credit assistance for products regulated under the National Consumer Credit Protection Act 2009 (Cth) (NCCPA) and based on the information available at the time. This includes credit assistance on products that are packaged with a mortgage and any standalone credit products on which you provide credit assistance. Available information will include any ‘reasonably foreseeable changes to the consumer’s personal circumstances and financial situation.3
Where there is a conflict of interest, a mortgage broker must give priority to the consumer’s interests. Therefore, mortgage brokers must not prioritise your own interests or the interests of third parties or credit provider.4
In addition, an anti-avoidance provision prohibits entering into or carrying out a scheme designed to avoid application of the BID, as well as a ban on conflicted remuneration. This included avoidance of the obligations by way of notice or disclaimer or consent to a known conflict by the consumer.
Complying with the bests interests duty
ASICs new Regulatory Guide 273 provides their recommended approach to the best interests obligations and the priority rule. This guidance also sets out their views on the obligations and expectations of the industry. Although what is required to act in the consumer’s best interests will solely depend on the information and circumstances provided, ASIC summarises that mortgage brokers are likely to need to:
- Gather information about the consumer and their situation (Regulatory Guide 273.30-273.43)
- Use that information to assess what credit assistance would be in the consumer’s best interests’ (Regulatory Guide 273.44-273.43);and
- Depending on that assessment, potentially suggest one or more options to the consumers, and provide information about why the recommended option(s) are in the consumer’s best interests (Regulatory Guide 273.87-273.104).
In contrast to the Future of Financial Advice reforms in 2013 which provided prescriptive ‘safe harbour’ steps in the Corporations Act 2001 (Cth), the BID which applies to mortgage brokers is ‘principles based’. Therefore, while the guidance provided by ASICs Regulatory Guide 273, may provide assistance in determining what mortgage brokers may need to comply with, individuals and companies remain solely responsible for determining how they will comply with the BID.
A breach of the obligations incurs a maximum civil penalty of 5,000 penalty units, equating to $1,050,000.00.
Responsible Lending: Complementary, but distinct.
The BID applies in addition to responsible lending obligations (RLOs) under the NCCPA which also recently underwent proposed significant reform. In contrast to RLOs, which is ultimately the credit licensee’s responsibility of whether a particular product is ‘not unsuitable’ for the consumer, the BID applies more broadly and extends to the conduct and processes of the mortgage broker as well as the suitability of the credit product.
How can we help you?
At Purcell Partners, we work with Mortgage Brokers, Borrowers, Lenders, Solicitors and Conveyancers to provide a transparent and customer-first approach, ensuring a seamless customer experience. Whilst the best interest duty brings the law in line with consumer expectations of mortgage brokers which is a valuable change, Brokers will have to remain vigilant throughout existing day-to-day procedures to ensure compliance.
Our experienced solicitors can provide the necessary support to ensure lenders and mortgage brokers are able to operate efficiently and seamlessly providing the borrower with a gold standard of service.
1The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Mortgage Broker Reforms Act) inserted these obligations into the National Credit Act. The Mortgage Broker Reforms Act also inserted other reforms relating to mortgage broker remuneration; RG 273.2.
2ASIC has provided a temporary exemption from the best interests obligations for six months from 1 July 2020 due to the effect of COVID-19: see ASIC Credit (Deferral of Mortgage Broker Obligations) Instrument 2020/487 and Media Release (20-109MR) ASIC defers commencement of mortgage broker reforms and design and distribution obligations (8 May 2020).
4For further guidance on the conflict of priority rule, see RG 273.144-RG 273-161