The mortgage broking industry is facing the most sweeping reforms to its regulatory environment since the introduction of credit licensing and responsible lending.
Yesterday the Federal Parliament passed a Bill imposing a best interests duty on mortgage brokers who provide credit assistance and banning conflicted remuneration for mortgage brokers and mortgage intermediaries. Draft regulations that will implement some of the details have also been released. These reforms implement recommendations of the Hayne Royal Commission.
Under the legislation, mortgage brokers and mortgage intermediaries may be credit licensees or credit representatives of a licensee, but they will not be covered if they only act in this role for credit contracts offered by a single credit provider (e.g. “mortgage managers” offering white label loans provided by one credit provider).
What is the best interests duty?
The best interests duty applies only to mortgage brokers, not mortgage intermediaries. The duty is simply that the broker must act in the best interests of the consumer when providing credit assistance. However, the duty goes beyond mortgage loans to any regulated credit contracts where the broker provides credit assistance.
The Bill does not define what it means to act in the best interests of the consumer, and there is no “safe harbour”, unlike the best interests obligations applying to Australian financial services licensees under the Corporations Act 2001 (Cth).
The Explanatory Memorandum for the Bill (the “EM”) says that the content of the best interests duty will ultimately depend on the circumstances, and that a broker may have to help the consumer to understand why a particular loan is or is not in their best interests.
Bests interests duty and responsible lending
The best interests duty and the responsible lending obligations are not the same. According to the EM, in some cases the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with.
Priority for consumer’s interests
On top of the best interests obligation, the Bill imposes a specific duty on the licensee or credit representative to give priority to the consumer’s interests, when the licensee knows or reasonably ought to know that there is a conflict between the consumer’s interests and the interests of the licensee or credit representative (or their associates or representatives).
In the case of a licensee, the Bill requires that the licensee take reasonable steps to ensure that its credit representatives comply with the best interests obligation and the duty to give priority to the consumer’s interests in the case of conflict.
The Hayne Royal Commission recommended that mortgage broker commissions paid by the lender should be phased out. The Government’s final position announced on 12 March 2019 was that brokers would be allowed to keep both upfront and trail commissions for at least the next 3 years.
The Bill bans the giving or accepting “conflicted remuneration” in connection with credit services provided by mortgage brokers and intermediaries, but only as prescribed by the regulations.
Under the draft regulations:
- campaign-based and volume-based benefits are banned;
- benefits given by the consumer are not conflicted remuneration;
- for residential property loans, the value of commissions may be a percentage of the amount drawn down by the borrower (but not a percentage of the loan amount), or an amount that does not reference either the amount of credit or the amount drawn down (e.g. a flat amount);
- some limited kinds of non-monetary (“soft dollar”) benefits such as certain education or training assistance and IT support are declared not to be conflicted remuneration;
- the period over which commissions can be clawed back is limited to 2 years; and
- the cost of clawbacks must not be passed on to consumers.
The controls on remuneration in the draft regulations follow the recommendations of the Productivity Commission in its report Competition in the Australian Financial System published in August 2018.
Failure to comply with the new best interests and conflicted remuneration obligations will attract civil penalties. There are also anti-avoidance provisions.
The reforms have a commencement date of 1 July 2020. In the case of conflicted remuneration, they will apply to any benefits given under an arrangement entered into on or after that date.
Patrick will be speaking on the mortgage broker reforms at the Informa Responsible Lending and Borrowing Summit in Sydney on 2-3 March 2020. More details here
Patrick Dwyer and Kathleen Harris
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