A new best interests duty for mortgage brokers starts on 1 July 2020, but the duty is not explained or defined in the legislation. Yet there are very serious consequences of getting it wrong. And there is no “safe harbour” procedure, unlike the case with the AFSL best interests duty.
ASIC will be publishing guidance and has just released a consultation paper and draft regulatory guide.
Two important points should be made clear at the outset.
First, the best interests duty is not just about product selection. ASIC says that it also includes conduct and processes.
Second, the best interests duty should not be confused with responsible lending. A broker could recommend a loan that was not unsuitable (meeting the responsible lending test) but still not be acting in the best interests of the consumer. The best interests duty holds brokers to a higher standard.
ASIC sees the best interests duty involving a 3-step process:
- gathering information about the consumer,
- making an individual assessment, and
- presenting information and recommendations to the consumer.
The assessment step is key. Making inquiries about the consumer’s requirements and objectives is already something that a broker has to do to comply with responsible lending. The assessment step for the best interests duty might also involve weighing the consumer’s priorities and preferences for different products and providers, and asking the question whether you have access to the appropriate products to offer the consumer.
If the broker can’t offer the appropriate product, the best interests duty would require the broker not to provide credit assistance to the consumer.
What if the consumer has preferences which the broker thinks are not in the consumer’s best interests? The draft ASIC guidance suggests that the broker should query these preferences. ASIC says that if you consider that a different product or feature to the one initially sought by the consumer may be more appropriate, and you fail to advise the consumer about this, it would be unlikely that you have acted in the best interests of that consumer.
Who then knows what a consumer’s best interests are? Underlying the concept of best interests seems to be the notion that they can be objectively defined, even if they are not apparent to the consumer or the broker.
It’s not good enough for the broker to simply recommend what the consumer prefers, as the consumer may not know what is truly in his or her best interests. Nor is it good enough for the broker to only do what he or she thinks is in the best interests of the consumer; the broker may be wrong, despite good intentions. The broker must do what is actually in the best interests of the consumer.
The risk of the broker getting it wrong should be less if the broker is skilled and applies those skills diligently and ethically when dealing with the consumer.
Whether the consumer decides to accept the recommendation is of course a matter for the consumer: a consumer is not legally obliged to act in his or her own best interests.
If it ever comes into dispute, ultimately the courts or AFCA will define the best interests of the consumer in that case.
Properly documenting the broker’s recommendations (including the basis of assessment) will therefore be crucial so that brokers can demonstrate how they arrived at their advice to the consumer.
Patrick Dwyer and Kathleen Harris
Click here to subscribe to our email list for news, comment and analysis