ASIC has published Regulatory Guide 273 Mortgage brokers: Best interests duty providing its views and worked examples on how mortgage brokers can comply with the best interests obligations in the new Part 3-5A of the National Consumer Credit Protection Act 2009 which was inserted by the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures) Act 2020. Background.
The new best interests duty in relation to the provision of credit assistance to a consumer by a mortgage broker and a credit representative of a licensee that is a mortgage broker will commence on 1 January 2021, having recently been deferred for 6 months. When there is a conflict of interest, mortgage brokers must prioritise the interests of consumers.
The best interests duty applies only in relation to credit products which are provided to consumers for personal, domestic or household purposes or for
the purchase or improvement of residential investment property.
The best interests duty does not apply in relation to non-credit products or services. When communicating with consumers, brokers should be aware of their obligations under the Australian Securities and Investments Commission Act 2001 not to mislead or deceive.
The duty is separate from the new ban on conflicted remuneration which also commences on 1 January 2021. The ban on conflicted remuneration will apply to a mortgage broker, a mortgage intermediary, a credit representative of a licensee that is a mortgage broker or a mortgage intermediary, a credit provider, an employer of a mortgage broker or mortgage intermediary and an employer of a representative of a mortgage broker or mortgage intermediary.
Complying with best interests duty
ASIC says that in order to comply with the best interests duty mortgage brokers need to:
- Gather information about the consumer;
- Make an individual assessment (which may involve considering a range of relevant products to identify options that are available to the consumer to meet their goals and objectives and assessing what is in that particular consumer’s best interests); and
- Present information and recommendations.
The best interests duty introduces requirements and steps that are additional to the responsible lending obligations. The obligations are complementary and mortgage brokers will need to comply with both, even if some steps are not required by the responsible lending obligations. Table 2 of RG 273 compares the responsible lending obligations and the best interests duty.
Cost of the product
ASIC says that while it acknowledges that consumer outcomes are affected by a series of factors, such as price, product accessibility, product features, and loan performance, it considers that cost is a factor that should generally
It says that this does not necessarily mean that recommending the lowest cost option will always be in a consumer’s best interests. Some consumers’ circumstances will mean that the benefits provided by other features or factors will outweigh the importance of cost. ASIC has set out its expectations of brokers when they are weighing up factors and features.
Range of credit providers and products
ASIC says brokers need to have an awareness of the products and features that are available on the market; brokers can achieve this by periodically comparing the products and credit providers they can access to those available on the market.
ASIC also expects brokers to use their judgment to determine whether their panel composition is sufficient to meet their consumers’ best interests.
It says that if a broker is not satisfied that the products and credit providers they can access and recommend will allow them to act in a consumer’s best interests, the broker must not provide credit assistance to that consumer.
ASIC has not specified a minimum panel size. However, brokers should be accredited with a reasonably representative panel of credit providers and products, reflecting the market they operate in.
ASIC says a product’s inclusion, as part of a package, must be in the best interests of the consumer in order for that package to be recommended.
ASIC has provided examples that demonstrate how a broker may compare packages to other packages and standalone home loan products available to the consumer. The examples also provide guidance on the extent to which brokers may need to compare a packaged credit card with other products.
Who the duty applies to
ASIC says whether mortgage managers will be captured under the definition of ‘mortgage broker’ will depend on the business model of individual mortgage managers. Individual mortgage managers should determine whether they will be captured by the ‘mortgage broker’ definition in section 15B of the National Consumer Credit Protection Act 2009.
ASIC clarifies that exercising some of the rights, or performing some of the obligations of a credit provider in relation to the majority of loans will mean the person is not within the ‘mortgage broker’ definition.
ASIC says that brokers are unlikely to need to provide reasons for not considering or recommending every alternative product on the market. Distinguishing the type of product or feature, as opposed to exhaustively excluding individual products, may be sufficient.
In some situations, recording the reasons why a certain product or type of product was not recommended might assist in demonstrating compliance with the best interests duty.
Brokers should use their judgment to determine how long their records should be kept, provided they comply with other obligations, such as the responsible lending obligations and the product design and distribution obligations.
Conflict priority rule
The guidance states that the conflict priority rule means that a broker must not recommend a product or service of a related party that would create extra revenue for the broker, their credit licensee or any other related party unless doing so would also be in the consumer’s best interests.
The guidance also states that to comply with the conflict priority rule, mortgage brokers must first identify what interests they and their related parties have.
Brokers will then consider what a mortgage broker in the same position, but without a conflict of interest, would do in the circumstances.
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.