Connective's head of compliance explains what changes could come from the royal commission
In this article I look at how the royal commission might change the standards imposed on mortgage brokers and what this will mean for the future of the industry.
The National Consumer Credit Protection Act 2009 sets out the responsible lending obligations of brokers. It says a broker must conduct an assessment that a product or loan is “not unsuitable” for their client.
In response to concerns in the ASIC review around conflicted remuneration, the Combined Industry Forum came up with this definition of “good consumer outcome”, which is considered to achieve a higher standard than the existing “not unsuitable” obligation: “The customer has obtained a loan which is appropriate (in terms of size and structure), is aff ordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”
What has changed?
What is concerning is the change in narrative in 2018 regarding these standards. The Productivity Commission has recommended a ‘best interests’ duty be applied to brokers of aggregators owned by banks. And the royal commission has questioned who a broker acts for – the lender, the customer, or both?
In May, the new ASIC chairman commented on the “reluctance and often resistance” to addressing conflicts in the financial services industry, especially those embedded in remuneration. He said that at times it had been recognised that the best way to deal with some conflicts was to remove them altogether.
Where are we heading?
Unfortunately for brokers, the parameters are changing. As the industry begins to roll out CIF’s proposed reforms and looks at how to apply the definition of good consumer outcome, recent headwinds indicate an even higher standard will be imposed. After its review, the royal commission will inevitably recommend changes, and a likely outcome is that mortgage brokers could become subject to a best interests duty.
What does ‘best interests’ mean?
If such a concept were introduced, the best guidance would be the Future of Financial Advice legislation governing financial advisers, which became mandatory in July 2013.
ASIC’s stance is that leaving the client in a “better” position according to the standard of a “reasonable advice provider” is key to determining whether the best interests duty has been complied with. If there is a conflict between the interests of the adviser and the client, priority must be given to the client.
The royal commission will inevitably recommend changes … and mortgage brokers could become subject to a best interests duty
It is important to appreciate the differences between financial advisers and mortgage brokers and how this influences what is the appropriate standard to apply. A mortgage broker assists a customer in obtaining a loan from a third party lender. A financial adviser makes decisions regarding the deployment of a customer’s hard-earned savings. Although bad decisions could mean the customer suffers financial hardship in either situation, it is arguable that financial advisers should be subject to a higher duty as their work involves dealing with the customer’s money.
Finally, what does ‘best interests’ actually mean? Who determines the definition of ‘best’ and in what circumstances is it measured? What does a broker need to do to meet that standard? What does the royal commission mean when it references the meeting of community standards and expectations? In meeting such a standard, would a broker need to factor in the customer’s motivations in obtaining the relevant loan? Does it matter if that customer can easily service the loan? Would a moral evaluation of the use of the loan proceeds be required?
Connective’s view
Connective does not support the imposition of a best interests duty. The current standard coupled with the ‘good consumer outcome’ concept is sufficient and appropriate.
How would moving to a best interests duty practically achieve a better consumer outcome, especially if it unintentionally adds subjectivity and uncertainty to how brokers operate? The royal commission’s findings regarding financial advisers, who have been subject to a best interests duty since 2013, make it clear that such standards have not improved customer outcomes or eliminated cases of misconduct.
As a general observation, we are not concerned about the greater majority of our brokers’ ability to meet whatever standards are prescribed by regulators or legislators. We see professionals who tirelessly work for their customers, are contactable at all hours, and relentlessly pursue outcomes that support their customers’ financial hopes and dreams.
Daniel Oh is group legal counsel at Connective. With almost 20 years’ experience, Daniel has worked for multinational law firms and investment banks across Australia, Europe and Asia.
