The government’s plan to impose a best interest duty on mortgage brokers has been criticised for being selective in its application, with inconsistent exclusions. A draft bill issued for consultation also bans conflicted remuneration.
In a commentary on the bill, National Consumer Credit Protection Amendment (Mortgage Brokers) Bill, law firm Dentons says the legislation does not apply to all finance brokers.
“Rather, it applies to mortgage brokers, being finance brokers who provide credit assistance in respect of regulated loans secured by mortgages over residential property,” the firm says.
“However, once a finance broker is categorised as a finance broker, the law applies in respect of all Code regulated loans, not just mortgage loans.”
Similarly, the conflicted remuneration rules apply to mortgage brokers and mortgage intermediaries (such as referrers and aggregators) but only in respect of regulated credit predominantly secured by residential property.
“Conflicted remuneration will not apply to unlicensed intermediaries and referrers,” Dentons says.
Lenders also appear to be exempt. “It’s not just brokers who provide credit assistance. Lenders provide credit assistance in respect of their own loans, and sometimes act as intermediaries, and would be subject to the rules if it was not for the exclusion in section 15B(2)(b) and section 15C(1)(b), which excludes licensees and credit representatives who perform the obligations, or exercise the rights , of a credit provider in relation to the majority of those contracts.”
Dentons says this exclusion will also exclude mortgage managers and servicers, but only so long as their business is such that the majority of the loans they handle are where they are the lender, manager or servicer.
This will likely mean that white label loans, some mortgage manager loans and some servicers will be subject to the duties because the majority of the loans written are brokered.
“This is inappropriate and an unintended result in respect of servicers and mortgage managers, and those loans need to be excluded in full from the rules.”
Treasury released an exposure draft of the bill last week, which amends the Credit Act to require brokers to act in the best interests of consumers and to address conflicted remuneration for brokers and other mortgage intermediaries.
The explanatory memorandum accompanying the bill says: “Requiring mortgage brokers to act in the best interests of consumers and addressing conflicted remuneration are intended to strengthen existing protections for consumers who deal with mortgage brokers.
“They bring the law into line with what consumers expect – that any advice provided by a mortgage broker serves the consumer’s interests first and foremost.”
The best interest obligation applies to credit assistance provided by mortgage brokers in relation to any credit contract, such as a personal loan or credit card, and not just in relation to mortgages.
Where there is a conflict of interest, brokers must give priority to consumers in providing credit assistance in relation to credit contracts.
For the purposes of the new law, a mortgage intermediary is either a licensee or a credit representative that acts as an intermediary in relation to mortgages.
The best interest duty is a principles-based standard. Conduct that satisfies the obligation will depend on the individual circumstances in which credit assistance is provided to a consumer. The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances.
Guidelines in the explanatory memorandum say any recommendation would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker.
Prior to recommending a product, it could be expected that the broker consider a range of such products and inform the consumer of that range and the options it contains.
A broker would not suggest a white label mortgage that has the same features as a branded product from the same lender, but with a higher interest rate.
During an annual review a broker would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests.
Conflicted remuneration is defined as any benefit, whether monetary or non-monetary, that could reasonably be expected to influence the credit assistance provided, because of the nature of the benefit or the circumstances in which it is given.
The bill says mortgage brokers and other mortgage intermediaries must not accept conflicted remuneration. It also says employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries.
Regulations may prescribe circumstances in which a benefit is conflicted.