“It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of ‘acting in the best interests of consumers’ in the relevant circumstances”
— FINANCIAL SECTOR REFORM (HAYNE ROYAL COMMISSION RESPONSE – PROTECTING CONSUMERS (2019 MEASURES)) BILL 2019 Replacement Explanatory Memorandum
Moving beyond ‘responsible lending’
In June 2020, ASIC released Regulatory Guide 273 “Mortgage Brokers: Best Interest duty” to assist brokers, and their authorising licensees, to manage the new obligations that apply from 1 January 2021.
The Guide is a clear and well-written explanation of the high-level principles that underpin ASIC’s expectations and approach. Most notably, it provides mortgage brokers with general principles rather than prescriptive steps, but is underpinned by an emphasis on the importance of alignment, education, informed engagement and aspirations of quality.
These obligations only apply to credit products/services provided to consumers for personal, domestic or household purposes or for the the purchase or improvement of residential investment property. National Consumer Credit Protection Act 2009.
Download RG273
Neither the duty nor the guidance should be surprising; the Financial Sector Reform (Hayne Royal Commission Response – Protecting Customers (2019 Measures) Act No.2 2020 codified the ‘best interest’ duty, outlined the Conflict Priority rule and addressed conflicted remuneration.
Ready. Set. Comply.
While some brokers are complaining about a lack of specificity, many financial advisers question how they have avoided the frustrating level of prescription imposed on them. Spared the ‘safe harbour’ demanded by the larger licensees, brokers are enabled to exercise their skill, education and experience to identify and determine their clients’ best interests.
It would be wrong to interpret ASIC’s mature approach to best interests as laissez faire or indifferent to process; rather, although their broad approach values outcomes above process, and seems explicitly designed to promote better outcomes and higher quality services, there are significant penalties for non-compliance.
While ASIC’s approach isn’t prescriptive, it still requires brokers (and their Licensees) to implement appropriate measures, processes and procedures to ensure their compliance with the law. If you haven’t already reviewed your existing governance arrangements to ensure compliance, start now. Inevitably, once you recognise that your best interest duty applies each and every time you provide services, you’ll need to consider your business model and its underlying assumptions.
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. In particular, 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.
Principles in practice
“Bureaucrats will care more for routine than for results”
— Walter Bagehot
First, it’s important to appreciate that these new duties, supplement and complement (but don’t replace) your responsible lending obligations.
Second, they are unavoidable; a broker cannot ‘contract out’, disclaim away their obligations or use client consent as a reason for non-compliance. Like death and taxes, there is simply no way to avoid them and any attempts to do so will be problematic, unproductive and costly.
Effective discovery is at the heart of your duty and the foundation of quality advice.
A broker’s consideration of the client’s needs, goals and financial situation is what underpins their assessment of choices, consequences and implications. This informs a broker’s decision making and provides them with the information, and insight, necessary to explain why one loan product is better for that client than another similar product. A bona fide assessment of benefits and risks, within the context of a client’s needs, and a commitment to prioritising client interests, is the clear goal of these reforms.
In fact, ASIC could not be clearer.
They do not see a broker’s role as a passive one. It is not a broker’s duty to unthinkingly facilitate clients’ whims or unhesitatingly pander to their preferences. Instead, a broker MUST exercise their own judgment about the clients’ best interests.
In some situations, this will include challenging the consumer’s perception of their best interests. (RG 237.18)
Of course, if a consumer still decides to proceed contrary to your recommendation, you can assist them with that application without breaching your duty (273.85).
As a broker, it would be difficult to comply with these duties unless you understand your client’s needs and the various options available to them.
You’re unlikely to secure their informed consent, without analysing and considering options and alternatives. This is why ASIC expect brokers to present consumers with more than one option. Presenting three options, as ASIC suggest, helps you to demonstrate that you’re acting in your client’s best interests.
Every broker ‘considers’ every application but ASIC expect a methodical process of ‘conscious consideration’ that addresses, for example:
- the consumer’s preferences and priorities (including costs, interest rates, fees, processing times and product features);
- the consumer’s needs and objectives (including term and access);
- the consumer’s personal circumstances and financial situation (including any reasonably foreseeable changes);
- the products available to you; and
- whether you are competent, capable and experienced enough to make an appropriate recommendation.
Record keeping
It would not surprise you to learn that file-notes and record-keeping are critical components of your compliance arrangements. In fact, ASIC recognise that
good communication and consultation – which ensures that your role and the broader application process are understood – are generally indicative of acting in the consumer’s best interests. (RG273.33)
In fact, ASIC provide an extensive list of the records they expect a broker to maintain (on file, in working papers, in audio form etc). They list, for example, documents including:
- Responsible Lending Assessment
- Copy of the Credit Guide provided
- information provided during the application process (and evidence of outcomes)
- any relevant conversations
- your analysis of costs, consequences and implications
- your comparison of options, risks and benefits
- the options you presented in your recommendation (and the reasons)
- any COI identified and addressed.
You’re unlikely to secure their informed consent, without analysing and considering options and alternatives. This is why ASIC expect brokers to present consumers with more than one option. Presenting three options, as ASIC suggest, helps you to demonstrate that you’re acting in your client’s best interests.
Every broker ‘considers’ every application but ASIC expect a methodical process of ‘conscious consideration’ that addresses, for example:
- the consumer’s preferences and priorities (including costs, interest rates, fees, processing times and product features);
- the consumer’s needs and objectives (including term and access);
- the consumer’s personal circumstances and financial situation (including any reasonably foreseeable changes);
- the products available to you; and
- whether you are competent, capable and experienced enough to make an appropriate recommendation.
It would not surprise you to learn that file-notes and record-keeping are critical components of your compliance arrangements. In fact, ASIC recognise that
good communication and consultation – which ensures that your role and the broader application process are understood – are generally indicative of acting in the consumer’s best interests. (RG273.33)
In fact, ASIC provide an extensive list of the records they expect a broker to maintain (on file, in working papers, in audio form etc). They list, for example, documents including:
- Responsible Lending Assessment
- Copy of the Credit Guide provided
- information provided during the application process (and evidence of outcomes)
- any relevant conversations
- your analysis of costs, consequences and implications
- your comparison of options, risks and benefits
- the options you presented in your recommendation (and the reasons)
- any COI identified and addressed
It should be understood that where you, as a broker, have incomplete or inaccurate information about your client, you should avoid making a recommendation.
Under no circumstances should you ignore critical gaps or try to fill them yourself.
TIP: Think about whether a more detailed discovery document (and a more methodical process) would help you mitigate these risks and improve your advice.
“A failure to consider cost and investigate the lowest cost options available to the customer may suggest non-compliance with the best interests duty. Any situation where a higher cost loan is recommended will need to be supported by evidence demonstrating why that recommendation is in the customer’s best interests”
— ASIC Regulatory Guide 273
Your clear priority
Sections 158LF and 158LB require brokers to prioritise their clients’ interests over their own (or those of an associate). The rule is simple, but the application may not be.
ASIC explain the conflict priority rule as a broad obligation, imposed on you as the broker, to ensure that you do not recommend a product or service offered by a related party in order to create extra revenue for yourself or a related party (unless doing so would also be in the consumer’s best interests).
Instead of limiting the application of this obligation, consider whether any conflicts are created not be remuneration models nor structure, but from your role or, more accurately, from additional roles you may have (accountant, developer, financial planner).
Think also about the systems, software and research you use. Are they, or could they be, biased to deliver benefits to a related party at the expense of your client?
TIP: Use a mind-map to track and record all your associations and links. Any relationship, benefit or arrangement that a reasonable person might think could influence your decision making or compromise your advice process.
Regulating broking, not just brokers
Credit Licensees, regardless of their distribution model, have obligations to:
- ensure that their representatives are trained and competent (and likely to comply with the law);
- appropriately monitor and supervise their representatives;
- provide ‘systems, guidelines and other material’ to ensure their representatives comply; and
- maintain adequate records.
TIPS:
- Review your compliance framework to ensure that these matters are adequately addressed.
- Consider whether, and to what extent, your monitoring and supervision regime moves beyond basic activity and financial monitoring.
- Consider whether you’d benefit by implementing an established and proven regtech solution.
