ASIC has today started a four week consultation on draft guidance about the new best interests duty for mortgage brokers.
The new obligations were legislated by the Parliament in response to Recommendation 1.2 of the Royal Commission.
From 1 July, the obligations will require mortgage brokers to act in
the best interests of consumers and to prioritise consumers’ interests
when providing credit assistance.
Announcing the
consultation, ASIC Commissioner Sean Hughes said, ‘The obligations
properly align the interests of mortgage brokers with the interests and
expectations of their clients – the borrowers. Consumers should feel
confident that their broker is offering the best loan for their
circumstances and we expect that consumer outcomes will improve as a
result of this reform.’
‘We have released this
draft guidance for consultation as early as possible, to help promote
certainty for mortgage brokers as industry prepares for the new
obligations to commence in July’ Mr Hughes added.
ASIC’s proposed approach to the guidance is outlined in Consultation Paper 327 Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty
(CP 327). Consistent with the legislation, the draft guidance is
high-level and principles-based, but also incorporates practical
examples. The purpose of the guidance is to explain the obligations
introduced by the Government, it does not prescribe conduct or impose
additional obligations.
The draft guidance is
structured around the key steps common to the credit assistance process
of brokers, such as gathering information, considering the product
options available and presenting options and a recommendation to the
consumer.
ASIC welcomes views from
all interested stakeholders on the proposals in CP 327, as well as the
draft guidance. This will allow ASIC to understand how the guidance can
best assist brokers to meet these new legal obligations. ASIC expects
that the new obligations will also improve competition in the home
lending market.
ASIC seeks public comment on the draft guidance by 20 March 2020.
ASIC intends to publish final guidance before the obligations commence on 1 July 2020.
Download
Consultation Paper 327: Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty
Background
In February 2019, Parliament passed the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures) Act 2020,
which introduces a best interests duty for mortgage brokers in response
to Recommendation 1.2 of the Royal Commission. The duty is a statement
of principle which seeks to align the interests of the mortgage broker
with the interests and expectations of the consumer.
ASIC’s proposed guidance
will assist mortgage brokers to comply with these new legal obligations
by setting out ASIC’s views on what the best interests duty provisions
require and steps that can minimise the risk of non-compliance.
The best interests duty
introduced by the Government applies in addition to the responsible
lending obligations. ASIC’s draft guidance explains the interaction of
these two obligations, including that information gathered for the
purpose of complying with the responsible lending obligations may help
brokers to comply with the best interests duty.
ASIC’s draft guidance follows research we published last year in Report 628Looking for a mortgage: Consumer experiences and expectations in getting a home loan. Key findings from this research included:
consumers who visit a mortgage broker expect the broker to find them the ‘best’ home loan;
mortgage brokers were inconsistent in the
ways they presented home loan options to consumers, sometimes offering
little (if any) explanation of the options considered or reasons for
their recommendation; and
first home buyers were more likely to take out their loan with a mortgage broker.
ASIC says that the Federal Court of Australia has today ordered Westpac Banking Corporation to pay a penalty of $9.15 million in respect of 22 contraventions of section 961K of the Corporations Act (the Act), and to pay ASIC’s costs of the proceeding.
The court case relates to poor financial
advice provided by a former Westpac financial planner, Mr Sudhir Sinha,
in breach of the best interests duty and related obligations under the
Act. Westpac is directly liable for these breaches, which attracts a
significant civil penalty, because the law imposes a specific liability
on licensees for the breaches of their financial advisers.
The decision comes as a result of civil penalty proceedings brought by ASIC against Westpac in June 2018 (18-175MR).
ASIC’s investigation revealed internal Westpac reviews, including an
internal bank investigation in 2010, had raised concerns about Mr
Sinha’s compliance history yet he continued to receive several ‘high
achievement’ ratings from Westpac. It was not until 2014 that Mr Sinha
was dismissed by Westpac and March 2015 that Westpac reported Mr Sinha’s
conduct to ASIC.
The trial took place before Justice Wigney
in April 2019, during which Westpac admitted that, as Mr Sinha’s
responsible licensee, it had contravened the Corporations Act. The exact
number of contraventions and penalty that should be imposed were
contested by ASIC and Westpac.
In its decision, the Court found Mr Sinha
failed to act in the best interests of his clients, provided
inappropriate financial advice, and failed to prioritise the interests
of his clients, in four sample client files identified by ASIC. Westpac
is directly responsible for the breaches of the best interests
obligations by Mr Sinha under section 961K of the Act.
‘Westpac, as Mr Sinha’s
responsible licensee, failed to properly monitor and supervise Mr Sinha
for a period of time. This meant his customers were not provided with
advice in their best interests. ASIC brought this case as a result of
Westpac’s suspected contraventions of the law and failures to observe
its duties. The court has found that Westpac contravened the law in this
regard’ ASIC Deputy Chair Daniel Crennan QC said.
In the judgment, Justice Wigney observed:
‘The
relationship between Westpac and Mr Sinha was structured so that Mr
Sinha was able to share in the commissions and fees earned or derived
when, as a result of his advice or recommendations, clients signed-up
for financial products in which Westpac or associated companies had an
interest. As will be seen, that rather cosy arrangement turned out to
be fruitful for both Mr Sinha and Westpac, but not always for their
clients.
…
Unfortunately
for four couples, it was subsequently discovered that the
recommendations that Mr Sinha made, and the circumstances in which he
made them, were deficient and defective, both as a matter of process and
in substance. That should not have been a complete surprise to Westpac
because Mr Sinha’s less than satisfactory conduct as a financial
adviser had previously come to the attention of certain senior officers
of Westpac as a result of various internal compliance reviews, audits or
investigations.’
His Honour further found that Westpac
ought reasonably to have known, from 1 July 2013, that there was a
significant risk that Mr Sinha would not comply with the best interests
obligations and that it failed to do all things necessary to ensure that
the financial services covered by its licence are provided efficiently,
honestly and fairly, and to comply with financial services laws. In
doing so Westpac also contravened sections 912A(1)(a) and (c) of the
Act.
Justice Wigney noted:
‘Westpac
also stood to gain from Mr Sinha’s actions. That perhaps explains why Mr
Sinha was permitted to continue as Westpac’s representative and partner
despite the serious compliance breaches which were exposed by the 2010
investigation. It is tolerably clear that, at least prior to the
commencement of the FoFA reforms, some officers or employees at Westpac
were either unable or unwilling to terminate the services of a
representative who achieved high achievement ratings and was plainly
proficient and successful at promoting the financial products of Westpac
and its associates. It may readily be inferred that Westpac’s
compliance systems and practices were less than rigorously applied, at
least in Mr Sinha’s case.’
The final best interests duty bill for mortgage brokers has been tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020. From The Adviser.
The amended Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has been tabled in Parliament today (28 November).
The key features of the new law are:
mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts;
where
there is a conflict of interest, mortgage brokers must give priority to
consumers in providing credit assistance in relation to credit
contracts;
mortgage brokers and mortgage intermediaries must not accept conflicted remuneration;
employers,
credit providers and mortgage intermediaries must not give conflicted
remuneration to mortgage brokers or mortgage intermediaries; and
the circumstances in which these bans on conflicted remuneration apply are to be set out in the regulations.
Notably,
the duty to act in the best interests of the consumer in relation to
credit assistance is a principle-based standard of conduct that applies
across a range of activities that licensees and representatives engage
in.
As such, what conduct satisfies the duty will depend on the
individual circumstances in which credit assistance is provided to a
consumer in relation to a credit contract.
The duty does not
prescribe conduct that will be taken to satisfy the duty in specific
circumstances. Instead, 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.
However, the new duty will mean that there could be circumstances
where the mortgage broker may not have acted in a consumer’s best
interests even if the responsible lending obligations were complied
with. For example, even if a home loan product is ‘not unsuitable’,
recommending it to the consumer might not be in the consumer’s “best
interests”, the accompanying documentation reads.
The penalty for breaking this duty for both credit representatives and licensees is 5,000 penalty units.
Examples of the duty in action – white label called in question
In the explanatory materials, there are examples of steps that may need to be taken for this new duty. These include:
prior to recommending any home loan product or other credit contract to a consumer based on consideration of that consumer’s particular circumstances, the mortgage broker may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
any recommendations made would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer;
in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.
Interestingly, the new duty also
outlines that “a broker would not suggest, from their aggregator’s
panel of lenders, a white label home loan that has the same features as a
branded product from the same lender, but with a higher interest rate,
because it would not be in the best interests of the consumer to pay
more for an otherwise similar product”.
The explanatory materials go on to outline that during a periodic 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”.
“For
example, it may be a breach of the duty if the broker suggested the
consumer remain in their current home loan when they could refinance to a
cheaper product as the broker did not want to incur the consequent
liability to the lender when their commission payments were clawed
back,” it reads.
Helping consumers understand their decision implications
The
materials also outline that there may be situations where the
consumer does not properly understand the implications of different
choices and so the broker may have to assist them to understand why a
particular loan is or is not in their best interests, which could inform
the brokers’ actions.
An example given is if a consumer asks the
broker if they should take out an interest-only home loan on a property
they are looking to buy. The home loan will have a higher interest rate
than a principal and interest home loan. The broker helps the consumer
to understand the difference in cost of the two home loans, and other
differences in the way in which they operate, including that the
consumer will only build equity if the property’s value increases or
they make additional repayments, and the implications of moving to
higher repayments at the end of the interest-only period.
Another
example is if a consumer asks the broker if they should take out a home
loan with an offset account as they have heard this can save them money,
even though the interest rate is slightly higher. The broker helps the
consumer to understand what is in their best interests, based on the
difference between the higher interest rate and the savings that
consumer could reasonably expect through utilisation of the offset
account.
Comments from Frydenberg
At the second reading this afternoon (28 November), Treasurer Josh Frydenberg said: “[T]he
bill introduces a best interests duty for mortgage brokers that will
ensure that consumers’ interests are prioritised when a mortgage broker
provides credit assistance, as regulated by the National Consumer Credit
Protection Act 2009. In practice this will mean that, in accordance
with Commissioner Hayne’s recommendations, a duty will apply in relation
to the provision of consumer credit assistance and not business
lending.
“The
government is also reforming mortgage broker remuneration, and the bill
provides for a regulation making power to this end. The regulations will
require the value of upfront commissions to be linked to the amount
drawn down by borrowers instead of the loan amount; ban campaign and
volume based commissions and payments; and cap soft dollar benefits.
“Further,
the period over which commissions can be clawed back from aggregators
and mortgage brokers will be limited to two years, and passing on this
cost to consumers will be prohibited.
“After
careful consideration, the government decided to delay consideration of
aspects of Commissioner Hayne’s recommendations for mortgage
brokers—namely moving to a borrower-pays remuneration structure. We will
be doing a review with the Council of Financial Regulators and the
Australian Competition and Consumer Commission (ACCC). That will be
carried out in three years time.
“Implementation
of these reforms, as recommended by the royal commission, is a critical
component of restoring trust and confidence in Australia’s financial
system and is part of the Morrison government’s plan for a stronger
economy.”
The government will also introduce the Financial
Sector Reform (Hayne Royal Commission Response – Stronger Regulators
(2019 Measures)) Bill 2019. The Bill implements a further four
additional commitments the Government announced at the time of
responding to the Royal Commission and will ensure that ASIC can
effectively enforce existing laws.
“The government is taking
action on all 76 recommendations contained in the Final Report of the
Royal Commission and, in a number of important areas, is going further.
Restoring trust in Australia’s financial system is part of our plan for a
stronger economy,” Mr Frydenberg said.
The National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 — containing a new bests interest duty obligation on mortgage brokers, as recommended by Commissioner Kenneth Hayne in the final report of the banking royal commission. Via The Adviser.
The bill states that brokers “must act
in the best interests of consumers when giving credit assistance in
relation to credit contracts”, meaning:
where there is a
conflict of interest, mortgage brokers must give priority to consumers
in providing credit assistance in relation to credit contracts,
mortgage
brokers and mortgage intermediaries must not accept conflicted
remuneration — any benefit, whether monetary or non-monetary that could
reasonably be expected to influence the credit assistance provided or
could be reasonably expected to influence whether or how the licensee or
representative acts as an intermediary.
employers, credit
providers and mortgage intermediaries must not give conflicted
remuneration to mortgage brokers or mortgage intermediaries.
The
draft bill, which is open for consultation until 4 October, notes that
the duty to act in the best interests of the consumer in relation to
credit assistance is a “principle-based standard of conduct” and “does
not prescribe conduct that will be taken to satisfy the duty in specific
circumstances”.
“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,” the bill states.
According to the bill, the content of the duty “ultimately depends on the circumstances in which credit assistance is provided”.
Examples of such content cited in the draft bill include:
prior
to the recommendation of a credit product, it could be expected that
the mortgage broker consider a range of such products (including the
features of those products) and inform the consumer of that range and
the options it contain,
any recommendations made could be
expected to be based on consumer benefits, rather than benefits that may
be realised by the broker (such as commissions);
in cases
where critical information is not obtained when inquiring about a
consumer’s circumstances, the broker could be expected to refrain from
making a recommendation about a loan where there is a consequent risk
that the loan will not be in the consumer’s best interests;
a
broker would not suggest a white-label home loan that has the same
features as a branded product from the same lender, but with a higher
interest rate, because it would not be in the best interests of the
consumer to pay more for an otherwise similar product; and
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.
In addition to the new best
interests obligation, the draft bill requires a mortgage broker to
“resolve conflicts of interests in the consumer’s favour”.
The
bill states that “if the mortgage broker knows, or reasonably ought to
know”, that there is a conflict between the interests of the consumer
and the interests of the broker or a related party, the mortgage broker
“must give priority to the consumer’s interests”.
As an extension
to the best interests duty, the bill builds on remuneration reforms
proposed by the Combined Industry Forum, which includes:
requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount;
banning campaign and volume-based commissions and payments; and capping soft dollar benefits.
The
proposed regulations also limit the period over which commissions can
be clawed back from aggregators and mortgage brokers to two years and
prohibit the cost of clawbacks being passed on to consumers.
The new provisions are scheduled for implementation by 1 July 2020.
