ASIC’s Advice to Mortgage Brokers on Their “Best Interest” Duty: Time to Act!

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The Australian Securities and Investments Commission (ASIC) has just released RG 273, which sets out its perspective on how mortgage brokers can meet their “best interests” obligations that begin in January 2021. The guidance follows the adoption, on February 6, 2020, from the Financial Sector Reform (Hayne Royal Commission Response – Client Protection Bill 2019 (2019 Measures) (Bill) which enshrines in law the obligation of “best interests”.

Mortgage brokers who haven’t started preparing for the imposition of the new laws need to start now. At the very least, it will require them to ensure that their existing governance arrangements and policies will ensure that the best interests of the client are respected whenever offered loan options. For some organizations, this may force them to review their business model. The regime is based on general principles, and there are severe penalties for misconduct.

In this briefing, we provide an overview of the legislation, advice from ASIC, and practical steps mortgage brokers and affected parties need to take right now.

Legislation

The bill requires mortgage broker licensees and their credit representatives to act in the “best interests” of clients when providing credit assistance under loan agreements; art. 158LA and 158LE of the bill. (Although not the subject of this briefing note, the bill also prohibits holders of mortgage broker’s licenses, credit intermediaries and credit representatives of such entities from accepting “”conflicting compensation‘; art. Bill 158NB and 158NC.)

If the licensed mortgage broker knows, or reasonably should know, that there is a conflict between the interests of the client and the interests of the licensed mortgage broker, his or her partner or a representative or partner a representative of the licensee, then the licensee must give priority to the interests of the client when granting credit assistance; s. 158LB of the bill. A similar broad provision on conflicts of interest is imposed on credit representatives; art.158LF of the bill.

Each of these provisions carries penalties of up to $ 1.05 million for violation. In addition, mortgage broker licensees must take “reasonable steps” to ensure that their credit representatives comply with their obligations; s. 158LE (2) of the bill. Duty is a principled standard of conduct. As stated in part 3.24 of the amended explanatory memorandum to the bill:

what conduct will satisfy the duty will depend on the individual circumstances in which credit assistance is provided to a client in connection with a credit agreement … It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of ” Act in the best interests of clients ‘in the relevant circumstances’

ASIC advice

In accordance with the nature of the scheme, ASIC takes a very broad approach.

ASIC has stated that it will be guided by the following outcomes in administering these obligations:

  • align the practices of mortgage brokers with client expectations;
  • improve customer support, support and communication throughout the credit assistance process;
  • better quality of credit assistance provided overall;
  • the reasons for the options recommended to clients by mortgage brokers – and why the product is in the best interest of the client – should be recorded and explained to the client;
  • credit assistance which is in the interests of the broker or of a third party can only be provided if it is also in the best interests of the client; and
  • the best interest obligation and the conflict priority rule are separate obligations that work side by side and apply whenever a mortgage broker provides credit assistance.

ASIC has defined three key stages during which the duty of the best interests is engaged; collect customer information; do an individual assessment; and, present information and recommendations. The level of action required in a given circumstance will be very specific to the facts.

Regarding information gathering, ASIC aptly stated in RG 273.42:

“A mortgage broker who provides incomplete or inaccurate information as part of a mortgage application will not act in the best interest of the client, although the inaccurate information would increase the likelihood of approval or give the customer access on better terms. ‘ (I underline)

With respect to valuation, that is, what is in the “best interests” of the client, ASIC has not prescribed any particular process or set of factors for brokers to consider. That said, ASIC stressed that costs should be a priority. He told RG 273.54:

‘A cost not taken into account and study the cheapest options available to the customer may suggest a nonconformity with the duty of the best interest. Any situation in which a higher cost loan is recommended will need to be supported by evidence demonstrating why this recommendation is in the best interest of the client. (I underline)

Regarding the presentation of information and recommendations, ASIC emphasized the educational role of mortgage brokers, asked them to align the way they present the options so as to meet the expectations of the client. and also provide details of the reasons why the particular option was selected. This is particularly the case when all the options presented come from the same credit provider. ASIC states at 273.90 of its guidelines:

“When you recommend a product, we consider that you need to present the information to the customer in a way that clearly explains how taking the recommended actions would achieve their goals and be in their best interest (relative to other options available). ‘ (I underline)

Consequences for mortgage brokers

RG 273 reflects the wide range of powers that ASIC has in principled reform, and ASIC’s intention not to limit itself to this topic. He expressly stated that nothing in RG 237 is intended to create a “safe haven” for mortgage brokers in meeting their new obligations; RG 273.13. ASIC also said it intends to closely monitor conduct and results from January 1, 2021 to ensure mortgage brokers are actually complying with the best interest obligation.

Brokers cannot claim to evade the best interest obligation through any scheme or conduct under the anti-avoidance provision of Section 158T of the National Consumer Credit Protection Act 2009 ( “NCCPBrokers found guilty of violating the anti-avoidance provision may be subject to a civil penalty under the NCCP.

ASIC has provided additional guidance that brokers cannot avoid the best interest obligation by a notice or disclosure provided or signed by the client, nor attempt to comply with the obligation by inducing the client to consent to credit assistance or a conflict of interest (RG 273.14).

Next steps

Mortgage brokers and other affected parties should review their governance process as well as their policies and procedures to ensure that an appropriate risk framework is in place. They will need to be confident that the best interests of the client are being respected whenever a mortgage broker recommends a loan product to them.

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