In February this year, the Financial Sector Reform Bill passed the houses of parliament and one outcome of this was the introduction of a new Best Interest Duty placed upon Mortgage Brokers.
After an initial delay, this required process will come into effect on 1 January 2021.
There remains significant discussion around this duty and for those who wish to read it for themselves, the following link is to RG273 – Mortgage Brokers: Best Interest Duty. Our interpretation and that of our legal advisers is as follows:
What is it?
In summary, when a mortgage broker deals with a customer in relation to any consumer loan, from 1-Jan 2021, they must act in the best interest of the consumer when providing credit assistance. There must be detailed evidence on file to demonstrate this has occurred.
This goes beyond current responsible lending obligations and the justification of a loan being ‘not unsuitable’. The duty is now on the Mortgage Broker to ensure the loan selected is the best available to the consumer’s unique circumstances and objectives.
When does it apply?
A mortgage broker’s best interest’s duty applies to a licensee providing credit assistance where the licensee is a mortgage broker.
It also applies to a credit representative providing credit assistance where either the licensee or the credit representative is a mortgage broker. This means non-mortgage broker credit reps will be caught if their licensee is a mortgage broker. Ie. Separate ACLs will be required.
Who does it apply to?
- A mortgage broker is defined as a licensee (or credit rep, where applicable) who:
- carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property; and
- does not perform the obligations, or exercise the rights, of a credit provider in relation to most of those credit contracts; and
- in carrying on the business, provides credit assistance in relation to credit contracts offered by more than one credit provider.
- Sub-clause (a) above means there is a question of when someone “carries on a business” of credit assistance in relation to mortgages. This is a legitimate legal point, but very subjective. However, it is our belief that an asset finance broker who only occasionally does a home loan might be able to argue that they are not carrying on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property. However, the more home loans one writes, the more difficult the argument becomes.
- Sub-clause (b) above means that if someone is a mortgage manager (or otherwise acts for the lender) in relation to most of their credit assistance activities, they will not be a mortgage broker. This means businesses that offer their own product principally (white-labelled from another lender) but occasionally broker loans, will not be mortgage brokers and will not need to comply with best interest duty. However, those who broker more business than they place into their own product will need to comply with best interest.
- Once a person meets the definition of “mortgage broker”, best interest duty applies to all their business (and for licensees, the whole businesses of all their credit reps) regardless of the consumer transaction type
- Credit reps of aggregators (but not mortgage managers) are likely to have to apply the duty to all their business, even if none of it is home loans, where the aggregator meets the definition of mortgage broker.
It is our belief that there are likely to be some unintended adverse consequences of this new regulatory process and we are therefore likely to see continued debate throughout 2021 and likely tweaks. However, if you haven’t already started preparing your business, we suggest you do asap! We also recommend you seek legal advice, where in doubt.
We hope the above details help you and your team.
As you know, we founded SalesKey with an objective to share our knowledge of Finance, Lending, Finance Broking, and business management and in turn guide businesses through the maze of compliance requirements. It’s our pleasure to do so! Whether it’s a review of your ACL Obligations, your readiness for BID, internal processes, NCCP adherence, sales maximisation, systems, or your organisational structure; we are well placed to help any participant within the Financial Services space.
For an obligation-free discussion, w’d love to hear from you on 1800 954 488.
Scott and Darren.