ASIC has released Consultation Paper 327 Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty (CP 327) about ASIC’s proposals for guidance on reforms relating to mortgage brokers, including a best interests duty, record keeping and the conflict priority rule.

Overview

The paper attaches a draft regulatory guide in response to a new Part 3-5A of the National Consumer Credit Protection Act 2009 (National Credit Act) which has been inserted by the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2019. It  will commence on 1 July 2020. Background.

ASIC intends to release final guidance before the new obligations commence on 1 July 2020.

UPDATE May 2020: Mortgage brokers changes commencement delayed until 1 January 2021.

ASIC Credit (Deferral of Mortgage Broker Obligations) Instrument 2020/487

Who is a mortgage broker?

Mortgage brokers are regulated by ASIC under the National Credit Act and must either hold an Australian credit licence or be an authorised credit representative of a mortgage aggregator (or any other entity) that holds an Australian credit licence.

Under new section 15B(1) of the National Credit Act a licensee is a mortgage broker if all of the following are satisfied:
• the licensee carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property;
• the licensee does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and
• in carrying on the business, the licensee provides credit assistance in relation to credit contracts offered by more than one credit provider.

A credit representative of a licensee (such as an aggregator) is a mortgage broker in equivalent circumstances: new section 15B(2).

The best interests duty does not apply to employees of lenders.

Duties of mortgage brokers and licensees

The amendments create a duty for mortgage brokers to act in the best interests of their consumers (the best interests duty) and require mortgage brokers to prioritise their consumers’ interests when providing credit assistance.

Credit licensees must take reasonable steps to ensure that their credit representatives who are mortgage brokers comply with the best interests duty. This obligation is extended to any process developed by a licensee to assist compliance with the best interests duty: see section 158LE(2).

Best interests duty, design obligations and responsible lending

The best interests obligations operate alongside other obligations that affect how credit assistance is provided to consumers. The best interests obligations do not affect existing laws, including the responsible lending obligations and the design and distribution obligations.

ASIC’s draft guidance explains the interaction of these obligations.

Information gathered may help brokers to comply with the design and distribution obligations from April 2021.

Information gathered for the purpose of complying with the responsible lending obligations may help brokers to comply with the best interests duty.

Appendix A of the draft guide contains a comparison of the responsible lending obligations and the best interests duty.

How to comply

The draft guidance does not contain a ‘safe harbour’ within which a broker is deemed to have complied with the obligations or prescriptive steps for mortgage brokers and others to follow to ensure they comply. Instead it gives examples.

The draft guide deals with:

• Gathering information about the consumer;
• Receiving instructions and making inquiries;
• Incomplete or inaccurate information about a consumer’s circumstances;
• Making an individual assessment;
• Considering cost;
• Risk-based pricing;
• Consumers with limited access to certain products;
• Presenting information and recommendations;
• Packaged products.

Conflict priority rule

The draft guide observes that there is potential for commissions given by credit providers to cause conflicts of interest. Examples of scenarios which would not satisfy the conflict priority rule include recommending, based on commission:
(a) a loan with a higher interest rate than comparable alternatives;
(b) a loan without features the consumer considers important or that would otherwise be in the consumer’s best interests; or
(c) loans by a particular credit provider to a substantial proportion of consumers, irrespective of the consumers’ particular needs.

ASIC’s proposals are intended to be consistent with Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure (RG 175).

Record keeping

ASIC expects mortgage brokers to keep records of how they acted when providing credit assistance. This includes records of inquiries they make into the consumer’s circumstances, and the consideration, investigation and assessment of the products they recommend.

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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.