On 24 June 2020, ASIC issued "Regulatory Guide 273 Mortgage brokers: Best interests duty" (RG 273) as a resource to assist mortgage brokers and other relevant Australian credit licensees to understand the new codified 'best interests obligations'.
RG 273 explains:
- what ASIC looks for when it assesses compliance with the best interests obligations in the National Credit Act;1 and
- the steps mortgage brokers can take to minimise the risk of non-compliance.
The 'best interests duty' was one of the recommendations emerging from the Royal Commission into Misconduct in the Banking and Financial Services Industry, which is now codified in the National Credit Act.
The best interest obligations will take effect from 1 January 2021 (it was due to take effect 1 July 2020 however ASIC has provided a temporary exemption due to COVID-19).
Nothing in RG 273 is intended to provide a 'safe harbour', rather the guide is designed to give clarity to expectations of the industry. As such, RG 273 offers a number of worked examples to demonstrate how ASIC will view the new obligations.
Best interests obligations
Under these new laws, a mortgage broker:2
- is subject to a duty to act in the best interests of their consumers (best interests duty);3
- must prioritise their consumers' interests when providing credit assistance (conflict priority rule).4
These obligations, which RG 273 collectively refers to as the 'best interests obligations', give statutory recognition to consumers' expectations when dealing with brokers.
Best interests duty
What is required for a broker to act in a 'consumer's best interests' will depend on the consumer's individual circumstances.
RG 273 provides that mortgage brokers are likely to need to:
- gather information about the consumer and their situation;
- use that information to assess what credit assistance would be in the consumer's best interests; and
- depending on that assessment, potentially suggest one or more products to the consumer, and provide information about why the recommended products are in the consumer's best interests.
The National Credit Act does not set out circumstances in which a mortgage broker is taken to have complied with these obligations. This means that there is no 'safe harbour'; mortgage brokers will need to take all steps necessary to ensure that they act in the best interests of the relevant consumer.
Importantly, the best interests obligations cannot be avoided or contracted out of.5 With respect to the anti-avoidance provisions in the National Credit Act, RG 273 states that "there is also a ban on entering into or carrying out a scheme that is designed to avoid the application of the best interests obligations, as well as the ban on conflicted remuneration." A civil penalty of 5,000 penalty units applies for breach in this respect.6
The best interests obligations apply in addition to other laws – a credit licensee must comply with the responsible lending obligations as well (the Appendix to RG 273 sets out a table of these two sets of obligations).
Conflict priority rule
Under the 'conflict priority rule', if there is a conflict of interest when providing credit assistance, the mortgage broker is required to give priority to the consumer's interests.7 The broker must not prioritise its own interests, the interests of credit providers or third parties.
To comply with the conflict priority rule, the broker must first identify what interests it or its related parties have. The broker may then consider what a mortgage broker in its position but without a conflict of interest would do.
The conflict priority rule means that the broker must not recommend a product or service of a related party that would create extra revenue for itself, its credit licensee or another related party, unless doing so would also be in the consumer's best interests.
If the broker has a conflict of interest and is unable to prioritise the consumer's interests, the broker must not provide the credit assistance.8
When do the best interests obligations apply?
The best interests obligations apply any time a broker provides credit assistance to a consumer including in respect of standalone credit products and where products that are packaged with a mortgage (e.g. credit cards, personal loans, car loans and other credit products that are packaged or bundled with the mortgage).
For the purposes of these obligations, a consumer is a natural person (or strata corporation)9 that is seeking advice/assistance on products that fall within the National Credit Act. Most commonly, it will involve a person seeking advice on everyday credit products such as those mentioned above.
When advising, the broker must take into account the information available at that time, including reasonably foreseeable changes to the consumer's personal circumstances and financial situation.
The best interest obligations do not apply to non-credit products (such as insurance products). If these products are offered or other such services are offered to a consumer, a mortgage broker must not imply that the best interests obligations apply in this situation. Doing so may be misleading or deceptive conduct as the consumer could be led to believe that the best interests obligations apply, when they do not.
In the industry, a concern has been whether these obligations apply throughout the whole property conveyancing exchange and settlement process or just at the time when the application for financing is made. We are seeing the industry move to a practice where the broker will have these obligations front of mind earlier in the conveyancing process, as that is when credit approval is sought by the consumer and that is when the fact finding and credit application process occurs. Anecdotally, brokers have commented to us that to continue this practice and to continue to explore alternative products later in the conveyancing process could be detrimental to the consumer's position, as each application for credit involves a credit enquiry which could jeopardise the previously approved credit.
Presenting information and recommendations to the consumer
ASIC considers that presenting information about alternative credit products, including one or more recommendations, forms part of the credit assistance mortgage brokers provide. As a result, a mortgage broker must act in the consumer's best interests when presenting such information.
This means that during the initial fact finding phase a mortgage broker should assess the needs of each consumer on a case-by-case basis, take into account their circumstances and needs, and then determine the number of alternatives one should provide to that specific consumer. ASIC takes the view that as a matter of good practice, a mortgage broker should present a consumer with more than one option, unless there is a good reason not to. This means that as a matter of practice mortgage brokers are now:
- considering the lowest rate for the borrowing may not be the sole determining factor for a credit product for the client;
- seeing that the fact-finding phase will filter out lenders and certain products (often a client's financial situation may mean that very few credit products are available or appropriate for them);
- following up with the client by way of written notes far more than they previously did.
ASIC expects mortgage brokers to keep good records of how they have acted when providing credit assistance so that they can demonstrate compliance. This includes records of inquiries made into the consumer's circumstances, and the consideration, investigation and assessment of the products recommended.
In the industry we are seeing that the better brokers are maintaining their already-in-place good habits of record keeping for themselves, providing summary notes to the client following key discussions and confirming key instructions in writing (in a manner similar to other professional services). It is the lesser diligent brokers that are being brought to these habits by way of the best interests duty requiring better practices.
Obligations for credit licensees
Credit licensees must take reasonable steps to ensure that their credit representatives who are mortgage brokers comply with the best interests obligations.10 ASIC considers that this will include the processes a licensee develops to help their mortgage brokers to comply with these obligations.
What constitutes reasonable steps may vary depending on the nature and scale of the broker's operations and their relationship with the licensee however we consider training and record keeping as baseline steps.
In our experience we are seeing that the already diligent brokers and credit licensees are best positioned to deal with these new obligations and will be treating this as business as usual. However even the diligent brokers are stepping up their training, compliance and diligence capabilities to ensure that they best serve their clients.
1 Pt 3-5A of the National Consumer Credit Protection Act 2009 (Cth)
2 Section 15B of the National Credit Act defines a mortgage broker as a person who: (a) carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property; (b) does not act as the credit provider in relation to most of those contracts; and (c) provides credit assistance in relation to credit contracts offered by more than one credit provider: s15B.
3 Sections 158LA and 158LE of the National Credit Act.
4 Sections 158LB and 158LF of the National Credit Act.
5 Section 158T of the National Credit Act.
6 At time of writing, one penalty unit is $222.
7 Sections 158LB and 158LF of the National Credit Act.
8 RG 273.146 to RG 273.148.
9 Section 5 of the National Credit Act
10 Sections 158LE(2) and 158LF(2) National Credit Act.