The devil is in the detail when it comes to mortgage brokers proving best interest duty

There are many great customer-centric ambitions of the National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019. Let me say that at the outset. 

But there are three key areas in the bill and associated draft regulations that I believe require a bit of a rethink in terms of their practical application and unintended ramifications for small business owners, particularly mortgage brokers, who will want to do the right thing but might well get tangled in the ambiguity.

Namely, I’m worried about additional layers of regulation, the timetable for implementation, and best interests duty.

I could talk about all three, but the one that really has me up at night is the latter. 

What does it mean? How do we define best? How does it work? How do we prove the duty has been fulfilled? How do we manage this transparently across hundreds or thousands of clients and brokers with lengthy, successful careers?

We need clarity here, but I’m afraid we have ambiguity, and with a 1 July 2020 start date we need clarity quickly. 

The broadness of this duty as laid out in the bill is confusing, subjective and therefore worrisome for me: “Mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts.”

There wouldn’t be any mortgage brokers I can think of who doesn’t believe they are always acting in their clients best interests. As small businesses and sole operators, there’s a genuine desire and imperative to do the right thing by all clients. It’s core to running a growing business and providing value to clientele who could just go to their lender. 

The Hayne Commission recommended a principle-based rather than a prescriptive-based approach to this duty, and that’s what’s in the bill.

I reckon that a prescriptive approach would actually be easier for all stakeholders, including clients. 

You see, those brokers who genuinely believe they are acting in their clients best interests go about their decision-making with confidence today. This bill, however, removes the confidence through the ambiguity of assessing a principle-based best duty, creating an onus for the broker being audited to prove they achieved this duty. But how they prove it is not laid out. And the penalty for not proving you achieved your best interests duty? $1million! That’s enough to drive doubt into anyone’s mind, let alone their business ambition. It would cripple most brokers. 

You can see why it’s keeping me up at night. 

How does a broker know they met the government’s expectations of best interest? How can they prove it? What does ‘best’ mean to the regulator: lowest, cheapest, quickest, most flexible, fully knowing a consumer’s needs and objectives? Who is assessing best interest and are they fair?

We all know rate is not always the determinant for ‘best’...

The reason it’s a concern is best highlighted in ASIC report 628 - a report that mystery shopped brokers and was published not long after the bill was released. ASIC queried why clients were not always offered the lowest rate. We all know rate is not always the determinant for ‘best’, there can be a bigger focus on a whole range of factors:the residency status, age of client, LVR, guarantor inclusion, flexible payments, deal structure, timing, policy… it’s limitless.  

Immediately this tells us we need a process, guidance, a way for brokers to communicate and document how they achieved their best interest duty. That’s what we’ve asked for in our lobbying submission following national roundtables with mortgage brokers. 

In financial planning, the addition of a thing called a ‘safe harbour’ gave a really clear set of steps that the planner undertakes that ensures they are compliant. We would have loved that ‘safe harbour’ for mortgage broking too, but failing that a regulatory guidance note for brokers would suffice. 

At Loan Market, we have created stipulated steps for compliance with best interests duty that help our brokers document their adherence to this important duty. So if or when they get challenged, whether three months or three years from the loan application, they have a proforma that serves as evidence of their best interests compliance. That document also contains examples of breaches of best interests duty. Most of it is obvious, but the process is the crucial part and the record is the evidence. 

The notes, reasoning and explanation will become crucial. The test or audit is often done in hindsight, so the forethought needs to be documented. “We did this because the client said that”, or “we went this way because the client couldn’t go the other way”. These details are harder to recall months and years after the fact. 

Without clarifying the practical definition, ‘best’ might become a fraught word. 

Without clarifying the detail and definition of the government’s and regulator’s expectation of best interests duty application through a process, ‘best’ might become a fraught word. 

We submitted our detailed position on this to Treasury, if you’d like to read it send me an email [email protected]