The Australian Securities and Investments Commission (ASIC) has just released RG 273, which sets out its view on how mortgage brokers may comply with their ‘best interests’ obligations which commence in January 2021. The guidance follows the passing, on 6 February 2020, of the Financial Sector Reform (Hayne Royal Commission Response – Protecting Customers (2019 Measures) Bill 2019 (Bill) which sets down ‘best interest’ duty into law.
Mortgage brokers who have not started to prepare for the imposition of the new laws need to start doing so now. At the least, it will require them to satisfy themselves that their existing governance arrangements and policies will ensure that the customer’s best interests are being met each time they are provided with loan options. For some organisations, it may require them to revisit their business model. The regime is a broad principles-based one, and there are serious penalties for getting it wrong.
In this briefing we give an overview of the legislation, ASIC’s guidance and practical steps that mortgage brokers and affected parties need to be taking now.
The Bill imposes an obligation on mortgage broker licence holders and their credit representatives to act in the ‘best interests’ of customers when giving credit assistance in relation to loan contracts; ss. 158LA and 158LE of the Bill. (While not the subject of this briefing, the Bill also prohibits mortgage broker licensees, credit intermediaries, and credit representatives of those entities from accepting ‘conflicted remuneration’; ss. 158NB and 158NC of the Bill.)
If the mortgage broker licensee knows, or reasonably ought to know, that there is a conflict between the interests of the customer and the interests of the mortgage broker licensee, their associate or a representative or an associate of a representative of the licensee, then the licensee must give priority to the customer’s interests when giving the credit assistance; s. 158LB of the Bill. A similar broad conflicts of interest provision is placed on the credit representatives; s.158LF of the Bill.
Each of these provisions come with penalties of up to $1.05M if they are breached. 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. The duty is a principles-based standard of conduct. As stated in part 3.24 of the Amended Explanatory Memorandum to the Bill:
‘what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a customer in relation to a credit contract… It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of ‘acting in the best interests of customers’ in the relevant circumstances’
Consistent with the nature of the regime, ASIC is taking a very broad approach.
ASIC has stated that it will be guided by the following outcomes in the administration of these obligations:
ASIC has set out three key stages at which the best interests duty is engaged; gathering information about the customer; making an individual assessment; and, presenting information and recommendations. The level of action that is required in any once circumstance will be highly fact specific.
In relation to information-gathering, ASIC has relevantly stated at RG 273.42:
‘A mortgage broker who provides incomplete or inaccurate information as part of a home loan application will not be acting in the customer’s best interests, even if the inaccurate information would increase the likelihood of approval or give the customer access to better terms.’ (Emphasis added)
In relation to assessment i.e. as to what is in the customer’s ‘best interests’, ASIC has not prescribed any particular process or set of factors for brokers to consider. With that said, ASIC has stressed that costs should be prioritised. It has said at RG 273.54:
‘A failure to consider cost and investigate the lowest cost options available to the customer may suggest non-compliance with the best interests duty. Any situation where a higher cost loan is recommended will need to be supported by evidence demonstrating why that recommendation is in the customer’s best interests’ (Emphasis added)
In relation to presenting information and recommendations, ASIC has emphasised the educative role of mortgage brokers, instructed them to align the way they present options in a way that meets the customer’s expectations and also to provide detail as to why the particular option has been selected. That is particularly the case when all the options being presented are from the same credit provider. ASIC states at 273.90 of its guidance:
‘When you recommend a product, we consider that you should present the information to the customer in a way that clearly articulates how taking the recommended action would achieve their objectives and be in their best interests (relative to the other options available).’ (Emphasis added)
RG 273 reflects the broad scope of powers ASIC has at its disposal under the principles-based reform, and ASIC’s intention not to limit itself within that rubric. It has expressly stated that nothing in RG 237 is intended to create a ‘safe harbour’ for mortgage brokers in meeting their new obligations; RG 273.13. ASIC has also stated that it intends to closely monitor the conduct and outcomes from 1 January 2021 to ensure that mortgage brokers are complying effectively with the best interest duty.
Brokers cannot purport to contract out of the best interests duty via any scheme or conduct under the anti-avoidance provision in Section 158T of the National Consumer Credit Protection Act 2009 (Cth) (NCCP). Brokers found to have breached the anti-avoidance provision may be liable for a civil penalty under the NCCP.
ASIC has provided further guidance in that brokers cannot avoid the best interests obligation by any notice or disclosure provided to or signed by the customer nor attempting to comply with the obligation by procuring the customer to consent to credit assistance or a conflict of interest (RG 273.14).
Mortgage brokers and other affected parties need to review their governance process and policies and procedures in order to ensure that an appropriate risk framework is in place. They will need to be satisfied that the customer’s best interests are being met each time a mortgage broker recommends a loan product to them.
Timelines are tight, and appreciable penalties apply for breaches of the law. We recommend engaging with these issues sooner rather than later. Our Banking & Finance and regulatory teams have deep experience in this space and would be happy to assist you. Please reach out to your usual Gadens’ contact if you would like any further information.
Craig Green, Partner
Shantal Evans, Partner
Victor Asoyo, Partner