From July, mortgage brokers will have to comply with current responsible lending obligations and a new best interests duty. Responsible lending and best interests are not the same thing.
According to the information memorandum accompanying the bill that was passed last week, “there are circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with.
“For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s best interests.”
The new law says that where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance.
It also says mortgage brokers must not accept conflicted remuneration, which means any benefit that could reasonably be expected to influence the credit assistance provided. The bill allows for conflicted remuneration to be prescribed in regulations.
The law covers “credit assistance”, which includes things like suggesting that a consumer apply for a particular credit contract, suggesting that a consumer apply for an increase to the credit limit of a credit contract and suggesting that a consumer remain in a particular credit contract with a particular provider.
The broker must act in the best interests of the consumer not only in relation to the mortgage but also in relation to any other credit contracts for which they provide credit assistance. These might include credit cards and personal loans.
Any recommendations would be expected to be based on consumer benefits. “A broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer.”
Mortgage brokers are expected to take active steps to identify all conflicts of interest that might arise as a result of their relationships with third parties. For example, if a mortgage broker has referral arrangements with a real estate agent, then the broker would need to consider the conflicts that could arise and ensues that they give priority to the interests of the consumer over their own interests or those of the real estate agent.
The industry had lobbied to have the best interests duty only apply to home loans but it was not successful.
Dentons special counsel Jon Denovan says this means that once a business is categorised as a mortgage broker, best interests duty will apply to all regulated credit products arranged for customer.
Denovan says: “This means that finance such as personal loans, credit cards and car finance arranged by mortgage brokers will be subject to best interests duty, even when that finance is a stand-alone product.
“But if the finance is arranged by a broker who is not a mortgage broker, the duty will not apply.”
The industry had also lobbied to have the bill make it clear that brokers don’t have to arrange the cheapest loan and review all available products.
Denovan says the duty is a principles-based standard. What conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided.