ASIC has released its guide on its interpretation of the Best Interests Duty ("BID") legislation. It sets out ASIC's "expectation of the industry" and lead to a "higher quality of credit assistance being provided".
Our previous updates on the scope and intent of BID are outlined below. This latest update largely deals with interpretation.
It is a guide for Mortgage Brokers and Credit Licensees. Relates to regulated credit matters.
It is about what advice and/or products are in each consumer's best interests. Key insights include:
- Consumer should in most instances be presented with more than one option;
- It operates "alongside" other laws so responsible lending cannot be compromised because of BID;
- Determination of product involves holistic factors and must challenge the customer's perceptions.
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">1. Data Gathering</span> |
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">Investigate the consumer's circumstances and financial status. Clarify objectives and features they value.</span> |
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">2. Individual Assessment</span> |
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">Consider a "Range" of Products that are available to meet consumer objectives.</span> |
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">3. Present Data/Recommendations</span> |
<span style="color: #333333; font-size: 12pt; font-family: georgia, palatino, serif;">Disclosure both broker and consumers considerations. Giving the consumer education to make informed decisions.</span> |
In terms of application, there are some key aspects that brokers will need to consider:
- This is a "point-in-time" assessment in terms of advice;
- Whether or not the broker has access to the products that the consumer needs;
- Whether the broker has the experience to make recommendations on the advice the consumer needs;
- Brokers should not prioritise recommendations using factors that cannot be substantiated;
- Brokers should present clients with more than one option, unless there is reason not to do so; and
- Cost. The starting point is that this is a key consideration
A Word on Cost
ASIC specifies that a failure to consider cost of "like" products can suggest non-compliance.
Although cost remains a key consideration - it is acknowledged that consumers drive value from other factors including:
- Product Features (including Loan Packages);
- Qualitative factors such as service levels of credit providers; and
- If Refinancing or switching Products - the extent to which it will be in the customers best interests.
As an overarching principle, if brokers are consistently recommending the same products it is a strong indicator of not complying with BID.
Of course, consumer preferences remain critical. Regulation across many industries has in many cases make life more disadvantageous for them. The balance is delicate but brokers must:
- Where the customer has an existing lender or product preference, the broker must still create awareness of products they think are more appropriate; and
- Where the customer has a preference for a loan feature, the broker must ensure they explain why it may not be in their best interests.
This step is effectively putting a minimum standard of knowledge for the broker.
It is generally expected that brokers be accredited with a reasonable panel of providers. The quantum may relate to the market that the broker operates in. As a guiding rule, brokers must have enough coverage to ensure that they can comply with BID.
If a broker is not satisfied that they can meet BID with the products they have available, they must not provide credit assistance to that consumer.
In short, this means that a broker cannot recommends products that bring extra revenue, if doing so doesn't support BID. This includes informing consumers where ownership structures or other commercial interests could potentially affect advice. Brokers cannot simply disclose their way out of this potential conflict.
At first glance, this may seem an obvious point with the standard requirements that comes with all professional services. ASIC has taken the opportunity to align record keeping requirements that relate to responsible lending too, being very explicit around the records that they require.
This theme follows a number of other ASIC communications, where the context is a flow of records that document the broker's journey from initial inquiry through to settlement.
The exact nature of the forms, including what the customer signs etc. is less material than demonstrating compliance with the law. This has, and will lead to material changes to systems (including aggregation software) that facilitates a complete complete customer record.
This "Loan summary" is a terminology used in ASIC laws and regulatory guides, and the latest round of BID builds on this concept.
Moving forward it is the critical part of the compliance process.
Although aligning your BID process to the existing Responsible Lending Guidelines does not mean both are satisfied, it is a good foundation. More than ever, the basis of your investigations and notes need to be properly documented.
If you are an Australian Credit Licence holder - there are also considerable obligations that will result in a step up of processes for many businesses.
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The new BID legislation was tabled in Parliament this week, with the format presented following the theme of the draft presented earlier this year.
The context of this is to align the roles of Mortgage Brokers and Financial Planners, and regulating the former as "financial adviser" – it will come into effect from 1 July 2020.
• Applies only to mortgage brokers that provide credit advice in respect of regulated credit contracts – so includes credit cards, personal loans etc;
• Enshrines into law the banning of the payment/receipt of Conflicted Remuneration on credit contracts struck on or after 1 July 2020;
• Clarifies that it only applies post 1 July 2020;
• “Annual Review” requirement in the draft has changed to “Periodic Review”.
The legislation is largely “principal based” but the intent is reasonably clear. In terms of some application:
• Prior to recommending any credit contract, a mortgage broker may need to consider a range of products, and form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
• A broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (e.g. the broker’s relationship with the lender), over factors which affect the cost of the product or are more relevant to the consumer;
• Where critical information is not obtained about a consumer’s circumstances, the broker must refrain from making a loan recommendation where there is a risk that the loan will not be in the consumer’s best interests.
The legislation notes the role of the broker in helping consumers with BI choices. Some highlighted examples include:
• Interest-only home loans with a higher interest rate.
“The broker helps the consumer to understand the difference in cost of the two home loans, and other differences in the way in which they operate, including that the consumer will only build equity if the property’s value increases or they make additional repayments, and the implications of moving to higher repayments at the end of the interest-only period.”
• Offset Accounts
The consumer asks if they should take a loan with an Offset Account, that also comes with a higher interest rate.
“The broker helps the consumer to understand what is in their best interests, based on the difference between the higher interest rate and the savings that consumer could reasonably expect through utilisation of the offset account”.
There will likely be continued engagement with industry until the law is introduced. Finally, as this becomes legislation, ASIC will provide Regulations on to how they see this applied – expected early next year.
The Federal Government has released an exposure draft Bill that requires mortgage brokers to act in the best interests of consumers when providing credit assistance. The reforms proposed follow the ASIC Remuneration Review, Productivity Commission Review and Royal Commission.
BID is a "principle based standard of conduct" and it draws on specific circumstances. This said, the Bill is relatively explicit in some respects and there are several considerations for mortgage brokers and their customers including:
- Conflicted Remuneration (Monetary or otherwise) is banned;
- Only applies to Mortgage Brokers/Intermediaries and not to Credit Providers themselves;
- Mortgage Brokers must consider/outline a range of products, based on customer circumstances;
- This test must apply too to variations or top-ups of an existing product;
- Recommendations must be based on consumer benefits, not commissions received;
- On review (annual) brokers would need to consider whether a customer should remain in a contract;
- Liability imposed on the Licencee for conduct of all employees, Credit Representatives;
- Only applies to Regulated Credit Matters (not Business Credit); and
- The changes do not affect the existing responsible lending obligations under NCCP.
The remuneration changes are not unexpected, and largely follow the recommendations already put forward by the Combined Industry Forum including:
- Upfront commissions linked to the amount drawn-down by borrowers instead of the loan limit;
- The banning of volume-based commissions and payments;
- Capping of any soft dollar benefits;
- Two (2) year limit on commission claw-backs back from aggregators and mortgage brokers;
- Prohibition of the cost of claw-backs being passed on to consumers.
There are some significant long term impact of the reforms.
The context is the broad objective to lift the professionalism of the industry, and a transition of mortgage broker to the role of "financial adviser". This implies a more connected broker/customer relationship.
The draft Bill made specific examples at times. For example, the positioning of "white label loans" ("A broker would not suggest a higher rate white label loan that has the same features as a branded product from the same lender") means brokers are on notice to demonstrate value.
Further, there is the reference to ensure that best interests are monitored and sustained as circumstances change. Whilst not specifically mandated, the comments "during an annual review", heightens the responsibility of ongoing communication and the need to recommend change if appropriate.
Perhaps this is indirect justification for preserving the existing remuneration model?
ASIC has followed the draft Bill announcing a project entitled ‘mortgage broker accountability' which will be a focus over the coming four years. The regulator described the effort as, “Examining mortgage broker accountability for home loan recommendations, and whether those recommendations align with consumer requirements and objectives.”
Significantly, the implication of BID is still largely focused on quantitative factors, though there is no line through considering qualitative situations (think credit assessment, turnaround times) that can affect borrowers too. The latter is traditionally a language that regulators pay little heed to, but can impact customers materially.
Lastly, the disclosure documentation may end up "trumping" the existing forms and disclosures that are currently produced. It will be critical that the industry continues to rally together as a collective, to avoid the mess that customers have to endure in the financial planning industry.
Otherwise, the customers that need the advice will not be able to access it effectively.
The adoption for BID is scheduled for 1 July 2020.
There may be some unintended consequences of the proposed reforms, and consultation back to Government is available up to early October.
Remember, we want to make it simpler for the customer too?