Mortgage broker best interest exclusions ‘will not have the intended effect’

John Kavanagh Finance regulation

Wording in the draft mortgage broker best interest bill intended to limit the effect of the new law to mortgage brokers and mortgage intermediaries “will not have the intended effect” according to a leading industry commentator, and needs to be fixed.

Lawyer Jon Denovan, a special counsel at Dentons, says the government needs to provide clarity for mortgage managers, servicers and other who provide support services to lenders and brokers.

Last month, Treasury released an exposure draft of National Consumer Credit Protection Amendment (Mortgage Brokers) Bill, which amends the Credit Act to require brokers to act in the best interests of consumers and to address conflicted remuneration for brokers and other mortgage intermediaries. The consultation period ended last week.

The explanatory memorandum accompanying the bill says: “Requiring mortgage brokers to act in the best interests of consumers and addressing conflicted remuneration are intended to strengthen existing protections for consumers who deal with mortgage brokers.

“They bring the law into line with what consumers expect – that any advice provided by a mortgage broker serves the consumer’s interests first and foremost.”

The new law imposes the best interest duty on mortgage brokers and mortgage intermediaries. A broker can be a licensee or a credit representative of a licensee that carries on a mortgage broking business.

In particular, the new law defines a mortgage brokers as a licensee or a credit representative of a licensee that carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property, and does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts.

The current draft attempts to exclude business that provide credit assistance but which are neither mortgage brokers nor intermediaries, as those terms are commonly used.

The information memorandum says the definitions of mortgage broker and mortgage intermediary are intended to only capture those businesses that would ordinarily be described as a mortgage broking or mortgage intermediary businesses.

It says: “In particular, the definitions of both terms are not intended to extend to credit providers where they are providing credit assistance in relation to their own products rather than providing broking or intermediary services.”

Denovan says there are many businesses that provide credit assistance but which are neither mortgage brokers nor intermediaries “as those terms are used colloquially”. Examples include the provision of outsourced services for lenders and lessors.

Denovan says the draft provisions attempt to exclude these kinds of businesses by “excluding business which perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts.”

He says this exclusion will not have the intended effect because there are many businesses that provide these services but do not perform the obligations or exercise the rights of a credit provider in relation to the majority of the credit contracts handled by the business.

Denovan says these types of businesses should be excluded in full from the provisions in the proposed act.

“It is very important that current and appropriate business structures are not intentionally disrupted,” he says.