Mortgage brokers looking for safe harbour provisions in ASIC’s regulatory guide to the mortgage broker best interests duty will not find them.
ASIC has applied what it calls “high-level principles” in setting out brokers’ obligations under the new best interests duty, which takes effect next January.
Rather than be prescriptive, ASIC says “what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract”.
The regulator has released RG 273 after conducting consultation earlier this year. It contains ASIC’s view on how mortgage brokers may comply with their best interests obligations.
Brokers “must act in the best interests of each individual consumer to whom credit assistance is provided. The obligations requite brokers to assess what products and what credit assistance would be in each consumer’s best interests”.
ASIC says the risk of non-compliance is substantially higher if a broker uses a one size fits all approach.
Information gathering
ASIC does not prescribe the appropriate information brokers should gather from their clients. Rather, it recommends a case-by-case approach to gathering information from the client and making inquiries about the client.
It says: “The type and amount of information that a mortgage broker should gather to identify the consumer’s needs and objectives, and determine whether a credit contract will be in their best interests, varies depending on the consumer’s individual circumstances.”
ASIC says that if it is clear that the information provided is incomplete or inaccurate, the broker must make further inquiries. “A mortgage broker who provides incomplete or inaccurate information as part of a home loan application will not be acting in the consumer’s best interests.”
Assessing best interests
ASIC recommends that brokers take a holistic view of products, with the cost of the loan a priority– interest rate, fees and charges and the size of repayments.
There is no prescribed process or set of factors for brokers to consider when conducting an assessment.
However, ASIC says: “We consider that cost is generally a factor brokers should prioritise. A failure to consider cost and investigate the lower cost options available to the consumer may be indicative of non-compliance.”
Non-cost considerations, such as loan features and accessibility, should also be assessed for the net benefits they offer.
Presenting information and recommendations
ASIC wants brokers to tailor the way they present product options and recommendations, “to account for the consumer’s expectations”.
It is also emphasising the educative role of mortgage brokers. ASIC says it is important that consumers are helped to understand the options presented.
The legislation does not prescribe how many options should be presented to consumers. But ASIC says “some practices are not consistent with acting in the consumer’s best interests.”
It cites consumer research which shows that 58 per cent of consumers receive only one or two loan options.
It says: “We consider it is important that consumers are presented with options and understand why the options presented to them have been selected and why a particular option has been recommended to them.”
The best interests duty does not require brokers to conduct periodic reviews or provider credit assistance in the future. “However, it is good practice to review the consumer’s circumstances from time to time.”
Interaction with responsible lending obligations
According to the information memorandum accompanying the bill – Financial sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019 - “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.”
ASIC says meeting responsible lending obligations is not necessarily sufficient to discharge a duty to act in someone’s best interests. “The best interests duty applies more broadly,” it says.
Range of credit products
Brokers should be able to satisfy themselves that recommending from within their panel is in the consumer’s best interests.
“If you are not satisfied that the products are credit providers you can access and recommend will allow you to act in a consumer’s best interests, you must not provide credit assistance to that consumer,” ASIC says.
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.
Brokers will be required to assess other credit products packaged with a home loan in meeting the new best interests duty.
Credit cards, personal loans and other credit products that are packaged with a mortgage are subject to the best interest duty. ASIC says a consumer’s financial situation and personal circumstances may affect the suitability of different products within packages.