The Final Report did not propose structural separation between product issuers and advisers, because the benefits did not outweigh the "significant disruption" it would cause.
The Report recommends that borrowers, not lenders, should pay mortgage brokers, and that brokers should be regulated as financial advisers. It also raises the prospect of following changes introduced in the Netherlands that 'level the playing field' by requiring banks to charge for mortgage broking services at cost.
The Government has not gone this far, but proposes to make changes that significantly restrict mortgage brokers' income, while significantly increasing their costs.
Restrictions on remuneration
From 1 July 2020 the Government has agreed to:
- prohibit payment of trail commissions on new loans
- require upfront commissions to be linked to amounts drawn down rather than amount borrowed
- ban campaign and volume-based commissions and payments
- limit to two years the period over which commissions can be clawed back from aggregators
- prohibit the cost of clawbacks being passed to the consumer
In three years' time, the Government proposes to review the impact of these changes, and look at the implications for consumer outcomes and competition of moving to a borrower pays system.
Greater regulation
The Government will:
- make mortgage brokers subject to a "best interests" test, with a civil penalty for breach
- "align" the regulatory frameworks for mortgage brokers and financial advisers, rather than to regulate mortgage brokers as financial advisers
- require ACL holders to comply with information sharing and reporting obligations, including requiring licensees to investigate misconduct, and to inform and remediate affected borrowers.
The best interests test is likely to be expressed as a requirement to 'act in the best interests of the loan applicant in the selection and arranging of loans'. This is a much broader obligation than a duty to give preference to the client's interests where the client's interests and the broker's interests do not coincide.
It is not yet clear how closely the Government intends the proposed regulatory framework to align to the financial advisers' framework. In particular, it is not clear whether mortgage brokers will need to meet the adviser educational requirements, or to give clients statements of advice.
Key challenges and opportunities
The industry is likely to examine opportunities to reduce regulatory and other costs, including:
- greater reliance on information technology systems: both to deliver services to customers and to comply with regulatory requirements
- consolidation with advisory businesses within their corporate group.
The Government's decision not to follow all of the recommendations in the Final Report exposes the industry to uncertainty. But it also gives the industry the opportunity to persuade the Government that mortgage brokers can act in their clients' best interests, and address the conflicts and other deficiencies identified in the Final Report, without being subject to the full financial advice regime, and without a prohibition on lender fees.
The proposed review in three years' time gives mortgage brokers three years to implement changes that convince the Government that the industry improves customer outcomes and increases competition. The industry has the opportunity to monitor whether the remuneration changes have a negative impact on customers, including for example whether the move to upfront commissions encourages customer churn.
