On the 26 August an exposure draft Bill — [draft] National Consumer Credit Protection Amendment (Mortgage Brokers) Bill 2019 — and exposure draft Regulations were released for consultation. The proposed legislation proposes to implement the government's response to two recommendations of the Hayne Commission, namely recommendations 1.2 (best interest duty for mortgage brokers) and 1.3 (broker remuneration reform).
[Note: The government's initial response to the Financial Services Royal Commission Final Report Recommendations released in February specified, with respect to recommendation 1.3, that the government will not move to implement a 'borrower pays' model (pending the outcome of a review) but would move forward with other recommended changes to broker remuneration. The government's recently released implementation roadmap for implementing the Commission's recommendations reiterated that recommendation 1.3 will be implemented in line with the government's initial response. For a summary of the implications of the government's initial response to implementing recommendations relating to brokers see: FSRC Final Report: Mortgage broking implications. For a summary of the government's implementation roadmap/timelines for implementing the Commission's recommendations see: Governance News 21/08/2019).]
Timeline
Consultation on the draft legislation will close on 4 October. The proposed reforms are planned to come into force on 1 July 2020.
According to the government's 'implementation roadmap' which sets out timelines for implementing the government's response to the Hayne Commission's recommendations, the government intends to consult and introduce the legislation by the end of 2019 (see: Governance News 21/08/2019).
What's proposed?
Schedule 1 to the draft Bill proposes to amend the National Consumer Credit Protection Act 2009 (NCCP Act) to:
- require mortgage brokers to act in the best interests of consumers (in line with the government's response to recommendation 1.2): Mortgage brokers would be required to act in the best interests of consumers in relation to credit assistance in relation to credit contracts and, where there is a conflict of interest, mortgage brokers would be required to give priority to consumers in providing credit assistance in relation to credit contracts.
- address conflicted remuneration for mortgage brokers and 'mortgage intermediaries such as aggregators' (in line with the government's response to recommendation 1.3): Mortgage brokers and mortgage intermediaries would be banned from accepting conflicted remuneration, and employers, credit providers and mortgage intermediaries would be prohibited from giving conflicted remuneration to mortgage brokers or mortgage intermediaries.
[Note: In his final report, Commissioner Hayne writes (at 72) that the best interests obligation should not apply to aggregators 'who have no direct relationship with the borrower and play no role in the selection or recommendation of the loan.
With respect to implementing recommendation 1.3, Treasurer Josh Frydenberg said that the Bill proposes to: a) link the value of upfront commissions to the amount drawn down by borrowers instead of the loan amount; b) ban campaign and volume-based commissions and payments; and c) cap soft dollar benefits.
It's proposed that a contravention of each obligation in Schedule 1 to the Bill will attract a civil penalty (a maximum of 5,000 penalty units per contravention) and that the existing enforcement regime in the NCCP Act will also apply in relation to a contravention of the obligations.
Additionally, the draft Regulations propose to limit claw back commissions payable to brokers to two years and prohibit the passing on of the costs associated with this to consumers.
Mr Frydenberg said that remuneration structures for mortgage brokers, including upfront and trail commissions, will be reviewed in three years' time by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC).
A duty to act in the best interests of the consumer? A 'principles based approach'
The explanatory memorandum states that the 'duty to act in the best interests of the consumer in relation to credit assistance is a principle-based standard of conduct that applies across a range of activities that licensees and representatives engage in…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'.
This approach is consistent, the explanatory memorandum states, with the Financial Services Royal Commission's final report recommendation, in that it does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. 'It is the responsibility of mortgage brokers to ensure that their conduct meets the standard of "acting in the best interests of consumers" in the relevant circumstances' the explanatory memorandum states.
[Note: Commissioner Hayne discusses this point in his final report at p72 where he comments 'As ASIC submitted, the content of the duty is best expressed "as a broad statement of principle". ASIC's proposed drafting of the obligation as "to act in the best interests of the consumer [I might prefer "loan applicant"] in the selection and arranging of loans' goes a long way to capturing the heart of the relevant ideas. Imposing this obligation would give statutory recognition to what borrowers currently expect of brokers.']
Who do the proposed changes apply to?
The proposed new law would impose obligations on mortgage brokers and mortgage intermediaries.
For the purposes of the proposed new law:
- a mortgage broker 'can be either a licensee or a credit representative of a licensee that carries on a mortgage broking business'. The new requirements also apply to 'representatives of credit representatives that are mortgage brokers'
- a mortgage intermediary 'is either a licensee or a credit representative of a licensee that acts as an intermediary in relation to mortgages'
The explanatory memorandum stipulates that these definitions are 'intended to only capture those businesses that would ordinarily be described as a mortgage broking or mortgage intermediary businesses. 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'.
Purpose/objective of the proposed reforms?
The explanatory memorandum states that the changes are intended to 'bring the law into line with what consumers expect — that any advice provided by a mortgage broker services the consumer's interests first and foremost'. The objective of the new law is to 'improve consumer outcomes' by requiring mortgage brokers to act in the best interests of their clients and by reducing the potential for conflicts of interests to impact the advice consumers receive from mortgage brokers.
Announcing the consultation Treasurer Josh Frydenberg echoed this saying, 'Mortgage brokers play an important role in promoting good consumer outcomes and competition in the home loan market. Mortgage brokers have a strong presence in the home loan market accounting for close to 60 per cent of home loans. The implementation of the best interests duty will bring the law in line with what consumers expect of mortgage brokers'.
Industry response?
The Age quotes Choice Head of campaigns Erin Turner as saying that the proposed wording of the best interests duty looked 'strong' at first glance and it should encourage better quality advice from brokers, which may include telling customers not to borrow at all in some cases. 'It should mean that you're more likely to get a better deal - a better interest rate or a better quality loan' Ms Turner is quoted as saying.
Managing Director of the Finance Brokers Association of Australia (FBAA) Peter White is quoted as saying that the FBAA does not oppose the introduction of a best interests duty in principle, but that the duty should 'be different to the duty imposed on financial advisers.'
