How best interests duty impacts asset finance brokers
The new best interests duty (BID) laws are coming into effect on 1 January 2021. These new laws consist of three key principles:
- best interests duty obligation – a ‘mortgage broker’ must act in the best interests of its customers
- conflict priority rule – a mortgage broker must prioritise the interests of their customer ahead of their own
- conflicted remuneration – there is a ban on the payment and receipt of conflicted remuneration (essentially, any additional perks and benefits, monetary or non-monetary, that could influence the loan products you recommend or the credit advice you provide to your customers).
I’m not a mortgage broker – can I stop reading?
You should keep reading unless your business only assists with commercial lending.
Although the original BID rules only applied to mortgage brokers, on 4 November Treasury announced they intend to extend BID to apply to all credit assistance providers
This means all finance brokers (not just mortgage brokers), would be subject to the new BID laws in any consumer lending they assist with from March 2021.
These new laws are currently going through a public consultation phase (submissions due 20 November 2020). Assuming these new laws get passed by Federal Government, Treasury want these laws to apply from 1 March 2021.
What does this mean?
There are two dates that you need to be aware of and potentially prepare for.
- 1 January 2020 when BID applies to mortgage brokers.
- 1 March 2021 when BID, if the new proposed law is passed, will apply to finance brokers that provide any consumer credit assistance.
Preparing for 1 January 2021
Come 1 January 2021 the key question is whether you fall within the definition of ‘mortgage broker’.
A mortgage broker is defined as someone who carries on business of providing credit assistance in relation to credit contracts secured over residential property. This definition centres around the concept of ‘carries on business’.
As a general rule, you are likely to be considered a mortgage broker and subject to these new BID laws if any of the following applies:
- you have assisted a customer with a home loan in the past 12 months
- you advertise that you can assist with home loans
- you hold residential loan accreditations.
With the last two points above, your intention will be considered and you may still be considered a mortgage broker even if you have not lodged any home loan applications.
When do these rules apply ?
If you are a mortgage broker according to the definition above, these new BID laws apply to all consumer credit you assist customers with, not just home loans.
Some examples of other consumer credit are:
- vehicle loans
- personal loans.
Although the test for determining whether you are a mortgage broker applies at an individual level, if you run a business that assist customers with a broad range of finance, including home loans, your entire business may be captured and be subject to these new BID provisions.
Preparing for 1 March 2020
If the new laws are passed the definition of mortgage broker will become redundant and any finance broker that assists customers with consumer lending, will be subject to BID.
The one area that is clearly not covered by the new BID laws is commercial lending. When enacting this new legislation, the Government clearly stated these rules would not impact small business in any way and would only apply to consumer lending.
How to get BID ready
Visit Connective’s BID Education Hub where you can find resources that will assist you in getting your business BID ready. In particular, download How to prepare for best interests duty: A mortgage broker’s guide which includes helpful checklists that can assist you in analysing what steps you need to take to be ready for these new laws.
BID is coming and if you are a mortgage broker, you need to start getting ready now ahead of 1 January 2021. It will apply to all consumer lending you assist customers with.
If you do not fall within the definition of a mortgage broker but are a broker that assists customers with consumer lending, you are likely to be subject to BID from 1 March 2021 so start familiarising yourself with new rules now.