What the new best interests duty means for asset finance brokers
For many asset finance brokers, best interests duty will not affect your business. However, if you, your business or your referral partners write home loans, now is the time to learn about the new best interests duty. Here’s what you need to know.
- If you’re in business as a mortgage broker you will need to apply best interests duty to all consumer loans. If you’re not in business as a mortgage broker the best interests duty will not apply to you.
- After a six-month delay due to COVID-19, the new best interests duty comes into effect on 1 January 2021.
- It applies to any mortgage broker who helps consumers with residential property lending, either for investment or as owner occupiers.
- Mortgage brokers will be required to act in the best interests of consumers and put clients’ interests first when there is a conflict.
- The reforms will affect the way mortgage brokers operate, and the way asset finance brokers interact with them.
The new best interests duty at a glance
Like so many recent financial services reforms, the best interests duty for mortgage brokers had its beginnings in a recommendation from the Hayne Royal Commission. Given shape by amendments to the National Consumer Credit Protection Act 2009 (NCCP Act) and regulations earlier this year, it is now set to kick off on 1 January 2021.
From that date, ‘mortgage brokers’ will be required to act in the best interests of consumers. They will need to prioritise consumers’ interests ahead of their own or those of a related party (known as the “conflict priority rule”).
The amendments also spell out other new rules ‘mortgage brokers’ and their related parties will need to follow, including:
- a requirement to link the value of any upfront commissions to the amount drawn down by borrowers, instead of the approved loan amount.
- a ban on paying or receiving “conflicted remuneration” – essentially payments to brokers which may influence the products they recommend or the advice they give to consumers.
- a ban on campaign and volume-based commissions and payments.
- a $300 cap on “soft dollar benefits” – benefits other than standard commission payments.
- a two-year limit to the period in which lenders can claw back commissions, and
- a ban on passing the cost of clawbacks on to consumers.
How might this impact asset finance brokers
The new requirements apply to anyone who falls into the new definition of “mortgage broker” in the NCCP Act. Essentially, it includes anyone who provides credit assistance to consumers for owner-occupied or residential investment loans or promotes a capability to do this. Importantly, if someone is a mortgage broker, the rules apply to any credit assistance they provide to consumers, including asset finance and personal loans, not just home loans. However, if you’re a dedicated asset finance writer, who does not offer home loans the new rules won’t apply to you, even if you write consumer business.
What it means for you and your business
While conscientious mortgage brokers already put their clients’ interests first, that doesn’t mean it will be business as usual. Apart from the specific rules listed above, the changes are likely to affect the way they give and record credit assistance.
If you’re purely an asset finance writer, but you have referral partners who are mortgage brokers, you also need to consider how the changes affect your referral relationship, including any referral fees, commission payments or other benefits you exchange.
If you are an asset finance broker who offers home loans, the best interests duty will also apply to you for all consumer loans, so it is important you understand how the changes on 1 July will affect you. You will find resources to help you get ready HERE.
4 implications of the best interests duty you may have missed
- Clients can’t opt out. According to ASIC’s guidance, brokers can’t avoid the best interests duty with notices or disclosures, or by asking a client to sign a waiver or specifically consent to a conflict of interest.
- Brokers must offer alternatives. Even if a client wants to use a specific lender, it's advisable to show them viable alternatives, so they’re aware of the consequences of their decision. It’s also important to record the options you discussed, noting the customer stated they wanted a specific lender and the reasons why. Remember – if acting on the client's directions is not in their best interests, you can’t give them credit assistance.
- Brokers won’t be able to recover clawbacks on some existing agreements. Mortgage brokers will no longer be able to recover commission clawbacks even for existing client agreements if a loan was drawn-down after 1 July 2020 and the clawback takes place after 1 January 2021.
- Refundable upfront service fees aren’t the solution. If you were thinking mortgage brokers could escape the prohibition on recovering clawbacks by charging an upfront service fee, then rebating it after the clawback period, think again. ASIC has made it clear that brokers and licensees can’t use measures like these to avoid their best interests duty.