3 steps to comply with best interests duty

We all know how much work mortgage brokers put in behind the scenes to get a deal across the line. But this process isn’t always transparent to the client. All of that is about to change with the best interests duty legislation (BID), which will come into effect on 1 January 2021.

The best interests duty goes above and beyond brokers’ responsible lending obligations of assessing a product as ‘not unsuitable’. It requires that they act in the best interests of their customers and show evidence every time they provide credit assistance.

ASIC released its Regulatory Guidance on the BID in June after consulting and making amendments based on industry consultation, including with Connective. We covered the topic in a recent webinar and unpacked the key takeaways for brokers below.

How to comply with the best interests duty in three steps

1. Gathering information about the consumer

Just as you do to meet your responsible lending obligations, document and record your client fact find, including their needs and objectives, financial situation and what features they’re looking for in a loan product. You should also take reasonable steps to verify the information.

“Have a questioning mind when you get the information. If something doesn’t smell or sound right on the face of it, ask more questions and document their response. Be inquisitive. Don’t just accept a bucket of information at face value,” says Connective Group Legal Counsel Daniel Oh.

Remember that the information they provided to you on Day 1 might change, so you should continue asking questions as you move through the process to the point of credit assistance.

2. Making an individual assessment

There’s no one-size-fits-all product or approach. You must assess each client on their individual facts, circumstances, preferences and objectives.

“At this point, you need to make a pretty rapid assessment if you can provide credit assistance and comply with the BID or not. If you don’t think you can, then refer them on or politely decline. Protect yourself,” Oh says.

For example, if you’re not experienced in dealing with a certain type of borrower or situation, don’t risk attempting it. You can refer the client to someone who specialises in that or walk away from the transaction. Also remember, if you’re accepting (or paying) a referral fee, you need to disclose that to the client. If a complaint is filed against the broker you referred them to, and you took a referral fee, you could get caught up in any future complaint too so choose your referral partners carefully.

3. Presenting information and recommendations

Once you’re ready to present your product recommendation, take your client through the process, tell the story and document what you’ve done. For some brokers, recording the ‘whys’ and ‘why nots’ may be the biggest change you’ll make.

Recap what they told you about their financial situation, needs, objectives and circumstances; present them with the loan and lender options you considered, including the costs; explain why you landed on the one you did and why you think it’s in their interests. If it’s not the cheapest option, but it’s the option that will work, just explain why.

If your client decides to choose a different product than the one you recommended, reiterate your reasoning. If that doesn’t work, note their decision and move on. What matters with all of this is that consumers are making fully informed decisions about their money. Educating and empowering your client will likely make them a stickier client in the end!

Key points to understand about the best interests duty

• Prioritising cost: After consulting with the industry, ASIC has acknowledged that the lowest interest rate is not always the indicator of what’s in the consumer’s best interests. While the broker must consider the borrowing costs, the consumer’s circumstances, the benefits and features of the product, and timing should factor into the broker’s decision and can outweigh the importance of cost.

Takeaway: Always document and show evidence for why you recommended the product you did and how it’s in your client’s interests to proceed.

• Obligations for ACL holders: Credit licensees, such as Connective, must take “reasonable steps” to ensure that their credit representatives comply with the BID. This could mean monitoring, supervising, creating processes and procedures, providing training and conducting file reviews. ASIC is not prescriptive on what ‘reasonable steps’ means, but says this is scalable based on the nature and size of the licensee’s business. If your broker contravenes the BID, then you as the licensee could also be in breach if you can’t show you’ve taken steps to ensure your representatives comply.

Takeaway: ACLs should take a proactive approach and start educating their brokers about what’s required now. Connective is working on training resources to support all members.

• Point-in-time assessment: The BID applies every time you’re providing credit assistance. However, it doesn’t apply for a routine home loan health check when the client just wants to vary an aspect of their existing loan or change their rate with the same bank, for example. If a new bank or new money is involved, or the client asks for your opinion or wants you to compare their current loan with others in the market, the BID and the responsible lending rules apply. This is because suggesting they remain where they are is credit assistance.

Takeaway: The point-in-time assessment means there’s no ongoing duty once credit assistance has been delivered. The BID and your responsible lending obligations cease at this point.

Supporting you along the way to 1 Jan 2021

We believe the majority of our brokers are already compliant with the BID in spirit. Now you just need to document how you’re meeting your clients’ best interests and ensure your lending practices allow you to meet the new duty.

Over the coming months, Connective will be providing Mercury updates, fact sheets and email templates, training tools and other resources to ensure your business processes, practices and procedures are in line with ASIC’s Regulatory Guidance, so you can keep doing what you do best: serving your clients’ best interests.