Preparing for the best interests duty
The best interests duty (BID) has been delayed and will now come into effect on 1 January 2021. Here is a snapshot of what it means to you and how you can prepare.
What is the best interests duty?
New laws were passed by the Federal Government on 17 January 2020 amending the National Consumer Credit Protection (NCCP) Act 2009 (Cwth) to introduce the following changes:
- Mortgage brokers are now required to act in the “best interests” of their clients
- Where there is a conflict between the interests of the broker and the interests of their client, the broker must give priority to the interests of their client
- There is now a ban on mortgage brokers receiving “conflicted remuneration”.
These were part of the Financial Services Royal Commission recommendations released in February 2019, and the new laws will come into effect on 1 January 2021. Significant penalties could apply for non-compliance, so it is important to ensure you’re prepared for the introduction of these laws and understand their implications.
How can you demonstrate you’ve acted in the client’s best interest?
ASIC have been tasked by the Government to provide the industry with regulatory guidance on what ‘acting in a customer’s best interests’ means. We have always maintained the belief that most brokers’ client management processes already meet the standard of a best interests duty. The great thing is ASIC’s draft regulatory guidance, which was circulated for public consultation in February 2020, largely reflects this. We are now awaiting the final version of this regulatory guidance from ASIC.
Some tips to help you demonstrate you’ve acted in your client’s best interests:
- Ensure your client understands and agrees with the product you have selected for them
- Show the client, where possible, the product comparisons you have conducted
- Explain to your client clearly why the product chosen meets their needs and requirements and why it is the best product for them (from the lenders and products that are available to you)
- Take lots of notes to record your interactions with your client, especially when your client prefers a lender or product which you do not recommend or consider to be in their best interests
- Meeting responsible lending obligations may not be enough to satisfy the best interests duty. A product may be “not unsuitable” but might not be in a client’s best interests.
Another aspect of the new laws to be introduced on 1 January 2021 is a ban on “conflicted remuneration”. What is and is not considered “conflicted remuneration” is set out in the regulations accompanying the new laws.
From your perspective, not much should change as many lenders have stopped paying amounts which are considered “conflicted remuneration” for the purposes of these new laws. Volume and campaign-based incentives and soft dollar benefits do not exist anymore in the residential lending space. Upfront commissions are based on drawn amount net of amounts in offset account already.
The main change that will be introduced on 1 January 2021 is that you will no longer be able to pass on clawbacks to your customer (whether directly or indirectly).
What can brokers do to prepare for the introduction of BID?
Here are some tips on how to prepare for the introduction of the best interests duty on 1 January 2021:
- Evaluate your current processes to ensure you are clearly communicating to your client your product recommendation rationale including how the product will meet their needs and requirements. Are you informing them of various lenders and products you have considered on their behalf? Are you explaining why some lenders and products have not been included in your recommendations?
- Are you taking adequate notes of your client interactions and ensuring key information is recorded, including client objectives, products considered, products recommended and products selected? Are you recording where a client specifically declines your recommendations or insists on a particular product or lender?
- Do you feel confident using all of the functions of your CRM software to support your client interactions and note taking? Are there efficiencies you can introduce into your processes by better utilising this CRM software and other technology?
- Reach out to one of our State Managers, if you need any further help on best interests duty or you’d like to understand how Mercury, Connective’s CRM can support your client interactions.