Mortgage brokers put on notice over new Hayne rules

The corporate regulator is warning mortgage brokers to boost their record keeping, as it vowed to closely monitor new rules.

ASIC chair James Shipton. Picture: Getty Images

The corporate regulator is warning mortgage brokers to boost their record keeping, as it vowed to “closely monitor conduct and outcomes” to ensure they are complying with a new requirement to act in borrowers’ best interests.

The new regime starts in January after being delayed by six months due to the COVID-19 crisis. Several mortgage broking firms have already committed to implementing the requirement sooner.

The Australian Securities and Investments Commission on Wednesday released regulatory guide 273, titled: Mortgage brokers: Best interests duty. The regulator also drew on six confidential and 15 non-confidential submissions which raised questions about how the cost of a loan should be factored into broker deliberations, and the sorts of records that need to be kept.

The new obligations have become law and were formulated in response to a Hayne royal commission recommendation. The requirement mandates that mortgage brokers act in the best interests of consumers and to prioritise borrowers’ interests when providing assistance with obtaining a loan.

ASIC received submissions on the guide from parties including the Australian Banking Association, Mortgage Choice, Australian Finance Group, consumer advocates, the Financial Planning Association of Australia and Legal Aid Queensland.

ASIC Commissioner Sean Hughes said the reforms were legislated to improve the “the quality of credit assistance” to borrowers.

“These are important and timely reforms for the mortgage broking industry and for customers shopping for a loan,” he added.

“Consumers rightly expect mortgage brokers to act in their best interests and ASIC’s guidance describes how we expect them to do so. Under these new obligations, let there be no doubt – the consumer must always come first.”

Mr Hughes noted that ASIC would closely monitor conduct and outcomes to ensure brokers were “complying effectively” with the best interests duty.

While brokers will be bound by the new requirement they escaped much harsher reforms that would have overhauled the commission pay structure that is embedded in the industry. They receive an upfront commission from lenders – usually 0.6 per cent of a mortgage amount – and an ongoing payment of 0.2 per cent annually for the life of the loan.

On Wednesday, the regulator said the 52-page guidance note was principles-based, but did not prescribe minimum standards of conduct or impose additional obligations. It does, though, include practical examples of how brokers should prioritise the borrower.

The guidance covers areas including the range of lenders and products brokers can access, recommending packages of credit products and the types of records to be kept to demonstrate compliance.

It tells brokers to “clearly record the recommendations” presented to borrowers – including any alternatives that are not selected by the consumer — and include steps taken to educate them on their options.

The accompanying document that outlines ASIC’s responses to feedback received said: “We suggest that drafting notes and creating records throughout the credit assistance process may be an effective way for brokers to keep accurate records.”

The guidance note also included a section on managing conflicts of interest.

“If there is a conflict of interest when providing credit assistance, you are required to give priority to the consumer’s interests. You must not prioritise your own interests or the interests of credit providers or third parties,” the guidance says.

“There is also a ban on entering into or carrying out a scheme that is designed to avoid the application of the best interests obligations, as well as the ban on conflicted remuneration.”

The regulator also tells brokers to be careful when dealing with cashback offers from banks or other promotions.

“You should also consider whether a lower interest rate, or other features such as an offset account, would provide more benefit to the consumer than the short-term benefit offered by the promotion.”

Aussie chief James Symond last month told The Australian his firm would look to implement the best interest policy ahead of January over coming months.

FAST boss Brendan Wright this month said his broking group was planning to implement the requirement in mid-July.