Mortgage brokers that fail to act in the best interests of consumers would face fines of up to $1.05 million under new laws proposed by the federal government.
Treasury released draft regulations for reforms to mortgage broking on Monday, following recommendations made by the banking royal commission for an overhaul of the industry.
Under the proposal, a requirement for brokers to act in the “best interests” of their clients will be enshrined into law, while so-called “conflicted remuneration” will be restricted.
These new restrictions on remuneration will include a ban on passing broker clawback onto consumers.
Proposed maximum fines for contravening the new laws are 5,000 penalty units, or $1.05 million.
The banking royal commission last year recommended banning commission arrangements between brokers and lenders, such as the big banks, finding the arrangements result in a conflict of interest.
But, amid an extensive lobbying effort from the broking industry, the government bowed to pressure and agreed not to pursue a ban on controversial up-front and trail commissions before the May election.
Many brokers had argued such changes would drive them out of business, while consumer groups, including CHOICE, continue to argue such a ban is necessary to ensure consumers are getting the best outcomes when searching for home loans.
CHOICE’s Erin Turner says it’s pleasing to see best interest duty enshrined into law, but argues further reforms to broker remuneration are needed in the longer term.
“As long as brokers are paid by banks it’s going to be difficult for them to act in the consumer interest,” Turner tells SmartCompany.
“We’re very pleased to see a broad principles-based interest duty. It’s one that recognises that best interest isn’t about simple tick-the-box advice.”
The federal government has committed to reviewing broker remuneration, including upfront and trail commissions, in three years’ time.
Turner says CHOICE will be preparing for that process, to be overseen by the Council of Financial Regulators and the ACCC.
Treasurer Josh Frydenberg’s office issued a press release on Monday which detailed the proposed reforms, saying they will deliver “better outcomes for consumers”.
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“The implementation of the best interests duty will bring the law in line with what consumers expect of mortgage brokers,” the statement said.
Mortgage brokers SmartCompany spoke with about the reforms say they’re worried about bearing the burden of extra compliance costs under the changes.
However, the best interest principle was broadly welcomed as an opportunity to demonstrate a commitment to clients and their interests.
Broker clawback to be restricted
The government is targeting “conflicted remuneration” more broadly with its current reforms.
That involves new rules the government says will require the value of upfront commissions to be linked to amounts drawn down by borrowers, instead of loan amounts.
Campaign and volume-based commissions will also be banned under the proposed reforms, alongside a cap on “soft dollar benefits”, including non-monetary things like conference trips and training.
Broker clawback — where banks recoup upfront broker commissions for home loans that are either paid or refinanced within two years of their first settlement— will also be limited, while a ban will be put on passing on the cost of clawback to consumers.
Rob McFadden, a Sydney-based broker who managed to get over 60,000 people to sign an online petition expressing anger over royal commission recommendations earlier this year, says the clawback ban will affect his business.
“I don’t have any issue at all with legislation that compels us to act in the best interest of the client, I certainly do that anyway,” McFadden tells SmartCompany.
“My big issue is with this proposal to ban passing on clawback to clients. I’d argue this is most unfair, as we mostly have no control over a client’s personal situation, and no other professionals are expected to hand back their fee for work done,” he says.
McFadden says he’ll likely have to consider charging customers a small upfront fee as an “insurance” against clawback if the proposed laws pass.
Fines for not being consumer-focused
Hefty fines are also on the table for brokers who don’t act in the best interests of consumers under the proposed reforms.
Brokers will be required to not only act in the best interest of consumers but also place consumer interests above their own in the provision of their services.
While the draft laws aren’t specific about what this means, saying it will “depend on individual circumstances”, several expectations are proposed.
This includes refraining from making a loan recommendation where there’s a risk a loan won’t be in the best interests of a consumer, and ensuring clients are given the full range of options available to them.
“A broker would not suggest a white-label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product,” an explanation of the draft laws reads.
Melbourne-based broker Edwena Dixon, director of Pinpoint Finance, says the best interest duty will be good for the industry.
“Our industry will gain more market share as it will be beyond a doubt that brokers provide the best avenue for all clients to secure finance,” Dixon tells SmartCompany.
Brokers are already responsible for about 60% of home loan arrangements in Australia.
“We agree with the aims, however, the finance broking industry is already highly regulated and it’s important that any new regulations do not further increase the already high level of compliance paperwork being completed for every client,” Dixon says.