The prospect of a Best Interests’ Duty and Statement of Advice obligation for mortgage brokers is looming, leaving many concerned about the potential impact on their everyday business practices.
Commissioner Kenneth Hayne recommended the introduction of the consumer-minded mandate in the recent Royal Commission, citing the need for better documentation, demonstrability and accountability in all forms of consumer lending.
He also said there was a need for the mortgage broking industry to be regulated in the same manner as financial advisory, which is already beholden to the law.
Jaime Lumsden Kelly, Solicitor Director of The Fold Legal, says, “Under the BID [as it currently stands for financial advisers] providers need to document background information about the client; what the scope of the advice is; what the clients’ needs and requirements are; alternative strategies and whether these are appropriate”.
Accompanying this is the possibility of a Statement of Advice – a mandatory form of documentation in which brokers will need to justify and validate their decision-making process in a way which is compelling to the regulator.
With the prospect of these new guidelines being implemented, many brokers are left wondering what the new laws will look like in practice and what sort of future they need to prepare for.
Ahead of Informa’s 29th Annual Credit Law Conference, Ms. Lumsden Kelly speculates about how the laws will likely unfold and offers some tips on how mortgage brokers can brace for their arrival.
#1 – Know your client, know your product and connect the dots
“Running through a checklist of facts regarding your clients’ financial status and circumstances is all very well, as is having an impeccable knowledge of your loan product. But equally important is the process of marrying the two up in a way which can be understood and validated by the regulator”, said Ms. Lumsden Kelly.
“This may seem obvious, but years of working with the financial advisory sector has taught me that often this process – of justifiably linking product and consumer – is overlooked.
“Providers can get into the habit of recommending a particular loan because it appears to be ‘the best in the marketplace’. In doing so, they may not be adequately tailoring the product to the specific circumstances of the consumer”.
“Providers should always be able to demonstrate that product X was recommended to customer Y for reason Z. Providing they can do this, there is no reason for ASIC to doubt the provision of the loan”.
#2 – Recognise the significance of a breach and act accordingly
In 2017, The Federal Court handed down its verdict and presented the first ever civil penalty for a breach of the Best Interest Duty.
ASIC had alleged that the provider had failed to comply with ss 961B and 961G by repeatedly providing personal advice to retail consumers which saw them committing to costly, expensive and unsuitable financial products.
It also alleged that the provider had failed to take reasonable steps to ensure that its representatives were compliant with the Best Interests Duty.
As a result of the contraventions, the firm was ordered to pay $1.1million in fines and costs.
The penalty served as a stark warning to the industry that the regulator is prepared to clamp down on those who may not be acting in the best interest of consumers – and on providers which do not provide adequate training to their staff.
#3 – Relax – there are fewer “trip-ups” than you think
Despite the potential consequences of breach, Ms. Lumsden Kelly say that brokers need not fret too much about the potential arrival of the Best Interests Duty, as there are fewer complexities in the context of mortgage broking than for financial advisory.
“Within financial advisory there are far more opportunities to trip up and inadvertently breach the obligation. This is because the nature of client assessment and the process of providing financial product advice is broader and more holistic in scope. Advisors must consider more variables against a broader range of financial solutions. In contrast, brokers offer a more discrete service for a more discrete consumer issue, with inherently less scope for error”.
#4 – An ethical mindset, with a compliance approach
“A purely ‘compliance’ or ‘box ticking’ mindset is potentially problematic in the context of the Best Interests’ Duty. Yes, there is a checklist of criteria that needs to be satisfied. However, the subjective nature of consumer interests, generally, requires a broader outlook, with morally guided decision making”, said Ms. Lumsden Kelly.
“An ethical mindset filters down from the top and instilling a culture of ethics is perhaps the single best way to ensure that representatives will continue to be motivated to do the right thing by consumers. Providers must be able to zoom in and zoom out of the transaction and find no faults in the process from any perspective”.
Jaime Lumsden Kelly is among a stellar line up of speakers to address the 29th Annual Credit Law Conference, to be held 4-6 September 2019 at the Gold Coast.