What this means for mortgage brokers and financial advisers
The Final Report
In the Final Report, the Commissioner made a number of recommendations to make or amend regulations that directly affect mortgage brokers. He raised concerns that while brokers act for their clients, they are incentivised by the lender, and their incentive is based on the loan amount. This creates a conflict, which could lead to excessive borrowing or poor product choices. The standard of care that brokers owe to their clients is also lower than the fiduciary duty owed by a financial advisor, which, coupled with conflicted remuneration, could further result in poor consumer outcomes.
To improve consumer outcomes and remove conflict, the Commissioner recommended:
- over two to three years, banning lender paid trail commissions that are linked to the value of the loan, and encouraging a user-pays model;
- establishing a working group to monitor the actual impact of the remuneration changes;
- introducing a broker best interests duty (similar to that applying to financial advisors); and
- aligning broker regulation and standards to that of financial advisors.
The response to the Final Report
The Government's initial response to support the Recommendations was met with intense dissatisfaction and criticism from the mortgage broking industry. Industry groups argued that banning trail commissions would compromise the industry's viability, and result in even poorer consumer outcomes because brokers deliver value and support to borrowers – especially first-time borrowers and those who cannot afford to pay a fee.
In August 2019, Treasury announced that changes to trail commissions would be deferred until 2022. Changes to mortgage broker campaign and volume-based commissions and payments would be implemented before the end of 2019. A draft Bill to this effect was introduced to Parliament in November 2019.
Where are we now?
On 6 February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019 was passed, and will take effect from 1 July 2020. This imposes the following new prohibitions and obligations on mortgage brokers:
- remuneration: it creates the concept of conflicted remuneration in connection with credit, and prohibits brokers and intermediaries from accepting and paying conflicted remuneration; and
- borrower best interest duty: it creates a new duty for mortgage brokers to act in the best interests of consumers, and where there is a conflict, to prioritise consumers' interests when providing credit assistance
The Bill is silent on banning trail commissions, which is expected to be considered in the Council of Financial Regulators and ACCC's review in three years' time.
On 26 August 2019, Treasury issued a draft consultation version of the National Consumer Credit Protection Amendment (Mortgage Brokers) Regulations 2019, which requires the value of upfront commissions to be linked to the amount of the loan drawn down within the first 90 days – rather than the total approved loan amount, bans campaign and volume-based commissions – and caps soft dollar benefits. It also limits clawbacks, to prevent consumers being 'locked-in' when a more suitable loan may be available.
In addition to regulations directly applicable to mortgage brokers, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth), registered on 10 April 2019, has been extended to apply to all credit provided to retail customers. This requires brokers to generally distribute credit products to customers in accordance with a target market determination that the lender has prepared. This applies in addition to responsible lending laws, and will involve further consideration of the appropriateness of a product for a consumer.
What's next?
Brokers were lucky to escape the recommended ban on trail commissions; however, these new regulations will fundamentally change the way in which brokers carry out their day-to-day role. As with all regulatory changes in the financial services industry, the devil is in the detail. The regulatory guidance relating to these laws is, in the most part, still in a consultation phase, which doesn’t leave much time to understand new obligations, establish new policies and undertake training.
The introduction of trail commissions was itself designed to encourage brokers to place borrowers in suitable long-term products, as the incentive is spread over time. The trail commission is now being challenged as creating a conflict and poor consumer outcomes. Only time will tell whether the new regulations will, in fact, result in better consumer outcomes, or whether they, like trail commissions, will be criticised.