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Changes Ahead for Mortgage Brokers

The draft legislation released by the Federal Government introducing a best interests duty and banning conflicted remuneration for mortgage brokers has sparked strong opposition to changes, whilst others contend the changes do not add an unreasonable burden to the industry.

These changes will not only affect mortgage brokers but, significantly, the existing safe harbour for financial advisors.

Exposure draft regulations have been released with submissions closing on 4th October 2019.

The Assistant Minister for Superannuation, Financial Services and Financial Technology stated:

“The best interest duty is a legislative requirement to ensure the processes and motivations of financial advisors are focused on what is best for the client.”[1]

CPA Australia stated:

“[I]t ensures providers of financial advice make certain the interests of their clients remain paramount above and beyond those of the advisor and other relative associates.”[2]

ASIC refers to these measures as a ‘safe harbour’ for complying with the best interests duty in subsection 961B(1). The steps are intended to provide an indication of what, is expected of providers.

Other submitters in firm favour reject any arguments that the changes would weaken the operation of the ‘best interests duty’. 

Whilst financial advisers might not be fans of the safe harbour, it appears to point advisers in the right direction.

The Bill suggests that mortgage brokers and mortgage intermediaries will not be allowed to accept, and credit providers cannot pay them, conflicted remunerations (Conflicted remuneration is defined as, like conflicted remuneration on the context of financial advice, a benefit influencing the credit assistance).

Although the conflicted remuneration does not include a benefit given by a credit provider to a mortgage broker or intermediary associate, calculated as a percentage of an amount that is not in excess of the drawdown amount for the credit contact. So in short commission is based on the actual drawn down amount not on the approved amount.

Further, the clawback periods (the date on which the last party signs the Funding Agreement) of no more than 2 years are not allowed, these being thought to add to the cost of switching products, discouraging further shopping around. 

There has been no suggestion of any grandfather clause to be in effect perhaps due to the broad exclusions from the definition of conflict remunerations. 

A volume-based benefit is a conflicted remuneration bearing no resemblance in the sector of financial advice; it bears reference to benefits that depend in apart on a total amount of credit available or total credit contracts issued.

Interestingly we will await how the conflicted remuneration of ‘campaign based benefits’ will be assessed.

The law concerns itself with persons who chose to act in the best interests of another remain objective and this is the position the Bill and regulations will ensure a mortgage broker adopts.

Thanks to Southern Cross University student Kylie Jay for assistance in preparing this article.

[1] Selection of Bills Committee, Report No. 3 of 2014, 20 March 2014.

[2] Journals of the Senate, 20 March 2014, p. 685.

Liam Young