Best Interests obligation
The Royal Commission recommended that mortgage brokers be required to act in the best interests of their clients, in line with the existing requirements for financial planners, and the Act itself contains only the vague and uninformative language that mortgage brokers must act in the best interests of consumers when providing credit assistance.
In order to try and provide some guidance, ASIC has now released a draft Regulatory Guide on the best interests obligation, with consultation closing on 20 March 2020. In the absence of a hard definition, ASIC appears to have leant on a combination of some clues in the Explanatory Memorandum to the amendment bill, as well as its existing approach to financial planners.
We think that the latter is fair enough, given that this is what the RC articulated. However, ASIC has introduced some terminology to the guidance now that is specific to the corporations Act requirements for financial advisors without defining what these terms mean in the Credit context. Our feedback to ASIC will be that they should define new terms that they wish to use.
QED intends to not only respond to this guidance, but to actively participate in the discourse surrounding the Best Interests Duty with the rest of the industry and keep you up to date with the latest developments.
What is new?
QED has said before that we don't believe that either the new RG209 nor the best interest obligation represents anything new. If you extrapolate the "requirements and objectives" requirements of responsible lending out far enough, QED thinks that this should always mean that the broker acted in the client's best interests.
However, ASIC has gone to great lengths in its guidance to stress that the two are not necessarily the same thing and we can see their point.
The difference is in how QED thinks that brokers should approach a client's requirements and objectives and the potential for the very low bar of "not unsuitable" to be got over. ASIC seems to emphasise that a product could possibly meet the client's requirements and objectives but not be in the client's best interests.
In other words, the standard now is no longer "just" the loan that is "not unsuitable" but is now, essentially, the "best loan possible".
What does this mean?
In essence, QED thinks that means all brokers must be capable, educated and willing to provide a top-quality service that demonstrates a knowledge that reaches industry-wide and a knowledge of all products available.
Readers of this article might feel somewhat insulted by this assertion but I'm sure you all know the odd broker that doesn't take the same care as you, generally pushes most clients into the same products all the time or just doesn't keep fully abreast of the latest policies and products. In other words, this new law is going to mean that it's time for the cowboys to leave the industry.
The overall "cost" of a loan to a consumer is seen as the primary consideration by ASIC, although they absolutely acknowledge that cost is not necessarily everything. Clients' needs and goals need to be prioritised and your reasoning for this prioritisation fully documented so you can demonstrate why you made the recommendations that you made.
Other priorities that require careful documentation concern conflicts of interest. You need to carefully consider what other parties - yourselves included - have an interest in this transaction and, where those interests conflict with the interests of the consumer, the consumer's interests have to be demonstrated to have been given first priority.
An interesting observation made in the draft RG is that, in dealing with an individual consumer, if there is a product out there that would be better for the client than what you can offer - e.g. if you are not accredited with that lender - then not only should you know about this, you should also refer the client off to someone else who can assist them with that product.
As we said in our previous material on this, we don't think that the best brokers, who have been fully living out QED's advice for years, should not really have to do anything at all. As long as you:
- Develop meaningful relationships with your clients so you really understand them;
- Collect as much information as you need to make meaningful recommendations;
- Keep fully informed, to the highest standards about products in the market;
- Document all your decisions and thoughts about the recommendations you make; and
- Have rigorous compliance testing that demonstrates all of the above
and complete this to the highest standard possible, then you should always be able to argue that you met the best interests obligation.
On the other hand, if you don't meet this "gold standard" of service and professionalism, this new obligation does represent the writing on the wall for you.