Posted: 01 Feb. 2021 05 min. read

Operationalising Best Interest Duty

Mortgage Brokers, aggregators and credit providers

Background:

The Hayne Royal Commission discovered that there were serious concerns that mortgage brokers and other credit assistance providers may not have acted in the best interest of their clients and had prioritised their own interests over their clients’. The final Hayne report recommended that the law be brought in line with consumer expectations. 

On 17 February 2020, the federal government legislated the Best Interests Duty (BID) for mortgage brokers commencing on 1 January 2021.
 

What is BID and who is impacted?

BID is a significant piece of regulatory change, effective 1 January 2021, and is aimed at improving consumer outcomes by requiring mortgage brokers to act in their clients’ best interests and also minimise the potential for conflicts of interests.

Prior to BID, brokers assisting a client with a mortgage application could recommend a mortgage product, without providing the factors that were considered in their decision-making process or the justification behind recommending certain product.

With the introduction of BID, when assessing each application, brokers will need to consider the individual circumstances of the client, their needs, goals and financial situation in detail to determine what is in their best interest and subsequently make recommendations in line with the assessment. These recommendations also need to be communicated to the client with an explanation of why they serve the client’s best interest. Credit licensees will also need to take reasonable steps to ensure that the mortgage brokers representing them are complying with the BID obligations.

Currently BID only applies to credit products that are regulated under the National Credit Act (NCC):

  • To purchase or for the improvement of residential or investment property.
  • Packaged products i.e. credit products such as credit cards, personal loan etc. packaged along with the mortgages are also covered. Brokers will now need to compare those products with other packaged and standalone products to ensure they are cost-effective and in the client’s best interests.

Treasury has also proposed an extension to the application of BID to all credit assistance providers which, if passed, could come into effect on the later of 1st of March 2021 or the date after the bill is passed. This would mean that all brokers that provide consumer credit assistance will be covered by the BID obligations regardless of the type of consumer credit contracts (e.g. mortgage, personal loans, credit cards, automotive finance) they assist their clients with.
 

What are the implications?

This is a regulatory driven cultural change which will require a transformational shift from a ‘one size fits all’ transactional approach to a tailored individual assessment of each application, while keeping the clients’ interests at the forefront. This will also require mortgage brokers, like other professionals in financial services, to challenge clients’ perceptions of their best interests (where appropriate) while making recommendations. There are six key obligations that brokers will have to comply with when they recommend a standalone or packaged mortgage product as shown in the figure above.

These obligations are high-level principles only and do not contain any prescriptive steps nor are they intended to provide a ‘safe harbour’.

It is also important to note that non-compliance with these obligations could attract a civil penalty. 

Key considerations for the mortgage broking industry

To meet ASIC’s expectations, mortgage brokers, aggregators and credit providers need to consider the following key areas:

  • Current compliance framework should allow an integration with BID principles or will need to be uplifted to accommodate these changes.
  • Have an adequate controls environment to proactively comply with BID obligations. e.g. A robust monitoring and assurance framework to:
    • - ensure recommendations made consistently align with the    clients’ best interests
    • - identify and avoid conflicts of interests
  • Have the right capability and materials to train staff and brokers and ensure that they understand their BID obligations.
  • Explore the use of technology to efficiently and accurately record communication and exchange of data during the application process from initial inquiry to fact find to settlement.

More about our authors

Tim Noad

Tim Noad

Partner, Audit & Assurance

Tim is a Partner with Deloitte’s Audit & Assurance practice.Tim began his professional career with Deloitte as a graduate with a focus on our banking audit clients. He has diverse experience providing governance, regulatory and conduct advisory services within banking and financial advice sectors. Tim is an experienced advisor on matters related to conduct, including leading financial advice and retail banking remediation programs, as well as conduct risk framework and remediation exercises related to retail banking products.

Carolyn Morris

Carolyn Morris

Partner, Audit & Assurance

Carolyn is a Regulatory Conduct partner with over 14 years in Financial Services at National Australia Bank including the Retail Bank, Wealth Management and Financial Advice. She has a proven track record in Customer Remediation, Regulatory Change Implementation, Business Transformation and Portfolio Management. She is commercially focused whilst still ensuring business solutions meet regulatory risk appetite. Carolyn is a strategic thinker with significant experience in creating teams and frameworks to address regulatory expectations and responses.