Mortgage brokers will soon be required to act in the best interests of borrowers by not pushing them into taking out high interest loans when better deals are available. At least, that’s according to the Australian Securities and Investment Commission (ASIC), which has just started a four week consultation on draft guidance for new laws about the best interests duty (BID) for mortgage brokers.
The new requirements will be in effect from 1 July 2020.
This change comes as a response to one of the recommendations of the Royal Commission to ensure brokers act in the best interests of consumers and prioritise their interests when providing credit assistance.
ASIC Commissioner Sean Hughes said borrowers should feel confident their mortgage broker has their best interests at heart.
“The obligations properly align the interests of mortgage brokers with the interests and expectations of their clients – the borrowers,” Mr Hughes said.
“Consumers should feel confident that their broker is offering the best loan for their circumstances and we expect that consumer outcomes will improve as a result of this reform.”
The draft rules suggest that mortgage brokers should consider products holistically to assess whether they are in the consumer’s best interests.
The cost of a product – such as interest rate, fees and charges and repayment size – is a factor that should generally be prioritised during this assessment, the draft reads. Where other non-cost considerations affect what is in the consumer’s best interests, brokers should assess whether those considerations or loan features have a realistic possibility of offering the consumer good value or a net benefit relative to other options.
The new rules aim to stamp out some mortgage brokers from pushing borrowers into unsuitable loans, or encouraging them to go with credit providers who pay fatter commissions.
Most consumers do not pay mortgage brokers for their services. Typically, credit providers pay brokers for their services with commissions, the draft reads. These commissions can create conflicts of interest where they may influence the broker’s recommendations in favour of the credit provider. A failure to consider cost and investigate the lowest cost options available to the consumer may be indicative of non-compliance.
The draft rules also state that brokers should present borrowers with a range of loan options, instead of just one or two: consumer research found that consumers are often not presented with a range of options, with 58% of consumers surveyed receiving two or fewer loan options, it said. Our research also found that it is important that consumers are helped to understand the options presented, so they can meaningfully compare options.
For anyone looking to take out a mortgage, this is great news. It is expected that these changes will help re-establish some trust in the sector, and consumers can only benefit from being presented with a larger range of better options.