Mortgage brokers fear ASIC’s plan to roll out best interests duty (BID) could actually drive a shift towards loans that offer the cheapest point-in-time interest rate, without considering the appropriateness of the loan for the individual consumer or the historical tendencies of the lender.
“Some don’t understand the nuances of the mortgage market,” says Sydney broker John Ruddick.
The corporate regulator last month published draft guidance on BID for brokers – an obligation that was legislated by parliament in response to a recommendation from the Hayne royal commission.
The legislation, which is slated to take effect on July 1, is a concession of sorts; while brokers will need to demonstrate compliance and navigate the complexity of BID they were spared proposed reforms to remuneration structures.
Ruddick says the concern among brokers is that clients and industry outsiders may be under the impression that cheaper second and third tier lenders are the options brokers should be recommending.
“What I do fear is that you can always find some obscure lender who has a low variable rate,” Ruddick says. “People who’ve been in the industry for a while know these providers come out with a low rate today but then jack that rate up in the not-too-distant future.”
Consumers can always find a cheaper rate than a lender like ING, for example, he adds. At any point in time other lenders may seem like the better option, but ING has “the consistently lowest rate”.
There needs to be an awareness that BID means something other than finding the cheapest rate, says Sheyne Walsh, a principal at brokerage firm Kingsbridge Private. Consideration needs to take into account all the relevant client variables, he says.
“AMP has about the cheapest 3-year fixed rate in the market at 2.49 per cent right now, but is that the right answer for that client? What about risk? What about the default rate at the end of the 3-year period? What about consolidating their banking?” Walsh asks. “It’s about what works best for them.”
The draft legislation clearly states that brokers should “consider products holistically”, but notes that the cost of a product – “such as interest rate, fees and charges and repayment size” – should generally be prioritised.
“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 paper states.
No free rides
Much like it has for financial advice professionals, rolling out a BID requirement will increase the compliance burden for mortgage brokers. What you have to show, Walsh reckons, is a lot more comprehensive detail about the choice of product recommendation.
Whereas previously brokers had to show they weren’t doing the wrong thing, he explains, they now have to prove that they are doing the right thing.
“The big change is before we had to prove and document why the loan we were offering wasn’t unsuitable for the client,” he says. “Now we have to show that this loan meets all their objectives and is the best placed and most appropriate product, and that we’re not ignoring something that might be cheaper somewhere else.”
Inevitably, he believes, there will be a cost incursion.
“When has any piece of new legislation not been more onerous in terms of time and cost?” he asks.
Whether brokers are able to share this increased cost with lenders remains to be seen, however. Walsh reckons brokers have been “fighting for survival” over the last decade – with the cost of doing business doubling since the GFC – and don’t have a lot of leverage with large lenders.
“There’s still a legacy of us not feeling empowered with the banks,” he says.
Despite the challenges, Walsh reckons the industry can move forward and flourish.
“I don’t want to whinge,” he says. “We’ve always been well-remunerated, but now we just have to work smarter. There’s no free rides in financial services anymore.”
Submissions to ASIC for the consultation paper ‘Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty‘ close on March 20.