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Topics: RG206 Mortgage and Credit Broking CPD
Along with the changes announced by Treasury on the 25 September to Responsible Lending reforms, the Government are now consulting on extending the Best Interests Duty to all credit assistance providers – not just mortgage brokers.
Three letters currently loom large over the credit industry: BID. Best. Interests. Duty. And while ASIC may have granted a temporary reprieve due to the Covid-19 pandemic, from 1 January 2021, all brokers will be expected to comply with this new customer-protection measure.
What is the BID?
Firstly, although most references to best interests refer to a ‘duty’, there are actually three parts to the new obligations:
- There is a best interests duty, which is a statement of principle that seeks to align the interests of the mortgage broker with the interests and expectations of the consumer by requiring them to act in the best interests of their consumers.
- Next, there is the conflict priority rule, which requires mortgage brokers to prioritise their consumers’ interests when providing credit assistance.
- Finally, there is the requirement that remuneration structures do not incentivise conduct contrary to the best interests of consumers.
How do you ensure you comply?
There are no prescriptive steps for mortgage brokers to follow to ensure they comply. Rather, the obligations are principles-based standards of conduct that operate alongside other obligations that affect how credit assistance is provided to consumers.
It is up to mortgage brokers to decide how they will comply (and demonstrate compliance) with the obligations. So, it falls to business owners and licensees to direct actions.
The good news is that if you are already doing the right thing by your customers, you will probably satisfy the best interests duty. However, if the introduction of a best interests duty into the financial planning market has taught us anything, it’s that the regulators want to see proof of your efforts. In other words, it’s not enough to ‘say’ that you’ve understood your customers’ needs and objectives and that they have been prioritised above your own – you need to have evidence that supports it.
Here are some ways that you can set yourself up for success…
Understanding your customer
In order to act in someone’s best interests, you need to understand their needs, wants and their current circumstances. For most brokers, this information is established during the fact find.
Consider your current information gathering process.
- Do you ask sufficient questions to be able to establish your client’s objectives?
- Do you take steps to ascertain all the factors that may influence their ability to service a loan?
- Do you take time to clearly explain the scope of your services to your customer?
It is important that you not only ask these questions but that you carefully record your client’s responses. This will help you demonstrate that you have conducted a comprehensive interview.
Understanding the market
When it comes to making a recommendation for your customer, the regulator will be looking for evidence that you have conducted sufficient research to be able to match the client’s individual needs to a specific product(s).
- Keep note of the products/packages that you investigated/reviewed in the course of your research, including why they were not suitable for the client.
- Even if there is only one product that is best suited to your customer, ideally you should provide your customers with two options, comparing the features, fees, etc.
- When documenting your recommendations, it should be clear that you have addressed each of the customer’s identified needs and objectives, as well as any other financial concerns that were ascertained in the interview.
In practical terms, you cannot possibly be an expert in every single product on the market, nor does ASIC expect you to be. However, you should maintain a general awareness of the different styles of product available in the lending market and keep yourself up to date with new features and/or providers.
If you are only licensed to write certain products, you should be transparent with your customers about which products you can, and cannot, deal in.
The majority of lenders have already phased out conflicted remuneration, however, it is not enough to rely on others to do the right thing.
- Make sure you understand what is and isn’t considered conflicted remuneration.
- Ask your licensee for clear guidance about what records you are expected to keep in relation to remuneration, such as a register of non-financial gifts.
Ultimately, the BID is about protecting the customer. Always keep the customer front of mind, maintain comprehensive records of your dealings, and keep your training up to date and you should have no difficulty satisfying your regulatory requirements.
Find out more about Best Interests Duty in our annual ACL CPD program, designed to enable Responsible Managers of Australian Credit Licencees to meet their organisational competency requirements and representatives to meet their mandatory continuing training requirements.
Until 17 September all MFAA conference attendees will receive a 10% discount on our Mortgage CPD programs. Contact us for your special code.
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