Editor’s Note: further guidance on the changes ahead has been released. Please find the latest information on this topic in our recent blog article.
ASIC has announced it will be deferring mortgage broker reforms which were originally set to commence 1 July 2020 by six months. The legislation which requires mortgage brokers to act in the best interest of consumers and outlines reforms to mortgage broker remuneration will now come into force 1 January 2021.
Best Interest Duty
The changes require mortgage brokers to act in the best interests of consumers when providing credit assistance in relation to credit contracts, and give priority to consumers in providing credit assistance where there is a conflict of interest. The best interest duty does not affect the existing responsible lending obligations.
The new obligations are aimed at improving outcomes for consumers by legally requiring that mortgage brokers place their clients’ interests before their own. This will bring the law in line with what consumers expect – that any advice given by a mortgage broker serves the consumer’s interests first and foremost.
The following changes to mortgage broker remuneration will come into effect:
- mortgage brokers can only receive upfront commissions that are linked to the amount drawn down by borrowers, instead of the loan amount;
- campaign and volume based commissions and payments will be prohibited;
- soft dollar benefits will be capped; and
- the period over which commissions can be clawed back from aggregators and mortgage brokers is limited to two years, and the cost of clawbacks cannot be passed on to customers.
The following is not considered conflicted remuneration:
- certain monetary and non-monetary benefits given by the consumer;
- monetary benefits that meet a number of specific requirements directed at ensuring the benefits are transparent and do not negatively impact consumers (i.e. not campaign-based or volume-based commissions);
- infrequent, low-value non-monetary benefits;
- non-monetary benefits related to education and training; and
- non-monetary benefits related to IT support.
The ban on conflicted remuneration applies to benefits given after 1 July 2020, regardless of whether any arrangements under which those benefits are given was in place prior to 1 July 2020.
The changes reflect recommendations 1.2 and 1.3 of the Royal Commission into Misconduct in The Banking, Superannuation and Financial Services Industry, and aim to implement better protections for consumers.
- Recommendation 1.2: Legislate a best interests duty for mortgage brokers; and
- Recommendation 1.3: Address conflicted remuneration for mortgage brokers.
- Mortgage Broker Best Interests Duty and Remuneration Reforms
- The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Bill 2019
- 20-109MR ASIC defers commencement of mortgage broker reforms and design and distribution obligations
If you would like to speak to us about how the new legislation could affect your business, please contact us.