Best interests duty – mortgage broker = Join the club

From

Jaime Lumsden Kelly

The new mortgage broker’s best interests duty obligations are wide reaching. They may apply even if you’re providing credit assistance that doesn’t relate to a mortgage.

Who does it apply to?

The mortgage broker’s best interests duty came into effect on 1 January 2021. It applies to:

  • A licensee providing credit assistance where the licensee is a mortgage broker; or
  • A credit representative providing credit assistance where either the licensee or the credit representative is a mortgage broker.

This is the case even where the specific credit assistance provided doesn’t relate to a mortgage.This also means non-mortgage broker credit representatives (like asset finance brokers) with mortgage broker licensees will be caught under this new obligation, even though the credit representative never provides mortgage broking services. This is a wide net and there are no current exemptions.

How will you know if you’re captured?

To ascertain if you’ve been swept up in this wide net you will need to determine whether you (or if you’re a credit representative, whether you or your licensee) are a mortgage broker.

A mortgage broker is defined as a licensee who:

(a) carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property; and

(b) does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and

(c) in carrying on the business, provides credit assistance in relation to credit contracts offered by more than one credit provider.

Sub-clause (a) refers to someone who “carries on a business” of credit assistance in relation to mortgages. This is a legitimate legal point, but very subjective. An asset finance broker who only occasionally does a home loan might be able to argue that they’re not carrying on “a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property”. The more home loans one writes, the more difficult the argument becomes.

Sub-clause (b) means that if someone is a mortgage manager (or otherwise acts for the lender) in relation to most of their credit assistance activities, they won’t be a mortgage broker. This means businesses that mostly offer their own product (white-labelled from another lender) and only occasionally broker loans, won’t be mortgage brokers and won’t need to comply with the best interests duty. But those who broker more business than they place into their own product will need to comply.

What are your obligations?

If you (or your authorising licensee) meet the definition of “mortgage broker”, you must apply the best interests duty to all your business. If you’re a licensee, it will also apply to all your credit representatives’ business.

How will this apply in practice?

There are several situations where the best interests duty will apply even if the product in question isn’t a mortgage. For example, it will apply where:

  • Someone who meets the definition of mortgage broker advising on personal loans and credit cards;
  • A broker offers their own product but they broker more than half their business;
  • A credit representative of an aggregator provides credit assistance on any product (even if none of it is home loans) where the aggregator meets the definition of a mortgage broker;
  • A mortgage broker passes an application to an asset finance broker in such a way that the mortgage broker is providing credit assistance and not just acting as an intermediary. In this instance, the best interests duty will apply to the credit assistance the mortgage broker provides. But it will only apply to the asset finance broker if they (or their licensee) meet the definition of mortgage broker.

In Regulatory Guide 273, ASIC explains what they will look for when they assess compliance with the best interest duty obligations.

By Jaime Lumsden

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