Low interest rates and Best Interest Duties will boost borrower confidence in 2021.
A year ago, it seemed the only direction interest rates were headed was up. But one of the few upsides to the upheaval of 2020 – for borrowers, at least – has been watching the cash rate plummet from 0.75 per cent to 0.1 per cent.
It’s expected to remain low for some time, with Reserve Bank Governor Philip Lowe saying in November he did not expect to increase the cash rate for at least three years.
This has already prompted many borrowers to refinance, but new Best Interests Duty laws taking effect this month will give added impetus for home loan customers to look for a more competitive rate using a mortgage broker.
From 1 January 2021, mortgage brokers have a legal obligation – known as Best Interests Duty (BID) – to act in the best interests of clients when helping secure finance for home or personal loans or consumer asset finance.
It means mortgage brokers are now held to a higher standard than bank lenders, who only need to meet responsible lending obligations.
Enshrining BID in law means customers can have confidence going to a mortgage broker for finance.
When a mortgage broker sits down with a customer s/he can say: ‘I’m actually held to a higher standard. I don’t have to just make sure you can afford this loan. I have to make sure it’s in your best interests as well.’
Previously, mortgage brokers had to ensure any credit product they recommended was, at least, not unsuitable for clients. Whilst the responsible lending obligations still apply for now, the new BID regulations raise that bar.
The new legislative changes stem from recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with new legislation passed last year as amendments to the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act). The new laws [Financial Sector Reform (Hayne Royal Commission ResponseProtecting Consumers (2019 Measures)) Act 2020] stipulate mortgage brokers have a legal responsibility to:
- Act in the best interests of the consumer when providing credit assistance.
- Prioritise the consumer’s interests above their own and all other parties’ interests.
- Avoid conflicted remuneration (any inducements to recommend one credit product over another).
The duty to act in the best interests of the consumer is a broad one, and the Australian Securities and Investment Commission (ASIC), which will administer the new laws, has issued guidelines stating mortgage brokers will be expected to demonstrate they have taken all steps to ensure they:
- Understand their client’s financial circumstances, priorities and goals.
- Have access to a broad range of loan options.
- Possess the ability and expertise to make a credit recommendation.
- Ensure their client has enough information and understanding to make an informed choice about the loan products being considered.
The obligations apply to finance products regulated under the NCCP Act – so, credit for personal, domestic or household purposes, or to buy or improve a residential investment property.
They will apply any time a mortgage broker provides credit assistance on NCCP Act regulated products, such as:
- Suggesting a new customer apply for a credit contract.
- Recommending an existing customer remain in their current home loan.
- Suggesting a customer increase their home loan borrowings.
Mortgage brokers have been preparing for the new Best Interests obligations for some time, seeing it as a positive step to build trust and confidence with clients.
Acting in the best interests of clients serves both the best interests of mortgage brokers and their clients, with most businesses built on referrals. Without good customer service a client will not return to their mortgage broker and they will not refer friends or family. A mortgage broker’s business is built on fostering long-term relationships.
In September 2020, the Treasurer, Josh Frydenberg, proposed reforms to the responsible lending laws including extending the BID obligations to all finance brokers. Watch this space as these reforms have not been enacted yet.
In a nutshell
What: From 1 January 2021 amendments to the NCCP Act and Regulations come into force requiring mortgage brokers to act in the best interests of their customers; prioritise the interests of their customers over their own interests; and decline to receive any payments or gifts that may induce them to recommend one credit product over another, when providing credit assistance.
The obligations will apply to credit regulated under the NCCP Act for personal, domestic or household purposes, or to buy or improve a residential investment property.
Why: It aims to improve outcomes for consumers by providing a statutory requirement for mortgage brokers to act in their customers’ best interests and prioritise their customers’ interests.