Introduction
This is the first of a series of three articles about changes to Australian law concerning mortgage brokers over the last five years (2018-2023). The series might be called ‘If It Ain’t Broker, Don’t Fix It’ given that mortgage brokers seem to have attracted disproportionate attention from the lawmakers over this period. This particular article concerns mortgage brokers’ statutory best interests obligation (often called a best interests duty or simply BID). A perhaps catchy but less-than-descriptive title for this article would be ‘(Far From) Simply The Best’.
Background
A statutory best interests obligation[1] for mortgage brokers was passed into Australian law in early 2020, and (following initial administrative deferral by ASIC[2]) came into effect on 1 January 2021. Those very carefully following the footsteps of government in this area perhaps already saw this change coming before the Hayne Royal Commission[3] in 2018/2019[4], but the push to implement it took most force from the Commission.
An identical form of best interests obligation binds both mortgage brokers holding their own Australian credit licence[5], as well as those carrying on business as credit representatives pursuant to licensee authorisation[6]. Licensees have an additional related obligation, in respect of their authorised credit representatives, of taking reasonable steps to ensure that the credit representative(s) comply with their best interests obligations[7].
Legal history
The legal pedigree of the best interests obligation lies in the obligations imposed by Courts on trustees and other fiduciaries. Trustees hold property for the benefit of others (i.e. the beneficiaries or objects of the trust), and Australian law imposes strict duties on them to do their best in managing that property and role. These ‘general law’ duties were and are quite flexible, however, and can be modified (if not completely excluded) by an aptly drafted trust deed. For this reason, various parliaments passed legislation to make some duties mandatory for those trustees managing property in which there was a significant public interest/interface – for instance, trustees of superannuation funds and responsible entities of managed investment schemes.
In Australia, statutory best interests obligations have since become part of the law in other parts of the financial services sector, including (with effect from July 2013) for financial advisers. Mortgage brokers are the latest group to attract this form of obligation.
Sometimes, it can be quite complex to navigate what these new obligations actually require in practice. While the Courts have spent many years clarifying what is expected of trustees, other statutory best interests obligations are relatively new. Further, because the statutory provisions cannot really be considered as legislating pre-existing general law duties (as was the case for trustees), it is likely that this area of the law will be clarified and developed as ‘edge cases’ come before the Courts and decisions are made and published. As at the time of first writing (March 2023), this has not yet occurred for mortgage brokers.
Requirements of the best interests obligation
In the case of mortgage brokers, the statutory best interests obligation concerns a relatively narrow field of conduct – i.e. how a mortgage broker must ‘act … in relation to’ certain phases of the customer lifecycle. If the statutory words are rearranged and made less formal, what is required is that a mortgage broker act in a customer’s best interests in relation to any suggestion that particular finance be applied for, extended, or maintained. The obligation also theoretically extends to brokers assisting in finance applications, but the main focus can be expected to be upon what is done in and around brokers’ suggestions/recommendations to customers.
The statutory provisions impose a closely related obligation that customer’s interests must be put first wherever a broker knows (or should know) that there is a conflict between these interests and the broker’s own interests, or those of the broker’s related parties[8]. Also, ASIC guidance is available that sets out the regulator’s expectations around many aspects of process, approach, and documentation[9]. To the extent that caselaw in other areas may assist, this would suggest that, while a mere checklist approach should not be adopted, the obligation is concerned with how a broker approaches things at the time of dealing with the customer – not with how things actually turn out for the customer.
Edge cases – consumers with potentially divergent interests
That may all sound clear enough, and fair enough, but let’s discuss an area that may produce ‘edge cases’, some of which may come before the Courts at some point.
While it may be clear that a broker needs to put the customer first, what happens when two customers have actually or apparently conflicting interests?
Let’s consider a scenario. A couple approaches a broker for preliminary discussions about finance because they are about to start looking to buy an investment property. Given that it is an investment property, the broker asks about their incomes and suggests that they apply for finance on the basis that the higher earner will acquire a greater share of any investment property to enhance the couple’s collective post-tax financial position. They discuss the likely credit providers and credit features.
After talking to the broker, the couple approaches the property market in line with the broker’s suggestions. They apply for finance and purchase a property with the title shared 9:1 in favour of the higher earner. The broker assists them in their finance application. They use a licensed conveyancer who attends to settlement but effectively gives them no other advice. The couple could have acquired the property in equal shares. Three years later, the relationship breaks down, and the property has greatly appreciated in value. Putting aside any Court powers to adjust their respective positions under the Family Law Act 1975, the starting point, on title, is that the lower earner has accrued only 10% of this increase in value.
In this scenario, in suggesting title arrangements in connection with potential finance, was the broker acting within the field of conduct regulated by the best interests duty? Was the broker able to act in the best interests of both customers in the given situation? Would it make any difference if they were two friends and not a couple? Would it be different if the broker had sent the couple off for legal advice, and had confirmed with them that they had received advice on the title arrangements before getting into specific finance suggestions?
Reasonable minds can differ in answering these questions, in what, anecdotally, is likely to be a relatively common set of circumstances.
A more complex scenario might involve a couple telling a broker that one of the parties is exposed to a real possibility of bankruptcy. Relatively nuanced differences in terms and conditions around events of default may potentially be important for the non-exposed party in this situation, to minimise prejudice to that party from any eventual bankruptcy. However, this may also directly limit the amount or availability of finance that can be obtained and so make bankruptcy a more likely outcome for the party exposed to creditors. What about this scenario?
Conflicts arise from different sources
These scenarios are illustrative of a common theme: a possible conflict of interest that is not a broker-customer conflict but, rather, a customer-customer conflict.
While much attention has, perhaps understandably, been given to the topic of broker-customer conflicts, it is important to keep front of mind that a broker’s ability to act in the best interests of a customer may also be impermissibly compromised by interests other than their own. It is a logical possibility, and not unrealistic to expect, that, in some instances, a broker will simply be unable to act in the best interests of one customer without automatically and necessarily failing to act in the best interests of another customer if they take on both. In these situations, it may be that brokers will be well-advised to take steps to ensure that they only proceed to assist only one of these potentially conflicting customers.
A note of caution here. While general law principles might treat disclosure and informed consent as sufficiently resolving certain conflicts of interest, it should not be assumed that these concepts will have any application to the statutory best interests obligation.
Certain customer-customer conflicts of interest may need to be dealt with by a broker sending some potential customers off to another broker, or even declining to assist. In cases where potential customers are referred out, but a common application for finance ensues, then a degree of commercial imagination may be required in allocating remuneration etc.
That may sound painful – but the consequences of a proven breach can be catastrophic. Also, while test cases can be useful to clarify the law, even completely successful parties will find these a stressful, draining and costly exercise for which the privilege of contributing to the development of the law is unlikely to be considered an appropriate reward.
[1] It is suggested ‘obligation’ cf. ‘duty’ better captures that a rule is involved, breach of which can be prosecuted by ASIC (as well as sued upon by any aggrieved consumers).
[2] ASIC Credit (Deferral of Mortgage Broker Obligations) Instrument 2020/487.
[3] The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – also commonly called The Banking Royal Commission. See https://www.royalcommission.gov.au/banking
[4] See eg ASIC Report 516 (March 2017), ‘Review of mortgage broker remuneration’: https://asic.gov.au/media/4184768/rep516-published-16-3-2017.pdf
[5] National Consumer Credit Protection Act 2009 (Cth), sections 158L & 158LA.
[6] National Consumer Credit Protection Act 2009 (Cth), sections 158LE(1) & 158LD.
[7] National Consumer Credit Protection Act 2009 (Cth), sections 158LE(2).
[8] National Consumer Credit Protection Act 2009 (Cth), sections 158LB & 158LF.
[9] ASIC Regulatory Guide 273: Mortgage brokers: Best interests duty: https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-273-mortgage-brokers-best-interests-duty/
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