As you are no doubt aware, late last month ASIC finally released its Regulatory Guide RG273: Mortgage Brokers: Best interests duty. QED produced a very brief communication on this a couple of days after. It was very brief, wrapped up in two lines!
Whilst our opinion has not altered since - we really do think it's much ado about nothing - we also thought it would be best if we give you some more material letting you know why we think this. We also appreciate that there may be newer QED customers who haven't quite got used to our methods and so may need a little more coaching and reasoning.
In that context, one of the first things we should point out is that ASIC has gone to great lengths to call this out as something new and to be a very big deal. If that sounds contrary to the QED view, there is a good reason for this.
The difference is in QED's view of the responsible lending obligations.
For a loan to not be "unsuitable" for a client, it needs to meet with their "requirements and objectives". Objectives are where the client wants to "get to" and requirements are the things "to get them there".
Through our audit work over the past decade, we have constantly coached brokers to really stretch this conversation out with their clients. Really understand what the client is about. Sometimes they think they know what they want but, when you dig deeper, your broking expertise may lead you to the conclusion that they actually need something very different.
All of this information and narrative must be carefully documented in your client file, to demonstrate what happened. The features of the product with which you eventually assist your client into must be shown to match with each one of the requirements you identified.
If you execute the above properly, diligently and consistently, then you have just covered most of what is in RG273.
So why has ASIC gone to such lengths to separate best interests from responsible lending?
QED can only guess at the answer to that question but, well, here goes. We have been extensively coaching our clients for a decade, including brokers using our CompliFast online compliance tool. Whilst QED covers a significant proportion of the broker market, not all brokers and not all compliance providers get it.
That is to say that a large number of brokers are not exposed to our coaching, thoughts or opinions on a regular basis. For this reason, we can imagine that there are plenty of brokers out there that have not thought to stretch out the "requirements and objectives" piece in quite the same way as outlined above.
If you choose to play it a particular way, the "not unsuitable" bar can be very easy to talk your way over. Can the client afford the loan repayments? Check. Did you help them to achieve their requirements and objectives? Well they got a home loan and purchased the house they wanted so...check!
QED has been coaching that attitude and behaviour out of brokers for years and we know it still exists out there. So here is an opportunity for ASIC to take a stand and say to the market - no! Taking that attitude to responsible lending is NOT acting in the client's best interests. THIS is what acting in the client's best interests looks like.
So even though it sounds like QED and ASIC are saying different things, we are actually arriving at the same outcome.
Aside from that, there are a few more specifics we should point out with RG273.
- Principles-based legislation.
Quite a long time ago, western financial services regulators started giving up the idea of rules-based legislation. Having rules makes it easy to comply in form but, in substance, you could be smashing the spirit of the legislation out of the park. Plenty of crafty institutions got away with this for a long time before regulators finally said, "no more".
Principles-based regulation means exactly that. We are provided with principles to adhere to and it is left largely to us to determine how we will adhere and whether or not we are doing a good job. However, don't be too cavalier about it because the regulator is watching, and they will be sure to let you know if they disagree!!
For this reason, Commissioner Hayne and consumer advocacy groups alike were adamant that a "best interests obligation" should not have a "safe harbour". In the Fairness of Financial Advice (FoFA) legislation for the planning world, such a safe harbour provision was made and it provided a roadmap that, as long as you followed the checkpoints, that would demonstrate that the planner acted in the client's best interests.
Unfortunately, safe harbours can turn into a tick-a-box exercise so that is why you have heard lots of people talking about there not being such a provision in this best interests obligation for mortgage brokers.
- Regularly check and reset your available range of products and lenders.
The draft RG from earlier in the year implied that you must be aware of all available products in the market and, if you cannot assist a client with the best product for them, then you must not help them.
Fortunately, the final RG is a lot softer in its language and leaves a lot of the responsibility back with YOU:
- You must be satisfied that the credit products you can access and recommend are sufficient to allow you to act in your consumers' best interests;
- You should be accredited with a reasonably representative panel of credit providers;
- You are not necessarily required to recommend a specific product outside your panel.
However, it does still leave us with this:
If you are not satisfied that the products and credit providers you can access and recommend will allow you to act in a consumer's best interests, you must not provide credit assistance to that consumer. In declining to provide credit assistance, it may be helpful to refer the consumer to another mortgage broker who would be better placed to assist them.
QED has workshopped this with a number of brokers and we are having a hard time coming up with a situation where an experienced broker, with a decent breadth of accreditations, would be in a position where they would have to refer a client over to another broker.
QED will be adding into all our compliance testing platforms a test that the brokers in the business have reviewed their accreditations every six months and documented whether or not they thought they were sufficient to service the broker's client base.
- Interest is not the only cost factor and cost is not the ultimate trump card.
The RG goes to some lengths to demonstrate to us that ASIC no longer thinks interest rate is the be-all-and-end-all of product choice. The RG asks us to consider all financial aspects of a transaction like government schemes, promotional offers like cashbacks and the fact that some borrowers do not have access to some products due to their particular circumstances.
To take it even further, at RG273.71 we get "Although cost is a key consideration, some consumers may also derive value from other loan features, depending on their individual circumstances."
So how do we identify the individual circumstances? You find out and document the client's requirements (where they want to get to) and objectives (what's needed to get them there) - this is what we have been advising brokers to do for the past 10 years and ASIC now has made it clear in the RG.
- The key to all of this is document, document, document.
This has always been QED's mantra.If you don't like documenting things, then your chance of being able to demonstrate your compliance to any interested stakeholder - your aggregator, lenders, regulators, AFCA etc. - is severely diminished.If it's not written down, it didn't happen!
However, there's really little or no excuse anymore with the technology that's available. There are any number of mobile apps that can record client meetings and others that can then convert the conversation to text. Yes, you could go straight to speech-to-text, but we know they don't always get it right. Hey, to save time, you could run both simultaneously! Go straight to text but still have the audio as backup when you know the text is not correct.
- Although ASIC avoided a "safe harbour" procedure, it provided a LOT of examples to try and answer questions before they are asked.
The QED team has listed these examples out and has come up with a whole lot more, examples that we will provide to you over the rest of the course of this year before it all takes effect on 1 January 2021.
Stay tuned, stay safe, stay "best".
The QED CompliFast Team