BEST INTEREST DUTY
The story of “The Dog on the Tuckerbox” tells of a dog guarding its master's tuckerbox and other possessions while he sought help from being bogged at a river crossing. The master, a driver of a bullock team, never returns but the dog continues to guard the tuckerbox until its death.
The dog’s unwavering duty was to its master. Whilst a compelling and moving act, can it be considered as best interest?
There is a lot being said in the industry, at the moment, about this new term Best Interest Duty. And this article delves into the background, legislation and definitions that help provide understanding.
The history of the Australian workforce and labour market gave rise to an allegiance to one’s employer. My Grandfather worked for Telecom/Telstra for over 40 years, his only employer, and was fiercely loyal to the company. But times change and with it dawns a new age of asking oneself and determining where does my allegiance lie - who do I owe a duty to?
And we have to answer the question for one self.
A Bit of Legislative Background
The finance broking industry in Australia is primarily regulated by the Australian Securities and Investment Commission (ASIC) and under the National Consumer Credit Protection Act (NCCP). The NCCP oversees the individuals who provide credit assistance to clients and act as intermediaries.
ASIC calls upon a variety of acts and regulations in overseeing their regulatory responsibilities. These are bounded in common law and the Corporations Act, with reference to three fundamental duties: a duty to act in the client’s best interests; a duty to prioritise the client’s interests in the event of a conflict; a duty to not accept conflicted remuneration.
Best Interest Duty: Mortgage brokers will have to act in the best interests of consumers when providing credit assistance in relation to credit contracts. The explanatory materials clarify that the best interest duty will not only capture credit assistance relating to residential mortgages, but also ancillary credit such as credit cards and personal loans that are packaged with mortgages. The legislation does not prescribe what conduct would satisfy the best interest duty. Unlike the equivalent obligation for financial advisers, there is no ‘safe harbour’ provision which mortgage brokers could rely on to defend claims that they had not acted in a consumer’s best interests.
Conflicts Priority Rule: Mortgage brokers will have to prioritise consumers’ interests when they know or ought to know that there is a conflict between the consumer’s interests and their own interests or those of a related party. This obligation is almost identical to the conflicts priority rule introduced for financial planners as part of the Future of Financial Advice (FOFA) reforms in 2013.
Conflicted Remuneration Rules: Mortgage brokers and mortgage intermediaries will be prohibited from accepting ‘conflicted remuneration’ and employers, creditor providers and mortgage intermediaries will be prohibited from giving ‘conflicted remuneration’. New regulations will prescribe benefits are not ‘conflicted remuneration’ if they meet certain criteria, which include that they are not volume-based benefits (essentially, payments that are dependent on sales volume or total credit metrics) or campaign based benefits (essentially, payments that are partly or wholly only available during a particular campaign period). Additionally, up front commissions will have to be linked to the actual amount drawn down by the consumer instead of the total loan amount. Certain non-monetary or ‘soft-dollar’ benefits are expressly permitted provided various conditions are satisfied, including infrequent non-monetary benefits with a value of less than $300.
Duty of Care
Duty of care may be defined as either:
The responsibility or the legal obligation of a person or organisation to avoid acts or omissions (which can be reasonably foreseen) to be likely to cause harm to others; or
The responsibility of a person or organisation to take all reasonable measures necessary to prevent activities that could result in harm to other individuals and/or their property.
A fiduciary relationship is where one person (the fiduciary) undertakes to act for another (the principal) placing the principal’s interests ahead of their own. The relationship is not necessarily formally or legally established, as in a declaration of trust, but can be one of moral or personal responsibility, due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling.
Best Interest Duty
Responding to recommendations of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Federal Government introduced the best interest duty for finance brokers, determining they must act in the best interest of the client in relation to credit assistance.
In prioritising the consumer’s interests, it is possible that the interests of the consumer and the broker will align. In this situation, the fact that there is a benefit for the broker does not indicate that the broker did not prioritise the clients’ interests. If the situation was reversed, and the credit provider charging the annual fee also paid the broker a higher commission, recommending the higher fee product would be inconsistent with the conflict priority rule.
Whether the broker has complied with the conflict priority rule will depend on whether it was in their clients’ interests to recommend the related party product. In this scenario, the broker must be able to articulate how the consumer’s interests are placed ahead of the interests of the broker to comply with the conflict priority rule. Although disclosure is not sufficient to satisfy the conflict priority rule, the broker must have nonetheless explained to prospective clients the relationship between the broker and the related party, what benefit the broker may receive, why that product was recommended and how their interests were placed ahead of the broker’s.
The mortgage broker in this scenario is likely to have acted in the best interests of the consumer by deciding not to closely consider products with a certain type of product feature. By keeping thorough notes and records throughout the process, mortgage brokers can accurately capture their reasoning, including why they might not closely consider certain types of products.
Facing these situations, mortgage brokers are likely to continue to:
get to know the client
clearly define the task to be undertaken
follow a process
ensure advice addresses the client’s goals, needs and objectives
To ensure that your advice meets the requirements of the best interest duty and its associated obligations, consider:
Would a reasonable broker believe that the client is likely to be in a better position by following my advice?
If this client was my son or daughter being influenced by my advice and trusting me to act in their best interests, is this what I would recommend?
Implicit in their role is an expectation that a broker will identify and recommend lending products that are appropriate and relevant to their clients’ individual needs and circumstances and arrange finance terms accordingly.
With a continuation of a client-first approach, brokers can rightly welcome the principle of Best Interest Duty. It will highlight another point-of-difference for brokers from lenders and mortgage intermediaries, who will not be subject to the same high standards. This should enhance the broker’s reputation.
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