In February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures) Act 2020 (Act) passed both Houses of Parliament and received Royal Assent.
The Act amends the National Consumer Credit Protection Act 2009 (Credit Act) to introduce a:
- best interest duty for mortgage brokers; and
- ban on conflicted remuneration for mortgage brokers and intermediaries.
This article focuses on the newly introduced ban on conflicted remuneration for mortgage brokers and mortgage intermediaries. You can find out more about the best interest duty for mortgage brokers here.
Why the ban on conflicted remuneration was introduced
Conflicted remuneration is not a new concept for holders of Australian Financial Services Licences and their representatives.
Until now, there has been no equivalent ban for holders of an Australian Credit Licence (ACL). Although, ACL holders have had an obligation to ensure that clients are not disadvantaged by any conflict of interest – including a conflict of interest arising from remuneration arrangements.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services (Royal Commission) controversially recommended changes be made to the way that mortgage brokers are remunerated.
Recommendation 1.3 in the Royal Commission Final Report provided that:
"The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers' remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers"
This recommendation was borne from the Royal Commission's finding that the existing system for remunerating mortgage brokers could reasonably be expected to influence the recommendations made by the broker with regard to the:
- choice of lender;
- amount to be borrowed; and
- terms on which the amount is borrowed.
In its initial response to the Royal Commission's Final Report, the Government said that it would proceed carefully in response to Recommendation 1.3. It also said that it would not, in the short term, implement a 'user pays' mortgage broker model.
The new law
The key features of the new ban on conflicted remuneration for mortgage brokers and mortgage intermediaries include:
- the introduction of definitions of "mortgage broker" and "mortgage intermediary";
- a ban on mortgage brokers and mortgage intermediaries accepting conflicted remuneration; and
- a ban on employers, credit providers and mortgage intermediaries giving conflicted remuneration to mortgage brokers or mortgage intermediaries.
But, what is conflicted remuneration?
The definition of conflicted remuneration can be found in newly inserted section 158N of the Credit Act. It is largely drawn from the definition of conflicted remuneration found in section 963A of the Corporations Act 2001.
From the newly inserted definition, remuneration paid to mortgage brokers and mortgage intermediaries will be conflicted where the following elements are present:
- a benefit (monetary or non-monetary);
- given to a credit licensee, or a credit representative of the licensee;
- who provides either credit assistance to consumers or who acts as an intermediary;
- in relation to the provision of credit assistance – that could reasonably be expected to influence the credit assistance provided to consumers;
- in relation to an intermediary – that could reasonably be expected to influence whether the licensee or representative acts as an intermediary or how the licensee or representative acts as an intermediary.
The Credit Act does not prescribe the circumstances in which a benefit will be, or will not be, conflicted remuneration. That is left to the Regulations.
The Government released for consultation Exposure Draft Regulations in 2019 – The National Consumer Credit Protection Amendment (Mortgage Brokers) Regulations 2019. While the consultation period ended in October 2019, the final Regulations have not been introduced.
The Exposure Draft Regulations give some insight into the types of benefits that are likely to be deemed to be conflicted remuneration, including:
- volume-based benefits; and
- campaign-based benefits.
However, we will need to wait until the final Regulations are introduced in order to have clarity as to what benefits will be deemed to constitute conflicted remuneration, and those benefits that will not be conflicted remuneration.
When will the ban commence?
The ban on conflicted remuneration for mortgage brokers and mortgage intermediaries was due to commence on 1 July 2020. However, due to COVID-19, the commencement of the ban has been delayed.
The ban will now commence on 1 January 2021. That is, on and from 1 January 2021:
- mortgage brokers and mortgage intermediaries will not be permitted to accept conflicted remuneration; and
- employers, credit providers and mortgage intermediaries will not be permitted to give conflicted remuneration to mortgage brokers or mortgage intermediaries.
Are there any exemptions from the conflicted remuneration prohibitions?
Yes, a benefit that meets the definition of conflicted remuneration will be exempt (meaning it can continue to be paid) if:
- it comes within an exemption prescribed in the Regulations; or
- it is a benefit paid under a grandfathered arrangement.
While the Regulations are yet to be made, the Exposure Draft Regulations also gives some indication about the type of benefits which may be exempted. These include:
- Benefits given by a client
- Benefits given in relation to mortgage broking in which the benefit is not volume-based or a campaign-based benefit, is calculated on the amount of the loan drawdown and complies with certain clawback requirements;
- Non-monetary benefits that are less than $300; and
- Non-monetary benefits in the form of IT support and education or training.
The grandfathering provisions essentially allow benefits that would otherwise be conflicted remuneration to be paid or received provided the arrangement was in place before 1 July 2020.
What should you do now?
While we wait for the final Regulations, mortgage brokers, mortgage intermediaries, employers and credit providers should begin to review their remuneration structures in order to consider which benefits they receive or pay would meet the definition of conflicted remuneration in section 158N of the Credit Act.
Consideration should also be given to the preparation of policies and procedures in relation to conflicted remuneration and how those policies and procedures will be supervised and monitored.
Finally, don't forget the anti-avoidance provision as any scheme that has no commercial purpose other than to avoid the application of the conflicted and other banned remuneration provisions is likely to contravene this provision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.