The days of questioning if a mortgage broker was recommending you a loan because it was the best for you are over, thanks to Best Interests Duty Law (BID).
From 1 January 2021, Best Interests Duty laws came into effect for mortgage brokers and financial advisers. These new regulations have changed the way that Australians search for home loans and investment property loans. This is how finance professionals offer their services with BID in mind.
What is Best Interests Duty?
Responsible lending obligations said that mortgage brokers had to provide mortgage deals that were “not unsuitable” for their clients. While the home loan had to be one you could afford, it didn’t have to be your best option.
Best Interests Duty enforces that mortgage brokers are required to act in the best interest of a client when providing financial advice and/or financial assistance. Best Interest Duty Law does NOT apply to banks (and/or bank staff) who can ONLY provide a product from their respective bank/s.
Previous Best Interest Duty rules had been in effect for financial advisers since 2013. The new reforms now apply the BID to mortgage brokers. Following the Banking Royal Commission, legislation was introduced to bring an end to these conflicts of interest by ensuring that mortgage brokers have a duty to act in the best interest of their clients.
How does Best Interests Duty work?
Generally, Best Interests Duty requires that mortgage brokers act in the best interest of the borrower when recommending loans and prioritise the consumer if there are any potential conflicts of interest.
The Best Interests Duty legislation considers that the best loan for a borrower may not always be the one with the lowest interest rate or fees. Depending on a borrower’s financial goals, sometimes the right home loan features and benefits may offer more value than just a lower price.
Similarly, if a borrower asks for a loan that may not be in their own best interest, such as insisting on a mortgage from a favourite lender even though they charge higher fees, or wanting a loan that offers feature that they’re unlikely to qualify for, a broker will be obliged to inform the borrower that there may be better choices out there.
Keep in mind that these rules only apply to mortgage brokers and financial advisers – they don’t apply to banks. If you approach a bank directly to apply for a home loan, they aren’t required to offer you the best possible deal for your needs.
What Best Interests Duty means for your home loan?
If you ever had doubts about whether a mortgage broker will offer you good advice, you can rest a little easier nowadays. This legislation helps minimise the risk of conflicts of interest from mortgage brokers between the borrowers they work for and the banks that pay them.
Even if a loan from a particular bank or lender will pay the broker a higher commission, they shouldn’t be recommending it to you unless the bank’s offer is also in your own best interest. However, keep in mind, most leading banks pays similar commission to brokers.
With Best Interest Duty Law in mind, If your broker advises for or against a home loan you’ve had your eye on, you can be that little bit more confident in their personal financial guidance.
When does the Best Interest Duty apply?
Best interests duty applies when your broker:
- suggests you apply for a particular loan with a particular lender;
- suggests you apply for an increase to a current loan you have with a particular lender;
- suggests you remain in a particular loan with a particular lender;
- helps you apply for a particular loan with a particular lender; and
- helps you apply for an increase to a current loan you have with a particular lender.
Best Interests Duty only applies to mortgage brokers and not banks or other non-bank lenders. So unlike when you go directly to a bank or lender, your broker is required by law to act in your best interests.
Why can you trust your Finance Circle Group Broker to put your best interests first?
At Finance Circle Group (FCG), you can always expect your FCG Broker to act in your best interests. We have:
- Over 100 years of combined experience in banking and finance industry;
- access to thousands of loans across more than 30 lenders; and
- been formally trained on our obligations around the best interests duty.
Your FCG Broker will consider your individual circumstances and provide you with a range of recommendations that meet your objectives, financial situation, and needs.
Does the Best Interests Duty apply to banks?
No, the Best Interests Duty doesn’t apply to banks and/or bank staff!
ASIC’s Best Interest Duty Guidelines
Whilst price (interest rates and fees) will be a determining factor, in some cases, the cheapest or lowest price may not be the best outcome.
Especially if the loan cannot be approved with the cheapest lender or the service proposition of the cheapest lender means missing out on the property the client wants to purchase.
ASIC’s final BID guidance outlines, “Some consumers’ circumstances will mean that the benefits provided by particular features might outweigh the importance of cost,” acknowledging the fact that some consumers will prioritise approval time and compromise on cost because of a time-sensitive transaction, such as impending settlement dates, or may value access to an offset account or the service levels and policies of the credit provider.
Therefore, mortgage brokers are expected to “exercise judgment in considering the relevance of these factors with reference to the consumer’s individual circumstances”.
The guidance highlights how mortgage brokers may comply with the best interest obligations at key stages of the credit assistance process and provides numerous examples.
Requests made by customers, not in their best interest
In cases where “Consumers may also have a strong preference for a loan feature that may not be in their best interests. For example, consumers may insist on an interest-only loan or offset account when it is not, in your view, in their best interests.”
The broker is expected to make “reasonable efforts to explain to the consumer why these features may not be appropriate or may not offer good value to them” to help them make an informed decision.
However, the guidance goes on to state that “If the consumer decides to still proceed with an application for that product, you may assist the consumer with that application.”
Another example is when “consumers may have strongly held beliefs or preferences about certain credit providers and will not consider those providers, regardless of the competitiveness of their product offering.”
The guidance states that in these situations, “you (brokers) may still reasonably consider and recommend products from these credit providers, rather than exclude them from the outset.”
This article is general and has not taken into account your objectives, financial situation, or needs. Consider whether any advice is right for you. You may need financial advice from a qualified adviser. Consider the product disclosure statement (PDS) before making any financial decision.