Conflicted remuneration – mortgage brokers’ tricky year ahead

The Federal Treasury has released the long-awaited regulations which will govern mortgage broker remuneration from 1 January 2021, the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers) (Mortgage Brokers) Regulations 2020 (Regulations). It follows the release of the draft regulations and explanatory statement in August 2019.

The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures) Bill 2019 (Bill) contains the mortgage broker’s ‘best interests’ duty obligation. You can learn more about that significant reform in our recent webcast here. The Bill also prohibits mortgage broker licensees, credit intermediaries, and credit representatives of those entities from accepting ‘conflicted remuneration’. There are appreciable penalties attached for those who do not.

With more guidance as to what is meant by ‘conflicted remuneration’, and only three short months until the prohibition comes into being, affected entities need to act now.

Legislation

1. 158N of the Bill sets out that ‘conflicted remuneration’ means any benefit, whether monetary or non-monetary, that is given to a licensee, or a representative of a licensee, who provides credit assistance to consumers or acts as an intermediary and because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the credit assistance provided to consumers or whether / how the licensee or representative acts as an intermediary.

The definition is very broad, and open to interpretation. In December 2019, the Senate’s Scrutiny of Bill Committee called for more guidance to be provided in the legislation as to what constitutes conflicted remuneration and the circumstances in which it should be banned, as, while noting the Bill’s intention to provide flexibility to identify and ban conflicted remuneration, its view was that:

‘…the need for flexibility does not, of itself, provide an adequate justification for leaving significant matters to delegation legislation. In this instance, it is unclear why these matters cannot be included on the face of the primary legislation. The committee’s scrutiny concerns are further heightened by the high civil penalties that can be imposed’

The Senate Committee’s concerns, which are set out in the Scrutiny Digest 10 of 2019 dated 5 December 2019, appear to have been dismissed by The Federal Treasury. It elected to provide more information in the regulations.

Regulations

The intention behind the Regulations is to give guidance as to which benefits received by mortgage brokers are considered conflicted remuneration, and when conflicted remuneration must not be accepted or given.

The Regulations clarify that benefits are not likely to be conflicted remuneration if:

• the remuneration is given by consumers themselves (r. 28VB(2));
• the benefit is:
  • not a volume-based; or
  • not campaign-based benefit; and
  • if a drawdown cap applies, the benefit is not tied to the amount of credit or percentage of the maximum drawdown (r. 28VB(3));
• non-monetary benefits which are non-frequent, and less than $300 (r. 28VH(2)); and
• non-monetary benefits which have a genuine education or training purpose (r. 28VH(3)) – and the regulations actually specifically that 75% of the course or 6 hours per day must be taken up with the education,

The Regulations define which is meant by ‘volume based’ benefits (r. 28VE), being where access to the benefit, or the value of the benefit, is wholly or partly dependent on: (a) the total amount of credit available or provided under credit contracts, or credit contracts of a particular class; or (b) the number of credit contracts, or the number of credit contracts of a particular class. Similarly, ‘campaign benefits’ are defined by reference to access to the benefit, or the value of the benefit, being wholly or partly dependent on the credit service being provided, or the consumer entering the credit contract, during a particular limited time period (28VF).

The Regulations also provide useful guidance as to working out the benefits to which the drawdown cap applies (r. 28VC) and the working out the maximum drawdown net of offset for a credit contract (r. 28VD). These more technical sections were subject to appreciable consultation, for example when the draw down period commences.

Clawbacks

One vexed issue addressed by the Regulations is clawback requirements (r. 28VG). Clawback is a concept which requires a mortgage broker to repay all or part of the benefit they receive if the consumer is in default under the credit contract or wholly or partly discharges the credit contract.

The regulations provide that the any clawback requirements in relation to the benefit must not apply for more than two years after:

• for a new credit contract—the first day on which an amount of credit is provided to the consumer under the credit contract; or
• for a refinanced credit contract—the first day on which an amount of credit is provided to the consumer under the credit contract after the refinanced credit is made available; and
• the repayment obligation must not require repayment of an amount greater than the benefit given to the licensee or representative; and
• the consumer must not be subject to an obligation to pay an amount as a result of an amount being required to be repaid under the repayment obligation i.e. the broker can’t seek to recoup their remunerative loss from the consumer.

Expect these provisions to receive continued attention. Lobbying from industry groups to reduce the period from two years down (in addition to individual lobbying of creditor providers) continues.

Next Steps

Mortgage brokers and other affected parties need to review their remuneration structures and policies and procedures in order to ensure that an appropriate risk framework is in place. In addition to making sure that they are satisfied that the customer’s best interests are being met each time a mortgage broker recommends a loan product to them, mortgage brokers will need to ensure that that process does not see them receive any conflicted remuneration.

Timelines are tight, and appreciable penalties apply for breaches of the law. We recommend engaging with these issues sooner rather than later. Our Banking & Finance and Regulatory teams have deep experience in this space and would be happy to assist you. Please reach out to your usual Gadens contact if you would like any further information.

Authored by:

Craig Green, Partner
Susan Forrest, Partner
Victor Asoyo, Partner