Best Interest Duty (BID)
The Latest On Best Interest Duty (BID)
What is BID
The best interests duty for mortgage brokers is a statutory obligation for mortgage brokers to act in the best interests of consumers (best interests duty), and to prioritise consumers’ interest when providing credit assistance (conflict priority rule). These two obligations are collectively referred to as the Best Interests Duty. Based on the Royal Commission’s recommendations, it aims to align “consumers’ expectation and interest with that of the interest of the mortgage broker.”
When does it come into effect?
The Best Interests Duty for mortgage brokers officially came into effect on 1 January 2021. Intially, the legislation passed both houses on February 2020 and was supposed to come into effect on 1 July 2020 but was delayed to January 2021 to allow the mortgage industry to focus on immediate priorities and the needs of their customers amid the COVID-19 crisis.
What does this mean for customers?
Mortgage brokers now operate under an unrivalled Best Interests Duty when providing credit assistance to consumers, which provides yet another compelling reason to use a broker. This new legal duty offers customers peace of mind knowing that their mortgage broker is legally required to act in their best interests and put their interests first. Did you know that the Best Interests Duty doesn’t apply to banks? As mortgage brokers, we act in your best interests when recommending a home loan, whereas a lender sells you their products. In other words, we must always act in your best interest; however, if a customer goes to a bank directly, then the bank can act in their own interests and not those of the borrower
ASIC's BID Guidelines: ASIC has released the following guidelines for mortgage brokers
- Gathering information about the consumer:
Mortgage brokers should gather relevant information to ensure they can provide recommendations that will be in the consumer’s best interests. The draft guidance indicates that this may involve an iterative process of receiving instructions and making inquiries.
- Assessing what is in the consumer’s best interests:
Mortgage brokers should consider products holistically to assess whether they are in the consumer’s best interests. The factors and their relative importance will depend on the consumers’ situation. Factors to be considered are both cost-based such as interest rate, fees and charges, and non-cost considerations or loan features, i.e. redraw, offset etc.
- Presenting information and recommendations:
Mortgage brokers should provide guidance to encourage mortgage brokers too, where necessary, tailor how they present product options and recommendations to account for the consumer’s expectations and circumstances. We also propose to emphasise the educative role of mortgage brokers and the importance of presenting a range of options.
What Are Some Key Issues To Consider
Don’t underestimate the complexity of the best interests duty:
Following the FOFA reforms, the financial advice sector has struggled with the practical challenges of implementing the best interests duty framework across adviser networks. In addition to making the necessary policy changes to reflect the new legislative requirements, embedding a consistent understanding of what it means to act in the best interests of the consumer, and how to evidence compliance with the requirements, will be crucial. While the good intent of mortgage brokers is not in question, compliance with the framework will require an end-to-end approach, including designing comprehensive training, tools and templates and audit processes. Cultural levers, including reward structures and the role of leaders in communicating behavioural expectations, will also need to be considered.
Demonstrating compliance is key:
The necessity to maintain and store comprehensive records which demonstrate compliance with new legislative requirements cannot be understated. Enabling mortgage brokers and intermediaries to capture prescribed information through the use of templates and other tools, rather than an over reliance on file notes, will greatly assist. ASIC has been especially critical of the shortcomings across the financial advice sector to demonstrate compliance through inadequate record keeping and this will undoubtedly be a focus of ASIC’s new surveillance project on mortgage broker accountability.
Review your conflicts compliance framework:
The new conflict requirements arguably extend a licensee’s general obligations to adequately manage conflicts of interest to ensure consumers are not disadvantaged. Financial advisers cannot comply with their equivalent conflicts priority rule merely by disclosure or by obtaining client consent and we expect ASIC will take a similar approach with mortgage brokers. Existing conflict of interest frameworks and supporting procedures must therefore be thoroughly reviewed and enhanced to facilitate compliance.