In some situations, one option is sufficient
Best Interests Duty is part of the DNA of mortgage broking, says Smartline franchisee Sally Richards (pictured).
Requiring mortgage brokers to act in the best interests of their customers, Best Interests Duty (BID) applies to credit products regulated under the National Credit Act. It covers products for personal, domestic or household purposes, including purchase or improvement of residential investment property.
Formally introduced on January 01, 2021, BID is a practice many brokers were familiar with and used with their clients. Under ASIC guidelines, as a matter of good practice, a mortgage broker should present a customer with “more than one option”. As a principles-based duty, the number of options provided will depend on the circumstances of each customer.
Where there are multiple options for to consider, these are to be presented “in a manner consistent with the customer’s best interests”.
Read more: Are brokers ready for BID?
Having moved from banking to mortgage broking 22 years ago, Richards says BID is a well-established practice.
In the year 2000, it was common practice to outline customers’ options in a Word document, comparing features, interest rates and repayments.
Now, the only difference is it’s formalised: brokers are required to document BID for compliance, as part of their sales process.
“It [BID] was just part of the sales proposition that we would present to our clients … it’s just been part of our DNA anyway,” Richards said.
“We now have to have our compliance folder and have that evidence of what we’ve provided to the client, demonstrate choice.”
Under the internal compliance process, where relevant, Richards would acknowledge the cheapest option, with reasons backing up her recommendations on whether it was the best product for a person’s circumstances. If the best product wasn’t the cheapest, it was essential for the client to understand why this recommendation was made.
Commenting on the wider benefits of BID for brokers, Richards said it removed the temptation to go with one lender, particularly if they’re offering special treatment – or even just a fast answer.
“I’m not tempted because I act in the best interests of my client,” Richards said.
She cites an example where if a client’s unique circumstances require a quick answer, there is a bank which could provide that – but their rates weren’t competitive. Richards said she risked losing the relationship because she didn’t put enough with them but it underlined the importance of putting the client first.
“I think BID is a good thing to force brokers who habitually went with a particular lender - best interests duty forces those brokers out of that potential habit and makes sure that the client proposition for clients isn’t driven by remuneration or ease for the broker,” she said.
The client has got to feel like they’ve “shopped around” and looked at the market without doing all the research themselves.
“That to me is what mortgage brokers are here for, ensuring clients are comparing apples with apples,” Richards said.
There were some customer situations where one option was enough. Examples include policy and/or servicing limits, and loans for expats. Richards said it was about educating the customer on why their unique circumstances only allowed them access to a particular lender.
“There are very few banks that will allow [expats] to borrow at the maximum … some will take the foreign tax rates so they can borrow a lot more, [and] if they’re self-employed expats, there’s really only one choice,” Richards said.
Another example is someone with substantial existing equity, where they want to borrow to extend, or demolish and rebuild, and the land covers the loan amount required. Some clients want the flexibility of access to money, without all the red tape, such as sighting of construction contracts.
Differences in bank policies, such as the way they assess other revenue, or allowances received by single parents, may also mean there’s only one option.
Richards said the main thing is that clients understand why the broker has only presented one choice, and that it’s talked through.
“Whilst some of your education might be verbal, it’s also important to have a clear record for each interaction with your client on what was discussed,” she noted.
“[This includes] why you’re going with a particular bank, or why any particular options presented are discounted, and it’s documented in the mortgage advice.”