Review finds brokers not recommending cheapest loan in more than 20% of cases at majority of aggregation groups
Mortgage brokers who steer clients away from the cheapest available home loan must be ready to show their working, after the Australian Securities and Investments Commission (ASIC) found the lowest-cost option was passed over in more than one in five recommendations.
The corporate regulator's new Report 840, Mortgage brokers: Review of best interests duty and complaints handling practices, is its first major test of the best interests duty (BID) since the obligation began in January 2021.
Seven of the eight mortgage aggregators examined by ASIC reported that their brokers did not recommend the cheapest loan in more than 20% of cases – and ASIC found instances where brokers had no clear evidence to support those recommendations.
BID, which evolved out of the Hayne Royal Commission, requires brokers to act in a borrower's best interests when recommending a home loan.
ASIC’s report does not imply that brokers are putting customers into inappropriate loans or favouring lenders that pay higher commissions, but the message is clear: when price is not the deciding factor, the loan file needs to say why.
ASIC commissioner Alan Kirkland said cost sits at the core of BID.
“Where a broker recommends a loan that costs more than the available alternatives, consumers should be able to clearly understand why that recommendation delivers greater value for their circumstances,” Kirkland said.
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The review covered mortgage aggregators AFG, Lendi, Loan Market, Mortgage Choice, Finsure, Connective, Yellow Brick Road and outsource Financial.
ASIC found the broking sector was mostly aligned with BID rules, which stipulates that recommending a loan is unlikely to be in a borrower's best interests if a cheaper product would still meet their non-cost objectives. Those objectives can include an offset account or redraw facility, approval times, a preference for a particular lender's brand or reputation, or a specialist assessment of non-standard income.
ASIC is calling on the aggregators to improve their data-sharing capabilities.
"Aggregators sit at the centre of the mortgage broking system, so they should be able to allow ASIC to see what's actually happening in lending through brokers," Kirkland said. "But they themselves should also be looking at that data so they can understand where there might be risks involving particular brokers or groups of brokers."
What does BID say?
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BID guidance is laid out in ASIC’s ‘Regulatory Guide 273 (RG 273)’. Relevant guidance (paraphrased below) includes:
RG 273.48(a): Brokers are likely to need to consider the consumer’s priorities and preferences for different products or credit providers, including the price of the loan, features such as offset accounts, and the credit provider’s level of service -
RG 273.54: Failing to consider cost and investigate the lowest-cost options may suggest non-compliance, and any higher-cost recommendation needs evidence showing why it is in the consumer’s best interests
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RG 273.55: Suggesting a loan when there is another, cheaper loan the broker could recommend that would meet the consumer’s non-cost needs and objectives is unlikely to be in the consumer’s best interests
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RG 273.56: The lowest-rate product is not necessarily the cheapest for every consumer, because an offset account or redraw facility can give some borrowers more flexibility and save them considerable interest
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RG 273.60: A credit provider’s credit policy, pricing practices and risk appetite may prevent some consumers from accessing the lowest-cost products
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RG 273.71(a): Although cost is a key consideration, some consumers may value substantive features such as an offset account, redraw facility or a package with other credit products
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RG 273.77: Some consumers will prioritise approval time and accept a higher cost because of a time-sensitive transaction such as an impending settlement, but ASIC expects such claims to be evidence-based and able to be substantiated
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RG 273.82–83: Consumers may hold strong beliefs or preferences about certain credit providers. Where a consumer prefers a specific credit provider, the broker should still investigate a broader range of products than just that provider’s
“Acting in customers' best interests is fundamental to trust in the mortgage broking industry. Consumers rely on brokers to help them navigate a complex market and recommend products that meet their needs,” said Kirkland.
“Licensees should closely monitor recommendations made by brokers operating under their licence, particularly where a lower-cost loan is available. The greater the cost difference, the stronger the evidence needed to show the recommendation is in the consumer's best interests.
“Consumers place significant trust in mortgage brokers. Strong supervision, effective monitoring and robust complaints handling help ensure that trust is well placed.”
MFAA responds
The Mortgage & Finance Association of Australia (MFAA) has framed Report 840 as a roadmap rather than a rebuke. The peak industry body noted ASIC found the licensees reviewed generally had processes designed to support compliance with the duty, largely aligned with ASIC guidance, and observed no apparent steering towards lenders paying higher commissions.
"ASIC's review gives our industry a roadmap. It recognises the foundations already in place, while being clear about where brokers, aggregators and licensees can continue to strengthen practices and consumer outcomes," MFAA chief executive Anja Pannek said.
"Our members are at the centre of this. They are the people sitting across the table from Australians every day, understanding their circumstances and helping them navigate one of the biggest financial decisions of their lives.
"Our job is to make sure members understand what these findings mean in practice, have the guidance and education they need, and that their experience continues to inform our engagement with ASIC."
On price, Pannek said ASIC's focus on the cost of individual recommendations was important, but should be weighed against the role brokers play in driving competition between lenders.
"Price absolutely matters. Consumers should have confidence that their broker has considered the available options and can clearly explain why a particular loan is in their best interests. At the same time, the lowest-cost loan is not necessarily the right loan for every borrower.”
Pannek continued: "With broker market share now at a record 81.6 per cent, the contribution brokers make to competition and putting downward pressure on price is significant.
"Strong consumer protections and strong competition work together to deliver better outcomes for borrowers.
"That level of consumer choice also brings significant responsibility. As the industry grows, maintaining trust means continuing to review what we do, responding where improvements are needed and keeping good consumer outcomes at the centre."
