2.5 Brokers as advisers

There is a further issue to consider. But none of the recommendations made so far depends upon how this final issue is considered or resolved. That is, implementation of the other changes that have been proposed does not depend on, and should not be delayed by, debate about this further issue.

The further issue to be considered is presented by the very point at which the debate about mortgage brokers begins. Consumers go to mortgage brokers for advice. The advice the consumer seeks is about what ordinary parlance would see as a financial product – a secured home loan. And the transaction about which the consumer seeks advice is very important to the consumer. For many it will be the most important and the most expensive capital acquisition they make.

Why not regulate mortgage brokers in precisely the same way as any other person who is to provide personal advice to a retail client? Why not treat mortgage brokers as financial advisers?

I know that doing this would bring with it the requirement to provide written statements of advice. I know that it would bring with it the educational requirements expected of other financial advisers.

But what reasonable answer can be given to the observation that the special and distinct treatment of mortgage brokers is no more than yet another carve out from, or exception to, generally applicable rules stated in the law because they are seen as necessary to the proper conduct of provision of financial services in Australia? None is evident to me. I consider that after a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.

Before leaving this topic, I make two further observations about bringing the framework for mortgage brokers into line with that for financial advisers.

The first observation relates to the steps that a lender or aggregator should take after identifying that a mortgage broker has engaged in misconduct. Consistently with what I say in the chapter concerning financial advice, when a lender or aggregator detects that a broker has engaged in misconduct in respect of a particular loan, it should always take steps to assess whether the broker may have acted poorly in respect of other loans. The evidence before the Commission showed that entities have not always done this. The result is that the damage done by a broker may not come to light until long after the event. That works to the detriment of both the affected clients and the entity itself. It is necessary in principle, and better in practice, for lenders and aggregators discovering misconduct by a broker to make whatever inquiries are reasonably necessary to determine the nature and full extent of the broker’s conduct. Where there is sufficient information to suggest that a broker has acted poorly, any customer affected by that misconduct should be told and remediated promptly.

The second observation relates to what is sometimes termed the ‘rolling bad apples’ phenomenon. In the chapter of this Report dealing with financial advice, I make two recommendations about financial advisers. In short, they are that:

  • compliance with the Australian Banking Association (ABA)’s reference checking and informationsharing protocol for financial advisers (or, at least, substantially similar requirements) should be mandatory for all AFSL holders whose licence authorises the provision of financial advice; and
  • the reporting of ‘serious compliance concerns’ by AFSL holders to ASIC should be formalised, and licensees should be required to report such concerns to ASIC on a quarterly basis.

In my view, similar requirements should apply to mortgage brokers.

Recommendation 1.5 – Mortgage brokers as financial advisers

After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.

Recommendation 1.6 – Misconduct by mortgage brokers

ACL holders should:

  • be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and
  • take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers.