What is the best interests duty?

Australia’s mortgage broker industry has undergone somewhat of an upheaval over the past few years following a spate of poor publicity due to the actions of some brokers and a banking Royal Commission that unearthed widespread unethical practices in the sector. As a result, mortgage brokers must now follow a statutory obligation called the ‘best interests duty’.

» MORE: How to find the right mortgage broker

Best interests duty (BID) is a Federal government compliance framework that forces mortgage brokers and financial advisers to operate in the best interests of their clients instead of simply maximising their commissions wherever possible. That means mortgage brokers have a duty to prioritise their clients when offering advice and recommending particular types of loans or suggesting specific lenders to borrowers.

The Australian Securities and Investments Commission (ASIC) enacted BID legislation on January 1, 2021. BID follows on from similar, but less enforceable, legislation that has been in effect since 2013.

Who has to follow best interests duty?

Best interest duty rules only apply to mortgage brokers. BID does not apply to banks or other non-bank mortgage lenders.

Best interests duty rules

The BID regulates how mortgage brokers offer advice, which can be quite detailed and involves considerations of lots of features. These include:

Loan type (variable or fixed)
Mortgage term
Interest rates
Ongoing fees and charges
Offset, redraw or line-of-credit accounts
The ability of the client to comfortably afford repayments
Likelihood of lender approval
The overall cost of the loan.

Put simply, under the terms of the BID, a broker cannot recommend a product or service they will profit from unless they can demonstrate that it’s in their customer’s best interests. These guidelines apply when recommending a specific loan, a loan increase or a refinance that may involve moving lenders.

In practical terms, BID means a mortgage broker is duty-bound to tell customers when something they want may not be in their best interests, or they have little chance of qualifying for it anywhere. For example, this could include anything from an interest-only or fixed-rate loan to a loan feature, such as an offset or redraw facility.

Brokers are still required to assist with applications if a customer insists they want to go ahead with something that may not be in their best interests — just as long as they have made every effort to explain the situation to them. They must also inform them when better options are available, even if it means earning less commission.

What best interests duty means for mortgage brokers

The best interests duty has transformed the obligations of mortgage brokers to borrowers. Before BID, there was no legal requirement for mortgage brokers to provide the best possible options to their clients, nor were responsible lending obligations enforceable by law.

As a result, brokers continuously recommended home loan products that maximised commissions rather than options that met the customer’s financial needs. The introduction of BID by ASIC aimed to address these issues and minimise the conflicts of interest that hurt borrowers.

Mortgage brokers get paid by lenders for every home loan transaction they sign off on. In the past, this commission model did not guarantee the most reasonable loan options for customers. With the enforcement of BID, brokers now have a legal duty to prioritise their customers’ needs over their commissions.

Acting according to BID means gathering information, assessing what a client genuinely needs and can afford to borrow, and then making enquiries accordingly. Through this iterative process, the broker understands a borrower’s needs holistically, which allows for more suitable recommendations. The emphasis on the broker’s educational role has never been greater, ensuring consumers receive advice that genuinely serves their best interests.

Moreover, the BID introduces a strict non-conflict rule, requiring brokers to recommend the best available product, irrespective of any personal gain or commission impact. The legislation also comes with increased penalties for non-compliance, a move welcomed by the heads of the Financial Brokers Association of Australia and the Mortgage and Finance Association of Australia. Both organisations have said the new fine structure would force brokers to adhere to increasingly higher standards of customer advice.

What best interests duty means for borrowers

While working with a mortgage broker, especially as a first-time home buyer, there are a few things you should know about how BID impacts you.

Banks and non-bank lenders don’t follow BID

The BID legislation was designed solely to monitor and enforce the behaviour of mortgage brokers and does not apply to banks or other non-bank mortgage lenders.

So, if you approach a bank directly to get a home loan, possibly the one you’ve been using since you were a kid, this is worth keeping in mind. While a large range of other regulations binds bank and non-bank lenders, they are not legally obliged to offer you their best available product. Beyond that, they will generally offer a much smaller range of products than a mortgage broker.

BID can help build trust

Mortgage brokers can answer essential questions about the homebuying journey. They can also serve as an invaluable resource for sifting through the mountain of information you’ll need to consider. Additionally, a good mortgage broker should have sufficient connections to find you a much better deal than if you just went to one lender for your mortgage.

However, those benefits become a moot point if you don’t trust them. Fortunately, BID should help inspire a little more confidence in any mortgage broker you choose.

You can take action if your broker violates BID

BID binds mortgage brokers, but it’s still possible that you may not get the best available service. If your mortgage broker isn’t following the BID for whatever reason, you should contact the Australian Financial Complaints Authority (AFCA) for advice. They can also direct you where to go if you need to take further action.