Best Interest Obligations On Mortgage Brokers—What The Law Means For You

The Scott Morrison administration, through the Royal Commission, has passed new legislation to prevent mortgage borrowers from being taken advantage of. It is called the Best Interests Obligation. It calls for mortgage brokers to favour the rights and interest of consumers over their own when selling mortgage packages.  The Law changes the rules of the game for both consumers and brokers. It is engineered to favour consumers of mortgages more. The law went into effect on the 1st of July, 2020– a time when the world economy has been suffering due to COVID19. You could call it a much-needed breath of fresh air for Australians interested in a new mortgage.

Breaking Down the Best Interest Obligations

Whose best interests are being secured? Why the sudden need to secure them? I have broken down what the law in essence states and how it intends to change the market. The analysis gives a brief explanation of the duties imposed on mortgage brokers as the law takes effect. It also informs consumers on what their new rights are.

It will please consumers to know that the Best Interest Obligation rule requires brokers, as a prerequisite to offering of a mortgage, to educate consumers on what each mortgage package is.  The requisite interest rates of each package and the implications of default also must be discussed. This will help consumers to make a well-informed decision on the mortgage contract which suits their needs and—most importantly—financial capacity.  This prerequisite was one of the major suggestions of the Hayne Royal Commission on how reforms in Australia’s financial sector were going to be implemented. It looked at the unfortunate behaviour of financial institutions and saw there was a great need to create a fair and safe playing field for people interested in entering into mortgage contracts with these institutions.

The new law has thrown mortgage brokers a curveball by not laying down a list of rules to act as a guideline on attaining the Best Interest Obligations. They are instead required to check with the Australian Securities and Investment Commission (ASIC) for it to qualify.

How Does It Apply To You?

Here are the main things mortgage brokers will be required to do by the new legislation in order to satisfy the Best Interests Rule requirements of the law.

  • Brokers will review varied credit contracts from their available panel of credit suppliers and create a recommendation to the consumer. This will include supporting data concerning the patron and the nature of the product.
  • As a prerequisite to settling on a mortgage contract and subsequently executing it, mortgage brokers will be required to present a consumer with a list of mortgage packages to choose from, then prescribe the most appropriate one and explain.
  • It is now an important requirement that communication to the client be made in writing. In line with this, the broker must keep detailed records.
  • Another recommendation in favour of consumers outlined by the Royal Commission is that brokers will no longer receive commissions from loan specialists. They are only entitled to commissions paid up by the clients. This will keep interests aligned.

The government acknowledged contentions that, on the off chance those clients were required to pay brokers out of their pockets, fewer individuals would utilize brokers. This would benefit the major banks and the small brokers would likely go out of business. Broker commissions will be checked on by the competition controller and monetary controllers from 2022 onward.

How The Law Affects Mortgage Brokers

Here are the underlying issues that brokers should be aware of:

  • You should not belittle the complexity of the leading interface obligation. Compliance with the system will require an end-to-end approach, counting planning comprehensive preparing, instruments and templates and review forms.
  • Provide clear steerage on ‘conflicted remuneration’. Mortgage brokers will not rely on disclaimers to indemnify them from breaches of their contractual obligations. Mortgage agents and intermediaries will want clean steerage and education on what is or may be viewed as conflicted remuneration, and proper controls need to be implemented.  If what they are not in the Best Interest of the consumer, this law will render it as an illegal action.
  • Illustrating compliance is key. The need to preserve and store comprehensive records which illustrate compliance with modern administrative necessities cannot be downplayed. ASIC will require mortgage brokers to keep a proper record that illustrates compliance with the best interest principles. The brokers are required to keep easy-to-retrieve records which will be structured in the form of a common template.
  • Give clear direction on ‘conflicted remuneration’. Disclaimers will not help a mortgage broker to avoid obligations arising from conflicted compensation rules. Contract brokers and mediators will require clear direction and preparation on what is (or may be seen as) clashed compensation. Satisfactory controls must also be actualized How these benefits will be legitimately checked, recorded and affirmed must also be considered.
  • How you will screen your agents. The current supervisory system for observing compliance by agents (counting credit agents) will require broad amendment in order to comply with the newly proposed regulations. The frameworks put in place ought to be competent in amassing information and discoveries from internal and outside audit reviews.
  • They should distinguish possible systemic breaches brought about by the broker and the network of mortgage brokers.
  • Audit of the conflict of interest compliance system. A modern audit system should be established to act as a watchdog that ensures that brokers do not benefit financially from conflict of interest. Financial counselors cannot comply with this rule by merely coming clean on the interests they might have in the subject matter or by getting a client’s consent. Under the dispensation of this new law ASIC is expected to take a similar approach with mortgage brokers. Existing frameworks for addressing conflict of interest must be looked into and improved to encourage compliance.


The legislation will be a relief for consumers who have for a long time been oppressed by forces of a capitalist market. This is also at a time when the coronavirus has reduced people’s financial capacity substantially since it has crippled the economy. The big question is how long will it take for the effect of the law to be felt and seen. Secondly, will the Australian Securities and Investment Commission effectively police banks and other lending institutions and ensure that they are complying with the obligations of the Best Interest Rule?

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