Ban on conflicted remuneration for mortgage brokers and intermediaries – here to stay

In February 2020, the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures) Act 2020 (Act) passed both Houses of Parliament and received Royal Assent.

The Act amended the National Consumer Credit Protection Act 2009 (Credit Act) to introduce a:

1. best interest duty for mortgage brokers; and
2. ban on conflicted remuneration for mortgage brokers and intermediaries.

This article focuses on the ban on conflicted remuneration for mortgage brokers and mortgage intermediaries.

Why the ban on conflicted remuneration was introduced

Conflicted remuneration is not a new concept for holders of Australian Financial Services Licences and their representatives.

Until 2021, there was no equivalent ban for holders of an Australian Credit Licence (ACL). Although, ACL holders had an obligation to ensure that clients were not disadvantaged by any conflict of interest – including a conflict of interest arising from remuneration arrangements.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services (Royal Commission) controversially recommended changes be made to the way that mortgage brokers were  remunerated.

Recommendation 1.3 in the Royal Commission Final Report provided that:

“The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.  Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers”

This recommendation was borne from the Royal Commission’s finding that the then existing system for remunerating mortgage brokers could reasonably be expected to influence the recommendations made by the broker with regard to the:

• choice of lender;
• amount to be borrowed; and
• terms on which the amount is borrowed.

In its initial response to the Royal Commission’s Final Report, the Government said that it would proceed carefully in response to Recommendation 1.3.  It also said that it would not, in the short term, implement a ‘user pays’ mortgage broker model.

The law

The key features of the now ban on conflicted remuneration for mortgage brokers and mortgage intermediaries include:

1. the introduction of definitions of “mortgage broker” and “mortgage intermediary”;
2. a ban on mortgage brokers and mortgage intermediaries accepting conflicted remuneration; and
3. a ban on employers, credit providers and mortgage intermediaries giving conflicted remuneration to mortgage brokers or mortgage intermediaries.

But, what is conflicted remuneration?

The definition of conflicted remuneration can be found in section 158N of the Credit Act.  It is largely drawn from the definition of conflicted remuneration found in section 963A of the Corporations Act 2001.

In accordance with the definition, remuneration paid to mortgage brokers and mortgage intermediaries will be conflicted where the following elements are present:

• a benefit (monetary or non-monetary);
• given to a credit licensee, or a credit representative of the licensee;
• who provides either credit assistance to consumers or who acts as an intermediary;
• in relation to the provision of credit assistance – that could reasonably be expected to influence the credit assistance provided to consumers;
• in relation to an intermediary – that could reasonably be expected to influence whether the licensee or representative acts as an intermediary or how the licensee or representative acts as an intermediary.

The Credit Act does not prescribe the circumstances in which a benefit will be, or will not be, conflicted remuneration.  That is left to the Regulations.

When did the ban commence?

The ban on conflicted remuneration for mortgage brokers and mortgage intermediaries commenced on 1 January 2021.  That is, on and from 1 January 2021:

• mortgage brokers and mortgage intermediaries have not been permitted to accept conflicted remuneration; and
• employers, credit providers and mortgage intermediaries have not been permitted to give conflicted remuneration to mortgage brokers or mortgage intermediaries.

Are there any exemptions from the conflicted remuneration prohibitions?

Yes, a benefit that meets the definition of conflicted remuneration will be exempt (meaning it can continue to be paid) if:

• it comes within an exemption prescribed in the Regulations; or
• it is a benefit paid under a grandfathered arrangement.

The Regulations set out certain benefits that will not be considered to be conflicted remuneration, including:

• monetary benefits given by a client in relation to a credit service
• monetary benefits given in relation to a credit service provided to the consumer who is a debtor under a credit contract in which the benefit is not volume-based or a campaign-based benefit, is calculated on the amount of the loan drawdown and complies with certain clawback requirements;
• Non-monetary benefits that are less than $300; and
• Non-monetary benefits in the form of IT support and education or training where certain conditions are met.

The grandfathering provisions essentially allow benefits that would otherwise be conflicted remuneration to be paid or received provided the arrangement was in place before 1 July 2020.

Anti-avoidance provision

It is important to note that the Credit Act contains an anti-avoidance provision. Any scheme that has no commercial purpose other than to avoid the application of the conflicted and other banned remuneration provisions is likely to contravene this provision.

What should you consider

You should review your remuneration arrangements to ensure that you are not inadvertently contravening the conflicted and other banned remuneration provisions in the National Credit Act.  You should also ensure that your policies and procedures in relation to conflicted remuneration remain up to date and that those policies and procedures are being appropriately supervised and monitored.

Do you have more questions?

Author: Rachel Erlich (Special Counsel)