Best interests duty requires mortgage brokers to act in the consumer’s best interests when providing covered credit assistance and prioritise those interests when conflicts arise. Your file must explain why the recommendation fits the client. A separate ban governs benefits that could influence your credit assistance.
What is Best Interests Duty?
Best interests duty (BID) has two limbs: acting in the consumer’s best interests and giving those interests priority when a conflict arises. Different lender commissions are one source of conflict.
The duty sits in Part 3-5A of the National Consumer Credit Protection Act 2009 (NCCP Act), alongside separate responsible lending obligations. It followed the banking royal commission and began operating for brokers in 2021.
Sections 158LA and 158LB of the NCCP Act cover mortgage broker licensees. Sections 158LE and 158LF cover credit representatives where the representative or licensee is a mortgage broker.
Understanding Best Interests Duty
The Act leaves best interests undefined. The Australian Securities and Investments Commission (ASIC) explains its approach in RG 273 Mortgage brokers: Best interests duty.
Components of BID Compliance
There is no mandated three-step formula or requirement to find one objectively best product. The reasonable steps needed depend on the client’s circumstances and the file’s complexity.
Find out what the client needs and why. Research the options you can recommend, then explain how your recommendation meets those needs. A completed form alone cannot establish that you acted in the client’s interests.
Compliance and Documentation
Keep the questions you asked and what the client said mattered. Save the options considered and your reasons for recommending or rejecting each one.
Records help a reviewer follow the decision, although they cannot turn a poor recommendation into a compliant one. Use your broker policy and procedures to assign file reviews and benefit approvals.
Types of Assessments Under Best Interests Duty
Your assessment must connect the client’s objectives to the loan’s costs and features. A preference stated at the first meeting needs enough discussion to understand its consequences.
Understanding Client Needs
A client might ask for the lowest headline rate while expecting to need redraw later. Explore the trade-off and explain the costs and access conditions plainly.
Let the client make an informed choice and record the conversation. Their instruction alone does not establish that recommending the chosen loan meets your duty.
How BID Fits With Other Financial Regulations
Responsible lending requires more than an affordability check. BID also goes beyond finding the lowest rate: fees, features and the client’s priorities affect the recommendation.
Neither obligation replaces the other. A loan can pass serviceability while a better-fitting option was ignored. The not-unsuitable assessment under responsible lending remains a separate legal test.
Best Interests Duty and Loan Products
Compare panel options by their rates, repayment terms, offsets, fees and exit costs. Record the rejected shortlist as well as the recommendation.
Your panel must be sufficient for the client’s needs. If accessible products cannot meet those needs, decline the credit assistance instead of recommending an inadequate option.
Broker’s Ethical Considerations
Disclose commissions upfront through the required documents, including the information explained in mortgage broker credit guides. Disclosure does not remove the conflict-priority rule.
If two loans serve the client equally well, explain both and keep the choice based on the client’s interests. Higher commission cannot justify a worse outcome for them.
A higher-paying loan can still be recommended when it genuinely serves the client better. Record the client benefit, so the commission difference does not become the reason for the recommendation.
Conflicted Remuneration: Benefits a Broker Cannot Accept
Conflicted remuneration is a monetary or non-monetary benefit that could reasonably be expected to influence credit assistance, or whether or how an intermediary acts. The NCCP Act prohibits mortgage brokers and relevant credit representatives from accepting it in the prescribed circumstances.
Assess the benefit’s substance and written conditions, including any route through an aggregator or referrer. Calling a payment a referral fee does not settle its legal classification. Disclosing a prohibited benefit does not make it acceptable.
Permitted Benefits and Conditions
Regulations 28VB to 28VH provide these exclusions:
- Consumer payments or gifts for credit services provided to that consumer.
- Commission for a debtor’s credit service, excluding volume and campaign incentives. Where applicable, the drawdown cap requires a flat payment or a percentage of maximum drawdown net of offset. Applicable clawbacks must end within two years, cannot exceed the benefit and cannot be charged to the consumer.
- Non-cash gifts below $300 per final recipient, with similar gifts neither frequent nor regular.
- Genuine, relevant education or training. For courses, professional development must occupy at least the lesser of 75% of course time or six hours daily. Travel, accommodation and associated events must be paid by the participant, employer, licensee or qualifying mortgage intermediary. Other educational benefits must have education as their dominant purpose.
- Software or IT support for credit services involving the benefit provider’s contracts.
Volume incentives depend on aggregate loan amounts or contract counts. Campaign incentives reward business during a limited period. Qualifying economies-of-scale discounts or rebates have a separate exclusion from the volume definition.
Benefit-Assessment Matrix
Use the same questions for every proposed benefit. These hypothetical examples identify the conduct to assess before deciding whether an exclusion applies.
| Who Gives the Benefit | Who Receives It | Form | Value | Conduct It Could Influence |
|---|---|---|---|---|
| Lender | Broker | Gift hamper | $150, plus earlier gifts | Which lender the broker recommends |
| Aggregator | Brokerage | Settlement target bonus | $2,000 | Number of loans placed |
| Referrer | Broker | Referral payment | $250 per completed deal | Where the broker sends the client |
| Lender | Broker | Conference attendance | Course fee and other funded costs | Product choice or intermediary conduct |
Record the full benefit, including related payments and non-cash costs. A gift’s value alone cannot answer whether the arrangement is acceptable.
Benefit Decision Log
Keep one decision log for each arrangement. Enter the giver, recipient, value and purpose. Attach the written terms, name the rule relied on and record the approval outcome and reviewer.
A hypothetical hamper entry could read: lender to broker, $150, relationship gift, regulation 28VH(2), approval withheld until earlier gifts are reviewed.
If the written terms do not allow you to classify an arrangement, send it to the licensee for legal review before accepting it. Keep rejected arrangements in the register too.
Checking Accepted Payments
Compare accepted payment arrangements with the commission statements and recipient-created tax invoices you later receive. Check the payer and loan reference, then compare the amount and payment basis with the approved terms.
Investigate an unexpected bonus or changed calculation before treating it as approved income. Track My Trail’s Commission Verification matches upfront payments to trail expected within two months and shows trail received without upfront. Use those payment records alongside the approved arrangement.
Best Interests Duty in Practice: A Case Study
In this hypothetical file, a first-home buyer asks for the cheapest rate but expects to renovate within two years. Further discussion makes redraw relevant.
The broker compares three fictional panel loans. The lowest-rate option, Loan A, lacks redraw. Under Loan B’s conditions, the client can redraw extra repayments but pays more for the loan. Loan C has an offset and an annual fee the client would not benefit from.
- Record the client’s renovation timing and how they expect to fund it. Establish whether they intend to make extra repayments they could later redraw.
- Compare the loans against those objectives. Keep the actual quoted rates and fees in the file, alongside the feature conditions.
- Explain the cost of Loan B’s redraw feature and Loan A’s restriction. Explain why Loan C’s fee buys a feature the client does not expect to use.
- Let the client choose after that discussion. In this example, the client prefers Loan B. Record why its cost is justified and why the other options were set aside.
Redraw accesses available extra repayments under the lender’s rules. It does not guarantee new renovation funding. The broker must explain that limit before relying on redraw as the reason for recommending Loan B.
Challenges and Opportunities for Brokers
Broader enquiries and fuller notes take time. Smaller brokerages can reduce duplicate work by recording the reasoning while the decision is made.
Navigating BID Compliance
Use prompts that ask why an option fits, instead of adding a generic compliance statement after submission. Save the client’s answers beside the comparison and record any conflict when it arises.
Using Technology for Records
A customer relationship management (CRM) system keeps enquiry notes attached to the file. Comparison software can log the options reviewed. Templated record prompts help carry the reasons through to submission.
Pick one recent file. Could a stranger reconstruct what the client wanted, which options you compared and why the recommendation fit? Repair any missing explanation before using the same process on the next file.
