Price setting brokers face conflict of interest

by Mackenzie McCarty14 Nov 2012

Brokers who are able to set the price of the product they recommend to consumers could face an 'irreconcilable' conflict of interest, according to advice from Gadens Lawyers.

The law firm's senior partner, Jon Denovan, has issued a warning to businesses who hold themselves out to be finance brokers who are able to set the price of a lending product.

"This is probably an irreconcilable conflict of interest, possibly even when the broker can only reduce the interest rate," Denovan said.

"Mortgage managers and brokers who can set the price must make it clear that they are not acting as a finance broker for the consumer and that borrowers should make their own inquiries as to price." 

Denovan said this is made more complicated when mortgage managers and brokers can 'switch hats'.

"If the house product does not suit and the business then looks beyond their preferred products, there should be clear disclosure when the business switches to acting as a finance broker," Denovan said.

Equipment finance brokers who can set the price must make careful disclosure so that customers realise they are not acting for the customer, Denovan said.

"This is the case despite the fact that most equipment finance is generally not regulated by the NCCP.  A failure to properly disclose the capacity in which the business is acting may comprise unconscionable or misleading and deceptive conduct under the ASIC Act."

Denovan has warned affected businesses to review their practices to ensure that the customer knows that the business is not acting for the customer.

The MFAA will be updating its 'conflict module' to include guidance on commission-induced conflict. However, Denovan said the only duty under NCCP is to ensure consumers are not disadvantaged by any conflict.

"It's important to recognise that competition iws good at the wholesale level - meaning that lenders can pay different commission rates - as well as at the retail level, or the price borrowers pay.

"What is essential is that brokers selling loans which pay a higher commission or carry other additional benefits ensure customers are not disadvantaged," Denovan said.

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  • by Graeme 14/11/2012 9:54:55 AM

    I don't see why "switching hat's" and acting for the client are mutually exclusive? What about the case where a client does not suit Panel lenders, perhaps simply due to turn-around times, or some other issue, so a Broker/Manager arranges suitable in house finance? If the reasons are outlined to the client and the usual disclosures made, where is the conflict?

  • by Scott 14/11/2012 10:40:22 AM

    This could have massive impact on car finance brokers. All lenders in this space offer brokers a "base" rate that they can sell at, but they make no commission. The broker must charge a higher rate to make a commission from the product.

  • by Broker 14/11/2012 10:57:07 AM

    I agree 100% , loading rates that lead to higher commission rates is just wrong on so many levels and is hardly in the best interests of your clients is it?