Price setting brokers face conflict of interest

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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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First test for white lables is client interest

  • Viki on 12/01/2013 7:45:21 PM

    Let's say you owe around $ 70K for your house it now apepsiars for $ 275K, you can cash out some of your equity.Equity is the difference between what you owe what the home is worth or appraised at now.There are many programs for cashing out equity. You could get up to 100% of your equity out. I do not suggest this your interest rate on your equity loan will be a lot higher.You could cash out say 80%, based on my #'s above that would total about $ 164,000. you could use this money towards a down payment for construction costs with the home you're interested in building.You want to make sure you're using your money with the best programs. Talk to a lender who will show you the pros cons. Don't use all of your liquid cash to sink into building a home, leverage, leverage, leverage talk to the lender about a Construction to Perm loan. (Construction to finished product)

  • the Banks are your client on 14/11/2012 3:57:28 PM

    The NCCP requires that the consumer is provided with a product or option that is not usuitable. It is assessed by enquiry into the consumer's requirements, objectives and financial position. It is not necessarily determined by interest rate.

    Proper procedures will protect the Broker from fouling the legislation. It all comes down to proper procedures.

  • Steve McClure on 14/11/2012 2:23:07 PM

    Country broker, I disagree with your comment. Some equipment finance is regulated and the commissions are disclosed. But even on the unregulated ef contracts, the repayments don't vary and the lender's margin can't be changed to the detriment of the client. They know excatly how much they will pay over the term - unlike over a 30 year mortgage. Business clients do business deals every day without the supplier disclosing their profit margin - so why seek to legislate disclosure of B2B profit margins, particularly when the cost to the client is defined to the cent?

  • Steve McClure on 14/11/2012 2:10:09 PM

    I wouldn't argue law with Jon Denovan and I don't use white labels. But, the definition of a broker is "One that acts as an agent in negotiating contracts in return for a fee or commission". A (finance) broker is therefore not defined by the number of lenders or getting the lowest rate. So, wouldnt price setting only be an issue when the customer's specific instruction is for the "lowest rate in the market"? Wouldn't the only issue be if the broker doesnt disclose other panel lenders that better fit the client's instructions? The white label may be better.

  • Mal Bartley- B debt Free on 14/11/2012 12:03:48 PM

    Never had a problem with any full disclosure of costs. However the regulators in this country seem to have taken the stance that all consumers profiles are the same. That is every borrower should be entitled to borrow at the most "cost effective" rate from any lender, thereby not being disadvantaged.
    Sorry to be the one who says "rate for risk"!.

    Image you and your partner have taken a contractual commitment for 30 years with a home loan provider.At the time of taking the loan you can easily service your commitments.

    Over time your ancillary borrowings like credit cards,personal loans and other unsecured debts have risen to meet the needs of your new family. You can still manage your finances because salaries have risen over time and your a two income family.
    Then the unthinkable happens one of you lose your income!. Your savings only last about 2-3 months because your using them to pay your commitments. New work takes longer than you expect to find !.So you contact your longstanding home loan provider and ask to combine all your loans into one easier to manage loan but now you don't meet servicing guidelines - So all they can offer is for you to fill out a "Hardship" application which is granted for 3 months.
    Your repayments start to fall behind so your lenders start to apply default interest, collection charges and legal costs. You couldn't pay the basic repayment so you have no hope of paying more!!.
    You seek help from a professional finance consultant who says they can roll your housing loan into one debt, extend the term and lower the monthly commitment.
    THIS NEW LOAN SEEMS AFFORDABLE! That is until you read the loan offer from the new lender who says you must pay replacement LMI,Loan establishment fees, discharge fees, documentation fees etc etc...these typically can total thousands sometimes tens of thousands of dollars!!..

    Your partners worried the kids cant go to the end of year school trip and the phone is ringing endlessly with collection companies!! ALL YOU NEED IS TIME TO FIND THAT NEW JOB. You still have some dignity left but its fast fading as you are forced into making commitments to collection people you just can't fulfill unless that job is found fast!.
    In desperation and from a position of little bargaining power you decide to accept the offer of the second tier financier.
    This decision annoys you because you know that you would have been able to pay your mortgage payments on time if you were not trying to pay all the other unsecured debts. Now your largest debt, your home loan is going to attract a much higher interest rate than before.

    Why couldn't your lender just give you a personal loan to consolidate those smaller debts!!

    You could sell but the markets dropped and you can't afford to spend the money needed to present the property in its best light.
    IN DESPERATION YOU AGREE TO THE RE-FINANCE AND HOPE WORK IS FOUND.
    _________________________________________

    This Regulators is the real mortgage belt dilemma in Australia...Not forcing brokers to tell their client's that they are not working for them!!
    _________________________________________
    A far better outcome for the above scenario may have been to entertain a formal debt agreement and protect the family home and assets from legal action. In addition they could have retained their lower original home loan rate going forward. In fact the family could have benefited from a period of no further fees or interest on the unsecured debts!!!.
    *Terms and conditions obviously apply.
    Regulators in Australia there are:- loans writers,mortgage brokers,and thankfully a select few professional people prepared to assist the consumers in need within Australia.. Stop putting the onus of verification,and liability onto the broker industry particularly when the same does not apply to our industries major financiers.

    Mal Bartley
    BFA Finance Pty Ltd T/as B Debt Free

  • Country Broker on 14/11/2012 11:32:19 AM

    As usual John Denevon is 100% correct , i do not think The PLAN LENDING product fall under this banner as the prices are fixed by the Mortgage Manager !!

    In regards to the Equipment finance areas all that needs to be done here is to reveal that ypu are getting a "brokerage" paid to you and it is in the deal and the monthly payment at present these deals are not regulated , but it is a matter of revealing that suitation. Car dealers are a diffreent matter as they also get floor plan offsets as well !!

  • Broker on 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?

  • Scott on 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.

  • Graeme on 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?

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