The Australian Securities and Investments Commission's (ASIC) review of brokers' best interest duty (BID) has sparked debate across the industry.
The regulatory body recently released Report 840, Mortgage brokers: Review of best interests duty and complaints handling practices, and found that the lowest-cost loan was overlooked in more than one in five recommendations. Furthermore, ASICS said brokers should be recommending the lowest-priced loan to borrowers, or have a compelling reason as to why they are not.
The review marks the first time the BID had come under scrutiny since its introduction in January 2021. Examining 13 credit licensees across eight major aggregator groups, ASIC found that seven of the eight aggregators reported that their brokers did not recommend the cheapest loan in more than 20% of cases. And there was no clear reason as to why.
The findings drew criticism across the mortgage broking industry, with major players — including industry body heads at the Mortgage & Finance Association of Australia (MFAA) and the Finance Brokers Association of Australia (FBAA) — pushing back against the suggestion that price should be the only consideration when accessing financial options.
While most industry participants agree that the lowest-priced option should at least be presented to borrowers, they argue that the cheapest loan is not necessarily the best fit. As with any product, value extends beyond price, with other factors playing a role in determining the most suitable option.
Australian Broker caught up with the brokers on the ground to get their take on ASIC’s findings, whether the lowest-priced loan is always the best choice, and what other variables shape the recommendations they make to borrowers.
Mortgage broker at Sydney-based Home Loan Village
"I don't think [the lowest price] is necessarily always the best. It is good to have a very clear reasoning as to exactly why you're recommending a different loan, if a high-priced loan is the best. Generally speaking, if everything else is the same, then you would have to imagine that the cheaper loan is better. But the cheapest loan certainly isn't always the best loan.
[Other factors to consider], valuation is a big one, but it's hard to quantify. It's a hard one, because sometimes we might actually compare a loan that in reality probably isn't actually doable with one lender, compared with another. For example, let's say we do a couple of valuations for a refinance. One lender gives us a high valuation and it allows us to extract more equity. And we really want that amount of equity. Whereas we wouldn't actually be able to get that much equity with a different lender. However, when we compare those lenders, what we generally do is we compare them as if the valuation were the same across all of them. In reality, that's not actually the case.
One of the other biggest reasons would be speed, especially when you're looking to purchase. If we're looking at a pre-approval and purchase, I might go to one lender because you can expect them to have a faster turnaround time. Whereas another lender, you may actually have a better rate in the market at the moment. But they're going to take a couple of weeks to actually have a look at the file. It's very difficult to escalate.
And the next factor would be that functionality: who's the borrower actually using at the moment? And what do they actually want from that? Do they want a branch network? Or is that somewhat helpful? Is the technology and the app and that sort of thing really important? Do they want to be able to be paid multiple payments from the offset? Do they want multiple offsets?"
Chief executive officer at Sydney-based brokerage Finconnex Financial
"The lowest price alone is not the best decision. The best interest duty is not only looking at the lowest price. There are other characteristics as well that brokers have to look into. It's got to benefit the client in other ways as well, not only the lower interest. Of course, lower interest comes into play. But also, it's important to look at the bank, which bank the borrowers are with, if they are happy with their service, the facility they have, offset rate draws, and then prepayments, BPAY, all these facilities. Also, if the client has a requirement of, for example, extra cash. We could look into going to other lenders where we can get them extra cash, because it helps them. So we look at what they need most urgently; we look into various things. For example, the consolidations; if they need to consolidate, or if they need a restructure of their loan. Possibly If they are cross-collateralized, then we might separate them. Or if they are buying a business they might need something else. The borrower might need many different things."
Franchise co-owner and broker at Mortgage Choice Coolum Beach and Noosaville
"It's a tricky one. I think you should offer the lowest-priced loan that fits their situation. But the lowest-priced loan in the market doesn't always fit their situation. I think the interpretation that the lowest priced loan in the marketplace should always be quoted isn't reflective of what we as brokers do day to day, because the lowest priced loan in the marketplace, nine times out of 10, doesn't fit that client's situation.
Other things to consider are turnaround times, banking facilities, lender policy, clients' requirements, all the standard stuff that goes into a recommendation. A perfect example is Newcastle Permanent. They seem to be one of the cheapest, nine times out of 10. But you can never send a client there if they've signed a contract, or if they want a pre-approval, because their turnaround times are so slow and so bad. We wouldn't have an answer [for an approval] for weeks. But we've sent approvals to Macquarie — which is a marginally higher rate — but it's likely going to be approved today, versus trying to do that with the Newcastle Permanent. We'd be waiting weeks to get the same result and wouldn't be able to secure the property before auction.
And then, when you're looking at refinancing, it would take six to eight weeks to refinance, versus four weeks. If the client wants the savings straight away, instead of it being dragged out for weeks and sometimes months, the cheapest option isn't always the best one for them. That's exactly what I tell my clients. I show them the cheapest, and then I show them the recommendations. And then what I do is I show them the turnaround times as well. And then I say, 'if it's going to take a bank three weeks just to pick up your application, what sort of ongoing experience do you think you're going to have with them if you've got any service issues or any queries?' And it's game over. If it takes that long to get you into the system, imagine what it's like once you're in the system."
Founder and finance specialist at Melbourne-based Heart Financial
"The cheapest loan doesn't necessarily mean it's the right loan for the client. They should consider what their purpose is in terms of the longer-term goals. It could be that they want special features, such as multiple offset accounts that might come at a slightly higher price because they want to manage their money better. Or, whether it's interest-only, or principal and interest (P&I). That could be the cheapest option is always P&I. But interest-only may be better for investment purposes.
And it could just also be that some clients actually say they've got a preferred lender that they want to deal with and they're happy with the fact that it's not the cheapest. I had a client come to me and say he needed a $70,000 top-up. He goes, 'I don't want to go to any other bank. I want to stay with Commonwealth Bank of Australia (CBA). Can you do it for me?' Now, it's not the cheapest. Absolutely, it's not the cheapest interest rate and ongoing fee structure, but he particularly wanted Commonwealth Bank. So we obviously will tell clients if there is something that could save them money. But ultimately, it's their choice. I think as long as you as a broker highlight that in the conversation, and make that clear to them, and then they make that decision, and that we document that in our assessment, then we're doing the right thing by them."
