Getting best interest duty right the first time

by Madison Utley11 Jul 2019

The head of a broker group has drawn a parallel between how the industry rallied in the face of the banking code of practice  and how it will need to work together to shape the implementation of a best interest duty. 

Susan Mitchell, CEO of Mortgage Choice, noted that even with the “amazing speed” at which the banking code of practice concerns arose just days before it was scheduled to go into effect, the industry worked together to secure clearer parameters and a system that worked for all parties involved.

Mitchell expects to see the same inter-industry cooperation around best interest duty, but hopes that the longer timeline will allow for a more thoughtful approach to be taken before any regulation is implemented.  

“You don’t want to introduce something that doesn’t work and then it takes six or nine months to get it fixed and the industry goes through pain as it’s sorted out,” she said.

“It’s much better to get a structure in up front that works for everybody and is well thought out and well discussed and well preserved. It takes time. You can’t do it quickly.”

Getting it right the first time rather than rashly implementing a new system and retroactively trying to shape it to the industry is important as many brokers are small business owners, and may not have the resources or margin necessary to survive a prolonged pain period.

According to Mitchell, aggregators are a key component to absorbing some of the impact that would otherwise be felt directly by the broker.

“A larger business also has resources to take the time to work it through with regulators. For a small business owner, there’s no time to do that,” she added.

“It’s important for the aggregators to put people in place that can participate in those regulatory discussions and bring their detailed knowledge of how the industry operates to ensure we get something that really works.”

Mitchell expects the duty to be implemented in the next year to 18-month window, and feels it is crucial that it’s structured in a way to complement the processes already in place.   

“It’s really important not to just pick up the financial planning structure and plunk it down. It might seem easy, but it won’t be in the long run. It’s important to think through what a broker actually does, where there might be conflict, and make sure that the structure works within the broking process,” she said.

Mitchell suggested that to mitigate the possibility of a painful or turbulent adoption period, the implementation of any changes should be gradual.

She explained, “It would be ideal to set up the overall theory or policy and then refine the details over time, as things come out and things are thought about longer. It’s really hard to think of all the unintended consequences on day one. You need to allow time for those to be fleshed out.”

However the best interest duty manifests itself, Mitchell thinks brokers need to prepare by beginning to document more clearly now how they decided on the loan selected for each customer. 

“Unfortunately, that might add some more time to what they’re doing. Which, of course, is not going to be an answer they want to hear,” she said.

“So it’s important for us as aggregators to take that into consideration and try to tweak the systems that our brokers are using to make that process easier.”

Mortgage Choice built checks and balances into its systems to help its brokers with compliance, and Mitchell feels there’s room to do something similar in this space.  

“I think the industry is actually quite supportive of best interest. They just want to make sure it’s implemented in such a way that it works in the mortgage broking industry and it isn’t just picked up from another industry and plunked down and we’re left with a bunch of issues to work through,” she finished.