Draft Bill: Devil in the details

Examination of reaction to National Finance Brokers Bill

Phil Naylor CEO MFAA on Draft BillAfter years of talk about national regulation, there finally appears to be some action. But just how much of an impact will the National Finance Brokers Bill have on brokers and consumers? This special feature gauges the mortgage industry's reaction

The draft National Finance Broking Bill promises to protect consumers and lift the mortgage industry's reputation through "stringent" licensing laws and a raft of other measures to make brokers more accountable.

The NSW Government has drafted the bill on behalf of other states and territories, and following submissions that will close in mid-February 2008, the final bill will be developed for the Ministerial Council on Consumer Affairs (MCCA) for approval.

There are few, if any, surprises in the package. Key features include mandatory licensing and probity checks to weed out unscrupulous operators. Education and training requirements will also be enshrined in law, covering not just minimum entry standards but also ongoing professional development.

No longer will it be optional to be a member of an external dispute resolution (EDR) scheme, as brokers will now be expected to join one of the ASIC-approved EDR, such as the Credit Ombudsman Service Ltd (COSL).

Brokers will legally be required to disclose information about costs and services to clients and, similar to legislation in some parts of the US, will also be responsible for checking a consumer's financial ability to afford the recommended product.

The legislation will also protect small businesses (entities which employ no more than 20 people or manufacturers which employ no more than 100 people), unless the credit sought is more than $2m.

According to the consultation package, all types of broking structures will be regulated: mortgage brokers, finance brokers, single line broking and single mobile operators, as well as aggregators and franchised organisations.

"A key aspect of the proposed new regulatory scheme is stringent licensing requirements that aim to rid the industry of the bad apples that have given responsible brokers a bad name," NSW Fair Trading Minister Linda Burney said at the time the draft bill was released.

However, the devil may be in the detail and at this stage not all the details are at hand. For instance, it is not yet known exactly how the probity checks into a broker's background will work and on what grounds the Department of Fair Trading could refuse to issue a licence.

Nor have the requirements on minimum education standards been clearly spelt out.

In relation to probity checks, the Minister told MPA that information would be sought from the police and other relevant regulatory agencies and organisations to determine whether the mortgage broker was "of fit and proper character to hold a licence".

However, expulsion from an industry association would not directly result in the cancellation of a mortgage broker's license.

"If expulsion from the industry association also resulted in the broker being expelled from an external dispute resolution scheme, they would not be allowed to operate," the Minister said.

Similarly, a mortgage broker who has been expelled by an industry association could still have their license approved if they were not previously expelled from an external EDR scheme.

If a mortgage broker did lose their license, they would be able to reapply for it, however they would have to demonstrate that they were a fit and proper person to hold a license.

The bill was drafted in consultation with the MFAA, which has backed the reforms.

"The MFAA has long sought robust membership standards and criteria on its 12,000 members, so we welcome legislation that makes those types of standards mandatory on all brokers in the industry," MFAA CEO Phil Naylor says.

While many of the key proposals mirror existing requirements that make up the MFAA code of conduct, Naylor says some details will need further debate.

The overwhelming response of mortgage brokers has also been positive, although some have raised concerns that the legislation will put banks and building societies, which are not covered by the bill, at an unfair advantage.

Minister Burney's office initially told MPA that the bill would go before Parliament by June this year, however the Minister has since said that this was unlikely to happen until late 2008 or early 2009.

However, the opposition's Fair Trading spokeswoman, Catherine Cusack, is sceptical and believes a vote may not take place until 2010 because of bureaucratic red tape.

The NSW Opposition has asked the Minister to bring forward the next ministerial meeting to hasten the passing of the legislation, however the Minister said this was not possible.

While the Labor government has thrown its weight behind the bill and is expected to support it without amendment, Cusack says the road to reform has been an "outrageously slow" process.

"All the key points were agreed on many years ago. It's incomprehensible that it's so slow," she says.

Minister Burney blamed the former federal government on delays in the development of national legislation to regulate the mortgage broking industry, saying that the Office of Best Practice Regulation had continually questioned the benefits and costs of the proposed regulation.

Consumer groups, including the Consumer Credit Legal Centre (CCLC), have praised the proposed changes.

"Increasing requests for our services from consumers with home loans has prompted CCLC to raise concerns about the growing and largely unregulated role of finance and mortgage brokers," said CCLC coordinator Karen Cox.

Members of the public can comment on the draft bill, which is available at www.fairtrading.nsw.gov.au. The deadline for submissions is February 15, 2008.

The industry association

Phil Naylor CEO MFAA

What is your overall view of the draft National Finance Broking Bill?

In general we are very supportive of the thrust and intent of the bill. It is what MFAA has been pressing for the past five years. MFAA members should have a relatively seamless transition into the bill's provisions as they are largely what already applies to them under MFAA membership criteria.

In your view does the draft bill go far enough or too far?

Subject to clarifying some details we think the balance of the bill is about right

What is the most important measure in the draft bill?

Licensing . . . apart from WA, the industry has not had a robust and enforced positive licensing regime.

Was there anything left out of the draft bill that you would have liked to have seen included?

No, as stated above we think the regulators have got the balance pretty right.

You say that there may be some details that still need to be debated. What areas in particular do you think will need to be further debated?

The areas that need further debate or clarification are:
* The details of the licensing system
* The stay of enforcement provisions in the case of broker initiated loans, which we have consistently opposed
* The shift of onus onto brokers to satisfy themselves a borrower can service a loan
* Other areas, for example education requirements (which will be the subject of further discussion when their specific details are revealed in yet to be released regulations)

If passed, what impact will the bill have on the broader mortgage broking industry?

It will enhance confidence of the consumers to deal with brokers knowing that there are provisions in the legislation to protect them and it will most likely eliminate the small percentage of brokers who potentially damage the good reputation of the industry.

Will the bill change the work of the MFAA in any way?

For the past three to four years, MFAA has concentrated on adding value to membership by providing a range of services and benefits to members. This will be enhanced


 

The mortgage broker and trainer

Maria Rigoni CEO Universal Wealth Management

What is your overall view of the draft National Finance Broking Bill?

While the idea of the drafty Bill has credence, I question the practical application of its requirements in everyday business activity and the affect it will have on consumers who will be forced to enter a contract if they wish to utilise a finance brokering service.

Providing disclose documents is a totally different concept to engaging consumers into unnecessary and binding contracts that will be prepared by the broking firm most likely under advice from their legal advisors. This is giving operators the perfect cover to use the law to develop long and complicated contacts favouring the broker under the guise of 'doing the right thing'. I see more danger in this for the consumer than being in consumers' best interest. Many consumers do not understand that an agreement in these cases will be a legally binding contract on them.

If the legislation is offering the consumers the comfort of an approved EDR scheme I suggest that the EDR schemes are overhauled to operate more in line with Victorian Civil and Administrative Tribunal (VCAT) operations. I disagree with the statement made by Ms Burney that "in short this legislation will make brokers accountable".

In your view does the draft bill go far enough or too far?

Too far in relation to:
* Finance broking agreements (risk of becoming complicated documents that benefit brokers instead of consumers).
* Not being allowed to accept a consumer's declaration relating to purpose of funds and capacity to repay and the need to verify this information from third parties including credit history
* The amount of gobbledygook to be given to a consumer.
* The compensation fund - if it is considered that "it is unlikely that compensations schemes will be set up until and unless there is a demonstration need". An amendment to the bill at that time would be the appropriate action rather than complicate the Bill now.

Not far enough in relation to:
* Distinguishing the function of a broker and a lender - some functions seem to be blurred in this draft.
* Acknowledging that a broker does not make the final decision as to whether credit offered by a credit provider in a letter of offer with full terms and conditions, and cost of the credit offer is accepted by the consumer. This relates mainly to mainstream mortgage lending and not necessarily leasing in which often consumers are not made aware of the brokerage payment.
* Lenders utilising brokers need to be responsible for providing up to date schedules of their fees and charges in full and simple terms with standardised labels.
* In simplifying what the consumer needs and wants to know to make an informed decision about a broking service offering.
* Establishing who is responsible for the standard of entry and other education courses conducted in the market palace for the finance broking profession.
* In creating a level playing field in relation to remuneration - finance broking under exclusive arrangement and first choice arrangements. These 'brokers' may not charge a broking fee as most residential mortgage brokers do not, however they are usually paid salary and bonuses and / or commissions that are not revealed in dollar terms.
* Revealing clawbacks (for which the industry standard is now 18 months) to the consumer.

What is the most important measure in the draft bill?

The most important measures are: * Consistency of operation for Australian consumers across small business, investment and personal finance broking transactions
* Consistency of behaviour requirements for all types of Australian broking structures
* Getting the focus in the education of and therefore quality of brokers right.

Was there anything left out of the draft bill that you would have liked to have seen included?

Lenders utilising brokers need to be responsible for providing up to date schedules of their fees and charges in full and simple terms with standardised labels e.g. an establishment fee be just that and to include application fees, valuation fees, legal fees, document preparation fees and settlement attendance fees. Loan finalisation fee to include deferred establishment fee, discharge fees and any settlement attendance fees.

If passed, what impact will the bill have on the broader mortgage broking industry?

The impact will depend if the broker sees the regulation as fair, how much additional cost is required to operate a broker business and if the legislation respects the broker as a professional. In its current form I feel the bill places a slur on the broking profession and subliminally will create more suspicion and fear within the consumer around dealing with a broker. This may deter reputable, skilled brokers from entering or continuing in the profession.

If the bill is not balanced, bank branch staff and 'single lender' participants will be at an advantage as they will not have to provide information in the same prescribed format, especially for example with a refinance proposal. A broker will be required to do a comparison with the existing credit arrangements, however single brand operators and credit provider branch staff will not. Maybe this a standard that needs to be adopted within the mortgage industry as a whole and not just apply to brokers.

People in the mortgage broking industry will do what they need to do to be seen as complying with practices they do not necessarily agree with or embrace or respect.

Will you be making a submission in response to the draft bill?

Yes I will be.

How will the bill affect your particular segment on the mortgage industry?

The prescribed training does not seem to be mentioned in the exposure bill. The level and emphasis on education standards in the bill will play an important part in the quality of brokers that are allowed to be granted a licence to operate. The education, training and mentoring needs to demonstrate competencies that reflect what a finance or mortgage broker actually does in today's environment with and for consumers. If the legislation does not address this issue, the quality and ethical standards of the broking profession will most likely not improve.


 

The mortgage broker and aggregator

Matt Ivers Principal Vision

What is your overall view of the draft National Finance Broking Bill?

I think it's quite positive. The industry needs it. If you're a good broker, you should be [following these measures] anyway.

In your view does the draft bill go far enough or too far?

It's quite big. It will be quite interesting to see how some things are enforced. On the surface it appears fairly balanced, but it can work in with the operations rather than being heavily legislative and a huge hindrance to brokers. By doing some of these things, it will benefit a broker's business. I think it will create more work in the front end but they'll see the benefit of that later in the process.

What is the most important measure in the draft bill?

For me, the most important measure is that the broker has to explain to the client why that particular product or that particular lender has been selected. They have to justify their conclusion. I think that's fantastic.

I think for the consumer it will benefit them a lot. Many brokers sell purely on commission. It will be in writing why they chose the product they did and, if they did choose on commission, they'll be found out.

It makes it a bit more difficult for those people who are inclined to making a fast buck.

Was there anything left out of the draft bill that you would have liked to have seen included?

What I didn't see is detail on the comparison rate schedule. I think that's a pretty stupid bit of legislation - that comparison rate schedule should go.

It's very confusing for the customer and it's a bit pointless. It's a hindrance to brokers with no real benefit for anyone. The comparison rates are completely misleading for the consumer. The new legislation, because you've got to put rates and fees and charges in and justify the product, is far better for the consumer.

If passed, what impact will the bill have on the broader mortgage broking industry?

I think it will get rid of people who are just in the industry for the fast buck and that will be good for consumers and good for brokers who are willing to do the right thing.

Will you be making a submission in response to the draft bill?

I'm on the fence at the moment. I'll sit down with my business partner and see what we think. But overall, we think the draft bill is fairly positive.

How will the Bill affect your particular segment on the mortgage industry?

I think it will make it easier for us. We do a lot of the processing for brokers, so the more information we can get on where the consumer's at and why the broker's doing something, the better it is for my business.


 

The aggregator

Tony Newcombe National Training Manager National Brokers Group

What is your overall view of the bill?

From the perspective of National Brokers Group, it models our expectations. It's similar in nature to the regulation of the financial planning industry. In essence there are no real surprises, however there is some need for clarification.

In your view, does the bill go far enough or too far?

I think it does cover the basic topics that we expected. There are a few areas of uncertainty that need clarification. For instance, if a broker has to provide a comparison, examples of templates or approved calculators would be useful. If they're not provided, it's still open to interpretation.

The licence costing is still an unknown, plus I'm not sure if the audit process extends far enough.

Is there anything left out of the bill that you would have liked included?

Apart from not having the licence costing structures available, as far as the bill is concerned, it's interesting that this is purely aimed at mortgage brokers.

Does it extend to the lender itself? Clearly it doesn't. What about a lender working in a bank or a building society? Consumers should have consistency.

The distribution avenue of broking is now compliant/regulated and the lender itself is still left with a non-regulated home loan situation. Why is it that the lending staff in banks and building societies are not held responsible for holding the same levels of education and disclosure requirements as mortgage brokers?

It could be viewed in favour or mortgage brokers as a key consumer marketing initiative in using brokers in preference to lenders themselves as they may hold more qualifications and do provide disclosure requirements.

In your view, what is the most important measure in the proposed legislation?

I see sections 33 & 36 about "capacity to repay" & "loan scenario cost comparisons" as important.

With further clarifications, especially on low doc & no doc lending, we will be able to assist our members to comply.

What will be the impact on the broader mortgage broking industry?

It puts confidence and more professionalism into the industry. I think there will be a little bit of fallout...some mortgage brokers will find the new extended compliance requirements too much.

It will be those ones who haven't prepared for regulation or those who don't think those extra efforts or costs are worth staying in the industry. Potential additional operating licensing costs may also impact on existing number numbers and new members entering. I would like to believe that consumers will be more confident [when approaching brokers].

Will National Brokers Group make a submission?

Yes. National Brokers Group will compile a response on behalf of our members.

How will it affect your particular segment of the industry?

Limited for National Brokers Group. It will be our role to help our members comply. Depending on the licence costing it may have a flow on affect on numbers entering.