Financial planners at both the dealer group level and at the individual adviser level recognise the benefit of linking financial planning with mortgage broking.
There are a range of commercial and legal strategies that can be followed in establishing the necessary links. Whether you are already linked with mortgage broking or whether you are in the process of selecting the strategy that is most suitable to your dealer group or individual financial planning practice, it will be helpful to understand:
~ the way in which mortgage broking is regulated and controlled; and
~ the pros and cons associated with each linking strategy.
There is no ‘one size fits all’ strategy that will be applicable in every case. The key is to be aware of:
~ the various ways in which links can be created between the two businesses; and
~ the business models and legal mechanisms that can be used (each with its own commercial, management and legal issues), and then work out the most appropriate strategy for your own business.
Regulation of the mortgage broking industry
There are some similarities and also some significant differences between the way in which financial planning is regulated and controlled and the way in which mortgage broking is regulated and controlled. Understanding both the similarities and the differences will assist in making strategic decisions for utilising mortgage broking in the development of your financial planning dealer group or practice.
The regulation of the mortgage broking profession is effected through a combination of:
~ state legislation in New South Wales, Victoria, Western Australia and the ACT, specifically directed to the regulation of the mortgage broking industry;
~ state legislation applying generally to all businesses conducted within the state (and not necessarily specifically directed to the mortgage broking industry);
~ Commonwealth legislation applying to all businesses conducted within the Commonwealth of Australia (and not necessarily specifically directed to the mortgage broking industry); and
~ adherence by industry participants with the codes of conduct of the Mortgage Industry Association of Australia (MIAA) and the Finance Brokers Association of Australia (FBAA).
The New South Wales Consumer Credit Administration Act 1995 is particularly important because it not only regulates the mortgage broking industry within New South Wales but also sets benchmark standards for the rest of Australia. Some of these standards (but not all) are replicated in the codes of conduct of the MIAA and the FBAA.
It would be very difficult for a financial planning practice or financial planning dealer groups conducting operations in a number of states and providing mortgage broking as an ancillary service to have one set of operational procedures for New South Wales and different operational procedures for other states.
It is therefore important to understand the scope of the regulatory mechanisms provided by the New South Wales Consumer Credit Administration Act 1995.
In broad terms, the New South Wales Act and regulations made under it make provisions in respect to:
~ ensuring clients of finance brokers:
— are given adequate information before entering into finance broking contracts;
— are protected from unfair practices engaged in by finance brokers; and
— have access to a redress mechanism when finance brokers breach the terms of the finance broking contract, engage in unjust conduct or charge excessive commission.
~ requiring a finance broker to enter into a written agreement with the client;
~ ensuring the contract between the finance broker and their client contains:
— particulars of the amount of consumer credit to be obtained;
— the term of the consumer credit desired by the client;
— if the consumer credit is to be repaid at regular intervals, the maximum periodic repayments the client is prepared to make in respect of the consumer credit;
— if the consumer credit is not to be repaid at regular intervals, the repayment arrangements acceptable to the client;
— the maximum interest rate that will be payable in respect of the consumer credit;
— the date by which the finance broker is to have secured the consumer credit;
— a statement in the prescribed form that the finance broker’s recommendations will be drawn from a range of potential lenders that does not necessarily include all lenders who offer consumer credit of the nature of the consumer credit sought;
— the name and address of the finance broker;
— if the finance broker is a company, the Australian Company Number of the company;
— if the finance broker trades under a business name, the name and address of the principals of the relevant business;
— the amount of commission payable by the client, or, if the exact amount of commission is not known, the method of calculating the commission and an estimate of the amount that will be payable;
— a statement as to the fact that the finance broker will receive a financial or other benefit from a person or persons other than the client;
— a statement indicating the highest and lowest amounts of the financial or other benefits the finance broker would receive from different credit providers if they were to provide consumer credit to the client;
~ an undertaking by the finance broker that they will, after recommending to the client a particular consumer credit product and before the client enters into any credit contract with the credit provider, disclose the following matters to the client:
— the amount of the financial or other benefit that the finance broker will receive from the credit provider;
— whether or not the finance broker can determine all recommended conditions of the credit contract (e.g, the interest rate, fees or terms of the loan), and if so the effect of any such condition on the amount that the finance broker will receive from the credit provider;
— the amount of any financial or other benefit that a person other than the finance broker (such as the finance broker’s employer or a company of which the finance broker is a director) will receive from the credit provider, but only if that financial or other benefit could reasonably be expected to influence the finance broker’s recommendation;
— any interests or relationships of the finance broker that could reasonably be expected to influence the finance broker’s recommendation;
— a description of any special loan features (such as redraw facilities) that are required by the client;
— if any financial or other benefit has been or will be paid by the finance broker to a person for referring potential clients to the finance broker, the amount of any such benefit and the name of the person;
— when and how any such commission will be payable;
— if the financial or other benefit will be received from a person other than the client by the finance broker, a statement in the prescribed form as to the fact that the finance broker will receive a financial or other benefit and as to any other matters that may be prescribed.
Other points to consider are:
~ payment of commission is dependent on the terms of consumer credit being the same as those agreed to;
~ commission must not be greater than that disclosed or estimated in the contract;
~ finance brokers must keep accurate records containing full particulars of all transactions entered into, including copies of all finance broking transactions;
~ prohibition on finance brokers receiving valuation fees, credit application fees and credit establishment fees from a client;
~ clients to have recourse to the Consumer, Trader and Tenancy Tribunal for any breaches by the finance broker on any provisions of the Act;
~ courts are empowered to order a finance broker to pay specified amounts to a client if it is established that the finance broker has engaged in unjust conduct (which includes conduct that is unfair, dishonest or fraudulent) or the commission charged by the finance broker is excessive.
In Victoria, the Consumer Credit (Victoria) Act 1995 contains provisions requiring finance brokers to obtain a document of appointment from their clients and prescribes the details to be included in the document of appointment.
In the ACT, any person wishing to act as a finance broker is required to obtain registration under the Consumer Credit (Administration) Act 1966. This Act also prescribes certain qualifications on advertising by finance brokers and also contains stringent disclosure provisions.
In Western Australia, finance brokers are required to hold a licence issued under the Finance Brokers Control Act 1975. The Act contains provisions regulating the amount of commission that can be charged and the manner in which advertising can be conducted. The Act also requires every finance broker to maintain a trust account and to have that trust account audited annually, with an auditor’s report being delivered to the Finance Brokers Supervisory Board.
Whilst there is no national industry specific regulator for the mortgage broking profession, some degree of control over the conduct of mortgage brokers is vested in the Australian Securities and Investments Commission (ASIC) through the powers vested in it under the Corporations Act relating to:
~ the regulation of the conduct of company directors and company officers; and
~ the “deceptive and misleading conduct” provisions of the Corporations Act.
In addition, mortgage brokers (including aggregators) are required to observe the following laws:
~ the consumer protection provisions of the Trade Practices Act 1974 and the ASIC Act 2001;
~ the consumer protection provisions of the various state Fair Trading Acts;
~ the Spam Act;
~ the ‘door to door’ sales provisions of various state Acts;
~ the ‘secret commissions’ provisions of the state criminal codes;
~ the Privacy Act;
~ the Hawking Act;
~ the Uniform Credit Acts;
~ the Trust Accounts Acts of the various states and territories; and
~ the general common law relating to ‘duty of care’.
In summary, the regulation of the mortgage broking industry varies from state to state, and it cannot safely be assumed that simply complying with the codes of conduct promoted by the MIAA and FBAA will ensure compliance with all relevant legislation.
As well as raising operational issues, the legislation also raises compliance issues. These compliance issues need to be properly addressed in the dealer group’s or individual practice’s compliance procedures.
Control of the mortgage broking profession
The control of the mortgage broking profession is effected through:
~ provisions contained within the aggregators agreements entered into between the major credit suppliers (mostly banks) and aggregators;
~ provisions contained within the broking/commission agreements entered into between aggregators and mortgage brokers; and
~ provisions contained within the sub-broking agreements entered into between mortgage brokers and their sub-brokers.
The contracts between credit suppliers/banks and mortgage aggregators are usually quite onerous. They generally include:
~ the right to withhold commissions (including trailing commissions) if there is any infringement by the aggregator or any broker or sub-broker working beneath an aggregator of any of the principal terms of the agreement;
~ the right to withhold commissions (including trailing commissions) if any broker or sub-broker working beneath an aggregator engages in ‘churning’;
~ the right to immediately terminate the agreement in the event of any of the above breaches by the aggregator or any broker or sub-broker working beneath the aggregator;
~ a prohibition on the sale by the aggregator of its business without first obtaining the consent of the credit provider/bank;
~ a prohibition on the aggregator approving a sale or transfer of any of its shares without first obtaining the consent of the credit provider/bank.
The brokers/commission agreements entered into between aggregators and mortgage brokers generally contain similar provisions.
Likewise, the agreements entered into between mortgage brokers and sub-brokers generally contain similar provisions.
In addition, each ‘loan writer’ employed by a mortgage broking business is required to hold accreditation with each bank to which finance applications are submitted. If the banks withdraw accreditation from a loan writer, then that person is unable to submit applications either as a mortgage broker or sub-broker.
Additional regulation and control of the mortgage broking profession is effected by mortgage brokers (though aggregators and brokers) joining either or both of the industry associations (the MIAA and FBAA) and agreeing to abide by the code of conduct of those associations. The codes of conduct generally reflect the provisions contained within the contracts entered into between credit providers/banks and aggregators and between aggregators and mortgage brokers. The ultimate penalty for failure to observe a code of conduct is expulsion from membership of the industry association.
Malcolm Wright is partner at Wright Pavuk Lawyers, Sydney. He will be speaking on this subject at the Linking Mortgage Broking and Financial Services seminar to be held at the University of Technology Sydney on May 1, 2007.
