Broker behaviour a credit risk

The human gestation period is nine months, that of the blue whale 12 months and that of elephants 22 months. In the case of the Finance Brokers Draft Bill, it's 36 months. Whether the proposed law is worth the wait or worth doing, is something skirted in the long awaited announcement of the details by the New South Wales Office of Fair Trading yesterday.

If the proposal becomes law all broking structures will be regulated, including mortgage brokers, finance brokers, single line broking, single mobile operators, aggregators and franchised organisations.

At present regulation of the broking market varies between states, with NSW, Victoria and ACT having specific legislation for brokers accessing credit regulated by the Consumer Credit Code.

Western Australia applies broker-specific legislation to personal and commercial credit. Queensland had proposed its own legislation, though that may no longer be relevant.

The Office of Fair Trading published its discussion paper on broker regulation in December 2004.

Most stakeholders chimed in yesterday to endorse the thrust of the proposals while reserving their position on the details.

The proposed national reforms outlined in the Finance Brokers Draft Bill are:

• Licensing and probity checks for brokers that will screen out applicants with a history of unfair practices.
• Mandatory skills and ongoing professional development to ensure that a quality service is provided.
• Mandatory membership of an ASIC-approved external dispute resolution scheme for affordable access to redress.
• A requirement that brokers take out professional indemnity insurance so that any claim on a broker can be satisfied.
• Prohibiting charging upfront fees and lodging caveats over property to secure fees.
• A requirement that the broker provide specified disclosures about costs and services before negotiating a broking agreement with the client.
• A broking agreement that contains details of the client's needs and, when recommending a product, a statement as to why the product recommended satisfies those needs.
• A requirement that brokers make sufficient enquiries about a consumer's financial status to ensure they can afford the product recommended.
• A requirement that a broker has a reasonable basis for recommending a particular product.
• In the case of brokers recommending a reverse mortgage, they will have to prepare an analysis that shows why this is the right product for the consumer's circumstances and a requirement that the broker give examples to the consumer to illustrate the reduction in their equity in the home over a period of time.
• Redress for losses when a consumer enters into an inappropriate credit product on the broker's recommendation.
• Provision for a stay of home repossession where damages are being claimed from the broker that could allow the consumer to get their repayments back on track.

The chief innovations are those that tackle the responsibility of those brokers contributing to the problem (more anecdotal that carefully documented) through predatory lending, and mainly by engaging in fraudulent applications (with or without the help of the borrower) or perhaps through the omission of relevant data to lenders.

The wider burden for all brokers is the need to adjust practice to prepare a statement of needs. Whether this will be a trivial piece of paperwork of low value to the client or a time consuming and expensive service analogous to a financial plan may be the key issue in these proposals.

Lenders won't be subject to corresponding regulations such as the requirement for a statement of needs, at least not under this proposal.