Regulations clarifying what constitutes mortgage broker conflicted remuneration have been registered, finalising the details of the broker best interests duty that takes effect next year.
The regulations also set the broker commission clawback period at no longer than two years.
A part of the best interests duty is that brokers must not accept conflicted remuneration. The regulations set out the circumstances under which a benefit is and is not conflicted remuneration.
Conflicted remuneration means any benefit, whether monetary or non-monetary, that is given to a licensee or their representative that could reasonably be expected to influence the credit assistance provided.
The regulations say benefits must not be volume or campaign-based. A volume-based benefit is a payment or non-monetary benefit that is dependent on the overall volume of sales of a particular class of credit contract.
The regulations include an exception for benefits attributable to economies of scale, such as “rebates or discounts related to the number of value of contracts in relation to which the licensee or representative provides credit services”.
Campaign-based commissions provide higher rates of commissions offered on a time-limited basis.
The regulations also give a detailed rundown on the calculation of a drawdown cap - the amount of credit provided, adjusted for items such as offsets, reverse mortgages and line of credit facilities. The drawdown cap is used to calculate the broker’s benefit.
If a benefit is linked to the amount borrowed, “the benefit must be linked to the amount drawn down by the borrower”.
Certain clawback arrangements are banned. The government’s view is that clawbacks may discourage brokers and consumers from exploring new and better loans because the clawback will add to the cost of switching.
The regulations ban clawbacks if they apply for more than two years from the beginning of the credit contract. This has been a contentious issue, with the industry calling for clawbacks arrangements to last for only 12 months.
The regulations also ban clawback arrangements if the repayment obligation is for an amount greater than the benefit given in the first place.
Fees paid by a consumer are not captured by the definition of conflicted remuneration, as long as they are “given in relation to a credit service provided to the consumer by the licensee or representative”.
Education and training benefits are not conflicted remuneration, as long as the benefit has a genuine education or training purpose.
IT support given to a licensee is not conflicted remuneration.
The Mortgage and Finance Association of Australia said it welcomed the release of the final. It said it was pleased that consultation with Treasury had resolved “a number of key issues”.