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Three big consumer wins from the banking royal commission

Mortgage broker best interests duty, unfair contracts laws extended to insurance, and better regulation for funeral products. 

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Last updated: 06 February 2020
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Need to know

  • Three key recommendations by the banking royal commission now have the force of law
  • They are: a best interests duty for mortgage brokers, unfair contracts law extended to insurance, and ASIC to regulate expenses-only funeral financial products
  • All three reforms come off the back of major CHOICE investigations and longstanding campaign priorities

In a long-awaited triple win for consumers, three key recommendations that came out of the banking royal commission have now become law. 

CHOICE, along with financial counsellors and community legal centres across Australia, have long campaigned for these important reforms to become legally binding. 

All three address serious inequities in the banking sector and make the system fairer for customers.   

The new laws come off the back of some recent major CHOICE investigations.

1. Best interests duty for mortgage brokers

The federal government has passed a best interests duty for mortgage brokers, something CHOICE has been campaigning to see legislated for many years. 

Until now, mortgage brokers have only been required to recommend loans that were "not unsuitable". 

Now brokers will be legally obligated to give you guidance in your best interests, according to your financial circumstances. 

We've conducted a number of investigations into the mortgage broking industry in recent years.  

Mortgage-broking businesses are often just outsourced sales teams for Australia's biggest banks

In 2015, we shadow-shopped the mortgage broker industry and found very few examples of brokers providing high quality advice. 

In 2019, the author of this article became an accredited mortgage broker in just ten days and found that the certification material was more about landing clients and learning sales techniques than finding the right loans for customers.

While mortgage-broking businesses market themselves as an independent alternative to banks, the mortgage broking industry itself is largely owned by banks. 

The result is that mortgage-broking businesses are often just outsourced sales teams for Australia's biggest banks, and don't deliver better outcomes for consumers than the bank itself would. 

This explains why almost seven in ten loans arranged by brokers have come from bank-owned aggregators. 

Brokers work on commission: the bigger the loan, the bigger the commission. 

The temptation for brokers to steer borrowers to the lender that pays them the biggest commission is a built-in conflict of interest that's been around too long. 

This explains why almost seven in ten loans arranged by brokers have come from bank-owned aggregators

All of which is why we wholeheartedly welcome the introduction of a best-interest duty for mortgage brokers – a similar duty to the one we fought to see applied to the financial advice industry. 

Now brokers will be legally obligated to scan the market and find you the best loan they can.

"For too long, the broking industry has depended on recommending mortgages that provide the best commission for them rather than the best deal for their customers. This has led to brokers selling people into loans that are riskier, take longer to repay, and are more likely to fall into arrears." says CHOICE CEO Alan Kirkland. 

"This best interests duty, well enforced, will promote price competition in the home lending market. Mortgage brokers will be unable to justify sending large numbers of customers to big banks that offer highly priced loans. They will now be legally required to scan the market and find loans that best meet the needs of people."

2. Unfair contract term rules to apply to the insurance industry

A contract term is unfair when it gives too much power to one party over the other. 

When it comes to insurance contracts, unfairness abounds. 

But somehow the insurance industry wangled itself an exemption from unfair contract term legislation. Could it have been because of the power of its lobby in Canberra? Well, we think so. 

Other industries have had to play by these rules for almost a decade. Now it's time for the insurance industry to clean up its act

CHOICE CEO Alan Kirkland

More than 20,000 CHOICE and Consumer Action Law Centre supporters signed a petition to treasurer Josh Frydenberg calling on him to close the unfair contract loophole in insurance contracts.

With the enactment of this key recommendation, insurers will have to think twice before peppering your policy document with murky terms that are all-too-open to interpretation when you make a claim. 

Unclear language and convoluted exclusions have long given insurers unfair leverage when it comes to determining whether you're covered for a claim.

"The insurance industry is now on notice. Insurance companies are no longer able to rely on unfair fine print exclusions to deny people's claims," Kirkland says. 

"Other industries have had to play by these rules for almost a decade. Now it's time for the insurance industry to clean up its act."

3. Funeral expenses products to be regulated by ASIC

In our recent multi-part investigation of the funeral industry, we unearthed a number of troubling practices by this increasingly corporatised sector. 

Lack of fee transparency and the power imbalance between funeral directors and the survivors of the deceased are among them. 

Then there's the financial chicanery that often comes into play when consumers attempt to plan ahead for funeral costs. 

Expenses-only funeral funds would probably top the list of dodgy funeral-related financial products. 

They're marketed especially to First Nations communities, many of which have suffered as a consequence. 

Funeral expenses products have disproportionately impacted upon our First Nations communities and led to egregiously poor outcomes

Financial Rights Legal Centre CEO Karen Cox

In the case of the Aboriginal Community Benefit Fund, now called Youpla (which is not an Aboriginal-owned business), many policyholders have lost thousands of dollars over the years when their plans were cancelled due to missing a single payment, or have paid far more in premiums than they ever got back to cover funeral expenses. (The fund keeps the difference.) 

So it's high time that this predatory industry fell under the jurisdiction of the Australian Securities and Investments Commission and fell in line with the Corporations Act. 

Karen Cox, CEO of the Financial Rights Legal Centre, says this reform should be applied retroactively, and we certainly agree. 

"Funeral expenses products have disproportionately impacted upon our First Nations communities and led to egregiously poor outcomes," Cox says. 

"We hope that, in the spirit of this reform, the Government will also step in to ensure that those people who already hold these products with unlicensed providers are duly compensated for any losses as a result of past conduct or this reform."