A new regulatory regime in the making

Licensing people who provide advice on financial services products is not a straight-forward subject.

Admittedly, the Financial Services Reform Act (FSRA) brought together many people who advise on investing and the sale of financial services products. However, there are still two areas that fall outside FSRA — real estate advice and mortgages.

Licensing real estate agents is state controlled and likely to remain that way for many years because that responsibility was given to the states when the Australian constitution was created.

State control

Real estate is also connected to stamp duty on property, which is a very attractive source of revenue and therefore state governments are unlikely to do anything that will damage this income stream.

Controlling mortgage brokers has also been the responsibility of the states, normally through consumer affairs departments.

Western Australia and the ACT have operated a licensing system for mortgage brokers for many years while other states have certain authorisation powers over who can sell mortgages.

A few years ago, the various state and territory ministers decided a uniform system of mortgage broker licences would be desirable.

Submissions on how a licensing system should look were called for from interested parties, including the various lobbying groups in the financial services industry.

There seems to be a general consensus among players in the financial services industry that mortgage brokers should be licensed, but the question is how. Some advocate the Western Australian model, which is state-based and is in addition to FSRA licences held by financial planners.

In that state, financial planners cannot sell mortgage products, including reverse mortgages, unless they hold a separate licence (see p20).

The FSR regime

The alternative view is mortgage brokers should be included in FSRA licensing. This route is favoured by the Financial Planning Association (FPA), which made a submission to the steering committee on licensing created by the state and territory consumer affairs ministers.

FPA manager policy and government regulations John Anning says: “We don’t want mortgage brokers included in the Corporations Act, but they should be included under a regime similar to FSRA,” he says.

“This means a planner would be qualified to make recommendations for mortgages.”

Mortgage Industry Association of Australia (MIAA) chief executive officer Phil Naylor believes consumers would be better off if all mortgage brokers were licensed. But he argues for a separate licence to FSRA that would be more akin to the Western Australian model.

“Our submission on the new mortgage broking legislation proposed that there be two levels of licensing — a full licence for mortgage broking businesses and a qualified licence for loan writers attached to a full licensee,” he says.

The MIAA believes the licence requirements should be similar to the WA model in that the applicant needs to have obtained a Certificate IV in finance and mortgage broking, not have a criminal past, provide professional indemnity insurance of at least $1 million and be a member of a disputes resolution scheme. It does not believe staff who deal with customers on administration matters should be licensed.

The MIAA also believes it is not necessary, and impractical, for the broker to determine if the borrower can afford the loan.

However, Naylor says enforcing the conditions of a mortgage brokers’ licence must include suspension for serious breaches.

“The capacity to ban people from working in the industry is required, even if they have never held a licence,” he says.

Planners as mortgage brokers

Gadens Lawyers partner Jon Denovan says financial planners have become involved in the licensing debate due to the growth of products such as reverse mortgages.

It is estimated that around $600 million of reverse mortgages were sold last year and financial planners have become an important cog in the distribution chain.

“Reverse mortgages are a natural product for a financial planner to sell,” Denovan says.

“But in some states there is a real impediment in handling these products as the clients have to go to a broker. But some financial planners don’t want to be a broker and are staying out of the mortgage business.”

Financial planners who are selling reverse mortgages have put further pressure on the demand for some uniform regulation.

Anning says when the FPA put in its submission on mortgage broking licensing, reverse mortgages were not on the radar of most planners.

“Our submissions were made in February last year, so excluded reverse mortgages,” he says.

“We have an open mind on including these in legislation.

“Our regulation committee has a watching brief on whether we need to take a position.”

Naylor says the MIAA argues planners will need licences to sell mortgages, in addition to their normal FSRA licence.

“We would argue that if planners want to sell mortgages they should be appropriately qualified and licensed, as with all other mortgage brokers,” he says.

Count senior executive — product and membership development Robyn Mohr says her organisation operates under a number of regimes nationally when it comes to mortgage broking.

“We allow our planners to write loans under the current legislation in the state they operate in,” she says.

“As a result, we do have a couple of firms with mortgage broker licences in Western Australia.”

Expanding the range of advice

Money Management understands that Count has been looking at buying some mortgage broking practices as part of a strategy to ensure it has qualified people in place whatever the outcome of any licensing requirements.

Mohr says the company has not made any purchases as yet, but doesn’t rule out the idea.

“We are always looking at indicators when the opportunity is right and if it is the right type of business,” she says.

“But we haven’t purchased any mortgage brokers to date.”

Denovan says there has been a suggestion that planners may become exempt from any existing laws in most states and territories, but nothing has been formally proposed. This would probably apply to reverse mortgages, he added.

“There is a school of thought that the regulation of brokers will be an AFSL type of licence with authorised representatives,” Denovan says.

“This will create two licensing schemes with participants trained in their own areas.

“So we could end up with states looking after brokers and the planners looked after under federal legislation.”

This would also mean there would have to be complaints schemes set up to deal with mortgage brokers, as financial planners already come under the Financial Industry Complaints Service (FICS).

New legislation for brokers

While there is no dispute from any sector of the financial services industry that mortgage brokers should be licensed, there is no draft legislation as yet. And it may be some time before any laws are passed.

However, Naylor believes draft laws could be available fairly shortly.

“We are expecting a Regulatory Impact Statement from the MCCA [combined Ministers of Consumer Affairs] soon. However, it could be another two years before the legislation and licensing across Australia is implemented,” he says.

The FPA is also calling for action.

“We haven’t had any feelings about what the policy will be since our submission,” Anning says.

“But something needs to happen sooner in light of the Westpoint affair.”

He believes the delay in issuing draft legislation may be because of differences in how a licensing scheme would be administered, either federally or through the states.

Denovan also believes some draft legislation will appear very soon, perhaps within the next couple of months, but implementation is a long way off.

“Within the year there will be draft legislation and this could come into force by 2008,” he says. “But you have to get each state government to agree and approve the legislation first and that might take some time.”

However, while the major eastern states might agree to draft legislation, states such as Western Australia may be reluctant to give up its tested licensing model.