Blog, Finance, Marketing, The Thin Green Line

Best Interests Duty and Borrower First Obligations – An Example of Unconscionable Conduct

We have linked to this article internally as one that would introduce our understanding and application of Best Interest Duty obligations. Instead, we're going to lean on a recent interaction with a client that went south after we introduced what we considered to be clear breaches of virtually every piece of legislation introduced to protect consumer interests. Resulting in a malicious Google Review by a pseudonym, we felt we had to address the significant of the malfeasance directly.

Since 1997 we've identified clear non-compliance or very deliberate unethical conduct just twice; we walked away from one business and reported another to ASIC (the latter high-profile individual recently attracted the hate of a nation, and then spent well-deserved time in prison).

In the case of our most recent dodgy broker, we weren't actually exposed to the actual product he served clients for a few weeks - we were deceived in the same manner as his clients (our solicitor likened it to Tom Cruise's character in The Firm recognising he worked for the mob). Had we known what the product actually was (or wasn't), we would have walked away from this dodgy mortgage broker from the beginning. In fact, since reporting this individual to the police (considering having AVO orders served - something he isn't unfamiliar with) and various finance-related alphabet organisations we've since learned more about him that would have absolutely distanced us from any connection. In fact, through some of the fake reviews he's used online, we've contact other businesses to expose an individual that, we believe, has absolutely no place in the industry. We've also contacted some industry veterans he claims supports his operation when the opposite applies.

The business asked for a refund after we provided a 'final' report making note of the clear lack of any and all customer-first obligations. We made the position known that his model had to evolve if he wanted to escape litigious scrutiny, and it certainly had to change with continued high-level promotion. We'd put in far too much work outside of our core product to offer a direct refund, so in order to expel this individual from our lives we suggested donating the money to a children's charity - something he rigorously objected to (this included allowing him to keep the products we served him, including a custom website and fully-customised back-end funnel experience). "F**k the children", he said, adding further definition to a damaged personality.

Note: The individual made a claim to his bank for the refund. We supplied a full dated snapshot of the work that was completed (well within the agreed time-frame), and we've supplied recorded screencasts and phone recordings of various meetings. The interactions make it very clear that his aggressive nature was in response to our report indicating that his lending model had to evolve (at this stage it was very clear to us that he was deliberately misleading clients).

The Product

The product provided by the business in question is a simple no-commission model that would likely work without the back-end obfuscation this business introduces. A $5500 fee is paid after the first consultation (fair enough, common industry practice for many), but what isn't initially disclosed, and one of the many attributes of the model that we found offensive, is a commission applied by the lender that amounts to %15 of the total savings by the borrower over the full term of the loan (this high commission is applied despite claiming that the business offers a 'commission free' product, and is only disclosed after the initial fee is received). The fee is as hidden as any fee; it's in the print and many borrowers simply are not aware.

Note: The $5500 up-front fee was charged even if it was known the consumer couldn't be helped with the advertised leveraged product. What would eventuate is a referral to a commission broker, but the referral wouldn't take place until the fee was received. We find this unconscionable.

The lure into his model is interest rates less than 1% - promoted illegally without a comparison rate as 0.75%. When we entered the business no comparison rate was provided, nor was it even known, so an arbitrary rate is now applied by his 'other' web developer - one that we've determined is flawed. The product is a leveraged product meaning that a lower rate is applied to the owner-occupied property while a profitable rate is applied to an investment loan, and the rate applied is predicated on a sliding LVR scale with the lower rates only applied if the borrower has 60% equity in their owner occupied or other properties. In this case the funds are sourced from Origin Mortgage Management Services, although most lenders have similar products, and many lenders have a commission-free product that are leveraged in a similar manner. In fact, one could argue that the model - if applied ethically - has merit, and might even represent an evolution of some of the products banks make available.

Note: The problem with the tiered scale is that the savings are often consistent or less than those that would be offered by a commissioned product, but the up-front fee and 15% back-end fee as a percentage of savings is still applied. Remember, this business vilifies the typical commission model and sells his product by stating he "refuses to accept commissions from the banks". As a sales tactic it's a deplorable and illegal way in which to operate.

If a broker is to utilise this type of product, and if they intend to apply an up-front fee, it's something that is hard to argue with - it's a model that has applied for decades for various types of financial services. The structure may offer genuine customer savings and may improve upon client serviceability (it's just another product, after all), but we believe that the savings made by a borrower belong to a borrower, and we find it impossible to justify 15% on the back-end of full-term savings when its introduction is deliberately obfuscated and muddled up into other discussions, making the borrower unaware of the real cost of fees (we were told that they short-term losses in breaking the loan "are the borrower's problem"). More objectionable is that the borrower could go to any other mortgage broker, source exactly the same product, and be tens of thousands better off.

This particular individual justified his fees by calling himself a 'Personal Finance Strategist' - something we failed to accept because, as a mortgage broker, his understanding of the industry was extremely poor. Further, he only offered those products that provided him with the higher back-end commissions. Despite repeated attempts to introduce a broader customer-focused model into this individual's business he refused to offer commissioned products that may provide better consumer outcomes.

The business in question leans on the Banking Royal Commission to support their 'broker-free' product, and they claim over and over in multiple videos and marketing material that brokers have a conflict in their dealings because of the remuneration arrangements with banks. It is our opinion that since this particular business provides only a panel of products (from a single lender) that best suits his flawed and seriously inflated commission structure, and since his fees are tens of thousands more than any other broker performing exactly the same function, he is clearly introducing deliberate 'conflicted remuneration' into his own operation. Further, he is not providing holistic advice (and zero product comparisons), nor is he prioritising the best interest of the borrower (as required by BID legislation) in any respect, and his actions in no way represent responsible lending. He is using the Royal Commission to leverage his own model when the Commission was established to ensure this type of unconscionable conduct didn't exist. The problem with the previous statement is this: the business operator understands exactly what he's doing. It is clear and deliberate predatory behaviour.

After we introduced very definitive data to our former client indicating that the deceptive practices had to end, our relationship immediately turned sour. We noted that the product itself had the potential to be brilliant if the 15% fee on borrower savings was excluded, and we made it clear that the product only had value when it was compared against others; the assertion a product is good isn't enough - it needs to be weighed up against various borrowing options to determine its relative value. Of course, taking the borrower first approach means placing a borrower into a product where massive commissions wouldn't be returned, thus the ethical pathway is simply contrary to the interests of our (former) client.

An email we sent to this business on the 30 August made it known that the structure had to change. We'd constructed a consumer and business survey to confirm our early suspicion: nobody was comfortable with the model.

Conclusion

We have the greatest deal of respect for the mortgage industry, and brokers in particular. Encountering any non-compliance is an issue that is normally resolved within an extremely short time, and the broker is always thankful for our efforts. We highly respect the efforts of the various aggregators groups, and we hold those industry bodies that fight for workable legislation in the highest regard. When a broker deliberately promotes a service that violates every customer first or best interest duty, it severely undermines the efforts of those mentioned groups that seek to provide the service expected of them.

We're clever enough to record every conversation we have with clients. As such, the evidence we'll supply to ASIC, APRA, AFCA, or any other group that will accept our testimony, will carry direct indisputable value and conclusions. We do not believe the individual should hold an ACL or any accreditations that requires oversight by an ethical and suitable person. We also believe there are grounds for criminal prosecution.

We understand that reporting a client to industry bodies isn't a good look (albeit, only after we'd tried to provide an ethical course-correction from our very first discussion), but in this case we hope the industry understands our position. The predatory nature of the product, coupled with the threats of violence against us, and the concern our families now have for their safety, and the fact we've had to escalate our concerns to police, is indication enough of the damaged nature of this broker.

The nature of the individual is somewhat litigious so he's threatened all sorts of action against us. In this case we welcome the opportunity to present our evidence in a sworn environment as a service to the industry.

Featured Image: Horse-drawn tram outside the Union Bank on the corner of Hunter and Pitt Streets, c1865. The horse-drawn carriages were Sydney's first light rail. [ View Image ]

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