There is lots of noise about the duties of financial advisers, and lawyers (this one included) love to debate whether FoFA has left any room for fiduciary obligations. For my money, it doesn’t really. They cover the same topics, but in different and often inconsistent ways – where a fiduciary in equity is prohibited from making an unauthorised profit or acting with a conflict of interest or duties, the financial adviser may provide advice to a client, notwithstanding a conflict, provided they give priority to their client’s interests. The best interests duty in Chapter 7 of the Corporations Act 2001 (Cth) bears no resemblance to any best interests duty in equity – it goes to the adviser’s process and then to the outcome of that process – the process is intended to ensure that the financial product advice is appropriate. Equity focuses on ensuring that the fiduciary is not subject to any improper influence and is intended to ensure that the adviser is able to provide advice that is in the interests of their client.
But what about that other large class of advisers who recommend credit products rather than financial products? Like financial advisers, they are divided into two groups – brokers who are independent of the lender and loans officers who are employed by the lender. To date, the courts have had little to say about the duties of either of these groups.
Chapter 7 does not apply to home loans and so neither the mortgage broker nor the loans officer has a statutory duty to act in the best interests of their client, to give priority to their client’s interests or to give appropriate advice in relation to a loan. They do have duties under the National Consumer Credit Protection Act 2009 (Cth). They have a duty to recommend a loan only if it is suitable. This doesn’t appear to apply a very high standard and, indeed, it is not. A loan is suitable unless it is unsuitable. It is unsuitable if the mortgage broker or the loans officer forms the view that their client can’t afford it. But is that it? Well, not by any stretch if the adviser is in a fiduciary relationship with the client. And they may well be.
A fiduciary is a person who falls within a category of person that the law says is always a fiduciary – a trustee is a good example. The mortgage broker or loans officer is not in this class. But a fiduciary is also a person who undertakes to act in the interests of another person, and they don’t have to do it expressly.
It is unlikely that the loans officer will promise to act in the client’s interest; but it is very likely to be what the mortgage broker offers. And it is also very likely that their clients will rely on them to recommend a lender and type of loan that is suitable (and maybe even best) for them. They will also rely on the broker to negotiate the terms and rates with the lender on their behalf. These are the kinds of facts that may well mean a judge would say that the mortgage broker stood in a fiduciary relationship to their client and that they were obliged to act in their client’s interest when they recommended a lender, a loan and negotiated any terms. In order to be able to do so, equity says that the broker is not able to accept an authorised profit or act with a conflict between their duty to their client and their personal interest.
And this is when things get really hard. A mortgage broker will collect a commission from the lender and the National Consumer Credit Protection Act allows them to do so, provided that it is disclosed to their client. This is probably enough to mean that the commission is authorised (albeit that their client has not consented to it); it also means that they will have a conflict. But again, the Act probably allows it.
What then is left of the fiduciary’s duty to their client without either of its two obligations? It is worth thinking about why equity created them. There are two reasons. First, it is because of human nature – the courts do not think that a person with a conflict of interest can properly assess whether any advice they give is in the interests of another person, and second, it is because the courts have not examined the quality of the advice – instead they have freed the fiduciary to give impartial advice that is in the interests of the client. The adviser’s duty of care requires them to provide advice that meets an appropriate standard.
In the absence of these obligations, the courts are no longer able to protect the fiduciary’s client (or beneficiary). This probably doesn’t matter where the law imposes other protection, and it does where an adviser provides financial product advice. In that case, the personal advice must be appropriate for the client. But, under the National Consumer Credit Protection Act, it only has to be ‘not unsuitable’. It seems to me the result might be that clients of mortgage brokers are exposed to a greater risk of poor advice than might be the case if they did not have the benefit of the National Consumer Credit Protection Act.