MORTGAGE BROKING

The Australian Financial System

BY PETER ANDREWS, MBA, CPA, B.ECONOMICS, B.ARTS
Former lecturer at Macquarie University

T he Australian financial system is part of the services sector of the

Australian economy, which collectively accounts for 68% of GDP. This
contrasts with the mining sector, which represents 10% of GDP.

Greater reliance on a service-based structure is a characteristic of a

modern, developed economy.

CONTENTS
THE AUSTRALIAN FINANCIAL SYSTEM ............................................... 2
AUTHORISED DEPOSIT-TAKING INSTITUTIONS.......................................... 2
INSURANCE ....................................................................................... 3
FINANCIAL MARKETS .......................................................................... 3
Peter Andrews is a specialist trainer in SUPERANNUATION ............................................................................. 4
Financial Planning. CLEARING SYSTEMS ............................................................................ 4
After an early career in corporate finance THE MORTGAGE BROKING INDUSTRY ............................................... 4
and banking, Peter became a lecturer at
Macquarie University.
MORTGAGE BROKERS ......................................................................... 4
LOAN PROVIDERS AND LENDERS ........................................................... 5
He has also taught in the Graduate AGGREGATORS .................................................................................. 5
School of Management at the University OTHER PARTICIPANTS ......................................................................... 6
of Sydney and the School of Banking and
Finance at the University of New South SUPERVISION OF THE AUSTRALIAN FINANCIAL SYSTEM ................... 6
Wales.
THE SUPERVISORY SYSTEM .................................................................. 6
Peter has a Bachelor of Arts and a AUSTRALIAN CREDIT LICENSES .............................................................. 7
Bachelor of Economics from the CREDIT REPRESENTATIVES ................................................................... 8
University of Sydney and a Master of
Business Administration from the TRAINING OF CREDIT REPRESENTATIVES.................................................. 8
University of Florida. He is also a ASIC’S DISCIPLINARY POWERS ............................................................. 8
Certified Practicing Accountant.
CODES OF CONDUCT .......................................................................... 9
INDUSTRY CODES OF CONDUCT ............................................................ 9
COMPANY CODES OF CONDUCT ........................................................... 10

PROCEDURES MANUALS .................................................................. 10

ETHICAL OBLIGATIONS ..................................................................... 10
DISPUTES RESOLUTION SCHEMES.................................................... 12

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THE AUSTRALIAN FINANCIAL
SYSTEM
The Australian financial system is the fourth largest
segment of the Australian economy, accounting for
more than 8 per cent of GDP.
The role of the financial system has been defined as
“the set of arrangements covering the borrowing and
lending of funds and the transfer of ownership of
financial claims” in Australia.1
It has several sectors:
 banks, credit unions and building societies –
referred to as Authorised Deposit-taking
Institutions (ADIs) or financial institutions;
 insurance (life and general);
 financial markets;
 superannuation; and
 clearing systems – cash, cheques, EFTPOS, RTGS
and other high-value payment systems.
AUTHORISED DEPOSIT-TAKING
INSTITUTIONS
Authorised Deposit-taking Institutions (ADIs) are
corporations that are authorised under Section 5
the Banking Act 1959 to carry on the business of
banking. They include:
 banks;
 building societies; and
 credit unions.
Authorisation is granted by the Australian Prudential
Regulation Authority (APRA) and a full list of ADIs is
available on APRA’s website:
www.apra.gov.au.
The use of the names “bank”, “banker” and “banking”
by an authorised ADI is still, however, subject to control
under s66 of the Banking Act and the consent of APRA
is required to use them
1
Submission to the Committee of Inquiry into the Australian
Financial System (‘the Campbell Committee’), Reserve Bank of
Australia Occasional Paper No 7, December 1979, para 1.
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Banks
Currently, the Australian banking sector is dominated
by four major banks: Australia and New Zealand
Banking Group, Commonwealth Bank of
Australia, National Australia Bank and Westpac Banking
Corporation.
In 1990, the Australian Government announced that it
had adopted a “four pillars“ policy. This is a long-
standing policy of rejecting any merger between the
four major banks. They have been allowed, however, to
take over smaller banks. Some of the smaller banks
taken over in this way have been absorbed into the
parent bank while others – such as BankWest
(Commonwealth) and Bank of Melbourne (Westpac) –
have continued to operate as separate entities.
Competitors to the “big four” banks include smaller and
often regional banks, including:
 Bendigo and Adelaide Bank
 Suncorp-Metway
 Bank of Queensland
 ME Bank. 2
Foreign banks may have a representative office in
Australia, but if they are to have a retail banking
presence they must have a license under the Banking
Act 1999. Only a few operate as retail banks, with HSBC
Bank Australia, Bank of Cyprus Australia Limited, Beirut
Hellenic Bank and Citibank Australia each having a small
number of branches.
There is also a trend for former credit unions to become
“mutual banks”. Mutual banks are co-operatively
owned, with ownership participation being a condition
for being a bank customer. Seven former credit unions
became mutual banks in 2012, with a further three
changing their name and status in 2013. These were:
 Police & Nurses Credit Society Ltd changed to
Police and Nurses Ltd and is now trading as P&N
Bank;
 Police Association Co-operative Ltd. Changed to
Police Financial services Limited trading as Bank
Vic; and
 Community CPS Australia Ltd trading as Beyond
Bank Australia
2 Owned by industry superannuation funds.
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In changing their status these institutions are seeking
broader community support and and end to concerns
about the security and offerings of credit unions.
Building Societies
Building societies used to have a more prominent place
in the financial system than they now have, with many
former building societies having either transformed
themselves into banks or been taken over by banks.
Established primarily for home lending, they may be
either mutually owned or owned by shareholders.
Building societies that continue to exist include:
 Australian Unity Building Society
 IMB (Illawarra Mutual Building Society).
 Newcastle Permanent Building Society
Credit Unions
A credit union is a cooperative financial institution that
is owned and controlled by its members.
Credit unions differ from traditional banks in that the
members who have accounts in the credit union are the
owners of the credit union and they elect their board of
directors in a one-person-one-vote system regardless of
the amount of money invested in the credit union. They
aim to provide a broad range of loan and savings
products at a much cheaper cost than the traditional
banks.
INSURANCE
Australia’s insurance market can be divided into life
insurance and general insurance, with larger insurers
focusing on only one type.
Life insurance companies provide insurance products
such as term life insurance and disability insurance,
which provide a lump sum event when a defined event
occurs, as well as products that provide a continuing
income such as income protection insurance. At times
they also compete directly with banks and other
lenders, for instance by providing housing loans.
Some of the life insurance companies that operate in
Australia are:
 Allianz Australia
 AMP Limited
 Asteron Life (Suncorp)
 AXA
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 OnePath (ANZ)
 Zurich Australia
FINANCIAL MARKETS
The main financial markets operating in Australia are
the debt, equity and derivative markets. Australian
banks also rely on overseas funding.
Debt Markets
By volume, the largest volume of debt securities issued
in Australia are Australian government bonds, which
generally have terms from three to ten years with
interest payments based on a fixed rate of interest and
paid twice yearly. These securities are mostly issued
and traded in a very large wholesale market that is
operated by the insurance companies, banks and large
corporates, although they have been listed on the
Australian Stock Exchange since April 2013.
There is also a growing domestic market for corporate
bonds, with the banks and utility companies such as
Telstra making large issues.
Existing alongside the bond market (also known as the
fixed-interest market), there is what is known as the
money market. This is another large wholesale market
which is used for shorter-dated securities, generally
with maturities of 90 or 120 days. These differ from
bonds in that they don’t pay interest. Instead they are
issued at a discount below their maturity value, with
the difference between the discounted amount and the
maturity value providing the investment return.
Money market securities are issued by:
 the Australian government (Treasury notes);
 the banks (certificates of deposit); and
 large corporates (promissory notes.)
The two debt markets are very large, with the bond
market growing significantly. This is happening in three
ways:
 the Australian Government continues to issue more
bonds because it currently has a budget deficit
which is proving difficult to reverse;
 Australian corporates are showing an increasing
interest in issuing bonds in the local (i.e. Australian)
market rather than overseas markets (such as the
US domestic market); and
 there is an increasing trend towards the issue of
securitised debt.
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Securitised debt, otherwise known as “asset-backed
securities”, can be used as a source of funding for
housing finance and as such is particularly relevant to
mortgage brokers. When issued for housing finance the
securities are known as Residential Mortgage Backed
Securities (RMBS). They will be discussed later in this
chapter.
Equities Market
The equities market, or share market, is the best known
of the financial markets because, with many small
investors, it receives significant press coverage.
Shareholders receive a dividend if directors declare a
dividend (they usually do). They also expect to receive a
capital gain on their investment.
Most companies operate with both equity and debt
finance. Debt finance leverages the returns available to
shareholders because it is cheaper. It also has the
advantage of being tax-deductible.
Derivatives
Derivatives are financial instruments such as futures
and options. They are “derived from”, or based on,
securities issued in the debt and equity markets. As
such, they are not used to raise funds but when used
for hedging they are used to smooth financial risk.
Derivatives have to be used carefully because it is easy
to make mistakes with them. Since they cannot be used
for either lending or borrowing they will not be
discussed further in this course.
Overseas Funding
Australia has traditionally relied on overseas debt
funding, with the banks in particular relying heavily on
overseas debt markets. The Australian government has
been attempting to lessen this reliance by encouraging
the growth of the domestic bond market, along with
increased participation by retail investors. It has also
established a financial system inquiry to consider how
the domestic deposit base might be increased. Mr
David Murray, former CEO of the Commonwealth Bank,
is heading the inquiry.
SUPERANNUATION
Superannuation is compulsory in Australia, with a
superannuation fund being a form of mutual fund
regulated by separate legislation.
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As of September 2013, Australians had over $1.75
trillion in superannuation assets. Australians now have
more money invested in managed funds per capita than
any other economy.3 Bank deposits, in contrast, sit on
$1.3 trillion.
For the most part, Australian superannuation assets are
invested in debt and equity securities, as well bank
deposits when bank interest rates are high.
CLEARING SYSTEMS
Some clearing systems, such as the cheque clearing
system and EFTPOS, although largely unobserved, are
commonly understood. Not as well-known are the
clearing systems that enable the functioning of modern
financial markets. They enable transfer of the
ownership of debt and equity securities to occur
promptly without physical handling and transfer of
security certificates.
The largest of the clearing systems used in the financial
markets is CHESS, which is used in the share market. To
illustrate what the share market would be like without
CHESS, with CHESS a transaction in the share market
takes four days between the transaction date and the
exchange of funds. Before CHESS the time required was
around 28 days.
Similar systems operate in the debt markets. It is hard
to imagine, but before these clearing systems were
developed the only legal evidence of ownership of a
debt security such as a bond was physical possession of
a paper certificate. These days a record of ownership
details is kept in a register, with the securities
themselves kept in a vault.
THE MORTGAGE BROKING
INDUSTRY
The mortgage broking industry consists of mortgage
brokers ad other participants such as loan providers and
other lenders, and also aggregators.
MORTGAGE BROKERS
Individuals seeking housing finance can deal directly
with an ADI, such as a bank or a building society or,
alternatively, a mortgage broker. If they act wisely, they
“shop around” by comparing the offerings of a few
institutions in order to select a loan that is more
suitable for their purposes. Alternatively, they can use a
3 ASFA, Superannuation Statistics, November 2013.
 5 2. MORTGAGE BROKING
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mortgage broker to go through the selection process for
them.
A mortgage broker helps borrowers by providing expert
information and contacts, by “comparison shopping”
the many loans available in the marketplace on the
borrowers behalf, and by facilitating a smooth
transaction with little hassle to the borrowers. Brokers
usually have access to a wide range of lenders and
products, and should aim to source the best and most
appropriate loan for their clients. A broker looks at the
clients specific needs and circumstances, and should be
able to interpret which type of loan best suits their
clients and why.
Once the loan application has been completed a broker
will then present it to the loan provider in its most
positive light, rather than just seeing whether it meets a
checklist.
LOAN PROVIDERS AND LENDERS
Mortgage brokers are loan facilitators rather than loan
providers. They must approach an ADI, such as a bank,
or another “loan provider”4 to obtain funding for the
borrower.
Loan providers are responsible for:
 packaging and design of home loans;
 final approval of the home loan;
 settlement of the home loan; and
 after sales service of the home loan.
AGGREGATORS
Mortgage brokers need to have access to a wide variety
of lenders and products. While many brokers maintain
direct accreditations with lenders, the major lenders
often have volume and compliance standards that a
broker might have difficulty in achieving by themselves.
For this reason, most brokers use the services of an
aggregator (a wholesaler for the finance industry) in
order to have access to major lenders and maintain
their accreditations. There are over fifty mortgage
aggregators operating in Australia.
Aggregators also provide access to securitised debt.
4 This is the term used in the NCCP Act
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Example - Aggregators
Australia’s first aggregator was Mortgage Choice, which
was established in 1992…
…with a vision of building a national network of ethical,
credible and professional mortgage brokers who local
communities could trust.5
Mortgage Choice currently has over 350 franchises in
Australia and continues to expand its network.
The Use of Securitised Debt
With debt securitisation, individual loans are pooled
together, and debt securities – usually bonds – are
issued to fund the pool of loans. Collateral security is
available to investors in the securities in the form of
individual property mortgages, and because of this the
securities issued in this way to finance residential
mortgages are known as Residential Mortgaged Backed
Securities (RMBS).
Each RMBS issue has a Pool Manager, who is
responsible for ensuring that payments from borrowers
are collected, with investors receiving all interest
payments and principal repayments that are due. Some
of the proceeds from borrowers is also used to pay
premiums for pool insurance which – as a form of
credit enhancement – provides a 100% guarantee of
principal and interest payments. This insurance is
distinct from any Lender’s Mortgage Insurance (LMI)
that the borrowers themselves may be required to take
out.
Use of funding provided by debt securities is not
exclusive to mortgage managers. Building societies,
credit unions and even the major banks have at times
used this form of funding. Its main advantage is always
a lower cost of funding.
Example – Securitised debt issue
Securitised debt issues provided almost one-fifth of
total housing finance before the GFC. The market then
died down because lenders became cautious, but the
market has been said to be coming back to life. In May
2015, Queensland-based Firstmac raised $1 billion
through the sale of residential mortgage-backed
securities. This was the largest RMBS issue since 2008
and was said at the time to be putting the RMBS market
“firmly backed on the map”.6
5 From Mortgage Choice website
6 Source: AFR 15 May 2015.
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Later on you will be reading about the role of The
Australian Prudential Regulatory Authority (APRA) and
the way it is able to regulate residential lending. A
challenge for APRA is that finance raised through RMBS
issues is outside its control. The Reserve Bank has
already observed that the ability of RMBS issues to
circumvent APRA controls is likely to result in
substantial growth in their volume.
OTHER PARTICIPANTS
There are a number of associated professionals
involved in the lending process.
Solicitors and Conveyancers
Conveyancing is the transfer of legal title
of property from one person to another. Commonly
included in conveyancing is the registration and
discharge or mortgages.
In Australia conveyancing is usually completed by
a solicitor or a licensed conveyancer. There are also kits
available if the buyer wishes to complete the process
themselves, but due to the complexity of varying state
and council laws and processes, this is usually not
recommended.
A common conveyance by a solicitor
a solicitor or usually takes 4–6 weeks. Most firms offer
fixed price services that usually include costs
of searches, legal advice and other outlays.
Valuers
Valuations are used to determine the value of a
property or other assets being offered to secure a loan.
Lenders will consider a number of factors to determine
the type of property valuation required. They often
make their own valuation assessment. In other cases,
they will bring in a licensed property valuer to complete
a valuation on their behalf.
To assess a property’s value, a valuer takes into account
individual features of the property, together with
recent comparable sales in the surrounding area and
prevailing market conditions to produce a valuation
report.
A licensed valuer must base their opinion on hard
evidence and take legal responsibility for any
information they provide.
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Land Titles Offices
State and territory land titles offices are responsible for
registering the transfer of property and the discharge of
mortgages.
Once a mortgage has been paid off, the mortgagee (the
lender) prepares a discharge of mortgage. This is an
acknowledgment in writing by the mortgagee that the
obligation (principal and interest) secured by a
mortgagee has been repaid.
Credit Reporting Agencies

Checking the credit history of potential borrowers is
an important part of the lending process.
There are three main credit reporting agencies
operating in the Australian market. These are – in order
of market share – Veda Advantage, Dun and Bradstreet
and the Tasmanian Collection Service.
The major consumer credit reporting agency Australia is
Veda Advantage, which is said to maintain credit data
on more than 14 million individuals in Australia and
New Zealand. It has over 5,000 subscribers from a wide
range of industries, including banking, finance
telecommunications, retail, utilities, trade credit,
government, credit unions and mortgage lenders.
While the major purpose of credit reporting is to
provide information to assist credit providers to assess
applications for credit, credit reporting also may be
seen as serving the associated purpose of facilitating
responsible lending. This is because the information on
individuals provided by credit reporting to credit
providers may help to prevent them becoming
financially overcommitted.
SUPERVISION OF THE AUSTRALIAN
FINANCIAL SYSTEM
THE SUPERVISORY SYSTEM
The two main regulatory bodies in the financial services
sector are:
1. The Australian Prudential Regulation
Authority (APRA)
The Australian Prudential Regulation Authority
(APRA) is the prudential regulator of banks,
insurance companies and superannuation funds,
credit unions, building societies and friendly
societies. In other words, it is the regulator of
financial institutions.
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APRA’s main function is to ensure the soundness of For example, consider the following announcement in
financial institutions. In addition, it is also able to an ASIC press release:
control the direction of institutional lending. This
A Perth-based mortgage broker has been permanently
second function has been dormant in recent, but it
banned from engaging in credit activities after an ASIC
has been recently revived because of concerns that
investigation found that he had falsified a letter stating
purchases by investors were causing a housing
finance approval had been provided for a client.7
price bubble in Sydney.
In that case, the mortgage broker had faked a letter
Example – APRA restricts investment loans from the Commonwealth Bank to arrange a $256,000
loan for a client through a settlement agent.
APRA can enforce its views on lending very simply by
just letting its views be known. Rather than have APRA
In addition, the Australian Competition and Consumer
take more forceful action, the banks and other ADIs
Commission (ACCC) has an economy-wide role to
simply comply.
protect competition. The responsibility for consumer
protection in the financial services sector, however, lies
In December 2014 APRA told the ADIs that it wanted
with ASIC.
the growth in residential investment loans limited to
10% a year. The lending statistics of the first quarter of
Australia’s “twin peaks” supervisory system, consisting
2015 showed this had almost been achieved, with the
of APRA and ASIC, is an outcome of the Wallis
annualised growth rate of residential investment loans
Committee of Financial Inquiry, which published its
for the quarter being just over 20%.
report in 1997. Pre-Wallis, Australia's financial system
was governed by overlapping supervisors; the Reserve
As noted earlier, securitised debt issues are not
Banks supervised banks, with credit unions and building
controlled by APRA because they occur outside the
societies regulated separately. After Wallis, the
financial intermediaries. Mortgage brokers are also not
Australian Prudential Regulation Authority was created,
controlled by ASIC. Consequently the use of securitised
gaining responsibility for all authorised deposit-taking
debt for residential housing loans is likely to be a
institutions - banks, credit unions and building societies.
continuing controversial issue.

2. The Australian Securities and Investments AUSTRALIAN CREDIT LICENSES

Commission (ASIC) Regulation of larger financial institutions such as banks
and insurance companies has been an Australian
The Australian Securities and Investments
government responsibility for many years. In contrast,
Commission (ASIC) is an independent government
regulation of mortgage broking and other forms of
body that enforces and administers Corporations
credit provision was originally a State responsibility.
Law and consumer protection law for investments,
This, however, changed with the passing of the National
life and general insurance, superannuation and
Consumer Credit Protection Act 2009 (“the NCCP Act”),
banking (except lending) throughout Australia. Its
which commenced on 1 July 2010. As well as regulating
purpose is to reduce fraud and unfair practices in
the conduct of credit provision, the NCCP Act created
financial markets and financial products so
requirements that must be met before credit activities
consumers use them confidently and companies
can be made available to the public.
and markets perform effectively.
Under the NCCP Act, participants in credit activities
Example – Action by ASIC against a mortgage must either hold an Australian Credit License or be a
broker “credit representative” of a credit licensee. Participants
for this purpose include companies as well as
APRA may be concerned about the capital adequacy individuals.
and lending direction of financial institutions, but when
it comes to illegal or unethical behaviour it is ASIC that
is concerned.

The legislation provides for fines and jail sentences, but

the action ASIC is most likely to take against mortgage
brokers is a banning order that is effective for either a
limited time or life. 7 ASIC press release, 17 July 2013

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The regulatory authority responsible for the granting of
credit licenses is ASIC. In assessing suitability of
applicants for a license, ASIC considers such matters as
the adequacy of their financial resources, the adequacy
of the systems they have in place to manage their
financial resources, whether the applicant is a “fit and
proper person” to hold a license, and whether they are
likely to act ethically and comply with the credit
legislation.
ASIC has power to suspense or cancel a credit license if
the licensee fails to act ethically or to comply with the
credit legislation.
CREDIT REPRESENTATIVES
Credit licensees may appoint “credit representatives”.
Before a person is appointed, there must be an
adequate background check to ensure that the person
meets the minimum training requirement of a
Certificate IV in Credit Management (effective 30 June
2014) and two years industry-related work experience.
Other appropriate checks include referee reports,
searches of the ASIC register of banned and disqualified
persons, and police checks.
After an appointment is made, licensees are responsible
for the conduct and on-going training of their
representatives.
ASIC does not have to be notified of appointment, so
evidence of appointment of a credit representative
must be must be maintained on file. Also, since ACL
holders are responsible for the training of their credit
representatives, a training register musty be
maintained.
Authorised Credit Representatives
The NCCP Act makes provision for licensees appointing
credit representatives, with the credit representative
being authorised to either engage in the same activities
as the licensee or some of those activities. ASIC must be
notified within 15 days of the appointment.8
If a company is appointed as an authorised
representative, any of its employees acting on its behalf
as credit representatives must be separately authorised
by the licensee as sub-representatives.9 The
requirements regarding internal and external disputes
systems, however, do not apply to sub-representatives.
8
NCCP Act, s. 64
9 NCCP Act, s. 65
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Employee Credit Representatives
Employees and directors of a credit licensee may act as
representatives without formal appointment. However
the same training and conduct supervision
requirements apply, with background checks also being
required.
TRAINING OF CREDIT REPRESENTATIVES
Mortgage broking firms are required to maintain their
resources as a license condition. This includes requiring
their representatives to undertake on-going continuing
professional development (CPD) of at least 20 hours a
year. This covers product and industry developments,
including new regulatory requirements.
As evidence of this, a register of CPD training must be
kept.
ASIC’S DISCIPLINARY POWERS
ASIC has the power to cancel Australian Credit licenses
as well as to ban credit representatives from the
industry, whether they are separately licensed or
representatives of a licensee. The banning may be for a
fixed period or for life.
ASIC is also prepared to institute criminal proceedings
in cases of fraudulent and misleading conduct, such as
deliberately misstating income and expense details on
loan applications. Available penalties include fines
and/or prison sentences.
Example – Predatory lending
Unfortunately, it is not hard to find examples of the sort
of practices that can develop without the ethical
standards which codes of conduct and other guides to
ethical behaviour attempt to promote. An example
follows.
In May 2007, ASIC obtained orders in the Federal Court
against mortgage-broking firm Sample and Partners
following allegations that the firm’s sales techniques
had been misleading and deceptive. While the exact
experience of borrowers varied from case to case, the
following factors were present in the majority of cases:
 borrowers were cold-called about a special
mortgage deal;
 borrowers were told by representatives who visited
their homes that they would save significant
amounts of money and pay off their homes sooner
by refinancing;
 9 2. MORTGAGE BROKING
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 borrowers were told that their loan was specially
chosen for them from a large range of products and
credit providers when in fact very few were
considered;
 promised savings did not eventuate or were
outweighed by the $3,500 fee paid to the mortgage
broker; and
 in many cases the interest rate was higher than the
borrowers’ previous loan.
Many borrowers finished up owing significantly more
than they did before they refinanced. 10
CODES OF CONDUCT
INDUSTRY CODES OF CONDUCT
A feature of the way the Australian financial system is
regulated is that industry associations are encouraged
by ASIC to draw up codes of conduct that can be used
as a guide to legal and ethical behaviour. Once a code of
conduct is drawn up ASIC provides its endorsement by
providing its approval.
The industry associations that draw up the codes of
conduct have minimal disciplinary powers, but the
codes have legal force in that the courts and external
disputes resolution schemes such as the Financial
Ombudsman Service (see below) treat them as being
guides to correct behaviour that are binding on
members and non-members alike.
Two codes of conduct operate in the mortgage broking
industry. They are:
1. The MFFA Code of Practice, which was developed
by the Mortgage and Finance Association of
Australia. The MFAA is a professional industry
association for mortgage and finance brokers,
mortgage managers, lenders, aggregators and a
range of other types of financial service
professionals and providers.
2. The FBAA Code of Practice, which was developed
by the Finance Brokers Association of Australia
(FBAA). The FBAA is a professional industry
association for finance brokers, mortgage brokers
and commercial finance professionals, among other
finance service professionals.
10 From an article by NSW solicitor Karen Cox in issue 7 of Hot
Topics: legal issues in plain language, published by the Legal
Information Access Centre (2010).
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Codes of conduct are public documents that can be
good sources of information for clients. They also
indicate the standard of conduct that members of the
organisation are committed to, so employees and other
industry participants should be aware of these
obligations and make sure that they have proper
knowledge and the required training to respond in the
manner that is expected of them.
The codes of conduct are binding on mortgage brokers,
credit providers and other principals. Under the law
governing principals and agents, they are then
responsible for the acts of their employees (i.e. agents).
An exception applies to sections of codes of conduct
that cover behaviour, which are then binding on all
members, including employees.
An example of the types of conduct that typically
govern all members can be found from the MFAA Code
of Practice:
“4.7 Members must:
(a) act with appropriate skill, care and diligence and
adhere to the reasonable instructions of Customers;
(b) deal with all persons with whom they may come
into contact in the course of their professional and
commercial activities in good faith;
(c) not engage in any acts or omissions of a misleading
or deceptive nature;
(d) not engage in any acts or omissions of a dishonest
or fraudulent nature;
(e) ensure that their advertising is not false,
misleading, deceptive, dishonest or likely to mislead
or deceive;
(f) not engage in unconscionable conduct;
(g) fully disclose any actual, apparent or potential
conflict of interest of which a Member is, or ought
to be, aware to the extent that such a conflict of
interest may reasonably concern a Customer;
(h) act in a professional and courteous manner
towards Customers and fellow Members;
(i) refrain from any conduct which may embarrass,
impugn, or discredit the MFAA or bring the MFAA
into disrepute; and
(a) not engage in unfair conduct.”
Some legal terms, such as “unconscionable conduct”
are explained in the article on compliance obligations.
 10 2. MORTGAGE BROKING
10
COMPANY CODES OF CONDUCT
A recent development is that some individual
companies have introduced their own codes of conduct
to ensure ethical behaviour, not only towards the
public, but also among employees.
The Commonwealth Bank, for example, has a Mortgage
Brokers’ Code of Conduct.
PROCEDURES MANUALS
The NCCP Act requires credit licenses to have systems in
place to ensure compliance with the NCCP Act, other
relevant legislation and the National Consumer Code. It
also requires a written plan that documents the
compliance systems.11 This is commonly referred to as a
Procedures Manual. Procedures Manuals may be
individually prepared. Otherwise they can be bought
off-the shelf.
A Procedures Manual covers a number of issues, such
as human resources, information technology, and
disputes resolution. In fact, there are likely to be around
ten separate topics such as these.
An essential part of a Procedures Manual is the section
on Responsible Lending. This sets out the information
required for an unsuitability test as well as the
documentary evidence that is required to substantiate
that information. This is a matter that will be covered in
the following chapter.
For a Procedures Manual to be effective, regular
compliance checks need to be arranged to ensure that
the required procedures are being followed. It is also
important that a compliance culture should be in place,
with the right example coming from the top of the
organisation. There many examples of companies that
have eventually collapsed because of unethical and
illegal behaviour in spite of detailed codes of conduct
and procedures manuals.
Example – Importance of a compliance
culture
If mortgage broking is to grow as an industry it needs to
have a strong compliance culture. It is unfortunate, but
the exact opposite has been happening among some
main players in the financial planning industry. For
example, consider this quote, which appeared in the
financial press in August 2014:
11 NCCP Act, s.47(1)(k)
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“The misconduct inside Macquarie’s private wealth
division occurred about the same time that Jeff Morris,
a whistleblower inside the Commonwealth Bank’s
financial planning division, approached ASIC warning it
of a ‘‘high-level conspiracy’’ to conceal the ‘‘corruption
and gross incompetence’’ of some of the bank’s star
financial planners, including Don Nguyen.
About the time Morris was hatching a plan to blow the
whistle on the Commonwealth Bank's financial planning
scandal, an internal review at Macquarie in 2008
revealed ‘‘compliance deficiencies’’ within Macquarie
Private Wealth that were so bad that 80 per cent of its
advisers were not up to scratch.”
It is sad that the bad practices, which were endemic as
early as 2008 and known internally by the financial
institutions concerned, remained in place and were
kept concealed for another six years. The consequence
has been a strong loss of consumer confidence and
destruction of brand image.12
If mortgage brokers are to take a larger share of the
home lending market, they will have to keep their
image “clean”.
ETHICAL OBLIGATIONS
Mortgage brokers need to be aware of ethical
obligations of the financial services industry. Most
people who work in the industry have access to a vast
amount of personal and financial information about
their customers. Given the highly personal nature of
this information, it is essential for practitioners to
respect confidentiality and privacy issues, and to
maintain an ethical approach at all times.
Ethics are the principles that govern morality and social
conduct. To act ethically, brokers need to be
accountable and take responsibility for their actions.
They must be trustworthy. They should take due care
with all tasks.
At all times, brokers should act in good faith. This
means they:
 should act honestly and with proper intentions
 should demonstrate integrity and objectivity in
their professional conduct
 must have respect for the law and act accordingly.
12 SMH, 2 August 2014.
 11 2. MORTGAGE BROKING
11
Information about required ethical behaviour can be
obtained from supervisors, colleagues and human
resources officers.
Mortgage brokers should be conversant with the
common ethical issues, and in particular those that
would directly impact on work practices
An ethical approach will be needed when dealing with:
1. Conflict of interest issues
A conflict of interest arises when a person or
organisation has multiple interests and one interest
impacts on the other. An example of a conflict of
interest is where a mortgage broker recommends a
specific financial product because it allows them to
obtain a larger commission, even though the
product is unsuitable for their client. Conflicts of
interest such as this should be avoided altogether.
There may, however, be occasions when a conflict
of interest is unavoidable, for instance when
financial benefits are received from a credit
provider. Nevertheless, it is important that those
who are conflicted (and even those who might be
seen to be conflicted) ensure that their actions are
always transparent, in order to avoid any allegation
of impropriety. This is why mortgage brokers are
required to disclose all fees and commissions
received from credit providers.
2. Duty of care13
There are times when people in the financial
services industry owe a duty of care. This means
that they must take reasonable care to avoid acting
in any way that they can reasonably foresee is likely
to injure a person to whom they owe a duty.
A duty of care is not owed to everyone. The only
people who are owed a duty are those who would
be so closely affected by an action that the person
undertaking the action should have considered
them. For example, a broker might owe a customer
a duty if their negligence results in them tripping
over a piece of carpet. Likewise, they owe a
customer a duty of care if advice that is negligently
provided causes them financial harm.
If a duty of care is breached, any party that suffers
from the breach is entitled to sue the mortgage
broker for damages.
13 The duty of care exists in common (I.e. case) law. For mortgage
brokers it also exists in statute law to the extent that the NCCP
Act requires them not to make a loan that is ‘unsuitable’.
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MB2 – The Australian Financial System PA 010615
Example – Duty of care owed by a mortgage
broker14
In the 2013 NSW Court of Appeal case of Carnemolla v
Adelaide Bank, held in 2013, two brothers who were
property developers sued their mortgage broker after
their bank had taken repossession of their residence,
which had been offered as partial security for a
property development loan.
The court held that a duty of care did exist, but that it
had not been breached because the brothers were
experienced property developers who knew the
consequence of defaulting, and that the loan was in
their best interest.
3. Confidentiality
Much of the information which practitioners in the
financial services industry have access to is highly
confidential. This information must not be
disclosed except in the way that was intended. This
is not only a moral obligation; it is also a legal
requirement.
To comply with the obligation of confidentiality, a
broker should not:
 discuss the finances of a client outside the
workplace; 

 provide details of a customer’s investment to a
person not authorised to receive it ;
and
 allow sensitive correspondence to be viewed
by people without the authority to access it.
To protect the confidentiality of client information
a security system should be in place. This normally
involves having client data stored on an online
system that is encrypted – i.e. data is only available
in suitable form if the correct access code is used.
Access to data should be restricted to authorised
personnel, such as staff using the data for
processing a client application and internal audit
personnel. Physical security should also be in place
to prevent unauthorised access to paper files and
security systems.
 12 2. MORTGAGE BROKING
12
4. Use of organisational property 
 The business is then obliged to respond to the
As part of their work, employees in the financial
services industry have access to organisational
property and resources. Various items and
resources are provided to allow work to be
completed efficiently and effectively. These must
be treated with respect and care, and must only be
used for their intended purpose.
5. 
Intolerance of discrimination 
 satisfactory outcome the disputant can then be take the
Financial services industry employees are expected
to treat people with respect and dignity. They must
never discriminate. They must exercise care to
avoid any behaviour that might be considered
abusive or constitute intimidation or harassment.
They must accept and actively apply the principles
of equal opportunity to ensure that others are not
disadvantaged or treated unfairly. 

complaint. They have five days in which they can
attempt to handle the matter at the point of contact.
After that it must be handed to the IDR scheme. If the
matter is not resolved satisfactorily within 45 days, the
client can than take the matter to the EDR scheme. The
EDR scheme first attempts to gain a successful outcome
through negotiation between the parties, and if that
fails it issues a determination. If that fails to provide a
matter to court.
There is always the alternative of taking the matter to
court at the outset, but that is likely to take longer and
be expensive. A good deal of patience, however, may
be required with some IDR and EDR applications,
particularly when financial compensation is being
sought.

DISPUTES RESOLUTION SCHEMES

The Corporations Act 2001 and the NCCP Act both
require licensees to provide an internal resolution
scheme (IDR) and also be a member of an ASIC-
approved external dispute resolution scheme (EDR).

Two ASIC-approved external dispute resolution

schemes currently operate in the Australian financial
and credit industries. They are:
1. Financial Ombudsman Service Limited (FOS)
2. Credit Ombudsman Service Limited (COSL)

EDR’s are industry-funded but they are independent

and are governed by a board with equal numbers of
consumer and industry representatives. Major
advantages are that they are free to consumers, with a
faster resolution to conflict than is likely to be available
through the court system. Just the same, the consumer
does not have to accept the decision of EDR on a
dispute and can still go to court

Borrowers with a complaint should first attempt to

settle the complaint on the spot. If that fails and they
want to take their complaint further, they should ask
the business for their complaints handling procedure
and then make a formal complain by letter or email.

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