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Is your bank legally bound to offer advice in your best interests?

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We put a lot of faith in the institutions that help us throughout life: our schooling and teachers, our government, our emergency services, and even our banking system. We trust that they've got our best interests at heart, and that they'll put our needs first when offering guidance. But is this readily true when it comes to our banks? Do they really act by advising us in our best interests - and are they even legally bound to?

The short answer is: no. Banks and lenders are not legally required to offer you advice that is in your best interest. 

But before you get alarmed, let's dig a little further into what this really means for you. 

Banks and your best interests

When you approach a financial institution and apply for a loan product, whether it's a bank loan for a property, a personal loan for a car, a credit card or even just a standard savings account, that particular bank or lender will provide advice around the products that THEY offer. 

For instance: if they offer a standard variable home loan with an interest rate of 3.75% then that is the product they might suggest for you. If the bank down the street - their competitor - offers a virtually identical loan for 3.4%, they're not going to alert you to this fact, are they?!

Technically, they're giving you the best of their best - but it might not be the best solution for your overall. 

That is why it's so important to do your own research, by comparing different rates and products from different lenders, before you lock in anything concrete with a bank. 

Or, even better: instead of going direct to a bank, where you're dealing with an employee who may have limited knowledge, limited industry experience and limited products to offer you (and who doesn't legally need to consider your best interests), seek out the advice of an experienced mortgage broker. 

Unlike banks and lenders, mortgage brokers are legally bound to act in your best interests

This is true even if doing so negatively impacts the broker personally - so, if Loan A pays a higher commission than Loan B, but it would results in a poorer outcome for the borrower, the broker must legally suggest Loan B. 

What's more, after the Royal Commission into financial services last year, a bill known as the Best Interests Duty Bill began undergoing some updates that outlined the role brokers would be required ti play when assisting borrowers. 

The changes in the broker's duty bill comes into effect on the 1st of July 2020, and they will be highly favourable towards loan customers. The bill updates contain several new elements, including:

  • Brokers must "give priority to consumers in providing credit assistance in relation to credit contracts", in the instance that a conflict of interest is uncovered.
  • Brokers and intermediaries "must not accept conflicted remuneration... that could reasonably be expected to influence the credit assistance provided, or could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary."
  • Conflicted remuneration must not be given by mortgage intermediaries, employers and credit providers to mortgage brokers/intermediaries. 

What does this mean for you?

In a nutshell, it means that the banking sector is about to become a whole lore more service-oriented. The truth is, reputable and professional mortgage brokers have been acting like this already - but this shake up is going to force the industry as a whole to become more competitive, professional and focused on delivering strong service. 

While banks may not be legally bound to offer products that suit your best interests, they're not 'the bad guy': it's important to recognise the roles that are played in this industry. 

One way to think about it is to consider bankers as salespeople; they have a quota of products to sell, and they will match you as best they can to their products. Mortgage brokers, on the other hand, are an independent third party who can review a range of product options and ultimately, provide you with the best possible outcome for your personal situation. 

 

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation or needs before making any decisions based on this information. 

Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.