Think tank urges AFSL requirement for property advisers, calls for stricter mortgage broker scrutiny

In its submission to the Senate economics references committee on home ownership, the Consumer Policy Research Centre (CPRC) – a representative of consumer groups – has asked the federal government to require anyone providing property investment advice to hold an Australian Financial Services Licence.

The group argues that in order to stop “risky property lending advice”, the recommendations from the 2016 Scrutiny of Financial Advice Inquiry relating to property advice should be adopted.

Among them is the recommendation to make the regulation of property investment advice a Commonwealth responsibility, and insert a definition of property investment advice into the Corporations Act and the Australian Securities and Investments Commission Act.

“There is a well-known gap in consumer and financial system protections – there are no protections to guard against poor quality property investment advice,” the CPRC said.

“Australia has, rightly, introduced strong and clear protections to ensure that financial advisers need to provide recommendations in the best interests of their clients. These protections do not cover situations where someone is seeking to invest in real estate – they only apply to financial products such as shares,” it continued.

According to the CPRC, the gap arises with the issue falling “neatly” between the responsibility of the federal and state governments, namely while the federal government regulates financial services markets, the state and territory governments regulate property transactions.

“Advice on property transactions has not been addressed, leaving investors at the mercy of an unregulated sector that can push people into poor investments counter to their interests, including known high-risk investments like land banking,” it said.

“This inquiry should consider the ongoing risks that investors and the people who live in investment properties face because of this regulatory gap,” it added.

The CPRC also raised concerns regarding remuneration structures that “lead to professionals recommending inappropriate loans”.

The group argued that despite efforts to address conflicted remuneration in financial services, recent moves by major banks to revert to sales-based bonuses and allegedly untested compliance in the mortgage broking sector raise concerns about self-regulation.

“In 2024, major banks have stepped away from their commitments to curb conflicted remuneration in lending. Major change has come from Commonwealth Bank (CBA), which has changed how it structures bonuses to preference sales results. Westpac and NAB quickly followed CBA’s lead. This shows that banks cannot be trusted to self-regulate conflicted remuneration,” the CPRC said.

"Like with financial advice, limits on conflicted remuneration should be formalised in legislation rather than left for reversible industry commitments.”

It added that the other source of potential harmful lending advice can come from the mortgage broking sector, arguing that ASIC should be directed or undertake new research into mortgage broker remuneration and the quality of recommendations from brokers.

“With mortgage brokers now arranging most loans in the home lending market, regulators need to test if legal protections are working and if brokers are helping or harming competition in the market in 2024,” it said.