Keeping on top of the latest financial services regulatory & compliance trends?
Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.
- Compensation scheme of last resort (AFCA): AFCA has reiterated its strong support for creating a compensation scheme of last resort (e.g. where compensation cannot be paid by a firm because of insolvency) in a submission to The Treasury in response to its Discussion Paper released on 20 December 2019 – Implementing Royal Commission Recommendation 7.1 — Establishing a Compensation Scheme of Last Resort. (Consultation closed on 7 February 2020.) Framed in the language you may expect from AFCA, key points are that AFCA wants the scheme to cover financial firms engaged in all forms of regulated financial services, financial advice or financial products; it also wants the scheme to cover managed investment schemes (which is too far in my view; there are plenty of unlicensed MISs); the scheme should cover unpaid determinations made by AFCA from 1 November 2018 onwards; debt management and buy-now pay-later firms should come under AFCA’s jurisdiction (many don’t as they do not hold an AFSL or ACL); the scheme should cover court and tribunal decisions, in addition to AFCA decisions. AFCA considers the scheme should be funded by all financial firms, calibrated to reflect risk and ability to pay. The Government has committed to establishing the scheme by 31 December 2020, with the scheme to then commence accepting claims from 1 July 2021. My personal sense is that AFCA’s wish list goes too far — why should one market segment bear the significant costs of shielding consumers from their competitors’ misconduct/insolvency in such a broad fashion? It is otherwise a timely reminder of how important AFCA is becoming though; don’t forget it has the power to report ‘systemic’ issues to ASIC and will have a remediation power in due course. (Which makes it a quasi-regulator in my view, whatever AFCA may say to the contrary.)
- ASIC v. AMP (Court): Lee J has delivered his decision in Australian Securities & Investments Commission v AMP Financial Planning Pty Ltd (No 2)  FCA 69, finding that AMP failed to take ‘reasonable steps’ to ensure its financial planners complied with their ‘best interests’ duty and related obligations under the Corporations Act 2001 (Cth). ASIC had alleged AMP’s financial planners engaged in ‘churning’ — cancelling existing policies and taking out similar ones, which had the effect of the planners receiving increased commissions than they would have if they had simply transferred the policies. On AMP becoming aware of one adviser taking this course of conduct, Lee J determined it was necessary for AMP to investigate the issue and he found that ‘the lack of a prompt response to the…conduct was the result of passivity and inaction following identified misconduct in contravention of the relevant best interests obligations.’ His Honour found there was a total of six contraventions of section 961L of the Corporations Act 2001 (Cth) — which require licensees to take reasonable steps to ensure that their representatives of the licensee comply with their duties — and imposed a penalty of $5.175M while stating ‘this penalty proceeding reflects a lamentable failure of corporate will to take the necessary steps to prevent greedy and unlawful conduct taking place, and a further failure to adopt a swift and proper remedial response’. I think there are two important things to note; first, the existing and new laws (e.g. the new mortgage brokers legislation — see 5 below) requiring licensees to take ‘reasonable steps’ to supervise their representatives are going to be a focus area in the years to come. Second, AMP admitted liability. This case is important, but I do not think seminal. Time will tell.
- Financial reports (ASIC): ASIC has announced the results from its review of the 30 June 2019 full-year financial reports of 200 entities. It has made inquiries of 47 entities on 80 matters. The largest number of inquiries continue to relate to impairment of non-financial assets and inappropriate accounting treatments. ASIC has said that its work highlights the need to focus on the newer accounting standards that can materially affect reported assets, liabilities and profits (see here: Financial reporting focuses for 31 December 2019 (19–341MR)). ASIC publicly announces when a company makes material changes to information previously provided to the market following its inquiries. I think that is a good thing, as it puts directors and auditors of other companies on notice of ASIC’s concerns so they can avoid similar issues.
- Open Banking (ACCC): one of the big matters on banks’ minds this year, the ACCC has just released the Competition and Consumer (Consumer Data Right) Rules. They came into effect on 6 February 2020. The Rules require the four major banks to share product reference data, such as interest rates, fees and charges, and eligibility criteria, with accredited data recipients. The consumer data sharing obligations become mandatory from 1 July 2020 for credit and debit cards, deposit accounts and transaction accounts. They become mandatory from 1 November 2020 for mortgage and personal loan data. My top read of the week is Division 1.2 of the Rules, which provides a simplified outline of how the CDR works and is a welcome addition to what has the potential to be a complicated regime. In particular, given the matching with other regimes that needs to occur e.g. FAR.
- Mortgage brokers (Legislation): on 6 February 2020, the Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers (2019 Measures) Bill 2019 (Bill) passed in Parliament. The Bill imposes an obligation on mortgage broker licence holders and their credit representatives to act in the ‘best interests’ of consumers when giving credit assistance in relation to credit contracts; ss. 158LA and 158LE of the Bill. If the mortgage broker licensee knows, or reasonably ought to know, that there is a conflict between the interests of the consumer and the interests of the mortgage broker licensee, their associate or a representative or an associate of a representative of the licensee, then the licensee must give priority to the consumer’s interests when giving the credit assistance; s. 158LB of the Bill. A similar broad conflicts of interest provision is placed on the credit representatives; s.158LF of the Bill. In addition, as is the case for financial adviser licencees, mortgage broker licensees must take ‘reasonable steps’ to ensure that their credit representatives comply with their obligations; s. 158LE(2) of the Bill. The other major limb of the BIll is that it prohibits mortgage broker licensees, credit intermediaries, and credit representatives of those entities from accepting ‘conflicted remuneration’; ss. 158NB and 158NC of the Bill. There is a definition of conflicted remuneration under S. 158N of the Bill, which the Senate’s Scrutiny of Bill Committee asked for more guidance on in December 2019; that was rejected by The Treasury, which wants to leave the detail to regulations. Each of these new laws come with penalties of up to $1.05M for breaches and will come into effect by 1 July 2020. Mortgage broker licensees have a lot of work to do before then in setting up appropriate risk frameworks / auditing their incentives structures.
Thought for the future: I wrote last week about The Treasury’s release 15 serious consultation papers late on a Friday. Revisiting the one on breach reporting, which creates a new breach reporting regime for ASFLs and ACL, matters that may need to be reported to ASIC are now to be referred to as ‘reportable situations’ and split between ‘core’ and ‘non-core’ reportable situations. A core reportable situation will arise where the licensee or its representative has breached or is likely to breach a ‘core obligation’ or the licensee has commenced an investigation into whether the licensee or its representative has breached a core obligation and, in either case, the breach or likely breach is ‘significant’.
My sense is that the proposed exposure draft legislation is much more prescriptive than the existing breach reporting regime and arguably goes too far. For example, it states that a breach or likely breach of a ‘core obligation’ needs to be taken as ‘significant’ where the breach constitutes a contravention of civil penalty provision. There are a vast number of civil penalty provisions in the NCCP and CA, for example failure by a mortgage broker licensee to provide a compliant credit proposal disclosure document under s. 121 of the NCCP. This will mean a lot more breach reports will be received by ASIC if the exposure draft stays in its current form. Another example is with respect to when the reporting actually needs to occur; as set out under 2.133 of the Explanatory Memorandum, there will be an obligation to lodge a report with ASIC upon the commencement of an investigation and at the end of an investigation. A report must be lodged within 30 calendar days after the credit licensee first reasonably knows there are reasonable grounds to believe the reportable situation has arisen. My take-away is that, if the legislation stays in its current form, it will create a lot more work for compliance / legal departments and ASIC will get swamped with much more information and probably a lot of low-level stuff. I am not sure that is in anyone’s interest…
Do you think I overlooked something or would like more information? If so, please send me a message!
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)