The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020 contains 24 separate measures relating to financial service licensees and credit licensees as well as financial advisers, mortgage brokers, insurers and superannuation licensees.
For the purpose of consultation the Bill has been divided into 14 parts.
Parts of the Bill will commence after Royal Assent, other parts will be delayed until July 2020 and other parts until April 2021.
UPDATE May 2020: amended timetable.
Breach reporting by financial service licensees and credit licensees
The Bill expands the situations that need to be reported to ASIC by financial services licensees, including:
– investigations about whether a specified breach or likely breach has occurred or will occur, and outcomes of those investigations;
– conduct constituting gross negligence or serious fraud (to the extent this conduct was not previously considered a breach of the financial services law); and
– where there are reasonable grounds to suspect that a reportable situation has arisen in relation to a financial adviser operating under another licence
The test for when a breach or likely breach is significant will include objectively determinable criteria. These criteria are in addition to the existing subjective significance test.
Licensees must report matters to ASIC within 30 calendar days after the licensee reasonably knows the matter has arisen. Outcomes of investigations will need to be reported within 10 calendar days.
The Bill amends the Credit Act to introduce a comparable breach reporting regime for Australian credit licensees.
It also introduces requirements on credit licensees to report serious compliance concerns about mortgage brokers.
The new reporting obligations in the Credit Act apply to all reportable situations arising on or after 1 April 2021.
Reference checking and information sharing protocol in relation to financial advisors and mortgage brokers
The Bill will require Australian financial services licensees and Australian credit licensees, as a condition of their licence, to comply with a reference checking and information sharing protocol in relation to financial advisors and mortgage brokers to undertake reference checking and information sharing regarding a former, current or prospective employee. This will be modelled on the existing ABA Reference Checking Protocol.
The amendments will apply from 1 April 2021 to a representative appointed on and after 1 April 2021. The obligation to share information about representatives will apply to a request for information made on and after 1 April 2021.
The Bill creates a civil penalty for non-compliance with the obligation.
Notifying clients of suspected misconduct
In addition to the current law, the Bill makes Australian financial services licensees and Australian credit licensees subject to a specific obligation to notify clients of suspected misconduct, conduct investigations into suspected misconduct, and remediate affected clients.
The obligation to investigate and remediate misconduct will apply from 1 April 2021.
Enforceability of financial services industry codes
The Bill provides that a court may impose a penalty if a declaration has been made that an enforceable code of conduct provision has been breached and there is a contravention of the obligation to comply with that enforceable code provision.
The penalty is an amount of up to 300 penalty units, currently equivalent to a total of $63,000.
Ongoing fee arrangements and disclosure of lack of independence
The Bill will insert new specific obligations in the Corporations Act 2001 (Corporations Act) in relation to fee recipients (a financial services licensee or authorised representative) providing personal financial product advice to retail clients under ongoing fee arrangements. There will also be new record-keeping requirements.
The Bill will require a financial services licensee and their authorised representative who are authorised to provide personal advice to a retail client to disclose in writing to the client where they are not independent and why that is so.
Trustees of Registrable Superannuation Entities (RSE) should hold no other role or office
The Bill will prohibit superannuation trustees from having duties other than those arising from or in the course of the performance of its duties as a trustee of a superannuation fund.
Advice fees in superannuation
The Bill will remove a superannuation trustee’s capacity to charge advice fees from MySuper products. Superannuation trustees would still be permitted to charge fees in relation to intra-fund advice as administration fees.
The Bill will remove the capacity of a superannuation trustee to charge advice fees to a member (other than fees for intra-fund advice) unless certain conditions are satisfied. For ongoing fee arrangements, the new conditions would include annual renewal, identification of services that will be provided and consent to the charging of fees.
No hawking of superannuation and insurance products
The Bill prohibits the hawking of superannuation products as well as the hawking of insurance products.
It also contains a new general prohibition of offers to sell or issue financial products which are made in the course of, or because of, unsolicited contact. The general prohibition will apply to all kinds of financial products, including securities and interests in managed investment schemes, except in certain circumstances.
The new law will commence on 1 July 2020.
Superannuation regulator roles
The Bill changes APRA’s and ASIC’s roles in relation to superannuation to accord with the principles that APRA is the prudential regulator and ASIC the conduct and disclosure regulator.
ASIC will have joint responsibility with ASIC for enforceable provisions in the SIS Act which relate to consumer protection.
In addition, the coverage of the Australian financial services licensing regime in superannuation will be extended. This will ensure ASIC has access to appropriate powers and enforcement tools, and can successfully perform its role as superannuation conduct regulator under the recommendations above.
APRA’s role is unchanged. APRA remains responsible for prudential and member outcomes regulation in superannuation.
Restricting use of the term ‘Insurance’ and ‘Insurer’
The Bill makes it a strict liability offence for a business to describe a product or service that they offer as insurance, if the product or service is not insurance, in circumstances where it is likely that the product or service could mistakenly be believed to be insurance.
The Bill also creates two new strict liability offences, one offence relating to the use of the term ‘insurance’ and another separate offence relating to the use of the term ‘insurer’.
Deferred sales model for add-on insurance
The Bill makes is an offence to sell an add-on insurance product before the end of the add-on insurance deferral period.
An add-on insurance product is a financial product that:
• is offered or sold to a consumer in connection with the consumer entering into a commitment to acquire a product or service;
• is offered or sold by the person who sold the principal product or service or by a third party with an arrangement with the person who sold the principal product or service which covers the add-on insurance product;
• manages financial risk related to the principal product or service; and
• is either a contract of insurance or a benefit under a contract of insurance.
The add-on insurance deferral period begins at the later of:
• the time when the consumer enters into a commitment to acquire, or acquires, the principal product or service to which the add-on insurance product relates; or
• the time when the consumer is given the information prescribed by ASIC relating to the add-on insurance product.
The add-on insurance deferral period ends four days after the day it begins. The four day deferral period provides the consumer an opportunity to consider the suitability of the add-on insurance product being offered and alternative products, while reducing the likelihood of the consumer disengaging entirely from the decision about whether to purchase the add-on insurance product.
For add-on insurance products, the deferred sales model will replace the anti-hawking obligations. Broadly, this means that providers of insurance will be subject to either the deferred sales model or the anti-hawking obligations, but not both at the same time. In circumstances where there are no requirements under the deferred sales model, or an exemption from the deferred sales model applies, the anti-hawking obligations will apply.
Cap on vehicle dealer sale or lease commissions
The Bill permits ASIC to determine a cap on the amount of commissions that can be paid in relation to add-on risk products sold in connection with the sale or long-term lease of a motor vehicle.
An offence is created for providing or receiving commissions in connection with the supply of add-on risk products that are provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle.
An offence is committed if the commission exceeds the cap determined by ASIC for that add-on risk product.
Duty to take reasonable care not to make a misrepresentation to an insurer
The Bill creates a duty by an insured to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts. The changes ensure that obligations for disclosure applied to consumers do not enable insurers to unduly reject the payment of legitimate claims.
Limiting avoidance of life insurance contracts
The Bill amends the Insurance Contracts Act so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.
The draft Bill seeks to strengthen consumer protection by including the extra condition for life insurers and prevent the insurer from inappropriately cancelling a contract in circumstances where the life insurer would still provide coverage.
Financial Regulator Assessment Authority
The Bill establishes an independent assessment authority to review the effectiveness of APRA and ASIC, and report on its findings to the Minister.
ASIC directions power
The Bill gives ASIC power to give directions to AFS licensees and credit licensees in order to prevent or address suspected breaches of financial services law or credit legislation.
The Bill provides a non-exhaustive list of directions that ASIC may give to AFS licensees or credit licensees. As the list of directions is non-exhaustive, ASIC are not limited by the list as to the substance of the directions they give. The list is however indicative of the kinds of directions that could be used by ASIC under the new law.
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.