One year on from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Federal Government has released its most significant reform package for the financial services industry.
On 31 January 2020, Treasury released exposure draft legislation to implement 22 of the 76 recommendations from the Royal Commission. Many of these reforms are proposed to come into effect on 1 July 2020, giving industry less than 6 months to implement far-reaching changes spanning product sales processes, distribution channels and governance structures, while grappling with an evolving relationship with ASIC and APRA.
The reforms will add another layer of complexity for the financial services industry on top of the existing complexity and density of financial services law. However, in the currently political and regulatory climate, this trend is unlikely to change in the short to medium term. There is significant pressure on the Government to demonstrate its commitment and ability to deliver on Commissioner Hayne’s recommendations, and with a compressed legislative timetable, we expect that the Government and regulators will press industry to meet new legislative and regulatory requirements with no leniency.
As with all reform, there is opportunity for the financial services industry to develop and transform in line with the new regulatory zeitgeist. We look forward to working with you in maximising these opportunities.
Misconduct and reporting
Treasury has proposed significant reforms to the breach reporting framework, including a new obligation on licensees to lodge a report with ASIC where there are reasonable grounds to believe that a “reportable situation” has arisen.
Enforceable codes provisions
ASIC will be able to designate enforceable provisions in industry codes, and the Minister will be able to introduce regulations to declare that a code will be mandatory.
Financial Regulator Assessment Authority
The new three-member authority will regularly assess APRA and ASIC’s effectiveness and report directly to the Minister. The Secretary of the Treasury be an ex-officio member.
ASIC directions power
ASIC will have a broad range of directions powers to address a contravention where it has reason to suspect that a financial services licensee has engaged, is engaging or will engage in conduct that constitutes a contravention of a financial services law.
No other role or office for RSE trustees
Body corporate RSE licensees must not have a duty to act in the interests of another person, other than a duty that arises in the course of performing duties or exercising powers as a trustee of a RSE, or providing personal advice.
Superannuation Regulator roles
APRA and ASIC will jointly administer provisions of the Superannuation Industry (Supervision) Act 1993 (Cth) that trigger penalty provisions or relate to member outcomes. Superannuation trustee services will be incorporated into ASIC’s Australian financial services licensing regime.
Advice fees in superannuation
The ability to charge advice fees in respect of MySuper products will be significantly curtailed. Advice fees in respect of choice products must comply with the annual renewal requirements for ongoing fee arrangements (where applicable) or with any consent requirements determined by ASIC.
The hawking prohibition in ss 992A and 992AA of the Corporations Act 2001 (Cth) (Corporations Act) will be expanded, with new provisions including a definition of ‘unsolicited contact’.
Financial advice reforms
Ongoing fee arrangements
Ongoing fee arrangements must be renewed annually and financial disclosure statements must be given both prospectively and retrospectively.
Disclosure of lack of independence
In instances where a financial adviser would otherwise contravene s 923A of the Corporations Act, the financial adviser must give clients a written statement in a form prescribed by ASIC disclosing their lack of independence before providing personal advice, and they must include equivalent information in their Financial Services Guide.
Restricting use of the term “Insurance” and “Insurer”
Penalties will apply if the word “insurance” or “insurer” is used in the course or proposed course of business when the product or person is not that thing, and it is likely that the product or person could be mistakenly believed to be that thing.
Deferred sales model for add-on insurance
Under these reforms, add-on insurance can only be sold to retail consumers 4 days after and within 6 weeks of the later of:
- the customer purchasing or entering into a commitment to purchase the principal product; or
- when the required information is given to them.
Cap on vehicle dealer commissions
ASIC may, by legislative instrument, determine caps on commissions for add-on risk products supplied in connection with motor vehicles.
Duty to take reasonable care not to make a misrepresentation to an insurer
The current disclosure regime for eligible contracts of insurance will be expanded to all general and life policies (including group life policies) that are sold to consumers for their personal use.
Limiting avoidance in life insurance contracts
The circumstances in which a life insurer can avoid a contract will be limited.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021