“There are no facts, only interpretations”
— Friedrich Nietzsche, financial services lawyer
Navigating the grey
Some of the most common questions we are asked relate to issues and breaches; what is an issue, when does an issue become a breach and when does a breach become reportable?
The answer is always “it depends”, which may not seem helpful at first, but take comfort in this; each situation is different and with your Compliance Manager’s (or our) help, these questions can be answered and handled appropriately.
Below we will take you through a real life case study and how the law was interpreted to establish whether or not the issue constituted a breach, and whether or not this breach was reportable to ASIC.
Due to a change in staff, 20 Fee Disclosure Statements (FDSs) were not sent to clients within 60 days of their respective anniversary dates.
Administrative staff informed their Responsible Managers as soon as this was discovered and the Responsible Managers were empowered to act swiftly.
Identifying the issue
Failing to deliver an FDS within 60 days of the client’s anniversary date is a breach of section 962G of the Corporations Act, which is a core obligation and civil penalty provision.
Generally, breaches of the civil penalty provisions will be deemed reportable, with a list of these provisions available here.
To be certain that there was nothing to report to ASIC, the Responsible Managers examined the significance tests to check whether or not the breach still needed to be reported to ASIC.
Using significance test 5, the Responsible Managers determined that:
- there were 20 clients impacted (of a database of 500 clients), so the number and frequency of similar breaches is low;
- the breach has not impacted the AFSL’s ability to provide financial services covered by the license;
- the breach does not point to a systemic failure of the adequacy of the AFSL’s arrangements to comply with its obligations.
The AFSL were relieved as it appeared that, while the breach had to be recorded on their Breach Register, it was not reportable to ASIC.
But was it?
What was missed
The failure to issue the FDS itself wasn’t the problem, it was what happened afterward.
Though 962F(3) says that no fee refund is required, we cannot view this in isolation of other parts of the Corporations Act.
The Responsible Managers checked with their staff and yes, fees had been received by the AFSL from Day 61 to the time that the breach was identified for each client.
The reportable situation here is that, because fees were accepted without written consent from the clients, there was a breach of section 962P.
Unfortunately, section 962P is not in the list of exceptions under regulation 7.6.02A, which meant that this breach was indeed a reportable situation and was reported to ASIC in the ASIC Regulatory Portal within the statutory 30 day period.
What can we learn
This reportable situation happened within a well-run AFSL and their team took this situation seriously.
The incident was not in any way a reflection of the quality of the advice they were providing, nor the quality of communication in their team. In fact, had it not been for the effectiveness of their teamwork, the breach may have sat unidentified and un-remediated for far longer than it should have.
What it demonstrates is that even the most compliant businesses can make mistakes, and that this kind of reportable situation could have been easily missed by an adviser or AFSL without enough knowledge and understanding of the applicable laws.
We’ve said it before and we’ll say it again; “measure twice, cut once”.
More often than not, advisers and licensees are doing their best to navigate what is a very complicated regulatory environment and, despite best efforts, they will still make mistakes in interpreting the law.
It’s also important to keep in mind that, while reporting to the regulator can feel intimidating, doing so is critical with regard to complying with the law. That being said, ASIC makes clear in Info Sheet 151 that it is selective about the reasons it chooses the matters that they pursue with enforcement action.
Bringing it all together
Be as organised as possible so that any identified issues can be quickly addressed, remediated and processes put in place to help ensure that these identified issues don’t occur again.
The most compliant AFSLs we deal with are those that are constantly questioning their regulatory framework and foster a culture of open communication that treats issues and breaches as coaching opportunities, rather than a fear-driven blame game.
This is why, in our view, it’s critical that advisers and AFSLs seek appropriate advice if they are uncertain about whether an issue will constitute a breach, and whether or not this breach is reportable to ASIC.
If you have a situation that you are presently concerned about, please reach out to your Compliance Team, or reach out to us at email@example.com