“Take the pressure down
Cause I can feel it, it’s rising like a storm
Take hold of the wheels and turn them around
Take the pressure down”
— Either the Explanatory Memorandum to The Financial Sector Reform (Hayne Royal Commission Response) Act 2020 or (less likely) “Pressure Down” by John Farnham.
The story so far
You’re probably aware that, despite the anti-hawking provisions embedded in the Corporations Act, Commissioner Hayne observed that these provisions neither adequately protected consumers nor effectively reduced misconduct and mis-selling. The Commissioner’s recommendations (3.4 and 4.1) were addressed in the Financial Sector Reform (Hayne Royal Commissions Response) Act 2020.
The reforms, which apply from 5 October 2021, introduce clearer rules (a General Prohibition) against offering, selling or issuing financial products in the course of, or because of, ‘unsolicited contact’ (Hawking) to insurance and superannuation products.
As you have probably realised, the introduction of the General Prohibition should reduce the complexities, and contradictions, that result from the current reality of three separate hawking prohibitions for securities (s736), financial products generally (s992A) and managed investment schemes (s992AA)
These reforms, like the Design and Distribution Obligations and the deferred sales model for add-on insurance, clearly intend to:
- protect consumers from harm;
- reduce inappropriate marketing, high-pressure sales techniques and widespread misconduct; and
- increase consumers’ agency in respect of decisions to purchase financial products.
The General Prohibition
“The hawking prohibition is intended to provide consumers with a degree of control over their decisions to purchase financial products—it allows them to determine how they want to be contacted and the kinds of products they are offered ”
— ASIC RG38 “The Hawking Prohibition”
It’s not easy to provide clarity, and close loopholes, without significant change and without introducing additional complexity and unintended consequences, but these reforms may deliver on their promise.
The introduction of a General Prohibition to underpin all marketing and sales activities directed at retail clients offers a tantalisingly simple solution. It’s not as simple as it at first appears, but should, at least, reduce the compliance and cognitive burden currently imposed on licensees and advisers.
When we talk about the General Prohibition it is this:
a person must not issue, sell, offer, request or invite a retail client to purchase a financial product during the course of, or because of, an unsolicited contact.
The appeal and potential of the general prohibition is obvious even to those oblivious to the work of JRR Tolkein: one prohibition to rule them all (s 736, 992A and 992AA) and in compliance bind them.
However, it’s important to note that the General Prohibition does not apply to:
- wholesale and sophisticated investors;
- contacting existing customers about current financial products (ie products that have not lapsed, been cancelled, terminated or expired);
- making offers of securities or interests in managed investment schemes to current clients who have transacted with you the preceding 12 months;
- any offer for the issue, transfer or sale of listed securities or an interest in a listed MIS made by telephone by a financial services licensee;
- personal advice given to a retail client by an adviser (subject to the best interests and related duties);
- Offers made under eligible employee share schemes and crowd-sourced funding offers;
- Offers of medical indemnity insurance made to a medical or health professional;
- Offers relating to superannuation sub-plan changes, payment splits and movement to members retirement phase; or
- add-on insurance (these offers are subject to different rules)
“‘Unsolicited contact’ is contact by telephone, face-to-face, or any other real- time interaction in the nature of a discussion or conversation to which the consumer did not consent.”
— ASIC RG38 “The Hawking Prohibition”
Let’s start with the general principle: contact is unsolicited contact if it wasn’t requested by the retail client and the contact is made via a medium that creates the reasonable expectation of an immediate response.
So unsolicited telephone calls, face-to-face meetings, video-chat and instant messaging would clearly fall within the definition; while post and faxes would fall outside the definition. But it’s less clear where emails, chatbots and sms fit; their classification would, in our opinion, depend on the context and specific circumstances.
So, how can you demonstrate that contact was solicited, requested or reasonably expected, by your retail client?
- The retail client made a clear, conscious and voluntary request to be contacted about a financial product. If you’re struggling to understand this standard, operationalise FASEA’s expectation of “free, prior and informed consent” as the essential pre-requisite for contact. Can you prove they asked to be contacted AND prove that they understood the consequence of that request. At the risk of offending web-designers everywhere, automatic opt-ins and defaults do not adequately address this requirement.
- The client was given sufficient time, and adequate information, to consider whether, and how they wanted to be contacted. Automatic follow-ups, incentive, time-critical opportunities or high-pressure sales techniques will generally compromise their consent;
- The retail client specified how they wanted to be contacted. You contacted them according to their preferences and did so within six (6) weeks of their request;
- You contacted the client about financial products reasonably within the scope of their consent (and vague consents are unlikely to satisfy point 1);
- They did not, and have not, withdrawn their request to be contacted by you.
Given the Commissioner’s observations about industry practices and consumers’ vulnerabilities, it would not surprise you to learn that any contravention is a strict liability offence.
In addition to maximum penalties of $13,320 per contravention for individuals (and $133,200 for corporations), retail clients also have the right to return products and obtain refunds.
Your call to action
- Train your front-line staff (and marketing team) on these new requirements
- Review your distribution and communication channels to ensure retail clients choose to be contacted (or not contacted).
- Review your communication, marketing and sales channels to assess whether they create an “expectation of an immediate response”.
- Review your measures, processes and procedures.
- Update your compliance framework.
- Review your consent mechanism (form and format).