“Long as you keep ‘em way off balance
How can they spot you’ve got no talents”
— “Razzle Dazzle”, Fred Ebb / John Kander
14 New and/or improved obligations
On 31 January 2020, the Government released an extensive package of Exposure Draft Bills relating to the final set of Royal Commission related reform measures.
We made a submission in relation to some of those exposure drafts but, in the intervening period, there’s been no response from the Treasury either about the submissions they received or their proposed response to that feedback.
Instead, last week the government gave us the old double-whammy and, without any further consultation, introduced legislation to implement those recommendations.
A review of the legislation versus what was Treasury consulted on, shows some anomalies; deletions (i.e. ongoing fee arrangements; disclosure; advice fees in superannuation and financial regulator assessment authority) and additions (i.e. statutory obligation to cooperate; formalising ASIC meeting procedures and claims handling).
Some of you might be asking at this point, but why weren’t we consulted on the changes?
Rest assured that the interests of advisers and independent licensees were directly addressed through the government’s close collaboration with the big banks. As I think we can all agree, the big banks are the best possible representatives of the emerging advice profession.
After all, they may not hold the hose, but who better to consult with on the Royal Commission’s recommendations than those that made the Commission necessary?
So, let’s delve into the detail, because as we all know, there’s nothing better than a three-ring circus.
The old flim flam flummox
Enforceable code provisions (recommendation 1.15)
COMMENCING 1 JULY 2021
- No change ASIC may approve voluntary industry codes of conduct.
- No change ASIC may vary or revoke an approved voluntary code of conduct.
- Amended ASIC may issue an infringement notice if it believes on reasonable grounds that a person has contravened an enforceable code provision in an approved code of conduct or a civil penalty provision in a mandatory code of conduct.
- New ASIC may designate one or more provisions of a voluntary code of conduct as enforceable code provisions if ASIC considers that it satisfies specific criteria.
- New Regulations may prescribe further criteria of which ASIC must be satisfied or have regard to, before designating a provision of a voluntary code of conduct as an enforceable code provision.
- New Regulations may prescribe a mandatory code of conduct.
- New Regulations may prescribe a penalty not exceeding 1,000 penalty units for contravention of a mandatory code provision.
- New The applicant in relation to a voluntary code of conduct must ensure that an independent review of the approved code is undertaken every five years.
- New A subscriber to a voluntary code of conduct may be subject to a penalty of up to 300 penalty units for breach of an enforceable code provision.
Insurer avoidance of life insurance contracts, and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5)
WILL APPLY TO ANY LIFE INSURANCE CONTRACT FROM 1 JANUARY 2021
- Amended An insurance contract, including a life insurance contract, will be a consumer insurance contract if:
– the insurance is obtained wholly or predominantly for the personal, domestic or household purposes of the insured; or
– the contract is for new business and, before the contract is entered into, the insurer gives the insured a written notice stating that the contract is a consumer insurance contract.
- Amended The insured has a duty to take reasonable care not to make a misrepresentation to the insurer on entering into a consumer insurance contract.
For other contracts of insurance:
– the insured’s duty to disclose all matters that they know to be relevant to the insurer’s decision and all matters that a reasonable person in the circumstances could be expected to know continues to apply; and
– the insured’s duty not to make a misrepresentation during the negotiations for a contract before it is entered into continues to apply.
- Amended The remedies available to an insurer in Division 3 of Part IV of the Insurance Contracts Act may apply if:
– upon entering into a consumer insurance contract, an insured has failed to comply with the duty to take reasonable care not to make a misrepresentation; or
– upon entering into a non‑consumer insurance contract, an insured has:
o failed to comply with the duty of disclosure; or
o has made a misrepresentation.
- Amended If, under a contract of life insurance, there is a relevant failure by the insured and the relevant failure was not fraudulent, the insurer may avoid the contract only if they can show that, had the relevant failure not occurred, they would not have entered into a contract of life insurance with the insured on any terms. In these circumstances, the insurer may only avoid the contract within three years of entering into it.
Deferred sales model for add-on insurance and the Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (recommendation 4.3)
COMMENCES 5 OCTOBER 2021
- Amended If either the principal provider or a third party provider is contacted by the customer during the add-on insurance deferral period, either provider may respond to the customer’s inquiry using any method of communication, as long as the response relates only to the purpose for which the customer initiated the contact.
- Amended If either the principal provider or a third party provider is contacted by the customer after the end of the add‑on insurance deferral period but before six weeks after the beginning of the add-on insurance deferral period, either provider may respond to the customer’s inquiry using any method of communication.
- Amended The principal provider commits an offence if they offer, request or invite the customer to purchase or apply for an add-on insurance product after the customer informs them that they no longer want to receive offers, requests or invitations to apply for or purchase the add-on insurance product.
- Amended A third party provider commits an offence if they offer, request or invite the customer to purchase or apply for an add-on insurance product after the customer informs the principal provider that they do not want to receive offers, requests or invitations to apply for or purchase the add-on insurance product.
- New It is an offence to sell an add-on insurance product before the end of the add-on insurance deferral period.
- New An add-on insurance product may be sold to the customer after the end of the add-on insurance deferral period.
- New It is an offence for the principal provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product during the add-on insurance deferral period, other than in writing.
- New It is an offence for a third-party provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product during the add-on insurance deferral period, other than in writing.
- New It is an offence for the principal provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product between the end of the add‑on insurance deferral period and six weeks after the beginning of the add-on insurance deferral period, other than in writing.
Caps on commissions (recommendation 4.4)
COMMENCES 1 JANUARY 2021
- New ASIC may determine a cap on the amount of commission 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.
- New It is a criminal offence, civil penalty and offence of strict liability for a person (other than a consumer) to pay or receive a commission in relation to an add-on risk product that exceeds the cap determined by ASIC for that product.
- New Where commissions are paid in excess of the cap, consumers may recover the entire amount of the commission.
Hawking of financial products (recommendations 3.4 and 4.1)
COMMENCES 5 OCTOBER 2021
- Amended The new law prohibits offers to sell or issue financial products to a retail client in the course of, or because of, unsolicited contact.
- Amended This includes offers to sell or issue interests in a managed investment scheme.
- Amended Requests or invitations to a retail client to ask for or apply for a financial product or to purchase a financial product are prohibited.
- Amended The new law establishes a general prohibition that applies to the hawking of all financial products.
- New Unsolicited contact is contact to which the consumer did not consent which is made by telephone call, face‑to‑face meetings, or any other real-time interaction in the nature of a discussion or conversation.
Use of terms “insurance” and “insurer” (additional commitment in response to recommendation 4.2)
COMMENCES 1 JANUARY 2021
- New It is a strict liability offence for a person to use the term ‘insurance’ to describe a product or service the person offers 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.
- New It is a strict liability offence for a person to use the term ‘insurer’ to describe themselves if the person could mistakenly be believed to offer insurance and either the product is not insurance or the person is not appropriately registered or authorised under the:
– Insurance Act 1973;
– Life Insurance Act 1995; or
– Private Health Insurance (Prudential Supervision) Act 2015.
Trustees of registrable superannuation entities should have no other duty (recommendation 3.1)
COMMENCES 1 JULY 2021
- New A body corporate superannuation trustee cannot, as a condition on its license, have a duty to act in the interests of another person, except in the course of:
– performing its duties and exercising its powers as superannuation trustee; or
– providing personal advice.
Adjustment of APRA and ASIC’s roles in superannuation (recommendations 3.8, 6.3, 6.4 and 6.5)
COMMENCES 1 JANUARY 2021
- Amended Section 6 of the SIS Act and related provisions are modernised and simplified. The general administration of a provision of the SIS Act is now determined under the general administration table.
- Amended An RSE licensee must also hold an Australian financial services licence to provide a superannuation trustee service, which covers the operation of a registrable superannuation entity as trustee.
- Amended The ASIC Act consumer protections also apply to the provision of a superannuation trustee service (other than for self-managed superannuation fund trustees).
- Amended ASIC must also obtain APRA’s agreement before cancelling an RSE licensee’s Australian financial services licence, imposing certain conditions on an RSE licensee’s Australian financial services licence, or making certain banning orders against an RSE licensee.
- Amended Superannuation trustees and trustee directors cannot use trust assets to pay a criminal, civil or administrative penalty incurred in relation to a breach of Commonwealth law in circumstances where the breach did not previously warrant disentitlement based on the principles in section 56.
- New ASIC’s role in superannuation is expanded to include protecting consumers from harm and market misconduct. ASIC is now generally responsible for consumer protection, market integrity, disclosure and the keeping of reports.
- New APRA and ASIC share general administration of SIS Act provisions which have consumer protection and member outcomes as their touchstone. These co-regulated provisions are either civil penalty provisions or provisions that are otherwise enforceable.
Reference Checking and Information Sharing Protocol (recommendations 1.6 and 2.7)
COMMENCES 1 OCTOBER 2021
- Amended Australian financial services licensees and Australian credit licensees are subject to:
– the existing general obligations under section 912A of the Corporations Act and section 47 of the Credit Act; and
– a specific obligation to undertake reference checking and information sharing regarding a former, current or prospective representative.
- New ASIC may make legislative instruments under the Corporations Act and the Credit Act setting out the detail of the reference checking and information sharing obligation.
- New Australian financial services licensees and Australian credit licensees who fail to undertake reference checking and information sharing regarding a prospective representative are subject to a civil penalty.
- New Australian financial services licensees and Australian credit licensees have a defence of qualified privilege against a defamation action or a breach of confidence action resulting from information shared as part of the obligation.
Breach reporting and remediation (recommendations 1.6, 2.8 and 7.2)
COMMENCES 1 OCTOBER 2021
- Amended Financial services licensees must lodge reports about reportable situations to ASIC. This includes breaches and likely breaches that are significant, and investigations into whether there has been or will be a significant breach of a core obligation (if the investigation continues for more than 30 calendar days) and the outcomes of those investigations.
- Amended There are two separate tests for when a breach is significant. The first test deems specified breaches to be significant, and the second test, which is based on the existing significance test, determines whether a breach is significant based on a number of listed factors.
- Amended Financial services licensees must lodge reports about reportable situations to ASIC within 30 calendar days after the licensee first knows, or is reckless with respect to whether there are reasonable grounds to believe, the situation has arisen.
- New Financial services licensees need to report serious compliance concerns about financial advisers engaged by another financial services licensee to ASIC and to the other licensee.
- New Reports must be lodged in the form prescribed by ASIC.
- New ASIC must publish data on breach reports lodged by licensees.
- New Credit licensees will be subject to a breach reporting regime that is comparable to the new regime for financial services licensees.
- New Credit licensees need to report serious compliance concerns about other mortgage brokers to ASIC and the licensee responsible for the mortgage broker.
Investigating and remediating misconduct (recommendations 1.6 and 2.9)
COMMENCES 1 OCTOBER 2021
- Amended In addition to the current law, Australian financial services licensees and Australian credit licensees are subject to a specific obligation to notify clients of misconduct, conduct investigations, and remediate affected clients.
- New Australian financial services licensees and Australian credit licensees are required to maintain records to show compliance with the obligation to notify, investigate and remediate misconduct.
- New Australian financial services licensees and Australian credit licences who fail to comply with the obligation to notify, investigate and remediate misconduct are subject to civil penalties.
- New Australian financial services licensees who fail to maintain records to show compliance with the obligation to notify, investigate and remediate misconduct are subject to a criminal penalties.
Statutory obligation to cooperate (recommendation 6.9)
COMMENCES 1 JANUARY 2021
- Amended APRA and ASIC are required to cooperate with each other in the performance of their functions and powers, so far as is practicable.
- Amended In addition to having the discretion to share information and documents, APRA and ASIC are required to comply with a request in writing for information and documents from each other unless the Chair of APRA or Chairperson of ASIC of the relevant regulator, formally refuses in writing.
- Amended APRA and ASIC are required to notify each other of material breaches in respect of which the other regulator has enforcement responsibilities.
Formalising ASIC meeting procedures (recommendation 6.11)
COMMENCES 1 JANUARY 2021
- Amended ASIC must hold meetings that are necessary for the efficient performance and exercise of its functions and powers.
- Amended The person presiding at a meeting has a deliberative vote, and if necessary, also a casting vote.
- New If determined by ASIC, resolutions may be passed without a meeting where a majority of members indicate agreement in accordance with the method determined by ASIC and that majority would have constituted a quorum.
Claims handling and settling services (recommendation 4.8)
COMMENCES 1 JANUARY 2021
- New The following people who provide claims handling services must hold an Australian financial services licence covering claims handling or be authorised by another person with an Australian financial services licence covering claims handling:
– certain tradespeople;
– insurance claims managers;
– certain insurance brokers; and
– certain financial advisers.
- New Australian financial services licensees with licences covering claims handling must comply with the general obligations in section 912A of the Corporations Act, including the obligation to ensure:
– claims are handled efficiently, honestly and fairly;
– their representatives are adequately trained and competent to provide claims handling services; and
– they have a compliant internal despite resolution process and be a member of AFCA if they provide claims handling services to retail clients.
- New Australian financial services licensees who offer to settle a general insurance claim using a cash payment must provide the consumer with a Cash Settlement Fact Sheet if the consumer is a retail client.
- New People representing a consumer to pursue a claim must hold an Australian financial services licence covering claims handling if they obtain a benefit for that service.
- New If the consumer is a retail client, the licensee must have a compliant internal dispute resolution system, be a member of AFCA and give a Financial Services Guide to the consumer.
Ongoing fee arrangements and disclosure of lack of independence (Recommendations 2.1 and 2.2)
- Fee recipients are required to seek renewal of ongoing fee arrangements by clients annually.
- Fee disclosure statements will include information on the fees to be charged and services to be provided in the coming year, as well as information about the previous year.
- Written consent must be obtained prior to fees being deducted under an ongoing fee arrangement and consent generally cannot be obtained for a period of more than 12 months. Fee recipients must obtain written consent to continue an ongoing fee arrangement annually.
Advice fees in superannuation (Recommendations 3.2 and 3.3)
- The general fee rules prohibit a trustee from charging a member fees for advice provided to that member (other than collectively charged advice, such as intra-fund advice) unless the fee is charged in accordance with an arrangement that the member has entered into, the member has consented to being charged the fee in accordance with the arrangement, and the trustee has the consent or a copy of the consent.
- Section 99F continues to apply to fees for advice charged to other members.
- A trustee cannot charge an advice fee to a MySuper product.
- Trustees can continue to collectively charge fees relating to intra-fund advice as administration fees. Section 99F continues to apply to fees for advice charged to other members.
Financial Regulator Assessment Authority (Recommendation 6.14)
- Establishes the Financial Regulator Assessment Authority and provides for its functions and powers. APRA and ASIC are required to cooperate with the Authority to enable the Authority to perform its functions and exercise its powers. This cooperation includes providing information and documents requested by the Authority.
- Sets out how members and staff members of the Authority are appointed or made available, and how the Authority makes decisions (including delegations).
- To safeguard information that APRA and ASIC provide to the Authority, it prohibits the unauthorised use or disclosure of protected information provided to the Authority (contravention of the prohibition is a criminal offence).