“Be Careful What You Wish For”
— Eminem, “Careful What You Wish For”
When too much regulation is never enough
Like many advisers and Licensees, we’ve been at a loose end this year (too much time, too little to do) so the passing of The Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Act 2021 – after an interminable delay – provides a welcome distraction to those of us jonesing for a hit of regulatory reform.
Unless you’d failed the FASEA exam twice, or needed to use your TPB registration to pay any number of other fees, it would have been easy to overlook this Bill. Admittedly, its gestation period was longer than that of an African Elephant [22 months – Ed.] but it finally passed through the Parliament without amendment and received Royal assent on 28 October 2021.
In addition to the usual addition of new penalties and new sanctions, the Act effects a new disciplinary system for financial advisers (with peer review at its core), new registration requirements for financial advisers and ends the participation of both FASEA and the Tax Practitioners Board in the oversight and registration of advisers.
We’d encourage you to read further but, for brevity, the Act which was drafted to address recommendation 2.10 of the Banking Royal Commission:
- Expands the role of the Financial Services and Credit Panel within ASIC to operate as the single disciplinary body for financial advisers;
- Creates new penalties and sanctions for financial advisers;
- Introduces a new registration system for financial advisers to improve “the accountability and transparency of the financial services sector”; and
- Transfers functions from FASEA to the responsible Minister and to ASIC to streamline the regulation of financial advisers.
The FSCP: Restoring Trust (through oversight and sanctions)
“Come to my arms, my beamish boy!
O frabjous day! Callooh! Callay!”
He chortled in his joy.”
— Joe Longo, ASIC Chair (or Lewis Carrol, “Jabberwocky’)
The single, biggest change effected by this act is the expansion of the role of the Financial Services and Credit Panel (FSCP) within ASIC.
You may recall that Commissioner Hayne observed that the financial advice industry was devoid of an effective system of professional discipline; there were simply too many parties involved to be confident that consumer complaints, and adviser misconduct, were dealt with consistently, predictably and appropriately. In fact, the Commissioner identified numerous examples where consumer complaints, and adviser misconduct, were not dealt with at all. Further, while ASIC could take action, it had neither the resources nor the sanctions to focus on anything other than the most serious incidents.
Given that neither the Associations nor the Licensees could (or would) step into that breach, Commissioner Hayne recommended the establishment of a single disciplinary body.
As background, it’s important to understand that the Financial Services and Credit Panel, constituted as needed from a pool of industry participants, assists ASIC with making administrative decisions on certain matters relating to retail financial services and credit activities. The plan is to leverage panel members’ expertise and industry knowledge (“peer review”) to provide an alternative to ASIC’s regulatory action.
Although it currently lacks any industry representatives, from 1 January 2022, the FSCP will operate as the single disciplinary body for financial advisers to ensure that less serious misconduct does not go unaddressed.
Essentially, in certain circumstances (prescribed in the Regulations) ASIC will convene the Panel to consider administrative action against a financial adviser (whether they are an AFS licensee, an authorised representative or an AFSL employee/director) where special circumstances exist or where the adviser has contravened a restricted civil penalty provision. For clarity, the FSCP will concern itself with any contraventions of:
- Education and training standards;
- The Code of Ethics;
- The obligations of a provisional financial advisers (or their supervisor);
- Registration requirements.
These matters may not be significant, in and of themselves, but they’re often early warning indicators of misconduct and mismanagement. Regardless of your view on the FSCP’s scope of activity, it’s important to remember the broad suite of administrative actions available to them. They can, for example:
- Issue a warning or reprimand (this is an automatic outcome if ASIC believes a contravention occurred but declines to take action or convene a Panel);
- Mandate additional training;
- Recommend increasing supervision;
- Require counselling or reporting;
- Recommend the suspension or cancelation of the adviser’s registration;
- Issue an infringement notice (a small financial penalty that becomes a civil penalty if not paid with the required timeframe, but otherwise prevents ASIC from applying to the court for a civil penalty for the contravention);
- Recommend ASIC seek a civil penalty; or
- Accept an enforceable undertaking from the adviser (if appropriate).
The FSCP’s purview is limited to financial advisers and only ASIC can take action against persons and entities that are not financial advisers and many of their decisions are reviewable upon application to the Administrative Appeals Tribunal.
Importantly, the FSCP focuses on contraventions of an adviser’s obligations under the Corporations Act or matters in respect of an adviser’s suitability to provide financial advice. Although the Panel cannot act unilaterally, or without notifying the relevant adviser and holding a hearing, it is expected to act if:
- A financial adviser becomes insolvent;
- A financial adviser is convicted of fraud;
- The Panel reasonably believes that an adviser is not a ‘fit and proper person’ to provide advice (ie banned or disqualified, convicted of an offence or insolvent);
- The Panel reasonably believes that the adviser has contravened a financial services law, or been involved with another’s contravention;
- An adviser has, twice, refused to give effect to an AFCA determination;
- An adviser has been an officer of two or more corporations that have been unable to pay their debts.
The Bill introduces a two-stage registration process for financial advisers to complement, but not replace, licensing and authorisation.
After 1 January 2022 and by 1 January 2023, Licensees will need to apply to ASIC to register their financial advisers (and confirm their fitness, appropriateness and competency) as a one-off registration using the Financial Advisers Register. From 1 January 2023, it will be an offence to provide personal advice without being registered.
On or before 28 October 2025, financial advisers will need to apply to be registered on the FAR and renew their registrations annually.
It may appear to be an unnecessary and bureaucratic addition to the current process, but it will make advisers (and not their Licensees) responsible for accuracy and currency of the adviser’s relevant information. Further, because registration is required in order to provide financial product advice, it provides ASIC with the opportunity (and obligation) to periodically confirm the appropriateness of an adviser’s ongoing registration. ASIC must refuse to register an adviser that is banned, disqualified or subject to a prohibition order.
FASEA, like a candle in the wind
On 1 January 2022, the functions of the Financial Adviser Standards and Ethics Authority (FASEA) will be transferred to ASIC and the relevant Minister.
In short, the standards authority established to raise the education, training and ethical standards of financial advisers will cease to exist. Although the aim of increasing standards, and maintaining increased standards, can never be marked ‘done’, the Minister responsible for administering the Corporations Act will become even busier by assuming responsibility for:
- making education and training standards for financial advisers;
- approving principles for the financial adviser exam;
- approving foreign qualifications; and
- the Code of Ethics.
ASIC will administer the financial adviser exam in accordance with the principals approved by the Minister.
The education and training standards, which are mandatory requirements for authorisation or licensing, require financial advisers (unless exempt) to:
- complete a Bachelor or higher degree or equivalent qualification by 1 January 2026 (for existing providers) or prior to commencing acting as an adviser (new entrants);
- pass the FASEA exam by 1 January 2022 (for existing providers), 1 October 2022 (existing providers who failed the exam twice before 1 January 2022) or prior to commencing Quarter 3 in their professional year as a Provisional relevant provider (new entrants); and
- comply with their Licensee’s requirements for Continuing Professional Development.
Regulating tax (financial) advisers
In what many may consider to be good news, from 1 January 2022, advisers who meet the training and education requirements to provide tax (financial) advice services may do so without being registered under the Tax Agent Services Act 2009.
Under the new law, to provide tax (financial) advice, a person must either (i) be a registered tax agent, or (ii) be a financial adviser who has met the additional education and training standard to provide tax (financial) advice under the Corporations Act.
This ensures there’s a single registration and disciplinary system for tax (financial) advisers and removes additional costs and complexity but, remember, the Minister may still impose additional education and training standards.
It’s worth noting that the Adviser Register will list whether an adviser provides, or can provide, tax (financial) advice services and the provision of tax (financial) advice services without registration is 250 penalty units ($55,500) for an individual or 1250 penalty units ($277,500) for a body corporate.