“We therefore recognise there will be a period of transition as industry finalises implementation of additional compliance measures, and ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply”
— ASIC Chair Joe Longo, 21-213MR “ASIC’s approach to new laws reforming financial services sector”
Too much change? (or barely enough?)
The jury is still out on the impact of Red October.
There was, by any measure, a degree of apprehension about the significant regulatory reforms that commenced in October 2021 (and those future changes built on that foundation). The difficulty is that it is difficult, for most people, to obtain any real clarity on the real consequences and implications of these reforms.
Given our perspective, it’s a little easier for us and while we’ll provide a more detailed analysis in the coming months, we’d like to share some general observations.
- Compliance with ASIC Instrument 2021/429 became mandatory from 1 October 2021;
- From that date, reference checking became a licence condition (s912A(1)(cc)) and subject to breach reporting requirements;
- Recruiting Licensees must seek written consent from a prospective representative to request a reference and if consent is given – request a reference from the referee licensee(s) in accordance with the ASIC protocol.The referee licensee(s) must then share information with the recruiting licensee about the prospective representative by giving a reference;
- Referee Licensees acting in accordance with the Instrument have a defence of qualified privilege against actions for defamation or breach of confidence; and
- The ASIC templates deliver a measure of consistency by defining the minimum steps to assess, and consider, a representative’s authorisation history and compliance with the general conduct provisions.
Despite the systemic problems identified by Commissioner Hayne, the industry seems generally untroubled by this new obligation. We’re seeing more licensees use our service, but these new requirements are also highlighting a surprising number of advisers that were never reviewed by their previous licensee.
In these cases, we strongly recommend that recruiting Licensees engage external experts to thoroughly assess the prospective representative’s advice before any decision is made.
The Breach regime
- The introduction of two new significance tests;
- The extension and definition of ‘reportable situations’ to encompass breaches (and likely breaches) of core obligations as well ongoing investigations, gross negligence and serious fraud:
- The classification of some breaches (dishonesty, misleading and deceptive conduct and contraventions of civil penalty provisions) as “deemed significant” and subject to reporting;
- Requiring licensees to lodge breach reports with ASIC in the prescribed form, and within 30 calendar days;
- An obligation to report others’ breaches; and
- ASIC can (and probably will) publish data about breach reports on its website.
Although it hasn’t seemed to trigger the regulatory armageddon prophesied by some of the Associations, it’s still caused inconvenience (and some ongoing issues) for some licensees. “Old School Licensees” have particularly struggled with these changes, less as a result of their under-investment in regulatory technology than their “culture of compliance”; the cascading effect of poor processes, lax oversight and poor record-keeping often suggest best interest, appropriateness and conflict issues (which are civil penalty provisions). Ironically, their refusal to deal with the identified issues may, in fact, cause additional contraventions (such as a breach of s912DAA).
Perhaps the worst impact is the view, promoted by some consultants, that almost everything is a breach that needs to be reported. In recent weeks, we’ve had to talk licensees off the ledge and explain how to properly assess issues and incidents. We recommend that they refer to the attached guide and remember that although “the reporting obligation is an important one in terms of the regulation of the financial services industry” ( Besanko J, ASIC v Statewide Superannuation  FCA 1650 at 123) it’s not intended to include every trivial and inconsequential incident. There are clear expectations of what matters that need to be reported and licensees need to understand these parameters.
““Financial supervision is increasingly driven by data, with regulators requiring data of greater granularity and at a greater frequency.” ”
— Institute of International Finance, March 2016
The Complaints Regime
- RG271 (which replaced RG165) became enforceable from 5 October 2021 has broader application and a new, more expansive definition:
- Introduces enforceable paragraphs;
- Is premised on data-driven and integrated IT solutions;
- Requires more effective capture, tracking, analysis and reporting of complaint data;
- Confirms ASIC’s expectation that Licensees will monitor key metrics for complaint management on an ongoing basis;
- Demands stronger complaint management skills and an organisation-wide accountability for complaint management;
- Mandates consistent data classification (glossary and dictionary);
- Focuses on accessibility, assistance and the need for a public policy;
- Requires structured processes for client acknowledgment and communication;
- Increases reporting requirements and reduces timeframes; and
- ASIC can publish data about complaints on its website.
READ: Fixing Complaints
In anticipation of RG271, and acknowledging that regulatory expectations for better data management, most licensees significantly refined their internal dispute resolution processes and embraced the technology required for compliance. Others, acknowledging their resource limitations, engaged external services to assist them to manage the change. Although most licensees have significantly improved their processes , the expected influx of complaints never eventuated. Although it took some time for many licensees to appreciate ASIC’s expectations, and adopt the systems required to meet them, but most substantial businesses have done so.
The prevailing problem is confusion about what constitutes a complaint (particularly in respect of products) and there’s a general failure to acknowledge that “an expression of dissatisfaction” without any expectation of response or resolution is not a complaint. Some licensees/advisers, thinking that any expression of dissatisfaction is a formal complaint, created unnecessary work for themselves.
“[An expression] of dissatisfaction made to or about an organization, related to its products, services, staff or the handling of a complaint, where a response or resolution is explicitly or implicitly expected or legally required. ”
— ASIC REGULATORY GUIDE 271, @271.27-29
In much the same way that breach reporting changes led to a renewed investment in integrated reg-tech, RG271 has driven licensees to pursue an organisation-wide understanding of the definition of ‘complaint’ and the types of matters that must be dealt with in a firm’s IDR process and leveraged technology and data analytics to enable root cause analysis and improve the products and services they offer. The reality is that compliance requires systems, particularly those that provide the data and insight demanded by stakeholders.
Design and Distribution Obligations
- Potentially, one of the most significant reforms of financial services since FSRA, this obligation encompasses product design, issue, distribution, intervention and enforcement;
- Product Issuers must prepare a Target Market Determination (TMD) for each product offered to retail clients;
- Distributors are required to take reasonable steps to comply with the TMD;
- Advisers are expected to use/consider the TMD in the same way they would consider external product research;
- Distributors that provide personal advice are largely exempted because their professional obligations (s961B, s961G, s961H and s961J) impose equal or greater obligations; and
- Distributors are required to track, record and escalate any breaches or complaints.
READ: D&D for beginners
Although ASIC mitigated adviser apprehension about the Design and Distribution Obligations, there’s little doubt that these obligations are generally perceived as a bureaucratic impost with little consumer benefit. Good Licensees, and competent advisers, provide appropriate advice (and follow a considered and methodical product selection process) so these refinements neither streamlined the advice process nor benefitted retail clients. A TMD is neither written for, nor provided to, a retail client so it is widely perceived as a redundant addition to a properly constructed APL.
The obligation on Distributors to track, record and escalate complaints is compromised (if not entirely undermined) by Issuers inconsistent reporting requirements, unclear communication and variable reporting periods. Despite its claims to represent adviser interests, the FSC has been spectacularly unsuccessful in creating a consistent standard for its members. Further, although Distributors are legally required to report product complaints within 10 days of the end of the reporting period, some Issuers demand immediate reporting. Others have no systems or processes to facilitate (or optimise) the reporting of product issues or complaints. More problematically, some Issuers either refer Distributors to their general IDR process or suggest that, in their view, these matters are not complaints and do not need to be either recorded or escalated. Given that the obligation sits with the Distributor, this advice should probably be ignored.
The New Misconduct Regime
- The Financial Services and Credit Panel within ASIC is expanded to operate as the single disciplinary body for financial advisers;
- The creation of new penalties and sanctions, which apply to those found to have breached the Corporations Act;
- The introduction of a new annual registration system for financial advisers to improve the accountability and transparency of the financial services sector;
- The transfer of functions from FASEA to the Minister and ASIC to streamline the regulation of financial advisers; and
- Started 1 January 2022 (with a registration transition period of 1 year).
READ: Restoring Trust: The Better Advice Act
For many advisers and Licensees, the most immediate impacts of this Act is continuing confusion over FASEA Standard 3 and perplexity over TPB registration and CPD requirements. Given the more immediate issues, this reform hasn’t attracted much attention beyond criticism that the FSCP (“stuffed with the usual suspects”) is, like the Compensation Scheme of Last Resort, just another way to hold advisers accountable for regulatory failures to police institutions and product issuers. This assessment is both unkind and inaccurate because the new misconduct regime (despite its faltering start and lack of clarity) actually provides the foundation for the emergence of an advice profession and, potentially, a shift towards co-regulation. However, because some commentators have presented this as self-licensing, there are concerns about the annual registration process and ASIC’s role in the development and enforcement of the FASEA Standards.
I’ll finish with two unrelated, but tangential, notes.
First, advisers, and advice businesses, were probably thrilled to learn that the Government’s Quality of Advice Review will be led by Ms Michelle Levy, a lawyer whose specialisation in life insurance and superannuation law (representing Trustees, Issuers and Product Manufacturers) perfectly equips her to improve advice and simplify regulatory compliance. Despite the expectation that her appointment will benefit institutional interests over advisers, she is, in my view, one of the most insightful and consistently entertaining critics of over-regulation, formalism and poor drafting.
This review may well provide a beachhead for more vertical integration and product sales, but her appointment shouldn’t be interpreted as either a slight on the advice profession or a green-light for the Banks’ re-entry into advice.
“Complex legislation is difficult to understand. It is harder for consumers to know their rights; for practitioners to advise their clients; and for regulated entities to comply. ”
— Dr William Isdale and Christopher Ash
Secondly, advisers, and advice businesses, may be heartened that the Australian Law Reform Commission has commenced their review of Chapter 7 of the Corporations Act, the most bloated, inconsistent and generally incomprehensible pieces of legislation with which they have to wrestle.
Don’t expect any significant changes in the short term (under 3 years) but the ALRC recognise that complexity leads to inefficiencies and increased costs. Although they need to balance consumer interests against commercial imperatives, they are focused on pursuing a simpler solution. The ALRC are incredibly transparent and highly effective communicators and we highly recommend their content to anyone interested in the future of financial services.
My predictions for the future:
- material changes to the Wholesale Client definition;
- the decoupling of advice from financial product advice; and
- the death (or retirement) of general advice.