ASIC releases reference checking protocol for mortgage brokers and financial advisors

ASIC releases reference checking protocol for mortgage brokers and financial advisors

New laws that introduce mandatory reference checking in respect to financial advisors and mortgage brokers before they are hired into new positions will take effect from 1 October 2021.

These amendments to the Corporations Act 2001 (Cth) and the National Consumer Credit Protection Act 2009 (Cth) (National Credit Act) were passed in late 2020 as part of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) – Schedule 10 (Reference Checking and Information Sharing Protocol). This reform gives effect to a recommendation of the Hayne Royal Commission which arose from concerns that financial services licensees were not communicating clearly enough in relation to the backgrounds of prospective employees.

The new legislation is underpinned by a “reference checking and information sharing protocol” (Protocol).  This Protocol was finally released by ASIC on 20 July 2021 following a public consultation process. The Protocol has been introduced via legislative instrument – ASIC Corporations and Credit (Reference Checking and Information Sharing Protocol) Instrument 2021/429 – and has the force of law.

ASIC has also provided an information sheet (INFO 257) and published examples of references as a guide.

Summary of the Legislation and the Protocol

In summary, from 1 October 2021, a financial services licensee or a credit licensee that is considering employing or authorising a mortgage broker or financial advisor (the “recruiting licensee”), will have to take reasonable steps to obtain a written reference in the prescribed standard format from the licensee who most recently authorised the relevant broker/adviser to operate under their licence.  The subject broker/adviser is referred to as a “prospective representative” in the legislation.  Where the prospective representative was authorised under their former licensee’s licence for less than 12 months, references are required from both that licensee and the next most recent former licensee within the previous five years.

In line with the privacy laws, the licensee must obtain the consent of the prospective representative (again in a prescribed format) before the reference is sought.  This consent can be revoked by the prospective representative at any point until the reference is obtained. Where the prospective representative is incorporated, then the reference checking provisions apply to its directors, employees and agents.

Our focus in this article is on the position with regard to mortgage brokers, although the requirements are similar in relation to financial advisers.

The reference checking obligations will form part of the “general conduct obligations” of credit licensees contained in section 47 of the National Credit Act.  The amendments insert a new section 47(3A).  As a result, any breach is both a breach of that Act, and of the conditions of the licence, giving the courts the power to make certain orders in relation to contraventions, and ASIC a range of additional more flexible enforcement powers. Failure to comply with the Protocol is itself subject to a civil penalty.

The template reference document and consent form

The Protocol prescribes a template consent form (which the recruiting licensee must ask the prospective representative to sign) and a template reference request which the recruiting licensee will submit to the former licensee(s) who will be providing the reference).

In summary:

  • An obligation is imposed on a recruiting licensee to take reasonable steps to conduct reference checks on mortgage brokers it is considering authorising as its representatives.
  • Credit licensees for whom a mortgage broker has worked for in the previous 12 months as a credit representative must provide a reference. Note that if the prospective representative worked for more than one licensee in the 12 months prior, then all relevant licensees must provide a reference.
  • Special rules apply where the prospective representative was sub-authorised by a corporate representative.
  • Generally, references must be provided within 10 business days of the request unless a longer period (of up to 30 business days) is agreed.
  • The reference provided by the “referee licensee” about the prospective representative is comprehensive and must cover matters such as:
    • referee details;
    • role and period of employment of broker;
    • description of broker’s main responsibilities;
    • any relevant ASIC reference number;
    • results of any compliance audit of files handled by broker;
    • detailed information about the conduct of the broker while working with the licensee providing the reference; and
    • whether there are any and if so what “unresolved matters”.

The recruiting licensee may ask the referee licensee for clarification of specific information or an update on unresolved matters mentioned in the reference up to six months after the reference is given.

There is no requirement under the Protocol for the prospective representative to be given a copy of the reference, although they may be able to obtain a copy under the right of access available to them under the privacy laws, if the exemption for employee records does not apply.

The reference only has to be given in relation to matters that occurred within the last five years.

Surprisingly, the legislation provides that a mortgage broker who holds a credit licence themselves is required to provide their own reference! – see note 1 and note 2 in INFO 257:

Note 1: Where the prospective representative is currently a licensee in their own right, the recruiting licensee must ask for a reference from the prospective representative about their conduct as a licensee.

Note 2: Where the recruiting licensee and referee licensee are the same licensee, the requirements of the ASIC protocol do not apply.

Qualified privilege against defamation

“Qualified” privilege applies to any reference given in accordance with the Protocol and protects the provider of the reference from an action for defamation by the relevant mortgage broker.

However, the protection is limited and care is required by referee licensees to ensure that:

  • They are in fact required to give the reference under the Protocol;
  • They only cover the matters prescribed when giving the reference; and
  • Only disclose matters that have arisen in the last 5 years.

Only objective verifiable information should be supplied.  In addition, to have the benefit of qualified privilege, a referee licensee providing a reference must act reasonably in selecting the information they choose to include in their reference. Courts will not protect those that carelessly, maliciously or unreasonably include defamatory imputations within the references they provide.

For more information about the extent of qualified privilege against defamation one can always refer to the defamation case involving Senators Leyonhjelm and Hanson-Young: (on appeal) Leyonhjelm v Hanson-Young [2021] FCAFC 22 – it’s not only a good read but also discusses the nature and scope of qualified privilege.

Having a lawyer draft/settle references might be well advised, particularly in the case of a request relating to a mortgage broker who has encountered difficulties during his engagement by the referring broker.

Protocol sets a minimum standard

The Protocol sets only a minimum requirement.  Recruiting licensees may choose to seek more information going back more than 5 years or to seek references from additional former employers.  This is particularly relevant to aggregators and lenders who authorise mortgage brokers to introduce loan applications under their platforms (see our comments below on aggregators and lenders).

Referee licensees should ensure that have a clear understanding of whether requests for a reference they receive are within the scope of the Protocol, or go beyond it, before responding to a request.

Other provisions of the Protocol

In addition, the Protocol contains provisions dealing with:

  • Restrictions on use of the information collected in accordance with the Protocol Such information must only be collected used disclosed or stored for the purposes of reference checking, and information sharing as required under the Protocol.
  • Record keeping obligations
    Complete and accurate records demonstrating compliance with the Protocol must be kept for five years from the day the last entry was made in the record. This includes records of complaints and request for clarification or updates, and procedures for the protection of personal information obtained under the Protocol.

Remedies available to aggrieved prospective representatives

In INFO 257, ASIC addresses the issue of unfair treatment of representatives by stating:

Where a prospective representative considers that a referee licensee has not acted in accordance with the ASIC protocol, they may:

    • directly approach a referee licensee to seek to resolve their concern
    • make a complaint to ASIC about a suspected breach of the ASIC protocol, and/or
    • make a complaint to the Office of the Australian Information Commissioner

As noted above, licensees are required to be complete and accurate.  Information provided in a reference that the prospective representative feels is not in that category may be grounds for complaint, or an action in defamation on the basis that the reference provided by the referee licensee fell outside the scope of the protection afforded by qualified privilege.

Remedies available to Recruiting Licensees where references provided are inaccurate or misleading

It is only human nature to not want to speak ill of another person. However, licensees providing references will need to be cognisant of the fact that to provide an inaccurate or misleading reference under the Protocol will most likely have adverse consequences. If a referee licensee fails to provide an accurate reference that will constitute a breach of the “general conduct obligations” under section 47 of the National Credit Act, potentially putting the credit licence of the referee licensee at risk and incurring a civil penalty.

Consequential changes to Regulatory Guide 205

Minor consequential changes have been made to Regulatory Guide 205 (Credit licensing: General conduct obligations), in particular updates to Table 1, RG 205.89 and Table 4 and added RG 205.100–RG 205.10.  The Regulatory Guide has not been reissued, however, and despite these recent updates is still dated April 2020.

Role of Lenders and Aggregators

In the past, aggregators and lenders have dominated and controlled the provision of reference checking and brokers transferring from one aggregator or lender to another. This has been done by way of a mechanism known as the “clean separation” letter.

The Protocol will hopefully add transparency to the provision of references by aggregators and lenders. In the past references have generally been informal and often opaque, with unsatisfactory results, as the Royal Commission found.

References have often ended up with the broker effectively being ‘black balled’ without the degree of transparency that would be considered fair in all the circumstances. Equally, ‘bad apples’ have been able to move around the industry and adversely affect the licenses of their employers.

Under the new Protocol, aggregators and lenders will not have as much visibility, especially with regard to those prospective representatives who hold their own credit licenses. However, as mentioned above, aggregators and lenders will still continue to have their own systems and procedures in place for reference checking and conduct of due diligence– usually more thorough than the minimum standard prescribed by the new Protocol.

We understand that the Mortgage Finance Association of Australia is making representations to ensure that aggregators will have more visibility under the new reference checking protocol. Whether aggregators are found to need this increased visibility and how successful they will be in this regard remains to be seen.

As with many aspects of new legislative reforms, these changes are being rushed through without sufficient time to consider all the implications of the reforms in practice.