A raft of draft legislation to implement a further 22 of the recommendations of the Banking, Superannuation & Financial Services Royal Commission (Royal Commission) was announced by the Treasurer, the Hon Josh Frydenberg MP on 31 January.
The consultation period on the exposure drafts ended on 28 February 2020.
These measures will directly affect the finance sector.
Most changes are proposed to take effect on 1 July 2020, indicating the urgency on the part of the Government to get these changes across the line quickly. A couple of the changes take effect later, while others do not yet have a definite start date.
The exposure drafts released are:
1. Breach Reporting and remediation by Credit Licensees
The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: FSRC rec 1.6, 2.7, 2.8, 2.9 and 7.2 (Reference checking and information sharing, breach reporting and remediation) which will:
- strengthen breach reporting requirements for financial services licensees and introduce them for credit licensees
- establish a compulsory scheme for checking references for prospective financial advisers and mortgage brokers.
- give ASIC power to make legislative instruments setting out the detail of the reference checking and information sharing obligation.
- require licensees to notify clients of suspected misconduct, conduct investigations into suspected misconduct, and remediate affected clients
- licensees are required to maintain records to demonstrate compliance with the requirement to notify, investigate and remediate misconduct.
These changes will have a major effect on the credit industry and will bring this sector generally into line with the financial advice sector. More immediate involvement of ASIC in situations where a breach has occurred is certain.
Licensees must report designated breaches to ASIC within 30 days of discovery of breach, and outcomes of investigation need to be reported within 10 days.
Treasury is currently consulting with industry on how this change will operate in practice. The requirement for Licensees to remediate consumers is a significant change.
Credit Licensees must also report serious concerns about mortgage brokers to ASIC.
Proposed commencement date: 1 July 2020
2. Codes of Conduct – ASIC may declare certain provisions of Codes to be enforceable
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC rec 1.15 (enforceable code provisions) which will strengthen the existing code of conduct framework in the financial services sector, by specifically:
- enabling ASIC to identify one or more provisions of the code as enforceable code provisions if ASIC considers that it satisfies specific criteria
- providing that if ASIC identifies one or more provisions of a code to be an enforceable code provision, that provision becomes enforceable under statute
- providing that a court may impose a penalty if a declaration has been made that an enforceable code provision has been breached (up to 300 penalty units).
- empowering AISC to issue infringement notices for breaches of enforceable provisions of Codes.
- requiring Codes to be independently reviewed every 5 years.
Proposed commencement date: 1 July 2020
3. Financial Advisers – requirement to periodically renew fee arrangements with clients
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC rec 2.1 (ongoing fee arrangements) and the associated Regulations, which will require:
- fee recipients to seek renewal of ongoing fee arrangements by clients annually (currently every 2 years, except for fee arrangements first entered into prior to 1 July 2013 where currently they are not required to be renewed).
- fee disclosure statements going forward to not only state what fees were in the preceding year, but also what fees will be in the current year (currently disclosure is only required for prior 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 (currently there is no ongoing requirement to seek new consent after the initial consent has been given)
- fee recipients to obtain written consent to continue an ongoing fee arrangement annually
- new record keeping requirements
Proposed commencement date: 1 July 2020
4. Financial Advisers – required to disclose any lack of independence
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: FSRC Rec 2.2 (disclosure of lack of independence) which will requires financial services licensees and authorised representatives are required to:
- give a written disclosure of lack of independence (in a form prescribed by ASIC) where they are unable to validly claim that they are “independent”, “impartial” and “unbiased”.
- include a statement to that effect in their financial service guide.
Proposed commencement date: 1 July 2020
5. Trustees of Registrable Superannuation Entities (RSEs) must hold no other duties or office
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: RSE licence condition—no other duty (FSRC rec 3.1) – will impose a new licence condition on RSEs prohibiting them from having a duty to act in the interests of another person.
Proposed commencement date: 1 July 2020
6. Restricting the ability of Trustees of Super Funds to charge advice fees on Choice funds without the informed consent by member.
The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: fees (FSRC Recs 3.2 & 3.3) will provide that superannuation members in choice funds must not be charged advice fees by Trustees unless they have first given informed consent.
Proposed commencement date: 1 July 2020
7. Trustees of Super Funds must not charge advice fees to members on My Super products.
The Financial Regulator Reform (no. 2) Bill 2019: Fees (FSRC Recs 3.2 & 3.3: Advice Fees for Mysuper and Choice Products) will implement this change.
Proposed commencement date: 1 July 2020
8. Ban the unsolicited sale of Financial Products
The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: Hawking of financial products will ban the “hawking” of financial products, subject to some limited exceptions. The legislation also defines more precisely the meaning of the expression “unsolicited contact” and strengthens the provisions dealing with “right of return and refund”
Proposed commencement date: 1 July 2020
9. Clarify roles of APRA and ASIC in relation to regulation of Superannuation.
The Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2020 Measures)) Bill 2020: ASIC regulation of superannuation makes it clear that:
- APRA is generally responsible for prudential regulation and member outcomes. It is also generally responsible for licensing and supervision of RSE licensees.
- ASIC is generally responsible for protecting consumers from harm, market integrity, disclosure and record keeping.
- The Commissioner of Taxation is generally responsible for self-managed superannuation funds, data and payment standards, tax file numbers and the compassionate release of superannuation amounts.
ASICs role and powers are beefed up under the amended legislation.
Proposed commencement date: 1 July 2020
10. Restrict use of the expressions “Insurance” and “Insurer” to prevent consumers from being misled.
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: Use of terms “insurance” and “insurer will make it a strict liability offence for a business to describe:
- a product or service they offer 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.
- itself as an insurer if the business could mistakenly be believed to offer insurance, and either the product is not insurance or the person is not appropriately registered or authorised under applicable insurance legislation.
The offences do not apply to government entities, State insurance, or products or services prescribed by the regulations, or entities exempted by ASIC.
Proposed commencement date: 1 July 2020
11. Implement a “deferred sales model” for the sale of add-on insurance products.
This change is implemented by The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: Deferred Sales Model For Add-On Insurance
Currently, only the Banking Code of Practice contains provisions dealing with deferred sales model.
These changes will make the sale of add on insurance products difficult, if not impossible.
Proposed commencement date: 12 months after the date the enabling legislation receives Royal Assent.
12. Introduce a cap on commissions that can be paid for sale of add on insurance in connection with the sale or leasing of motor vehicles.
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: Caps on commissions implements these changes and will:
- place a cap on the amount of commissions that may be paid in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle.
- provide ASIC with the power, by legislative instrument, to set caps on the amount of commissions that may be paid in relation to certain add-on risk products sold in connection with the sale or long-term lease of a motor vehicle.
- make it a criminal offence, civil penalty and offence of strict liability for a person to pay or receive a commission in relation to an add-on risk product that exceeds the cap determined by ASIC for that product.
- give consumers the right to recover commissions paid in excess of the cap.
Proposed commencement date: the day after the enabling legislation receives Royal Assent.
13. When taking out life insurance, replace the existing duty of disclosure imposed on the consumers with a duty to take “reasonable care” to not make a misrepresentation.
These changes are implemented by the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: FSRC Rec 4.5 (Duty of Disclosure To Insurer) and will bring life insurance more into line with the existing regime that currently applies to motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance.
Under the current law, an insured is required to disclose matters known to the insured that are relevant to the insurer’s decision of whether or not to accept the risk and, if so, on what terms. The current duty was considered to have placed too greater a burden on insureds.
Proposed commencement date: 1 July 2020
14. An insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms
This change is implemented by the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: Avoidance of Life Insurance Contracts (FSRC Rec 4.6) .
Proposed commencement date: the day after the enabling legislation receives Royal Assent.
15. Establish the Financial Regulator Assessment Authority to oversee ASIC and APRA.
This is implemented by the Financial Regulator Assessment Authority Bill 2020 and the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2020 Measures)) Bill 2020 . In summary, the Authority:
- will assess APRA’s and ASIC’s effectiveness;
- reports to the relevant Minister;
- undertakes capability reviews of APRA and ASIC when requested by the Minister;
- consists of the Chair, a Departmental member and 2 other members assisted by APS employees’ and
- may request information from APRA and ASIC
Proposed commencement date: 1 July 2020
16. ASIC given new powers to issue directions to licensees to prevent or address suspected breaches of financial services law or credit legislation.
This change is implemented by the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2020 Measures)) Bill 2020: FSRC Rec 7.2 (ASIC Directions)
Proposed commencement date: the day after the enabling legislation receives Royal Assent.
