Proposed Australian Financial Complaints Authority
On 9 May 2017, the Federal Government announced that a new “one stop shop” scheme to deal with financial system complaints would be established, in response to the Review of external dispute resolution and complaints arrangements in the financial system (the Ramsay Review) published in April 2017.
The Treasury Laws Amendment (Putting Consumers First – Establishment of the Australian Financial Complaints Authority) Bill 2017 introduced on 14 September 2017, would establish a new body, the Australian Financial Complaints Authority (AFCA) to replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).
The ACFA would have a monetary limit of $1 million and compensation cap of $500,000, which is almost double the existing limits. The AFCA is expected to commence on 1 July 2018.
New Professional Standards Regime for Financial Advisers
The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (Cth) aims to raise the professional standards for financial advisers. The reforms seek to address some of the problems and fallout from recent scandals involving poor or negligent financial advice and to rebuild customer confidence in the industry. The legislation introduced:
- compulsory education requirements for both new and existing financial advisers;
- supervision of the requirements for new financial advisers;
- a code of ethics for the financial advice industry;
- development of an exam that will represent a common benchmark across the industry; and
- development of an ongoing professional development component.
The new regime is to commence on 1 January 2019 and, from that date, new financial advisers entering the financial advice industry will be required to hold a relevant degree. Existing financial advisers will have access to transitional arrangements that will allow them two years (until 1 January 2021) to pass the relevant examinations, and five years (until 1 January 2024) to meet the education requirements.
First civil penalty judgment in Future of Financial Advice case
The Federal Court of Australia imposed the first civil penalty (of $1 million) against a Melbourne-based financial advice firm for breaches of the best interests duty (s 961B) and appropriate advice duty (s 961G) introduced under the Future of Financial Advice (FOFA) reforms to the Corporations Act 2001 (Cth): Australian Securities and Investment Commission, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2)  FCA 1267.
Section 961K(2) imposes civil penalty liability on financial services licensees if their officers and employees contravene the best interests and appropriate advice duties (and other related duties) -- that is, direct liability for the breaches by such representatives. Section 961L requires licensees to take “reasonable steps” to ensure that their representatives (including authorised representatives) comply with those obligations under the FOFA regime, and if the licensee does not take such steps it may be liable to a civil penalty.
Here, the conduct was systemic, and included a lack of proper training on FOFA obligations, an organisational emphasis on sales over compliance, and a failure to act when issues with financial advice were identified. A “substantial penalty” was appropriate in the circumstances, as the contraventions by NSG were “very serious in nature” (at ).
ASIC also banned two of NSG's representatives from the financial services industry but both currently have ongoing appeals before the AAT (see ASIC: 17-101MR).
New Banking Executive Accountability Regime (BEAR)
The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 – a new "Banking Executive Accountability Regime" (BEAR) announced in the Federal Government's 2017-2018 budget and introduced to the Parliament on 19 October 2017 – is expected to enhance the power of the Australian Prudential Regulatory Authority (APRA) to increase consequences for banks and their senior executives when they fail to meet expectations.
The BEAR will introduce the concept of an "accountable person", being a director, executive or other person considered to exercise significant influence over conduct of and behaviour within an authorised deposit-taking institutions (ADIs) or their subsidiaries. The BEAR prohibits a person from being an accountable person if the person has not registered with APRA.
Accountable persons will be identified using a combination of prescriptive and in-principle criteria. The in-principle criteria provide that an individual is an accountable person if they have senior executive responsibility for management or control of the ADI, or of a significant or part or aspect of its operations. The positions that are then further prescribed as accountable persons include the members of the board of the ADI, the CEO, CFO, COO, CIO (or CTO), Chief Risk Officer, Head of Compliance/Chief Compliance Officer, Head of Internal Audit, Head of Human Resources and the Anti Money Laundering Officer.
Under the BEAR, persons holding positions in Australian branches of foreign ADIs will be exempt from the prescriptive test of an accountable person, however foreign ADIs will still be subject to the in-principle test. Thus, a person who has senior executive responsibility for the conduct of all of the activities of an Australian branch of the foreign ADI, or of a significant or substantial part or aspect of its operations, will be an accountable person.
In addition to their existing obligations under the APRA Prudential Standards and the Corporations Act 2001 (Cth), accountable persons will be subject to a new set of "accountability obligations".
For ADIs, the obligations include taking reasonable steps to:
- conduct their business with "honesty and integrity, and with due skill, care and diligence";
- "in conducting its business, prevent matters from arising that would adversely affect the ADI's prudential standing or prudential reputation";
- deal with APRA in an "open, constructive and cooperative way"; and
- ensure that BEAR is complied with by the ADI's subsidiaries and by each of its accountable persons.
ADIs that fail to meet the new obligations under BEAR will face significant penalties, with maximum civil pecuniary penalties ranging from $10.5 million to $210 million depending on the size of the ADI.
The personal obligations of individual accountable persons largely mirror or complement those of the ADI itself. Accountable persons will face similarly significant penalties should they fail to meet the obligations.
In addition to APRA's existing power to direct an ADI to remove a director or senior manager under threat of losing authority to carry on banking practices, the BEAR grants APRA power to summarily disqualify accountable persons from acting in their positions within ADIs.
The BEAR also requires that the lesser of 60% of bank CEOs' variable remuneration, and 40% of their total remuneration, be deferred for a specified period. These requirements fall to and 40% of variable remuneration or 20% of total remuneration for other accountable persons in large and medium ADIs, and 40% of variable remuneration or 10% of total remuneration for small ADIs.
[See earlier: Financial Stability Board's Thematic Review on Corporate Governance & G20/OECD Principles posted 14 June 2017.]
Industry Funding of ASIC
Legislation for ASIC's industry funding model became effective on 1 July 2017. Under the ASIC Supervisory Cost Recovery Levy Act 2017 (Cth), any entity that is regulated by ASIC (leviable entity) will need to pay a levy for the financial year they were regulated to recover ASIC’s regulatory costs.
All companies registered under the Corporations Act 2001 (Cth) are leviable entities, with Australian financial services (AFS) licensees and Australian credit licensees specifically identified. Other subsectors of note that are identified as leviable entities include custodians, managed discretionary account providers, payment product providers and responsible entities of registered schemes.
The ASIC Supervisory Cost Recovery Levy Regulations 2017 (Cth) outline the mechanisms to calculate levies payable. ASIC’s Report 535 ASIC cost recovery arrangements: 2017-18, released on 14 July 2017, provides greater detail on how the levies will be applied. The first invoices will be issued in January 2019 and will recover costs for regulatory services for the 2017-18 financial year. The ASIC Supervisory Cost Recovery Levy (Collection) Act 2017 (Cth) establishes penalties in the event of late payment or shortfalls in payment of levies required, including a penalty at the rate of 20 per cent per annum for failure to pay by the due date.
Dominique Hogan-Doran SC
21 November 2017
Liability limited pursuant to a scheme approved under professional standards legislation.