The Australian Securities and Investments Commission (ASIC) remains focused in its pursuit of achieving a fair, strong and efficient financial system by targeting enforcement action and pursuing opportunities for smarter regulations as evidenced by its latest quarterly update.
Introduction
Recently, ASIC released its latest quarterly update, REP 704 ASIC quarterly update: July to September 2021 (Update), which outlines ASIC’s key priorities in providing industry guidance to support the implementation of a raft of reforms, protecting market integrity in the digital age and targeting enforcement action to deter misconduct.
Raft of law reforms
A raft of law reforms commenced in October 2021 in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The reforms aim to provide consumers with long-term protection from harm and close the regulatory gaps identified by the Royal Commission. ASIC has provided guidance on how to comply with these new obligations, which are outlined below:
Design and distribution obligations
The new product design and distribution obligations came into force from 5 October 2021. These reforms require firms to design financial products to meet the needs of consumers.
As part of these obligations, issuers must notify ASIC of a significant dealing (with the exception of excluded dealings) in a financial product that is not consistent with the product’s target market determination (TMD). Distributors must notify issuers when they identify a significant dealing that is not consistent with the TMD.
A significant dealing is considered to be a dealing outside of the TMD for a product. Factors that may be considered in determining whether a significant dealing exists, include:
- proportion of consumers not in the target market;
- actual or potential harm to consumers, including amount of loss; and
- nature and extent of inconsistency of distribution to the target market determination.
Issuers must notify ASIC in writing as soon as practicable, and within 10 business days, after becoming aware of a significant dealing.
Restrictions on the unsolicited selling of financial products (hawking)
The reforms to the anti-hawking regime under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (the Act) commenced on 5 October 2021. The three existing hawking prohibitions have been replaced with one general prohibition that applies to the hawking of all financial products, with limited exceptions. Under the prohibition, a person must not offer a financial product to a retail client in the course of or because of unsolicited, real-time contact. A consumer must consent to being contacted, and that consent must be positive, voluntary and clear.
Deferred sales model for add-on insurance products
The deferred sales model applies from 5 October 2021. This model introduces a mandatory four-day pause between the sale of a principal product or service and the sale of add-on insurance. ASIC has made an instrument specifying the information that must be given to a customer to start the four-day deferral period, and how that information must be given which can be accessed here.
Reference checking for financial advisers and brokers
The Act introduces obligations on AFS licensees and Credit licensees to comply with an ASIC protocol in relation to reference checking commencing on 1 October 2021 (ASIC Protocol). The ASIC Protocol sets out obligations for licensees to undertake a reference check and share information on an individual seeking to be employed or authorised as a financial adviser or mortgage broker. To help licensees comply with the new reference checking requirements, ASIC has prepared an information sheet which can be accessed here.
Breach reporting
From 1 October 2021, Australian financial services (AFS) licensees who provide personal advice to retail clients, Australian credit licensees who provide mortgage broking services to consumers and their representatives (collectively, Licensees) must comply with the new breach reporting obligations. These obligations are intended to benefit consumers by allowing ASIC to better identify and swiftly address systemic problems. As a result, it is believed that there will be greater transparency for consumers and firms with the publication of breach reporting data from late 2022.
What are the obligations?
The obligations require Licensees to:
- report breaches to ASIC that are discovered after 1 October 2021 (and to the extent the licensee is an AFS licensee, the obligation extends to reporting breaches that occurred before such date);
- notify clients affected by certain breaches of the law;
- investigate the nature and full extent of those breaches;
- remediate affected clients within certain timeframes; and
- maintain records to show compliance with these obligations.
When will the obligations arise?
The obligations will be triggered when the following issues arise:
- Personal advice or credit assistance is provided to an affected client – either:
- an AFS licensee or one of its representatives provides personal advice to the affected client as a retail client on a ‘relevant financial product’ (these are financial products other than basic banking products, general insurance products, consumer credit insurance, or any combination of these); or
- a credit licensee or one of its representatives is a mortgage broker who provides credit assistance to the affected client in relation to a credit contract secured by a mortgage over residential property.
- Reportable situation – either:
- a significant breach of a ‘core obligation’ (section 912D(1)(a) of the Corporations Act or section 50A(1)(a) of the National Credit Act); or
- conduct that constitutes gross negligence or serious fraud (section 912D(2) of the Corporations Act or section 50A(2) of the National Credit Act).
- Loss or damage – there are reasonable grounds to suspect that the affected client has suffered, or will suffer, loss or damage as a result of the reportable situation.
- Legally enforceable right to recover loss or damage – there are reasonable grounds to suspect that the affected client has a legally enforceable right to recover the loss or damage from the licensee.
What action is required to be taken?
Once the obligations have been triggered a Licensee will be required to:
- self-report specified matters to ASIC (such as the above issues);
- take reasonable steps to notify affected clients in writing of the reportable situation within 30 days;
- start an investigation into the nature and full extent of the reportable situation within 30 days;
- take reasonable steps to notify affected clients in writing of the outcome of the investigation within 10 days of the investigation concluding;
- if there is loss or damage and an enforceable right to recover, take reasonable steps to pay affected clients remediation of an amount equal to the loss or damage within 30 days of the investigation concluding; and
- keep sufficient records to demonstrate your compliance with the notify, investigate and remediate obligations.
ASIC can take enforcement action against you if you fail to comply with the notify, investigate and remediate obligations.
Crypto-asset related financial products
ASIC has urged Australians to be wary of investing in crypto-asset related financial products through unlicensed entities.
ASIC has received a number of reports from Australians who have used unlicensed platforms to trade crypto-asset related financial products, such as options and futures, and have experienced significant losses due to excessive leverage, platform outages, or unfair liquidations.
Investors are urged to check and ensure entities they deal with hold an AFS licence or an Australian market licence.
ASIC’s targeted enforcement action
As of 30 June 2021, six of Australia’s largest banking and financial services institutions have paid or offered a total of $1.86 billion in compensation in relation to fees-for-no-service misconduct or non-compliant advice.
During the quarter, the Federal Court has ordered the following penalties:
- A penalty of $18.5 million for a bank’s failures relating to misleading fee disclosure statements. The court also declared that the bank had contravened its obligations as an AFS licence holder to act efficiently, honestly and fairly by failing to have procedures and systems in place to provide timely and effective fee disclosure statements. This is the first penalty imposed by the court for fee disclosure statement failures under the Corporations Act 2001.
- A combined penalty of $10.5 million against two financial institutions for failing to act in their clients’ best interests. It was held that by recommending that customers roll out of their superannuation funds into another account the financial institutions failed to act in the best interests of its customers as they were not licensed to provide personal advice.
- In September 2021, the first two criminal prosecutions were brought against banks under the consumer protection provision of the Australian Securities and Investments Commission Act 2001 (s12DB) in relation to allegations of false and misleading representations in letters to its home loan customers and allegedly failing to provide written notice about annual interest rate and repayment amount changes and allegedly mis-selling consumer credit insurance.
- Civil penalties totalling $3 million against two financial institutions for charging fees for no service and making misleading statements to clients. The financial institutions were also ordered to publish an Adverse Publicity Order on their websites.
- Upon ASIC’s application, the Federal Court declared several terms in a bank’ s small business contracts to be unfair.
- The Federal Court made orders requiring a bank to publish notices on its website and newsroom, acknowledging its false or misleading conduct.
ASIC continues to pursue enforcement, regulatory and remediation action in line with its vision to drive good consumer and investor outcomes, promote a strong and innovative financial system and act against misconduct.
This article was written by Alexandra White, Partner and Lily Davies, Graduate-at-Law.
