Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)General outline and financial impact
Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 and Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020
On 4 February 2019, the Government released its response to the Financial Services Royal Commission Final Report entitled Restoring trust in Australia's financial system. The Government's response committed to taking action on all the recommendations of the Financial Services Royal Commission, and made additional commitments to address the issues identified by Commissioner Hayne.
This package implements a significant number of recommendations of the Financial Services Royal Commission and additional commitments the Government has made to improve consumer protections and strengthen financial regulators. The amendments address conflicts between the interests of financial institutions and their customers, ensure consumers are treated fairly in their dealings with the financial sector, and ensure regulators have the powers and resources needed to be effective in their enforcement and supervision roles.
References to a bill in this explanatory memorandum are references to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, unless otherwise stated.
The Financial Services Royal Commission Final Report has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement for the purposes of the Government decision to implement this reform.
The Financial Services Royal Commission Final Report can be accessed through the Australian Parliament House website. [1]
The following table provides a summary of the reforms implemented by this package and the primary area of law that is being amended:
| Chapter | Recommendation implemented | Primary area of law amended |
| 1 | 1.15 - Enforceable code provisions | Chapter 7 of the Corporations Act and Chapter 5 of the Credit Act. |
| 2 | 4.5 - Duty to take reasonable care not to make a misrepresentation to an insurer
4.6 - Avoidance of life insurance contracts |
Part 4 of the Insurance Contracts Act. |
| 3 | 4.3 - Deferred sales model for add-on insurance | Part 2 of the ASIC Act. |
| 4 | 4.4 - Caps on commissions | Part 2 of the ASIC Act. |
| 5 | 3.4 - No hawking of superannuation products
4.1 - No hawking of insurance |
Chapter 7 of the Corporations Act. |
| 6 | Additional commitment in response to 4.2 - Restricting use of the term 'insurer' and 'insurance | Part 10 of the Insurance Act 1973. |
| 7 | 4.8 - Removal of claims handling exemption | Chapter 7 of the Corporations Act. |
| 8 | 3.1 - No other role or office | Part 2A of the SIS Act. |
| 9 | 3.8 - Adjustment of APRA and ASIC's roles
6.3 - General principles for co-regulation 6.4 - ASIC as conduct regulator 6.5 - APRA to retain functions |
Part 1 of the SIS Act, Part 2 of the ASIC Act and Chapter 7 of the Corporations Act. |
| 10 | 1.6 - Misconduct by mortgage brokers
2.7 - Reference checking and information sharing |
Chapter 7 of the Corporations Act and Chapter 2 of the Credit Act. |
| 11 | 1.6 - Misconduct by mortgage brokers
2.8 - Reporting compliance concerns 7.2 - Implementing the recommendations |
Chapter 7 of the Corporations Act and Chapter 2 of the Credit Act. |
| 12 | 1.6 - Misconduct by mortgage brokers
2.9 - Misconduct by financial advisers |
Chapter 7 of the Corporations Act and Chapter 2 of the Credit Act. |
| 13 | 6.9 - Statutory obligation to co-operate | Part 2 of the APRA Act, Part 2 of the ASIC Act, inserts a new Part 5A into the APRA Act and a new Part 6A into the ASIC Act. |
| 14 | 6.11 - Formalising meeting procedures | Part 4 of the ASIC Act. |
Schedule 1: Enforceable Code Provisions (recommendation 1.15)
Schedule 1 to the Bill amends the Corporations Act and the Credit Act to strengthen the existing voluntary code of conduct framework to allow ASIC to designate enforceable code provisions in approved codes of conduct. A breach of an enforceable code provision may attract civil penalties (including pecuniary penalties of up to 300 penalty units) and/or other administrative enforcement action from ASIC.
Schedule 1 also establishes a mandatory code of conduct framework for the financial services and consumer credit industry through regulations, with the ability to designate certain provisions as civil penalty provisions. A breach of these provisions may attract civil penalties (including pecuniary penalties of up to 1,000 penalty units) and/or other administrative enforcement action from ASIC. A breach of any of the mandatory code of conduct provisions may attract other enforcement action from ASIC.
These amendments implement recommendation 1.15 of the Financial Services Royal Commission.
Date of effect: Schedule 1 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 1 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.1 to 15.31.
Compliance cost impact: This measure will result in a small increase in compliance costs.
Schedule 2: Insurer avoidance of life insurance contracts and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5)
Part 1 of Schedule 2 to the Bill amends the Insurance Contracts Act to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured. This amendment implements recommendation 4.6 of the Financial Services Royal Commission.
Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure for consumer insurance contracts with a duty to take reasonable care not to make a misrepresentation. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.
Date of effect: Part 1 of Schedule 2 applies to any life insurance contract that is entered into from the later of Royal Assent and 1 January 2021.
Part 2 of Schedule 2 (relating to recommendation 4.5) applies to consumer insurance contracts that are entered into on or after 5 October 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 2 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.32 to 15.45.
Compliance cost impact: Part 1 of Schedule 2 (relating to recommendation 4.6) should have an insignificant compliance cost.
Part 2 of Schedule 2 (relating to recommendation 4.5) has an estimated compliance cost of $3.1 million.
Schedule 3: Deferred sales model for add-on insurance and Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (recommendation 4.3)
Schedule 3 to the Bill amends the ASIC Act to implement an industry-wide deferred sales model for the sale of add-on insurance products.
The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.
Date of effect: Schedule 3 commences immediately after the commencement of Schedule 5 to the Bill.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 3 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.46 to 15.74.
Compliance cost impact: Schedule 3 will result in low increases to compliance costs. It is estimated that the measure will increase costs for industry by $16.46 million per year.
Schedule 4: Caps on commissions (recommendation 4.4)
Schedule 4 to the Bill amends the ASIC Act to place a cap on the amount of commission 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.
Date of effect: Schedule 4 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 4 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.75 to 15.96.
Compliance cost impact: Schedule 4 has no impact on compliance costs.
Schedule 5: Hawking of financial products (recommendations 3.4 and 4.1)
Schedule 5 to the Bill amends the Corporations Act to ban the hawking of financial products. In particular, the amendments strengthen the existing prohibitions on offers of financial products, securities and interests in managed investment schemes during the course of, or because of, unsolicited contact with a consumer.
Date of effect: Schedule 5 commences on the later of the day after Royal Assent and 5 October 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 5 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.97 to 15.113.
Compliance cost impact: Schedule 5 will result in low increases to compliance costs.
Schedule 6: Use of terms "insurance" and "insurer" (additional commitment in relation to recommendation 4.2)
Schedule 6 to the Bill amends the Insurance Act 1973 to restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.
Date of effect: Schedule 6 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 6 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.114 to 15.139.
Compliance cost impact: Schedule 6 will result in low increases to compliance costs.
Schedule 7: Claims handling and settling services (recommendation 4.8)
Schedule 7 to the Bill gives effect to recommendation 4.8 of the Financial Services Royal Commission to make claims handling and settling a financial service under the Corporations Act.
Date of effect: Schedule 7 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 7 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.140 to 15.143.
Compliance cost impact: This measure is estimated to increase compliance costs by approximately $4.8 million per year.
Schedule 8: Trustees of registrable superannuation entities should have no other duty (recommendation 3.1)
Schedule 8 to the Bill amends the SIS Act to impose a new condition on licences held by a body corporate trustee of a registrable superannuation entity. The new licence condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to carry out their ordinary functions as a trustee of a registrable superannuation entity.
Date of effect: Schedule 8 commences on the later of the day after Royal Assent and 1 July 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 8 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.144 to 15.148.
Compliance cost impact: This measure is estimated to increase compliance costs by approximately $0.8 million per year on average over 10 years.
Schedule 9: Adjustment of APRA and ASIC's roles in superannuation (recommendations 3.8, 6.3, 6.4 and 6.5)
Part 1 of Schedule 9 to the Bill makes adjustments to the SIS Act relating to the roles and responsibilities of superannuation industry regulators. Specifically, it extends ASIC's role in superannuation regulation to cover consumer protection and market integrity regulation. Part 1 also makes general improvements to section 6 of the SIS Act (and related provisions) which allocates the general administration of provisions.
Part 2 of Schedule 9 extends the Australian financial services licensing regime under the Corporations Act and the consumer protection provisions under the ASIC Act to cover a broader range of activities undertaken by APRA-regulated superannuation trustees. Consistent with the objective of recommendation 6.3 of the Financial Services Royal Commission, this is designed to more effectively make ASIC the superannuation regulator responsible for promoting consumer protection and market integrity.
Date of effect: Schedule 9 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 9 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.149 to 15.160.
Compliance cost impact: This measure will result in low increases to compliance costs.
Schedules 10 and 11: Reference checking and information sharing protocol, and Breach reporting and remediation (recommendations 1.6, 2.7, 2.8, 2.9 and 7.2)
Schedule 10 to the Bill gives effect to recommendations 1.6 and 2.7 of the Financial Services Royal Commission by imposing a new obligation on Australian financial services licensees and Australian credit licensees, in respect of mortgage brokers, to comply with a reference checking and information sharing obligation.
Schedule 11 to the Bill gives effect to recommendations 1.6, 2.8 and 7.2 of the Financial Services Royal Commission by clarifying and strengthening the breach reporting regime for Australian financial services licensees, introducing a comparable breach reporting regime for Australian credit licensees, and requiring financial services licensees and credit licensees to report serious compliance concerns about financial advisers and mortgage brokers respectively.
Schedule 11 also gives effect to recommendations 1.6 and 2.9 of the Financial Services Royal Commission by imposing a new obligation on Australian financial services licensees and Australian credit licensees who are mortgage brokers to investigate misconduct and promptly remediate affected clients.
Date of effect: Schedules 10 and 11 generally apply from 1 October 2021.
Proposal announced: The proposals were announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedules 10 and 11 are compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.161 to 15.216.
Compliance cost impact: It is estimated that the total increase in annual compliance costs for recommendation 1.6 will be $4.4 million for credit licensees. It is estimated that the increase in annual compliance costs for recommendation 2.7 will be $1.08 million for financial services licensees.
The compliance cost impact for recommendations 2.8 and 7.2 is nil.
Schedule 12: Statutory obligation to cooperate and formalising ASIC meeting procedures (recommendation 6.9 and 6.11)
Parts 1 and 2 of Schedule 12 to the Bill implement recommendation 6.9 of the Financial Services Royal Commission to remove barriers to efficient co-operation and information sharing between APRA and ASIC, including requiring the regulators to notify each other when they reasonably believe there may be material breaches of each other's legislation.
Part 3 of Schedule 12 to the Bill implements recommendation 6.11 of the Financial Services Royal Commission to formalise ASIC meeting procedures.
Date of effect: Schedule 12 commences on the later of the day after Royal Assent and 1 January 2021.
Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.
Financial impact: Nil.
Human rights implications: Schedule 12 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.217 to 15.247.
Compliance cost impact: Nil.