House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 10 - Reference Checking and Information Sharing Protocol (recommendations 1.6 and 2.7)

Outline of chapter

10.1 Schedule 10 to the Bill implements recommendations 1.6 and 2.7 of the Financial Services Royal Commission, which called for Australian financial services licensees and Australian credit licensees to be required, as a condition of their licence, to comply with a reference checking and information sharing protocol in relation to financial advisors and mortgage brokers.

Context of amendments

10.2 A person who carries on a financial services business must hold an Australian financial services licence (section 911A of the Corporations Act). An Australian financial services licensee is subject to general obligations under section 912A of the Corporations Act, including the obligation to take reasonable steps to ensure that its representatives comply with the financial services laws (section 912A(1)(ca) of the Corporations Act).

10.3 Similarly, a person must not engage in a credit activity if they do not hold an Australian credit licence authorising them to engage in the credit activity (section 29 of the Credit Act). An Australian credit licensee is subject to general conduct obligations under section 47 of the Credit Act, including the obligation to comply with the credit legislation (section 47(1)(e) of the Credit Act).

10.4 In support of these obligations, ASIC's Regulatory Guide 104 Licensing: Meeting the general obligations and Regulatory Guide 205 Credit licensing: General conduct obligations set out expected processes for monitoring and supervising representatives. Under the Regulatory Guides, ASIC expects Australian financial services licensees and Australian credit licensees to have undertaken appropriate background checks before appointing new representatives, including new employees. These checks could include, for example, referee reports, searches of ASIC's register of banned and disqualified persons and police checks.

10.5 Despite these requirements, the Financial Services Royal Commission found that Australian financial services licensees are not doing enough to communicate between themselves about the backgrounds of prospective employees. In particular, the Financial Services Royal Commission found that:

•

the reference checking and information sharing protocol administered by the Australian Banking Association is limited to signatories and not consistently applied;

•

Australian financial services licensees frequently fail to respond adequately to requests for references regarding their previous employees; and

•

Australian financial services licensees do not always take the information they receive about prospective representatives seriously enough.

10.6 As a result of these deficiencies, the Financial Services Royal Commission found that financial advisers facing disciplinary action from their employer can seek employment from another Australian financial services licensee.

10.7 Recommendation 2.7 of the Financial Services Royal Commission was that Australian financial services licensees should be required to give effect to reference checking and information sharing protocols for financial advisers, to the same effect now provided by the Australian Banking Association in its 'Financial Advice - Recruitment and Termination Reference Checking and Information Sharing Protocol'. The intention of the protocol is to promote better information sharing about the performance history of financial advisers - focusing on compliance, risk management and advice quality.

10.8 Recommendation 1.6 of the Financial Services Royal Commission was that the requirement to give effect to reference checking and information sharing protocols should be extended to Australian credit licensees in respect of mortgage brokers.

Summary of new law

10.9 Schedule 10 implements recommendation 2.7 of the Financial Services Royal Commission (and, in part, recommendation 1.6) by:

•

requiring an Australian financial services licensee and an Australian credit licensee, as an obligation under their licence, to comply with reference checking and information sharing protocols to be made by ASIC in the form of legislative instruments under the Corporations Act and the Credit Act; and

•

creating a civil penalty for non-compliance with the obligation.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to the Corporations Act

10.10 The amendments to the Corporations Act impose the new reference checking and information sharing obligation in section 912A of the Corporations Act.

The obligation to check references and share information

10.11 There is a specific obligation on an Australian financial services licensee to comply with a reference checking and information sharing requirement. [Schedule 10, item 3, section 912A(1)(cc) of the Corporations Act]

10.12 Australian financial services licensees are required to conduct reference checking and information sharing in relation to individuals to whom the Reference Checking and Information Sharing Protocol applies - either by requesting information about the individual or providing information about the individual, as the case may be. A licensee must comply with the obligation in relation to:

•

an individual licensee-for example, a current or former licensee who is seeking to work for another licensee as a representative; and

•

a former, current or prospective representative of a licensee-for example, a financial adviser who currently works for a licensee and is seeking employment with another licensee.

10.13 Requiring all licensees to comply with the Reference Checking and Information Sharing Protocol will ensure that there is consistent practice throughout the industry, and that employment information will be available about all financial advisers and mortgage brokers.

10.14 In some circumstances, under the obligation a person must provide information to a licensee about themselves. For example, where a person is a licensee in their own right and seeks to become a representative of an employing licensee, the obligation would operate to require the employing licensee to request information from the prospective representative regarding their work as a licensee.

Reference Checking and Information Sharing Protocol

10.15 While the obligation to comply with reference checking and information sharing requirement is contained in the Corporations Act, the particular obligations will be included in a legislative instrument - the Reference Checking and Information Sharing Protocol. The Reference Checking and Information Sharing Protocol is to be made by ASIC and is subject to disallowance and sunsetting under the Legislation Act 2003. [Schedule 10, item 5, section 912A(3A) of the Corporations Act]

10.16 It is appropriate to delegate the particular requirements of the obligation to a disallowable instrument because it will contain detail that is machinery and technical in nature. This detail may include, for example:

•

information that should be sought and provided when checking a reference and sharing information;

•

information that need not be sought and provided when checking a reference and sharing information;

•

steps a licensee should take to contact referees;

•

methods by which information is to be requested and provided; and

•

record keeping requirements.

10.17 The delegation of particular requirements to the Reference Checking and Information Sharing Protocol allows ASIC to ensure the integrity of the scheme. It is important that the protocol can be made and amended quickly so as to accommodate rapidly changing industry practices. Before making the Reference Checking and Information Sharing Protocol and when making amendments to it, ASIC will be required to undertake any consultation that is appropriate and reasonably practicable (see section 17 of the Legislation Act 2003). As part of this consultation, ASIC may choose to consult with, for example, Australian financial services licensees and Australian credit licensees, the Office of the Australian Information Commissioner, and other relevant stakeholders.

10.18 For information to be provided between Australian financial services licensees and other Australian financial services licensees, ASIC may determine in the Reference Checking and Information Sharing Protocol arrangements for:

•

information about a financial services licensee who is an individual, being shared by the licensee with another financial services licensee; and

•

information about an individual who is a former, current or prospective representative of a financial services licensee being shared by that licensee with another financial services licensee.

[Schedule 10, item 5, section 912A(3A) of the Corporations Act]

10.19 Likewise, for information to be provided between Australian financial services licensees and Australian credit licensees, the amendments provide that ASIC may determine in the Reference Checking and Information Sharing Protocol arrangements for:

•

information about an individual financial services licensee being shared by the licensee with an Australian credit licensee; and

•

information about an individual who is a former, current or prospective representative of a financial services licensee being shared by that licensee with an Australian credit licensee.

[Schedule 10, item 5, section 912A(3A) of the Corporations Act]

10.20 The Reference Checking and Information Sharing Protocol applies to an individual described in section 912A(3A)(a) (see paragraph 10.18) if there are reasonable grounds to suspect that the individual will provide personal advice to retail clients about relevant financial products if they are successful in obtaining the job. For the purposes of the amendments, relevant financial products are defined in section 910A of the Corporations Act. [Schedule 10, item 5, section 912A(3C) of the Corporations Act]

10.21 Likewise, the Reference Checking and Information Sharing Protocol applies to an individual described in section 912A(3A)(b) (see paragraph 10.19) if there are reasonable grounds to suspect that, if they are successful in obtaining the job they have sought, the individual will:

•

provide credit assistance in relation to credit contracts secured by mortgages over residential property; and

•

be a mortgage broker or a director, employee or agent of a mortgage broker.

[Schedule 10, item 5, section 912A(3D) of the Corporations Act]

10.22 In some circumstances, an individual may be appointed to a relevant role before a current or former employer provides a complete reference to the new employer. This may occur, for example, where a current or former employer informs a new prospective employer that:

•

an investigation, inquiry or compliance audit is underway, or an unresolved complaint has been raised, in relation to conduct of the individual; and

•

where the new employer appoints the individual before the investigation, inquiry or audit is completed or the complaint is resolved.

10.23 In these circumstances, because the application of the reference checking and information sharing requirement was triggered by the prospective employment of the individual, it continues to apply to require complete reference information to be given on the outcome of the investigation, inquiry or audit once it is finalised, even if the individual has already been employed in the new role.

10.24 The 'reasonable grounds to suspect' threshold relies on the general law meaning of the term and is not defined by legislation for the purposes of this section. There are reasonable grounds to suspect where there are facts that would induce a reasonable person to suspect the truth or existence of the circumstance. In determining whether the grounds are reasonable, a person may take into account the facts and circumstances of the situation.

10.25 The references to mortgage broker in section 912A(3D) have the same meaning as in section 15B of the Credit Act. The application of the Reference Checking and Information Sharing Protocol is explained further at paragraph 10.47. [Schedule 10, item 5, section 912A(3E) of the Corporations Act]

Record keeping

10.26 For ASIC to monitor compliance with the information sharing and reference checking obligation, the amendments provide that ASIC may determine record keeping requirements in the Reference Checking and Information Sharing Protocol. [Schedule 10, item 5, section 912A(3A) of the Corporations Act]

10.27 The Reference Checking and Information Sharing Protocol may include matters relating to the keeping and retaining records of information shared, and the circumstances under which the information is shared. Under the protocol ASIC may determine requirements including, for example:

•

information that should be sought and provided when checking a reference and sharing information;

•

information that need not be sought and provided when checking a reference and sharing information, for example information that has been provided to a licensee under section 916G (see paragraph 10.40);

•

steps a licensee should take to contact referees;

•

how long records of compliance must be kept for; and

•

record keeping requirements.

Consequences for failing to check references and share information

10.28 A civil penalty applies to an Australian financial services licensee if they fail to comply with the obligation to check references and share information. If a court is satisfied that a licensee has contravened the obligation, the court must make a declaration of contravention. Once a declaration has been made, ASIC can seek a pecuniary penalty order under which a court would order the licensee to pay a penalty to the Commonwealth (see sections 1317E and 1317G of the Corporations Act). The court may order a pecuniary penalty no greater than 5,000 penalty units for an individual or 50,000 penalty units for a body corporate (or those amounts multiplied by three if the court can determine the benefit derived and detriment avoided because of the contravention or, for a body corporate, an amount determined with respect to the annual turnover of the body corporate) (see sections 1317G(3) and 1317G(4) of the Corporations Act). [Schedule 10, item 9, section 912A(5A) of the Corporations Act]

10.29 The imposition of a civil penalty for contravention of the obligation to comply with the Reference Checking and Information Sharing Protocol is necessary and appropriate. This is the case because, in circumstances where poor conduct is identified and consequences are applied, the Financial Services Royal Commission found that licensees have done too little to share that information with others and are not doing enough to communicate between themselves about the backgrounds of prospective employees. Licensees also frequently fail to respond adequately to requests for references regarding their previous employees, nor do they always take the information delivered to them seriously enough. The result is that financial advisers facing disciplinary action from their employer can shop around for another licensee to employ them.

10.30 Further, the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the likelihood of customers being exposed to a financial adviser who has a history of poor conduct, resulting in the customer having an increased risk of receiving poor quality advice or another form of unsuitable service.

10.31 Also, the Australian Banking Association's reference checking and information sharing protocol, intended to deter the practice of the 'rolling bad apples', has been insufficient. Particularly, the Financial Services Royal Commission found that the Australian Banking Association protocol is limited to signatories and not consistently applied.

10.32 The imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the reference checking and information sharing obligation is consistent with the treatment of other contraventions of the general obligations imposed on an Australian financial services licensee-for example, the obligation to do all things necessary to ensure that the financial services covered by the licensee are provided efficiently, honestly and fairly, and the obligation to ensure that representatives of the licensee are adequately trained.

10.33 The maximum penalty applicable to a failure to comply with the Reference Checking and Information Sharing Protocol is 5,000 penalty units for an individual and 50,000 penalty units for a body corporate (see sections 1317G(3) and (4) of the Corporations Act). If the court can determine the benefit derived and detriment avoided because of the contravention, the applicable penalty may otherwise be that amount multiplied by three (see sections 1317G(3)(b) and (4)(b) of the Corporations Act). In the case of a body corporate, the applicable penalty may otherwise be 10 per cent of the annual turnover of the body corporate (not exceeding an amount equal to 2.5 million penalty units) (see section 1317G(4)(c) of the Corporations Act). This is consistent with the maximum penalty that is applicable in relation to a contravention of some other general obligations of a financial services licensee.

10.34 Consistent with all pecuniary penalty orders made under section 1317G of the Corporations Act, when considering the penalty to be ordered for a failure by a financial services licensee to comply with the Reference Checking and Information Sharing Protocol the court must take into account all relevant matters. Section 1317G of the Corporations Act provides that these matters include:

•

the nature and extent of the contravention;

•

the nature and extent of any loss or damage suffered because of the contravention;

•

the circumstances in which the contravention took place; and

•

whether the person has previously been found by a court to have engaged in similar conduct.

10.35 In considering the imposition of this civil penalty, regard has been had to the Guide to Framing Commonwealth Offences.

Privacy

10.36 The Reference Checking and Information Sharing Protocol must not require personal information be shared other than with the consent of the individual to whom the information relates. [Schedule 10, item 5, section 912A(3B) of the Corporations Act]

10.37 The giving of consent by the prospective representative means that the disclosure of information by the current or former employer and the use of the information by the prospective employer does not breach the Australian Privacy Principles contained in the Privacy Act 1988 (provided that the use and disclosure is consistent with the terms of the consent given by the prospective representative). Accordingly, the amendments provide that the Reference Checking and Information Sharing Protocol must not require or permit personal information (within the meaning of the Privacy Act 1988) to be shared, other than with the consent of the individual to whom the information relates.

10.38 The giving of consent for reference checking and information sharing formalises a practice that is standard across a wide range of industries and professions.

10.39 The Reference Checking and Information Sharing Protocol must not require information to be provided in relation to conduct that occurred more than five years before the information is shared. This reflects the period of time for which employee records would be expected to be retained and therefore does not impose unreasonable record keeping obligations on licensees. However, if a person is able to do so, the person may voluntarily provide relevant information that relates to conduct that occurred more than five years ago. [Schedule 10, item 5, section 912A(3B) of the Corporations Act]

Information about representatives given to licensees by ASIC

10.40 Section 916G provides that ASIC may, if it considers it appropriate to do so, give information to an Australian financial services licensee about a person who ASIC believes is, or will be, a representative of the licensee. Further use and disclosure of the information is permitted in limited circumstances only (see sections 916G(2), (3) and (5)).

10.41 The reference checking and information sharing obligation is not intended to alter the restrictions on disclosure of information provided by ASIC under section 916G. Accordingly, it is not intended that a person who has received information from ASIC under section 916G is required to share this information with another licensee in the performance of their reference checking and information sharing obligation.

Defence against defamation and breach of confidence actions

10.42 It is essential to the operation of the reference checking and information sharing obligation that licensees share information honestly and frankly. For this reason, the defence of qualified privilege applies to a person who gives information about a representative in the course of complying with their obligation under the Reference Checking and Information Sharing Protocol. [Schedule 10, item 5, section 912A(3F) of the Corporations Act]

10.43 The defence of qualified privilege will apply to an Australian financial services licensee where they provide information about an individual who is currently or was formerly a representative of the licensee (see section 89 of the Corporations Act).

10.44 The qualified privilege defence in relation to compliance with the Reference Checking and Information Sharing Protocol is consistent with the defence in similar circumstances under the Corporations Act-namely, in relation to information given to ASIC, for the conduct of market licensees and CS facility licensees, and for information given to market licensees and CS facility licensees (see Division 1 of Part 7.12 of the Corporations Act).

10.45 In addition to a licensee's qualified privilege when acting in compliance with the obligation to provide a reference about a representative, licensees are also not liable for any action based on breach of confidence in relation to that conduct. This provides a protection to the licensee where confidential information is divulged in the course of satisfying the obligation to share information. However, to balance the interests of a current or former representative with respect to their confidential information, the Reference Checking and Information Sharing Protocol may specify that certain information does not need to be shared to comply with the protocol. [Schedule 10, item 5, section 912A(3G) of the Corporations Act]

Amendments to the Credit Act

10.46 The amendments to the Credit Act impose the new reference checking and information sharing obligation in section 47 of the Credit Act. The amendments to the Credit Act impose the obligation on Australian credit licensees in relation to mortgage brokers in generally the same manner as the amendments to the Corporations Act impose the obligation on Australian financial services licensees. An Australian credit licensee may be a licensee that is a mortgage aggregator (including, for example, a dealer group or franchise group).

The obligation to check references and share information

10.47 The amendments impose an obligation on an Australian credit licensee to comply with a reference checking and information sharing requirement in respect of their mortgage broker representatives. [Schedule 10, item 13, section 47(1)(ea) of the Credit Act]

10.48 Australian credit licensees are required to conduct reference checking and information sharing in relation to individuals to whom the Reference Checking and Information Sharing Protocol applies - either by requesting information about the individual or providing information about the individual, as the case may be. A licensee must comply with the obligation in relation to:

•

an individual licensee-for example, a current or former licensee who is seeking to work for another licensee; and

•

a former, current or prospective representative of a licensee-for example, a mortgage broker who currently works for a licensee and is seeking employment with another licensee.

10.49 Requiring all licensees to comply with the Reference Checking and Information Sharing Protocol will ensure that there is a consistent practice throughout the industry, and that employment information will be available about all financial advisers and mortgage brokers.

10.50 In some circumstances, under the obligation a person must provide information to a licensee about themselves. For example, where a person is a licensee in their own right and seeks to become a mortgage broker employed by a licensee, the obligation would operate to require the employing licensee to request information from the prospective representative regarding their work as a licensee.

Reference Checking and Information Sharing Protocol

10.51 While the obligation to comply with reference checking and information sharing requirements is contained in the Credit Act, the particular obligations will be included in a legislative instrument - the Reference Checking and Information Sharing Protocol. The protocol is to be made by ASIC and is subject to disallowance and sunsetting under the Legislation Act 2003. [Schedule 10, item 14, section 47(3A) of the Credit Act]

10.52 It is appropriate to delegate the particular requirements of the obligation to a disallowable instrument because it will contain detail that is machinery and technical in nature. This detail may include, for example:

•

information that should be sought and provided when checking a reference and sharing information;

•

information that need not be sought and provided when checking a reference and sharing information;

•

steps a licensee should take to contact referees;

•

methods by which information is to be requested and provided; and

•

record keeping requirements.

10.53 The delegation of particular requirements to the Reference Checking and Information Sharing Protocol allows ASIC to ensure the integrity of the scheme. It is important that the protocol can be made and amended quickly so as to accommodate rapidly changing industry practices. Before making the Reference Checking and Information Sharing Protocol and when making amendments to it, ASIC will be required to undertake any consultation that is appropriate and reasonably practicable (see section 17 of the Legislation Act 2003). As part of this consultation, ASIC may choose to consult with, for example, Australian credit licensees and Australian financial services licensees, the Office of the Australian Information Commissioner, and other relevant stakeholders.

10.54 For information to be provided between different Australian credit licensees, the amendments provide that ASIC may determine in the Reference Checking and Information Sharing Protocol arrangements for:

•

information about an Australian credit licensee who is an individual being shared by the licensee with another Australian credit licensee; and

•

information about an individual who is a former, current or prospective representative of an Australian credit licensee being shared by that licensee with another Australian credit licensee.

[Schedule 10, item 14, section 47(3A)(a) of the Credit Act]

10.55 Likewise, for information to be provided between Australian credit licensees and Australian financial services licensees, the amendments provide that ASIC may determine in the Reference Checking and Information Sharing Protocol arrangements for:

•

information about an Australian credit licensee who is an individual, being shared by the licensee with an Australian financial services licensee; and

•

information about an individual who is a former, current or prospective representative of an Australian credit licensee being shared by that licensee with an Australian financial services licensee.

[Schedule 10, item 14, section 47(3A)(b) of the Credit Act]

10.56 The Reference Checking and Information Sharing Protocol applies to an individual described in paragraph 10.54 if there are reasonable grounds to suspect that, if they are successful in obtaining the job they have sought, the individual will:

•

provide credit assistance in relation to credit contracts secured by mortgages over residential property; and

•

be a mortgage broker or a director, employee or agent of a mortgage broker.

[Schedule 10, item 14, section 47(3A) of the Credit Act]

10.57 In some circumstances, an individual may be appointed to a relevant role before a current or former employer provides a complete reference to the new employer. This may occur, for example, where a current or former employer informs a new prospective employer that:

•

an investigation, inquiry or compliance audit is underway, or an unresolved complaint has been raised, in relation to conduct of the individual; and

•

where the new employer appoints the individual before the investigation, inquiry or audit is completed or the complaint is resolved.

10.58 In these circumstances, because the application of the reference checking and information sharing requirement was triggered by the prospective employment of the individual, it continues to apply to require complete reference information to be given on the outcome of the investigation, inquiry or audit once it is finalised, even if the individual has already been employed in the new role.

10.59 The references to credit assistance and credit contracts in section 47(3C) have the same meaning as they have in the Credit Act. A person undertaking mortgage broking for the purposes of these amendments has a broader meaning than that contained in section 15B of the Credit Act as these amendments extend to employees, directors and agents of a mortgage broker (provided that their job involves or will involve the provision of credit assistance in relation to credit contracts secured by mortgages over residential property). For these individuals, the carrying on of a business is not required. The Reference Checking and Information Sharing Protocol applies to a broader cohort of people in this way to ensure that the reference checking and information sharing framework operates in relation to all relevant people undertaking mortgage broking activity. For simplicity, this Chapter refers to this cohort as mortgage brokers. [Schedule 10, item 14, section 47(3C) of the Credit Act]

10.60 Likewise, the Reference Checking and Information Sharing Protocol applies to an individual described in paragraph 10.55 if there are reasonable grounds to suspect that, if they are successful in obtaining the job they have sought, the individual will provide personal advice to retail clients about relevant financial products. For the purposes of the amendments, relevant financial products are defined in section 910A of the Corporations Act. [Schedule 10, item 14, sections 47(3D) and 47(3E) of the Credit Act]

10.61 The 'reasonable grounds to suspect' threshold relies on the general law meaning of the term and is not defined by legislation for the purposes of this section. There are reasonable grounds to suspect where there are facts that would induce a reasonable person to suspect the truth or existence of the circumstance. In determining whether the grounds are reasonable, a person may take into account the facts and circumstances of the situation.

Record keeping

10.62 For ASIC to monitor compliance with the information sharing and reference checking obligation, the amendments provide that ASIC may determine record keeping requirements in the Reference Checking and Information Sharing Protocol. [Schedule 10, item 14, section 47(3A) of the Credit Act]

10.63 The Reference Checking and Information Sharing Protocol may include matters relating to the keeping and retaining records of information shared, and the circumstances under which the information is shared. Under the protocol ASIC may determine requirements including, for example:

•

information that should be sought and provided when checking a reference and sharing information;

•

information that need not be sought and provided when checking a reference and sharing information, for example information that has been provided to a licensee under section 73 (see paragraph 10.75);

•

steps a licensee should take to contact referees;

•

how long records of compliance must be kept for; and

•

how records of compliance should be stored.

Consequences for failing to check references and share information

10.64 A civil penalty applies to an Australian credit licensee's failure to comply with the obligation to check references and share information. If a court is satisfied that a licensee has contravened the obligation, the court must make a declaration of contravention. Once a declaration has been made, ASIC can seek a pecuniary penalty order under which a court would order the licensee to pay a penalty to the Commonwealth (see sections 166 and 167). The court may order a pecuniary penalty no greater than 5,000 penalty units for an individual or 50,000 penalty units for a body corporate (or those amounts multiplied by three if the court can determine the benefit derived and detriment avoided because of the contravention or, for a body corporate, an amount determined with respect to the annual turnover of the body corporate) (see sections 167A and 167B). [Schedule 10, item 9, section 47(4) of the Credit Act]

10.65 The imposition of a civil penalty for contravention of the obligation to comply with the Reference Checking and Information Sharing Protocol is necessary and appropriate. This is the case because, in circumstances where poor conduct is identified and consequences are applied, the Financial Services Royal Commission found that licensees have done too little to share that information with others and are not doing enough to communicate between themselves about the backgrounds of prospective employees. Licensees also frequently fail to respond adequately to requests for references regarding their previous employees, nor do they always take the information delivered to them seriously enough. The result is that representatives of an Australian credit licensee facing disciplinary action from their employer can shop around for another licensee to employ them. This contributes to the 'rolling bad apples' phenomenon.

10.66 Further, the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the likelihood of customers being exposed to a mortgage broker who has a history of poor conduct, resulting in the customer having an increased risk of receiving poor quality broking services or another form of unsuitable service.

10.67 The imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the reference checking and information sharing obligation is consistent with the treatment of other contraventions of the general obligations imposed on an Australian credit licensee-for example, the obligation to do all things necessary to ensure that the credit activities engaged in by the licensee are provided efficiently, honestly and fairly, and the obligation to ensure that representatives of the licensee are adequately trained.

10.68 The maximum penalty applicable for a failure to comply with the Reference Checking and Information Sharing Protocol is 5,000 penalty units for an individual and 50,000 penalty units for a body corporate (see sections 47(4) and 167B(2)(a) of the Credit Act). If the court can determine the benefit derived and detriment avoided because of the contravention, the applicable penalty may otherwise be that amount multiplied by three (see sections 167B(1)(b) and (2)(b) of the Credit Act). In the case of a body corporate, the applicable penalty may otherwise be 10 per cent of the annual turnover of the body corporate (not exceeding an amount equal to 2.5 million penalty units) (see section 167B(2)(c) of the Credit Act). This is consistent with the maximum penalty that is applicable in relation to a contravention of some other general obligations of a credit licensee.

10.69 Consistent with all pecuniary penalty orders made under Part 4-1 of the Credit Act, when considering the penalty for a failure by a credit licensee to comply with the Reference Checking and Information Sharing Protocol the court must take into account all relevant matters. Section 167(3) of the Credit Act provides that these matters include:

•

the nature and extent of the contravention;

•

the nature and extent of any loss or damage suffered because of the contravention;

•

the circumstances in which the contravention took place;

•

whether the person has previously been found by a court to have engaged in similar conduct.

10.70 In considering the imposition of this civil penalty, regard has been had to the Guide to Framing Commonwealth Offences.

Privacy

10.71 The Reference Checking and Information Sharing Protocol must not require personal information be shared other than with the consent of the individual to whom the information relates. [Schedule 10, item 14, section 47(3B) of the Credit Act]

10.72 The giving of consent by the prospective representative means that the disclosure of information by the current or former employer and the use of the information by the prospective employer does not breach the Australian Privacy Principles contained in the Privacy Act 1988 (provided that the use and disclosure is consistent with the terms of the consent given by the prospective representative). Accordingly, the amendments provide that the protocol must not require or permit personal information (within the meaning of the Privacy Act 1988) to be shared, other than with the consent of the individual to whom the information relates.

10.73 The giving of consent for reference checking and information sharing formalises a practice that is standard across a wide range of industries and professions.

10.74 The Reference Checking and Information Sharing Protocol must not require information to be shared in relation to conduct that occurred more than five years before the information is shared. This reflects the period of time for which employee records would be expected to be retained and therefore does not impose unreasonable record keeping obligations on licensees. However, if a person is able to do so, the person may choose to provide information that relates to conduct that occurred more than five years ago. [Schedule 10, item 14, section 47(3B) of the Credit Act]

Information about representatives given to licensees by ASIC

10.75 Section 73 provides that ASIC may, if it considers it appropriate to do so, give information to an Australian credit licensee about a person who ASIC believes is, or will be, a representative of the licensee. Further use and disclosure of the information is permitted in limited circumstances only (see sections 73(2), (4) and (8)).

10.76 The reference checking and information sharing obligation is not intended to alter the restrictions on disclosure of information provided by ASIC under section 73. Accordingly, it is not intended that a person who has received information from ASIC under section 73 is required to share this information with another licensee in the performance of their reference checking and information sharing obligation.

Defence against defamation and breach of confidence actions

10.77 It is essential to the operation of the reference checking and information sharing obligation that licensees share information honestly and frankly. For this reason, the defence of qualified privilege applies to a person who gives information about a representative in the course of complying with their obligation under the protocol. [Schedule 10, item 14, section 47(3F) of the Credit Act]

10.78 The defence of qualified privilege will apply to an Australian credit licensee where they provide information about an individual who is currently or was formerly a representative of the licensee (see section 16 of the Credit Act).

10.79 The qualified privilege defence in relation to compliance with the protocol is consistent with the defence in similar circumstances under the Credit Act-namely, in relation to certain information shared between licensees and ASIC (see sections 73 and 243 of the Credit Act).

10.80 In addition to a licensee's qualified privilege when acting in compliance with the obligation to provide a reference about a current, former or prospective representative, licensees are also not liable for any action based on breach of confidence in relation to that conduct. This provides a protection to the licensee where confidential information is divulged in the course of satisfying the obligation to share information. However, to balance the interests of a current or former representative with respect to their confidential information, the protocol may specify that certain information does not need to be shared to comply with the protocol. [Schedule 10, item 14, section 47(3G) of the Credit Act]

Interaction of the amendments

10.81 As described in this Chapter, the reference checking and information sharing obligation applies to both Australian financial services licensees and Australian credit licensees. This is intended to enable any past misconduct by a person to be ascertained and shared between the financial advice and mortgage broking industries, particularly where the person seeks to move from one industry to the other.

10.82 Example 10.1 shows how the reference checking and information sharing regime would prevent a person being appointed to a position in one industry where they have engaged in misconduct in the other.

Example 10.1 : Reference checking identifying prior breach

Vincent worked as a financial adviser with Company Alpha, an Australian financial services licensee. Vincent stole money from a client and Company Alpha terminated his employment.

One year later, Vincent applies for a position as a financial adviser with Company Bravo, another Australian financial services licensee. Company Bravo undertakes its obligation to check references and contacts Company Alpha (with Vincent's consent). Company Alpha satisfies its obligation to share information with another Australian financial services licensee and informs Company Bravo that Vincent was terminated for stealing money from a client. Company Bravo declines to offer Vincent a position.

After two years, Vincent realises that, owing to his misconduct, it will be difficult for him to find further employment as a financial adviser. He decides to seek work as a mortgage broker and applies for a position with Company Charlie, an Australian credit licensee. Because Vincent had previously worked as a representative of an Australian financial services licensee, Company Charlie undertakes its obligation to check references and contacts Company Alpha (with Vincent's consent). Company Alpha undertakes its obligation to share information with an Australian credit licensee and informs Company Charlie of Vincent's conduct. Company Charlie declines to offer Vincent a position.

Consequential amendments

Amendments to the Corporations Act

10.83 The amendments insert in the Corporations Act a definition of Reference Checking and Information Sharing Protocol to mean the protocol determined by ASIC, and described at paragraph 10.15. The amendments also insert new subheadings in section 912A of the Corporations Act to add clarity. [Schedule 10, items 1, 2, 4, 6, 7, 8 and 10, sections 910A and 912A of the Corporations Act]

Amendments to the Credit Act

10.84 The amendments insert a definition in the Credit Act of Reference Checking and Information Sharing Protocol to mean the protocol determined by ASIC, and described at paragraph 10.51. [Schedule 10, item 12, section 5 of the Credit Act]

Application and transitional provisions

10.85 The amendments commence on 1 October 2021. [Clause 2]

Amendments to the Corporations Act

10.86 The amendments apply from 1 October 2021. Accordingly, the obligation to undertake reference checking about a potential representative of an Australian financial services licensee applies to a representative appointed on and after 1 October 2021. Likewise, the obligation to share information about representatives applies to a request for information made on and after 1 October 2021. [Schedule 10, item 11, section 1670 of the Corporations Act]

Amendments to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009

10.87 The obligation to undertake reference checking about a prospective mortgage broker applies in relation to a mortgage broker appointed on and after 1 October 2021. Likewise, the obligation to share information about representatives applies to a request for information made on and after 1 October 2021. [Schedule 10, item 16, clause 1 of Schedule 15 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]