House of Representatives

Explanatory Memorandum

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

Chapter 15 - Statement of Compatibility with Human Rights

Schedule 1 - Enforceable code provisions (recommendation 1.15)

15.1 Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.2 Schedule 1 amends the Corporations Act and the Credit Act to strengthen the existing voluntary code of conduct framework by allowing 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.

15.3 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 codes of conduct provisions may attract other enforcement action from ASIC.

Human rights implications

15.4 In assessing the impact on human rights, consideration has been given to the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights (Guidance Note 2), and to the Guide to Framing Commonwealth Offences.

15.5 Schedule 1 engages, or may engage, the following human rights contained in the International Covenant on Civil and Political Rights:

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the right to a fair trial and public hearing (Article 14); and

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the right to privacy (Article 17).

15.6 The civil penalties contained in Schedule 1 are not considered to be 'criminal' for the purposes of human rights law. As such, the criminal process guarantees in Articles 14 and 15 of the International Covenant on Civil and Political Rights do not apply.

Right to fair trial

Civil penalties are not 'criminal' for the purposes of human rights law

15.7 Schedule 1 contains new civil penalty provisions. If an individual or corporation contravenes a civil penalty provision, ASIC may apply to the court for a civil penalty order of up to a maximum of:

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300 penalty units for a breach of an enforceable code provision contained in an approved voluntary code of conduct; or

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1,000 penalty units for a breach of a civil penalty provision contained in a mandatory code of conduct.

15.8 Given the civil nature of these penalty provisions, applications to the court for civil penalty orders will be dealt with in accordance with the rules and procedures that apply in relation to civil matters.

15.9 None of the penalty provisions in Schedule 1 impose a criminal penalty, nor carry a penalty of imprisonment.

15.10 Despite this, Guidance Note 2 observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights, regardless of the distinction between criminal and civil penalties in domestic law.

15.11 In accordance with the Committee's guidance, each civil penalty provision in Schedule 1 was assessed to determine whether it amounts to a 'criminal' penalty for the purpose of international human rights law. This assessment took into consideration the nature, purpose and severity of the penalties.

15.12 In providing reasons for recommendation 1.15 of the Financial Services Royal Commission, Commissioner Hayne noted that the limited consequences for a breach of an approved voluntary code of conduct may not be enough to make industry participants correct and prevent systemic failures in their application of the code. To address this limitation in the existing codes framework, the law must be amended to provide adequate incentives for industry participants to identify, correct and prevent systemic failures in applying the code.

15.13 The civil penalties in Schedule 1 are not intended to be punitive in nature. They are intended to encourage industry members to comply with the standards of behaviour set out in the code of conduct. The penalties are directed at members of the financial services and consumer credit industry in a specific disciplinary context (and not to the public in general), and are considered to be 'disciplinary' or 'regulatory' rather than 'criminal'.

15.14 The purpose of a code of conduct is for industry to commit to a particular set of standards or requirements for the benefit of consumers. A breach of the code of conduct can therefore create distrust in the financial services and consumer credit sector. In this context, the maximum penalties contained in Schedule 1 are considered appropriate as a preventive and protective measure to support consumer confidence in these sectors.

15.15 Having regard to the specific regulatory context and the nature of the industry being regulated, the severity of the civil penalties that may be imposed on individuals is not sufficiently severe to be considered 'criminal'. In addition, a breach of a code of conduct in the financial services and consumer credit industry may result in commercial gains by the industry participant at the expense of the consumer. Therefore, where the industry participant has made a monetary gain from consumers by breaching a code, it is in the public interest that the gain not be retained by that industry participant. It also serves as an effective regulatory signal to industry participants, reducing the potential gain or benefit that may accrue from non-compliance.

15.16 In practice, ASIC retains the flexibility to take administrative action that is appropriate to, and likely to be most effective in, the circumstances of individual cases. Where ASIC applies for a civil penalty in relation to a breach, the court will continue to have discretion to apply an appropriate penalty up to the maximum amount. The court would consider the relevant facts of any given case, and impose a penalty that is proportionate to that conduct, making it unlikely that the maximum penalty would be imposed in every instance. In practice, the maximum amount would only be applied in the most egregious instances of non-compliance.

15.17 Imposing the civil penalties contained in Schedule 1 on industry participants-who should reasonably be aware of their obligations under the Corporations Act and Credit Act-will enable an effective disciplinary response to non-compliance. Based on the above factors, including the cumulative effect of the nature and severity of the civil penalties in Schedule 1, these penalties are not 'criminal' for the purposes of human rights law.

Infringement notices

15.18 The amendments in Schedule 1 relating to the code of conduct regime apply the existing infringement notice regimes contained in the Corporations Act and Credit Act to breaches of enforceable code provisions in an approved voluntary code of conduct, and to breaches of civil penalty provisions in a mandatory code of conduct. This may be considered to engage Article 14 of the International Covenant on Civil and Political Rights which provides that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

15.19 The right to a fair and public hearing by a competent, independent and impartial tribunal is not limited by the Schedule because the person subject to an infringement notice may still elect to have the matter heard by a court rather than pay the amount specified in the infringement notice.

15.20 The Guide to Framing Commonwealth Offences suggests that amounts payable under an infringement notice should not exceed 12 penalty units for a natural person or 60 penalty units for a body corporate. The penalties under the infringement notice regime in the Credit Act are 50 penalty units for an individual and 250 penalty units for a body corporate for a single contravention of a civil penalty provision. The penalties under the infringement notice regime in the Corporations Act, subject to regulations, may amount to one-fortieth of the maximum penalty for the contravention of a civil penalty provision.

15.21 While these penalty amounts are a departure from the Guide to Framing Commonwealth Offences, they are considered appropriate and proportionate to encouraging industry members to comply with the standards of behaviour set out in the code of conduct. They are rationally connected to achieving the legitimate objective of maintaining consumer confidence in the financial services and consumer credit industry.

15.22 To the extent that Schedule 1 engages the rights under Article 14 of the International Covenant on Civil and Political Rights, it is compatible with human rights because a person subject to an infringement notice may still elect to have the matter heard by a court rather than pay the amount specified in the infringement notice.

Right to privacy

15.23 Article 17 of the International Covenant on Civil and Political Rights contains the right to protection from arbitrary or unlawful interference with privacy. The UN Human Rights Committee has not defined 'privacy' but it is generally understood to comprise of a freedom from unwanted and unreasonable intrusions into activities that society recognises as falling within the sphere of individual autonomy. The collection and sharing of information (public or otherwise) may be considered to engage and offend the right to privacy.

15.24 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

15.25 In order for an industry code of conduct to be effective, appropriate administrative systems need to be established to monitor compliance with the code and, where appropriate, report breaches to the regulator. This may engage the right to privacy, to the extent that it includes personal information about individuals. This would apply to both voluntary codes of conduct approved by ASIC, and mandatory codes of conduct imposed by regulations.

15.26 As holders of an Australian financial services licence or credit licence, industry participants already have existing obligations to share serious contraventions of financial services law with ASIC. This information may include personal information about an individual licensee or consumer. These obligations are already contained in the Corporations Act and the Credit Act. Schedule 1 extends these existing obligations to enforceable code provisions in an approved code of conduct and all provisions in a mandatory code of conduct as these provisions will now form part of the 'financial services law'.

15.27 The sharing of this information is important to assist with ASIC's investigation and enforcement functions. It alerts the regulator to systemic issues within the financial services and consumer credit industry and allows ASIC to act quickly and effectively with the most appropriate solution (whether that be through ASIC administrative action, civil or criminal proceedings, or potentially seeking amendments to legislation). This achieves the legitimate objective of maintaining consumer confidence in the industry, by enabling better monitoring of illegal and other high-risk activities and strengthening corporate compliance with the financial services law.

15.28 When information is shared with ASIC and that information contains personal information about an individual licensee or consumer(s), ASIC must comply with disclosure and retention principles contained in the Privacy Act 1988. This information is also received as 'protected information' under section 127 of the ASIC Act, which prohibits disclosure and unauthorised use unless in specified circumstances.

15.29 Based on the above factors, the potential for interference with the right to privacy is permissible as it is considered to be reasonable, proportionate and necessary to achieve the legitimate objective of maintaining consumer confidence in the financial services and consumer credit industry. Therefore, to the extent that Schedule 1 engages the right to privacy, it is consistent with Article 17 of the International Covenant on Civil and Political Rights as any limitations on that right are authorised by law and are not arbitrary.

Conclusion

15.30 To the extent that Schedule 1 engages the rights under Articles 14 and 17 of the International Covenant on Civil and Political Rights, it is compatible with human rights as the limitations:

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achieve the legitimate objective of maintaining consumer confidence in the financial services and consumer credit industry;

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are rationally connected to the objective by improving the likelihood of compliance with the codes of conduct regime; and

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impose proportionate and appropriate penalties to deter any misconduct.

15.31 Therefore, Schedule 1 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

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)

15.32 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.33 Part 1 of Schedule 2 amends the Insurance Contracts Act to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of a non-fraudulent relevant failure by an insured. This amendment implements recommendation 4.6 of the Financial Services Royal Commission.

15.34 As a result, an insurer may only avoid a contract of life insurance on the basis of a non-fraudulent relevant failure within three years of entering into the contract if the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms, had the relevant failure not occurred.

15.35 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.

15.36 The new duty applies only to contracts of insurance (including general and life insurance contracts) obtained for the insured's personal, domestic or household purposes.

15.37 In determining whether the insured has taken reasonable care not to make a misrepresentation, all relevant circumstances must be taken into account. Any characteristics or circumstances of the insured of which the insurer was, or ought reasonably to have been, aware must also be taken into account.

Human rights implications

15.38 This Schedule may engage the right to protection from unlawful or arbitrary interference with privacy under Article 17 of the International Covenant on Civil and Political Rights.

15.39 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case

15.40 The duty to take reasonable care not to make a misrepresentation requires the consumer to take reasonable care to answer relevant questions put to them by an insurer when entering into an insurance contract. Depending on the nature of the insurance, this may be information relating to details of previous insurance, sensitive information (such as health information in relation to life insurance policies), drivers licence suspensions, claims history and information about a spouse or partner. It is appropriate for the insurance company to collect this information to process requests for quotes, applications for insurance, underwriting and pricing policies, issuing consumers with a policy, as well as managing an insured's claim and processing payments.

15.41 The new duty may require the disclosure of personal information as requested by insurers for consumers wishing to enter into insurance contracts. This is appropriate as the disclosure of certain matters known to the insured, including personal information, is relevant to the insurer's decision of whether or not to accept risk under an insurance contract and, if so, on what terms.

15.42 The new duty is proportionate. It applies in relation to insurance contracts that a consumer elects to apply for or enter into, and represents a more targeted approach to the disclosure required of consumers than the current law. The current requirements fall short of adequately safeguarding consumers against having their claims declined where they may have inadvertently failed to disclose their past circumstances or because insurers have failed to ask the right questions. The Financial Services Royal Commission concluded that the duty to take reasonable care not to make a misrepresentation to an insurer is more appropriate for consumer contracts of insurance and is substantially less complex than the current disclosure duty. Commissioner Hayne noted it placed the burden on an insurer to elicit the information that it needs and does not require the consumer to surmise or guess what information might be important to an insurer.

15.43 Where this right is engaged, there are also appropriate safeguards to prevent breaches of an individual's privacy. Insurance companies who request specific personal information from an individual are subject to the Privacy Act 1988 and must comply with the relevant Australian Privacy Principles. The protections in the Privacy Act 1988 relate to the collection, storage, use and disclosure of personal information. Consumers who feel that their privacy has been compromised can contact the Office of the Australian Information Commissioner for investigation, and where appropriate, redress.

15.44 Therefore, to the extent that the right has been engaged, this is proportionate to achieving the legitimate objective of ensuring that insurers have enough information to adequately assess the appropriate insurance cover for the consumer. This is rationally connected to the legitimate objective by better targeting the duty on consumers for disclosure. This ensures that consumers don't have to surmise or guess what information is required. Any engagement with this right has appropriate safeguards as insurance companies must comply with the Privacy Act 1988 and the Australian Privacy Principles.

Conclusion

15.45 Schedule 2 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Schedule 3 - Deferred sales model for add-on insurance and Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020

15.46 Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

15.47 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.48 Schedule 3 implements an industry wide deferred sales model applicable to any add-on insurance products. These amendments give effect to recommendation 3 of the Financial Services Royal Commission.

15.49 The deferred sales model prohibits the sale of add-on insurance products for at least four clear days after a customer has entered into a commitment to acquire a principal product or service.

15.50 During the add-on insurance deferral period, if either the principal provider or a related third party is contacted by the customer, either party may respond to the customer's inquiry using any method of communication if the offer, request or invitation is made in response to contact initiated by the customer and relates only to the purposes for which the customer initiated the contact.

15.51 In the pre-deferral period, the principal provider and a related third party can offer the add-on insurance product for sale. After the deferral period, the principal provider and the related third party can sell the add-on insurance product and only offer the product in writing. The recipient of customer inquiries after the deferred sales period may respond in any manner.

15.52 Offences relating to customer contact by the principal provider or a related third party provider before, during or after the deferral period are defensible by the person. The person bears the onus of proof in relation to those particular matters.

15.53 For a person to rely on exceptions or exemptions from the deferred sales model, the evidential burden is reversed and the defendant must bear the onus of proof.

15.54 Currently, no specific restrictions apply in relation to selling add-on insurance products.

15.55 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the definition of chargeable matter in section 4(1) of 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.

Human rights implications

15.56 Schedule 3 engages the right to a fair trial under Article 14 of the International Covenant on Civil and Political Rights by introducing a reversed evidential burden for certain offences and the use of infringement notices where there are alleged contraventions of the deferred sales model. However, these amendments are compatible with human rights because to the extent that the right to a fair trial may be limited, those limitations are reasonable, necessary and proportionate.

15.57 The impact of Schedule 3 on the right to a fair trial under Article 14 of the International Covenant on Civil and Political Rights has been considered. Article 14(2) of the International Covenant on Civil and Political Rights recognises that all people have the right to be presumed innocent until proven guilty according to the law. Article 14(1) of the International Covenant on Civil and Political Rights ensures that everyone is entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

Reverse evidential burden

15.58 A number of offences in this Schedule contain exceptions in relation to which a defendant bears an evidential burden. These exceptions relate to the timing of the sale of the product, when and in what circumstances an offer of the product was made, and the kind of product that was offered.

15.59 If the defendant seeks to rely on one of these exceptions, they are required to adduce or point to evidence to establish that a matter exists or does not exist. These matters include that:

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the add-on insurance product is sold to the customer after the end of the add-on insurance deferral period;

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the add-on insurance product is offered in response to contact initiated by the customer and is made either after the end of the add-on insurance deferral period or relates only to the purpose for which the customer initiated the contact;

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the product is the subject of an ASIC product intervention order which imposes a deferred sales period;

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the product is comprehensive car insurance;

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the product is exempted by regulation;

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the person is exempted by ASIC by notifiable instrument; and

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the product is recommended by a financial adviser.

15.60 It is appropriate that the defendant bear the evidential burden in relation to whether a relevant exemption applies. Information relating to whether exemptions apply are peculiarly within the knowledge of the defendant.

15.61 Matters relating to the timing of the sale of a product, the timing of an offer of a product, the nature of customer interactions, whether the product was recommended as part of financial advice, and the nature of the product itself should be recorded by the principal provider and related third party as a matter of good business practice.

15.62 The limitation is reasonable because this information is peculiarly within the knowledge of the defendant. Further, the reversal of the evidential burden is proportionate as record keeping in the first instance does not unduly burden the defendant.

15.63 These limitations are necessary to avoid costly and difficult investigations by the regulator to enforce this regime. Further, it would be problematic for the prosecution to disprove elements that are peculiarly within the knowledge of the defendant.

15.64 It would be significantly more difficult, costly and, in relation to some of the exemptions, redundant for the prosecution to have to disprove that a matter relating to an exemption exists than it would be for the defendant to adduce or point to evidence that suggests a reasonable possibility that a matter exists.

15.65 The reversal of the evidential burden achieves the legitimate objective of protecting customers from products that are poor value, is rationally connected to the objective by ensuring accountability with principal providers and is proportionate by having a limited impact on affected groups as good record keeping is a common requirement for sound business practice.

Infringement notices

15.66 If ASIC believes on reasonable grounds that a person has committed an offence under the deferred sales model, ASIC may give the person an infringement notice for the alleged contravention.

15.67 The penalty under an infringement notice is 12 penalty units for a person who is not a body corporate and 60 penalty units for a body corporate. This is consistent with the Guide to Framing Commonwealth Offences, which suggests that amounts payable under an infringement notice should not exceed 12 penalty units for a natural person or 60 penalty units for a body corporate.

15.68 Infringement notices are an administrative tool that ASIC can use to punish misconduct in relation to the deferred sales model and can act as an alternative to criminal or civil proceedings. The use of infringement notices will deter providers from contravening the deferred sales model and acts as an immediate regulatory response to misconduct that could have significant financial detriments for customers.

15.69 If an infringement notice is complied with, including payment of the penalty, no further action will be taken against the person and the payment is not considered an admission of guilt. However, if the infringement notice is not complied with, ASIC may pursue criminal or civil penalties. The infringement notice regime does not mean an infringement notice needs to be issued for an alleged contravention. It is one of the regulatory tools ASIC may decide to use.

15.70 Schedule 3 may be considered to engage the right to a fair and public hearing by a competent, independent and impartial tribunal through the use of infringement notices but it does not limit the right as the person may still elect to have a matter heard by a court rather than pay the amount specified in the infringement notice.

15.71 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 does not engage any of the applicable rights and freedoms.

Conclusion

15.72 To the extent that Schedule 3 engages the rights under Article 14 of the International Covenant on Civil and Political Rights, it is compatible with human rights as the limitations:

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achieve the legitimate objective of protecting consumers from products which are poor value and minimising the risk of unfair sales with adverse outcomes;

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are rationally connected to the objectives by ensuring accountability by principal and third party providers; and

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are proportionate to the objectives by having a limited impact on affected groups.

15.73 Schedule 3 is compatible with human rights because to the extent it may limit human rights, the limitation is reasonable, necessary and proportionate.

15.74 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 is compatible with human rights as it does not raise any human rights issues.

Schedule 4 - Caps on commissions (recommendation 4.4)

15.75 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.76 Schedule 4 amends the ASIC Act to provide ASIC with the power to set caps on the amount of commission that may be paid for certain add-on risk products sold in connection with motor vehicle sales or long-term leases. The new law improves outcomes for consumers by discouraging the mis-selling of add-on risk products in car yards, particularly those products where the amount of commission paid is greater than the amount paid out in claims.

15.77 The new law:

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provides ASIC with the power, by legislative instrument, to set caps on the amount of commission 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;

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makes it a criminal offence, civil penalty and offence of strict liability for a person (other than a consumer) to pay or receive a commission in relation to an add-on risk product that exceeds the cap determined by ASIC for that product; and

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gives consumers the right to recover commissions paid in excess of the cap.

Human rights implications

Right to fair trial

15.78 Schedule 4 makes amendments to introduce two new criminal offences - an ordinary offence and an offence of strict liability.

15.79 The default fault elements of the Criminal Code apply to both these new offences. This is consistent with paragraph 2.2.4 of the Guide to Framing Commonwealth Offences.

15.80 The offences engage, but do not limit, Article 14.2 of the International Covenant on Civil and Political Rights.

15.81 Article 14.2 states that all persons shall be innocent until proven guilty according to law. To prove the ordinary offence, the prosecution must prove that the accused engaged in the prohibited conduct (the physical elements) and that the accused did so with a criminal mind (the fault elements). To prove the strict liability offence, the prosecution must only prove that the accused engaged in the prohibited conduct; there is no requirement to prove the accused's criminal intentions.

15.82 The offences for breaching the cap on commissions are appropriate to ensure the integrity and enforceability of the regime. The offences pursue the aim of preventing the mis-selling of certain low value add-on risk products to consumers, and ensuring consumers are adequately protected from sales practices that do not align with their best interests. The strict liability offence further pursues the aim of ensuring that a contravention of the prohibited conduct can be brought to account, providing integrity to the regime and deterring misconduct.

15.83 The offences, and prohibited conduct more generally, are rationally connected to the objective as placing a cap on the amount of commission that can be given or received in connection with certain add-on risk products will deter mis-selling of certain low value products and protect consumers from unscrupulous practices. The regime does this by neutralising the incentive to give or receive excess commissions by imposing an appropriate financial penalty on contraventions of the cap.

15.84 The penalty amounts for the strict liability offence have been determined in consultation with the Guide to Framing Commonwealth Offences. The offence specifies a maximum penalty of 60 penalty units for an individual. This complies with the Guide to Framing Commonwealth Offences, which provides that an appropriate maximum penalty for a strict liability offence is 60 penalty units for an individual. The offence specifies a maximum penalty amount of 600 penalty units for bodies corporate. This exceeds the amount considered appropriate in the Guide to Framing Commonwealth Offences, which is 300 penalty units for bodies corporate.

15.85 The departure from the Guide to Framing Commonwealth Offences for the maximum penalty amount for bodies corporate is appropriate in this situation. Consistent with the uplift factor for body corporate penalties in the ASIC Act, having the body corporate penalty at a maximum of 600 penalty units reflects the need for bodies corporate to be genuinely deterred from engaging in criminal behaviour, even where fault elements do not need to be proven. An increased penalty of 600 penalty units effectively neutralises any profit-based incentive to break the law, and is appropriate to direct toward bodies corporate because it is commensurate with a body corporate's potential size, resources and capacity.

15.86 The Guide to Framing Commonwealth Offences has also been considered with respect to the other elements that provide when a strict liability offence may be appropriate. In this regard, the Guide to Framing Commonwealth Offences outlines that strict liability offences are also appropriate where they are likely to enhance the effectiveness of the enforcement regime, and where there are legitimate grounds for penalising persons lacking fault.

15.87 Excessive commissions create a disproportionate incentive for car yard intermediaries to sell add-on insurance to customers who cannot afford or have no use for the product, or who will be unable to claim on the product. The community expects consumers to be adequately protected from sales practices that do not align with their best interests, especially in financial services. Giving and receiving excessive commissions to sell add-on insurance in car yards contributes to that misalignment.

15.88 The strict liability offence will significantly improve the regulatory regime by making the standards of behaviour enforceable in a broader range of circumstances than for an ordinary criminal offence alone. This will discourage disreputable practices that cause consumer detriment more broadly across the industry and ensure lower level contraventions that can still cause harm to consumers, can be brought to account.

15.89 The regulatory response is proportionate, as it continues to allow the giving or receiving of commissions within defined parameters, but brings to account commissions that are in excess and contribute to mis-selling and consumer harm. Failure to comply with the cap results in detriment to consumers and it is appropriate that this conduct be sanctioned.

15.90 The penalty for the ordinary offence reflects the seriousness of the offence and the potential harm that could be caused. The strict liability offence reduces non-compliance and acts as an appropriate deterrent. The lower penalty amount reflects that fact that fault elements do not need to be proved for there to be a contravention. The penalty amounts are also the maximum a Court can order, which allows a Court to determine the most appropriate penalty for the circumstances.

15.91 The strict liability offence preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of this offence.

15.92 The introduction of the new offences does not amend any of the criminal process or procedural rights that currently exist. These are upheld in accordance with Article 14 of the International Covenant on Civil and Political Rights.

15.93 The new offences will apply to conduct that occurs, or begins to occur, after Schedule 4 commences. The offences apply prospectively, therefore upholding Article 15 of the International Covenant on Civil and Political Rights. To the extent the new offences apply to bodies corporate, they do not engage any human rights.

Civil penalties are not 'criminal' for the purposes of human rights law

15.94 The civil penalty provisions contained in Schedule 4 are not 'criminal' for the purposes of human rights law. While a criminal penalty is deterrent or punitive, these provisions are regulatory and disciplinary as they operate to impose a pecuniary penalty at a civil level for contravening the law. Further, the provisions do not apply to the general public, but to a sector or class of people who should reasonably be aware of their obligations under the ASIC Act.

15.95 Imposing the civil penalties will enable an effective disciplinary response to non-compliance. Finally, the civil penalties come with no sanction of imprisonment for non-payment of the penalty. Based on the above factors, the cumulative effect and the nature and severity of the civil penalty in Schedule 4 is not 'criminal' for the purposes of human rights law.

Conclusion

15.96 Schedule 4 is compatible with the applicable human rights and freedoms because to the extent that it engages the applicable rights and freedoms, it is reasonable, necessary and proportionate.

Schedule 5 - Hawking of financial products (recommendations 3.4 and 4.1)

15.97 Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.98 Schedule 5 amends the Corporations Act to give consumers the power to guide their conversations in relation to financial products. It achieves this by including a new general prohibition of offers to sell or issue financial products made in the course of, or because of, unsolicited contact. The general prohibition will apply to all kinds of financial products, including securities and interests in managed investment schemes, except in certain circumstances. A contravention of this prohibition is an offence of strict liability.

15.99 Unsolicited contact is any contact in relation to a financial product which the consumer did not consent to which is made by telephone, in face-to-face meetings or any other real-time interaction which is in the nature of a discussion or conversation. Contact is not unsolicited if the consumer consented to the contact in relation to the financial product. For a consumer to consent to contact, they must make a positive, voluntary and clear request to be contacted about the financial product.

15.100 The consent must be provided before the contact is initiated. This means that offers cannot be made to consumers during cold calls or other unsolicited contact even if the consumer makes a positive, voluntary and clear request during that contact.

Human rights implications

Right to fair trial

15.101 This Schedule engages the right to a fair trial in Article 14 of the International Covenant on Civil and Political Rights.

15.102 The offence also engages, but does not limit, Article 14.2 of the International Covenant on Civil and Political Rights.

15.103 Article 14.2 states that all persons shall be innocent until proven guilty according to law. To prove the ordinary offence, the prosecution must prove that the accused engaged in the prohibited conduct (the physical elements) and that the accused did so with a criminal mind (the fault elements). To prove a strict liability offence, the prosecution must only prove that the accused engaged in the prohibited conduct; there is no requirement to prove the accused's criminal intentions.

15.104 Such offences do not offend Article 14.2 where they pursue a legitimate aim, and are reasonable and proportionate to that aim.

15.105 The penalty provisions contained in this Schedule are consistent with existing penalties in the Corporations Act for similar offences, including the existing hawking rules that these provision replace.

15.106 In maintaining a strict liability offence for contraventions of the revised prohibition, the Guide to Framing Commonwealth Offences has been considered. The maximum penalty applicable for contravening the prohibition is 60 penalty units for persons other than a body corporate, which is consistent with the Guide to Framing Commonwealth Offences. The maximum penalty for bodies corporate is 600 penalty units (see the table item in Schedule 3 relating to section 992A(1) and sections 1311B and 1311C of the Corporations Act).

15.107 While this amount exceeds the amount of 300 penalty considered appropriate in the Guide to Framing Commonwealth Offences for bodies corporate, the departure from that amount is appropriate in these circumstances. The amount is based on the standard multiplier applicable to bodies corporate under the Corporations Act. This uplift provides a genuine deterrent for bodies corporate from engaging in criminal behaviour that is prohibited by these amendments.

15.108 The Guide to Framing Commonwealth Offences has also been considered in determining the appropriateness of maintaining an offence of strict liability. In this regard, the Guide to Framing Commonwealth Offences outlines that strict liability offences are also appropriate where they are likely to enhance the effectiveness of the enforcement regime, and where there are legitimate grounds for penalising persons lacking fault.

15.109 The Financial Services Royal Commission highlighted the widespread unsolicited sales of superannuation and insurance products, and that hawking methods often contributed to consumers purchasing products that did not meet their needs.

15.110 Maintaining a strict liability offence for the revised prohibition is appropriate and necessary for deterring this misconduct, which can have a serious detrimental impact for consumers. Strict liability offences are likely to enhance enforcement by deterring unsolicited offers, requests and invitations in relation to financial products. A financial services provider will always have control over when they make such an offer, request or invitation and will be aware of all matters that are relevant to demonstrating whether the contact is unsolicited or not.

15.111 The regulatory response is proportionate. It does not prevent information about financial products being provided to consumers in all circumstances. The providers of financial products, and their representatives, are also still able to contact consumers to offer them a financial product where the consumer has provided prior consent to the contact.

15.112 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact. This defence maintains adequate checks and balances for persons who may be accused of such offences.

Conclusion

15.113 To the extent that Schedule 5 engages the rights under Article 14 of the International Covenant on Civil and Political Rights, it is compatible with human rights as the strict liability offences are appropriate and consistent with the requirements of the Guide to Framing Commonwealth Offences.

Schedule 6 - Use of terms "insurance" and "insurer" (additional commitment in response to recommendation 4.2)

15.114 Schedule 6 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.115 Schedule 6 amends the Insurance Act 1973 to give effect to an additional commitment in response to recommendation 4.2 of the Financial Services Royal Commission to restrict the ability of a person to use the terms 'insurance' and 'insurer' to only persons that have a legitimate interest to do so.

15.116 A strict liability offence will arise for a person that uses the term 'insurance' to describe a product or service that 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.

15.117 A strict liability offence will also arise for a person that uses the term 'insurer' to describe themselves if the person could mistakenly be believed to offer insurance, and either the product is not insurance or the person is not appropriately registered or authorised under either the:

•

Insurance Act 1973;

•

Life Insurance Act 1995; or

•

Private Health Insurance (Prudential Supervision) Act 2015.

Human rights implications

Right to fair trial

15.118 The impact of Schedule 6 on the right to a fair trial under Article 14 of the International Covenant on Civil and Political Rights has been considered. Article 14 recognises that all people have the right to be presumed innocent until proven guilty according to the law.

15.119 Schedule 6 engages with Article 14 of the International Covenant on Civil and Political Rights by introducing strict liability offences and reversing the evidential burden for exceptions to the offences.

15.120 Schedule 6 introduces restrictions on using the terms 'insurance' and 'insurer' in certain circumstances, and strict liability offences if those restrictions are contravened. There are exceptions to the offences if:

•

the person is a government entity;

•

the person is covered by an ASIC determination;

•

the product or service is prescribed by the regulations; or

•

the product or service is State insurance (within the meaning of section 51(xiv) of the Constitution).

15.121 These exceptions are offence specific defences, and a defendant bears an evidential burden in relation to these matters.

Strict liability offences

15.122 The Financial Services Royal Commission uncovered the harms caused by poor value insurance products and the selling of such products to particularly vulnerable groups. Describing a financial product as 'insurance', or the entity offering the product as an 'insurer', tends to suggest that the provider of the product is prudentially supervised. If the provider is not in fact prudentially supervised by APRA, consumers could be misled into having a higher degree of confidence in the safety and soundness of the provider and their products than they should.

15.123 The amendments in this Schedule seek to minimise such harm by ensuring inappropriate uses of the terms 'insurance' and 'insurer' can be effectively deterred or properly brought to account. It is necessary to strongly deter this kind of misconduct as it can cause serious detriment for consumers.

15.124 The strict liability offences are appropriate as they will ensure the integrity of this regulatory regime and significantly enhance its effectiveness in deterring the inappropriate use of the terms 'insurance' and 'insurer'.

15.125 The new offences will protect consumers from businesses that do not have a legitimate interest in using the terms and ensure their ability to pay out legitimate claims. Consumers generally place trust in businesses that brand their products as insurance, and expect those businesses to pay out claims that might arise. Breaching this trust has serious consumer detriments. For example, consumers could be faced with large or even catastrophic losses if a financial institution refuses or is unable to pay out claims.

15.126 Consistent with the Guide to Framing Commonwealth Offences, the offences are not punishable by imprisonment, and the maximum penalty for individuals is less than 60 penalty units (set at a maximum penalty of 50 penalty units).

15.127 In relation to a body corporate, the maximum penalty is 500 penalty units. Although this is more than the 300 penalty unit maximum for bodies corporate recommended by the Guide to Framing Commonwealth Offences for strict liability offences, this reflects the seriousness of the offence and acts as a sufficient deterrent to ensure a body corporate is not able to view the penalty as a cost of doing business.

15.128 Financial services businesses have the potential to make large profits due to the specialist nature of their products and services. Additionally, bodies corporate can be well resourced and often can, in the corporate and financial sector, have significant financial value and resources. The higher maximum penalty is appropriate to ensure financial penalties:

•

act as an adequate deterrent;

•

punish illegal behaviour;

•

are commensurate to the size and capacity of a body corporate; and

•

are not viewed as a cost of doing business.

15.129 The penalty is a maximum amount and courts continue to have a discretion when sentencing to ensure the appropriate penalty is given in the circumstances.

15.130 Further, the application of strict liability preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of the offences.

Reversal of evidential burden

15.131 The amendments in this Schedule seek to minimise harm to consumers by prohibiting inappropriate uses of the terms 'insurance' and 'insurer'. The amendments also recognise that it is appropriate that the offences not apply to certain persons or in certain circumstances.

15.132 A person seeking to rely on an exception to the offences will bear an evidential burden in relation to those matters. That burden is to adduce or point to evidence that suggests a reasonable possibility that a matter exists, or does not exist.

15.133 For the government entity and State insurance exception, information about an organisation's structure would be readily and specifically within the knowledge of the defendant and it would not be onerous for them to produce the evidence should the need arise.

15.134 In respect of coverage by a determination and a product or service being of a kind prescribed in the regulations, key information about the products or services a person provides and whether they are covered by a determination or the regulations would reside with the person and would be peculiarly in the knowledge of the person.

15.135 While it is not expected a prosecution would commence against a person covered by a determination or the regulations, it would not be burdensome for the person to product such evidence in the event that there is an obstacle for the prosecution to obtain information about such coverage.

15.136 In contrast, obtaining information about an organisation's ownership structure or its products or services, and whether they are covered by an exception, may require the prosecution to undertake difficult and costly investigative exercises to obtain evidence or review a large volume of information which would be readily accessible to the organisation. Overall, it would be significantly more difficult, costly and (often) redundant for the prosecution to have to disprove each of the matters in proposed section 114(4) of the Insurance Act 1973 than it would be for the defendant to adduce or point to evidence that suggests a reasonable possibility that a matter exists.

15.137 Placing an evidential burden on the defendant for these exceptions is necessary to ensure that the offence is able to be successfully prosecuted, while ensuring that the use or disclosure of protected information is not criminalised in the circumstances covered by those exceptions.

15.138 The reversal of the evidential burden in these limited circumstances is proportionate and is rationally connected to achieving the legitimate objective of protecting customers from being misled into having a higher degree of confidence in the safety and soundness of the provider and their products than they should.

Conclusion

15.139 Schedule 6 is compatible with the applicable human rights and freedoms because to the extent that it engages the applicable rights and freedoms, it is reasonable, necessary and proportionate.

Schedule 7 - Claims handling and settling services (recommendation 4.8)

15.140 Schedule 7 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.141 Schedule 7 makes handling an insurance claim, or potential insurance claim, a new 'financial service' under the Corporations Act.

Human rights implications

15.142 This Schedule does not engage any of the applicable rights and freedoms.

Conclusion

15.143 Schedule 7 is compatible with human rights obligations as it does not raise any human rights issues.

Schedule 8 - Trustees of registrable superannuation entities should have no other duty (recommendation 3.1)

15.144 Schedule 8 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.145 Schedule 8 implements recommendation 3.1 of the Financial Services Royal Commission by amending section 29E of the SIS Act to impose an additional condition on licences held by a body corporate trustee of a registrable superannuation entity. The new condition prohibits these trustees from having a duty to act in the interests of another person, except in the course of:

•

performing the trustee's duties and exercising the trustee's powers as a trustee of a registrable superannuation fund; or

•

providing personal advice.

15.146 The new licence condition will improve outcomes for beneficiaries of registrable superannuation funds by requiring trustees to avoid conflicts of duties arising from competing duties owed by the trustee to the beneficiaries of the fund and other persons.

Human rights implications

15.147 This Schedule does not engage any of the applicable rights or freedoms as it applies only to the regulation and licensing of body corporate trustees.

Conclusion

15.148 Schedule 8 is compatible with human rights as it does not raise any human rights issues.

Schedule 9 - Adjustment of APRA and ASIC's roles in superannuation (recommendations 3.8, 6.3, 6.4 and 6.5)

15.149 Schedule 9 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.150 Schedule 9 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.

15.151 An outcome of this change is that APRA and ASIC will now co-regulate existing SIS Act provisions that have consumer protection and member outcomes as their touchstone. These co-regulated provisions are either civil penalty provisions or provisions that are otherwise enforceable.

15.152 Schedule 9 also 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.

15.153 In general terms, the effect is that each RSE licensee must hold an Australian financial services licence authorising it to provide a superannuation trustee service, which captures all activities involved in operating a superannuation fund. In turn, the Australian financial services licence obligations apply in full to these activities.

15.154 In that context, Schedule 9 also amends the SIS Act's existing indemnification rules to prevent superannuation trustees and their directors from using trust assets to pay criminal, civil or administrative penalties incurred in relation to a contravention of any Commonwealth law.

Human rights implications

15.155 This Schedule does not engage any of the applicable rights or freedoms.

15.156 While the amendments to the SIS Act affect which regulator may take enforcement action against regulated entities, they do not create any new offences or civil penalty provisions.

15.157 The extension of the Australian financial services licensing regime and the ASIC Act consumer protection provisions has the effect that existing legal obligations on APRA-regulated superannuation trustees, and consequences for contravention, apply in a broader range of circumstances. However, these amendments also do not create any new offences or civil penalty provisions.

15.158 In any event, almost all APRA-regulated superannuation trustees are bodies corporate rather than individuals.

15.159 Similarly, the amendments to the indemnification rules do not create any new offences or civil penalty provisions. Rather, they limit the sources which a superannuation trustee or director may draw on to pay a penalty imposed by a court once a contravention is established.

Conclusion

15.160 Schedule 9 is compatible with human rights as it does not raise any human rights issues.

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

15.161 Schedule 10 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.162 Schedule 10 gives effect to, among other things, 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 to comply with a reference checking and information sharing protocol.

15.163 The information sharing and reference checking obligation involves the dissemination of information about a prospective employee's current or former employment. This information could involve the period in which the prospective employee occupied a position, the terms of their employment, the standard of their performance, and any relevant disciplinary matters.

15.164 To comply with the obligation:

•

before appointing a person to a role involving the provision of financial advice or mortgage broking- the relevant licensee is required to check the person's references with other Australian financial services licensees and credit licensees who currently employ or formerly employed the person as a representative; and

•

when requested by a prospective employer of a person- the relevant licensee must provide reference information about the person where the person is or was a representative of an Australian financial services licensee or a mortgage broker.

15.165 A licensee who fails to undertake reference checking and information sharing regarding a prospective employee is subject to a civil penalty.

15.166 A person who supplies information about a prospective employee has a defence of qualified privilege against a defamation action and against a breach of confidence action resulting from information shared as part of the obligation.

Human rights implications

Right to fair trial

15.167 Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.

15.168 In relation to the new reference checking and information sharing protocol, requirements in Schedule 10 that are subject to a civil penalty are found in section 912A(1) of the Corporations Act and section 47(1) of the Credit Act. The imposition of a civil penalty for non-compliance with the reference checking and information sharing protocol is consistent with the treatment of non-compliance with other licensee obligations in those sections.

15.169 While the civil penalty provisions are intended to deter people from non-compliance with the new reference checking and information sharing protocol, the civil penalty provisions do not carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.

15.170 Therefore, the civil penalty provisions should not be considered 'criminal' for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.

Right to privacy

15.171 This Schedule engages the right to protection from unlawful or arbitrary interference with privacy under Article 17 of the International Covenant on Civil and Political Rights.

15.172 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

15.173 To the extent that the information sharing and reference checking framework constitutes a limitation of a person's right to be protected from interference with his or her privacy, the limitation is justified.

15.174 The framework is prescribed by law and contingent on the affected person giving consent to the disclosure of information.

15.175 The framework is in pursuit of the legitimate objective identified by the Financial Services Royal Commission-namely, to improve compliance with existing reference checking practices and to prevent representatives of an Australian financial services licensee or Australian credit licensee 'shopping around' for alternative employment when faced with disciplinary action.

15.176 The framework is rationally connected and proportionate to the objective sought. In this regard it is noted that the framework implements in law practices that are currently a feature of the industry. In particular, ASIC's Regulatory Guide 104 'Licensing: Meeting the general obligations' and Regulatory Guide 205 'Credit Licensing: General conduct obligations' set out measures for monitoring and supervising representatives and ASIC expects licensees to have in place appropriate background checks before appointing new representatives. Additionally, the Australian Banking Association's 'Financial Advice - Recruitment and Termination Reference Checking and Information Sharing Protocol' is intended to promote better information sharing about the performance history of financial advisers - focusing on compliance, risk management and advice quality.

Conclusion

15.177 Schedule 10 is compatible with human rights because to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 11 - Breach reporting (recommendations 1.6, 2.8 and 7.2)

15.178 In relation to its implementation of recommendations 1.6, 2.8 and 7.2 of the Financial Services Royal Commission, Schedule 11 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

15.179 This Schedule's compatibility with human rights in relation to its implementation of recommendations 1.6 and 2.9 of the Financial Services Royal Commission is discussed from paragraph 15.211.

Overview

15.180 Schedule 11 clarifies and strengthens the breach reporting regime in the Corporations Act and introduces a comparable breach reporting regime in the Credit Act, implementing recommendations 1.6, 2.8 and 7.2 of the Financial Services Royal Commission.

15.181 Under the new breach reporting regimes, financial services licensees and credit licensees will be required to self-report specified matters to ASIC, including significant breaches of the financial services laws and credit legislation respectively. Additionally, licensees will also need to report serious compliance concerns about financial advisers or mortgage brokers engaged by another licensee to ASIC and the other licensee.

15.182 A person may commit an offence or contravene a civil penalty provision if they fail to comply with the breach reporting obligations.

15.183 The changes also require ASIC to publish breach report data at the licensee-level for each financial year.

Human rights implications

15.184 Schedule 11 engages the following human rights under the International Covenant on Civil and Political Rights:

•

the right to a fair trial and fair hearing rights under Articles 14 and 15; and

•

the right to protection from arbitrary or unlawful interference with privacy under Article 17.

Right to fair trial

Civil penalties are not 'criminal' for the purposes of human rights law

15.185 Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.

15.186 The civil penalty provisions in Schedule 11 are found in new sections 912DAA(7), 912DAB(8) and 912DAC(4) of the Corporations Act, and new sections 50B(1), 50C(1) and 50C(5) of the Credit Act.

15.187 While the civil penalty provisions in Schedule 11 are intended to deter people from non-compliance with the breach reporting obligations, none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.

15.188 Therefore, the civil penalty provisions introduced by Schedule 11 should not be considered 'criminal' for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.

Applying strict liability to part of an offence

15.189 The amendments in Schedule 11 apply strict liability to whether the report was lodged with ASIC, including whether it was lodged in accordance with the relevant section, in the following offences:

•

section 912DAA(1) of the Corporations Act-obligation on financial services licensees to self-report reportable situations; and

•

section 50B(2) of the Credit Act-obligation on credit licensees to self-report reportable situations.

15.190 Applying strict liability to whether the report was lodged with ASIC, including whether it was lodged in accordance with the section is appropriate as requiring proof of fault would undermine deterrence.

15.191 In particular, applying strict liability in this case makes clear that the prosecution would not need to prove that the licensee knew that they were under a legal obligation to lodge a report in the prescribed form, or that they knew they were required to submit a report within the statutory period applying in the particular circumstances. Not applying strict liability to this conduct would undermine deterrence, as in most cases it would not be possible for the prosecution to prove these matters.

15.192 However, the prosecution will be required to prove that the licensee knew of, or was reckless with respect to, the facts constituting the reasonable grounds to believe that a reportable situation had arisen. This includes proving when the licensee knew of, or was reckless with respect to, that circumstance. Requiring proof of this is central to the offence as it determines when the 30-day period for reporting starts.

15.193 The defence of honest and reasonable mistake of fact will apply in relation to the strict liability matters covered by these provisions. This defence will, for example, protect a licensee that has put in place a proper compliance system, and that does not lodge a report within the statutory timeframe due to an honest and reasonable mistake of fact as to when precisely the 30-day period for reporting starts. However, where licensees have not acted honestly and reasonably, the defence will not be available. In this sense, licensees are incentivised to develop and maintain adequate compliance systems. The licensees that will be penalised are more likely to have poor compliance systems in place that would not enable them to comply with the breach reporting regime.

15.194 The application of strict liability to these parts of the relevant offences is therefore compatible with human rights because it achieves the legitimate object of protecting the general public from misconduct and is rationally connected to the objective of improving the likelihood of compliance with the regulatory regime.

Right against self-incrimination

15.195 Schedule 11 may engage the right against self-incrimination contained in Article 14(3)(g) of the International Covenant on Civil and Political Rights as it requires financial services licensees and credit licensees to self-report specified matters, including significant contraventions of the law, to ASIC. ASIC may subsequently investigate and pursue enforcement action, including commencing court proceedings against the licensee or an individual engaged by the licensee.

15.196 The existing breach reporting regime in the Corporations Act already requires a financial services licensee to self-report certain significant breaches of the law. Information provided by licensees to ASIC in the course of breach reporting plays a critical role in ASIC's ability to regulate the financial services industry.

15.197 The clarification and expansion of the breach reporting regime in Schedule 11 is directed at the legitimate objective of ensuring ASIC is better able to detect and address misconduct in the financial services and credit sector, resulting in improved outcomes for consumers. Following the findings of the Financial Services Royal Commission, it will also help restore public trust in these sectors.

15.198 To the extent these amendments engage with the right against self-incrimination, this is necessary and justified as the public benefit in limiting the right outweighs the potential loss to any individual concerned. The information that would be obtained by ASIC in this process will be critical in enabling ASIC to perform its functions, specifically facilitating and improving the performance of the financial system, and promoting the confident and informed participation of investors and consumers in the financial system.

15.199 Additionally, those who are best placed to provide ASIC with information about misconduct and potential contraventions of the financial services laws and credit legislation may have been involved in that conduct. If the right against self-incrimination is not engaged in this way (to the extent it is so engaged), licensees would be unlikely to provide this information to ASIC, limiting its ability to carry out its functions effectively.

15.200 Where ASIC relies on information provided by a licensee during the breach reporting process to commence court proceedings, there remains wide and flexible judicial discretion to exclude derivative evidence to prevent or remedy potential unfairness.

15.201 The new breach reporting provisions in the Corporations Act and the Credit Act are therefore consistent with the right against self-incrimination under Article 14(3)(g) of the International Covenant on Civil and Political Rights.

Right to privacy

15.202 Schedule 11 engages the right to protection from arbitrary or unlawful interferences with privacy in Article 17 of the International Covenant on Civil and Political Rights by requiring:

•

financial services licensees and credit licensees to lodge breach reports which could include personal information to ASIC, and in some circumstances, to another licensee; and

•

ASIC to publish breach report data on its website, which could include personal information about a licensee who holds a licence in the name of an individual.

15.203 In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

15.204 The purpose of the new breach reporting obligations in the Corporations Act and the Credit Act is to ensure ASIC has the information it requires to effectively regulate the financial services and credit sector. Personal information is required to be given to ASIC in this context as many of the contraventions that need to be reported relate to particular conduct by an individual. This ensures ASIC is aware of potential concerns about an individual provider of financial services or credit activities, and that appropriate action is taken in relation to the individual where appropriate.

15.205 The protections in the Privacy Act about collection, use and disclosure of personal information will apply to ASIC in relation to personal information included in breach reports lodged with ASIC. There are also existing safeguards in the ASIC Act specifying how ASIC can use this information. Together, these safeguards ensure there will be appropriate protection for any affected individuals.

15.206 The Privacy Act also applies to many private sector organisations who will be subject to the breach reporting obligations. This is relevant in respect of the requirement on licensees to report serious compliance concerns about financial advisers or mortgage brokers engaged by another licensee to ASIC and the other licensee. The requirement to inform the other licensee supports the legitimate purpose of ensuring licensees can quickly act on that information, and take steps to investigate suspected misconduct and remediate affected clients.

15.207 The purpose of requiring ASIC to publish breach report data each financial year is to enhance accountability in the financial services and credit sectors and ensure consumers are appropriately informed. These are legitimate regulatory purposes.

15.208 ASIC's publication will only include personal information to the extent it is about a financial services licensee or a credit licensee where the licence is held in the name of an individual. This ensures ASIC is able to publish breach report data at the licensee-level consistently, and ensures licensees who hold a licence in the name of an individual are not excluded from publication. In addition to the protections in the Privacy Act relating to personal information, new section 912DAD(4) of the Corporations Act makes clear that ASIC may correct any error in, or omission from its publication. This is an important safeguard against inaccuracy of published information, including personal information.

15.209 The changes are therefore proportionate to the legitimate objective of strengthening ASIC's ability to investigate and pursue contraventions of the law, and ensure participants in the financial services and credit sector are held accountable for their misconduct.

Conclusion

15.210 With regard to the implementation of recommendations 1.6, 2.8 and 7.2 of the Financial Services Royal Commission, Schedule 11 is compatible with human rights because to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 11 - Investigating and remediating misconduct (recommendations 1.6 and 2.9)

15.211 Schedule 11 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.212 Schedule 11 implements recommendations 1.6 and 2.9 of the Financial Services Royal Commission. Under this Schedule, Australian financial services licensees and Australian credit licensees are required, as a condition of their licence, to make whatever inquiries are reasonably necessary to determine the nature and full extent of the misconduct. Licensees are required to investigate potential and actual misconduct engaged in by financial advisers and mortgage brokers, and to inform and remediate affected clients.

Human rights implications

Right to fair trial

Civil penalties are not 'criminal' for the purposes of human rights law

15.213 In relation to the new requirement to investigate and remediate misconduct, requirements that are subject to a civil penalty are found in sections 912EA(1), and 912EB(1), (5) and (8) of the Corporations Act and sections 51A(1), and 51B(1), (5) and (8) of the Credit Act.

15.214 The civil penalty provisions are intended to deter people from non-compliance with the new requirements to notify, investigate and remediate in relation to potential and actual misconduct. None of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.

15.215 Therefore, the civil penalty provisions should not be considered 'criminal' for the purposes of Articles 14 and 15 of the International Covenant on Civil and Political Rights.

Conclusion

15.216 In relation to its implementation of recommendations 1.6 and 2.9 of the Financial Services Royal Commission, Schedule 11 is compatible with human rights as it does not raise any human rights issues.

Schedule 12 - Statutory obligation to cooperate (recommendation 6.9)

15.217 Parts 1 and 2 of Schedule 12 to the Bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.218 Parts 1 and 2 of Schedule 12 amend both the APRA Act and the ASIC Act to require:

•

APRA and ASIC to co-operate with each other so far as is practicable; and

•

APRA and ASIC to share information with each other on request; and

•

each regulator to notify the other when it forms the reasonable belief that a material breach may occur or may have occurred, in respect of a law which the other regulator administers.

Human rights implications

15.219 Parts 1 and 2 of Schedule 12 engage the following human rights under the International Covenant on Civil and Political Rights:

•

the right to a fair trial under Article 14; and

•

the right to protection from arbitrary or unlawful interference with privacy under Article 17.

Right to fair trial

15.220 Part 2 of Schedule 12 may engage the right to a fair trial under Article 14 of the International Covenant on Civil and Political Rights.

15.221 The mandatory sharing of information and documents between ASIC and APRA will include information that may be about a natural person or the corporation or business. A consideration of the extent to which human rights and freedoms are engaged is not relevant where the information and documents are not about a natural person.

15.222 The right to a fair trial may be engaged by APRA or ASIC not providing access to an administrative hearing (the hearing rule) for a person who may be affected by APRA or ASIC meeting their obligation to share information or documents in compliance with a request under the new law.

Analysis

15.223 The right to a fair trial is, amongst other matters, concerned with procedural fairness. Part 2 of Schedule 12 engages with Article 14 of the International Covenant on Civil and Political Rights in terms of the affording of appropriate procedural fairness.

15.224 To the extent that the new information sharing scheme does engage the right to a fair trial, the mandatory information and document sharing scheme is aimed at the legitimate objective of providing APRA and ASIC with the ability to efficiently share material important to their roles as regulators of the financial system.

15.225 Despite their close relationship and reliance on efficient information sharing, the ability for APRA and ASIC to regulate effectively has at times been restrained and delayed by administrative law procedural requirements. Information and documentation sharing is vital in order for both APRA and ASIC to perform their functions successfully, and Part 2 of Schedule 12 will be effective in achieving this objective.

15.226 The new scheme is reasonable and proportionate to achieving this legitimate objective.

15.227 The new scheme does not replace or override the method of sharing information or documents that the regulators have historically utilised. This approach involves voluntarily sharing information and documents. Under voluntary sharing, procedural fairness is required to be afforded to persons relevantly affected by a decision of APRA and ASIC to share information or documents with another regulator.

15.228 The potential harm to consumers and participants in financial markets caused by inefficient sharing of information by regulators can be very serious. While a requirement on regulators to share information when requested by the other displaces procedural fairness and specifically the hearing rule this is appropriate given the potential harm which could be addressed if the regulator has the right information or documents.

15.229 It is also not reasonable to place a statutory obligation on a regulator which they could be prevented from meeting if they needed to offer the hearing rule.

15.230 Once information is received by a regulator under the scheme, all procedural fairness requirements that ordinarily apply under the general law, will apply to further use and disclosure (subject to any other pre-existing statutory limitations).

15.231 The rule against bias is not displaced in any way under the new law.

15.232 If ASIC or APRA does err on a matter of law or process, parties affected by this error retain the capacity to seek review by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977, as well as through other review mechanisms provided for under the Judiciary Act 1903.

Right to privacy

15.233 Part 2 of Schedule 12 engages the right to protection from unlawful or arbitrary interference with privacy under Article 17 of the International Covenant on Civil and Political Rights by allowing APRA and ASIC to share information with each other. This information may identify individuals and include personal information about regulated persons.

15.234 The right in Article 17 of the International Covenant on Civil and Political Rights may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. For an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the International Covenant on Civil and Political Rights and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

Analysis

15.235 Under the existing law and the amendments in Part 2 of Schedule 12, APRA and ASIC will only be able to disclose confidential or personal information to other Australian government regulatory agencies and law enforcement agencies in line with APRA and ASIC's legal obligations and internal policies. This disclosure and sharing improves the ability of regulatory and enforcement agencies to conduct timely compliance activity and better protect the integrity of Australia's financial system.

15.236 The protections in the Privacy Act 1988 about collection, storage, use and disclosure of personal information will apply to APRA and ASIC in relation to personal information included in information and documents shared between APRA and ASIC.

15.237 There are also existing safeguards in the APRA Act (secrecy provisions) and the ASIC Act (confidentiality provisions) specifying how APRA and ASIC can use certain protected types of information and documents, respectively.

15.238 The secrecy provisions at section 56 of the APRA Act apply to both APRA staff and any ASIC staff who acquire information or documents that are protected by that same section. It is an offence to disclose information or produce a document to a third party in breach of the secrecy provisions.

15.239 Similarly, ASIC is required by section 127 of the ASIC Act to take all reasonable measures to protect personal information given to it in confidence from unauthorised use or disclosure.

15.240 Together, these safeguards ensure there will be appropriate protection for any affected individuals.

15.241 The sharing of information and documentation between regulators achieves the legitimate objective of ensuring the regulators are furnished with all the most relevant and available material in carrying out their regulatory activities including ensuring the stability of the financial system and reducing financial harm to consumers.

Conclusion

15.242 Accordingly, to the extent that Parts 1 and 2 of Schedule 12 engage the rights under Articles 14 and 17 of the International Covenant on Civil and Political Rights, they are compatible with human rights as the limitations are appropriate, proportionate and achieve a legitimate objective.

Schedule 12 - Formalising ASIC meeting procedures (recommendation 6.11)

15.243 Part 3 of Schedule 12 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

15.244 Part 3 of Schedule 12 implements recommendation 6.11 of the Financial Services Royal Commission to formalise ASIC meeting procedures.

15.245 It amends the ASIC Act to include provisions substantially similar to those set out in sections 27 to 32 of the APRA Act to deal with the times and places of meetings, how voting is to occur and the passing of resolutions without meetings.

Human rights implications

15.246 Part 3 of this Schedule does not engage any of the applicable rights or freedoms.

Conclusion

15.247 Part 3 of Schedule 12 to the Bill is compatible with human rights as it does not raise any human rights issues.