House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 and Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020

On 4 February 2019, the Government released its response to the Financial Services Royal Commission Final Report entitled Restoring trust in Australia's financial system. The Government's response committed to taking action on all the recommendations of the Financial Services Royal Commission, and made additional commitments to address the issues identified by Commissioner Hayne.

This package implements a significant number of recommendations of the Financial Services Royal Commission and additional commitments the Government has made to improve consumer protections and strengthen financial regulators. The amendments address conflicts between the interests of financial institutions and their customers, ensure consumers are treated fairly in their dealings with the financial sector, and ensure regulators have the powers and resources needed to be effective in their enforcement and supervision roles.

References to a bill in this explanatory memorandum are references to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, unless otherwise stated.

The Financial Services Royal Commission Final Report has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement for the purposes of the Government decision to implement this reform.

The Financial Services Royal Commission Final Report can be accessed through the Australian Parliament House website.^[1]

The following table provides a summary of the reforms implemented by this package and the primary area of law that is being amended:

Schedule 1: Enforceable Code Provisions (recommendation 1.15)

Schedule 1 to the Bill amends the Corporations Act and the Credit Act to strengthen the existing voluntary code of conduct framework to allow ASIC to designate enforceable code provisions in approved codes of conduct. A breach of an enforceable code provision may attract civil penalties (including pecuniary penalties of up to 300 penalty units) and/or other administrative enforcement action from ASIC.

Schedule 1 also establishes a mandatory code of conduct framework for the financial services and consumer credit industry through regulations, with the ability to designate certain provisions as civil penalty provisions. A breach of these provisions may attract civil penalties (including pecuniary penalties of up to 1,000 penalty units) and/or other administrative enforcement action from ASIC. A breach of any of the mandatory code of conduct provisions may attract other enforcement action from ASIC.

These amendments implement recommendation 1.15 of the Financial Services Royal Commission.

Date of effect: Schedule 1 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 1 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.1 to 15.31.

Compliance cost impact: This measure will result in a small increase in compliance costs.

Schedule 2: Insurer avoidance of life insurance contracts and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5)

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

Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure for consumer insurance contracts with a duty to take reasonable care not to make a misrepresentation. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

Date of effect: Part 1 of Schedule 2 applies to any life insurance contract that is entered into from the later of Royal Assent and 1 January 2021.

Part 2 of Schedule 2 (relating to recommendation 4.5) applies to consumer insurance contracts that are entered into on or after 5 October 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 2 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.32 to 15.45.

Compliance cost impact: Part 1 of Schedule 2 (relating to recommendation 4.6) should have an insignificant compliance cost.

Part 2 of Schedule 2 (relating to recommendation 4.5) has an estimated compliance cost of $3.1 million.

Schedule 3: Deferred sales model for add-on insurance and Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (recommendation 4.3)

Schedule 3 to the Bill amends the ASIC Act to implement an industry-wide deferred sales model for the sale of add-on insurance products.

The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Date of effect: Schedule 3 commences immediately after the commencement of Schedule 5 to the Bill.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 3 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.46 to 15.74.

Compliance cost impact: Schedule 3 will result in low increases to compliance costs. It is estimated that the measure will increase costs for industry by $16.46 million per year.

Schedule 4: Caps on commissions (recommendation 4.4)

Schedule 4 to the Bill amends the ASIC Act to place a cap on the amount of commission that may be paid in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle.

Date of effect: Schedule 4 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 4 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.75 to 15.96.

Compliance cost impact: Schedule 4 has no impact on compliance costs.

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

Schedule 5 to the Bill amends the Corporations Act to ban the hawking of financial products. In particular, the amendments strengthen the existing prohibitions on offers of financial products, securities and interests in managed investment schemes during the course of, or because of, unsolicited contact with a consumer.

Date of effect: Schedule 5 commences on the later of the day after Royal Assent and 5 October 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 5 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.97 to 15.113.

Compliance cost impact: Schedule 5 will result in low increases to compliance costs.

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

Schedule 6 to the Bill amends the Insurance Act 1973 to restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.

Date of effect: Schedule 6 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 6 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.114 to 15.139.

Compliance cost impact: Schedule 6 will result in low increases to compliance costs.

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

Schedule 7 to the Bill gives effect to recommendation 4.8 of the Financial Services Royal Commission to make claims handling and settling a financial service under the Corporations Act.

Date of effect: Schedule 7 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 7 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.140 to 15.143.

Compliance cost impact: This measure is estimated to increase compliance costs by approximately $4.8 million per year.

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

Schedule 8 to the Bill amends the SIS Act to impose a new condition on licences held by a body corporate trustee of a registrable superannuation entity. The new licence condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to carry out their ordinary functions as a trustee of a registrable superannuation entity.

Date of effect: Schedule 8 commences on the later of the day after Royal Assent and 1 July 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 8 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.144 to 15.148.

Compliance cost impact: This measure is estimated to increase compliance costs by approximately $0.8 million per year on average over 10 years.

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

Part 1 of Schedule 9 to the Bill makes adjustments to the SIS Act relating to the roles and responsibilities of superannuation industry regulators. Specifically, it extends ASIC's role in superannuation regulation to cover consumer protection and market integrity regulation. Part 1 also makes general improvements to section 6 of the SIS Act (and related provisions) which allocates the general administration of provisions.

Part 2 of Schedule 9 extends the Australian financial services licensing regime under the Corporations Act and the consumer protection provisions under the ASIC Act to cover a broader range of activities undertaken by APRA-regulated superannuation trustees. Consistent with the objective of recommendation 6.3 of the Financial Services Royal Commission, this is designed to more effectively make ASIC the superannuation regulator responsible for promoting consumer protection and market integrity.

Date of effect: Schedule 9 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 9 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.149 to 15.160.

Compliance cost impact: This measure will result in low increases to compliance costs.

Schedules 10 and 11: Reference checking and information sharing protocol, and Breach reporting and remediation (recommendations 1.6, 2.7, 2.8, 2.9 and 7.2)

Schedule 10 to the Bill gives effect to recommendations 1.6 and 2.7 of the Financial Services Royal Commission by imposing a new obligation on Australian financial services licensees and Australian credit licensees, in respect of mortgage brokers, to comply with a reference checking and information sharing obligation.

Schedule 11 to the Bill gives effect to recommendations 1.6, 2.8 and 7.2 of the Financial Services Royal Commission by clarifying and strengthening the breach reporting regime for Australian financial services licensees, introducing a comparable breach reporting regime for Australian credit licensees, and requiring financial services licensees and credit licensees to report serious compliance concerns about financial advisers and mortgage brokers respectively.

Schedule 11 also gives effect to recommendations 1.6 and 2.9 of the Financial Services Royal Commission by imposing a new obligation on Australian financial services licensees and Australian credit licensees who are mortgage brokers to investigate misconduct and promptly remediate affected clients.

Date of effect: Schedules 10 and 11 generally apply from 1 October 2021.

Proposal announced: The proposals were announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedules 10 and 11 are compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.161 to 15.216.

Compliance cost impact: It is estimated that the total increase in annual compliance costs for recommendation 1.6 will be $4.4 million for credit licensees. It is estimated that the increase in annual compliance costs for recommendation 2.7 will be $1.08 million for financial services licensees.

The compliance cost impact for recommendations 2.8 and 7.2 is nil.

Schedule 12: Statutory obligation to cooperate and formalising ASIC meeting procedures (recommendation 6.9 and 6.11)

Parts 1 and 2 of Schedule 12 to the Bill implement recommendation 6.9 of the Financial Services Royal Commission to remove barriers to efficient co-operation and information sharing between APRA and ASIC, including requiring the regulators to notify each other when they reasonably believe there may be material breaches of each other's legislation.

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

Date of effect: Schedule 12 commences on the later of the day after Royal Assent and 1 January 2021.

Proposal announced: The proposal was announced on 4 February 2019 as part of the Government's response to the Financial Services Royal Commission.

Financial impact: Nil.

Human rights implications: Schedule 12 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 15, paragraphs 15.217 to 15.247.

Compliance cost impact: Nil.

Chapter 1 - Enforceable code provisions (recommendation 1.15)

Outline of chapter

1.1 Schedule 1 to the Bill amends the Corporations Act and the Credit Act to strengthen the existing voluntary code of conduct framework to allow ASIC to designate enforceable code provisions in approved codes of conduct. A breach of an enforceable code provision may attract civil penalties (including pecuniary penalties of up to 300 penalty units) and/or other administrative enforcement action from ASIC.

1.2 Schedule 1 also establishes a mandatory code of conduct framework for the financial services and consumer credit industry through regulations, with the ability to designate certain provisions as civil penalty provisions. A breach of these provisions may attract civil penalties (including pecuniary penalties of up to 1,000 penalty units) and/or other administrative enforcement action from ASIC. A breach of any of the mandatory code of conduct provisions may attract other enforcement action from ASIC.

1.3 These amendments implement recommendation 1.15 of the Financial Services Royal Commission.

Context of amendments

1.4 A code of conduct is a set of statements that sets out an industry's commitment to deliver a certain standard of practice. Where an industry has the capacity, cohesion and commitment to develop an effective code, consumers can receive greater benefits than might otherwise have been achieved.

1.5 Voluntary codes of conduct have existed in the financial services sector since the late 1980s and a number of codes of conduct have been developed since that time. However, ASIC approval of codes is optional, and historically ASIC approval has not often been sought, or granted.

1.6 Codes of conduct provide a set of standards for industry on how to comply with and exceed what is required by the law. This can promote better consumer outcomes as well as confidence and trust in the industry.

1.7 Under the current law, ASIC can approve industry codes of conduct in relation to any aspect of financial services licensees, credit licensees, authorised representatives of financial services licensees, credit representatives and issuers of financial products in relation to the activities of which ASIC has regulatory responsibility (section 1101A of the Corporations Act and section 241 of the Credit Act).

1.8 ASIC's approval of a code of conduct is a signal to consumers that they can have confidence in the code. An approved code should respond to identified and emerging consumer issues and deliver substantial benefits to consumers.

1.9 Commissioner Hayne identified a number of limitations in the current financial services industry codes framework, some of which had previously been identified in the final report of the ASIC Enforcement Review Taskforce.

1.10 In particular, recommendation 1.15 of the Financial Services Royal Commission proposed:

•

that ASIC's power to approve codes of conduct should extend to codes relating to all Australian Prudential Regulation Authority-regulated institutions and Credit licensees;

•

that industry codes of conduct approved by ASIC may include enforceable code provisions, which are provisions in respect of which a contravention will constitute a breach of the law;

•

that ASIC may take into consideration whether particular provisions of an industry code of conduct have been designated as 'enforceable code provisions' in determining whether to approve a code;

•

that remedies, modelled on those set out in Part VI of the Competition and Consumer Act 2010, should apply where there is a breach of an enforceable code provision; and

•

the establishment of a mandatory code of conduct framework for the financial services industry.

1.11 The Government, in its response to the Financial Services Royal Commission, agreed to amend the law to implement recommendation 1.15.

Related recommendations

1.12 Set out below are details of other recommendations of the Financial Services Royal Commission that are related to the implementation of recommendation 1.15. Responsibility for implementing these recommendations is split between Government and industry.

For Government to implement:

•

Recommendation 3.8 - Adjustment of APRA and ASIC's roles (see Chapter 9).

•

Recommendations 2.8, 7.2 and part of 1.6 - Breach reporting (see Chapter 11).

For industry to implement:

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Recommendation 1.8 - The Australian Banking Association should amend the Banking Code to provide greater access to banking services.

•

Recommendation 1.10 - The Australian Banking Association should amend the definition of 'small business' in the Banking Code.

•

Recommendation 1.13 - The Australian Banking Association should amend the Banking Code to provide that banks will not charge default interest on loans secured by agricultural land in certain circumstances.

•

Recommendation 1.16 - The Australian Banking Association and ASIC should work to designate enforceable code provisions in the Banking Code.

•

Recommendation 4.9 - Certain provisions in the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice should be made enforceable code provisions by 30 June 2021.

•

Recommendation 4.10 - The Life Insurance Code of Practice and the General Insurance Code of Practice should be amended to impose sanctions on subscribers for breaches of the relevant code.

Summary of new law

1.13 Schedule 1 amends the Corporations Act and the Credit Act to strengthen the existing voluntary code of conduct framework to allow ASIC to designate enforceable code provisions in approved codes of conduct which, if breached, may attract civil penalties of up to 300 penalty units.

1.14 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 a mandatory code of conduct provision may attract civil penalties of up to 1,000 penalty units.

Comparison of key features of new law and current law

Detailed explanation of new law

The role of codes of conduct

1.15 Industry codes play an important role in how financial products and services are regulated in Australia.

1.16 The development of industry codes can raise standards and complement existing legislative obligations to deliver benefits for both consumers and subscribers to the code of conduct.

1.17 For voluntary industry codes to be effective, industry leadership is required to commit to a progressive model that raises standards and complements the existing legislative requirements that are already set out, bringing better outcomes for consumers and subscribers to the code of conduct. This can improve consumer confidence in a particular industry or industries.

1.18 As instruments of self-regulation, voluntary industry codes identify and respond to emerging consumer issues. Receiving ASIC approval of a voluntary code of conduct provides a signal to consumers that they can have confidence in that code.

1.19 Ultimately, the development of voluntary industry codes that improve these consumer outcomes is a matter for industry. In the absence of a voluntary industry code, there may be situations where a government-imposed mandatory code of conduct is appropriate. Alternatively, the government may consider whether other legislative options may be appropriate, for example to address identified issues of systemic and/or egregious conduct.

1.20 An approved voluntary code of conduct, or one that is mandated through regulations, is a signal to consumers that this is a code they can have confidence in. These codes of conduct respond to identified and emerging consumer issues and deliver substantial benefits to consumers.

1.21 The enhanced code of conduct framework allows for a graduated level of industry engagement and government regulation. Under the new framework, codes of conduct may be:

•

developed by industry, voluntary and not approved by ASIC;

•

developed by industry, voluntary and approved by ASIC; or

•

developed and mandated by Government.

1.22 The enhanced codes regime will:

•

strengthen the existing framework for voluntary, industry-developed codes of conduct to be approved by ASIC;

•

enable voluntary codes that are approved by ASIC to include enforceable code provisions. These enforceable code provisions should comprise the key provisions that govern the terms of a contract between the financial services entity or credit provider and the customer or guarantor;

•

allow remedies, including civil pecuniary penalties, for breaches of a designated enforceable code provision in an approved code; and

•

create a framework for establishing and imposing mandatory financial services and consumer credit codes of conduct.

Approved voluntary codes of conduct

How does a voluntary code of conduct get approved?

1.23 Schedule 1 allows an applicant to request that ASIC approve a code of conduct. An applicant, also known as a code owner, is often an industry association or peak body. Historically, this has been the case. However, a single licensee, on behalf of a group of subscribers to the code, may also request approval by ASIC for a voluntary code of conduct.

1.24 A subscriber to the code means a person or entity that agrees, in a way required by the code owner, to be bound by an approved code of conduct. This may be through a contractual arrangement with the code owner, or by publicly holding out that they comply with the code. If a person or entity no longer agrees to be bound by the code, they are a subscriber for the period that they did agree to be so bound. [Schedule 1, items 1 and 9, section 9 of the Corporations Act and section 5 of the Credit Act]

1.25 ASIC can approve a code of conduct in relation to any aspect of the activities for which ASIC has regulatory responsibility in relation to:

•

Australian Financial Services licensees;

•

authorised representatives of Australian Financial Services licensees;

•

issuers of financial products;

•

Australian Credit licensees;

•

credit representatives of Australian Credit licensees.

[Schedule 1, items 1, 4, 9 and 10, section 9 and 1101A of the Corporations Act, and sections 5 and 238A of the Credit Act]

1.26 ASIC can also approve a code of conduct on behalf of trustees of a registerable superannuation entity that hold a relevant licence. A majority of these entities already hold an Australian Financial Services licence, and from 1 July 2021, the remainder will be required to do so (except certain trustees of pooled superannuation trusts).

1.27 This is a result of the implementation of recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission, which will require all trustees of non-public offer superannuation funds to hold an Australian Financial Services licence from 1 July 2021.

1.28 To approve a voluntary code of conduct, ASIC must:

•

be satisfied that the code of conduct meets the threshold criteria; and

•

after having regard to further relevant criteria, be satisfied that it is appropriate to approve the code.

1.29 The threshold criteria for approving a code requires ASIC to be satisfied that:

•

the code is not inconsistent with the Corporations Act or the Credit Act or any other law of the Commonwealth under which ASIC has regulatory responsibilities; or

•

to the extent that the code is inconsistent, the code imposes an obligation on a subscriber that is more onerous than that imposed by the Corporations Act or the Credit Act or any other law of the Commonwealth under which ASIC has regulatory responsibilities; and

•

each enforceable code provision has been agreed with the applicant, and is drafted in a way that can be legally enforced.

[Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.30 If ASIC is satisfied of the above threshold criteria, ASIC must also consider whether it is appropriate to approve the code, after having regard to the following matters:

•

whether the obligations of subscribers to the code are capable of being enforced;

•

whether the applicant has effective administration systems for monitoring compliance with the code and making information obtained as a result of monitoring publicly available; and

•

whether the applicant has effective administrative systems for maintaining, and making publicly available, an accurate list of subscribers to the code.

[Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.31 If, after having regard to the above matters, ASIC is satisfied that the criteria have been met, then ASIC may approve the voluntary code of conduct by way of legislative instrument. When assessing these matters, ASIC should consider these matters as a whole and come to a decision about whether, on balance, the code of conduct can be approved. Once approved, the code of conduct becomes an approved code of conduct.

1.32 An approved code of conduct will also include a replacement code of conduct approved by ASIC under section 1101A of the Corporations Act or section 238A of the Credit Act.

1.33 As ASIC approves a code of conduct by making a legislative instrument that is subject to the disallowance process, this allows for parliamentary scrutiny of the instrument (as set out in section 42 of the Legislation Act 2003). [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.34 A legislative instrument is appropriate in this instance to allow for effective co-regulation between the regulator and the financial services and consumer credit sector. ASIC will conduct public consultation before any code of conduct is approved. Further discussion regarding consultation in relation to enforceable code provisions is at paragraph 1.79.

1.35 The approved code of conduct, including any variations, will be available in consolidated form on the Federal Register of Legislation.

1.36 An approved code of conduct will be subject to a statutory requirement for five-yearly reviews. This is more onerous than the standard sunsetting requirements under section 50 of the Legislation Act 2003, which require legislative instruments to be reviewed every 10 years. Further discussion about the review process is at paragraph 1.114.

1.37 ASIC's decision whether to approve, or not approve, an application under the voluntary code approval regime is not subject to merits review. This is consistent with the existing voluntary code approval regime. [Schedule 1, items 5 and 13, section 1317C of the Corporations Act and section 327 of the Credit Act]

1.38 The purpose of a merits review is to enable the Administrative Appeals Tribunal to review administrative decisions made by a decision-maker. This process is appropriate in relation to administrative decisions, as they are not generally subject to the accountability safeguards that apply to legislative decisions. However, a decision by ASIC to approve a voluntary code is legislative in character; made by way of a disallowable legislative instrument and therefore subject to parliamentary scrutiny.

1.39 Considering the voluntary nature of the code approval process, and the legislative character of any such decision made by ASIC, it is appropriate that this is not subject to merits review. An industry code of conduct can bring about positive consumer outcomes, with or without ASIC approval. The voluntary approval process aims to strengthen a code of conduct by holding industry accountable for breaches of the code, thereby building consumer confidence within the financial services and consumer credit sector. This is consistent with the 1999 Administrative Review Council publication 'What decisions should be subject to merits review?'

1.40 If there is a concern that ASIC has not followed due process in deciding whether or not to approve a code of conduct, the code applicant may seek a judicial review by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977, as well as through other appeal mechanisms in the Federal and High Courts provided for under the Judiciary Act 1903. This is consistent with the Attorney-General's Department's Australian Administrative Law Policy Guide.

Factors ASIC must be satisfied of before approving a code of conduct - threshold criteria

1.41 An approved code of conduct should do more than simply restate existing laws, rather, it should offer consumers greater benefits than what would normally exist under the law.

1.42 Subscribers to an approved code of conduct should aim to set and deliver standards that exceed what is required by the law and that will fill gaps or provide additional protections about matters not covered by the law. In addition, codes of conduct may provide greater clarity or specificity about matters covered by the law.

1.43 By doing so, codes of conduct can promote better consumer outcomes, raise industry standards and increase confidence and trust in the industries to which the codes apply.

1.44 Historically, industry codes have delivered better outcomes for consumers (even without regulator enforceability) than what the applicable financial services legislation at the time was able to deliver. These include consumer-specific provisions in codes that have been applied as part of external dispute resolution determinations, and broader undertakings (for example, service standards), through industry commitment to the code.

Consistency with other Commonwealth laws

1.45 Where code provisions overlap with existing law they should, at a minimum, be consistent with that law. If not, they must offer consumers protections over and above those set out in the law.

1.46 This 'more onerous' assessment is only a relevant consideration where a specific code provision conflicts with existing law. In this situation, ASIC will assess whether a subscriber is committing to a 'more onerous' obligation than what is currently required under the law. A 'more onerous' obligation is to be taken in its ordinary meaning, and will always require that the provision delivers better outcomes for consumers. [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.47 For example, the law may require industry participants to perform an action within 30 days, yet code subscribers may wish to go beyond the law and commit to do the action within 20 days. While such a code provision would be inconsistent with the law, the obligation that subscribers have chosen to commit to is 'more onerous' and would deliver a better outcome for consumers, therefore the inconsistency would be permitted.

Enforceable code provisions have been agreed with the applicant and are legally effective

1.48 Before a code of conduct is approved, ASIC must be satisfied that any provisions that have been designated as enforceable code provisions have been agreed with the applicant and have been appropriately drafted to be legally effective. [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.49 Given the voluntary nature of the code approval process, it would not be appropriate for ASIC to unilaterally designate enforceable code provisions. It is envisaged that, as part of the code approval process, industry will identify provisions for ASIC to consider designating as enforceable code provisions. ASIC would then engage with the code applicant as necessary to ensure that the appropriate provisions have been identified, and ensure that they are appropriately drafted, before being designated as enforceable code provisions.

1.50 This process is consistent with that contemplated by Commissioner Hayne, namely that in reviewing the proposed enforceable code provisions put forward by industry, ASIC should continue to engage with industry to designate enforceable code provisions.

1.51 Any enforceable code provisions in an approved code must be drafted in a way that is legally effective so they can be relied upon by consumers and regulators to enforce. This may require ASIC to consult with other Government stakeholders to ensure that the enforceable code provisions are appropriate and fit for purpose.

1.52 This is important as community confidence in the effectiveness of industry codes is largely reliant on consumers being able to seek redress under the code, and further, that the code is seen to be enforced against non-compliant subscribers. As penalties are attached to breach of an enforceable code provision, the language of these provisions must be sufficiently clear and specific to be relied upon.

Other factors that ASIC must consider before approving a code

1.53 When approving a code of conduct, ASIC must also have regard to the following matters.

Whether the obligations of subscribers to the code are capable of being enforced

1.54 This factor requires ASIC to consider whether all of the provisions within the code of conduct are stated with sufficient clarity so that they are capable of being enforced by an individual. In doing so, ASIC may also consider whether there are other mechanisms available to consumers to enforce the provisions, such as through a court, tribunal, external dispute resolution scheme or other alternative dispute resolution body.

1.55 The success of any code of conduct in protecting consumers and raising standards depends on ensuring that code subscribers comply with the provisions of the code and that there are appropriate remedies and sanctions in place to deal with non-compliance. The applicant (or code owner) is responsible for setting up these arrangements.

1.56 ASIC should look at whether the provisions of the code of conduct are binding on (and therefore, enforceable against) subscribers through a contractual arrangement. Contractual arrangements may include subscribers incorporating their agreement to abide by a code in individual contracts with consumers. This would generally be the preferred arrangement.

1.57 Alternatively, code subscribers contracting directly with an independent person or body that has the power to administer and enforce that code could also be an effective means of enforcement. However, this is dependent on the details of the arrangement. In addition to this, ASIC could consider any internal or external dispute resolution mechanisms available to consumers that deal with any alleged breaches of the code of conduct.

Whether the applicant has effective administrative systems for monitoring compliance with the code and making information obtained as a result of monitoring publicly available

1.58 This factor requires ASIC to consider whether the applicant has established effective systems for monitoring compliance by subscribers to the code of conduct, whether this information is publicly reported and the frequency of that information being reported.

1.59 Effective and transparent systems for monitoring code compliance are vital to ensuring public confidence in a code and those who subscribe to it. Consumers will have the ability to identify subscribers not adhering to the terms of the code and will indirectly benefit from the accountability that can be brought upon subscribers through effective monitoring of compliance. The public information may be in the form of an annual report which presents de-identified information about the number of and reasons for the reported breaches of the code of conduct.

1.60 These monitoring arrangements are also important to provide information to both industry and ASIC to help identify misconduct or more granular systemic issues. For example, whether particular subscribers are not meeting their commitments, or whether there are broader trends observable within the industry which may need to be addressed.

1.61 Monitoring arrangements include an independent body to monitor and report on compliance by the relevant subscribers and, where required, to provide this information to ASIC.

1.62 Providing compliance information assists with ASIC's regulatory functions and helps maintain confidence in the financial services and consumer credit industry by alerting ASIC to concerns in the sector.

1.63 Many code compliance bodies choose to delegate their secretariat functions to AFCA's Code Compliance and Monitoring Team. This is a separately operated and funded business unit of AFCA that supports independent committees to monitor compliance with codes of practice and codes of conduct in the financial services industry.

1.64 For this type of monitoring arrangement, a code of conduct may provide that a consumer or subscriber may disclose a breach about another subscriber, or a subscriber may disclose a breach regarding their own conduct, to the code compliance body. Such a disclosure may contain personal information relating to a client, or to an individual within the subscriber's body corporate structure. AFCA's Code Compliance and Monitoring Team holds that information only for the purpose of provision of service to the code committees. The safe handling and disclosure of such information is managed in accordance with both AFCA's privacy policy and the individual privacy policy of the relevant code committee on whose behalf the information is received.

1.65 Where this information is provided to another independent code compliance body, the handling and disclosure of this information will either be in accordance with the Australian Privacy Principles (if they are covered by the Privacy Act 1988) or in accordance with their own privacy policy.

1.66 When assessing the approval of a code of conduct, ASIC may consider whether the code monitoring body will voluntarily opt-in to the Privacy Act 1988. This may be appropriate to ensure the safe handling of personal information, and to provide certainty that code monitoring bodies can disclose these breaches to ASIC.

Whether the applicant has effective administrative systems for maintaining, and making publicly available, an accurate list of subscribers to the code

1.67 This factor requires ASIC to consider whether the applicant has administrative systems in place for maintaining an accurate and publicly available list of subscribers to the code.

1.68 This allows consumers to identify in real-time who is a subscriber to the code and encourages transparency and accountability within the financial services and consumer credit industry.

Enforceable code provisions

1.69 Under the enhanced code of conduct framework, an approved voluntary code of conduct may have enforceable code provisions. These provisions will be agreed with the applicant, and designated by ASIC, through the code approval process. [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.70 An enforceable code provision is any provision of an approved voluntary code of conduct designated by ASIC, which if breached attracts a civil penalty of up to 300 penalty units. [Schedule 1, items 1, 4, 9 and 10, sections 9 and 1101AC of the Corporations Act and sections 5 and 238D of the Credit Act]

1.71 It is necessary to delegate the setting of penalties to an ASIC legislative instrument because the enforceable code provisions will be assessed on a code-by-code basis once a code is brought to ASIC for approval.

1.72 However, the criteria governing the types of provisions ASIC may designate as enforceable code provisions is contained in the primary law. Further discussion about the criteria for enforceable code provisions is at paragraph 1.87.

Role of enforceable code provisions in an approved voluntary code of conduct

1.73 Voluntary codes of conduct, approved by ASIC, are a form of co-regulation between government and industry. Designating certain provisions as enforceable code provisions allows industry to be held accountable for breaches of the code, and shows industry's commitment to better outcomes for consumers.

1.74 Therefore, in the first instance, the applicant should identify which provisions of their code may be considered enforceable code provisions. This sentiment was also expressed by Commissioner Hayne. Ultimately, given the voluntary nature of the code approval process, ASIC cannot designate a provision as an enforceable code provision without the agreement of the code applicant.

1.75 Commissioner Hayne observed that designating certain provisions as enforceable would provide individuals with greater certainty and enforceability on key code of conduct provisions.

1.76 For example, provisions which could be designated as enforceable may include:

•

cooling off periods;

•

providing information to consumers; and

•

fees and charges.

1.77 These examples show the type of provisions that could bring about better outcomes for consumers over and above the legislative obligations contained in financial services law. Consistent with the criteria for enforceable code provisions at paragraph 1.87, these provisions relate to specific commitments made by a code subscriber to the consumer and if breached are likely to result in significant and direct detriment to the consumer.

1.78 Provisions within industry codes that are broader in their nature and seek to make general, in-principle commitments regarding industry practices or aspirational targets, would not meet the requirement for enforceable code provisions to represent a commitment to a person by a subscriber to the code. Such broad principles based provisions within an industry code would also not meet the criteria for enforceable code provisions because a breach of such a provision would be unlikely to cause significant and direct detriment to the consumer.

Consultation on enforceable code provisions

1.79 Before designating an enforceable code provision, ASIC should consult with relevant government agencies who have regulatory responsibilities in relation to the activities to which the provision would relate.

1.80 This is standard practice in accordance with section 17 of the Legislation Act 2003, which requires the rule maker to be satisfied that appropriate consultation has been undertaken before making a legislative instrument.

1.81 In determining whether the consultation was appropriate, the rule-maker may have regard to any relevant matter, including the extent to which the consultation drew on the knowledge of persons having expertise in fields relevant to the proposed instrument, and whether persons likely to be affected by the proposed instrument had an adequate opportunity to comment on its proposed content.

1.82 Therefore, when ASIC is considering designating certain provisions as enforceable code provisions, ASIC should identify whether any of the provisions involve the types of activities that other agencies have regulatory responsibility for, and notify those agencies of ASIC's intention to designate that provision as an enforceable code provision.

1.83 This provides notice to the relevant agency of ASIC's intention to designate an enforceable code provision, and provides an opportunity for them to respond to the appropriateness of making that provision an enforceable code provision and subject to penalties.

1.84 For example, ASIC should consult on potential enforceable code provisions with APRA where those provisions impact APRA-regulated entities, and the Office of the Australian Information Commissioner where the provisions have privacy implications.

1.85 This process will also alert ASIC to areas where enforceable code provisions may intersect with other Commonwealth legislation, some of which may also apply penalties for substantively the same conduct. This information will help ASIC to make an informed decision about whether it is appropriate to designate that provision as an enforceable code provision. Ultimately, the designation of enforceable code provisions is up to ASIC and the code owner (or applicant). Therefore, a failure to consult does not affect the validity of the approval of a voluntary code of conduct or an enforceable code provision.

1.86 The process set out above relates to consultation ASIC would undertake in relation to proposed enforceable code provisions, as part of ASIC's code approval process. This does not affect the consultation process that the applicant should undertake when developing a code of conduct, before submitting an application to ASIC for approval. ASIC's Regulatory Guide 183: Approval of financial services sector codes of conduct outlines that the applicant should consult with other regulators where any provisions in a code also come within the jurisdiction of those regulators. For example, the applicant may need to obtain ACCC authorisation if a code contains any anti-competitive measures; the applicant should also consult the Office of the Australian Information Commissioner if a code contains any privacy requirements.

Criteria for identifying enforceable code provisions

1.87 ASIC may only designate a provision as an enforceable code provision if ASIC considers that:

•

the provision represents a commitment to a person by a subscriber to the code, relating to transactions or dealings performed for, on behalf of or in relation to the person; and

•

a breach of the provision is likely to result in significant and direct detriment to the person; and

•

any additional criteria that have been prescribed by the regulations have either been satisfied, or taken into account, as required.

[Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.88 The regulations may prescribe further criteria that ASIC must be satisfied of, or prescribe matters that ASIC needs to take into account before it identifies a provision as an enforceable code provision. [Schedule 1, items 4 and 10, section 1101AD of the Corporations Act and section 238E of the Credit Act]

1.89 Enforceable code provisions should not be mere restatements of existing law. Instead, these provisions should create new or extended obligations, or elaborate on what is already stated in the law. These provisions may also provide further specificity in regards to how subscribers intend to comply with existing law.

1.90 If a particular provision in the code of conduct meets the above criteria, and if the applicant agrees, ASIC may designate the provision as an enforceable code provision.

1.91 The enforceable code provisions will be designated in the legislative instrument that approves the code.

An enforceable code provision must represent a commitment

1.92 To be designated as an enforceable code provision, a provision must represent a commitment by the subscriber to a person, such as individual customers or a guarantor who has obligations under the contract. The commitment must relate to transactions or dealings performed by the subscriber for, on behalf of or in relation to that person.

1.93 For example, this would include a direct and specific commitment by the subscriber to take specified action within a specified timeframe. It would not include broad aspirational commitments to the public at large.

Breaching an enforceable code provision may cause significant and direct detriment

1.94 A mere outlining of a 'commitment' is not sufficient for a provision to be designated as enforceable. ASIC must also consider the potential harm that may be caused by breaching that commitment. This criteria ensures that only non-trivial provisions will be designated as enforceable code provisions and therefore subject to penalties.

1.95 In considering the potential harm, ASIC will consider whether breaching the commitment is likely to cause significant and direct detriment to the consumer. Where such commitments have been made to consumers under existing voluntary industry codes, evidence of significant and direct detriment caused by past breaches may be taken into consideration by ASIC in considering whether future breaches are likely to cause significant and direct detriment to the consumer.

1.96 The term 'significant detriment' means something more than just an inconvenience, and may include both economic and non-economic loss. When considering this, ASIC may consider factors such as:

•

the nature and extent of the potential detriment, which may include non-financial detriment;

•

the potential financial loss to consumers; and

•

the impact of the detriment on consumers.

1.97 ASIC may also consider the potential harm caused by a single breach of the commitment, or by multiple breaches of the commitment. For example, while a single breach of the commitment may not be considered likely to cause significant and direct detriment to the consumer, ASIC may consider that multiple breaches of that commitment would be likely to have this effect.

Contraventions of an enforceable code provision

1.98 The maximum penalty for a contravention of an enforceable code provision in an approved code is 300 penalty units. However, a court maintains the discretion to impose an amount below this maximum. This is consistent with the enforceable industry codes regime administered by the ACCC in the Competition and Consumer Act 2010. [Schedule 1, items 4 and 10, section 1101AC of the Corporations Act and section 238D of the Credit Act]

1.99 Once a voluntary code of conduct containing enforceable code provisions has been approved, any person who holds out to comply with the approved code must not breach an enforceable code provision. [Schedule 1, items 4 and 10, section 1101AC of the Corporations Act and section 238D of the Credit Act]

1.100 A person holding out that they comply with an approved code of conduct may do so by telling the code owner that they subscribe to the code, or by publicly holding out that they comply with the code via their website or advertising material.

1.101 In addition to the obligations to comply with enforceable code provisions under the voluntary codes of conduct regime, if a holder of an Australian financial services licence or an Australian credit licence knows or is reckless as to whether there are reasonable grounds to believe that it has breached, or will breach an enforceable code provision, and that breach is or will be significant, they must report that breach to ASIC. Additionally, where a licensee conducts an investigation into whether there has been or will be a significant breach of an enforceable code provision, the investigation also needs to be reported to ASIC where it continues for more than 30 calendar days. These breach reporting obligations give effect to recommendation 7.2 of the Financial Services Royal Commission.

Variations to an approved voluntary code of conduct

1.102 An applicant (or code owner) may apply to ASIC to vary an approved voluntary code of conduct. [Schedule 1, items 4 and 10, section 1101AA of the Corporations Act and section 238B of the Credit Act]

1.103 The applicant should seek to vary an approved code of conduct to deal with issues identified during an independent review or where a new consumer or market problem is identified.

1.104 When considering whether to vary an approved voluntary code of conduct, ASIC must consider the same matters that it was required to consider during the original approval process. [Schedule 1, items 4 and 10, section 1101AA of the Corporations Act and section 238B of the Credit Act]

1.105 ASIC should use reasonable judgement in deciding to what extent it reassesses a code of conduct. For example, variations that are minor in nature, or address typographical or grammatical errors would not require ASIC to review a code in its entirety.

1.106 ASIC can approve a variation of an approved voluntary code of conduct by way of a legislative instrument. Once approved by ASIC, the legislative instrument will be subject to disallowance and parliamentary scrutiny (section 42 of the Legislation Act 2003). [Schedule 1, items 4 and 10, section 1101AA of the Corporations Act and section 238B of the Credit Act]

1.107 An ASIC decision to not approve a variation is not subject to merits review. Additional discussion on merits review is at paragraphs 1.37 to 1.40. [Schedule 1, items 5 and 13, section 1317 of the Corporations Act and section 327 of the Credit Act]

1.108 Once a variation has been approved through a legislative instrument, the varied code becomes the ASIC approved code of conduct and subscribers must comply with the approved code as varied.

1.109 Any variation to the approved code of conduct may be viewed in consolidated form on the Federal Register of Legislation.

Revocation of approval of a voluntary code of conduct

1.110 ASIC may, by legislative instrument, revoke approval of a voluntary code of conduct. [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.111 ASIC may revoke approval of a code:

•

on application by the applicant; or

•

if ASIC does not continue to be satisfied that the code meets the requirements it had to be satisfied of to approve the code as contained in section 1101A of the Corporations Act or section 238A of the Credit Act; or

•

because a review of the operation of the code was not completed within the timeframe.

[Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.112 The grounds listed do not limit the application of section 33(3) of the Acts Interpretation Act 1901. [Schedule 1, items 4 and 10, section 1101A of the Corporations Act and section 238A of the Credit Act]

1.113 Section 33(3) of the Acts Interpretation Act 1901 provides that where an Act confers a power to make any instrument of a legislative character, the power shall be construed as including a power to repeal, revoke, amend or vary that instrument.

Reviewing a voluntary code of conduct

1.114 The applicant must ensure that an independent review that considers the operation of the approved code of conduct is undertaken every five years. The review must be subject to public consultation. [Schedule 1, items 4 and 10, section 1101AB of the Corporations Act and section 238C of the Credit Act]

1.115 The five year period commences on the day the code of conduct was approved. [Schedule 1, items 4 and 10, section 1101AB of the Corporations Act and section 238C of the Credit Act]

1.116 Each subsequent review must be completed within five years after the completion of the previous review. This provides the applicant with flexibility to undertake a review sooner if they consider that it is appropriate to do so, for example, a change to the law may prompt a review of a code. [Schedule 1, items 4 and 10, section 1101AB of the Corporations Act and section 238C of the Credit Act]

1.117 A review is complete once the applicant has provided a copy of the report to ASIC. The applicant must also publish the report on their website within 10 business days. [Schedule 1, items 4 and 10, section 1101AB of the Corporations Act and section 238C of the Credit Act]

1.118 Regular reviews of the code of conduct by an independent body means that the code remains current and can respond appropriately to changing industry practices.

1.119 The role of the independent reviewer is to consider, without bias, the broad range of stakeholder views, including both consumer and industry stakeholders. The independent reviewer should consider the relevant factors that ASIC considers when approving the code. Therefore, the review provides an opportunity for stakeholders to give feedback on the effectiveness of the approved code of conduct, and suggestions on how the approved code of conduct may be improved.

Mandatory codes of conduct

1.120 The Government may impose a mandatory code of conduct through regulations where a mandatory code is the most appropriate tool. This may be more appropriate to address poor consumer outcomes in an industry sector when, for example, an industry has insufficient capacity or cohesion to develop a voluntary code of conduct; efforts between ASIC and industry to develop a voluntary code of conduct have not been successful; industry participants have not put forward a proposed code in a timely manner; and/or where the industry has engaged in egregious conduct and it is in the public interest for a mandated code of conduct. [Schedule 1, items 4 and 10, section 1101AE of the Corporations Act and section 238F of the Credit Act]

1.121 A mandatory code of conduct would be prepared by Treasury in consultation with ASIC, industry and consumer groups, and would be subject to a public consultation process. Regulations are made by the Governor-General and are subject to disallowance.

1.122 Regulations imposing a mandatory code of conduct may:

•

confer functions and powers on a person or body for the purposes of:

-

monitoring compliance with the code of conduct; and

-

dealing with disputes or complaints arising under, or in relation to, the code of conduct; and

-

dealing with other associated administrative matters; and

•

provide for record keeping and reporting obligations.

[Schedule 1, items 4 and 10 section 1101AE of the Corporations Act and section 238F of the Credit Act]

1.123 The ability to confer powers and functions on a body or person is important to the operation of the mandatory code of conduct as the industry sector that the mandatory code of conduct applies to may not have the appropriate structures in place to monitor compliance with the code, or deal with disputes arising between consumers and industry participants who are subject to the code.

1.124 The mandatory code of conduct may require industry participants who are subject to the code to share information with a code monitoring body. This may be information relating to breaches of any provision in the mandatory code of conduct. This information should be shared between the industry participants subject to the code and a code monitoring body, and if significant, also shared with ASIC under breach reporting obligations.

1.125 Once the regulations have been made, a person to whom the code applies must not contravene a mandatory code of conduct. The breach of a provision in a mandatory code of conduct may attract ASIC enforcement. [Schedule 1, items 4 and 10, section 1101AF of the Corporations Act and section 238G of the Credit Code]

1.126 Under the mandatory codes of conduct regime, the regulations may prescribe civil penalty provisions with a maximum of 1,000 penalty units. The penalty amount prescribed is the maximum amount that can be applied by a court following a breach of the specific provision. [Schedule 1, items 4 and 10, section 1101AE of the Corporations Act and section 238F of the Credit Act]

1.127 In prescribing the level of penalty associated with a breach of a civil penalty provision, the Government may decide to set a maximum penalty amount of less than 1,000 penalty units. To determine the appropriate maximum penalty for each civil penalty provision, the Government may take into account factors such as the nature of the industry to be subject to the mandatory code, its participants and other relevant matters.

1.128 The maximum penalty amount of 1,000 penalty units highlights the significance of the breach. The maximum penalty is set at this amount to achieve an effective and meaningful level of deterrence. Further discussion about the appropriateness of the pecuniary penalties is at paragraph 1.144.

1.129 The standard pecuniary penalties contained in sections 1317G(3) and (4) of the Corporations Act and sections 167B(1) and (2) of the Credit Act do not apply to mandatory codes of conduct. [Schedule 1, items 4 and 10, section 1101AE of the Corporations Act and section 238F of the Credit Act]

1.130 Any regulations creating mandatory codes of conduct will be subject to disallowance under section 42 of the Legislation Act 2003 and therefore subject to parliamentary scrutiny.

Enforcement

1.131 ASIC and individual consumers have a range of enforcement options available to them for breaches of civil penalty provisions under the Corporations Act and the Credit Act.

1.132 Where a person or entity ceases to subscribe to an approved code of conduct, that person or entity will still be liable for any contraventions of the code that occurred during the period that the person or entity was a subscriber. ASIC or individual consumers can still take action in relation to any breach that occurred during that period. [Schedule 1, items 1 and 9, section 9 of the Corporations Act and section 5 of the Credit Act]

1.133 ASIC should use its regulatory judgement as to what breaches, and what remedies, it applies in using their regulatory enforcement tools.

1.134 Commissioner Hayne recommended that remedies modelled on those set out in Part VI of the Competition and Consumer Act 2010 should be available for a breach of an enforceable code provision in an approved code of conduct or a civil penalty provision in a mandatory code of conduct.

Infringement notices

1.135 Schedule 1 allows ASIC to issue an infringement notice for a breach of an enforceable code provision in an approved code of conduct, or a breach of a civil penalty provision in a mandatory code of conduct. [Schedule 1, items 6 and 12, section 1317DAN of the Corporations Act and section 288K of the Credit Act]

1.136 This amendment adds enforcement of the code provisions to the existing infringement notice regime administered by ASIC under the Corporations Act and the Credit Act.

1.137 Infringement notices are an administrative tool that ASIC can use to deter and punish breaches of the enforceable code provisions in an approved code of conduct and civil penalty provisions in a mandatory code of conduct. This can be used as an alternative to other civil or administrative proceedings.

1.138 ASIC may issue an infringement notice if it believes on reasonable grounds that a person has contravened an enforceable code provision in an approved code of conduct or a civil penalty provision in a mandatory code of conduct. This must be given to the subscriber within 12 months after the day on which the contravention is alleged to have taken place. ASIC may give a person a single infringement notice for one contravention, or multiple infringements notices for multiple contraventions (section 1317DAM of the Corporations Act and section 288J of the Credit Act).

1.139 Under the Corporations Act, the amount of an infringement notice payable to ASIC for the breach of an enforceable code provision in an approved code of conduct or a civil penalty provision in a mandatory code of conduct is 12 penalty units for an individual and 60 penalty units for a body corporate.

1.140 For multiple contraventions, the amount payable is calculated by multiplying the number of penalty units by the number of contraventions (section 1317DAP(2) of the Corporations Act). This follows the existing penalty unit regime within the Corporations Act.

1.141 Under the Credit Act, the amount of an infringement notice payable to ASIC for the breach of an enforceable code provision in an approved code of conduct or a civil penalty provision in a mandatory code of conduct is 50 penalty units for an individual and 250 penalty units for a body corporate.

1.142 For multiple contraventions, the amount payable is calculated by multiplying the number of penalty units by the number of contraventions (section 288I(2) of the Credit Act). This follows the existing penalty unit scheme within the Credit Act.

1.143 The infringement notice regime for codes of conduct have been incorporated into the existing infringement notice frameworks within the Corporations Act and the Credit Act. Therefore, the penalties reflect the existing frameworks and amounts that the relevant codes operate within. Creating a new framework would unnecessarily increase complexity.

Pecuniary penalties

1.144 If a subscriber to an approved code of conduct breaches an enforceable code provision, or if an industry participant subject to a mandatory code breaches a civil penalty provision, ASIC may take action against the subscriber or industry participant for a pecuniary penalty. The maximum penalty which may be applied to any such breach is established in the primary law. The specific provision to which a penalty applies will be prescribed in delegated legislation: determined by ASIC (in the case of approved voluntary codes), or by the Government (in the case of mandatory codes).

1.145 A breach of an enforceable code provision contained in an approved code of conduct may attract pecuniary penalties of up to 300 penalty units. This applies to both individuals and corporations, and is consistent with the level of penalties in industry codes prescribed under the Competition and Consumer Act 2010. [Schedule 1, items 4 and 10, section 1101AC of the Corporations Act and section 238D of the Credit Act]

1.146 A breach of a civil penalty provision contained in a mandatory code of conduct may attract pecuniary penalties of up to 1,000 penalty units. This applies to both individuals and corporations. This is the maximum penalty which may be prescribed for civil penalty provisions specified in the regulations. In some circumstances, it may be appropriate to prescribe a lower penalty amount for a specific civil penalty provision in a mandatory code. [Schedule 1, items 4 and 10, section 1101AE of the Corporations Act and section 238F of the Credit Act]

1.147 These maximum penalties are appropriate as codes of conduct aim to set standards or requirements for a wide range of behaviour. The penalties work to protect the public interest by encouraging compliance with the code of conduct and also penalising those subscribers who are operating in breach of these codes of conduct.

1.148 The court will continue to have discretion to apply an appropriate penalty up to the maximum amount. The court must consider the relevant factors in any given case, 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.

1.149 The courts are experienced in making civil penalty orders at appropriate levels within the maximum amount specified in legislation to reflect the individual circumstances of a case. Factors typically include: the nature and extent of the conduct which led to the contravention; the nature and extent of any resulting loss or damage; the relevant circumstances; the size of the organisation; whether the breach was deliberate; and the need for deterrence.

1.150 A pecuniary penalty is an appropriate sanction as a breach of a code of conduct could result in commercial gains by the subscriber (in relation to an approved code) or the industry participant (in relation to a mandatory code). Therefore, where the subscriber or 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 subscriber or industry participant. It also serves as an effective deterrent to eliminate the gain or benefit resulting from non-compliance.

1.151 The quantum of the two different civil penalties in the codes of conduct framework reflect the importance of the codes of conduct regime in ensuring consumer confidence in the financial services and consumer credit industry.

1.152 In particular, the penalty for the mandatory code of conduct reflects the seriousness of the imposition of these codes by the Government and the high penalty encourages compliance with the code of conduct. A mandatory code of conduct may be imposed where the industry has engaged in egregious conduct and it is in the public interest for a mandated code of conduct. In these instances, as a reflective regulatory action, the high maximum pecuniary penalty encourages deterrence from the egregious conduct that would otherwise bring about adverse outcomes for consumers.

Other enforcement options

1.153 All enforceable code provisions in an approved code of conduct and all provisions in a mandatory code of conduct will form part of the 'financial services law'. This means that if a subscriber breaches any enforceable code provision in an approved code of conduct, or if an industry participant subject to a mandatory code breaches any provision in that code, ASIC may take administrative action under the enforcement options available.

1.154 ASIC will have a range of other civil enforcement options that it can apply to the Court for in relation to a breach. These include applying for compensation on behalf of another person, injunctions, non-punitive orders such as corrective advertising or applying for an order that a particular contract relating to financial products or financial services be void or voidable.

Application and transitional provisions

1.155 The Banking Code of Practice^[2], approved by ASIC on 18 December 2019, will be taken to be approved under the new section 1101A as outlined in this Chapter. [Schedule 1, item 8, section 1671 of the Corporations Act]

Chapter 2 - Insurer avoidance of life insurance contracts, and duty to take reasonable care not to make a misrepresentation (recommendations 4.6 and 4.5)

Outline of chapter

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

2.2 Part 2 of Schedule 2 to the Bill 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.

Context of amendments

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.3 The Financial Services Royal Commission concluded that the current regime for allowing insurers to avoid contracts of life insurance is unfairly weighted in favour of insurers. Recommendation 4.6 of the Financial Services Royal Commission was that the Insurance Contracts Act be amended to limit the circumstances in which an insurer can avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured.

2.4 Under section 29(3) of the Insurance Contracts Act, a life insurer can avoid a contract of life insurance within three years of entering into the contract if the insured:

•

failed to comply with their duty of disclosure at the time of entering into the contract; or

•

made a misrepresentation to the insurer before entering into the contract.

2.5 Section 29(3) applies where the insured's failure to comply with the duty of disclosure or misrepresentation was not fraudulent.

2.6 Section 29(3) was inserted into the Insurance Contracts Act in its current form in 2013 by the Insurance Contracts Amendment Act 2013. Prior to the 2013 amendments, section 29(3) did not give life insurers as broad a power to avoid contracts of life insurance on the basis of a non-fraudulent failure to comply with the duty of disclosure, or a non-fraudulent misrepresentation. That is, under the previous law, the insurer could not avoid a life insurance contract with the insured unless the insurer could show that it would not have entered into a contract on any terms had it known the information that was omitted or misrepresented.

2.7 Consistent with recommendation 4.6 of the Financial Services Royal Commission, this Schedule restores the wording of section 29(3) to its pre-2013 form.

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.8 Under the current law, an insured is required to disclose matters known to the insured that are relevant to the insurer's decision of whether or not to accept the risk of insurance and, if so, on what terms (section 21 of the Insurance Contracts Act).

2.9 A modified duty of disclosure applies to 'eligible contracts of insurance' (section 21A of the Insurance Contracts Act). These contracts are prescribed in the Insurance Contracts Regulations 2017 and include contracts relating to consumer credit insurance, motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance. Life insurance contracts and all other insurance products purchased by consumers are not eligible contracts of insurance.

2.10 Under the existing duty of disclosure for eligible contracts of insurance, the insurer must ask specific and relevant questions. The insured's duty does not extend beyond responding to those questions. When the insured renews their contract, the insurer may ask the insured specific questions or ask them to confirm or update the information they previously gave the insurer.

2.11 Insurers must also inform the insured clearly in writing of their duty of disclosure. If an insurer does not inform the insured of their duty, the insurer cannot rely on the duty of disclosure (section 22 of the Insurance Contracts Act).

2.12 If an insured breaches their duty of disclosure the insurer may access the remedies outlined in Division 3 of Part IV of the Insurance Contracts Act. Broadly, depending on the circumstances of the failure to comply with the duty of disclosure, these remedies allow the insurer to:

•

reject a claim;

•

reduce a payout;

•

increase a premium; or

•

avoid the contract.

2.13 In assessing the current duty of disclosure, the Financial Services Royal Commission found the existing approach to disclosure is no longer relevant for modern consumer contracts of insurance. Commissioner Hayne concluded that the duty does not recognise the breadth and depth of the gap between what a consumer knows and what an insurer knows is relevant. That is, the duty fails to recognise the extent of the information asymmetry between a consumer and an insurer.

2.14 The Financial Services Royal Commission set out observations made in the United Kingdom Law Commission and the Scottish Law Commission's 2009 joint report: Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation. Commissioner Hayne found those observations - that, even where consumers act honestly and reasonably, they may be denied cover and they can easily misunderstand the insurer's questions - apply equally in the Australian context.

2.15 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.

2.16 In agreeing to amend the duty of disclosure for consumers, the Government noted 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.

Summary of new law

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.17 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.

2.18 The key feature of the new law is that 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.

2.19 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.20 Part 2 of Schedule 2 replaces the existing duty of disclosure with a new duty for an insured to take reasonable care not to make a misrepresentation when entering into a consumer insurance contract. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

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

2.22 In determining whether the insured has taken reasonable care not to make a misrepresentation, it is necessary to take into account:

•

any particular characteristics or circumstances of the insured that the insurer was, or ought to have been, aware of; and

•

all other relevant circumstances.

2.23 The amendments to implement recommendation 4.5 (the duty to take reasonable care not to make a misrepresentation) will apply in relation to consumer insurance contracts that are entered into on or after 5 October 2021 to align with the application date of the Design and Distribution Obligations in Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.

Comparison of key features of new law and current law

Detailed explanation of new law

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

2.25 Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure with a new duty for an insured to take reasonable care not to make a misrepresentation when entering into (including renewing, extending, varying or reinstating) a consumer insurance contract. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.26 Part 1 of Schedule 2 amends section 29(3) of the Insurance Contracts Act to implement recommendation 4.6 of the Financial Services Royal Commission.

2.27 Current section 29(3) of the Insurance Contracts Act applies where the insured's failure to comply with the duty of disclosure or misrepresentation on entering into a life insurance contract was not fraudulent. In these circumstances, the insurer may avoid the contract as long as the failure was within three years of entering into the contract.

2.28 Current section 29(3) was inserted into the Insurance Contracts Act in its current form in 2013 by the Insurance Contracts Amendment Act 2013. Prior to the 2013 amendments, section 29(3) did not allow the insurer to avoid a life insurance contract unless the insurer could show that it would not have entered into the contract with the insured on any terms had it known the information that was omitted or misrepresented.

2.29 Consistent with recommendation 4.6 of the Financial Services Royal Commission, the amendments restore the pre-2013 wording of section 29(3) of the Insurance Contracts Act.

2.30 Therefore, where the insured's failure to comply with the duty of disclosure or misrepresentation on entering into a life insurance contract was not fraudulent, the insurer may (within three years of entering into the contract) avoid the contract only if the insurer would not have been prepared to enter into a contract with the insured on any terms, had the relevant failure not occurred. [Schedule 2, item 19, section 29 of the Insurance Contracts Act]

2.31 The intent of the amended section 29(3) is to place the insurer in a position similar to the position they would have been if the insured had not made the relevant failure. This means that if the insurer would not have offered that product on any terms if the insurer had known about the relevant failure, the insurer has a right to avoid the contract.

2.32 However, where the insurer would have offered that product on different terms (for example, different terms and conditions or a different premium) if the insurer had known about the relevant failure, the insurer only has the right to vary the contract in accordance with sections 29(4) to 29(8) of the Insurance Contracts Act. Sections 29(4) and 29(5) set out a formula by which the insurer may substitute the sum insured. Alternatively, sections 29(6) to 29(8) provide that the insurer may, by notice in writing given to the insured, vary the contract in such a way as to place the insurer in the position they would have been had the relevant failure not occurred.

Example 2.1

Jason purchased a term life insurance policy contract two years ago. When entering into the contract, Jason made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) he had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that applications for term life insurance that disclosed symptoms of ventricular tachycardia should be accepted with a premium loading. This means that the insured pays a higher premium to account for the additional risk.

The insurer cannot avoid the term life insurance policy contract because it would have offered the contract with a premium loading. However, the insurer can vary the contract in accordance with sections 29(4) to (8) of the Insurance Contracts Act.

Example 2.2

Jenny purchased a term life insurance policy contract two years ago. When entering into the contract, Jenny made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) she had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that all applications for term life insurance that disclosed symptoms of ventricular tachycardia should be declined.

The insurer can avoid the term life insurance policy contract as the insurer would not have offered the contract on any terms.

Example 2.3

James purchased a term life insurance policy contract two years ago. When entering into the contract, James made a non-fraudulent relevant failure with regard to symptoms of ventricular tachycardia (an irregular heartbeat) he had previously experienced.

The insurer's internal underwriting policy, which was consistently followed in practice, stated that all applications for term life insurance that disclosed symptoms of ventricular tachycardia should be declined.

Under the insurer's internal underwriting policy, a total and permanent disability policy could be sold to insureds with symptoms of ventricular tachycardia.

The insurer can avoid the term life insurance policy contract on the basis that the insurer would not have offered term life insurance on any terms, even though it could have been possible that the insurer would have offered another product, like a total and permanent disability policy.

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.33 Part 2 of Schedule 2 amends the Insurance Contracts Act to replace the duty of disclosure of an insured. These amendments implement recommendation 4.5 of the Financial Services Royal Commission.

2.34 The new duty of disclosure is that an insured must take reasonable care not to make a misrepresentation to the insurer. It applies when a consumer insurance contract is 'entered into'. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.35 Under section 11(9) of the Insurance Contracts Act, a reference to the entering into of a contract of insurance also includes a reference to:

•

for life insurance contracts - the making of an agreement by the parties to the contract to extend or vary the contract; and

•

for other contracts of insurance:

-

the making of an agreement by the parties to the contract to renew, extend or vary the contract; or

-

the reinstatement of any previous contract of insurance.

2.36 For a contract of life insurance that is a consumer insurance contract, a person who is insured under a life insurance contract must take reasonable care not to make a misrepresentation. This replaces the current obligation on the life insured to comply with the duty of disclosure in section 31A of the Insurance Contracts Act. [Schedule 2, items 15 and 28, section 27AA of the Insurance Contracts Act]

Consumer insurance contracts

2.37 The new duty to take reasonable care not to make a misrepresentation to the insurer applies in relation to:

•

consumer insurance contracts; and

•

proposed contracts of insurance that, if entered into, would be consumer insurance contracts.

[Schedule 2, item 6, section 20A of the Insurance Contracts Act]

2.38 A 'contract of insurance' (as defined in section 10 of the Insurance Contracts Act) is a consumer insurance contract if the insurance is obtained wholly or predominantly for the personal, domestic or household purposes of the insured. [Schedule 2, items 3 and 4, definition of 'consumer insurance contract' in sections 11 and 11AB of the Insurance Contracts Act]

2.39 This definition is consistent with the definition of 'consumer contract' (to which unfair contract term protections apply) in section 12BF(3) of the ASIC Act.

2.40 Consumer insurance contracts include both:

•

general insurance contracts; and

•

life insurance contracts.

2.41 Consumer insurance contracts are likely to include contracts previously classified as eligible contracts of insurance - such as contracts relating to consumer credit insurance, motor vehicle insurance, home buildings insurance, home contents insurance, sickness and accident insurance and travel insurance. Other insurance contracts that are not currently eligible contracts of insurance (such as pet insurance) are also consumer insurance contracts.

2.42 If a contract for insurance is for new business, an insurer may elect to notify the insured that a contract is considered to be a consumer insurance contract. When an insurer has notified the insured that the contract is to be considered a consumer insurance contract, it won't need to be required to prove that the contract is a consumer insurance contract. This allows the insurer to resolve any uncertainty as to whether a particular contact is categorised as a consumer insurance contract. This broadly replicates the existing section 6(3) of the Insurance Contracts Regulations 2017. [Schedule 2, item 4, section 11AB of the Insurance Contracts Act]

2.43 If it is alleged in a proceeding in relation to a contract of insurance that the contract is a consumer insurance contract, the contract is presumed to be a consumer insurance contract unless proved otherwise. [Schedule 2, item 4, section 11AB of the Insurance Contracts Act]

2.44 The duty of utmost good faith in Part II of the Insurance Contracts Act will continue to be a duty of each party in the pre-contractual phase (and an implied term of an insurance contract), and operates alongside the duty to take reasonable care not to make a misrepresentation. However, in relation to the disclosure of a matter to the insurer under a consumer insurance contract, the insured does not have a duty under Part II of the Insurance Contracts Act other than the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 5, section 12 of the Insurance Contracts Act]

2.45 For contracts of insurance that are not consumer insurance contracts, Division 1 (Duty of Disclosure) and Division 2 (Misrepresentations) of Part IV of the Insurance Contracts Act continue to apply.

The duty to take reasonable care not to make a misrepresentation

2.46 In determining whether an insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer, regard must be had to all the relevant circumstances of a particular case. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.47 The circumstances that are relevant in determining whether the insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer will vary depending on the facts of the particular case. There is no limitation on the range of factors that can be considered (noting that all relevant circumstances must be considered).

2.48 However, when determining what matters could be looked at when determining whether the insured has taken reasonable care not to make a misrepresentation:

•

section 20B(3) of the Insurance Contracts Act specifies a range of matters that may be taken into account in determining whether an insured has fulfilled the new duty; and

•

section 20B(4) of the Insurance Contracts Act requires the insurer to respond appropriately to particular characteristics or circumstances about the insured of which the insurer was, or ought to have been, aware. This may be to ask for more information, or to provide assistance where the insured may require it.

[Schedule 2, item 6, section 20B of the Insurance Contracts Act]

Matters that may be taken into account in determining whether the insured has fulfilled the new duty

2.49 All relevant circumstances are to be taken into account when considering whether the insured has taken reasonable care not to make a misrepresentation to the insurer. Without limiting the range of factors, consideration may be given to the following matters:

•

the type of consumer insurance contract in question and its target market;

•

explanatory material or publicity produced or authorised by the insurer;

•

how clear, and how specific, any questions asked by the insurer were;

•

how clearly the insurer communicated the importance of answering their questions and the possible consequences of failing to do so;

•

whether or not an agent was acting for the insured; and

•

whether the contract was a new contract or was being renewed, extended, varied or reinstated.

[Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.50 The list of matters reflects common scenarios of relations between the insurer and the insured that may be relevant in determining whether an insured has fulfilled the new duty. This list of matters is indicative and non-exhaustive. Other matters may also be taken into account when relevant.

2.51 Further, if the insurer was, or ought to have been, aware of particular characteristics or circumstances of the insured individual, these characteristics or circumstances must be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

The type of consumer insurance contract in question and its target market

2.52 The type of consumer insurance contract and its target market may be taken into account when determining whether the insured took reasonable care not to make a misrepresentation to the insured. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.53 Consumer insurance contracts can vary widely. For instance, consumer insurance contracts can have different pricing mechanisms, payment arrangements, subject-matters and terms and be of different duration. They can be negotiated, standard-form, written, verbal, online or a mix of these contract types. Therefore, the type of insurance contract may affect what the insured is required to do to satisfy the new duty.

2.54 For example, if a consumer purchases a bespoke motor vehicle insurance contract that has unique terms, such as for an antique car, it is likely that, before the contract is entered into, the insurer would seek more detailed information about the consumer and their circumstances than if the consumer was purchasing a standard motor vehicle insurance contract.

2.55 Policies containing options and levels of cover may have a broad target market with narrower components within them. For example, if a consumer selects the wrong insurance cover when purchasing online (such as commercial insurance instead of residential insurance) this should be taken into account when considering whether the duty was met by the insured in answering questions in relation to that contract.

2.56 Similarly, consumer insurance contracts can have different target markets. For example, home contents insurance for rare or otherwise unusually valuable items may be targeted toward users' needs. When taking this matter into consideration, a target market determination made by the insurer in accordance with their design and distribution obligations under the Corporations Act should be taken into account.^[3]

Explanatory material or publicity produced or authorised by the insurer

2.57 Whether the insurer provided easily comprehensible, accessible material that explains the specific consumer insurance contract in question would generally be taken into account in determining whether the insured discharged their duty. If that material was ambiguous, the ambiguity would also be taken into account. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.58 Explanatory materials may include both written and non-written communications to convey the type of information that the insurer considers relevant.

How clear, and how specific, any questions asked by the insurer were

2.59 The clarity and specificity of questions asked by the insurer may be taken into account when determining whether the insured took reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.60 There is no express consequence for insurers asking an insured to answer questions of a general nature or questions that are unclear, confusing or ambiguous (as is the case with the existing disclosure requirements for eligible insurance contracts). However, this would likely be taken into account in determining whether the insured has satisfied their duty to take reasonable care not to make a misrepresentation.

2.61 For example, it may generally be more difficult for an insured to answer:

•

compound questions that are open-ended, general or long; or

•

questions that are difficult to understand or interpret.

2.62 Therefore, when assessing this matter, the sort of things that would be taken into account may be the type of questions asked as well as the circumstances in which the questions are asked.

2.63 In this regard it is intended that on the renewal of an insurance contract, the new law would not prevent an insurer from providing the insured with a copy of information previously provided and asking them for details of any material changes.

How clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)

2.64 How clearly the insurer communicated the importance of answering the questions, and the possible consequences of failing to do so, may be taken into account when determining whether an insured has taken reasonable care not to make a misrepresentation. This will also be relevant where the insurer did not communicate the importance (or the consequences) of answering the questions. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.65 Therefore, an insurer should give a clear explanation of the duty to take reasonable care not to make a misrepresentation and the consequences of a misrepresentation (including the remedies available to the insurer if the insured fails to take reasonable care) to the insured. This explanation can be given to the insured in the form that the insurer considers to be effective.

2.66 Section 22 of the Insurance Contracts Act (which requires an insurer to inform the insured of the existing duty of disclosure in writing) does not apply to consumer insurance contracts. However, this does not change the insurer's obligation to give a clear explanation of the new duty to the insured. In addition, consistent with section 22, a failure by the insurer to fulfil those obligations will reduce the remedies available to the insurer in the event that the insured does make a misrepresentation.

Whether or not an agent was acting for the insured

2.67 Whether or not an agent (such as a financial advisor or insurance broker) was acting for the insured is one of the matters that is relevant in determining whether the insured has fulfilled the new duty to take reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.68 The appointment of an agent by the insured does not, by itself, change the insured's duty to take reasonable care not to make a misrepresentation to the insurer. However, depending on the nature of the agent's involvement, it may be a reason to expect the insured was informed about their duty to take reasonable care not to make a misrepresentation and what they need to do to discharge the duty.

Whether the contract was a new contract or was being renewed, extended, varied or reinstated

2.69 The circumstances of an insured entering into a new contract are different to those surrounding the renewal, extension, variation or reinstatement of a contract. This may be taken into account when considering whether the new duty has been fulfilled. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.70 The insurer should communicate with and provide information to the insured in circumstances when:

•

a contract is being entered into for the first time; or

•

a contract is being renewed, extended, varied or reinstated.

2.71 When entering into a contract for the first time, the insurer may need to take greater care to ensure that they have done what is necessary to satisfy themselves of their knowledge of the insured's position.

2.72 In contrast, when an insurance contract is being renewed, extended, varied or reinstated, it may be appropriate for the insurer to provide previously disclosed information to the insured and ask them for details of any material changes (along the lines of what is currently provided for under the existing sections 21A and 21B of the Insurance Contracts Act).

2.73 The insured should follow the insurer's guidance as to what needs to be disclosed. Guidance may include the type of information that might need updating and examples of information commonly overlooked by an insured consumer.

Particular characteristics or circumstances of the insured that are known by the insurer must be taken into account

2.74 Section 20B(3) of the Insurance Contracts Act sets out matters that, if relevant, may be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. This list of matters reflects common scenarios of relations between the insurer and the insured that may be relevant in determining whether an insured has fulfilled the new duty but is non-exhaustive. Other matters may also be taken into account when relevant.

2.75 In relation to matters taken into account under sections 20B(2) and (3) of the Insurance Contracts Act, if the insurer was aware, or ought reasonably to have been aware, of particular characteristics or circumstances of the insured, those characteristics or circumstances must be taken into account in determining whether the insured has taken reasonable care not to make a misrepresentation to the insurer. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.76 As a result, an insured will not be disadvantaged under the new duty even if they do not specifically disclose those particular characteristics or circumstances to the insurer.

2.77 This makes it clear that an assessment of whether an insured met the standard of the duty is not limited to the actions of the insured and may require consideration of the insurer's knowledge of the insured's circumstances and the actions taken by the insurer once made aware of that knowledge.

2.78 For example, where an insured requires special assistance in satisfying the requirements for an insurance application, and the insurer is aware of this, whether and how the insurer assisted the insured will be relevant in determining whether the standard of the new duty was met by the insured.

Failure to answer a question

2.79 Consistent with section 27 of the Insurance Contracts Act, the insured is not taken to have made a misrepresentation in respect of the new duty merely because they failed to answer a question or gave an obviously incomplete or irrelevant answer to a question. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

2.80 This allows for circumstances where a response is obviously incomplete or irrelevant (for example, where an insured may have overlooked a question). The inclusion of this provision encourages the insurer to follow up in such cases if, in the particular circumstances, the insurer considers the issue to be material.

Fraudulent misrepresentation

2.81 Consistent with the current law, and for the avoidance of doubt, any misrepresentation made fraudulently is taken to be a breach of the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 6, section 20B of the Insurance Contracts Act]

Warranties of existing facts to be representations

2.82 A statement with respect to the existence of a state of affairs made in or in connection with a consumer insurance contract by the insured (or that is attributable to the insured) does not have effect as a warranty. Instead, the statement has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into. This replicates section 24 of the Insurance Contracts Act for misrepresentations, and applies it to the new duty. [Schedule 2, item 6, section 20C of the Insurance Contracts Act]

2.83 This amendment ensures that the effect of section 24 of the Insurance Contracts Act continues to apply to consumer insurance contracts. The amendment is required because the provisions relating to the general duty of disclosure in Division 2 of Part IV of the Insurance Contracts Act (which includes section 24) will no longer apply to consumer insurance contracts. [Schedule 2, item 8, section 20E of the Insurance Contracts Act]

Group life insurance

2.84 The new duty to take reasonable care not to make a misrepresentation to the insurer applies to a life insured in a consumer insurance contract provided under a group life contract. [Schedule 2, items 29 to 32, section 32 of the Insurance Contracts Act]

2.85 A group life contract is defined in section 11 of the Insurance Contracts Act to mean a contract of life insurance that is maintained for the purposes of:

•

a superannuation or retirement scheme under which there can be more than one life insured; or

•

another kind of group life scheme (including a scheme that is not related to employment) under which there can be more than one life insured.

2.86 The new duty to take reasonable care not to make a misrepresentation to the insurer also applies to a life insured in a consumer insurance contract provided through a Retirement Savings Account. [Schedule 2, items 33 and 34, section 32A of the Insurance Contracts Act]

2.87 While the new duty applies to each individual life insured in a group life contract, the new duty does not apply to a superannuation fund trustee or authorised representative who enters the group life contract with the insurance company for the purposes of offering the insurance to fund members or employees. Like other commercial contracts, this relationship continues to be subject to the existing duty of disclosure.

Remedies for breach of the new duty

2.88 The remedies in Division 3 of Part IV of the Insurance Contracts Act continue to be available to the insurer if an insured breaches the new duty to take reasonable care not to make a misrepresentation. These remedies are currently available for a breach of the duty of disclosure and for the making of a misrepresentation.

2.89 The remedies apply where there has been a relevant failure by the insured. A relevant failure in relation to a contract of insurance is:

•

if the contract is a consumer insurance contract - a misrepresentation made by the insured in breach of the duty to take reasonable care not to make a misrepresentation; or

•

for other insurance contracts - a failure by the insured to comply with the duty of disclosure or a misrepresentation made by the insured to the insurer before the contract was entered into.

[Schedule 2, items 3 and 15, definition of 'relevant failure' in sections 11 and 27AA of the Insurance Contracts Act]

2.90 In addition, in relation to a contract of life insurance under which a person other than the insured would become a life insured, a misrepresentation is a relevant failure in relation to the contract (whether or not the contract is a consumer insurance contract) if:

•

the life insured made a misrepresentation during the negotiations for the contract but before it was entered into; and

•

this misrepresentation would have been a breach of the duty to take reasonable care not to make a misrepresentation if that duty had applied in relation to the life insured in relation to the contract.

[Schedule 2, item 15, section 27AA of the Insurance Contracts Act]

2.91 Section 28 of the Insurance Contracts Act sets out the remedies that are available to an insurer where the relevant failure occurs in relation to a general insurance contract. The amendments modify section 28 so that it applies in relation to general insurance contracts that are consumer insurance contracts (where a misrepresentation is made by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that it currently applies to other general insurance contracts (where the insured fails to comply with the existing duty of disclosure). [Schedule 2, items 16, 17 and 18, section 28 of the Insurance Contracts Act]

2.92 Consistent with the existing law, the remedies under section 28 are not available to the insurer if they would have entered into the general insurance contract, for the same premium and on the same terms and conditions, even if the failure had not occurred. [Schedule 2, item 16, section 28 of the Insurance Contracts Act]

2.93 Section 29 of the Insurance Contracts Act sets out the remedies that are available to an insurer where the relevant failure occurs in relation to a life insurance contract. The amendments modify section 29 so that it applies in relation to life insurance contracts that are consumer insurance contracts (where a misrepresentation is made by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that it currently applies to other life insurance contracts (where the insured fails to comply with the existing duty of disclosure). [Schedule 2, items 19 to 23, section 29 of the Insurance Contracts Act]

2.94 Consistent with the existing law, the remedies under section 29 of the Insurance Contracts Act are not available to the insurer if:

•

the insurer would have entered into the life insurance contract even if the failure had not occurred; or

•

the failure was in respect of the date of birth of one or more of the life insureds.

[Schedule 2, item 19, section 29 of the Insurance Contracts Act]

2.95 Consequential amendments are made to other provisions relating to the remedies available to an insurer so that they apply to consumer insurance contracts (in relation to a misrepresentation by the insured in breach of the duty to take reasonable care not to make a misrepresentation) in the same way that they currently apply to other insurance contracts (in relation to a failure by the insured to comply with the existing duty of disclosure). [Schedule 2, items 26 to 36, sections 31, 31A, 32, 32A and 60 of the Insurance Contracts Act]

2.96 In seeking a remedy, the onus of proof is on the insurer to show that the insured has failed to discharge the duty to take reasonable care not to make a misrepresentation.

Consequential amendments

2.97 Consequential amendments ensure that the duty of utmost good faith in Part II of the Insurance Contracts Act does not impose any duty on the insured under a consumer insurance contract in relation to the disclosure of a matter to the insurer, other than the duty to take reasonable care not to make a misrepresentation. [Schedule 2, item 5, section 12 of the Insurance Contracts Act]

2.98 In addition, the general duty of disclosure in section 21 of the Insurance Contracts Act is modified so that it applies only in relation to contracts (and proposed contracts) of insurance that are not consumer insurance contracts. [Schedule 2, item 8, section 20E of the Insurance Contracts Act]

2.99 Finally, sections 21A and 21B of the Insurance Contracts Act (which contain a modified duty of disclosure for eligible contracts of insurance) are repealed. In this regard, as the concept of an eligible contract of insurance is being replaced with the concept of a consumer insurance contract, the modified duty of disclosure in sections 21A and 21B is redundant. [Schedule 2, item 9, section 21A and 21B of the Insurance Contracts Act]

Application and transitional provisions

Insurer avoidance of life insurance contracts (recommendation 4.6)

2.100 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

2.101 The amendment will apply to any life insurance contract that is entered into after the date of commencement. [Schedule 2, item 2]

2.102 However, if a life insurance contract entered into prior to the date of commencement is varied on or after that date to increase the sum insured in respect of one or more of the life insureds, or to provide one or more additional kinds of insurance cover between the insurer and the insured, then to the extent of that variation the contract is treated as though it were entered into after the date of commencement. [Schedule 2, item 2]

The duty to take reasonable care not to make a misrepresentation (recommendation 4.5)

2.103 The amendments in Part 2 of Schedule 2 to the Bill to implement recommendation 4.5 (the duty to take reasonable care not to make a misrepresentation) apply in relation to consumer insurance contracts (other than life insurance contracts) that are entered into on or after 5 October 2021. [Schedule 2, item 37]

2.104 The new duty to take reasonable care not to make a misrepresentation will also apply to life insurance contracts that are originally entered into on or after 5 October 2021. Therefore, the new duty will not apply when a life insurance contract that was originally entered into before 5 October 2021 is extended or reinstated after that day. In this regard, the existing duty of disclosure will apply to the life insurance contract when it is extended or reinstated.

2.105 Similarly, the new duty to take reasonable care not to make a misrepresentation will generally not apply when a life insurance contract that was originally entered into before 5 October 2021 is varied on or after that day. However, an exception applies if:

•

the variation is to increase the sum insured in respect of one or more of the life insureds, or to provide one or more additional kinds of insurance cover; and

•

the variation was not an automatic variation but was required to be expressly agreed between the insurer and the insured before the contract was varied.

[Schedule 2, item 37]

2.106 In these circumstances, to the extent of that variation, the life insurance contract is treated as though it were entered into on or after 5 October 2021. Therefore, to the extent of that variation, the new duty to take reasonable care not to make a misrepresentation will apply to the life insurance contract. [Schedule 2, item 37]

2.107 The new duty to take reasonable care not to make a misrepresentation will apply from 5 October 2021 to align with the application date of the Design and Distribution Obligations in Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.

2.108 In this regard, the ASIC Corporations (Deferral of Design and Distribution Obligations) Instrument 2020/486 effectively deferred the application date of Schedule 1 to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 until 5 October 2021.

2.109 However, in some circumstances an insurer may wish to apply the new duty to take reasonable care not to make a misrepresentation from an earlier date. Therefore, the new duty will apply to a contract of insurance (including a the life insurance contract) from the date of commencement (that is, from the day after the Bill receives Royal Assent or 1 January 2021, whichever is later) if, before the contract is entered into, the insurer gives the insured a written notice that the contract is a consumer insurance contract. [Schedule 2, item 37]

Chapter 3 - Deferred sales model for add-on insurance and the Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (recommendation 4.3)

Outline of chapter

3.1 Schedule 3 to the Bill amends the ASIC Act to implement an industry-wide deferred sales model for the sale of add-on insurance products. These amendments give effect to recommendation 4.3 of the Financial Services Royal Commission.

3.2 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Context of amendments

3.3 Add-on insurance products are insurance products that are sold alongside, or in relation to, a principal good or service. Examples of add-on insurance products include:

•

consumer credit insurance sold alongside the sale of a credit facility;

•

travel insurance sold alongside the sale of flights or a trip; and

•

mobile phone screen protection insurance sold alongside the sale of a mobile phone.

3.4 The Financial Services Royal Commission found that:

•

add-on insurance products represent poor value for consumers;

•

insurers commonly pay more in commissions than in claims;

•

consumer claim outcomes are considerably worse than in markets where there is meaningful competition; and

•

consumers are at risk of unfair sales and adverse outcomes.

3.5 Previous work by ASIC and the Productivity Commission has also highlighted widespread issues in add-on insurance markets. In 2016, ASIC released three reports covering its review of the sale of add-on insurance through car dealers:

•

Report 470 - Buying add-on insurance in car yards: Why it can be hard to say no;

•

Report 471 - The sale of life insurance through car dealers: Taking consumers for a ride; and

•

Report 492 - A market that is failing consumers: The sale of add-on insurance through car dealers.

3.6 The reports found that car-yard add-on insurance is expensive, is of poor value and often provides consumers little or no benefit.

3.7 The Productivity Commission also found weak competition in the broader add-on insurance market in its inquiry report titled Competition in the Australian Financial System Report, released in 2018.

3.8 The Financial Services Royal Commission recommended that:

•

a Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive car insurance); and

•

the model be implemented as soon as is reasonably practicable.

3.9 In its response to the Financial Services Royal Commission, the Government agreed to implement an industry-wide deferred sales model, tasking Treasury to develop an appropriate model.

3.10 On 9 September 2019, Treasury released a proposal paper titled Reforms to the sale of add-on insurance products. The paper outlined the Government's proposed approach to implementing a deferred sales model and sought feedback from stakeholders. Exposure draft legislation was released for a public consultation on 31 January 2020.

3.11 These amendments have been developed taking into account the views expressed during those consultations.

Summary of new law

3.12 Schedule 3 implements an industry-wide deferred sales model for the sale of add-on insurance products.

3.13 Broadly, an add-on insurance product is an insurance product which is sold to cover risks associated with the offer or sale of a principal product or service either by the provider of the principal product or service or by a related party.

3.14 The deferred sales model separates the sale of an add-on insurance product from that of the principal product or service, and applies across all sales channels - including in-person and online. The deferred sales model prohibits the sale of add-on insurance products for at least four days after a customer has entered into a commitment to acquire the principal product or service.

3.15 The deferred sales model does not apply to:

•

products that are the subject of an ASIC product intervention order which imposes a deferred sales period;

•

comprehensive car insurance;

•

products exempted by regulations;

•

persons that ASIC exempts by notifiable instrument; and

•

products recommended by financial advisers.

3.16 The add-on insurance deferral period is the period of time that:

•

begins at the later of:

-

the time the customer enters into the commitment to acquire the principal product or service to which the add-on insurance product relates; or

-

the time the customer is given information about the product as prescribed by ASIC; and

•

ends four days later.

3.17 During the add-on insurance deferral period, a series of prohibitions apply in relation to:

•

the sale of an add-on insurance product; and

•

communicating with customers in relation to an add-on insurance product.

3.18 These prohibitions apply to both the principal provider and related third parties who sell add-on insurance products.

3.19 In the six week period after the beginning of the add-on insurance deferral period, add-on insurance products may be sold to customers. However, communication with the customer in forms other than writing is restricted.

3.20 Six weeks after the beginning of the add-on insurance deferral period, the deferred sales model ends. After that time, any contact made by the principal provider or a third party with the customer will be subject to the anti-hawking obligations.

3.21 The add-on insurance pre-deferral period is the period that:

•

begins when the customer indicates an intention to acquire the principal product or service; and

•

if there is an add-on insurance deferral period in relation to the add-on insurance product, ends immediately before the start of the add-on insurance deferral period, or otherwise does not end.

3.22 During the add-on insurance pre-deferral period, any party can communicate with a customer about an add-on insurance product, but is prohibited from selling the add-on insurance product to the customer.

3.23 At any stage during the deferred sales model periods, both the principal provider and a third party may respond to customer inquiries. This recognises instances where the customer has queries about the product or its features after reviewing the prescribed information.

3.24 At any stage during the deferred sales model periods, a customer can inform either the principal provider or a related third party that they no longer wish to receive offers, requests or invitations to purchase or apply for an add-on insurance product. Once a customer has made such a request, it is an offence for the principal provider or a third party to offer, request or invite a customer to purchase or apply for an add-on insurance product.

3.25 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Comparison of key features of new law and current law

Detailed explanation of new law

3.26 The deferred sales model applies to add-on insurance products. An add-on insurance product is a financial product that:

•

is offered or sold to a customer in connection with the customer entering into a commitment to acquire a product or service;

•

is offered or sold by:

-

the person who sold the principal product or service; or

-

a third party who has an arrangement with that person which covers the add-on insurance product;

•

manages financial risk related to the principal product or service; and

•

is either a contract of insurance or a benefit under a contract of insurance.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance product' in sections 12BA and 12DO of the ASIC Act]

3.27 Insurance offered by a third party as a result of a referral by a principal provider could be considered add-on insurance.

3.28 Add-on insurance may be provided to customers under group arrangements where the customer stands to benefit from an insurance contract between the add-on product provider and an insurer.

3.29 Insurance that is provided complimentary with a product or service (regardless of whether the insurance covers the risks associated with that product or service or another unrelated product or service) is generally not an add-on insurance product. Such insurance is unlikely to be caught by the deferred sales model as it is generally not offered nor sold to a customer.

3.30 An insurance product offered or sold on the standalone market is not an add-on insurance product. For an insurance product to be an add-on insurance product, there needs to be a connection between the offering and selling of the add-on insurance product and the principal product or service. Products purchased on the standalone market lack this connection. Such insurance products are not captured under the deferred sales model.

Example 3.1 : Insurance product offered by a third party

Wendy arranges a mortgage with a bank, Bank Ltd. Bank Ltd asks Wendy if she would like to purchase mortgage protection insurance, to which Wendy agrees. Bank Ltd is party to an arrangement with an insurer, Insurer Ltd. Bank Ltd provides Insurer Ltd with Wendy's details. Using these details, Insurer Ltd calls Wendy to offer mortgage protection insurance.

The mortgage protection insurance offered to Wendy is add-on insurance because:

•

it is offered by a person other than the provider of the principal product in accordance with an arrangement that Bank Ltd is a party to; and

•

it is offered in connection with Wendy acquiring the mortgage.

Example 3.2 : Insurance product purchased on standalone market

Annie purchases a second-hand car for $7,000 from Ben, a car dealer. Ben asks Annie if she has considered third-party property insurance for the car and says he has an arrangement with an insurer he could refer Annie to. Annie declines the offer. She researches other options for third-party property insurance and finds a suitable different product on the standalone market. The product is underwritten by the same insurer which Ben has an arrangement with.

The product that Annie purchased was not sold as an add-on insurance product as it was not offered or sold by the insurer in connection with Annie's purchase of the car. Rather, Annie approached the insurer on the standalone market, and sought to purchase one of their insurance products on her own accord.

Example 3.3 : Complimentary travel insurance

Aisling's credit card comes with complimentary travel insurance, which does not cost any extra and cannot be separated from the credit card product. The travel insurance is automatically triggered when Aisling purchases a flight for an overseas holiday with her credit card.

The complimentary travel insurance is not an add-on insurance product. It was not an additional insurance product offered or sold to Aisling in connection with her being approved for her credit card and does not manage risks relating to the credit card.

3.31 A contract of insurance includes contracts that contain an insurance arrangement, but also contain other contractual terms that do not relate to insurance. Including such contracts in the definition of contracts of insurance, is the standard approach under the Insurance Contracts Act. [Schedule 3, item 3, section 12DO of the ASIC Act]

The add-on insurance pre-deferral period

3.32 The add-on insurance pre-deferral period is the period that:

•

begins when the customer indicates an intention to acquire the principal product or service; and

•

if there is an add-on insurance deferral period in relation to the add-on insurance product, ends immediately before the start of the deferral period, or otherwise does not end.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance pre-deferral period' in sections 12BA and 12DP of the ASIC Act]

3.33 The purpose of the add-on insurance pre-deferral period is to enable sales people to discuss add-on insurance products with customers before the primary product or service is sold, without triggering the anti-hawking obligations.

3.34 During the add-on insurance pre-deferral period, the principal provider or a third party provider may not sell add-on insurance products to customers. [Schedule 3, item 3, section 12DQ of the ASIC Act]

3.35 Whether a customer has indicated an intention to acquire a principal product or service will depend on the circumstances. A customer may indicate an intention to acquire a product or service by, for example:

•

making a statement that they are considering purchasing a product or service; or

•

asking questions about a product or service.

3.36 A customer entering a shop and asking questions about a product or service would not generally be indicative of a customer indicating an intention to acquire that product or service.

The add-on insurance deferral period

3.37 The add-on insurance deferral period begins at the later of:

•

the time when the customer enters into a commitment to acquire, or acquires, the principal product or service to which the add-on insurance product relates; and

•

the time when the customer is given the information prescribed by ASIC relating to the add-on insurance product.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance deferral period' in sections 12BA and 12DP of the ASIC Act]

3.38 The add-on insurance deferral period ends four days after the day it begins. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.39 The four day deferral period provides the customer with an opportunity to consider the suitability of the add-on insurance product being offered and alternative products, while reducing the likelihood of the customer disengaging entirely from the decision about whether to purchase the add-on insurance product.

Example 3.4 : The add-on insurance deferral period

Caroline purchases a new mobile phone and is given the prescribed information relating to screen protection insurance for the mobile phone on Sunday, 1 January. The deferral period for the insurance product offered to Caroline ends at 11.59pm on Thursday, 5 January.

3.40 The add-on insurance deferral period creates a separation between the customer's decision to acquire the principal product or service and the decision to acquire add-on insurance. This is to enable the customer to consider the merits of add-on insurance independently of the principal product or service and to reduce the likelihood that their decision to acquire add-on insurance is unduly influenced by pressure from the principal provider or a related third party.

3.41 Whether a customer has entered into a commitment to acquire the principal product or service will depend on the circumstances. A commitment is generally a firm decision by the customer to acquire the principal product or service, such as:

•

making a payment for the product or service; or

•

entering into an agreement for the product or service which might allow payment over a period of time or at a later date.

3.42 The customer would generally know what they have purchased and would have a risk to manage in respect of the purchase. A customer expressing a preference for a product or service does not amount to a commitment. The time at which a commitment has been entered into would depend on the circumstances of each case.

Example 3.5 : A commitment to acquire the principal product

Nik is interested in purchasing a season ticket to the theatre. Before the season program is released, Nik pays a 50 per cent deposit for the season ticket online. The payment of the deposit would be considered a commitment to acquire the principal product or service.

Example 3.6 : Not a commitment to acquire the principal product

Maddie is in an electronics store looking at mobile phones. She has a discussion with the salesperson and states a clear preference for a particular handset. Maddie tells the salesperson that she will return to the store at a later date to purchase the phone if that is the phone that she ultimately decides to purchase. Maddie's stated intention to possibly return to purchase the phone does not represent a commitment to acquire the phone.

3.43 The regulations may specify when a customer is taken to have entered into a commitment to acquire a principal product or service. The regulation making power is required due to the diversity of add-on insurance products available in the market and the need to ensure the regime achieves the intended policy outcome for all classes of add-on insurance products. [Schedule 3, item 3, section 12DO of the ASIC Act]

3.44 ASIC can, by legislative instrument, prescribe that certain information may be given to a customer in relation to an add-on insurance product, and the way in which the information must be given, for the add-on insurance deferral period to begin. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.45 The add-on insurance deferral period does not begin if this information has not been given to the customer in the way that ASIC prescribes. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.46 The information ASIC prescribes must include information that the customer may inform the principal provider or a third party provider that the customer does not want to receive any further offers, requests or invitations for add-on insurance products. This gives the customer the ability to opt-out of further contact relating to add-on insurance products. [Schedule 3, item 3, section 12DP of the ASIC Act]

Prohibitions on the principal provider

3.47 The prohibitions under the deferred sales model may apply if a customer acquires, or enters into a commitment to acquire, a principal product or service from a person, and then the same person offers or sells the customer add-on insurance product.

3.48 In certain circumstances, it is both a criminal offence and civil penalty to sell or offer an add-on insurance product to a customer before the end of the add-on insurance deferral period.

Prohibitions on selling add-on insurance products

3.49 The provider of the principal product or service commits an offence if they sell an add-on insurance product to a customer, except if that sale is after the end of the add-on insurance deferral period. [Schedule 3, item 3, section 12DQ of the ASIC Act]

3.50 The principal provider also commits an offence if:

•

there is an arrangement between the principal provider and a third party provider that relates to the provision of add-on insurance products in relation to products or services offered by the principal provider to a customer; and

•

the third party provider sells an add-on insurance product to the customer, except after the end of the add-on insurance deferral period.

[Schedule 3, item 3, section 12DQ of the ASIC Act]

3.51 An add-on insurance product is taken to be sold no later than at the first time at which no further action is required from the customer for the sale to occur. This is the case even if the sale does not actually occur until a later time. [Schedule 3, item 3, section 12DQ of the ASIC Act]

Example 3.7 : When an add-on insurance product has been sold

Kevin purchases a car from Ben, a car dealer. Ben subsequently raises windscreen protection insurance as a potential add-on purchase. Before giving the prescribed information about the add-on insurance product to Kevin, Ben explains the insurance product to Kevin and invites him to fill out the paperwork to apply for the insurance product.

Kevin fills out the application form including his credit card information to pay the insurance premium. Kevin is then given the prescribed information about the insurance. Kevin does not need to do anything more for the application to be processed.

Ben waits until the end of the add-on insurance deferral period and processes Kevin's application. The premium is then charged to Kevin's credit card.

Ben has committed an offence by selling the add-on insurance product before the add-on insurance deferral period began.

In substance, Kevin and Ben agreed that he would purchase the insurance policy before the add-on insurance deferral period was triggered. Kevin agreed to purchase the insurance policy by providing the completed form, with his payment details, before being given the prescribed information. This is the case even though the application was not processed until after the end of the add-on insurance deferral period.

3.52 An exception to the offence exists if there is an add-on insurance deferral period, and the add-on insurance product is sold to the customer after the end of that period. To rely on the exception, a defendant bears the evidential burden in relation to those matters. The defendant has the burden to adduce or point to evidence to establish a matter exists, or does not exist, in relation to those matters.

3.53 Reversing the evidential burden in this case is reasonable because the information relating to the matters contained in the exception would be peculiarly within the knowledge of the provider.

3.54 As a matter of good business practice, and to comply with general business recording keeping obligations, the defendant should keep records relating to:

•

the add-on insurance product that was sold and when it was sold;

•

the circumstances in which it was sold, such as whether it was sold in connection with the acquisition of a primary product or service, and whether an add-on deferral period applies; and

•

when the add-on deferral period ended.

Prohibitions on offering add-on insurance products

3.55 A principal provider commits an offence if they offer an add-on insurance product for issue or sale to the customer (or if they request or invite the customer to ask for, apply for, or purchase an add-on insurance product) in certain circumstances.

3.56 A principal provider commits an offence where the offer, request or invitation is not in writing, except:

•

during the add-on insurance pre-deferral period; or

•

after the end of the add-on insurance deferral period.

[Schedule 3, item 3, section 12DR of the ASIC Act]

3.57 However, an offence will not arise if the offer, request or invitation is made in response to contact initiated by the customer. [Schedule 3, item 3, section 12DR of the ASIC Act]

3.58 If a principal provider seeks to prove that the offer was made during the add-on insurance pre-deferral, or after the end of the add-on insurance deferral period, they will have the evidential burden relating to those matters.

3.59 This reversal of the onus of proof is appropriate as the time at which the principal provider makes an offer, request or invitation should be recorded by the principal provider as a matter of good business practice. Therefore, this information is peculiarly within the knowledge of the defendant. Otherwise costly and difficult investigations by the regulator would be required to enforce this regime.

3.60 A principal provider commits an offence if, before the offer, request or invitation is made, the customer informs the principal provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.61 A principal provider commits an offence if:

•

before the offer (or request or invitation) is made, the customer informs any person with whom the principal provider has an arrangement which covers the add-on insurance product that they do not want to receive such offers, requests or invitations; and

•

the principal provider is reckless as to that fact.

[Schedule 3, items 3 and 10, sections 12DS and 12GBCN of the ASIC Act]

3.62 Recklessness is the fault element that applies to the physical element relating to a customer informing of an opt-out. The fault element of recklessness is appropriate in this situation as the principal provider may not be privy to circumstances in which the customer opts-out. The fault element of recklessness also needs to be established for this physical element in civil penalty proceedings. [Schedule 3, item 10, section 12GBCN of the ASIC Act]

3.63 A person is reckless to a fact if the person is aware of a substantial risk that the fact exists and, having regard to the circumstances known to the person, it is unjustifiable to take the risk. [Schedule 3, item 10, section 12GBCN of the ASIC Act]

Prohibitions on third party providers

3.64 Prohibitions may also apply to a third party provider if there is an arrangement between the principal provider and the third party provider that relates to the provision of add-on insurance products.

3.65 Broadly, the same restrictions apply to third party providers as principal providers, except that certain physical elements have the fault element of recklessness for the civil offence.

3.66 It is appropriate that the fault element of recklessness applies to these physical elements because a third party provider tends to be removed from the selling of the principal product or service. Broadly, a third party provider commits a civil offence only if they are reckless as to these facts.

3.67 Further, to rely on a defence to these offences, the third party provider will have an evidential burden in relation to those matters.

3.68 This reversal of the onus of proof is appropriate as the time at which the principal provider makes an offer, request or invitation should be recorded by the principal provider as a matter of good business practice and is therefore peculiarly within the knowledge of the defendant. Otherwise costly and difficult investigations by the regulator would be required to enforce this regime.

Prohibitions on selling add-on insurance products

3.69 A third party provider commits an offence if they sell an add-on insurance product to the customer where either of the following applies and the third party provider is reckless as to whether it applies:

•

there is no add-on insurance deferral period; or

•

the third party provider sells the add-on insurance product to the customer before the end of the add-on insurance deferral period.

[Schedule 3, items 3 and 10, section 12DQ and 12GBCN of the ASIC Act]

Example 3.8 : Third party selling of add-on insurance during the add-on insurance deferral period

Roger hires a car from Car Hire Ltd, a car hire company. Car Hire Ltd emails Roger's contact details to Insurer Ltd, a third party insurer with whom Car Hire Ltd has an arrangement to sell excess reduction insurance. The arrangement between Car Hire Ltd and Insurer Ltd is well established and includes the process for Insurer Ltd to sell add-on insurance in compliance with the deferred sales model.

Insurer Ltd receives Roger's details and proceeds to offer excess reduction insurance during the add-on insurance deferral period. Roger buys the excess reduction insurance during the deferral period.

Insurer Ltd has committed an offence by selling the excess reduction insurance before the end of the add-on insurance deferral period.

Prohibitions on offering add-on insurance products

3.70 A third party provider may commit an offence if they offer an add-on insurance product for issue or sale to the customer (or requests or invites the customer to ask for, apply for or purchase an add-on insurance product).

3.71 A third party provider commits an offence where:

•

the offer, request or invitation is not in writing; and

•

both of the following apply and the third party provider is reckless as to whether they apply:

-

there is an add-on insurance deferral period; and

-

the offer, request or invitation is made during the period of six weeks beginning on the first day of the add-on insurance deferral period.

[Schedule 3, items 3 and 10, section 12DR and 12GBCN of the ASIC Act]

3.72 The offence will not arise if the offer, request or invitation is made in response to contact initiated by the customer (see paragraphs 3.75 to 3.80). [Schedule 3, item 3, section 12DR of the ASIC Act]

3.73 A third party provider commits an offence if, before the offer, request or invitation is made, the customer informs the third party provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.74 A third party provider commits an offence if:

•

before the offer, request or invitation is made, the customer informs either of the following parties that they do not want to receive such offers, requests or invitations and the third party is reckless as to that fact:

-

the principal provider; or

-

any person with whom the principal provider has an arrangement which covers the add-on insurance product; and

•

the third party provider is reckless as to that fact.

[Schedule 3, item 3, section 12DS and section 12GBCH of the ASIC Act]

Responding to customer-initiated contact

3.75 Both the principal provider and a third party provider can respond to customer inquiries during and after the add-on insurance deferral period.

3.76 During the add-on insurance deferral period, if either the principal provider or a third party provider 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

•

the offer, request or invitation relates only to the purposes for which the customer initiated the contact.

[Schedule 3, item 3, section 12DR of the ASIC Act]

3.77 Responses to customer-initiated contact during the deferral period are permitted because they may assist customers to make informed decisions about add-on insurance products and allow for comparisons with products available on the standalone market.

3.78 However, to avoid committing an offence, any offer, request or invitation to a customer to apply for an add-on insurance product must relate only to the purposes for which the customer initiated the contact. This is to prevent providers of add-on insurance from using contact initiated by the customer for other purposes as an opportunity to pressure customers and undermine the deferred sales model.

3.79 There is an onus on providers of add-on insurance products to show that the offer, request or invitation to a customer relates only to the purpose for which the customer has initiated the contact. Providers could show this by, for example, maintaining records of phone calls showing that contact was only made by customers and the offer, request or invitation relates only to the purpose of that contact.

3.80 After the add-on insurance deferral period, if either the principal provider or third party provider 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. [Schedule 3, item 3, section 12DR of the ASIC Act]

Example 3.9 : Responding to customer-initiated contact

Angus purchases new glasses lenses from an optometrist. The optometrist offers Angus add-on insurance to cover damage to the lenses and provides the prescribed information about the insurance.

During the add-on insurance deferral period, Angus calls the optometrist requesting more information about the claims ratio for the lens insurance. The optometrist provides further information about the claims ratio over the phone.

The optometrist has not committed an offence because the communication was initiated by Angus and related only to the purpose for which he initiated the contact.

Example 3.10 : Responding to customer-initiated contact

Frank buys a mobile phone. He discusses with the retailer the possibility of purchasing mobile phone insurance. The retailer provides Frank with the prescribed information.

The retailer receives a phone call from Frank during the add-on insurance deferral period in which Frank asks for additional information about the mobile phone insurance product but he does not ask to purchase the add-on insurance product. The retailer provides that information but then offers to sell Frank the mobile phone insurance.

The retailer has committed an offence because:

•

they have offered to sell the add-on insurance product during the add-on insurance deferral period; and

•

the defence of responding to Frank's inquiry does not apply as the response was not limited to the purposes for which Frank initiated the contact.

Customer requests no further contact

3.81 At any stage a customer can inform the principal provider or a third party provider that they no longer wish to receive offers, requests or invitations to purchase or apply for add-on insurance products.

3.82 A principal provider or a third party provider commits an offence if they offer an add-on insurance product for issue or sale (or requests or invites the customer to ask for, apply for, or purchase an add-on insurance product), after the customer has informed them that they no longer wish to receive such offers, requests or invitations.

3.83 In this regard, a principal provider commits an offence if, before the offer, request or invitation is made, the customer informs the principal provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.84 A principal provider also commits an offence if:

•

before the offer (or request or invitation) is made, the customer informs any person with whom the principal provider has an arrangement which covers the add-on insurance product that they do not want to receive such offers, requests or invitations; and

•

the principal provider is reckless as to that fact.

[Schedule 3, items 3 and 10, sections 12DS and 12GBCN of the ASIC Act]

3.85 A third party provider commits an offence if, before the offer, request or invitation is made, the customer informs the third party provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.86 A third party provider also commits an offence if:

•

before the offer, request or invitation is made, the customer informs either of the following parties that they do not want to receive such offers, requests or invitations and the third party is reckless as to that fact:

-

the principal provider; or

-

any person with whom the principal provider has an arrangement which covers the add-on insurance product; and

•

the third party provider is reckless as to that fact.

[Schedule 3, item 3, section 12DS and section 12GBCH of the ASIC Act]

Example 3.11 : Customer requests no further contact

Jamie applies for a loan. She discusses with the lender the possibility of purchasing consumer credit insurance in relation to the loan. Three days later, Jamie rings the lender and states that she no longer wishes to be contacted about the consumer credit insurance product.

The lender contacts Jamie three weeks later, by email, to invite her to apply for the consumer credit insurance product.

The lender has committed an offence as they have offered an add-on insurance product to Jamie after she has informed them that she does not wish to receive such offers.

Summary of prohibitions in the deferred sales model

3.87 Table 3.1 summarises the various prohibitions in the deferred sales model which apply in each time period. Table 3.1 - Summary of the deferred sales model provisions

Exclusions from the deferred sales model

3.88 The deferred sales model will not apply where another regime already gives appropriate consumer protection in relation to the sale or offer of add-on insurance products.

3.89 Financial advisers providing personal advice are exempted from the deferred sales model as they are already subject to a range of obligations under the Corporations Act. The deferred sales model does not apply to advice given by a person who is required under Division 2 of Part 7.7A of the Corporations Act to act in the best interests of the client in relation to that advice where:

•

the advice recommends a principal product the adviser is authorised to provide; and

•

the add-on insurance product relates to the principal product.

[Schedule 3, item 3, section 12DU of the ASIC Act]

3.90 The deferred sales model does not apply to products which are covered by a product intervention order under Part 7.9A of the Corporations Act which provides for a period during which the product must not be sold or offered. This ensures the two legislative regimes operate consistently in instances where ASIC identifies consumer detriment requiring the exercise of its powers. [Schedule 3, item 3, section 12DV of the ASIC Act]

3.91 The deferred sales model does not apply to comprehensive motor vehicle insurance sold as an add-on insurance product. Add-on comprehensive motor vehicle insurance is defined as an add-on insurance product that:

•

provides cover to an individual who either wholly or partly owns a motor vehicle or has the use of a motor vehicle under a lease of at least four months duration; and

•

provides cover for loss of or damage to:

-

the insured's vehicle resulting from an accident;

-

property of another person resulting from an accident in which the insured's motor vehicle is involved; and

-

the insured's vehicle caused by fire, theft or malicious acts.

[Schedule 3, item 3, section 12DW of the ASIC Act]

3.92 To rely on one of the above exclusions from the deferred sales model, the defendant will have the evidential burden in relation to those matters.

3.93 This reversal of the onus of proof is appropriate as matters relating to the nature of the product or service a person provides and whether the product or service would be covered under any exceptions would be peculiarly in the knowledge of the person. The reversal is also required to avoid costly and difficult investigations by the regulator to enforce this regime as specific information relating to products or services a person offers would be peculiarly in the knowledge of the defendant.

3.94 If an exemption from the deferred sales model applies in relation to a person, a class of add-on insurance products sold by a person, or a class of add-on insurance products generally, that person, product or class of products may still be subject to the anti-hawking rules. Whether this is the case will depend on the specific application of the anti-hawking rules to that person, product or class.

Exemptions from the deferred sales model by regulations

3.95 The regulations may exempt a class of add-on insurance products from the deferred sales model. [Schedule 3, item 3, section 12DX of the ASIC Act]

3.96 An exemption in the regulations for a class of add-on insurance products may be subject to conditions. Contravention of a condition of an exemption is an offence. [Schedule 3, item 3, sections 12DX and 12DZA of the ASIC Act]

3.97 An exemption under the regulations does not apply to an add-on insurance product to which a product intervention order is in force under Part 7.9 of the Corporations Act which provides for a period during which the add-on insurance must not be sold. [Schedule 3, item 3, section 12DZ of the ASIC Act]

3.98 An exemption by making regulations will only be granted in exceptional circumstances and will be considered against other policy considerations of the Government. An exemption might be granted when, for example, subjecting a class of add-on insurance products to the deferred sales model would produce perverse policy outcomes.

Exemptions from the deferred sales model by ASIC

3.99 ASIC has the power to exempt certain persons from the deferred sales model.

3.100 ASIC may, by notifiable instrument, exempt an add-on insurance product or a class of add-on insurance products sold by a specific person. [Schedule 3, item 3, section 12DY of the ASIC Act]

3.101 In considering whether to make an exemption, ASIC must have regard to certain matters. [Schedule 3, item 3, section 12DY of the ASIC Act]

3.102 One of the matters to which ASIC must have regard is whether or not, in the absence of an exemption, there is a high risk of underinsurance or non-insurance. The intention of this criterion is for ASIC to consider the likelihood and impact of a claim occurring during the deferral period (rather than considering the impact of an insurer leaving the add-on insurance market or an intermediary ceasing to sell the product if they are not operating under an exemption).

3.103 ASIC can also have regard to any other matters that ASIC considers relevant in considering whether to make an exemption. A relevant matter might include, for example, whether insurance is required by law.

3.104 ASIC may place conditions on an exemption. Contravention of a condition of an exemption is an offence. [Schedule 3, item 3, sections 12DY and 12DZA of the ASIC Act]

3.105 The following decisions are reviewable by the Administrative Appeals Tribunal:

•

a decision by ASIC to refuse to exempt an add-on insurance product, or a class of add-on insurance products sold by a specific person; and

•

a decision by ASIC to vary or revoke such an exemption, or to impose or vary a condition on such an exemption.

[Schedule 3, item 17, section 244 of the ASIC Act]

Penalties for breaching the deferred sales model

3.106 The prohibitions in the deferred sales model are ordinary offences under section 12GB of the ASIC Act and carry a maximum penalty of 2,000 penalty units for individuals. [Schedule 3, items 5 to 8, section 12GB of the ASIC Act]

3.107 Section 93E of the ASIC Act outlines the penalty applicable to an offence where the offence is committed by a body corporate. In accordance with that provision, the maximum penalty for a body corporate is 10 times the penalty specified for the offence for individuals. Therefore for the prohibitions in the deferred sales model, the maximum penalty for a body corporate is 20,000 penalty units.

3.108 Each offence in the deferred sales model is also a civil penalty provision. [Schedule 3, item 9, section 12GBA of the ASIC Act]

3.109 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. [Schedule 3, item 16, section 12GXA of the ASIC Act]

3.110 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. [Schedule 3, item 17, section 12GXB of the ASIC Act]

3.111 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.

3.112 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.

Right of return and refund for customers

3.113 The customer has the right of return and refund when a principal provider or third party provider sells an add-on insurance product to the customer during the add-on insurance deferral period. The right of return and refund is exercisable at any time during the period starting when the product was sold and ending:

•

one month after the end of the period in which a customer has a right to return the product under section 1019B of the Corporations Act; or

•

one month and 14 days after the product was sold.

[Schedule 3, item 3, section 12DT of the ASIC Act]

3.114 The refund amount to be paid to a customer in relation to their add-on insurance product must be the entire amount paid for the product. However, this amount may be reduced if a customer has made a claim under the product. [Schedule 3, item 3, section 12DT of the ASIC Act]

3.115 If an add-on insurance product creates a legal relationship between the customer and any other person, at the time the product is returned the legal relationship is terminated without penalty to the customer. Additionally, any contract for the acquisition of the product by the customer is terminated at the time of return with no penalty to the customer. [Schedule 3, item 3, section 12DT of the ASIC Act]

3.116 The right of return and refund applies along with any other penalties for or in relation to a provider or third party provider selling add-on insurance during the deferral period. [Schedule 3, item 3, section 12DT of the ASIC Act]

Consequential amendments

Amendments to the Corporations (Fees) Act 2001

3.117 Consequential amendments are made to amend 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. [Schedule 1 to the Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020, items 1 and 2, sections 4 and 7 of the Corporations (Fees) Act 2001]

Amendments to the ASIC Act

3.118 A series of consequential amendments to the ASIC Act are made to ensure the deferred sales model draws on general provisions that form part of the unconscionable conduct and consumer protection provisions in Division 2 of Part 2 of the ASIC Act. These general provisions include:

•

the savings of other laws and remedies;

•

actions for damages;

•

general criminal defences;

•

the making of non-punitive orders; and

•

the making of orders prohibiting the payment or transfer of money or other property.

[Schedule 3, items 4 and 11 to 15, sections 12AE, 12GF, 12GI, 12GLA and 12GN of the ASIC Act]

Interaction with anti-hawking obligations for insurance products

3.119 Unsolicited offers for the sale of financial products are generally prohibited by the anti-hawking obligations (see section 992A of the Corporations Act).

3.120 Amendments to the Corporations Act ensure that the deferred sales model replaces the anti-hawking obligations with respect to add-on insurance products. Therefore, providers of insurance will generally be subject to either the deferred sales model or the anti-hawking obligations, but not both at the same time. In circumstances where there are no requirements under the deferred sales model, or an exemption from the deferred sales model applies, the anti-hawking obligations will generally apply.

3.121 The hawking prohibitions do not apply to offers of, or requests or invitations relating to, an add-on insurance product. [Schedule 3, items 21 and 22, section 992A of the Corporations Act 2001]

3.122 Add-on insurance product has the same meaning in the Corporations Act as it does under the deferred sales model being established in the ASIC Act. [Schedule 3, item 20, the definition of 'add-on insurance product' in section 9 of the Corporations Act 2001]

3.123 However, the hawking prohibitions do apply to offers, requests or invitations to apply for add-on insurance products if they are made six weeks after either:

•

the day the add-on insurance deferral period begins; or

•

if there is no add-on insurance deferral period, the day on which the customer indicates an intention to purchase a principal product to which an add-on insurance product relates.

[Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.124 The hawking prohibitions will apply to offers, requests or invitations relating to an add-on insurance product if one of the following exemptions from the deferred sales model applies:

•

the exemption for comprehensive motor vehicle insurance;

•

an exemption by regulations; and

•

an exemption by ASIC.

[Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.125 The hawking prohibitions may apply in relation to add-on insurance products covered by a product intervention order in force under Part 7.9A of the Corporations Act which provides for a period during which the add-on insurance product must not be sold. Whether the hawking prohibitions apply will depend on the nature and scope of the product intervention order. [Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.126 It is unlikely that the hawking prohibitions will apply to an add-on insurance product covered by the exemption for financial advisers under the deferred sales model. A broader exemption to the anti-hawking rules exists for financial advisers than under the deferred sales model. [Schedule 3, item 23, section 992A of the Corporations Act 2001]

Application and transitional provisions

3.127 The amendments in Schedule 3 commence immediately after the amendments in Schedule 5 commence. The amendments in Schedule 5 commence on the later of 5 October 2021 and the day after the Bill receives Royal Assent. [Clause 2]

3.128 The deferred sales model will apply to commitments to acquire principal products and services entered into on or after the commencement of the amendments. [Schedule 3, item 19, section 329 of the ASIC Act]

Chapter 4 - Caps on commissions (recommendation 4.4)

Outline of chapter

4.1 Schedule 4 to the Bill amends the ASIC Act to place a cap on the amount of commission that may be paid in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle.

Context of amendments

4.2 The Financial Services Royal Commission considered add-on insurance sold in car yards and found that the levels of commissions paid to motor vehicle dealers in connection with the sale of such products contributed to the mis-selling of those products. The Financial Services Royal Commission noted that:

•

amounts paid out in commissions on add-on insurance products regularly exceed claims payouts;

•

insurers view car dealers as distribution networks and pay higher commissions to compete with one another to gain market share of those networks; and

•

industry has taken limited steps to reduce commissions, but there are few legal requirements to do so.

4.3 Recommendation 4.4 of the Financial Services Royal Commission recommended was that ASIC impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.

4.4 Currently, commissions paid by insurers in connection with consumer credit insurance taken out by a debtor is capped at 20 per cent of the premium (where the related credit contract is regulated by the Credit Act).

Summary of new law

4.5 Schedule 4 amends the ASIC Act to:

•

provide 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;

•

make it a criminal offence, civil penalty and offence of strict liability for a person 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

•

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

4.6 The amendments improve outcomes for consumers by discouraging the mis-selling of add-on risk products in car yards, particularly those products where the amounts paid in commissions are greater than those paid out in claims.

Comparison of key features of new law and current law

Detailed explanation of new law

Commissions for add-on risk products must not exceed the cap

4.7 Schedule 4 inserts a new offence into Subdivision D of Division 2 of Part 2 of the ASIC Act. The offence relates to providing or receiving commissions in connection with the supply of add-on risk products that are provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle. An offence is committed if the commission exceeds the cap determined by ASIC for that add-on risk product. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.8 An add-on risk product is defined as a facility through which, or through the acquisition of which, a person manages financial risk. The concept of managing financial risk is defined in section 12BAA(5) of the ASIC Act. Add-on risk products include insurance products and certain insurance-like products. [Schedule 4, items 2 and 3, the definition of 'add-on risk product' in section 12BA(1) and section 12DMC(2) of the ASIC Act]

4.9 The offence applies to commissions provided or received in connection with the supply of a financial service that consists of providing an add-on risk product to the product recipient in connection with the sale or long-term lease of a motor vehicle, or in connection with the provision of credit connected with the sale or long-term lease of a motor vehicle. The product recipient may be the consumer, or the person who sells or leases the motor vehicle and provides a warranty in connection with the motor vehicle to the consumer. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.10 The financial service may be supplied by any person to any other person. It is not limited to transactions in which a financial service is supplied to a consumer. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.11 Commission includes any form of monetary consideration, or non-monetary consideration to which a monetary value can be assigned. Whether a payment or benefit is a commission is determined by the substance of the arrangement, regardless of how it is characterised by the parties to the arrangement. Examples of commissions intended to be captured by this definition include, but are not limited to, the following, or a combination of the following:

•

financial or other benefits in the nature of a commission;

•

the profit on the sale of an extended warranty which is underwritten by an add-on risk product;

•

payments or other incentives (such as holidays, hospitality or training) that are not necessarily linked to an individual transaction but are based on a cumulative amount of sales (by number or dollar value) of add-on insurance or insurance like products.

[Schedule 4, item 2, the definition of 'commission' in section 12BA(1) of the ASIC Act]

4.12 Long-term lease of a motor vehicle means a contract for the hire of a motor vehicle for a fixed period of more than four months, or for an indefinite period. [Schedule 4, item 2, the definition of 'long-term lease' in section 12BA(1) of the ASIC Act]

4.13 Motor vehicle has also been defined for the purposes of the caps on commissions. [Schedule 4, item 2, the definition of 'motor vehicle' in section 12BA(1) of the ASIC Act]

4.14 Motor vehicle means any motor-powered vehicle of a kind intended for use as land transport (other than rail transport), whether or not it is for use on a road. Motor vehicles that are not intended for use on a road and that are of a kind intended primarily for use by persons with restricted mobility are carved-out from the definition. This excludes electric wheelchairs, mobility scooters and similar vehicles from the definition of motor vehicle.

4.15 Motor vehicle also means any other vehicle of a kind intended to be towed by a motor-powered road vehicle intended for use as land transport (such as a caravan).

4.16 For the offence to apply, the person acquiring the motor vehicle must acquire it as a consumer within the meaning of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 as applied under Subdivision A of Division 2 of Part XI of that Act). [Schedule 4, items 2 and 3, the definition of 'Australian Consumer Law' in section 12BA(1) and section 12DMC(1) of the ASIC Act]

4.17 The offence applies where:

•

the supply of the add-on risk product is covered by an ASIC determination setting a cap on the commission; and

•

the value of the commission is greater than the cap set out in the determination in relation to that add-on risk product.

[Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.18 Where there is no determination covering the product, there is no cap on the commission, subject to the interaction between the new law and section 145 of the National Credit Code (which regulates commissions for consumer credit insurance).

ASIC's power to determine the caps on the value of commissions

4.19 The new law gives ASIC the power to make a legislative instrument setting out the cap on commissions provided in connection with add-on risk products of a kind specified in the instrument. [Schedule 4, item 3, section 12DMC(3) of the ASIC Act]

4.20 The determination may limit the circumstances in which the cap applies to a particular add-on risk product. [Schedule 4, item 3, section 12DMC(4) of the ASIC Act]

Example 4.1

ASIC makes a determination capping the commission payable on guaranteed asset protection insurance policies at 10 per cent of the premium. The determination provides that guaranteed asset protection insurance products with a claims ratio of 65 per cent or more are not covered by the determination and can continue to attract uncapped commissions.

4.21 The determination may also set out how the value of commissions is to be calculated when determining if the cap on commissions applies. [Schedule 4, item 3, section 12DMC(4) of the ASIC Act]

How commissions should be valued

4.22 The value of the commission provided in connection with an add-on risk product must be calculated in accordance with the applicable ASIC determination that covers the product. This is to enable ASIC to apply a formula or method that is flexible and tailored to particular payment arrangements. [Schedule 4, item 3, section 12DMC(5) of the ASIC Act]

4.23 If the ASIC determination does not include a way to calculate the value of the commission, the value of the commission is the sum of:

•

the amount of money of the commission (to the extent that the commission is expressed as an amount of money); and

•

if some or all of the commission is not expressed as an amount of money, the market value of that portion of the commission.

[Schedule 4, item 3, section 12DMC(5) of the ASIC Act]

4.24 Money has the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999 and includes:

•

currency;

•

promissory notes and bills of exchange;

•

any negotiable instrument used or circulated, or intended for use or circulation, as currency;

•

postal notes and money orders; and

•

payment by way of a credit card or debit card, crediting or debiting an account, or the creation or transfer of a debt.

[Schedule 4, item 2, the definition of 'money' in section 12BA(1) of the ASIC Act]

4.25 In working out the market value, anything that would prevent or restrict conversion to money should be disregarded. [Schedule 4, item 3, section 12DMC(6) of the ASIC Act]

4.26 Where a commission is provided in connection with two or more add-on risk products, the value of the commission is to be apportioned between the add-on risk products in accordance with the ASIC determination. However, if the ASIC determination does not provide for apportionment, the commission is to be apportioned between the products on a reasonable basis. [Schedule 4, item 3, section 12DMC(7) of the ASIC Act]

Example 4.2

ASIC makes a determination imposing a cap on commissions for certain insurance products. The determination covers arrangements between licensees and intermediaries where employees who meet sales targets may attend an overseas conference paid for by the licensee. The determination made by ASIC can:

•

prescribe how the value of the overseas conference is to be calculated; and

•

provide that the value of the benefit must be apportioned equally between the products sold by each employee in the period during which sales are used to ascertain eligibility to attend the conference.

4.27 The offence also applies where more than one commission is provided in connection with a single add-on risk product.

4.28 In these circumstances, the offence applies as if one single commission is provided that comprises all of those commissions. If those commissions are provided by more than one person, the commission is then taken to be jointly provided by all of those persons. The value of that single commission is the sum of the values of all of those commissions. [Schedule 4, item 3, section 12DMC(8) of the ASIC Act]

4.29 The effect of this provision is to stop providers and recipients of commissions from dividing a commission that would otherwise exceed the cap between multiple providers or recipients.

Example 4.3

An Australian Financial Services licensee issues mechanical breakdown insurance through an authorised representative (broker) who works on the same site as a car dealership. ASIC caps commissions on mechanical breakdown insurance at 15 per cent of the premium. If the premium is $600 and the licensee provides a commission of $70 to the broker and $30 to the dealer on the sale of each product, the combined value of both commissions ($100) will be 16 per cent, which exceeds the 15 per cent cap.

Interaction with the National Credit Code

4.30 Section 145 of the National Credit Code provides for a 20 per cent cap on commissions provided in connection with consumer credit insurance.

4.31 The offence of exceeding the cap on commissions that is inserted by this Schedule will only affect commissions paid in connection with consumer credit insurance that are subject to section 145 of the National Credit Code:

•

the insurance is an add-on product of a kind covered by a ASIC determination; and

•

the add-on product is provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle.

[Schedule 4, item 3, section 12DMC(9) of the ASIC Act]

4.32 If no determination has been made by ASIC in relation to the add-on product, section 145 of the National Credit Code will continue to apply a 20 per cent cap on commissions provided in connection with consumer credit insurance. [Schedule 4, items 2 and 3, the definition of 'National Credit Code' in section 12BA(1) and the note to section 12DMC(9) of the ASIC Act]

4.33 Consequential amendments have been made to section 145 of the National Credit Code to provide for this interaction. [Schedule 4, item 13, section 145(6) of the National Credit Code]

4.34 New definitions of add-on risk product, long-term lease, and motor vehicle are inserted into section 204(1) of the National Credit Code to ensure the consequential amendments operate as intended. [Schedule 4, item 14, section 204(1) of the National Credit Code]

Criminal consequences for breaching the caps on commissions

The ordinary offence

4.35 Breaching the cap on commissions is an ordinary criminal offence under section 12GB of the ASIC Act. Under section 12GB of the ASIC Act, a person who contravenes provisions of Subdivision D of Division 2 of Part 2 of the ASIC Act (which contains consumer protection provisions, and will include those relating to the cap on commissions) is subject to a maximum penalty of 2,000 penalty units. A person also commits an offence if they attempt to contravene or are involved in a contravention of the cap on commissions. This is consistent with the existing penalties for contravening consumer protection provisions in the ASIC Act.

4.36 Section 93E of the ASIC Act outlines the penalty applicable to an offence where the offence is committed by a body corporate. In accordance with that section, the maximum penalty for a body corporate is 10 times the fine specified for the offence in section 12GB (that is, 20,000 penalty units).

The civil penalty provision

4.37 Breaching the cap on commissions is a civil penalty provision under section 12GBA(6) of the ASIC Act.

4.38 The maximum penalty for contravening the civil penalty provision is to be determined in accordance with section 12GBCA of the ASIC Act (section 12GBCA provides the penalty that is applicable to a contravention of a civil penalty provision by an individual and a body corporate).

The strict liability offence

4.39 Breaching the cap on commissions is an offence of strict liability. The maximum penalty for the strict liability offence is 60 penalty units for an individual. In accordance with section 93E of the ASIC Act, the penalty for a body corporate is 600 penalty units. [Schedule 4, item 4, sections 12GB(1AA) and (1AB) of the ASIC Act]

4.40 The Guide to Framing Commonwealth Offences was considered in determining the penalty amounts for the strict liability offence. 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.

4.41 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.

4.42 Corporate participants in the financial sector often have significant resources, which may encourage some operators to view lower penalties as a cost of doing business when compared to the chances of getting caught, and the overall gains to be made from engaging in the criminal behaviour. 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.

4.43 The Guide to Framing Commonwealth Offences notes 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.

4.44 A concurrent strict liability offence for breaching the cap on commissions is important to ensure the regime is enforceable in the absence of evidence of fault elements. The strict liability offence creates a lower penalty for engaging in the prohibited conduct (compared to the ordinary offence). For lower levels of offending, the strict liability offence is appropriate to deter future criminal behaviour. In complex cases where it is particularly difficult to find adequate evidence of fault elements, the strict liability offence allows the regulator to still take appropriate enforcement action ensuring contraventions can still be brought to account.

4.45 As found by the Financial Services Royal Commission, 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.

4.46 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.

4.47 A 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.

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

4.49 Where a person is convicted of two or more offences constituted by breaching the cap on commissions that are of the same nature and occurred around the same time, the penalty imposed will not be more than the maximum fine that would ordinarily be imposed for a single offence. If a person is convicted of multiple strict liability offences, where those offences were of the same nature or committed around the same time, the cumulative penalty must not exceed the maximum fine that may be imposed for one strict liability offence. This is consistent with the existing rules that apply in relation to offences against Subdivision D of Division 2 of Part 2 of the ASIC Act, which deals with consumer protections. [Schedule 4, items 5, 6 and 7, sections 12GB(2), (2A) and (2B) of the ASIC Act]

4.50 The penalty limit for multiple contraventions of the same offence provision applies whether or not the person was also convicted of another offence or offences in contravention of the cap on commissions that were of a different nature or occurred at a different time. [Schedule 4, item 7, section 12GB(2B) of the ASIC Act]

4.51 Consequential amendments are made to sections 12GB(3), (5) and (6) of the ASIC Act to ensure the strict liability offence operates consistently with the existing ordinary criminal offence. [Schedule 4, item 8, sections 12GB(3), (5) and (6) of the ASIC Act]

Recovering commissions that exceed the cap

4.52 The amendments in Schedule 4 allow consumers to recover commissions that exceed a cap. The consumer may recover the commission from the person who provided the commission or the motor vehicle dealer who received the commission, depending on the nature of the financial service and the attached commission that has been provided.

4.53 Where a commission is subject to a cap and that cap is exceeded, the consumer is entitled to recover the entire value of the commission from the person who provided the commission. [Schedule 4, item 9, section 12GFA(1) of the ASIC Act]

4.54 Similarly, where a person who is a motor vehicle dealer receives a commission that exceeds the cap in relation to a warranty they gave to a consumer, the consumer is entitled to recover the entire value of the commission from the motor vehicle dealer. [Schedule 4, item 9, section 12GFA(2) of the ASIC Act]

4.55 These provisions do not affect the consumer's right to recover loss or damage under section 12GF of the ASIC Act (section 12GF entitles a person to recover loss or damage caused as a result of conduct that contravenes certain provisions in the ASIC Act). [Schedule 4, item 9, section 12GFA(3) of the ASIC Act]

4.56 If a court finds that a person has committed an offence or contravened a civil penalty provision by breaching the cap on commissions, that finding may be used as evidence in a separate action to recover commissions that exceed the cap. [Schedule 4, item 10, section 12GG of the ASIC Act]

4.57 In an action to recover commissions that exceed the cap, the court may make other orders (other than to repay the excess commission) if the consumer has suffered loss or damage as a result of a contravention of a provision in Division 2 of Part 2 of the ASIC Act. [Schedule 4, item 11, section 12GM(1) of the ASIC Act]

4.58 In an action to recover commissions that exceed the cap, the court may, on application of the Minister or ASIC, make an order prohibiting the payment or transfer of money or other property. [Schedule 4, item 12, section 12GN(1) of the ASIC Act]

4.59 If a consumer makes a claim to recover a commission that exceeds the cap and wishes to rely on conduct engaged in outside Australia in the proceeding to prove their claim, they may do so only if the Minister consents in writing. [Schedule 4, item 1, section 12AC(2) of the ASIC Act]

Application and transitional provisions

4.60 The amendments in Schedule 4 apply to commissions provided in connection with supplies of add-on risk products under contracts, arrangements or understandings entered into on or after the day after the amendments commence. The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2, Schedule 4, item 15]

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

Outline of chapter

5.1 Schedule 5 to the Bill amends the Corporations Act to ban the hawking of financial products. In particular, the amendments strengthen the existing prohibitions on offers of financial products, securities and interests in managed investment schemes during the course of, or because of, unsolicited contact with a consumer.

5.2 These amendments implement recommendations 3.4 and 4.1 of the Financial Services Royal Commission.

Context of amendments

5.3 The Corporations Act currently contains three separate prohibitions for the hawking of financial products, securities, and interests in managed investment schemes. The Financial Services Royal Commission found that the existing prohibitions did not effectively protect consumers from harm.

5.4 The revised prohibition on the hawking of financial products means that consumers have greater control over their decisions to purchase financial products by determining how they want to be contacted and the kinds of financial products they are offered.

Operation of current law

The general prohibition on hawking

5.5 The primary anti-hawking provisions are located in Division 8, Part 7.8 of Chapter 7 of the Corporations Act. Under section 992A(1) of the Corporations Act 'a person must not offer financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person'.

5.6 The term 'financial product' is defined in Chapter 7 of the Corporations Act. Broadly, a 'financial product' includes insurance products, superannuation interests, shares, interests in managed investment schemes (whether or not they are registered), currency trading, and other products.

Exceptions to the general prohibition

5.7 The Corporations Act provides a number of exceptions to the general prohibition on hawking.

5.8 Broadly, these exceptions include:

•

offers of financial products to a person who is not a retail client (see section 992A(3A) of the Corporations Act); or

•

offers of financial products under an eligible employee share scheme (see section 992A(3B) of the Corporations Act).

5.9 Further, section 992A(3) of the Corporations Act prohibits a person from making an offer to issue or sell financial products in the course of, or because of an unsolicited telephone call or unsolicited contact with another person unless it is made during certain prescribed hours and the other person is not listed on the do not call register.

5.10 The general prohibition on hawking does not apply to offers of interests in a managed investment scheme or securities, which are covered by specific hawking prohibitions.

Specific hawking prohibitions

5.11 In addition to the general hawking prohibition, there are two specific prohibitions that apply to the hawking of interests in managed investment schemes and securities in sections 992AA and 736 of the Corporations Act, respectively.

Prohibition on the hawking of interests in a managed investment scheme

5.12 Section 992AA(1) of the Corporations Act prohibits offering interests in a managed investment scheme for issue or sale in the course of, or because of, an unsolicited meeting or telephone call.

5.13 However, the prohibition does not apply to:

•

offers made to a wholesale client (see section 992AA(2)(a) of the Corporations Act);

•

offers of interests in a listed managed investment scheme made by telephone by a financial services licensee (see section 992AA(2)(b) of the Corporations Act);

•

offers by a financial services licensee to existing clients who acquired or disposed of interests in a managed investment scheme in the previous 12 months (see section 992AA(2)(c) of the Corporations Act); or

•

offers under an eligible employee share scheme (see section 992AA(2)(d) of the Corporations Act).

Prohibition on the hawking of securities

5.14 Section 736(1) of the Corporations Act specifically prohibits offering to sell or issue securities in the course of, or because of, an unsolicited phone call or meeting.

5.15 However, the prohibition does not apply to:

•

offers not requiring disclosure documents because the offeree is a professional or sophisticated investor; or

•

offers of listed securities made by telephone by a licensed securities dealer; or

•

offers of securities by a licensed securities dealer to a client who has bought or sold securities through that dealer in the last 12 months; or

•

offers made under an eligible employee share scheme.

Summary of recommendations 3.4 and 4.1 of the Financial Services Royal Commission

5.16 The Financial Services Royal Commission found that the existing anti-hawking provisions do not effectively protect consumers from harm. Case studies showed widespread unsolicited sales of superannuation and insurance products and that hawking methods often contributed to consumers purchasing products that did not meet their needs.

5.17 Recommendations 3.4 and 4.1 of the Financial Services Royal Commission were that the hawking of superannuation and insurance products should be prohibited except to those who are not retail clients and for offers made under an eligible employee share scheme.

5.18 Commissioner Hayne also recommended amending the law to make clear that contact with a person during which a product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that product.

5.19 In response to the Financial Services Royal Commission, the Government agreed to:

•

prohibit the hawking of superannuation and insurance products; and

•

clarify the definition of hawking for a financial product to include selling of a financial product during a meeting, call or other contact initiated to discuss an unrelated financial product.

5.20 The Government also noted in its response that that the Financial Services Royal Commission did not propose restricting the ability of insurers to contact policyholders in relation to existing policies

Summary of new law

5.21 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.

5.22 Unsolicited contact is any contact in relation to a financial product to which the consumer did not consent that 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.

5.23 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.

5.24 The amendments in Schedule 5 also give consumers the power to specify how they can be contacted and the power to withdraw or vary consent at any time. This ensures consumers have control over the form of the contact and can stop the contact from continuing if they are no longer interested in the relevant financial product or no longer wish to be contacted.

Comparison of key features of new law and current law

Detailed explanation of new law

5.25 Section 992A of the Corporations Act currently prevents a person from offering certain financial products for issue or sale in the course of, or because of, an unsolicited meeting or telephone call with another person.

5.26 The amendments modify section 992A of the Corporations Act to strengthen and broaden the existing hawking prohibition.

5.27 Under the revised prohibition, a person is still prohibited from offering a financial product for issue or sale to another person, but is also prohibited from requesting or inviting another person to ask or apply for or purchase a financial product if the offer, request or invitation is made in the course of, or because of, unsolicited contact with the other person. [Schedule 5, item 2, section 992A(1) of the Corporations Act]

5.28 Extending the prohibition beyond offers to also include requests and invitations means that a person cannot avoid the hawking prohibition by approaching a consumer and asking them to request a financial product or by asking a consumer to fill in an application to be sold or issued a financial product.

5.29 Unlike the existing anti-hawking provisions, which consist of three separate regimes (for the offer of interests in a managed investment scheme, for securities and for other financial products), the revised prohibition on hawking applies to all financial products. [Schedule 5, item 2, section 992A(1) of the Corporations Act]

5.30 The prohibition is limited to offers, requests and invitations in relation to financial products, and is not a prohibition on hawking products generally. This means that while offers, requests and invitations for financial products (for example, car insurance) are covered by the hawking rules, offers, requests and invitations for products that are not financial products (for example, roadside assistance) are not.

5.31 The hawking rules apply to the person (including a body corporate) who undertakes the prohibited activity. Applying the prohibition to such persons means that it is not limited to the provider of a financial service product - it can include, but is not limited to, agents and representatives of the provider of a financial product. Further, as entities are responsible for the actions of their agents and representatives, the hawking prohibition cannot be circumvented by engaging a third party to make offers on their behalf. Where there is no such relationship between a provider of a financial product and a third party who makes an offer, request or invitation, the third party will be solely responsible for any contravention of the hawking prohibition.

5.32 The prohibition will only apply to offers, requests and invitations that are made to retail clients. It does not apply to wholesale clients. [Schedule 5, item 2, section 992A(1)(a) of the Corporations Act]

5.33 The term 'retail client' has the meaning given by sections 761G and 761GA of the Corporations Act. In general terms, limiting the prohibition to retail clients ensures that offers, requests or invitations about financial products to sophisticated investors or wholesale clients (such as businesses that are not small businesses) are not prohibited. Such consumers are more capable of assessing the value of a financial product offered in the course of unsolicited contact and are less susceptible to pressure selling tactics.

5.34 The hawking rules do not prevent a person from contacting an existing client about a financial product that has already been purchased or that is provided under a contract which is still in force. Any offer involving the extension of the term of a contract that is still in force would not involve an offer, request or invitation about a new financial product, and is therefore outside of the scope of the hawking prohibition.

Example 5.1 : Offer to extend existing contract

Taylor has a contract with Imaginative Insurance for comprehensive motor vehicle insurance for his car. Prior to his policy expiring, a representative from Imaginative Insurance calls Taylor to ask him if he would like to extend his policy before it expires. This extension relates to Taylor's existing policy and does not involve an offer relating to a new financial product.

This offer is not prohibited by the hawking rules because it is in relation to a contract that Taylor currently holds with Imaginative Insurance.

5.35 A further exception is also expected to be introduced through the regulations to allow product issuers to contact customers about renewals of contracts that involve the creation of a new financial product, including the renewal of an expired contract. This exception will not apply to contact that occurs more than 30 days after the contract expires.

5.36 In the case of a superannuation product, superannuation trustees are permitted to contact existing fund members about their benefits, including in relation to changes to their insurance held through superannuation. However, as discussed further below, they will not be permitted to make unsolicited contact with their members to offer, request or invite them to apply for the issue of a new superannuation product (as it is defined for the purposes of this prohibition).

Contravention is an offence of strict liability

5.37 A contravention of the prohibition remains an offence of strict liability. [Schedule 5, item 2, section 992A(9) of the Corporations Act]

5.38 This is consistent with the previous prohibitions on hawking for financial products other than securities. 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 sections 992A(1), 1311B and 1311C of the Corporations Act). 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 to be genuinely deterred from engaging in criminal behaviour that is prohibited by these amendments.

5.39 Corporate participants in the financial sector often have significant resources, which may encourage some operators to view lower penalties as a cost of doing business when compared to the chances of getting caught, and the overall gains to be made from engaging in the criminal behaviour. 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.

5.40 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.

5.41 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.

5.42 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.

5.43 The application of strict liability, as opposed to absolute 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 such offences.

Advertising and provision of information

5.44 The hawking prohibition does not prevent a person from general advertising of financial products or providing information to consumers in respect of financial products that they offer. Standard forms of advertising do not involve an offer, or a request or invitation to a consumer in a form of contact that is covered by the prohibition. A person is free to provide information about their products to a consumer in any form that they wish as long as the mere provision of information does not amount to an offer, request or invitation.

5.45 Additionally, the hawking prohibition would not apply if a consumer actively contacts a person about a financial product after seeing an advertisement for the product, or having received information about it. The positive action by the consumer to contact the person would break the causal nexus, which is discussed further below. In such cases, the contact in relation to the product would be 'because of' the consumer making a request.

Example 5.2 : Information sessions

Gary attends an information session being run by Ros from Very Good Super Fund at his workplace. Ros tells the attendees about the benefits and features of the different superannuation products that Very Good Super Fund has available.

During the information session, Ros does not make any offer, request or invitation in relation to the different superannuation products. As such, Ros's contact with the attendees during the session does not come within the scope of the hawking rules.

However, as Gary is leaving the information session Ros hands him an application form for the Very Good MySuper product and asks him to fill it out. Ros has breached the hawking rules because Gary did not consent to being invited to apply for a superannuation product before Ros gave him the application form and asked him to fill it out. If Gary had approached Ros and asked her how to apply before he had been given the application form then Ros would not have breached the hawking rules.

Application to superannuation interests

5.46 The hawking prohibition applies to any offers, requests or invitations that are made in relation to a class of beneficial interest in a superannuation fund. This is achieved by treating each class as a separate financial product for the purposes of the hawking rules. [Schedule 5, item 2, section 992A(8)]

5.47 Differentiating between different classes of beneficial interests in a superannuation fund is consistent with the approach that is generally taken under the SIS Act, which envisages that there are distinct types of beneficial interest in a superannuation fund. In broad terms, the different types of classes are 'MySuper products' and 'choice products' (which are both defined in section 10 of the SIS Act), and defined benefit interests (which are not specifically defined but are usually referred to as a class of beneficial interests held solely by defined benefit members).

5.48 Treating each class of interests in a superannuation fund as separate financial products ensures that the prohibition applies to any offers, requests or invitations to a member of a superannuation fund to switch between different types of superannuation interest in a fund of which they are already a member (for example, an offer, request or invitation to a default MySuper member to switch to a choice product). As retirement phase products are particular types of choice product, the prohibition applies to any offers, requests or invitations that are made to a member about converting their accumulation interest into a pension, annuity, or other retirement phase interest. However, as discussed above, trustees are not prohibited from contacting their members to provide them with information. For example, the hawking rules permit a trustee to contact a member who is approaching retirement with information about different retirement income products offered by the fund provided that the trustee does not make an offer, request or invitation to the member.

5.49 The deeming provision is limited to the hawking rules and does not affect any other provision of the Corporations Act.

5.50 In the superannuation context, the hawking prohibition does not apply to investment and insurance options for members that form part of a superannuation interest. Such options are not financial products.

Offers, requests or invitations made 'because of' unsolicited contact

5.51 Under the prohibition, an offer, request or invitation is only prohibited if it is made in the course of, or because of, unsolicited contact.

5.52 Further, an offer, request or invitation that is made during unsolicited contact with a consumer will constitute an offer, request or invitation made 'in the course of' unsolicited contact.

5.53 Consistent with the existing hawking prohibition, the words 'because of' mean that an offer will only be prohibited where there is a causal nexus between the unsolicited contact and the offer, request or invitation. The inclusion of the words 'because of' seeks to address the situation in which a person makes unsolicited contact with a consumer, but the actual offer, request, or invitation is made during subsequent contact that is solicited by the consumer.

5.54 Whether or not an offer, request or invitation in relation to a financial product is 'because of' unsolicited contact will depend on the facts and circumstances of each case. An offer, request or invitation will not be 'because of' unsolicited contact where the link between the offer, request or invitation and the unsolicited conduct is trivial, insignificant or remote.

5.55 The causal nexus will be broken between unsolicited contact and a subsequent offer, request or invitation if, after the unsolicited contact occurs:

•

the consumer takes active steps to consent to further contact involving an offer, request or invitation in relation to the financial product (for example, calling the person to ask for the product or emailing the person to ask to be contacted about acquiring the financial product); and

•

the consumer has had a reasonable opportunity after the unsolicited contact to consider any information that they have been provided about the financial product and assess its suitability.

5.56 The causal nexus will be broken if a consumer obtains personal advice about a financial product after the unsolicited contact and subsequently consents to further contact in relation to that product.

5.57 However, consent will not be valid if a consumer has been pressured or manipulated into providing it. In such cases, any subsequent offer, request or invitation would be made in the course of unsolicited contact. In other words, a person cannot elicit consent from the consumer to be contacted at a later time and then make an offer during that later instance of contact.

Example 5.3 : Offer must be 'because of' unsolicited contact

Jonathan has a meeting with his bank to discuss refinancing his mortgage. During the meeting the bank representative provides Jonathan with some brochures about the insurance products that the bank offers. A few days after the meeting, Jonathan reads the brochures and decides to call the bank and ask for a quote for life insurance. During the call, the sales representative offers to sell Jonathan a life insurance policy.

The offer does not breach the hawking rules because it was not made 'because of' the initial meeting. Instead it was made because Jonathan took positive steps to consent to being contacted in relation to the policy, had reasonable opportunity to consider the information, and was not pressured into providing that consent.

Forms of contact

5.58 The revised prohibition is technology neutral and will apply to offers which are made during the course of or because of contact which is made via telephone, in face-to-face meetings or in any other real-time interaction in the nature of a discussion or conversation. [Schedule 5, item 2, section 992A(1)]

5.59 This captures interactions between a person and a consumer where they are responding to each other continuously in real-time. That is, the person and the consumer are communicating in a way which is similar to a telephone call or face-to-face meeting because there is an expectation on both parties that the other will provide an immediate response. It does not matter for the purpose of the hawking prohibition whether the communication is written or verbal.

5.60 The hawking prohibition does not apply to communication between a person and a consumer where there is no expectation of either party responding to the communication immediately or where the form of communication necessarily means that there will be a delay in the consumer responding to the person (for example, a consumer could not respond to a hard-copy letter in real-time).

Example 5.4 : Real time interaction

Brian contacts Classic Car Cover and requests a face-to-face meeting to discuss options for taking out car insurance in relation to a vintage car that he has just purchased. Classic Car Cover advises Brian that they do not have a sales representative in his area to meet with him in person but can discuss his options either by phone, or by using an online chat service through their website.

Brian agrees to use the online chat service. The service allows Brian to discuss his insurance options with a Classic Car Cover representative in real-time. After providing Brian with information about his car insurance options and answering his questions through the service, the Classic Car Cover representative offers Brian one of their car insurance policies.

As the contact with Brian through the chat service is conducted in real-time and constitutes a discussion and conversation, the offer and contact are within scope of the hawking rules. However, as the offer was in scope of Brian's original consent to be contacted through the chat service in relation to the car insurance policy, neither the representative nor Classic Car Cover has contravened the hawking rules.

Consumer can specify the form of the contact

5.61 If a consumer chooses to consent to be contacted, the consumer can also limit the form of the contact that they consent to. If a consumer specifies the form of the contact that they consent to and a person subsequently contacts them in a different form then that contact will be unsolicited contact. [Schedule 5, item 2, section 992A(5)(e) of the Corporations Act]

Consumer must consent to contact

5.62 A person can only offer to sell or issue a financial product to a consumer if the consumer has specifically consented to being contacted for the purpose of making the offer for that product, or where the offer was reasonably within the scope of the consumer's consent. [Schedule 5, item 2, section 992A(5)(a) of the Corporations Act]

5.63 Similarly, a person cannot request or invite a consumer to apply for a financial product unless the consumer has consented to the request or invitation to apply for that product, or the request or invitation is reasonably within the scope of the consumer's consent. [Schedule 5, item 2, section 992A(5)(b) of the Corporations Act]

5.64 These requirements reflect the various actions that are prohibited by the hawking rules. While the provider of a financial product may engage in many other types of actions, consent under the hawking rules is only necessary in relation to an action that is prohibited (and is not required, for example, when providing information to a consumer or advertising).

5.65 An offer, request or invitation in relation to a financial product will be reasonably within the scope of the consumer's consent if:

•

the consumer has consented to contact in relation to products of a particular type or with particular features, and the product is of that type or has those features;

•

the consumer asks for a product which has a particular purpose or function and the financial product that is offered has that purpose or function; or

•

a reasonable person would consider the financial product to be within the scope of the consumer's consent.

5.66 A reasonable person should consider a financial product to be within the scope of the consumer's consent if it:

•

covers the risks that the consumer consented to being contacted about;

•

has the same purpose or function as the product that the consumer consented to being contacted about; or

•

is so closely related to the product that the consumer consented to being contacted about that the consumer would reasonably expect to be offered that product.

5.67 A consumer may be offered more than one financial product during the contact if the consumer consented to being contacted about multiple products before the contact, or the consumer's consent is sufficiently broad so as to reasonably apply to more than one product.

Example 5.5 : Products outside the scope of consent

Kayla calls Big Insurance Co and asks the sales representative, Tom, to give her a quote for third party property damage insurance for her car. Tom tells Kayla that Big Insurance Co is currently offering a discount to clients who take out car and home insurance policies as part of a package and asked Kayla if she would like a quote for home insurance as well.

The offer of the insurance package is outside the scope of Kayla's request because she did not consent to contact involving offers about any product other than third party property damage insurance. Tom has therefore contravened the hawking prohibition.

Example 5.6 : Multiple products

Alex calls Trusty Bank, a competitor of his existing bank, and advises the customer service representative that he wishes to refinance the mortgage over his investment property and to 'sort out' the related insurance arrangements. The customer service representative arranges a meeting with one of Trusty Bank's sales representatives, Emily.

During their meeting, Emily offers Alex the option of applying for refinancing through Trusty Bank and offers him quotes in relation to their home building insurance and landlord insurance. During the meeting, Alex also asks Emily about home and contents insurance options in relation to his residential property. Emily provides Alex with information about Trusty Bank's home and contents insurance products.

The offer in relation to the mortgage refinance is within scope of Alex's consent as he specifically requested contact in relation to it. Although Alex did not specifically refer to the home building and landlord insurance products that Emily offered him, those products are also within the scope of his consent as they are clearly related to his investment property. Trusty Bank's home and contents insurance products are outside the scope of the consent that Alex provided before the meeting because they do not relate to his investment property. However, Emily has not contravened the hawking prohibition in relation to those products as she has only provided information in relation to them.

5.68 In the context of superannuation interests, if a member requests that a trustee contact them to discuss the issue or sale of superannuation generally, a trustee could discuss both MySuper and choice products, because the consent is broad enough to capture both. However, if the consumer instead asks for retirement products, the trustee could not offer the consumer a pre-retirement accumulation product because the consent was not broad enough to capture the second product

5.69 A choice product would also not be within scope of a specific request about a fund's MySuper product. As all MySuper products must comply with the provisions of Part 2C of the SIS Act, all MySuper products have the same core characteristics. Another distinguishing factor between MySuper and choice products is that a superannuation fund has to be provided with authority by APRA to offer a MySuper product whilst there is no equivalent in relation to the offering of choice products.

5.70 Therefore, a consent that only covers contact about a superannuation fund's MySuper product would therefore be restricted to the MySuper product, and would not extend to contact about the fund's other products.

5.71 However, as it is possible for a consumer's consent to be broader than a particular product or class of products, whether or not a fund can make an offer, request or invitation in relation to any particular superannuation product will ultimately depend on the scope of the consumer's consent.

Consent must be given prior to the contact

5.72 For a consent to be valid the consumer must give it before the contact occurs. This means that a person cannot elicit consent from a consumer for the contact after the contact has already begun. [Schedule 5, item 2, section 992A(5)(c) of the Corporations Act]

5.73 This requirement means that a person cannot cold-call a consumer and obtain consent during that call to offer them a financial product.

5.74 Where a consumer consents to be contacted about one financial product, a person cannot elicit consent from the consumer to be contacted about another financial product. In practice, this means that if a consumer contacts or consents to be contacted by a person about one financial product, then that person cannot offer the consumer any other financial product even if the consumer gives consent to be contacted about that financial product during the contact.

Consent must be positive and voluntary

5.75 A consumer's consent must be positive and voluntary. This means that a consumer must take an active step to consent to the contact, such as calling the provider of a product and asking to discuss a financial product or submitting a form online indicating that the provider should contact the consumer. The consumer must have taken this step voluntarily, meaning that the consent will not be valid if the consumer was pressured or forced into consenting to be contacted. [Schedule 5, item 2, section 992A(5)(d) of the Corporations Act]

5.76 Consent is positive if it involves a conscious decision by the consumer to seek a financial product. A consumer response to a leading question or failing to ask for no future contact is not consent for the purposes of the prohibition.

5.77 A consumer's consent is not voluntary if they are coerced or pressured into giving the consent, for example, to receive another service or take up another opportunity. However, it is intended that consent would be voluntary if the consumer was aware that they would need to consent to being contacted about a financial product before they took steps to receive that other service or take up an opportunity.

5.78 Consent is neither voluntary nor positive if a consumer only becomes aware that they have provided consent after the fact (for example, where a consumer has filled out a competition form but did not know that in doing so, to enter the competition, they were consenting to being contacted about a financial product).

Consumer consent must be clear and understood

5.79 For a consent to be valid the consumer must also be clear about what they are consenting to. If the consumer is vague or ambiguous about what they are consenting to then it is not a valid consent. [Schedule 5, item 2, section 992A(5)(e) of the Corporations Act]

5.80 The consumer must clearly indicate what product, or the purpose and function of the product, that they want to be contacted about. In cases where a consumer gives a consent that is unclear, a person would need to obtain further information from the consumer before the contact in which an offer, request or invitation is made to ensure they have clearly stated either the type of financial product they are interested in discussing or the type of outcome they wish to achieve through a financial product.

5.81 It must also be evident that the consumer understands what they are providing consent in relation to. As another person cannot be expected to determine a consumer's actual state of mind, the relevant test is whether a reasonable person would have understood that the consumer consented to the contact. [Schedule 5, item 2, section 992A(5)(e)]

5.82 This requirement means that a person making an offer, request or invitation in relation to a financial product must be satisfied on a reasonable basis that the consumer was sufficiently informed to understand they had provided consent to be contacted by the person, and that this contact may result in the offer, request or invitation.

5.83 Whether a reasonable person would consider that the consumer understands what they are consenting to will depend on the circumstances in each case. Where the consumer initiates the contact and therefore has had sufficient time and information to decide to consent to be contacted, including the method of contact with the financial provider, it is reasonable to assume the consumer would understand what they are consenting to. Conversely, a consumer is unlikely to understand what they are consenting to if they are incentivised to hastily consent to be contacted about a financial product. A consumer who is able to clearly explain what they are consenting to is more likely to understand what they are consenting to than a consumer who gives consent in a vague or ambiguous manner.

Variation, withdrawal and expiry of consent

5.84 A consent may be withdrawn or varied by a consumer at any time. Such withdrawal or variation may take any form, regardless of the form that the consent was originally provided in. [Schedule 5, item 2, section 992A(6)]

5.85 A withdrawal or variation has immediate effect and a person cannot make any offers, requests or invitations after they have been notified by the consumer that the consent has been withdrawn.

5.86 Offers, requests or invitations in relation to financial products that are made subsequent to a related consent being withdrawn will be unsolicited. A person making an offer, request or invitation in relation to a financial product should ensure that appropriate systems are in place to track and record withdrawals of consent. Providers of financial products, or their agents or representatives, who have any doubt as to whether a consent is in place, or has been withdrawn, should confirm by checking the relevant record that a pre-existing consent remains in place before making an offer, request or invitation to a consumer in relation to a financial product.

5.87 A consumer's consent to be contacted will expire six weeks from the day that the consent is given. [Schedule 5, item 2, section 992A(5)(g)(i) of the Corporations Act]

5.88 However, if there is a requirement for the consumer to undergo a medical examination before the financial product can be sold or issued then the consumer can consent to a longer period. Such periods cannot exceed 12 weeks in total. [Schedule 5, item 2, section 992A(5)(g)(ii) of the Corporations Act]

5.89 These time limits ensure that consumers cannot be contacted indefinitely after having provided consent. They balance giving consumers adequate time to discuss a financial product and reach an agreement for its sale or issue against the need to protect consumers from being contacted about products when they are no longer at the front of their mind.

5.90 It is not possible for a consumer to voluntarily extend the period that is applicable to their consent. However, there is nothing to prevent a consumer from providing a new consent at any time after consent is initially provided. This could be done either before or after the original consent expires. In either case, to be valid, the new consent would need to satisfy all of the same criteria as the original consent. While it may be more onerous for a person to obtain a new consent rather than a mere extension, this is an appropriate outcome given the consumer protection focus of the prohibition.

Exceptions to the revised prohibition

Financial advisers

5.91 The hawking prohibition will not apply to offers to sell or issue financial products if the offer is made in the course of giving financial advice to a client by a financial adviser who is required to act in the client's best interests under Division 2 of Part 7.7A of the Corporations Act. [Schedule 5, item 2, section 992A(2)(a) of the Corporations Act]

5.92 This exception is appropriate because the best interests duty already provides the consumer with adequate protection in relation to such offers. Division 2 of Part 7.7A of the Corporations Act provides that a person giving personal financial advice to a consumer must act in the best interests of that consumer. This duty to act in the consumer's best interests protects consumers from being sold financial products which they do not need or that are not fit for purpose.

Regulation making power

5.93 A regulation making power has also been inserted to allow further kinds of offers, requests and invitations to be prescribed as exempt from the hawking prohibition. [Schedule 5, item 2, section 992A(2)(b of the Corporations Act)]

5.94 Allowing the regulations to exempt certain offers, requests or invitations will provide the Government with the necessary flexibility to respond to changes in the way that industry deals in financial products and will ensure that the hawking prohibition only imposes obligations in appropriate circumstances.

5.95 Any such regulations would be subject to appropriate parliamentary scrutiny through the disallowance process.

Right of return

5.96 In the event that a person breaches the revised hawking prohibition, the consumer who was sold or issued the product will have the right to return the financial product and obtain a refund for any amounts paid. Where the financial product has a cooling-off period under section 1019B of the Corporations Act, then the right of return will expire one month after the end of the cooling-off period. For all other products the right of return will expire one month and 14 days after the financial product was issued or sold. [Schedule 5, item 2, section 992AA of the Corporations Act]

5.97 If a financial product is returned under these provisions, any legal relationship between the consumer and issuer is terminated. Similarly, any contract for the acquisition of the product by the consumer is also terminated. Such terminations occur at the time of the return and without any penalty to the consumer. [Schedule 5, item 2, sections 992AA(2)(a) and (b) of the Corporations Act]

5.98 The right of return is a consumer remedy and applies in addition to the applicable civil penalties for breaching the revised hawking prohibition. This means that a person who breaches section 992A may be liable to pay civil penalties as well as being required to refund the amount paid by a consumer for the financial product. [Schedule 5, item 2, section 992AA(4) of the Corporations Act]

Regulation making power

5.99 A further regulation making power has also been inserted to allow additional consequences (such as additional obligations on the product issuer) to be specified in relation to financial products returned under these provisions. [Schedule 5, item 2, section 992AA(2)(c) of the Corporations Act]

5.100 The regulations also allow for certain classes of financial products to be excluded from the right of return provisions, subject to any conditions specified in the regulations. [Schedule 5, item 2, section 992AA(3) of the Corporations Act]

5.101 Any such regulations would be subject to appropriate parliamentary scrutiny through the disallowance process.

Consequential amendments

5.102 To ensure the hawking rules apply consistently to all financial products the existing rules which prohibit the hawking of securities in sections 736 and 738 of the Corporations Act are repealed. [Schedule 5, item 1]

5.103 References to the existing hawking provisions in section 1200F of the Corporations Act is updated to reflect the new provisions. This ensures that the application of the rules for recognised offers in the hawking prohibition will be maintained in respect of the revised prohibition. [Schedule 5, items 7 and 8, section 1200F of the Corporations Act]

5.104 The civil penalty table in Schedule 3 to the Corporations Act is also amended to remove the reference to the existing securities prohibition in section 736. [Schedule 5, item 9, Schedule 3 of the Corporations Act]

5.105 The Competition and Consumer Act 2010 is also amended to ensure that the references to the hawking prohibition are accurate. [Schedule 5, items 3, 4, 5, and 6, Schedule 2 to the Competition and Consumer Act 2010]

Application and transitional provisions

5.106 The amendments commence on the later of 5 October 2021 and the day after Royal Assent. [Clause 2]

5.107 ASIC has provided exemptions from the hawking prohibition in existing sections 736, 992A and 992AA of the Corporations Act in a number of specific circumstances. ASIC will retain the power to provide such exemptions on a class or individual basis.

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

Outline of chapter

6.1 Schedule 6 to the Bill amends the Insurance Act 1973 to restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.

Context of amendments

6.2 There are a number of legislative restrictions on the use of certain words and phrases to prevent confusion and protect consumers. For example, there are currently restrictions on the use of the term 'bank' and similar terms in the Banking Act 1959.

6.3 As part of the response to recommendation 4.2 of the Financial Services Royal Commission, the Government announced it would restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.

6.4 The objective of this change is to avoid confusion for consumers as to the nature of the products they are purchasing.

Summary of new law

6.5 Schedule 6 amends the Insurance Act 1973 so that a strict liability offence will arise for a person that uses the term 'insurance' to describe a product or service that they purport to offer as insurance, if:

•

the product or service is not insurance; and

•

it is likely that the product or service could mistakenly be believed to be insurance.

6.6 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 the:

-

Insurance Act 1973;

-

Life Insurance Act 1995; or

-

Private Health Insurance (Prudential Supervision) Act 2015.

6.7 The offences do not apply to government entities, State insurance, products or services prescribed by the regulations, or entities exempted by ASIC.

Comparison of key features of new law and current law

Detailed explanation of new law

6.8 Schedule 6 creates two new strict liability offences: one offence relating to the use of the term 'insurance' and another offence relating to the use of the term 'insurer'.

Restricting the use of the term 'insurance'

6.9 A strict liability offence will arise for a person that uses the term 'insurance' if:

•

the person carries on a business or is proposing to carry on a business;

•

the person uses the word 'insurance' to describe (expressly or by implication) a product or service that the person supplies or proposes to supply as part of carrying on that business;

•

the product or service is not insurance; and

•

it is likely in all the circumstances that the product or service could be mistakenly believed to be insurance.

[Schedule 6, item 5, sections 114(1) and (8) of the Insurance Act 1973]

6.10 The offence operates to restrict a person from using the word 'insurance' to describe a product or service they are supplying in instances where the product or service is not insurance. The offence does not operate to restrict a person using the word 'insurance' to describe a product or service that another person is supplying.

6.11 The term 'insurance' takes on its ordinary meaning. This will ensure it remains fit for purpose and can be interpreted in a way that achieves the intent of these reforms.

6.12 The maximum penalty for the offence is 50 penalty units in the case of an individual and 500 penalty units in the case of a body corporate. [Schedule 6, item 5, section 114(1) of the Insurance Act 1973]

6.13 The maximum penalty of 50 penalty units for an individual is consistent with the Guide to Framing Commonwealth Offences, which suggests that an appropriate maximum penalty for a strict liability offence is 60 penalty units for an individual. Also consistent with the Guide to Framing Commonwealth Offences, imprisonment is not a penalty for committing the strict liability offence.

6.14 The offence specifies a maximum penalty amount of 500 penalty units for a body corporate. This exceeds the amount considered appropriate in the Guide to Framing Commonwealth Offences, which is 300 penalty units for bodies corporate. The higher penalty for a body corporate 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.

6.15 The new offence will protect consumers from businesses that do not have a legitimate interest in using the term and ensures businesses are able 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.

6.16 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. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour, are proportionate to the size and capacity of a body corporate, and are not viewed as a cost of doing business, the higher maximum penalty is appropriate.

6.17 Additionally, 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.

Example 6.1 : Using the term 'insurance' by implication

Aidan is interested in purchasing a flight to Nigeria. He contacts Kathryn, who works at a travel agency. Kathryn finds a flight that suits Aidan's needs. Aidan is not ready to purchase the flight just yet and inquires about the ability to lock in the price. Kathryn's travel agency provides Aidan with a brochure entitled "Airfare insurance - lock in your price now" that lists five products of varying degrees that Aidan can purchase to lock in the price of the airfare.

However, the products listed in the brochure are all price guarantees that are underwritten by Kathryn's travel agency. Kathryn's travel agency has used the term 'insurance' to describe price guarantee products as insurance and would therefore contravene the new strict liability offence.

Example 6.2 : Not using the term 'insurance'

Fred has just purchased a mobile phone from a retailer when the salesperson Cosimo asks him whether he would like to purchase an extended warranty for the phone. Cosimo explains that the warranty provides coverage against the risk of accidental damage of the phone, requires a payment of $300 for three years' coverage and that an excess of $50 would need to be paid for each claim.

Cosimo has not committed an offence because he has not used the term 'insurance' to describe the product that he is selling.

Restricting the use of the term 'insurer'

6.18 A strict liability offence will also arise for a person that uses the term 'insurer' if:

•

the person carries on a business or is proposing to carry on a business;

•

the person uses the word 'insurer' to describe themselves in connection with a product or service that they supply or are proposing to supply as part of carrying on that business;

•

it is likely in all the circumstances that the product or service that they are supplying or proposing to supply could be mistakenly believed to be insurance; and

•

either:

-

the product or service is not insurance; or

-

the product is insurance and the person would be in breach of relevant provisions in the Insurance Act 1973, the Life Insurance Act 1995 or the Private Health Insurance (Prudential Supervision) Act 2015 if they supplied the product or service as part of their business.

[Schedule 6, item 5, sections 114(2), (3) and (8) of the Insurance Act 1973]

6.19 The maximum penalty for the offence is 50 penalty units in the case of an individual and 500 penalty units in the case of a body corporate. [Schedule 6, item 5, section 114(2) of the Insurance Act 1973]

6.20 As noted above, the higher penalty for a body corporate reflects the seriousness of the offence and acts as a sufficient deterrent to ensure a body corporate does not view the penalty as a cost of doing business.

6.21 Bodies corporate can be well resourced and often can, in the corporate and financial sector, have significant financial value and resources. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour, are proportionate to the size and capacity of a body corporate, and are not viewed as a cost of doing business, the higher maximum penalty is appropriate.

6.22 The new strict liability offences will enhance the integrity of the regulatory regime. The Financial Services Royal Commission uncovered the harm caused by poor value insurance products and the sale of such products to particularly vulnerable groups. Describing a financial product as 'insurance', or the person offering the product as an 'insurer', tends to suggest that the person is prudentially supervised by APRA. If the person is not in fact prudentially supervised, consumers could be misled into having a higher degree of confidence in the safety and soundness of the person and the products the person sells than is justified.

6.23 Having strict liability offences as part of this regulatory regime will reduce such risks by strengthening the enforceability of the provisions by regulators, thereby discouraging disreputable practices and effectively deterring inappropriate uses of the terms.

Exceptions to the offences

6.24 The offences do not apply to government entities. Government entities are not prudentially regulated by APRA. Products issued by government entities, which are generally supported by Government, do not suffer from the same vulnerability as products issued by the private sector. As a result, it is less likely that products issued by government entities will cause confusion. [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.25 An entity is a government entity if it is:

•

a Department of State of the Commonwealth, a State, or a Territory;

•

a Department of the Parliament;

•

an Executive or Statutory Agency; or

•

an entity that is established for a public purpose by a law of the Commonwealth, a State or a Territory.

[Schedule 6, items 1 and 5, the definition of 'government entity' in sections 3(1) and 114(5) of the Insurance Act 1973]

6.26 ASIC may, by legislative instrument, determine that the offences do not apply to a specific person or a class of persons. The terms 'insurance' and 'insurer' are used in relation to a wide variety of products in various circumstances. ASIC, being the corporate regulator and the regulator that will administer this regime, is in the best position to obtain and consider information from businesses and determine whether it is appropriate that a person or a class of persons be excluded from the restrictions. [Schedule 6, item 5, sections 114(4) and (6) of the Insurance Act 1973]

6.27 A determination made by ASIC to exempt a specific person or class of persons from the offences may be subject to conditions. ASIC may revoke or vary the determination. However, ASIC must not revoke or vary a determination in relation to a specific person unless ASIC has notified the person in writing that it is considering revoking or varying the determination. [Schedule 6, item 5, sections 114(6) and (7) of the Insurance Act 1973]

6.28 The regulations may prescribe that the offences do not apply to certain products and services. [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.29 The terms 'insurance' and 'insurer' are used in relation to a wide variety of products in various circumstances. Regulations may be made to exclude products and services that are not vulnerable to the same risks as the products and services that are the target of this regime from the restrictions. The exemption of a certain type of product or service has broader consequences than the exemption of a specific person or class of persons. Therefore, it is appropriate for an exemption of types of products or services to be made by regulations.

6.30 The offences do not apply to State insurance products that do not apply outside that State (within the meaning of section 51(xiv) of the Constitution). [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.31 A person who wishes to rely on the exceptions to the offences bears the evidential burden in relation to the matters in the exception. This is consistent with section 13.3(3) of the Criminal Code. An evidential burden requires the person to provide evidence that suggests the reasonable possibility that the exception applies.

6.32 A reversal of the evidential burden is justified where the matters are peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

6.33 The reversal of the evidential burden in this instance is limited to reliance on an exception.

6.34 In respect of coverage by a determination and a product or service being of a kind in the regulations, key information about a product or service a person provides and whether it is covered by a determination or the regulations, would reside with the person and would be peculiarly within the knowledge of the person.

6.35 While it is not expected that the prosecution would commence proceedings against a person covered by a determination or the regulations, it would not be burdensome for the person to produce information about the person's organisation and the products or services they provide.

6.36 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 itself. 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 provide or point to evidence that suggests a reasonable possibility that a matter exists.

Administration of the provisions

6.37 Amendments are made to the administration of the Insurance Act 1973 to make ASIC responsible for the enforcement of the new offences as they are consumer protection measures. [Schedule 6, items 2 to 4, section 8 of the Insurance Act 1973]

Commencement provisions

6.38 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

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

Outline of chapter

7.1 Schedule 7 to the Bill amends the Corporations Act to make insurance claims handling and settling (referred to in this chapter as claims handling) a financial service.

Context of amendments

7.2 Chapter 7 of the Corporations Act sets out a regime which regulates financial products and services. The regime requires people who provide financial services to:

•

hold an Australian financial services licence covering the financial service they provide;

•

act efficiently, honestly and fairly when providing financial services (among other general obligations in section 912A of the Corporations Act);

•

provide appropriate disclosure to consumers when providing financial services; and

•

when providing financial services to retail clients, comply with the general obligation of having an internal dispute resolution process in place and be a member of AFCA.

7.3 Claims handling, which covers activities such as assisting a person to lodge an insurance claim and assessing and settling a claim, is currently excluded from being a financial service by regulation 7.1.33 of the Corporations Regulations 2001. The effect of this exclusion is that people who provide claims handling services are not required to comply with the regulatory regime in Chapter 7 of the Corporations Act.

7.4 A number of independent inquiries have recommended removing the exclusion in regulation 7.1.33 of the Corporations Regulations 2001 and requiring people who provide claims handling services to comply with the regulatory regime in Chapter 7 of the Corporations Act. These inquiries include:

•

ASIC Report 633 Holes in the safety net: A review of Total and Permanent Disability Insurance Claims, dated 17 October 2019;

•

the Financial Services Royal Commission;

•

the report of the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into the Life Insurance Industry, dated 27 March 2018; and

•

ASIC Report 498 Life insurance claims: An industry review, dated 12 October 2016.

7.5 Recommendation 4.8 of the Financial Services Royal Commission recommends that claims handling should no longer be excluded from the definition of 'financial service' for the purposes of Chapter 7 of the Corporations Act.

7.6 Commissioner Hayne observed that there is no basis for continuing to exclude claims handling (including in relation to potential insurance claims) from the definition of 'financial service' in the Corporations Act. In particular, Commissioner Hayne noted that:

•

claims handling is as much the provision of a financial service as any other financial service; and

•

for consumers, the intrinsic value of an insurance product lies in the ability to make a successful claim when an insured event occurs.

7.7 In response to the Financial Services Royal Commission, the Government agreed to implement recommendation 4.8. In March 2019, Treasury released a consultation paper seeking feedback on options to include claims handling in the definition of 'financial service' in the Corporations Act.

Summary of new law

7.8 Schedule 7 makes claims handling a financial service and therefore subject to the regulatory regime in Chapter 7 of the Corporations Act.

7.9 This means that insurers and other people who provide claims handling services for insurers (including certain tradespeople, insurance claims managers, certain insurance brokers and certain financial advisers):

•

must obtain an Australian financial services licence covering claims handling;

•

must provide appropriate disclosure to retail clients when offering to settle a general insurance claim using cash payments;

•

can authorise representatives to provide claims handling services on their behalf;

•

can continue to appoint service providers, such as tradespeople to fulfil insurance contracts on their behalf;

•

must ensure insurance claims are handled and settled efficiently, honestly and fairly (whether they handle the claims themselves, or have representatives handle the claim on their behalf); and

•

when providing claims handling services to retail clients, must have an internal dispute resolution process in place and be a member of AFCA.

7.10 The reforms also mean that people who represent an insured (referred to in this chapter as a consumer) to pursue an insurance claim:

•

must hold an Australian financial services licence covering claims handling;

•

must represent the consumer efficiently, honestly and fairly; and

•

when representing a retail client to pursue an insurance claim, must have an internal dispute resolution process in place, be a member of AFCA and give the client a Financial Services Guide.

Comparison of key features of new law and current law

Detailed explanation of new law

7.11 Schedule 7 makes claims handling a financial service under Chapter 7 of the Corporations Act. [Schedule 7, items 1, 4, 7 and 10, the definition of 'claims handling and settling and settling service' in sections 9, 761A and 766A, and section 766G of the Corporations Act]

7.12 The amendments in Schedule 7 will be supported by regulations to repeal regulation 7.1.33 of the Corporations Regulations 2001, which excludes claims handling from being a financial service.

What is a claims handling service?

7.13 A person will provide a claims handling service if the person:

•

makes a recommendation or states an opinion that could influence a decision whether to make an insurance claim;

•

assists another person to make an insurance claim;

•

assesses whether an insurer is liable under an insurance product;

•

makes a decision to accept or reject all or part of an insurance claim;

•

quantifies an insurer's liability under an insurance product;

•

offers to settle all or part of an insurance claim; or

•

satisfies a liability of an insurer under an insurance claim.

[Schedule 7, item 10, section 766G of the Corporations Act]

7.14 The new claims handling service captures a broad range of activities, from an initial inquiry before an insurance claim is lodged to the formal lodgement, assessment and settlement of an insurance claim.

Example 7.1

Vhairi has insurance for her rare sports car. After being involved in a crash, Vhairi makes an insurance claim. Vhairi's insurer has authorised an insurance claims manager to handle all of its claims. Vhairi's insurer notifies the claims manager of Vhairi's claim. The claims manager then hires an assessor to assess the damage to Vhairi's car and a smash-repairer to repair the car.

Each of these people (the insurer, insurance claims manager, assessor and smash repairer) provide a claims handling service. However, they are affected by the reforms in different ways.

The insurer must obtain an Australian financial services licence covering claims handling. The claims manager can obtain their own Australian financial services licence covering claims handling or become an authorised representative of the insurer. The assessor and smash repairer do not need to obtain an Australian financial services licence (or be authorised representatives of a financial services licensee), unless the insurer has given them the power to reject a claim.

7.15 The new claims handling service only applies to insurance products under the Corporations Act. Therefore, it does not extend to products that are not financial products under the Corporations Act, including:

•

health insurance;

•

insurance provided by the Commonwealth, and State and Territory insurance (including compulsory third party insurance);

•

insurance entered into by the Export Finance and Insurance Corporation;

•

reinsurance; and

•

insurance-like products (such as warranties).

Licensing requirements

7.16 While the new claims handing service is broad, a person will only need to obtain an Australian financial services licence covering claims handling if the person is:

•

an insurer;

•

a tradesperson (referred to as an 'insurance fulfilment provider') who has authority to reject all or part of a claim;

•

an insurance claims manager;

•

an insurance broker who provides claims handling services on behalf of the insurer; or

•

a financial adviser who provides claims handling services on behalf of the insurer.

[Schedule 7, item 12, section 911A(2)(ek) of the Corporations Act]

7.17 An 'insurance fulfilment provider' is a person who provides goods or services to consumers to fulfil insurance contracts. This includes smash repairers, builders and any other tradespeople contracted by an insurer to fulfil a claim. [Schedule 7, item 4, the definition of 'insurance fulfilment provider' in section 761A of the Corporations Act]

7.18 An insurer may authorise a tradesperson to accept a claim and begin immediate repairs. Where this occurs, the tradesperson is not required to obtain an Australian financial services licence covering claims handling, as these arrangements allow for claims to be handled quickly and are to be encouraged, particularly in natural disaster situations.

7.19 However, if an insurer authorises a tradesperson to reject all or part of a claim, the tradesperson must either:

•

obtain an Australian financial services licence covering claims handling; or

•

be authorised by a person with an Australian financial services licence covering claims handling.

7.20 This requirement reflects that, in these circumstances, the tradesperson has taken over an important part of the claims handling process that could result in consumer harm. The provision of claims handling services in these circumstances should therefore be regulated under Chapter 7 of the Corporations Act.

7.21 An 'insurance claims manager' is a person who carries on the primary business of providing claims handling services on behalf of one or more insurers. [Schedule 7, items 4 and 6, the definition of 'insurance claims manager' in sections 761A and 761DA of the Corporations Act]

7.22 In practice, insurers may outsource the entire claims handling process to an insurance claims manager. These claims managers are therefore required to either obtain an Australian financial services licence covering claims handling, or be authorised by a person with an Australian financial services licence covering claims handling. This ensures fair regulatory treatment of insurers who handle claims themselves and insurers who outsource their claims handling processes.

7.23 The regulations may prescribe when a person carries on (or does not carry on) the primary business of providing claims handling services on behalf of one or more insurers. This regulation-making power is an integrity measure to ensure:

•

people that should be captured by the amendments cannot avoid them by restructuring their business; and

•

people that may be unintentionally captured by the amendments can be excluded.

7.24 Any regulations made for these purposes would be subject to disallowance and parliamentary scrutiny. [Schedule 7, item 6, section 761DA(2) of the Corporations Act]

7.25 Whether a person is an 'insurance broker' relies on the definition in the Insurance Contracts Act, and is a person who carries on the business of arranging contracts of insurance for consumers. [Schedule 7, item 12, section 911A(2)(ek) of the Corporations Act]

7.26 These amendments do not require a trustee of a registrable superannuation entity to obtain an Australian financial services licence covering claims handling. However, a trustee of a registrable superannuation entity who provides claims handling services will be subject to equivalent regulation as part of providing a superannuation trustee financial service (see Chapter 9).

Obligations that apply to Australian financial services licensees

7.27 The general obligations under section 912A of the Corporations Act will apply to Australian financial services licensees who hold a licence covering claims handling.

7.28 Under the general obligations, licensees are required to do all things necessary to ensure that claims handling services are provided efficiently, honestly and fairly. A licensee will generally satisfy this obligation if their claims are handled:

•

in a timely way without undue delay, balancing the negative effects of delay on consumers with the insurer's reasonable requirements for handling an insurance claim;

•

in the least onerous and intrusive way possible, including only requesting information, medical examinations, surveillance and other assessments if it is strictly relevant to the claim;

•

fairly and transparently, by providing consumers with information about:

-

the claims handling process;

-

the reason for information requests; and

-

reasons for decisions; and

•

in a manner that ensures adequate support is provided for consumers, in particular those who are experiencing vulnerability (such as financial hardship).

Example 7.2

Emily has a total and permanent disability insurance policy. Emily has a serious accident and makes a claim on her policy. The insurer collects information from Emily, appoints a claim assessor and requires Emily to be examined by an independent orthopaedic surgeon.

The surgeon provides an opinion that is favourable to Emily and the insurer expresses no reason to doubt the surgeon's opinion, qualifications or expertise. Nevertheless, the insurer seeks the opinions of a second and third orthopaedic surgeon, requiring Emily to undergo the same medical examination multiple times and causing significant delays in the claims handling process.

The insurer is not acting efficiently, honestly or fairly as Emily's claim has not been handled in a timely manner and has not been conducted in the least intrusive way possible. The insurer is in breach of section 912A of the Corporations Act.

7.29 Whether an insurance claim has been handled efficiently, honestly and fairly will depend on the circumstances of each case. Relevant factors could include the vulnerability of an insured, whether there has been a surge in the volume of claims to be processed because of a natural disaster, or other unanticipated circumstances that restrict normal operations.

Example 7.3

Onyu has two properties that are covered by separate insurance policies. One property is located in an isolated area, and the other property is in an area that is easily accessible. Both properties are affected by a natural disaster.

The property in the easily accessible area is quickly assessed and repaired by representatives of the insurer.

In the isolated area, the insurer has experienced a sudden increase in claims and delegates the authority to accept claims to a local builder. The builder takes slightly longer to attend to Onyu's second claim due to the property's isolation and the peak in claims in the area.

The insurer for each property is required to ensure its claims are handled efficiently, honestly and fairly. Taking into account the circumstances of each claim, this obligation is likely to be satisfied by each of the insurers.

Licensees are responsible for the conduct of their representatives

7.30 Consistent with the financial services law, Australian financial services licensees who provide claims handling services can appoint authorised representatives to provide those services on their behalf. When this occurs, the licensee is responsible for the conduct of the authorised representative.

7.31 Under section 916F of the Corporations Act, Australian financial services licensees must notify ASIC when they appoint an authorised representative to provide financial services on their behalf. Authorised representatives are subject to a range of requirements under Chapter 7 of the Corporations Act.

Example 7.4

Faith has a life insurance policy. The insurer has appointed an external claims manager as its authorised representative to handle its insurance claims. After Faith passes away, her family lodge a claim.

Following a long delay, the external claims manager assesses the claim and recommends to the insurer that the claim be accepted. The insurer accepts the claim immediately.

Faith's family complain that the claims process has taken too long.

The claims manager is responsible for the delays in handling the claim. However, the insurer is also responsible for the delay because the claims manager is an authorised representative of the insurer.

7.32 Australian financial services licensees who handle claims may hire tradespeople to fulfil claims (as well as other service providers such as investigators and loss assessors) without needing to appoint them as authorised representatives. This exemption does not apply however if the tradesperson is authorised to reject all or part of a claim or is otherwise required to obtain an Australian financial services licence covering claims handling. This is intended to simplify the process of hiring service providers to fulfil claims. [Schedule 7, items 11 and 13, sections 910D and 911B of the Corporations Act]

7.33 Australian financial services licensees are responsible for the conduct of the service providers they hire. Additionally, licensees must ensure the provider has the relevant qualifications and are adequately trained to provide claims handling services. There are no new obligations imposed on these service providers (except if they are authorised to reject all or part of a claim). [Schedule 7, items 11 and 13, sections 910D and 911B of the Corporations Act]

Example 7.5

Larissa has a home and contents insurance policy. Her home is damaged in a flood and she lodges a claim with her insurer, who hires a builder to begin repairing Larissa's house.

The insurer has received numerous complaints about the quality of the builder's work, but hires them to repair Larissa's house regardless. The builder fails to adequately repair Larissa's home and Larissa makes a complaint to the insurer.

The insurer is responsible for ensuring that its representatives, including the builder, are adequately trained and are competent to provide claims handling services. Given the circumstances, the insurer is likely responsible for failing to comply with this obligation.

7.34 Where a consumer chooses to accept a cash settlement under an insurance contract so that they can hire a service provider of their choice, the Australian financial service licensee responsible for the insurance claim is not responsible for the conduct of the service provider. In these circumstances, the service provider is unlikely to be a representative of the licensee responsible for the claim (in most cases, this would be the insurer).

7.35 The existing extraterritorial application of the financial services law in the Corporations Act will mean that the amendments extend to the claims handling activities of Australian insurance claims outside Australia. Therefore, if an insurer outsources its claim handling services to a representative based overseas, the conduct of that representative will be relevant for the purposes of these reforms.

Licensing requirements for claimant intermediaries

7.36 A claimant intermediary is a person who carries on a business of representing people to pursue insurance claims in exchange for a monetary or non-monetary benefit, or a benefit provided to another party. The regulations may prescribe circumstances in which a person is not a claimant intermediary. [Schedule 7, items 4 and 5, the definition of 'claimant intermediary' in section 761A and section 761CAA of the Corporations Act]

7.37 Claimant intermediaries who carry on a business representing consumers to pursue claims are required to:

•

obtain an Australian financial services licence covering claims handling;

•

comply with the general obligations under section 912A of the Corporations Act, including the obligation to:

-

provide claims handling services efficiently, honestly and fairly; and

-

have a compliant internal dispute resolution process in place and be a member of AFCA (if the consumer is a retail client); and

•

give the consumer a Financial Services Guide if the consumer is a retail client.

7.38 This licensing requirement only applies to insurance claims made under insurance products prescribed by the regulations. [Schedule 7, item 12, section 911A(2)(ek) of the Corporations Act]

7.39 Both of the regulation-making powers described above are required to ensure people who are not intended to be captured by the licensing regime can be excluded as needed. Any regulations made would be subject to disallowance and parliamentary scrutiny.

Example 7.6

Sarah's roof is damaged in a hail storm. Katherine approaches Sarah and says she will repair the roof and handle the insurance paperwork for Sarah in exchange for a fee to be paid to a company controlled by another person.

Katherine is a claimant intermediary as she carries on a business of representing a consumer to pursue an insurance claim for a benefit, even though the benefit is not provided directly to Katherine.

Katherine will be required to obtain an Australian financial services licence covering claims handling and will be required to act efficiently, honestly and fairly in providing claims handling services.

7.40 Claimant intermediaries who represent retail clients to pursue insurance claims must have a complaint internal dispute resolution process in place and be a member of AFCA. The claimant intermediary must also give the consumer a Financial Services Guide. This ensures the consumer has appropriate information about the financial service that is being offered by the claimant intermediary. [Schedule 7, item 17, section 941C(7A) of the Corporations Act]

Requirement to provide a Cash Settlement Fact Sheet

7.41 A person who offers to settle a general insurance claim of a retail client with a cash payment must give the consumer a Cash Settlement Fact Sheet. This ensures the consumer has sufficient information about the offer to make an informed decision about whether to accept the offer.

7.42 A Cash Settlement Fact Sheet only needs to be provided when the consumer has a choice to make between cash settlement and another settlement option under the insurance contract. An alternative option for settling a claim could be the repair or replacement of the insured item. [Schedule 7, items 4 and 18, the definition of 'Cash Settlement Fact Sheet' in section 761A, sections 948B to 948F of the Corporations Act]

7.43 The Australian financial services licensee or the person acting on behalf of the licensee must give the consumer the Cash Settlement Fact Sheet at the same time the cash settlement offer is made. [Schedule 7, item 18, sections 948B, 948C and 948D of the Corporations Act]

7.44 The Cash Settlement Fact Sheet must be given in writing and:

•

include all options for settlement that are legally available (for example, the option to have the insured product repaired or replaced);

•

include a statement of the cash settlement being offered, broken into components representing the sum insured and any additional payments;

•

include a statement that the insured should consider obtaining independent legal or financial advice before settling;

•

include an outline of any rights of review regarding the payout the insured may have;

•

be titled as 'Cash Settlement Fact Sheet' on the cover;

•

be dated with the date on which the Cash Settlement Fact Sheet was prepared;

•

be presented in a clear, concise and effective manner; and

•

contain any other information prescribed by the regulations.

[Schedule 7, item 18, sections 948E and 948F of the Corporations Act]

7.45 In practice, claimant intermediaries will not be required to provide consumers with a Cash Settlement Fact Sheet as they are not offering to settle the consumer's claim.

7.46 A Cash Settlement Fact Sheet must be given in printed or electronic form, and must be:

•

given to the insured personally;

•

sent to the insured at a nominated address or fax number; or

•

provided in another way which is agreed between all parties.

[Schedule 7, item 16, section 940C(1) of the Corporations Act]

7.47 The regulations may prescribe further information which must be included in a Cash Settlement Fact Sheet. This provides flexibility to respond to developments and changes in the insurance industry and is expected to be used to accommodate the different insurance industries and their practices. The regulations would be subject to disallowance and parliamentary scrutiny. [Schedule 7, item 18, section 948F(1) of the Corporations Act]

7.48 A contract cannot overrule the obligations that apply in relation to a Cash Settlement Fact Sheet. [Schedule 7, item 19, section 951A of the Corporations Act]

Penalties regarding Cash Settlement Fact Sheets

7.49 Chapter 7 of the Corporations Act contains a variety of offences, civil penalty provisions and liability provisions that apply when Australian financial services licensees and their representatives fail to provide adequate disclosure documents to consumers. This includes circumstances where disclosure documents are not provided to consumers or defective disclosure documents are provided to consumers. The offences that apply include strict liability offences, and ordinary offences with maximum penalties of up to 15 years imprisonment. The maximum penalty is generally reserved only for the most egregious cases.

7.50 These provisions apply to a number of existing disclosure documents, including:

•

Statements of Advice, which are provided to consumers receiving personal financial advice; and

•

Financial Services Guides, which are provided to people receiving certain kinds of financial services.

7.51 The same offences, civil penalty provisions and liability provisions will extend to failures relating to Cash Settlement Fact Sheets. This reflects that Cash Settlement Fact Sheets are important disclosure documents that will assist consumers to make informed decisions whether to accept a cash settlement offer for their insurance claim.

7.52 Therefore, it is an offence if a person:

•

fails to provide a consumer with a Cash Settlement Fact Sheet when they are required to under the Corporations Act;

•

either knowingly or unknowingly, gives a Cash Settlement Fact Sheet which is defective; or

•

fails to take reasonable steps to ensure that their authorised representative;

-

gives a Cash Settlement Fact Sheet when required; and

-

does not give a Cash Settlement Fact Sheet that is defective.

[Schedule 7, items 19 to 33, sections 951A to 953A and section 1317E(3) of, and Schedule 3 to, the Corporations Act]

7.53 A Cash Settlement Fact Sheet will be considered defective if it does not include the material required by sections 948E and 948F of the Corporations Act. This includes for example, the options for settlement legally available to the client, the sum insured under the insurance product and the total amount of the cash settlement being offered. [Schedule 7, items 20, 21, 29 and 30, definitions of 'defective' in sections 952B(1) and 953A(1) of the Corporations Act]

7.54 Failing to give a Cash Settlement Fact Sheet as required is a strict liability offence under section 952C of the Corporations Act. This is consistent with the Guide to Framing Commonwealth Offences as this requirement is necessary to maintain the integrity of the regulatory regime. It is also consistent with the strict liability offences that apply to failures to give other types of disclosure documents to consumers, such as Statements of Advice and Financial Services Guides. [Schedule 7, item 22, sections 952B(1) and 952C of the Corporations Act]

7.55 If a Cash Settlement Fact Sheet is not provided, a consumer who has already suffered a loss may not have the relevant information needed to make an informed (and potentially significant) financial decision. Additionally, the new strict liability offence is not punishable by imprisonment and the penalty is below the maximum penalty unit cap provided for in the Guide to Framing Commonwealth Offences.

7.56 A civil penalty provision applies if a person:

•

fails to give a disclosure document in the required way;

•

either knowingly or unknowingly gives a defective disclosure document; or

•

fails to take reasonable steps to ensure their authorised representative:

-

gives a disclosure document as required; and

-

does not give a disclosure document that is defective.

7.57 The same civil penalty provisions will apply to Cash Settlement Fact Sheets. They will apply to Cash Settlement Fact Sheets in the same manner and with the same penalty as they would apply to other disclosure documents. [Schedule 7, items 18, 20 to 23 and 32, sections 948C, 952B, 952E, 952H and 1317E(3) of the Corporations Act]

7.58 The standard maximum financial penalty for a contravention of a civil penalty provision under the Corporations Act applies to the new civil penalty provisions (see section 1317G of the Corporations Act).

7.59 The liability provisions which apply to failures relating to disclosure documents will also extend to Cash Settlement Fact Sheets. This will allow consumers to recover loss or damage resulting from failures relating to Cash Settlement Fact Sheets (for example, where the consumer was not given a Cash Settlement Fact Sheet or was given a defective Cash Settlement Fact Sheet). [Schedule 7, items 29, 30 and 31, section 953A of the Corporations Act]

Giving advice to consumers when providing claims handling services

7.60 Generally, a person providing financial advice about insurance products is required to:

•

hold an Australian financial services licence covering the provision of financial advice; and

•

comply with various obligations under Chapter 7 of the Corporations Act such as training and educational standards.

7.61 The amendments allow a person who provides claims handling services to also provide financial advice which is a necessary part of providing the claims handling service, without needing to hold an Australian financial services licence covering the provision of financial advice or comply with the obligations under Chapter 7 of the Corporations Act relating specifically to financial advice. [Schedule 7, items 8 and 9, sections 766B(7A) to 766B(8) of the Corporations Act 2001]

7.62 However, a person providing financial advice in these circumstances will still need to provide the claims handling service efficiently, honestly and fairly.

7.63 If a person gives advice that is not a necessary part of providing a claims handling service, they would need to hold an Australian financial services licence covering the provision of financial advice and comply with the various other obligations under Chapter 7 of the Corporations Act which relate to financial advice.

7.64 Financial advice that may be a necessary as part of claims handling includes:

•

providing information about the insurance product such as how a benefit is calculated or how a claim can be lodged;

•

recommending the easiest way to submit a claim;

•

recommending the easiest way to get information for a claim;

•

recommending whether it would be appropriate to repair or replace an item as part of a claim; and

•

recommending ways to mitigate the extent of loss or damage associated with an insurance claim.

7.65 A regulation-making power allows the Government to prescribe circumstances when advice will and will not be regarded as a necessary part of providing a claims handling service. This will provide industry with greater certainty about the types of advice that can be given when providing a claims handling service without needing to be licensed as a financial adviser. Regulations made under this power would be subject to disallowance and parliamentary scrutiny. [Schedule 7, item 8, section 766B(7B) of the Corporations Act]

Other technical amendments

Lawyers

7.66 Lawyers will not be required to obtain an Australian financial services licence for activities undertaken in their professional capacity as a lawyer. However, if a lawyer provides other services which are not in their professional capacity as a lawyer, such as making a decision about whether an insurance claim should be fulfilled, they may be required to obtain an Australian financial services licence covering claims handling.

7.67 Lawyers can provide the following services without being required to obtain an Australian financial services licence covering claims handling:

•

advising about matters of law or the application of the law to facts;

•

providing advice that is a necessary part of being a lawyer (except as prescribed by the regulations);

•

determining whether an insurer is liable for a claim and quantifying their liability;

•

negotiating a claim; or

•

any conduct by a lawyer where they are acting on their client's instructions.

[Schedule 7, item 12, section 911A(2)(en) of the Corporations Act]

Licensing of foreign and wholesale insurers

7.68 Chapter 7 of the Corporations Act contains a number of exemptions for certain foreign insurers and wholesale insurers from the requirement to obtain an Australian financial services licence. These exemptions are extended for the purposes of these amendments, so those foreign insurers and wholesale insurers are not required to obtain an Australian financial services licence for claims handling.

7.69 An insurer prescribed in the regulations can handle an insurance claim of a retail client without needing to hold an Australian financial services licence if:

•

the insurer has an arrangement with an intermediary that covers claims handling; and

•

the intermediary holds an Australian financial services licence covering claims handling.

[Schedule 7, item 12, section 911A(2)(el) of the Corporations Act]

7.70 Insurers who have only wholesale clients can provide claims handling services claims without holding an Australian financial services licence covering claims handling if the insurer has an arrangement with a licensed party. [Schedule 7, item 12, section 911A(2)(em) of the Corporations Act]

7.71 Insurers who have only wholesale clients, and where the services they provide are regulated by APRA (such as claims handling services), will be able to handle their own claims without a licence (see section 911A(2)(g) of the Corporations Act).

7.72 This approach to regulating foreign and wholesale insurers is consistent with the existing regulation of foreign and wholesale providers of other financial services under Chapter 7 of the Corporations Act.

Treatment of representatives

7.73 Authorised representatives of Australian financial services licensees can engage other people to provide claims handling services on behalf of the authorised representative and the licensee. When a third person is engaged by an authorised representative in this way, both the authorised representative and the licensee are responsible for the conduct of the third person. [Schedule 7, item 13, section 911B(1)(g) of the Corporations Act]

7.74 Generally, if an Australian financial services licensee seeks to appoint a person as their authorised representative, and that person is already the authorised representative of another licensee, the first licensee must seek the consent of the second licensee (see section 916C of the Corporations Act). However, Australian financial services licensees with a licence covering claims handling are not required to obtain the consent of other licensees to appoint the authorised representatives of those other licensees. [Schedule 7, item 15, section 916C(1) of the Corporations Act]

7.75 Australian financial services licensees with licences covering claims handling are also not required to take reasonable steps to ensure any tradespeople who are their representatives comply with financial services laws that relate to claims handling. However, these licensees remain responsible for the conduct of their representatives in relation to the other obligations under sections 912A and 917A to 917F of the Corporations Act, such as managing conflicts of interest, carrying out supervisory arrangements, and ensuring they are competent to provide those financial services. [Schedule 7, item 14, section 912A(1)(ca) of the Corporations Act]

Other amendments

7.76 Australian financial services licensees with licences covering claims handling will be required to have an internal dispute resolution system in place and to be a member of AFCA where the consumer is a retail client, even if the policy holder is not a retail client (for example, a large sports club that is not a retail client may hold an insurance policy for its individual members who are retail clients). [Schedule 7, items 7 and 10, section 766A(1) and definition of 'claims handling and settling and settling service' in section 766G of the Corporations Act]

7.77 Australian financial services licensees with licences covering claims handling can still be retail clients for the purposes of Chapter 7 of the Corporations Act. This will ensure that businesses which obtain Australian financial services licences will still receive the appropriate degree of regulatory protection if they are below the threshold for becoming a wholesale client. [Schedule 7, item 2, definition of 'professional investor' in section 9 of the Corporations Act]

7.78 A person providing a claims handling service will not need to provide a consumer with a Financial Services Guide in relation to the claims handling service, unless the person is representing an insured to pursue an insurance claim (in which case the person will be a claimant intermediary). [Schedule 7, item 17, section 941C(7A) of the Corporations Act]

7.79 A Financial Services Guide is required to be provided by a claimant intermediary because a person representing a consumer to pursue an insurance claim has a closer and more personal relationship with the consumer. For these services, the consumer is more vulnerable to the conduct of the person representing them to pursue a claim and therefore the consumer is in greater need of disclosure to ensure the service they are receiving is appropriate for their needs.

7.80 The definitions in the Corporations Act are updated to refer to the new claims handling service (referred to as a 'claims handling and settling service'). [Schedule 7, item 3, the definition of 'binder' in section 761A of the Corporations Act]

7.81 Provisions are added to direct readers to provisions that deal with claims handling and settling and Cash Settlement Fact Sheets. [Schedule 7, items 1, 4, and 18, section 9, the definition of 'claims handling and settling and settling service' in section 761A and the definition of 'Cash Settlement Fact Sheet' in section 761A of the Corporations Act]

Transitional arrangements

Overview of the transitional arrangements

7.82 The amendments made by Schedule 7 commence on the later of 1 January 2021 or the day after Royal Assent. [Clause 2]

7.83 However, the amendments made by Schedule 7 will apply to different persons providing claims handling services and different insurance claims at different times.

7.84 The amendments made by Schedule 7 do not apply to any person providing claims handling services before the end of 30 June 2021. [Schedule 7, item 33, sections 1675B(1) and 1675C of the Corporations Act]

7.85 The amendments made by Schedule 7 will never apply to insurance claims that were started before the day the legislation commences. [Schedule 7, item 33, sections 1675 and 1675A of the Corporations Act]

7.86 However, the amendments made by Schedule 7 will apply to an insurance claim started after the day the legislation commences, once Schedule 7 applies in full to the person handling and settling the insurance claim. [Schedule 7, item 33, sections 1675 and 1675A of the Corporations Act]

7.87 For a person who provides claims handling services after 30 June 2021, the amendments made by Schedule 7 partially applies to them, by requiring them to have applied for a new or varied licence covering claims handling. However, a person can provide claims handling services on behalf of someone else who holds, or has applied for, a new or varied licence covering claims handling after 30 June 2021, without having applied for a licence themselves. [Schedule 7, item 33, sections 1675B and 1675C of the Corporations Act]

7.88 This obligation for persons who provide claims handling services to apply for a licence before the amendments made by Schedule 7 applies to them in full ensures that a person who needs a licence will apply for one early, so ASIC has sufficient time to process the licence applications.

7.89 If a person is granted a new licence or variation, Schedule 7 may not apply to them immediately upon being granted a licence. Instead, Schedule 7 will apply to them in full after the last licence-processing day. The last licence-processing day is the later of:

•

31 December 2021; and

•

a later day prescribed by the Minister that is before 1 July 2022.

[Schedule 7, item 33, sections 1675B(1) and 1675C of the Corporations Act]

7.90 The Minister is given the discretion to extend the date before Schedule 7 starts to apply in full to a person who has been granted a licence (the last licence-processing day) in case ASIC is unable to process the large number of expected applications before 31 December 2021.

7.91 If a person applies for a licence or variation before the last licence-processing day, but their application is rejected, refused or the person withdraws the application, Schedule 7 applies to them in full from the time the application is rejected, refused or withdrawn. However Schedule 7 will not apply to them if they provide claims handling services on behalf of another person covered by these transitional arrangements. [Schedule 7, item 33, sections 1675B(1)(b) and (d) and 1675C of the Corporations Act]

7.92 If a person does not apply for a new or varied licence before the end of 30 June 2021, Schedule 7 starts to apply to them in full immediately after 30 June 2021. However, Schedule 7 will not apply to them if they provide claims handling services on behalf of another person still covered by these transitional arrangements. [Schedule 7, item 33, sections 1675B(1)(e) and 1675C of the Corporations Act]

7.93 Despite Schedule 7 not applying to any person who provides claims handling services before 30 June 2021, persons who provide these services can take the below steps after Schedule 7 commences, to prepare for when Schedule 7 applies to them:

•

a financial services licensee can authorise a person to provide claims handling services on their behalf; and

•

an authorised representative of a licensee may appoint a person to provide claims handling services on behalf of the licensee.

[Schedule 7, item 33, section 1675C of the Corporations Act]

7.94 Despite Schedule 7 not applying to a person who provides claims handling services before 30 June 2021, a financial services licensee must comply with various ASIC information gathering powers after the Schedule 7 commences. [Schedule 7, item 33, section 1675C(1) of the Corporations Act]

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

Outline of chapter

8.1 Schedule 8 to the Bill amends section 29E of the SIS Act to impose a new condition on registrable superannuation entity licences held by a body corporate trustee. The new licence condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to carry out their ordinary functions as a trustee of a registrable superannuation entity. This will reduce the risk of potentially unmanageable conflicts of duties arising and improve outcomes for beneficiaries of registrable superannuation entities.

8.2 The amendments implement the Government's response to recommendation 3.1 of the Financial Services Royal Commission.

Context of amendments

8.3 Section 52 of the SIS Act imposes covenants on trustees of registrable superannuation entities.^[4] Relevantly, these covenants require each superannuation trustee to:

•

perform their duties and exercise their powers in the best interests of the beneficiaries;

•

give priority to the duties to and interests of beneficiaries over the duties to and interests of other persons where there is a conflict; and

•

not enter into any contract or do anything else that would prevent the trustee from properly performing or exercising the trustee's functions and powers.

8.4 While these covenants (and relevant prudential standards) contemplate that conflicts may arise between the duties to and interests of the beneficiaries and the duties to and interests of other persons, they require superannuation trustees to develop a conflicts management framework that gives priority to the interests of the beneficiaries.

8.5 The Financial Services Royal Commission considered various conflicts management frameworks developed by superannuation trustees. While Commissioner Hayne recognised that in some circumstances, conflicts may be prudently managed, he found that irreconcilable conflicts of duties should be avoided entirely to give effect to the covenants.

8.6 In particular, Commissioner Hayne considered that superannuation trustees should avoid being the responsible entity of a registered scheme because of the potential conflict of duties that arises when the trustee 'wears two hats'.

8.7 The Financial Services Royal Commission heard evidence relating to superannuation trustees who also acted as responsible entities of registered schemes.

8.8 A potential conflict of duties arises in this context because such an entity is required to act in the best interests of the beneficiaries of the superannuation fund under section 52 of the SIS Act, and is also required to act in the best interests of the members of the registered scheme under section 601FC(1)(c) of the Corporations Act.

8.9 The conflict clearly materialises when a person who is not a beneficiary of the superannuation fund invests in the registered scheme, and the duties to the beneficiaries of the superannuation fund are in conflict with the duties to the other members of the registered scheme. As the trustee owes a best interests duty to two different groups of members, the trustee may be unable to discharge its duty to both.

8.10 Recommendation 3.1 of the Financial Services Royal Commission goes beyond prohibiting superannuation trustees from being the responsible entity of a registered scheme and states that a trustee of a registrable superannuation entity should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.

8.11 Schedule 8 implements the Government's response to recommendation 3.1.

Summary of new law

8.12 Schedule 8 creates an additional condition on licences held by a body corporate superannuation trustee. The new condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to undertake their ordinary functions as a superannuation trustee.

Comparison of key features of new law and current law

Detailed explanation of new law

8.13 Schedule 8 amends section 29E of the SIS Act to create an additional condition on registrable superannuation entity licences held by a body corporate trustee. The condition prohibits the trustee from having a duty to act in the interests of another person, except in the course of:

•

performing its duties and exercising its powers as a superannuation trustee; or

•

providing personal advice.

8.14 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 to members of a registered scheme.

Who will need to comply with the new licence condition?

8.15 The new licence condition only applies to body corporate superannuation trustees. This includes a superannuation trustee that is a constitutional corporation. [Schedule 8, item 1, section 29E of the SIS Act]

8.16 The new licence condition does not apply to individual trustees, groups of individual trustees or individual directors of body corporate trustees. This approach reflects the various duties to act in the interests of another person that an individual may be subject to, for example as trustee of a family trust or as part of their professional employment.

8.17 The new licence condition only applies in respect of the licensee. It does not prohibit another entity in the same corporate group, including a subsidiary of the trustee, from having a duty to act in the interests of another person.

Having a duty to act in the interests of another person

8.18 A superannuation trustee may have a duty to act in the interests of another person because the duty:

•

arises under legislation (for example, under the Corporations Act), under a contract or deed, or under a rule of common law or equity (such as a fiduciary duty); or

•

is imposed by a court.

8.19 For the purposes of the new licence condition, it is not relevant how the duty arises. A duty to act in the interests of another person that is voluntarily assumed or is imposed on the superannuation trustee would therefore be captured. A superannuation trustee will also have a duty to act in the interests of another person if the trustee holds an office or role that gives rise to a duty to act in the interests of another person.

8.20 The new prohibition is limited to duties to act in the interests of another person and is subject to the broad exemptions discussed in the following section. Further, only legally enforceable duties to act in the interests of another are captured by the new licence condition.

8.21 While it is not possible to exhaustively list the situations or relationships that give rise to a duty to act in another person's interest, such a duty may arise in the context of a superannuation trustee:

•

being the responsible entity of a registered managed investment scheme, as this would give rise to a statutory duty to act in the best interests of the members of the scheme under section 601FC(1)(c) of the Corporations Act;

•

being a trustee of an unregistered managed investment scheme, as this would give rise to a fiduciary duty to act in the interests of the members of the scheme;

•

acting as an agent of another person, as this would give rise to a fiduciary duty to act in the interests of the principal;

•

being the trustee of a traditional trust, as specified in Chapter 5D of the Corporations Act, as this would give rise to a fiduciary duty to act in the interests of the beneficiaries of the trust estate; or

•

providing personal advice to a person as a retail client, as this would give rise to a statutory duty to act in the best interests of the person under section 961B of the Corporations Act.

8.22 The new licence condition would not prohibit a superannuation trustee from having a duty that does not involve acting in the interests of another person. For example, this may allow a superannuation trustee to provide trustee administration services to other entities in exchange for fees, as this would likely involve a contractual duty to provide a service to the entity, rather than a duty to act in the interests of the entity.

Exemptions from the licence condition

8.23 The exemptions allow superannuation trustees to effectively carry out their duties and exercise their powers as a superannuation trustee in the best interests of its beneficiaries of the fund. [Schedule 8, item 1, section 29E of the SIS Act]

8.24 In addition to the exemptions listed in the new licence condition, APRA has broad powers of exemption and modification under Part 29 of the SIS Act. These powers may be exercised by APRA in exceptional circumstances in relation to this licence condition.

Performing the duties and exercising the powers of a superannuation trustee

8.25 This exemption ensures that a superannuation trustee can effectively perform its duties and exercise its powers as trustee of a registrable superannuation fund.

8.26 Duties imposed on the superannuation trustee under the 'RSE licensee law' are within the scope of this exemption. RSE licensee law is defined in section 10 of the SIS Act and includes, but is not limited to, the SIS Act, the SIS Regulations and prudential standards.

8.27 Other duties that are considered to be within the scope of the exemption include:

•

duties imposed on the superannuation trustee under the common law by virtue of the trustee being a trustee of a superannuation fund;

•

duties arising from the superannuation trustee operating investment vehicles, such as managed investment schemes, special purpose vehicles and pooled superannuation trusts, that are only open to members of the registrable superannuation entity;

•

duties arising from the superannuation trustee holding an Australian financial services licence under the Corporations Act in relation to its superannuation activities that are financial services; and

•

duties arising under Commonwealth, State or Territory legislation, or more generally under the common law, that relates to the business operation of the registrable superannuation fund. For example, duties under work health and safety legislation in relation to staff of the superannuation trustee.

8.28 Additionally, under this exemption, a superannuation trustee will be able to act as a trustee for more than one superannuation fund. The Financial Services Royal Commission expressly recognised that acting as a trustee of another superannuation fund is unlikely to give rise to an unmanageable conflict of duties that would adversely affect beneficiaries of those funds.

Provision of personal advice

8.29 Where a representative of superannuation trustee provides personal advice to a person as a retail client, the representative has a duty to act in that person's best interests under section 961B of the Corporations Act.

8.30 ASIC Report 639 Financial advice by superannuation funds found that of the superannuation funds surveyed, the majority of personal advice provided by a superannuation trustee is to its members in respect of their superannuation accounts. This advice often covers topics such as member investment choice and contributions. In these cases, the provision of advice would likely be captured by the exemption in new section 29E(5A)(a), as the advice is provided in connection with the trustee's role as a superannuation trustee.

8.31 However, certain types of personal advice may not be captured by that exemption, including:

•

personal advice given to or involving a person who is not a beneficiary of the registrable superannuation fund, such as a spouse or relative of a member; or

•

personal advice given to a beneficiary of the superannuation fund that does not meet the requirements of the sole purpose test in section 62 of the SIS Act and is therefore paid for directly by the member (rather than from their superannuation account). For example, where the advice is about a member's assets outside superannuation or age pension entitlement.

8.32 The provision of these types of personal advice is unlikely to adversely affect beneficiaries of the superannuation fund as a whole.

8.33 The personal advice exemption therefore ensures superannuation trustees and their representatives are not restricted from providing comprehensive personal advice. This recognises the important role superannuation funds play in meeting the financial advice needs of members wanting to build their retirement income.

8.34 This exemption is not limited to the provision of personal advice to a person as a retail client. It therefore allows a superannuation trustee to provide personal advice to wholesale clients, such as a trustee of another superannuation fund.

Failure to comply with the new condition

8.35 There are a range of existing mechanisms for APRA to enforce compliance with licensing conditions. For example, if a superannuation trustee fails to comply with a condition, APRA can issue directions requiring the trustee to comply. In exceptional circumstances, APRA may also cancel the licence.

8.36 Failure to comply with directions made by APRA under section 131D of the SIS Act is an offence with a maximum penalty of 100 penalty units. If a body corporate trustee is convicted of an offence, section 4B(3) of the Crimes Act 1914 allows a court to impose a fine of up to 500 penalty units.

8.37 Additionally, a breach of the new licence condition is likely to be a significant matter that must be reported to APRA under section 29JA of the SIS Act. Failure to comply with this requirement is an offence with a maximum penalty of 50 penalty units.

8.38 As the requirement is imposed by way of a licence condition on registrable superannuation entity licences, a failure to comply with the licence condition by having another duty to act in the interests of another person does not have any consequences for the validity or performance of the other duty.

Example 8.1

Company A is a superannuation trustee and becomes the responsible entity of a registered scheme. In its capacity as the responsible entity of the scheme, Company A subsequently does not invest money pooled in the scheme properly.

Company A has breached the new licence condition in section 29E(5A) of the SIS Act. However, Company A cannot rely on that breach to argue that section 29E(5A) has the effect that its appointment as responsible entity of the registered scheme was invalid, or that it does not need to comply with duties in relation to the scheme (including the duty to invest money properly).

Interaction with the Corporations Act

8.39 Sections 912A(4) and (5) of the Corporations Act contemplate that a superannuation trustee may also be the responsible entity of a registered scheme.

8.40 These provisions have not been amended because it is possible for a corporate entity to be both the responsible entity of a managed investment scheme and the superannuation trustee where the arrangement is exempt from the new licence condition. In order for this arrangement to be exempt, the managed investment scheme would need to be open only to members of the registrable superannuation fund or other superannuation trustees that are investing superannuation fund assets (or both).

Application and transitional provisions

8.41 The amendments commence on the later of 1 July 2021 and the day after Royal Assent. [Clause 2]

8.42 The amendments made by Schedule 8 apply in relation to any duty that is had before, on or after 1 January 2022. Body corporate superannuation trustees will therefore need to consider whether their existing structures are compliant with the new licence condition and may need to restructure by 1 January 2022 to comply with the new licence condition.

8.43 The amendments have prospective application as it has a future effect on rights and obligations. Any breaches of the new licence condition will only occur prospectively, on and after 1 July 2021.

8.44 Superannuation trustees who are also responsible entities of a registered scheme may choose to retire as the responsible entity to comply with the new licence condition. Ordinarily, section 601FL of the Corporations Act requires a responsible entity to hold a members' meeting to allow the scheme's members to vote on a new responsible entity.

8.45 ASIC may consider on a case-by-case basis whether to use its existing powers of exemption and modification to provide relief from this requirement. ASIC's Regulatory Guide 136: Funds management: Discretionary powers sets out its general policy on exercising this relief. ASIC's Regulatory Guide 51: Applications for relief and the ASIC service charter are also relevant for trustees seeking to make applications for relief from the requirement in section 601FL of the Corporations Act.

8.46 Relevantly, ASIC may consider granting relief from the requirement to hold a members' meeting for a change of responsible entity if:

•

the existing responsible entity and the proposed new responsible entity are related companies;

•

the change is unlikely to have an adverse impact on the administrative, custodial or asset management of the registered scheme or give rise to any significant changes in the manner in which the scheme operates; and

•

the costs of strict compliance with the meeting requirements under section 601FL(1) of the Corporations Act are disproportionately burdensome compared to the benefits of holding a meeting.

8.47 Additionally, APRA may use its exemption and modification powers in Part 29 of the SIS Act to postpone the operation of the licence condition so as to allow trustees a further period to comply with the new licence condition. When granting such an exemption, APRA may impose conditions, such as a condition that the exemption is for a specified period. This relief may be appropriate where an entity is required to undergo a complex restructuring process to comply with the licence condition. These powers will be exercised on a case-by-case basis, taking into account each trustee's circumstances.

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

Outline of chapter

9.1 Schedule 9 to the Bill implements recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission.

Context of amendments

Recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission

9.2 Schedule 9 implements the following recommendations of the Financial Services Royal Commission:

•

Recommendation 3.8: The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in recommendation 6.3.

•

Recommendation 6.3: The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that:

-

APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system; and

-

as the conduct and disclosure regulator, ASIC's role in superannuation primarily concerns the relationship between RSE licensees^[5] and individual consumers.

•

Recommendation 6.4: Without limiting any powers APRA currently has under the SIS Act, ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions.

•

Recommendation 6.5: APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given.

ASIC's expanded role in superannuation regulation

9.3 The Financial Services Royal Commission recommended ASIC's regulatory role in superannuation be expanded to better promote consumer protection and market integrity in the superannuation industry.

9.4 To achieve this, recommendation 6.4 stated that ASIC be given the power to enforce the provisions in the SIS Act that concern consumer protection.

9.5 The SIS Act and the RSE licensing regime are primarily designed with prudential supervision in mind. That means the focus of obligations is on governance and other prudential requirements that ensure trustees operate in a manner consistent with their best interest obligations and deliver quality outcomes for members.

9.6 Given the prudential focus of the SIS Act, the amendments expand the Australian financial services licensing regime to cover the provision of superannuation trustee services. This is a simple and effective way of ensuring that ASIC has access to appropriate powers and enforcement tools, and can successfully perform its expanded role as the superannuation regulator responsible for consumer protection and market integrity regulation.

9.7 The Australian financial services licensing regime promotes confident and informed decision making by consumers of financial products and services, as well as fairness, honesty and professionalism by those who provide financial services. The regime imposes specific duties on licensees, including to provide financial services efficiently, honestly and fairly, and comply with Australian financial services laws. Currently, most superannuation trustees are required to hold an Australian financial services licence authorising them to deal in a superannuation interest. If a trustee provides other services, for example, financial product advice, its Australian financial services licence must also cover those services.

9.8 Expanding the coverage of the Australian financial services licence regime enables ASIC to enforce conduct and consumer protection obligations across a broader range of superannuation trustee activities. It also provides ASIC with access to its full suite of enforcement tools, which strengthens its ability to deter trustee misconduct through court-based enforcement activities, and to ensure fair remediation of consumers.

Summary of new law

9.9 Part 1 of Schedule 9 makes adjustments to the SIS Act relating to the roles and responsibilities of superannuation industry regulators. In line with Financial Services Royal Commission recommendations 3.8, 6.3, 6.4 and 6.5, Part 1 expands ASIC's role in the SIS Act to include promoting consumer protection and market integrity.

9.10 An outcome of this change is that APRA and ASIC now share general administration of, or co-regulate, the 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.

9.11 Consistent with Financial Services Royal Commission recommendation 6.4, provisions with a consumer protection focus that become enforceable provisions in the future are expected to also be co-regulated by APRA and ASIC.

9.12 The role of the Commissioner of Taxation has not changed.

9.13 Part 1 of Schedule 9 introduces general improvements to section 6 of the SIS Act and related provisions to modernise and simplify the allocation of the general administration of provisions. The general administration of a provision of the SIS Act is now determined under the general administration table. Including a table of the general administration provisions in section 6(1) improves the readability and accessibility of the provision.

9.14 Part 2 of Schedule 9 extends the Australian financial services licensing regime to cover a broader range of activities undertaken by APRA-regulated superannuation trustees. It does this by creating a new financial service of providing a superannuation trustee service. A person provides a superannuation trustee service if they operate a registrable superannuation entity.

9.15 In general terms, this means 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. Examples of the activities intended to be covered include fee charging practices, investment selection, product changes, oversight of service providers, insurance claims handling, and transfer, payment and rollover practices.

9.16 In turn, the Australian financial services licence obligations apply in full to these activities from the Schedule's commencement. A superannuation trustee service will generally be provided to the beneficiaries of a superannuation fund, which constitutes the provision of a financial service to a retail client. This engages certain additional protections and obligations under Chapter 7 of the Corporations Act.

9.17 Part 2 of Schedule 9 also introduces the requirement for ASIC to obtain APRA's agreement before taking certain actions affecting RSE licensees, reflecting the changes made to the framework for superannuation regulation. These requirements apply to the cancellation of an Australian financial services licence, the imposition of certain licence conditions and the making of certain banning orders.

9.18 In the context of the extension of the Australian financial services licensing regime's coverage over superannuation, Part 2 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.

9.19 Part 2 also applies the consumer protections for financial services under the ASIC Act to the expanded range of trustee activities (other than for self-managed superannuation fund trustees) captured by the extension of the Australian financial services licensing regime.

9.20 Transitional provisions are included concerning the extension of the Australian financial services licensing regime's coverage of superannuation trustee services. Existing RSE licensees who already hold an Australian financial services licence authorising them to deal in a superannuation interest do not need to apply for the new authorisation.

Comparison of key features of new law and current law

Detailed explanation of new law

Adjustment of APRA and ASIC's role in the SIS Act

Adjustments relating to the roles and responsibilities of superannuation industry regulators

9.21 Schedule 9 repeals section 4 of the SIS Act and replaces it with a simplified outline. The simplified outline sets out high-level statements of the supervision responsibilities of APRA, ASIC and the Commissioner of Taxation in superannuation. [Schedule 9, item 1, section 4 of the SIS Act]

9.22 Rather than demarcating the three regulators' roles, the statements of their supervision responsibilities are intended to provide guidance to SIS Act users about the focus of their regulatory activities. Particularly for APRA and ASIC, the role statements highlight that their regulatory activities are complementary and overlapping, rather than mutually exclusive. The Commissioner of Taxation's role is unchanged.

9.23 Other Financial Services Royal Commission recommendations support coordinated interactions between APRA and ASIC. For example, recommendation 6.9 provides that APRA and ASIC must work in cooperation and share information (see Chapter 13).

APRA's role and responsibilities

9.24 APRA is generally responsible for prudential regulation and member outcomes (other than for self-managed superannuation funds which are regulated by the Commissioner of Taxation). It is also generally responsible for licensing and supervision of RSE licensees. [Schedule 9, item 1, section 4 of the SIS Act]

9.25 Consistent with Financial Services Royal Commission recommendations 6.4 and 6.5, APRA's responsibilities in the SIS Act are largely unchanged. APRA, as the prudential regulator for RSE licensees, remains responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities are met within a stable, efficient and competitive financial system.

9.26 The only substantive change to APRA's general administration is reflected in item 26 of the general administration table, which reallocates APRA's responsibility for section 68B of the SIS Act to ASIC. [Schedule 9, item 1, section 6(1) of the SIS Act]

9.27 Section 68B concerns the promotion of illegal early release schemes. Such schemes may involve promoters encouraging individuals to fraudulently access their superannuation on compassionate or hardship grounds, or transfer or rollover their superannuation from their existing superannuation fund to a self-managed superannuation fund so the individual can withdraw their superannuation before they are legally entitled to it. The general administration of section 68B is reallocated to ASIC because its focus on preventing harm to individual consumers of superannuation products is consistent with ASIC's regulatory focus under the SIS Act, as set out in new section 4.

9.28 The Commissioner of Taxation's role in administering section 68B in relation to self-managed superannuation funds is unchanged.

ASIC's role and responsibilities

9.29 Currently in the SIS Act, ASIC's role is generally limited to matters of disclosure and record keeping. For example, ASIC has general administration of the covenants imposed on RSE licensees under section 52 of the SIS Act, but only to the extent that they relate to record keeping and disclosure obligations of RSE licensees.

9.30 Consistent with Financial Service Royal Commission recommendations 6.3 and 6.4, Schedule 9 expands ASIC's role in superannuation to include promoting consumer protection and market integrity. As a result of these amendments, ASIC is now generally responsible for consumer protection, market integrity, disclosure and record keeping. [Schedule 9, item 1, section 4 of the SIS Act]

9.31 'Consumer protection' regulation provides consumers and regulators with legal recourse concerning circumstances or actions that unreasonably disadvantage consumers. 'Market integrity' regulation promotes confidence in the efficiency and fairness of markets by ensuring that markets are fair, orderly and transparent. Market integrity and consumer protection regulation are inherently linked; both rely on disclosure and conduct rules to achieve regulatory outcomes.

9.32 ASIC's existing role in regulating certain disclosures and record keeping by RSE licensees is unchanged by Schedule 9. [Schedule 9, item 1, sections 6(1) and (2) of the SIS Act]

9.33 ASIC's expanded role in superannuation regulation is consistent with ASIC's broader role in the Australian financial system, which is articulated in the ASIC Act. Indeed, section 12A(2) of the ASIC Act provides that ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system.

The Commissioner of Taxation's role and responsibilities

9.34 Finally, the simplified outline provides that the Commissioner of Taxation is generally responsible for self-managed superannuation funds, data and payment standards, tax file numbers and the compassionate release of superannuation amounts. [Schedule 9, item 1, section 4 of the SIS Act]

General administration table

9.35 Currently, section 6 of the SIS Act divides responsibility for the general administration of SIS Act provisions among APRA, ASIC and the Commissioner of Taxation. The existing section 6 is confusing and opaque insofar as the provision's structure makes it difficult to identify which regulator is responsible for a particular provision.

9.36 Schedule 9 repeals the existing section 6 of the SIS Act and inserts a new section 6. [Schedule 9, item 1, section 6 of the SIS Act]

9.37 To modernise and simplify section 6, the general administration of a provision of the SIS Act is now determined under the general administration table in section 6(1). [Schedule 9, item 1, section 5(1) of the SIS Act]

9.38 The new tabular structure of section 6(1) improves the readability and accessibility of the information in the provision. Under that section, the general administration of a provision referred to in column one of the table is conferred on the regulator listed in column three. [Schedule 9, item 1, sections 5(1) and 6(1) of the SIS Act]

9.39 Additionally, general administration table is now defined in section 10(1) to mean the table in section 6 of the SIS Act. [Schedule 9, item 2, section 10(1) of the SIS Act]

Substantive changes to the general administration of provisions

9.40 The main changes to the general administration of provisions in the SIS Act relate to the co-regulation of provisions by APRA and ASIC. Other changes to section 6, including the general administration of provisions, improve the operation of the section and efficiency of general administration.

9.41 The following items in the general administration table reflect no substantive change from the allocation of general administration in the existing SIS Act: items 1, 3-14, 17, 21-22, 24-25, 27-31, 33-35, 37-38, 40-49, 51-53, and 55-61. [Schedule 9, item 1, section 6(1) of the SIS Act]

Co-regulation of provisions by APRA and ASIC

9.42 Recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission underpin a number of changes to the allocation of general administration, which enable co-regulation of enforceable consumer/member focused SIS Act provisions by APRA and ASIC. Co-regulated provisions are civil penalty provisions or provisions that are otherwise enforceable, and which have consumer protection and member outcomes as their touchstone.

9.43 The introduction of the co-regulation by APRA and ASIC of enforceable consumer/member focused provisions is a shift from the existing division of responsibilities under the SIS Act where regulators have discrete responsibilities and roles.

9.44 Consistent with Financial Services Royal Commission recommendation 6.4, provisions with a consumer protection focus that become civil penalty provisions in the future will also be co-regulated by APRA and ASIC.

9.45 The amendments ensure that the following SIS Act provisions, to the extent they concern consumer protection and member outcomes, are now co-regulated by APRA and ASIC:

•

section 29JCA, which concerns false representation about status as an RSE licensee (item 2 in the general administration table);

•

sections 52, 52A and 54B, which concern the governing rules covenants for registrable superannuation entities and the consequences for breaching these covenants (item 18 in the general administration table);

•

section 54A, which provides a power to prescribe other governing rules covenants in regulations (item 20 in the general administration table);

•

sections 62 and 68, which establish the sole purpose test and the prohibition against victimisation, including of trustees, respectively (item 23 in the general administration table);

•

section 108A, which concerns the duty on trustees to identify multiple superannuation accounts of members (item 36 in the general administration table);

•

section 126K, which provides that it is an offence for disqualified persons to be trustees, investment managers or custodians of superannuation entities (item 39 in the general administration table);

•

Part 21 - Civil and criminal consequences of contravening civil penalty provisions - to the extent it relates to, or is being applied for the purposes of, a provision administered by both APRA and ASIC (item 50 in the general administration table); and

•

sections 242K, 242L and 242M, which concern trustee obligations relating to eligible rollover funds and the consequences for breaching those obligations (item 54 in the general administration table).

[Schedule 9, item 1, section 6(1) of the SIS Act]

9.46 While co-regulation introduces overlap between APRA's member outcomes role and ASIC's consumer protection and market integrity role, in practice, APRA and ASIC have a natural focus on different aspects of conduct. ASIC's focus is generally on the relationship between superannuation trustees and individual consumers whereas APRA's focus is generally on the outcomes that trustees deliver for their membership as a whole, or for cohorts of members.

9.47 APRA and ASIC are working together to improve outcomes for superannuation members and beneficiaries, and to enhance their regulatory cooperation.

9.48 Co-regulation does not change any of the obligations on RSE licensees or how they are to comply with these obligations. For example, breaches of RSE licence conditions must still be reported to APRA in accordance with existing section 29JA of the SIS Act.

9.49 However, APRA and ASIC will now have a role in administering the obligations contained in the above listed enforceable consumer/member focused provisions. This could involve, for example, determining and enforcing compliance in relation to these provisions.

9.50 Co-regulation of enforceable consumer/member focused provisions is only between APRA and ASIC. The Commissioner of Taxation's role is unchanged, including in relation to self-managed superannuation funds.

9.51 These outcomes are consistent with Financial Services Royal Commission recommendations 3.8, 6.3, 6.4 and 6.5.

General improvements to section 6 and related provisions

Trustee elections and complying fund status

9.52 Schedule 9 updates the SIS Act to clarify the existing position that the Commissioner of Taxation, rather than APRA, is responsible for receiving written notices from trustees of their election to have the Act apply to them as a regulated superannuation fund. [Schedule 9, item 6, section 19(4) of the SIS Act]

9.53 Currently, section 19(4) of the SIS Act refers specifically to APRA receiving written notices from trustees. Despite this reference, section 19(4A) authorises regulations to prescribe that notices are to be given to different bodies or persons. Since 1999, regulation 1.04A of the Superannuation Industry (Supervision) Regulations 1994 has prescribed that the Commissioner of Taxation is to receive all such notices in all circumstances. The amendments update the SIS Act to reflect this long-standing position, rather than relying on regulation 1.04A (which will be separately repealed through amendments to the Superannuation Industry (Supervision) Regulations 1994).

9.54 As a result of this change, the regulation making power in section 19(4A) is no longer required and is therefore repealed. [Schedule 9, item 7, section 19(4A) of the SIS Act]

9.55 The amendments also make a number of changes to provisions affected by the existing re-allocation of responsibility from APRA to the Commissioner of Taxation.

9.56 In particular, there are a number of references to 'APRA' in sections 42 and 42A (about complying fund status) that are currently deemed to refer to 'the Commissioner of Taxation' instead. These provisions generally relate to decisions that are made by the entity that receives trustee elections under section 19(4) (for example, extension of time for providing written notices).

9.57 Under the current law, the Commissioner of Taxation is given general administration of these provisions instead of APRA through section 6(4)(c) of the SIS Act, and the various references to APRA in the provisions are deemed to instead be to the Commissioner through sections 42(3) and 42A(7).

9.58 Instead of relying on additional rules, the amendments update the various references to APRA in sections 42 and 42A so that they refer directly to the Commissioner of Taxation. [Schedule 9, items 9 to 11, 13 and 14, sections 42(1AA)(b)(ii) and (c)(ii), 42(1AC)(b) and (c), 42(1AC)(d)(ii), 42A(3)(c)(ii) and (d)(ii) and 42A(4) of the SIS Act]

9.59 These changes improve the readability of the provisions, but do not change their operation.

9.60 As a result of these amendments, the deeming rules to replace the references to APRA are no longer required and are therefore repealed. [Schedule 9, items 12 and 15, sections 42(3) and 42A(7) of the SIS Act]

General administration of Part 5

9.61 General administration of the provisions in sections 42 and 42A of the SIS Act that now refer to the Commissioner of Taxation is given directly to the Commissioner of Taxation through item 15 in the general administration table. Some administration responsibility remains with APRA. [Schedule 9, item 1, section 6(1) of the SIS Act (table item 15)]

9.62 This is achieved by assigning general administration to the Commissioner of Taxation of provisions in Part 5 of the SIS Act that require or permit the Commissioner of Taxation to do something. The provisions are assigned in addition to other provisions that the Commissioner of Taxation also has general administration of because they relate to self-managed superannuation funds.

9.63 This replicates the outcome currently provided by section 6(4)(c) of the SIS Act and means that this provision does not need to be separately re-enacted.

9.64 Item 16 of the general administration table maintains the existing responsibilities between APRA and the Commissioner of Taxation over sections 40 and 41 of the SIS Act (which relate to notices given by the Regulator about complying fund status). [Schedule 9, item 1, section 6(1) of the SIS Act (table item 16)]

9.65 Item 16 in the general administration table also maintains the outcome currently provided by sections 6(4)(a) and (b) of the SIS Act, which allocate general administration of sections 40 and 41 on the basis of an entity's status on the final day of year of income.

9.66 The amendments also modify the note to section 40 to more accurately reflect who "the Regulator" is and how past notices may be dealt with as a result of a superannuation fund changing its status (for example, by ceasing to be a self-managed superannuation fund). [Schedule 9, item 8, section 40(4) of the SIS Act]

Redundant Parts repealed

9.67 Schedule 9 repeals Parts 33 and 34, which relate to the MySuper transition and the Eligible Rollover Fund transitions respectively. [Schedule 9, item 26, Parts 33 and 34 of the SIS Act]

9.68 The MySuper start date was the later of 1 July 2017 and the end of the period set out in section 387(2)(b) (essentially 90 days after an authority or refusal to offer a MySuper product was given). The Eligible Rollover Fund transition was to occur 90 days after 1 January 2014. Given the transfer of all relevant amounts has occurred, and Parts 33 and 34 impose no current requirements on trustees, the Parts are redundant.

9.69 Schedule 9 also repeals sections 388 and 394, which are civil penalty provisions. [Schedule 9, item 16, sections 193(l)-(n) of the SIS Act]

9.70 In line with section 7 of the Acts Interpretation Act 1901, the repeal of these civil penalty provisions does not affect a penalty or punishment incurred in respect of an offence committed in breach of them.

Clarifying general administration of certain covenants

9.71 As discussed above, both APRA and ASIC now have general administration of the provisions concerning covenants and the consequences of breaching covenants. [Schedule 9, item 1, section 6(1) of the SIS Act (table item 18)]

9.72 Schedule 9 also gives the Commissioner of Taxation sole administration of the covenants concerning self-managed superannuation funds under sections 52B and 52C of the SIS Act. [Schedule 9, item 1, section 6(1) of the SIS Act (table item 19)]

9.73 An additional change has been made to the general administration of section 54A, which enables regulations to prescribe other covenants. Currently, APRA has general administration of section 54A. Schedule 9 allocates general administration of section 54A to the Commissioner of Taxation, to the extent it relates to self-managed superannuation funds, and APRA and ASIC to the remaining extent. [Schedule 9, item 1, section 6(1) of the SIS Act (table item 20)]

9.74 This change ensures that each regulator has general administration of regulations made under section 54A, to the extent those regulations concern the provisions they have general administration of.

Use of the term 'Regulator'

9.75 Schedule 9 amends the definition of Regulator in section 10(1) of the SIS Act so that it operates when it is being applied for the purposes of a provision that is administered by both APRA and ASIC. [Schedule 9, item 3, section 10(1) of the SIS Act]

9.76 For co-regulated provisions, the context may require 'Regulator' to mean the same body as referred to elsewhere. For example, in section 344(1), the Regulator who may be requested to reconsider a decision is required by the context to be a reference to the body who made the reviewable decision.

9.77 Existing section 298A(1) provides that the Regulator may authorise a member of staff of 'the other Regulator' for a specified purpose. Schedule 9 removes the reference to 'the other Regulator' and replaces it with a cross-reference to the definition of 'Regulator' in section 10(1). [Schedule 9, item 22, section 298(1) of the SIS Act]

9.78 A similar change has been made to section 265(1). [Schedule 9, item 21, section 265(1) of the SIS Act]

9.79 The intent and substance of sections 265(1) and 298A(1) have not changed. Any of APRA, ASIC or the Commissioner of Taxation could appoint or authorise an APRA, ASIC or taxation officer, as appropriate, to conduct investigations or commence relevant proceedings, as required.

9.80 A saving rule ensures that any existing appointments or authorisations under sections 265(1) and 298A(1) of the SIS Act continue to apply despite the fact that the rules under which existing appointments and authorisations were made have been amended. [Schedule 9, item 27]

9.81 Schedule 9 also amends the following provisions to ensure the definitions of Regulator and a member of staff (of the Regulator) work as intended:

•

section 265(1); [Schedule 9, item 20, section 265(1) of the SIS Act]

•

sections 315(1)(a)-(f); and [Schedule 9, item 23, sections 315(1)(a)-(f) of the SIS Act]

•

section 315(3). [Schedule 9, item 24, section 315(3) of the SIS Act]

Powers and duties of the regulators

9.82 Schedule 9 moves existing provisions related to the powers and duties conferred on the regulators into new section 5. It also restructures the provisions to improve their flow and readability. [Schedule 9, item 1, sections 5(2) to (6) and (9) of the SIS Act]

9.83 Schedule 9 adds that the provisions listed in new section 5(3) also confer powers and duties on APRA and ASIC for the purpose of administering the provisions that they co-regulate. [Schedule 9, item 1, sections 5(2)(a) and (b) of the SIS Act]

9.84 There are two changes to the provisions that confer powers and duties on the regulators. First, Schedule 9 adds Part 29A (protections for individuals against self-incrimination) to the list of provisions that confer powers and duties on the three regulators. [Schedule 9, item 1, section 5(3) of the SIS Act]

9.85 Relatedly, Schedule 9 amends section 336F in Part 29A of the SIS Act so that it now refers to 'the Regulator' rather than just 'APRA', as that section should also apply in cases where ASIC and the Commissioner of Taxation are the Regulator. [Schedule 9, item 25, section 336F(1) of the SIS Act]

9.86 Second, Schedule 9 amends the existing conferral of exemptions and modifications powers and duties by sections 328 and 332. These provisions now confer exemptions and modifications powers and duties on ASIC in relation to all of the modifiable provisions that it solely administers. [Schedule 9, item 1, section 5(8)(b) of the SIS Act]

9.87 ASIC solely administers the following modifiable SIS Act provisions:

•

sections 29P to 29QC (item 4 in the general administration table); and

•

Part 19 (item 48 in the general administration table).

[Schedule 9, item 1, section 6(1) of the SIS Act]

9.88 The conferral of powers and duties on ASIC by sections 328 and 332 means that ASIC can now exempt RSE licensees from obligations under the abovementioned provisions, or modify the obligations imposed on RSE licensees under those provisions.

9.89 Additionally, sections 328 and 332 now also confer powers and duties on APRA for the purpose of administering the provisions it co-regulates with ASIC. [Schedule 9, item 1, section 5(8)(a)) of the SIS Act]

9.90 This means that only APRA may exercise the exemption and modification powers conferred on APRA by sections 328 and 332 for co-regulated provisions.

9.91 Finally, a new provision makes clear that, for the purposes of the definition of taxation law in section 995-1(1) of the Income Tax Assessment Act 1997, the Commissioner of Taxation is taken to have the general administration of a provision of the SIS Act or regulations that confers power and duties on the Commissioner of Taxation. [Schedule 9, item 1, section 5(7) of the SIS Act]

9.92 An effect of a provision being administered by the Commissioner of Taxation is that people who acquire information under the provision (such as a taxation officer) are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953.

Other minor changes

9.93 Schedule 9 also makes a number of consequential amendments to the following provisions of the SIS Act:

•

section 10(1) - note to the definition of self-managed superannuation fund; [Schedule 9, item 4, section 10(1) of the SIS Act]

•

section 10(4); [Schedule 9, item 5, section 10(4) of the SIS Act]

•

section 253 - note 2; and [Schedule 9, item 17, section 253 of the SIS Act]

•

section 253 - note 3. [Schedule 9, items 18 and 19, section 253 of the SIS Act]

9.94 Currently, in section 6(3) of the SIS Act, the Minister may give APRA or ASIC directions about the performance or exercise of its functions or powers under the SIS Act. Schedule 9 amends this direction rule so that the Minister must use a legislative instrument to direct APRA or ASIC. [Schedule 9, item 1, section 5(9) of the SIS Act]

9.95 This change updates the existing requirement that the Minister publish such directions in the Gazette, and is consistent with other amendments in respect of directions to APRA under the APRA Act introduced through miscellaneous amendments in items 155 and 156 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020. Legislative instruments that are directions to agencies (as well as instruments relating to superannuation) are exempt from disallowance and do not sunset under the Legislation (Exemption and Other Matters) Regulation 2015.

Extending the coverage of the Australian financial services licensing regime for superannuation trustee services

New financial service - providing a superannuation trustee service

9.96 Schedule 9 creates a new type of financial service: providing a superannuation trustee service. The purpose of creating the new financial service is to ensure that the conduct of RSE licensees in operating a registrable superannuation entity is subject to the Australian financial services licensing regime's obligations and protections.

9.97 The amendments require each RSE licensee to hold an Australian financial services licence with an authorisation to provide a superannuation trustee service. This encompasses all trustees of a registrable superannuation entity, with the exception of trustees of pooled superannuation trusts in certain circumstances.

9.98 The amendments introduce this requirement by specifying that a person provides a financial service within the meaning of section 766A of the Corporations Act, if they provide a superannuation trustee service. A person provides a superannuation trustee service if they operate a registrable superannuation entity as trustee of the entity. [Schedule 9, items 41 and 43, sections 766A(1)(ec) and 766H(1) of the Corporations Act]

9.99 A notional person who is a group of individual trustees holding an RSE licence must also obtain an Australian financial services licence authorising them to provide a superannuation trustee service. The notional person would hold one Australian financial services licence as if they constituted a single legal entity. [Schedule 9, item 43, note 1 to section 766H(1) of the Corporations Act]

9.100 In turn, section 911A of the Corporations Act requires a person who carries on a financial services business to hold an Australian financial services licence covering the provision of the financial services they provide.

9.101 Each RSE licensee must also continue to hold an Australian financial services licence authorisation to deal in a financial product if they are to issue, vary or dispose of an interest in a superannuation fund. Schedule 9 does not alter that requirement. In practice, this is expected to result in every RSE licensee holding an Australian financial services licence authorising them both to deal in a superannuation interest and to provide a superannuation trustee service (again with the exception of trustees of pooled superannuation trusts in certain circumstances).

9.102 Similarly, the introduction of the new financial service does not displace the existing requirement that RSE licensees be separately authorised to provide financial product advice if they are to provide that service.

9.103 Financial services can overlap. Schedule 9 clarifies that conduct is capable of constituting the provision of more than one financial service. For example, conduct may constitute providing a superannuation trustee service and dealing in a superannuation interest at the same time, as indicated below in the explanation of activities covered by the new service. [Schedule 9, item 42, section 766A(5) of the Corporations Act]

Which activities constitute the provision of a superannuation trustee service?

9.104 The new financial service is intended to cover all of the activities involved in operating a registrable superannuation entity, at all stages of the trustee's interactions and transactions with members and others.

9.105 Broadly, this is intended to ensure the Australian financial services licensing and SIS Act regulatory regimes have comparable coverage of RSE licensee activities, and that all relevant activities of licensees need to be conducted in accordance with the conduct obligations in the Australian financial services licensing regime.

9.106 For example, licensees must do all things necessary to ensure they provide a superannuation trustee service efficiently, honestly and fairly.

9.107 Table 9.1 sets out examples of those activities. Neither the activities nor the descriptions in Table 9.1 are intended to be exhaustive.

Table 9.1 examples of operating a registrable superannuation entity

9.108 Some of these activities are likely to already fall, at least in part, into the category of 'dealing' in a superannuation interest.

9.109 As noted above, a trustee deals in a superannuation interest when it issues, varies or disposes of an interest in a superannuation fund. This means a trustee is dealing whenever it accepts a new member into the fund and issues that member an interest in the fund, changes a member's interest in a fund, or disposes of a member's interest in the fund.

9.110 The extension to the Australian financial services licensing regime made by Schedule 9 is intended to ensure that the regime's conduct obligations clearly apply to those superannuation trustee activities that may fall outside the parameters of dealing in a superannuation interest. In turn, this is intended to ensure ASIC is an effective conduct regulator in superannuation and can take action against misconduct by superannuation trustees, whatever the type of activity in question.

9.111 Note that the Corporations Act generally uses the terminology of 'superannuation product', which is defined as a superannuation interest within the meaning of the SIS Act - see sections 761A and 764A(1)(g) of the Corporations Act. This means a dealing in a superannuation interest is a dealing in a superannuation product, for the purposes of the Corporations Act.

Insurance claims handling

9.112 Other amendments introduce insurance claims handling as a new financial service. Those amendments implement recommendation 4.8 of the Financial Services Royal Commission.

9.113 As a result, insurers, parties acting on behalf of insurers, and 'claimant intermediaries' may be required to hold an Australian financial services licence authorising them to provide claims handling services.

9.114 As mentioned above, handling insurance claims on behalf of beneficiaries is a function of a superannuation trustee and is part of providing the financial service of providing a superannuation trustee service. In recognition of this fact, RSE licensees will not require an Australian financial services licence authorisation for claims handling.

9.115 However, while RSE licensees do not need to obtain a specific Australian financial services licence authorisation to handle insurance claims on behalf of their beneficiaries, all of the Australian financial services licence obligations will apply to their claims handling and settling conduct as part of their provision of a superannuation trustee service. This could include, for example:

•

an RSE licensee's activities in pursuing an insurance claim for the benefit of a beneficiary; and

•

making a recommendation or stating an opinion that could influence a decision whether to make an insurance claim.

9.116 Claimant intermediaries are required to obtain an Australian financial services licence authorisation to provide claims handling services if they provide those services to people insured under general insurance products. This means that RSE licensees and their representatives, in handling life insurance claims, are excluded from that requirement.

9.117 The amendments implementing recommendation 4.8 also exclude a recommendation or statement of opinion, or a report of either of those things, from constituting financial product advice if it is a necessary part of claims handling.

9.118 As a result, where RSE licensees make that type of recommendation or statement, it will be regulated as part of their provision of a superannuation trustee service and they will not need a separate Australian financial services licence authorisation to provide financial product advice.

9.119 Conversely, if the recommendation or statement is not a necessary part of claims handling, the RSE licensee will need a separate authorisation to provide financial product advice from 1 January 2022.

What obligations are triggered by the superannuation trustee service?

9.120 Licensees must comply with the general Australian financial services licence obligations in relation to the provision of a superannuation trustee service. This means that licensees must, for example:

•

do all things necessary to ensure that they provide the superannuation trustee service efficiently, honestly and fairly;

•

have in place adequate arrangements for the management of conflicts of interest arising in relation to their provision of the superannuation trustee service; and

•

comply with the financial services laws and take reasonable steps to ensure their representatives comply with the financial services laws.

9.121 The requirement to comply with the financial services laws centres on the definition of that term in section 761A of the Corporations Act. A number of provisions in the SIS Act can be expected to fall within the meaning of 'financial services laws' because they cover conduct relating to, in this case, the provision of a superannuation trustee service. For example, a contravention of the general fee rules in Part 11A of the SIS Act may constitute a failure to comply with financial services laws, in turn allowing ASIC to treat it as a failure to comply with an Australian financial services licence obligation.

9.122 The scope of 'financial services laws' is affected by exemptions or modifications made by a regulator or through regulations. For example, if a licensee is exempt from complying with a particular legal obligation because of an instrument made by ASIC, the general Australian financial services licence obligation to comply with the financial services laws is not intended to override that exemption.

9.123 Apart from the general Australian financial services licence obligations in section 912A of the Corporations Act, Chapter 7 of that Act imposes other obligations on licensees. The following are examples of where the Australian financial services licensing regime extension made by Schedule 9 affects RSE licensees' obligations:

•

The obligation in section 912D to report breaches of Australian financial services licence obligations and other financial services laws to ASIC applies directly to a broader range of trustee activities.

•

Division 6 of Part 7.8, relating to financial records, statements and audit - the scope of what constitutes a licensee's financial services business for the purposes of these reporting requirements is expanded by the new superannuation trustee service.

•

The prohibition on unconscionable conduct in relation to the provision of a financial service under section 991A extends to the new superannuation trustee service.

•

Part 7.10, relating to further conduct prohibitions - the prohibitions on dishonest conduct (which attracts a criminal sanction) and misleading or deceptive conduct now extend to the new superannuation trustee service.

To whom is a superannuation trustee service provided?

Retail clients

9.124 A superannuation trustee service will generally be provided to the beneficiaries of a superannuation fund, which in turn constitutes the provision of a financial service to a retail client. [Schedule 9, items 38 and 43, section 761G(6)(b) and note 2 to section 766H(1) of the Corporations Act]

9.125 This engages certain additional protections and obligations under Chapter 7 of the Corporations Act that attach specifically to circumstances where services are provided to a retail client. For example, licensees must have arrangements for compensating retail clients for loss or damage suffered because the licensee breached its licensing obligations.

9.126 However, the obligation to provide a Financial Services Guide to a retail client will not be engaged merely because a licensee provides a superannuation trustee service (see paragraphs 9.189 to 9.191 below).

Wholesale clients

9.127 The only instances where a superannuation trustee service is provided to a wholesale client are when it is provided to:

•

a trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme that has net assets of at least $10 million; or

•

a retirement savings account provider.

[Schedule 9, item 38, section 761G(6)(c) of the Corporations Act]

Who must obtain an authorisation to provide a superannuation trustee service?

RSE licensees and third party service providers

9.128 An RSE licensee is the only entity who requires an authorisation to provide a superannuation trustee service. Administrators, custodians and others who may undertake activities on behalf of a trustee who operates a registrable superannuation entity do not themselves operate the registrable superannuation entity.

9.129 However, these entities may be regulated as authorised representatives of another Australian financial services licensee or as holders of their own Australian financial services licence for financial services they provide - for example, providing a custodial or depository service.

9.130 An RSE licensee cannot appoint an authorised representative to provide a superannuation trustee service. The service can only be provided by the licensee.

9.131 Where an RSE licensee outsources activities to third party service providers, the licensee remains responsible for the provision of the superannuation trustee service and complying with its Australian financial service licence obligations in relation to those outsourced activities. For example, misconduct by the service provider may result in the licensee failing to do all things necessary to ensure the superannuation trustee service is provided efficiently, honestly and fairly, or failing to take reasonable steps to ensure that its representatives comply with the financial services law.

9.132 The RSE licensee remains responsible for the provision of the superannuation trustee service whether or not the third party service provider holds its own Australian financial services licence or is the authorised representative of another licensee.

9.133 Beyond the Australian financial services licensing regime, misconduct by a third party service provider may result, for example, in the trustee failing to meet its obligation to exercise the same degree of care, skill and diligence as a prudent superannuation trustee would exercise. The decision itself to outsource, and to whom to outsource, must be in the best interests of the members. APRA's Superannuation Prudential Standard 231: Outsourcing also applies to trustees' outsourcing arrangements.

Professional trustees

9.134 A professional trustee may be engaged by another entity to operate a superannuation fund as trustee. The other entity may be an entity who has designed a new superannuation product (and may be appointed to promote the product) or another trustee who is no longer willing or able to continue to act as trustee of the superannuation fund and wishes to transfer the trusteeship to a professional trustee.

9.135 In these circumstances, the professional trustee is the entity who is operating the fund - it must hold an Australian financial services licence authorising it to provide a superannuation trustee service. The professional trustee will be the only entity requiring this authorisation and remains responsible for the provision of the superannuation trustee service, even if the promoter or outgoing trustee continues to perform some functions or activities that comprise operating the fund.

Example 9.1

NovelSuper develops a new superannuation product and wants to bring it to market without the ongoing responsibilities of being the trustee of the fund. NovelSuper engages TrusteePro to take on the trustee role in full. TrusteePro then outsources various functions to an administrator, a custodian and others.

Due to NovelSuper's experience in marketing and promoting of superannuation products, TrusteePro contracts the promotion function to NovelSuper.

TrusteePro must hold an Australian financial services licence authorising it to provide a superannuation trustee service, regardless of how many functions it outsources. TrusteePro remains accountable for complying with its licence obligations in connection with NovelSuper's ongoing promotion activities and the other functions it has outsourced.

Trustees of non-public offer funds

9.136 One category of RSE licensees - non-public offer funds (that is, trustees of superannuation funds not open to the general public) - have been exempt from the requirement to hold an Australian financial services licence to deal in a superannuation interest. This exemption is removed through related amendments to be introduced through regulations.

9.137 As a result, every trustee of a non-public offer fund will be required to hold an Australian financial services licence with authorisations to deal in superannuation interests and to provide a superannuation trustee service.

Existing exemptions - pooled superannuation trusts

9.138 The Corporations Act sets out a number of exemptions from the requirement to hold an Australian financial services licence to provide particular financial services. None of these exemptions applies to an RSE licensee in respect of a superannuation trustee service, unless the exemption expressly covers that service. [Schedule 9, item 45, section 911A(4A) of the Corporations Act]

9.139 This makes it clear that an exemption that applies to a particular financial service does not also apply to the new superannuation trustee service, even if both services share the same underlying conduct.

9.140 However, Schedule 9 preserves a set of exemptions relating to pooled superannuation trusts by amending those exemptions to expressly cover a superannuation trustee service. As a result of these amendments, an Australian financial services licence is not required for a superannuation trustee service provided only to wholesale clients - namely, to:

•

a trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme that has net assets of at least $10 million; or

•

a retirement savings account provider.

[Schedule 9, items 38 and 44, sections 761G(6)(c) and 911A(2)(ga) of the Corporations Act]

9.141 Amendments to be introduced separately through regulations will also extend existing exemptions for pooled superannuation trusts in the Corporations Regulations 2001 that currently apply in relation to dealing in a superannuation interest.

9.142 The combined effect of these expanded exemptions is that, in certain circumstances, a trustee of a pooled superannuation trust is exempt from the requirement to hold an Australian financial services licence to provide a superannuation trustee service. This is the only instance where an RSE licensee could continue to operate a registrable superannuation entity beyond 1 July 2021 without holding an Australian financial services licence.

Exempt public sector superannuation schemes

9.143 The fact that operating an exempt public sector superannuation scheme does not constitute the provision of a superannuation trustee service is clarified. This is consistent with the fact that such schemes are outside the scope of the RSE licensing regime. [Schedule 9, item 43, section 766H(2)(a) of the Corporations Act]

Regulation making power for exemptions

9.144 A regulation making power allows the Government to prescribe certain conduct so that it is exempt from constituting the provision of a superannuation trustee service. Regulations made under this power would be subject to disallowance. [Schedule 9, item 43, section 766H(2)(b) of the Corporations Act]

Licence cancellation, variation of licence conditions and banning orders

9.145 The Corporations Act and SIS Act contain requirements for APRA and ASIC to consult or inform each other about certain actions affecting entities they both regulate.

9.146 For example:

•

For entities regulated by APRA, other than authorised deposit-taking institutions, ASIC must consult APRA before imposing a condition on the entity's Australian financial services licence that would prevent it carrying on its usual activities (being activities in relation to which APRA has regulatory or supervisory responsibilities). This includes RSE licensees who are Australian financial services licensees.

•

For an RSE licensee who is an Australian financial services licensee, APRA must consult ASIC before varying a condition where that action might reasonably be expected to affect the licensee's ability to provide one or more of the financial services that it provides.

9.147 Additional statutory requirements are introduced to reflect the changes Schedule 9 makes to the framework for superannuation regulation.

9.148 RSE licensees are prudentially regulated entities that provide a compulsory product to members. These additional requirements recognise the importance of ASIC's coordination with APRA when taking regulatory actions that would prevent the trustee from operating a superannuation fund.

Licence suspension or cancellation

9.149 ASIC must obtain APRA's written agreement before suspending or cancelling an Australian financial services licence that authorises a licensee to provide a superannuation trustee service. [Schedule 9, item 50, section 915I(1)(aa)(i) of the Corporations Act]

Variation etc. of licence conditions

9.150 ASIC must also obtain APRA's written agreement before imposing, varying or revoking a condition on an RSE licensee's Australian financial services licence if that action would, in ASIC's opinion, prevent the licensee from providing a superannuation trustee service. [Schedule 9, item 46, section 914A(4)(aa)(i) of the Corporations Act]

9.151 For example, this means ASIC must obtain APRA's agreement before varying a condition on an RSE licensee's Australian financial services licence to remove its authorisation to provide a superannuation trustee service.

9.152 In any other case where ASIC imposes, varies or revokes a condition on an RSE licensee's Australian financial services licence, it must comply with the existing requirements to:

•

consult APRA if the condition would prevent the licensee carrying on its usual activities (being activities in relation to which APRA has regulatory or supervisory responsibilities); or

•

otherwise, within one week, inform APRA of the action that has been taken.

[Schedule 9, items 47 and 48, sections 914A(4)(a) and (b) of the Corporations Act]

Banning orders

9.153 ASIC must obtain APRA's written agreement before making a banning order against an RSE licensee if that action would, in ASIC's opinion, prevent the licensee from providing a superannuation trustee service. [Schedule 9, item 54, section 920A(3A)(a)(i) of the Corporations Act]

9.154 In any other case where ASIC makes a banning order against an RSE licensee authorised to provide a superannuation trustee service, ASIC must, within one week, inform APRA of the action that has been taken. This could be the case where, for example, the order would ban the licensee from providing financial product advice, but would not otherwise affect its operation of the registrable superannuation entity. [Schedule 9, item 54, section 920A(3A)(b) of the Corporations Act]

9.155 These requirements do not apply where the banning order is against a director or other officer of an RSE licensee, rather than the licensee itself. Where a banning order is made against a director or officer of an RSE licensee, the RSE licensee is still able to provide the superannuation trustee service.

Compliance with the requirements to obtain APRA's agreement

9.156 A failure to comply with any of these requirements does not invalidate the action taken by ASIC. [Schedule 9, items 49, 53 and 54, sections 914A(5A), 915I(3) and 920A(3B) of the Corporations Act]

9.157 This is consistent with the existing approach for the requirement for ASIC to consult with APRA on licensing actions that affect the ability of an APRA-regulated entity to carry on its usual activities.

9.158 This approach reflects that the benefits of avoiding any potential cost or uncertainty if the affairs of third parties were subsequently affected by any non-compliance with these administrative requirements outweigh the potential benefits of assuring compliance through the prospect of invalidity.

Exceptions to the requirements to obtain APRA's agreement

9.159 None of the requirements to obtain APRA's agreement apply where the RSE licence that is the subject of ASIC's proposed regulatory action is not in effect. [Schedule 9, items 46, 50 and 54, sections 914A(4)(aa)(iii), 915I(1)(aa)(iii) and 920A(3A)(a)(ii) of the Corporations Act]

9.160 This may occur where APRA has already removed the entity from acting as the trustee of a superannuation fund and cancelled its RSE licence. In those circumstances, APRA would not have any reason to object to ASIC's proposed action.

9.161 However, the requirements do still apply where APRA has cancelled the RSE licence but allowed it to be treated as if it were in effect, under APRA's power in section 29GB of the SIS Act. [Schedule 9, items 46, 50 and 54, sections 914A(4)(aa)(iii), 915I(1)(aa)(iii) and 920A(3A)(a)(ii) of the Corporations Act]

9.162 Similarly, ASIC does not need to obtain APRA's agreement before suspending or cancelling an RSE licensee's Australian financial services licence, or imposing, varying or revoking a condition, if the licensee itself applied for ASIC to take the proposed action. [Schedule 9, items 46 and 50, sections 914A(4)(aa)(ii) and 915I(1)(aa)(ii) of the Corporations Act]

9.163 Existing requirements to consult or inform APRA may still apply in the above circumstances. [Schedule 9, items 47, 48, 51 and 52, sections 914A(4)(a) and (b) and 915I(1)(a) and (b) of the Corporations Act]

Extending the SIS Act indemnification prohibitions

9.164 Sections 56 and 57 of the SIS Act currently operate to prevent a superannuation trustee or a director of a superannuation trustee from using trust assets to pay a penalty that they incurred for liabilities arising from breach of trust in certain circumstances or the contravention of certain provisions and types of provisions under the SIS Act.

9.165 In view of the extension of the Australian financial services licensing regime to cover the provision of a superannuation trustee service, Schedule 9 also extends the existing indemnification prohibitions. Specifically, sections 56 and 57 of the SIS Act now prevent trustees and directors from using trust assets to pay a criminal, civil or administrative penalty incurred in relation to a contravention of a Commonwealth law. [Schedule 9, items 63 and 64, sections 56(2) and 57(2) of the SIS Act]

9.166 This means that a superannuation trustee or a director of a superannuation trustee cannot use trust assets to pay a penalty that they incurred for the contravention of a provision of the Corporations Act or ASIC Act.

9.167 An application provision clarifies that these amendments apply in relation to liabilities imposed on or after this Schedule's commencement day. [Schedule 9, item 66, sections 56 and 57 of the SIS Act]

9.168 Note that a contravention of a state or territory law, depending on the circumstances, may amount to a breach of trust within the meaning of sections 56 and 57 of the SIS Act. Such a law would prevent a trustee or director using trust assets to pay a penalty for such a contravention if they failed to act honestly, or intentionally or recklessly failed to exercise the requisite care and diligence, as set out in those sections.

Court to consider impact of penalties on beneficiaries

9.169 When considering the imposition of a fine for a Corporations Act offence committed by a trustee of a registrable superannuation entity, or a pecuniary penalty for a contravention of a civil penalty provision of that Act, the court must take into account the impact the fine or penalty would have on the beneficiaries of the registrable superannuation entity. [Schedule 9, items 57 to 59, sections 1311A and 1317G(6)(e) of the Corporations Act]

9.170 This is in addition to the existing factors identified in section 1317G(6) of the Corporations Act that the court must consider in determining a pecuniary penalty, including the nature and extent of the contravention and the nature and extent of any loss or damage suffered.

9.171 The nature and structure of superannuation funds means that there is a risk that penalties incurred by a superannuation trustee could impact beneficiaries. The requirement to consider the impact on beneficiaries mitigates this risk.

9.172 While this consideration would already be taken into account by the courts in determining the appropriateness of a particular penalty, the specific inclusion of this factor ensures that the courts explicitly turn their minds to it.

9.173 The impact of a fine or penalty on the directors of a trustee is not required to be taken into account.

Alignment of breach reporting timeframes

9.174 Schedule 9 extends the timeframe within which an RSE licensee must report breaches of its RSE licence conditions from 10 business days to 30 calendar days. [Schedule 9, item 62, section 29JA(1) of the SIS Act]

9.175 This change aligns the breach reporting timeframe with the new 30 day breach reporting deadline for Australian financial services licensees, introduced by amendments that implement recommendation 7.2 of the Financial Services Royal Commission. This alignment helps to reduce the reporting burden on dual regulated superannuation trustees.

9.176 An application provision clarifies that this change applies in relation to breaches of which the RSE licensee becomes aware on or after 1 October 2021. [Schedule 9, item 65, section 29JA of the SIS Act]

9.177 This application date aligns with the application date of the changes to the Corporations Act breach reporting timeframes made through Financial Services Royal Commission recommendation 2.8.

ASIC Act consumer protections

9.178 The amendments require every RSE licensee to hold an Australian financial services licence with an authorisation to provide a superannuation trustee service, by listing that service at section 766A of the Corporations Act (which defines when a person provides a financial service).

9.179 Schedule 9 also specifies that a person provides a financial service for the purpose of the ASIC Act consumer protection provisions if they provide a superannuation trustee service. [Schedule 9, item 29, section 12BAB(1)(ea) of the ASIC Act]

9.180 Superannuation trustee service has the same meaning in the ASIC Act as in Chapter 7 of the Corporations Act. That is, a person provides a superannuation trustee service if they operate a registrable superannuation entity as trustee of the entity. [Schedule 9, item 28, the definition of 'superannuation trustee service' in section 12BA(1) of the ASIC Act]

9.181 This ensures the ASIC Act consumer protection provisions in Division 2 of Part 2 of that Act apply to RSE licensees' conduct in operating a superannuation fund. These protections include:

•

the prohibition on conduct in relation to financial services that is or is likely to be misleading or deceptive;

•

the prohibition on false or misleading representations in connection with the supply or possible supply of financial services;

•

rules about offering rebates, gifts, prizes or other free items in trade or commerce, in the supply or possible supply or promotion of financial services;

•

the prohibition on conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services; and

•

the prohibition on accepting payment without intending or being able to supply the financial services paid for.

9.182 ASIC has clear powers to take action to protect consumers from these practices, whatever the type of activity in question.

9.183 In a superannuation context, these provisions are intended to apply to protect past and present members and consumers who may become new members. For example, the accuracy of representations made in advertisements is relevant to the interests of consumers who may become members.

9.184 Certain provisions in the ASIC Act apply in respect of the 'supply' of a financial service to a person, rather than to the provision of that service. These provisions apply in respect of the new superannuation trustee financial service to the extent that the service is supplied to a person (which will in turn depend on conduct that constitutes the provision of the service in a particular case and the context in which it is provided).

Court to consider impact of penalties on beneficiaries

9.185 Schedule 9 also introduces requirements equivalent to those explained above for contraventions of the ASIC Act consumer protections. When considering the imposition of a fine for an offence committed by a trustee of a registrable superannuation entity, or a pecuniary penalty for a contravention of a civil penalty provision, the court must take into account the impact the fine or penalty would have on the beneficiaries of the registrable superannuation entity. [Schedule 9, items 30 to 32, sections 93C and 12GBB(5)(e) of the ASIC Act]

Consequential amendments

Retail and wholesale clients

9.186 A consequential amendment is made to the rules governing who is a retail client in relation to financial products and services that do not relate to superannuation, general insurance or traditional trustee company services. This amendment excludes the new superannuation trustee service from these rules to maintain consistent treatment with superannuation products. [Schedule 9, item 39, section 761G(7) of the Corporations Act]

9.187 Similarly, a consequential amendment is made to exclude the provision of a superannuation trustee service from the mechanism permitting sophisticated investors to be treated as wholesale clients if they satisfy a licensee of certain matters. This is consistent with the existing exclusion of superannuation products from that mechanism. [Schedule 9, item 40, section 761GA of the Corporations Act]

9.188 Schedule 9 amends the heading for section 761G(6) of the Corporations Act to better reflect its coverage of financial services as well as financial products. [Schedule 9, item 37, section 761G(6) of the Corporations Act]

Financial Services Guides

9.189 RSE licensees are not required to provide a Financial Services Guide merely because the RSE provides a superannuation trustee service. This effectively preserves the current requirements about Financial Services Guides as they apply to superannuation trustees. [Schedule 9, item 55, section 941C(3B) of the Corporations Act]

9.190 However, an obligation to give a Financial Services Guide may arise because of another financial service provided by the trustee as part of the operation of the entity, such as the provision of financial product advice. The superannuation trustee service would then form part of the authorised services referred to in section 942B(2)(c) of the Corporations Act.

9.191 That is, the relief provided by this consequential amendment does not extend to other financial services that may require a trustee to provide a Financial Services Guide. Trustees may separately be relieved of the requirement to provide a Financial Services Guide in relation to such other services by existing exemptions (for example, if they provide the relevant information through a Product Disclosure Statement).

RSE licence conditions and APRA prudential standards

9.192 APRA has an existing power to impose additional conditions on individual RSE licences, and such conditions may have effect despite anything in APRA's prudential standards.

9.193 Amendments to the SIS Act clarify that in the event of inconsistency between an RSE licence condition imposed by APRA and a provision of the prudential standards, the licence condition prevails in determining for the purposes of any law of the Commonwealth whether the RSE licensee has complied with its obligations under the prudential standards. [Schedule 9, item 61, section 29EA(2B) of the SIS Act]

9.194 This is intended to resolve any uncertainty that may arise in the context of RSE licensees' obligations to comply with the RSE licensee law, within the meaning of the SIS Act, and with the financial services law, within the meaning of the Corporations Act.

Definitions

9.195 The term superannuation trustee service is inserted into the definitions section of Chapter 7 of the Corporations Act and the definitions section of Division 2 of Part 2 of the ASIC Act. The term registrable superannuation entity is also inserted into the definitions section of Division 2 of Part 2 of the ASIC Act. [Schedule 9, items 28 and 35, section 12BA(1) of the ASIC Act and section 761A of the Corporations Act]

9.196 The definition of registrable superannuation entity in section 761A of the Corporations Act is relocated to section 9 so that it applies across that Act. An identical definition in section 960 is repealed. [Schedule 9, items 33, 34 and 56, sections 9, 761A and 960 of the Corporations Act]

9.197 The definition of RSE licensee in section 960 of the Corporations Act is relocated to section 9 so that it applies across that Act. The term RSE licence is inserted into the definitions section of Chapter 7 and its definition of trustee is amended. [Schedule 9, items 33, 35, 36 and 56, sections 9, 761A and 960 of the Corporations Act]

Application and transitional provisions

SIS Act application and transitional provisions

Breach reporting timeframes

9.198 The amendments to align the SIS Act timeframe for breach reporting with the Corporations Act timeframe for breach reporting apply in relation to breaches of which an RSE licensee becomes aware on or after 1 October 2021. [Schedule 9, item 65, section 29JA of the SIS Act]

9.199 This application date aligns with the application date of the changes to the Corporations Act breach reporting timeframes made through recommendation 7.2 of the Financial Services Royal Commission (see Chapter 11).

Indemnification prohibitions

9.200 The amendments of the SIS Act indemnification prohibition provisions apply in relation to liabilities imposed on or after this Schedule's commencement day. [Schedule 9, item 66, sections 56 and 57 of the SIS Act]

9.201 This application provision clarifies the extent to which a provision in the governing rules of a superannuation entity becomes void when Schedule 9 commences. A provision will become void to the extent that it purports to provide indemnification for liabilities imposed on or after the commencement of the amendments - that is, where the court imposes the penalty (or the regulator issues the infringement notice, imposes the administrative penalty or makes the education direction) on or after the commencement day.

Australian financial services licensing regime extension - application and transitional provisions

9.202 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. Application and transitional provisions concerning the extension of the Australian financial services licensing regime's coverage for superannuation trustee services have also been included. [Clause 2]

Relief from ordinary Australian financial services licence application requirements

9.203 An important objective of these legislative amendments is to ensure that ASIC has full regulatory coverage over the activities of RSE licensees and can take action against misconduct. The findings of the Financial Services Royal Commission show the importance of achieving this outcome expeditiously.

9.204 Consistent with this objective, each existing RSE licensee who already holds an Australian financial services licence authorising it to deal in a superannuation interest does not need to apply for the new authorisation.

9.205 However, from the commencement of Schedule 9, those licensees must comply in full with all Australian financial services licence obligations in respect of all of their activities in providing a superannuation trustee service.

9.206 After the Schedule's commencement, new applicants for Australian financial services licences authorising them to provide a superannuation trustee service must comply with all of the ordinary Australian financial services licence application requirements in respect of each financial service they propose to provide.

Grant of authorisation to provide a superannuation trustee service

9.207 The ordinary mechanism to grant an Australian financial services licence authorisation is for ASIC to make the person's licence subject to a condition authorising the person to provide the particular financial service or services. In the event of an existing Australian financial services licensee successfully applying for an additional authorisation, ASIC varies that condition on the licence and inserts a reference to the additional authorisation.

9.208 An RSE licensee who is covered by the transitional provisions is taken from the relevant date to be subject to a condition authorising the holder to provide a superannuation trustee service. This will occur automatically because they are deemed by the transitional provisions in Schedule 9 to be authorised.

9.209 However, ASIC retains the powers it would ordinarily have to vary or revoke the authorisation condition, or vary, suspend or cancel the licence, as though ASIC had granted the authorisation in the first instance. [Schedule 9, item 60, sections 1675 and 1675D of the Corporations Act]

Transitional provisions for existing Australian financial services licensees authorised to deal in superannuation interests

9.210 Each RSE licensee who holds an Australian financial services licence authorising it to deal in a superannuation interest just before the Schedule's commencement day are deemed from that date to be authorised to provide a superannuation trustee service. [Schedule 9, item 60, sections 1675 and 1675A of the Corporations Act]

9.211 RSE licensees in this category do not need to apply for the new authorisation or take any specific action to obtain it. However, licensees must comply with all Australian financial services licence obligations from the Schedule's commencement day in respect of all activities involved in operating a registrable superannuation entity.

Transitional provisions for applicants for an Australian financial services licence before the Schedule commences

9.212 In certain circumstances, if an RSE licensee is granted an Australian financial services licence to deal in a superannuation interest, it will also be deemed to be authorised to provide a superannuation trustee service from the time the licence is issued. This will occur if all of the following requirements are met:

•

the applicant lodges an application for an Australian financial services licence authorising it to deal in a superannuation interest on or before the Schedule's commencement day;

•

ASIC approves that application on or after the commencement day; and

•

the applicant is an RSE licensee at the time ASIC approves that application.

[Schedule 9, item 60, sections 1675 and 1675B of the Corporations Act]

Transitional provisions for existing Australian financial services licensees without an authorisation to deal in superannuation interests

9.213 Similarly, in certain circumstances, existing Australian financial services licensees who are granted an additional authorisation to deal in a superannuation interest will also be deemed to be authorised to provide a superannuation trustee service from the time that application is approved. This occurs if all of the following requirements are met:

•

the applicant lodges an application, on or before the Schedule's commencement day, to vary its Australian financial services licence to authorise it to deal in a superannuation interest;

•

ASIC approves that application on or after the commencement day; and

•

the applicant is an RSE licensee at the time ASIC approves that application.

[Schedule 9, item 60, sections 1675 and 1675C of the Corporations Act]

Application provisions for non-public offer funds

9.214 For trustees of non-public offer superannuation funds, the obligation to hold an Australian financial services licence authorising the licensee to provide a superannuation trustee service applies from the commencement day of the related regulations.

9.215 Those regulations will also remove the exemption for this group of trustees from the requirement to hold an Australian financial services licence authorising them to deal in a superannuation interest.

9.216 As with other applicants after the commencement of Schedule 9, trustees of non-public offer funds lodging an application after Schedule 9's commencement must comply with the ordinary Australian financial services licence application requirements in respect of each financial service they propose to provide.

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]

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

Outline of chapter

11.1 Schedule 11 to the Bill implements recommendation 7.2 of the Financial Services Royal Commission, which called for the implementation of the ASIC Enforcement Review Taskforce recommendations to:

•

clarify and strengthen the breach reporting regime for financial services licensees in the Corporations Act; and

•

introduce a comparable breach reporting regime for credit licensees in the Credit Act.

11.2 This Schedule also implements recommendations 1.6 and 2.8 of the Financial Services Royal Commission by requiring credit licensees and financial services licensees to report serious compliance concerns about mortgage brokers and financial advisers.

Context of amendments

11.3 Breach reporting is a cornerstone of Australia's financial services regulatory structure. Breach reports allow ASIC to detect significant non-compliant behaviours early and take action where appropriate. It also allows ASIC to identify and address emerging trends of non-compliance in the industry.

11.4 Section 912D of the Corporations Act sets out the existing breach reporting regime for financial services licensees. It requires these licensees to notify ASIC of breaches or likely breaches of specified obligations that are significant. Reports must be lodged with ASIC as soon as practicable, and in any event, within 10 business days of the licensee becoming aware of the significant breach or likely breach.

11.5 ASIC and industry participants have raised concerns about the existing breach reporting regime in the Corporations Act. The concerns mainly relate to the test for whether a breach or likely breach is significant and therefore reportable, as this requires a financial services licensee to make a judgement based on a broad range of matters. As a result, breach reporting is largely inconsistent amongst licensees in terms of the matters reported and the timeliness of reports.

11.6 Currently, there is no equivalent breach reporting obligation for credit licensees. Instead, credit licensees are required to lodge annual compliance certificates with ASIC. While these certificates give ASIC broad oversight over whether the credit licensee is complying with its general conduct obligations, the information in these certificates is high level and there is no obligation to provide ASIC with information about particular breaches in a timely way.

ASIC Enforcement Review Taskforce Report

11.7 The ASIC Enforcement Review Taskforce considered the effectiveness of the breach reporting regime in the Corporations Act and made nine recommendations in relation to that regime. In particular, the recommendations sought to strengthen the breach reporting requirement by resolving ambiguity about:

•

when a breach or likely breach is significant and reportable;

•

whether a licensee is required to report misconduct by a representative;

•

the timeframe for reporting to ASIC; and

•

the content of the breach report.

11.8 The ASIC Enforcement Review Taskforce also recommended introducing a comparable breach reporting regime for credit licensees.

The Financial Services Royal Commission

11.9 Recommendation 7.2 of the Financial Services Royal Commission was that the recommendations of the ASIC Enforcement Review Taskforce about breach reporting of contraventions by financial services licensees and credit licensees should be implemented.

11.10 Recommendation 2.8 of the Financial Services Royal Commission was that financial services licensees should be required to report serious compliance concerns about financial advisers to ASIC on a quarterly basis. Commissioner Hayne identified serious compliance concerns as concerns that a financial adviser may have engaged in:

•

dishonest, illegal, deceptive and/or fraudulent misconduct;

•

any misconduct that, if proven, would be likely to result in instant dismissal or immediate termination;

•

deliberate non-compliance with financial services laws; or

•

gross incompetence or gross negligence.

11.11 Recommendation 1.6 of the Financial Services Royal Commission states, in part, that credit licensees should be bound by reporting obligations in respect of mortgage brokers similar to those obligations referred to in recommendation 2.8 for financial advisers.

11.12 In its response to the Financial Services Royal Commission, the Government agreed to implement these recommendations. In particular, the Government agreed to implement recommendation 2.8 as part of strengthening the breach reporting requirements.

11.13 Schedule 9, which implements recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission, also contains a minor amendment to the breach reporting regime in the SIS Act. This amendment aligns the 30-day timing requirement for reporting under that regime with these changes.

Summary of new law

11.14 Schedule 11 amends the Corporations Act to clarify and strengthen the breach reporting regime for financial services licensees. The key features of the amendments include:

•

expanding the kinds of situations that need to be reported by licensees to ASIC (which are referred to as 'reportable situations') to include:

-

investigations into whether a significant breach has occurred or will occur if the investigation continues for more than 30 days, and the outcomes of those investigations;

-

conduct that constitutes gross negligence or serious fraud;

-

conduct that amounts to misleading or deceptive conduct under the financial services law; and

-

serious compliance concerns about individual financial advisers operating under another licence;

•

requiring licensees to lodge breach reports with ASIC in the prescribed form, and within 30 calendar days after the licensee first knows that, or is reckless with respect to whether there are reasonable grounds to believe, a reportable situation has arisen; and

•

requiring ASIC to publish data about breach reports on its website.

11.15 The serious compliance concerns identified by Commissioner Hayne are addressed through the reportable situations which must be reported. Under the reforms, financial services licensees will have to report these concerns to ASIC if there are reasonable grounds to believe they have arisen in relation to individual financial advisers operating under another financial services licence. Licensees who report these concerns to ASIC will also need to provide a copy of the report to the licensee that was responsible for the financial adviser when the concern arose. This allows responsible licensees to quickly investigate and take action as needed, including remediating affected clients.

11.16 Schedule 11 also amends the Credit Act to introduce a comparable breach reporting regime for credit licensees. As part of these amendments, credit licensees will be required to report serious compliance concerns about individual mortgage brokers operating under another licence.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to the Corporations Act

11.17 Schedule 11 repeals section 912D of the Corporations Act and replaces it with new provisions. [Schedule 11, item 5, section 912D of the Corporations Act]

Matters that may need to be reported to ASIC

11.18 The amendments in Schedule 11 refer to matters that may need to be reported to ASIC as 'reportable situations'. The reportable situations are set out in new section 912D and can be broadly separated into two categories:

•

reportable situations about core obligations (referred to in this chapter as core reportable situations); and

•

additional reportable situations.

[Schedule 11, item 5, section 912D of the Corporations Act]

Core reportable situations

11.19 A core reportable situation arises in relation to a financial services licensee where:

•

the financial services licensee or its representative has breached a core obligation and the breach is significant; or

•

the financial services licensee or its representative is no longer able to comply with the core obligation and the breach will be significant if it occurs; or

•

the financial services licensee or its representative conducts an investigation into whether there has been or will be a significant breach of a core obligation, and the investigation continues for more than 30 calendar days; or

•

an investigation described in the previous point discloses that there has been no breach of a core obligation.

[Schedule 11, item 5, section 912D of the Corporations Act]

What are the core obligations?

11.20 The new core obligations mirror the existing obligations that may need to be reported to ASIC if they are breached.

11.21 The core obligations are:

•

the general obligations on licensees under section 912A (other than the obligation to comply with the financial services laws), which includes for example, the obligations to:

-

do all things necessary to ensure the financial services covered by the licence are provided efficiently, honestly and fairly;

-

comply with the conditions on the licence; and

-

maintain the competence to provide financial services covered by the licence;

•

the requirement to have compensation arrangements for retail clients under section 912B; and

•

the obligation to comply with certain financial services laws under section 912A(1)(c).

[Schedule 11, item 5, section 912D of the Corporations Act]

11.22 The core obligations to comply with certain financial services laws is broad and includes the obligations under Chapter 7 of the Corporations Act and Division 2 of Part 2 of the ASIC Act.

11.23 Relevantly for the responsible entity of a registered scheme, the core obligation covers the obligation to comply with the financial services laws in Chapters 5C and 6C of the Corporations Act.

11.24 Further, the core obligations may include the obligation to comply with other financial services laws set out in Commonwealth legislation, if those laws are specified in the regulations.

When is a breach significant?

11.25 There are two separate significance tests set out in new sections 912D(4) and (5) respectively.

11.26 The first significance test (referred to in this chapter as the deemed significance test) provides that a breach of a core obligation is taken to be significant if any of the following circumstances apply:

•

the breach is constituted by the commission of an offence under any law, and the offence is punishable on conviction by a penalty that includes imprisonment for up to:

-

three months or more if the offence involves dishonesty; or

-

12 months or more in any other case; or

•

the breach is constituted by a contravention of a civil penalty provision under any law, other than a civil penalty provision that is prescribed by the regulations; or

•

the breach is constituted by a contravention of section 1041H(1) of the Corporations Act or section 12DA(1) of the ASIC Act, which relate to misleading or deceptive conduct in relation to financial products or services; or

•

the breach results, or is likely to result, in material loss or damage to:

-

in the case of a managed investment scheme-a member or members of the scheme;

-

in the case of a superannuation entity-a member or members of the entity; or

-

in all cases-a person or persons to whom the licensee or its representative provides a financial product or a financial service as a wholesale or retail client; or

•

any other circumstances prescribed by the regulations exist.

[Schedule 11, item 5, section 912D of the Corporations Act]

11.27 Therefore, under the deemed significance test, a breach of a core obligation will be significant if it is constituted by a contravention of the civil penalty provision in section 912A(5A) of the Corporations Act, which relates to the general obligations on licensees. Alternatively, a breach of a core obligation will be significant if it is constituted by a contravention of another civil penalty provision that forms part of the financial services law, unless that provision is prescribed by the regulations.

11.28 However, even if a civil penalty provision is prescribed by the regulations, the breach may still be significant and reportable if one of the other circumstances in the deemed significance test apply, or if the breach is significant under the second significance test.

11.29 This regulation-making power ensures there is sufficient flexibility to target ASIC's surveillance to problematic areas. For example, if ASIC is receiving a large number of largely unproblematic breach reports for minor, technical or inadvertent breaches of civil penalty provisions, and those breaches would not otherwise be significant, the Government may decide that the regulatory burden imposed outweighs the benefit of receiving those reports. In those circumstances, the regulation-making power may be used to quickly reduce the regulatory burden on licensees to report breaches where appropriate. Any instrument made would be subject to disallowance and parliamentary scrutiny.

11.30 'Loss or damage' in the context of the deemed significance test has its ordinary meaning, which is extensive. The term includes financial and non-financial loss or damage.

11.31 Whether a breach results or is likely to result in material loss or damage to a person will depend on the person's circumstances. For example, a relevant circumstance may include the person's financial situation.

11.32 If a breach affects a number of people, it is sufficient for significance to be established if the breach is likely to result in material loss or damage to one person. Additionally, where the breach affects a number of people, licensees should consider the total loss or damage resulting from the breach. For example, even if the breach does not result in a material loss or damage to individual persons, the total loss or damage to persons resulting from the breach may, when aggregated, amount to material loss or damage to persons, thereby satisfying the significance requirement.

11.33 Consistent with the common law position, 'likely to result in material loss or damage' is intended to mean that there is a real and not remote possibility that loss or damage will occur as a result of the breach.

11.34 The inclusion of contraventions of section 1041H(1) of the Corporations Act and section 12DA(1) of the ASIC Act in the deemed significance test captures the remaining misleading and deceptive conduct provisions in the financial services laws that are not already captured by the other circumstances in the deemed significance test.

11.35 This means that all breaches of misleading and deceptive conduct provisions in the financial services laws are taken to be significant and therefore reportable to ASIC. This ensures that the deceptive conduct element of the serious compliance concerns identified by Commissioner Hayne is captured in the definition of 'reportable situation'.

11.36 A general regulation-making power is included to prescribe other circumstances in which a breach of a core obligation is taken to be significant. This allows the Government to respond quickly and effectively to emerging trends of non-compliance in the financial services sector to ensure the breach reporting regime is fit for purpose. Any regulations made would be subject to disallowance and parliamentary scrutiny.

11.37 The purpose of the deemed significance test is to provide greater certainty for industry and to ensure significant breaches are reported to ASIC in a timely manner. For example, where a breach constitutes a contravention of a relevant civil penalty provision or the commission of a relevant offence, the significance of the breach is immediately taken to be satisfied.

11.38 If none of the circumstances in the deemed significance test apply, the breach may still be significant under the second significance test. This test is based on the existing significance test and requires consideration of all of the following matters:

•

the number or frequency of similar breaches;

•

the impact of the breach or likely breach on the licensee's ability to provide financial services covered by the licence;

•

the extent to which the breach or likely breach indicates that the licensee's arrangements to ensure compliance with those obligations are inadequate; and

•

any other matters prescribed by regulations.

[Schedule 11, item 5, section 912D of the Corporations Act]

11.39 Whether a particular breach is significant under the second significance test is determined objectively. This is made clear as the standard for reporting is that there are reasonable grounds to believe a reportable situation has arisen (see new section 912DAA(1) of the Corporations Act).

11.40 The new formulation of the significance tests gives effect to recommendation 1 of the ASIC Enforcement Review Taskforce Report, which called for amendments to the significance test to clarify the matters that should be reported, and amendments to ensure that the significance of breaches is determined objectively.

When is a licensee no longer able to comply with a core obligation?

11.41 The reportable situation that a licensee is no longer able to comply with a core obligation reflects the existing meaning of a 'likely breach' in section 912D of the Corporations Act. [Schedule 11, item 5, section 912D of the Corporations Act]

Example 11.1

Section 912A(1)(d) of the Corporations Act generally requires a financial services licensee to have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements.

Licensee A becomes aware that on a future date, its overdraft facility will be closed and it will no longer be able to comply with its base level financial requirements. Licensee A is aware that it does not have other means of meeting the financial requirements at that time, which is required under section 912A(1)(d).

As a breach of section 912A(1)(d) constitutes a contravention of a civil penalty provision (section 912A(5A) of the Corporations Act), there is a reportable situation in relation to Licensee A.

Reporting investigations

11.42 Investigations conducted by financial services licensees or their representatives into whether there has been or will be a significant breach of a core obligation also need to be reported to ASIC if the investigation continues for more than 30 calendar days. This means that on the 31st calendar day of such an investigation, it becomes a reportable situation. [Schedule 11, item 5, section 912D of the Corporations Act]

11.43 The term 'investigation' is not defined in the legislation and has its ordinary meaning. What constitutes an investigation is likely to vary significantly depending on the size of the licensee's business, their internal systems and processes, and the type of breach.

11.44 The Macquarie Dictionary defines 'investigation' as 'a searching inquiry in order to ascertain facts.' Accordingly, if a financial services licensee is considering whether it has conducted an investigation, a relevant factor would be whether there has been some information gathering or human effort applied by the licensee to determine whether a breach has occurred or will occur. Examples of information gathering may include:

•

communicating with representatives or staff of the licensee who may have been involved in the relevant conduct;

•

communicating with potentially affected clients; or

•

seeking specialist or technical advice.

11.45 Merely entering a suspected compliance issue into a risk management system is unlikely to amount to a searching inquiry to ascertain facts, although this will depend on the circumstances in each case.

11.46 The intention is that the term 'investigation' applies irrespective of how the licensee describes an investigation in its internal processes, as long as it satisfies the ordinary meaning of the term.

11.47 The time at which an investigation commences is a matter of fact and is not a subjective determination by the licensee. For example, after receiving a complaint from a client, if the licensee begins to look into the matter or takes steps towards ascertaining whether a significant breach has occurred, this would generally be considered to be when the investigation has commenced.

11.48 A financial services licensee is also considered to have conducted an investigation if it outsources the investigation, or if a related entity (such as a parent company) conducts the investigation.

11.49 Even if a licensee does not conduct an investigation, there may still be a reportable situation if the licensee has reasonable grounds to believe that they have breached, or will breach a core obligation and the breach is or will be significant. In other words, there may be circumstances where a significant and reportable breach should be clear to a licensee, even without an investigation being conducted.

11.50 Outcomes of investigations that continue for more than 30 calendar days must be reported to ASIC, even if the outcome is that there is no significant breach. The other possible outcomes of such an investigation will either be that there has been a significant breach of a core obligation or there will be a significant breach of a core obligation. The requirement to report these investigation outcomes are captured through the reportable situations (see sections 912D(1)(a), (b) and (d) of the Corporations Act). This ensures ASIC has visibility of protracted investigations, and incentivises licensees to prioritise and streamline investigation processes where appropriate. [Schedule 11, item 5, section 912D of the Corporations Act]

Additional reportable situations

11.51 Additional reportable situations are not linked to the core obligations and the significance tests. These reportable situations arise in relation to a financial services licensee if:

•

in the course of providing a financial service, the licensee or its representative has engaged in conduct constituting gross negligence; or

•

the licensee or its representative has committed serious fraud.

[Schedule 11, item 5, section 912D of the Corporations Act]

11.52 Serious fraud is defined in section 9 of the Corporations Act and means an offence involving fraud or dishonesty against an Australian law or any other law that is punishable by imprisonment for life or for a maximum period of at least three months.

11.53 Conduct that constitutes gross negligence or serious fraud must be reported to ASIC because of the potentially considerable detriment that could be caused to people as a result of that conduct. This conduct also goes to the licensee's or representative's character and suitability to provide financial services, which is relevant to ASIC's regulatory remit.

11.54 While investigations about the additional reportable situations are not expressly required to be reported to ASIC as part of the additional reportable situations, they may still need to be reported if they amount to a core reportable situation. That is, if the investigation can be characterised as an investigation conducted by a licensee or its representative into whether there has been or will be a significant breach of a core obligation, and the investigation continues for more than 30 calendar days. This is likely to occur in practice as there is some overlap between the additional reportable situations and the general obligations under section 912A of the Corporations Act (which are core obligations).

11.55 The additional reportable situations capture the 'serious compliance concerns' identified by Commissioner Hayne in relation to recommendation 2.8 of the Financial Services Royal Commission that are not already covered by the core reportable situations.

11.56 A regulation-making power is also included to prescribe other circumstances in which an additional reportable situation arises. This allows the Government to respond effectively to emerging trends of non-compliance in the financial services sector, particularly if those trends of non-compliance are unrelated to the core obligations. Any regulations made would be subject to disallowance and parliamentary scrutiny.

Self-reporting obligations to ASIC

11.57 A financial services licensee must lodge a report with ASIC if there are reasonable grounds to believe that a reportable situation has arisen in relation to the licensee. [Schedule 11, item 5, section 912DAA of the Corporations Act]

11.58 'Reasonable grounds to believe' ensures the breach reporting obligation is clearly objective. There will be reasonable grounds to believe a reportable situation has arisen if there are facts and/or evidence to induce, in a reasonable person, a belief that a reportable situation has arisen.

11.59 Each reportable situation is separate from one another. This means, for example, that there will be two separate obligations to lodge a report with ASIC if a financial services licensee is no longer able to comply with a core obligation and the breach will be significant if it occurs (as this is a reportable situation under section 912D(1)(b) of the Corporations Act), and that later eventuates into a significant breach of a core obligation (which is a reportable situation under section 912D(1)(a) of the Corporations Act).

Timing for reporting

11.60 A report must be lodged with ASIC within 30 calendar days after the licensee first knows that, or is reckless with respect to whether there are reasonable grounds to believe that, a reportable situation has arisen.

11.61 The terms 'know' and 'reckless' are equivalent to the concepts of 'knowledge' and 'recklessness' in the Criminal Code. A licensee knows of reasonable grounds to believe a reportable situation has arisen if the licensee knows of facts and/or evidence sufficient to induce in a reasonable person a belief that a reportable situation has arisen. The term 'reckless' is intended to capture circumstances where the licensee does not know that there are reasonable grounds to believe a reportable situation has arisen, but:

•

is aware of a substantial risk that there are reasonable grounds to believe a reportable situation has arisen; and

•

having regard to the circumstances known to the licensee, it is unjustifiable to take the risk that there are reasonable grounds to believe a reportable situation has arisen.

11.62 While the licensee must have knowledge of, or be reckless with respect to, whether there are reasonable grounds to believe that a reportable situation has arisen for the reporting timeframe to commence, the question of whether those reasonable grounds exist remains objective.

11.63 The timeframe for reporting has been extended from 10 business days to 30 calendar days to give licensees more time to investigate the breach (if needed) before reporting it to ASIC. This will also likely improve the quality of breach reports and assist ASIC to assess those reports. [Schedule 11, item 5, section 912DAA of the Corporations Act]

Example 11.2

11.64 These changes give effect to recommendation 4 of the ASIC Enforcement Review Taskforce Report.

How is a reportable situation reported to ASIC?

11.65 The report must be lodged by the financial services licensee in the form prescribed by ASIC. [Schedule 11, item 5, section 912DAA of the Corporations Act]

11.66 The use of a prescribed form aims to enhance the effectiveness of the breach reporting regime, as the reports will need to include all the information and supporting documents required by ASIC to assess the reportable situation and determine whether further action should be taken.

11.67 The prescribed form will require financial services licensees to include at a minimum the following information:

•

the date the reportable situation occurred;

•

a description of the reportable situation;

•

whether and how the reportable situation has been rectified by the licensee; and

•

the steps that have been or will be taken by the licensee to ensure future compliance.

11.68 This gives effect to recommendation 5 of the ASIC Enforcement Review Taskforce Report.

Where reports are received by APRA

11.69 A report that a financial services licensee is required to lodge in relation to its own reportable situations is taken to have been lodged with ASIC if:

•

the licensee is also regulated by APRA; and

•

the report is given to APRA containing all of the information that is required in a report in relation to the reportable situation.

[Schedule 11, item 5, section 912DAA of the Corporations Act]

11.70 A financial services licensee may need to consider the form prescribed by ASIC to ensure that it gives APRA all the information that is required in a report about the reportable situation.

11.71 The licensee will also need to ensure it gives the report to APRA within 30 calendar days after the licensee first knows that, or is reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen. This reflects that this new provision does not operate as a general exemption from the requirement to report, but operates such that a report is taken to have been lodged with ASIC even though it has been actually lodged with APRA.

11.72 There is a general exemption from the requirement to report. This exemption applies if the licensee is also regulated by APRA and the auditor or actuary of the licensee has given APRA a written report about the reportable situation within 10 business days after the licensee first knows that, or is reckless with respect to whether there are reasonable grounds to believe that, the reportable situation has arisen. This substantially replicates existing section 912D(1D) of the Corporations Act. [Schedule 11, item 5, section 912DAA of the Corporations Act]

11.73 These provisions recognise that there may be overlaps between the matters that need to be reported under the Corporations Act and under other legislation, such as the SIS Act. This reduces the compliance burden on licensees that are dual-regulated, as these licensees will only need to report the matter to one regulator to satisfy their reporting obligations.

Consequences of failing to satisfy self-reporting obligations

11.74 In the circumstance where there are reasonable grounds to believe that a reportable situation has arisen, the conduct of failing to lodge a report with ASIC as required constitutes an offence with a maximum penalty of two years imprisonment. A fine may also be imposed (see sections 1311B and 1311C of the Corporations Act).

11.75 Strict liability applies in relation to the conduct of lodging a report with ASIC, including whether it is lodged in accordance with the 30-calendar day timing requirement and the prescribed form requirement. [Schedule 11, item 5, section 912DAA of the Corporations Act]

11.76 Applying strict liability in this case is appropriate as requiring proof of fault would undermine deterrence.

11.77 In particular, applying strict liability makes it clear that the prosecution would not need to prove that the financial services 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 particular statutory period. 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. This approach is therefore consistent with the principles in the Guide to Framing Commonwealth Offences about applying strict liability.

11.78 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 is the fault element for that circumstance under the Criminal Code.

11.79 The prosecution will also need to prove when the licensee first knew of, or was reckless with respect to, the facts constituting that circumstance. Requiring proof of this is central to the offence as it determines when the 30-day period for reporting starts. This will need to be proven notwithstanding the application of strict liability, as it is included in section 912DAA(3).

11.80 The defence of honest and reasonable mistake of fact will be available in relation to the matters to which strict liability apply. 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.

11.81 In accordance with section 769B(3) of the Corporations Act, for a licensee that is a body corporate, the state of mind of a director, employee or agent of the licensee (or certain other persons) will be attributed to the licensee where that person was engaged in the relevant conduct within the scope of their actual or apparent authority.

11.82 The maximum penalty of two years imprisonment, and/or a fine covered by section 1311B or 1311C of the Corporations Act, reflects the seriousness of the offence, and aims to encourage compliance with the breach reporting obligation. Maximum penalties also provide a court with guidance on how to punish criminal behaviour. The maximum penalty is generally reserved only for the most egregious cases.

11.83 Failure to lodge a report as required also attracts a civil penalty. [Schedule 11, items 5, 7 and 8, sections 912DAA and 1317E of the Corporations Act]

11.84 Consistent with other civil penalty provisions in the Corporations Act and section 1317QB of the Corporations Act, except to the extent expressly provided otherwise, it is not necessary to prove any state of mind of the person in proceedings for:

•

a declaration of a contravention of the civil penalty; or

•

a pecuniary penalty order relating to a contravention of the civil penalty.

11.85 Additionally, while the new breach reporting obligation relies on the Criminal Code definitions of 'knowledge' and 'recklessness', this does not import criminal standards of proof, or criminal rules of evidence or procedure in any civil penalty proceedings. This is consistent with sections 1317L and 1332 of the Corporations Act.

11.86 The standard maximum financial penalty for a contravention of a civil penalty provision under the Corporations Act is:

•

for individuals, the greater of:

-

5,000 penalty units; or

-

if the court can determine-the benefit derived or detriment avoided because of the contravention, multiplied by three;

•

for bodies corporate, the greater of the following:

-

50,000 penalty units;

-

if the court can determine-the benefit derived or detriment avoided because of the contravention, multiplied by three;

-

10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.

11.87 The offence provision will also form part of the infringement notice regime, and regulations will be made for this purpose. This is appropriate as there may be a high volume of contraventions (ranging in severity) of the reporting provisions. The Guide to Framing Commonwealth Offences highlights failing to comply with reporting obligations as an example of a case where issuing infringement notices may be appropriate.

11.88 Minor contraventions may be caused by poor internal processes. Where this is the case, the use of infringement notices may lead to a faster rectification of processes, as licensees are put on notice by ASIC sooner.

11.89 These enforcement options give ASIC sufficient flexibility to pursue the most appropriate action in each case, which will depend on its assessment of various considerations, including the severity and nature of the reportable situation. These options are also consistent with the existing consequences for failures relating to breach reporting.

11.90 This gives effect to recommendations 6 and 7 of the ASIC Enforcement Review Taskforce Report.

Reporting about other financial services licensees to ASIC

11.91 A financial services licensee will also be required to lodge a report with ASIC if the licensee has reasonable grounds to believe that a reportable situation, other than a reportable situation about an investigation, has arisen in relation to an individual who:

•

provides personal advice to retail clients about relevant financial products; and

•

is any of the following:

-

another financial services licensee;

-

an employee of another financial services licensee (or a related body corporate of another licensee), acting within the scope of the employee's employment;

-

a director of another financial services licensee (or a related body corporate of another licensee), acting within the scope of the director's duties as director; or

-

a representative of another financial services licensee, acting within the scope of the representative's authority given by the licensee.

[Schedule 11, item 5, section 912DAB of the Corporations Act]

11.92 Relevant financial products are defined in section 910A of the Corporations Act as financial products other than basic banking products, general insurance products, consumer credit insurance, or a combination of any of those products.

11.93 This obligation therefore targets misconduct by individual financial advisers who provide personal advice to retail clients about more complex financial products. It also recognises that in the financial advice industry, parties other than the financial adviser's licensee may be well positioned to identify this misconduct.

11.94 In practice, a reporting licensee will likely have reasonable grounds to believe that a reportable situation has arisen in relation to another financial adviser through a relationship of proximity between the two parties. For example, this may occur because of business dealings between the two parties or through mutual clients.

11.95 A reporting licensee who gives information to ASIC as required generally has the benefit of qualified privilege under section 1100A of the Corporations Act. This means the reporting licensee has qualified privilege in proceedings for defamation, or is not liable to an action for defamation if the reporting licensee had no malice when making the report to ASIC. A licensee who lodges a false report with ASIC under this section with an improper motive, for example to undermine a competitor, will not have the benefit of qualified privilege in an action for defamation.

11.96 A reporting licensee who has qualified privilege in respect of reporting on another licensee is also not liable for any action for breach of confidence in relation to that reporting under section 1100A of the Corporations Act.

11.97 This reporting obligation only applies in relation to other financial services licensees. If a licensee has reasonable grounds to believe that a reportable situation has arisen in relation to its own financial advisers who are acting within the scope of the authority given by the licensee, the licensee must self-report that matter under section 912DAA of the Corporations Act.

Timing for reporting a breach

11.98 The report must be lodged with ASIC within 30 calendar days after the reporting licensee first knows that, or is reckless with respect to whether there are reasonable grounds to believe that, the reportable situation has arisen in relation to another licensee. [Schedule 11, item 5, section 912DAB of the Corporations Act]

11.99 This is consistent with the general timing rules for self-reporting of reportable situations to ASIC.

How is a reportable situation reported to ASIC?

11.100 The report must be lodged by the reporting licensee in the form prescribed by ASIC. This ensures the report includes the information and supporting documents required by ASIC to assess whether further action should be taken. [Schedule 11, item 5, section 912DAB of the Corporations Act]

Informing the other financial services licensee

11.101 The reporting licensee must also provide a copy of the report lodged with ASIC to the licensee who is the subject of that report. In some cases, this will require the reporting licensee to provide a copy of the report directly to the financial adviser if the adviser operates under their own financial services licence, or to a financial services licensee who is no longer involved with the financial adviser (for example, a previous employer). [Schedule 11, item 5, section 912DAB of the Corporations Act]

11.102 Upon receiving a copy of the report, the financial services licensee who is the subject of that report may need to commence an investigation or report that matter to ASIC under the self-reporting obligation. This reflects that a financial services licensee will generally have more information about its own reportable situations, which will assist ASIC in assessing the reportable situation.

11.103 The copy of the report needs to be provided to the other licensee within 30 calendar days after the reporting licensee first knows that there are reasonable grounds to believe that the reportable situation has arisen, or is reckless with respect to that circumstance. This is the same timeframe for reporting the matter to ASIC.

11.104 A reporting licensee who provides a copy of the report to the other licensee as required will also have the benefit of qualified privilege in an action for defamation if the reporting licensee had no malice. Additionally, a reporting licensee is not liable for an action based on breach of confidence in relation to that conduct. [Schedule 11, item 5, section 912DAB of the Corporations Act]

11.105 This obligation supports the new requirement to be imposed on licensees to take steps to remediate an affected client when they detect misconduct - either arising from their own behaviour or that of a representative under their licence (see recommendation 2.9 of the Financial Services Royal Commission). The new obligation will require licensees to inform a client who is potentially affected by the detected misconduct, and to investigate the nature and full extent of the detected misconduct. As part of this investigation, licensees will be required to determine the quantum of any loss or damage to the client caused by the misconduct. Once the investigation is completed, the licensee is required to inform the affected client of the nature and full extent of the misconduct and remediate the client's loss.

Example 11.3

On 1 July 2021, Licensee C becomes aware of reasonable grounds to believe that a reportable situation has arisen in relation to Licensee D's financial adviser. This financial adviser also operates under Licensee C's licence.

Under section 912DAB of the Corporations Act, Licensee C is required to lodge a report with ASIC within 30 calendar days after the licensee first knows of the reportable situation, and is also required to provide a copy of that report to Licensee D in the same timeframe.

Licensee C also commences an investigation into whether the financial adviser, while acting within the scope of the authority of Licensee C's licence, has engaged in conduct amounting to a reportable situation. However, within 30 days of commencing the investigation, the investigation discloses that a reportable situation has not arisen in relation to Licensee C. Licensee C is not required under section 912DAA of the Corporations Act to report the investigation or its outcome to ASIC.

No need to report if reasonable grounds to believe ASIC is aware of the reportable situation

11.106 A financial services licensee is not required to lodge a report with ASIC about another licensee if the first licensee has reasonable grounds to believe that ASIC is aware of:

•

the existence of the reportable situation; and

•

all of the information that would otherwise be required in a report about the reportable situation.

[Schedule 11, item 5, section 912DAB of the Corporations Act]

11.107 This is a high threshold that is primarily intended to reduce reporting of matters to ASIC that are publicly well known about an individual financial adviser operating under another financial services licence.

11.108 This exemption only applies to the obligation to report about other financial services licensees. It does not apply in relation to reporting about a licensee's own matters.

Consequences of failing to satisfy reporting obligations in relation to another financial services licensee

11.109 Failure to lodge a report or provide a copy of a report as required attracts a civil penalty, which is subject to the standard maximum financial penalties for a contravention of a civil penalty provision under the Corporations Act. Failure to lodge a report or provide a copy of a report does not constitute an offence. [Schedule 11, items 5 and 8, sections 912DAB and 1317E of the Corporations Act]

11.110 Consistent with other civil penalty provisions in the Corporations Act and section 1317QB of the Corporations Act, except to the extent expressly provided otherwise, it is not necessary to prove any state of mind of the person in proceedings for:

•

a declaration of a contravention of the new civil penalty provision; or

•

a pecuniary penalty order in relation to a contravention of the new civil penalty provision.

11.111 Additionally, while the reporting obligation relies on the Criminal Code definitions of 'knowledge' and 'recklessness', this does not import criminal standards of proof, or criminal rules of evidence or procedure in any civil penalty proceedings in respect of a failure to lodge a breach report as required. This is consistent with sections 1317L and 1332 of the Corporations Act.

11.112 The civil penalty provisions will also be subject to the infringement notice regime and regulations will be made for this purpose. This is appropriate as there may be a high volume of contraventions (ranging in severity) of these reporting obligations. The Guide to Framing Commonwealth Offences highlights failing to comply with reporting obligations as an example of a case where issuing infringement notices may be appropriate.

11.113 Minor contraventions may be caused by poor internal processes. Where this is the case, the use of infringement notices may lead to a faster rectification of processes, as firms are put on notice by ASIC sooner.

11.114 These enforcement options give ASIC sufficient flexibility to pursue the most appropriate action in each case, depending on its assessment of various considerations, including the severity and nature of the reportable situation.

Participants in a licensed market or a licensed CS facility - existing requirement

11.115 A financial services licensee must give written notice to ASIC as soon as practicable if the licensee becomes a participant in a licensed market or a licensed CS facility, or ceases to be such a participant. [Schedule 11, items 5, 10 and 11, section 912DAC of the Corporations Act]

11.116 The notice must set out when the event happened and identify the market or facility. [Schedule 11, item 5, section 912DAC of the Corporations Act]

11.117 Failure to comply with this requirement is an offence with a maximum penalty of one year imprisonment. It is also a civil penalty provision. [Schedule 11, items 5, 7 and 8, sections 912DAC and 1317E of the Corporations Act]

11.118 This provision retains existing section 912D(2) of the Corporations Act without any changes.

ASIC publication of breach reporting data

11.119 ASIC must publish information about breaches and likely breaches of core obligations that are self-reported by licensees during the financial year. This includes reports lodged with APRA by dual regulated licensees or their auditors and actuaries. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.120 ASIC's publication must contain information about the licensees that have lodged these reports. This means the publication will contain licensee-level data. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.121 Subject to any requirements prescribed by regulations, ASIC has discretion as to the contents and form of the publication. ASIC's publication may include the following information:

•

the name of the licensee;

•

volume of reported breaches;

•

breakdown of breach reports by corporate group; and

•

the number of breaches compared to the size, activity or volume of the licensee's business.

11.122 ASIC's publication does not need to include information about reports regarding:

•

investigations into whether a significant breach of a core obligation has occurred or will occur, which are reportable situations under section 912D(1)(c) of the Corporations Act;

•

outcomes of those investigations, which are reportable situations under section 912D(1)(d) of the Corporations Act;

•

additional reportable situations under section 912D(2) of the Corporations Act; or

•

reportable situations in relation to other financial services licensees made under section 912DAB of the Corporations Act.

11.123 ASIC will be required to publish this information on its website within four months after the end of each financial year, starting on the financial year ending on 30 June 2022. [Schedule 11, item 5, section 912DE of the Corporations Act]

11.124 The information published by ASIC must include any information prescribed by the regulations, which may include personal information under the Privacy Act 1988 about a financial services licensee who is an individual. This regulation-making power may be exercised to allow ASIC to publish the names of financial services licensees where the licence is held in the name of an individual, as this would constitute personal information under the Privacy Act 1988. This will allow ASIC 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 ASIC's publication. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.125 Regulations may also prescribe circumstances in which information does not need to be included in ASIC's publication. This regulation-making power ensures there is an appropriate mechanism to balance to the broad requirement on ASIC to publish breach report data at the licensee-level. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.126 The information must also be organised in accordance with the regulations, if any. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.127 Regulations made for the purposes of these provisions would be subject to disallowance and parliamentary scrutiny.

11.128 ASIC may also correct any error in, or omission from, a report published under this section. This mirrors Australian Privacy Principles 10 and 13, which are set out in Schedule 1 to the Privacy Act 1988. The correction may be initiated by an affected licensee or by ASIC. [Schedule 11, item 5, section 912DAD of the Corporations Act]

11.129 This supplements ASIC's existing reporting framework to enhance accountability and provide an incentive for improved behaviour. It will also assist licensees and consumers to identify areas where substantial numbers of significant breaches are occurring, and allows licensees to target their efforts to improve their compliance outcomes in those areas.

11.130 This give effect to recommendation 10 of the ASIC Enforcement Review Taskforce Report.

Amendments to the Credit Act

11.131 The amendments made to the Credit Act largely replicate the new breach reporting provisions in the Corporations Act, with some changes to reflect the differences between the credit industry and its participants. These amendments give effect to recommendation 2 of the ASIC Enforcement Review Taskforce Report and recommendation 1.6 of the Financial Services Royal Commission.

Matters that may need to be reported to ASIC

11.132 The matters that may need to be reported to ASIC are referred to as 'reportable situations'. The reportable situations are set out in section 50A of the Credit Act and can be broadly separated into two categories:

•

reportable situations relating to core obligations (referred to in this chapter as core reportable situations); and

•

additional reportable situations.

[Schedule 11, item 15, section 50A of the Credit Act]

Core reportable situations

11.133 A core reportable situation arises in relation to a credit licensee where:

•

the credit licensee or its representative has breached a core obligation and the breach is significant; or

•

the credit licensee or its representative is no longer able to comply with the core obligation and the breach will be significant if it occurs; or

•

the credit licensee or its representative conducts an investigation into whether there has been or will be a significant breach of a core obligation, and the investigation continues for more than 30 calendar days; or

•

an investigation described in the previous point discloses that there has been no breach of a core obligation.

[Schedule 11, item 15, section 50A of the Credit Act]

What are the core obligations?

11.134 The core obligations in the Credit Act mirror the core obligations in the Corporations Act, and are:

•

the general conduct obligations on licensees under section 47 (other than the obligation under section 47(1)(d)), which includes for example, the obligation to:

-

do all things necessary to ensure the credit activities authorised by the licence are engaged in efficiently, honestly and fairly;

-

comply with the conditions on the licence;

-

have adequate compensation arrangements in place; and

•

the obligation to comply with certain credit legislation under section 47(1)(d).

[Schedule 11, item 15, section 50A of the Credit Act]

11.135 The core obligations will cover the obligation to comply with a broad range of credit legislation. It includes for example, the obligations in the Credit Act, the National Consumer Protection (Transitional and Consequential Provisions) Act 2009, and Division 2 of Part 2 of the ASIC Act.

When is a breach or likely breach 'significant'?

11.136 There are two separate significance tests which are set out in sections 50A(4) and (5) respectively.

11.137 The first significance test (referred to in this chapter as the deemed significance test) provides that a breach of a core obligation is taken to be significant if any of the following applies:

•

the breach is constituted by the commission of an offence under any law, and the offence is punishable on conviction by a penalty that includes imprisonment for up to:

-

three months or more if the offence involves dishonesty; or

-

12 months or more in any other case; or

•

the breach is constituted by a contravention of a civil penalty provision under any law, other than a civil penalty provision excluded by the regulations; or

•

the breach is constituted by a contravention of a key requirement (as defined for the purposes of the National Credit Code), other than a key requirement excluded by the regulations; or

•

the breach is constituted by a contravention of section 12DA(1) of the ASIC Act, which relates to misleading or deceptive conduct in relation to a financial service; or

•

the breach results in or is likely to result in material loss or damage to a credit activity client of the licensee; or

•

any other circumstances prescribed by the regulations exist.

[Schedule 11, item 15, section 50A of the Credit Act]

11.138 Therefore, under the deemed significance test, a breach of a core obligation will be significant if it is constituted by a contravention of the civil penalty provision in section 47(4) of the Credit Act, which relates to the general conduct obligations on licensees. Alternatively, a breach of a core obligation will be significant if it is constituted by a contravention of another civil penalty provision that forms part of the credit legislation, unless that provision is prescribed by the regulations.

11.139 However, even if a civil penalty provision is prescribed by the regulations, a breach of that provision may still be significant and reportable if one of the other circumstances in the deemed significance test apply, or if the breach is significant under the second significance test.

11.140 This regulation-making power ensures there is sufficient flexibility to target ASIC's surveillance to problematic areas. For example, if ASIC is receiving a large number of largely unproblematic breach reports for minor, technical or inadvertent breaches of civil penalty provisions, and those breaches would not otherwise be significant, the Government may decide that the regulatory burden imposed outweighs the benefit of receiving those reports. In those circumstances, the Government may exercise the regulation-making power to quickly reduce the regulatory burden on licensees to report breaches where appropriate. Any regulation made would be subject to disallowance and parliamentary scrutiny.

11.141 Key requirements, which are set out in section 111 of the National Credit Code, are treated in the same manner as civil penalty provisions for breach reporting purposes. This is consistent with the approach taken in other parts of the National Credit Code and the Credit Act, and reflects that the key requirements have been a fundamental component of the National Credit Code since its inception.

11.142 'Loss or damage' in the context of the deemed significance test has its ordinary meaning, which is extensive. The term includes financial and non-financial loss or damage.

11.143 A credit activity client of a licensee has a broad definition that takes into account the various credit activities regulated under the Credit Act. A credit activity client of a licensee therefore includes a consumer who:

•

is a party to a credit contract, or will be a party to a proposed credit contract;

•

is a person to whom the licensee or its representative provides a credit service;

•

is a party to a consumer lease, or will be a party to a proposed consumer lease;

•

is a mortgagor under a mortgage, or will be a mortgagor under a proposed mortgage;

•

is the guarantor under a guarantee or will be the guarantor under a proposed guarantee; or

•

is a person in relation to whom the licensee or its representative engaged in a prescribed activity under table item 6 of section 6(1) of the Credit Act.

[Schedule 11, item 15, section 50A of the Credit Act]

11.144 Whether a breach results in, or is likely to result in, material loss or damage to a credit activity client, requires the licensee to consider the particular client's circumstances. For example, a relevant circumstance may include the client's financial situation.

11.145 If a breach affects a number of clients, it is sufficient for the reporting obligation to be triggered if the breach is likely to result in material loss or damage to one client. Additionally, where the breach affects a number of clients, licensees should consider the total loss or damage. For example, even if the breach does not result in a material loss or damage to individual clients, the total loss or damage to clients resulting from the breach may, when aggregated, amount to material loss or damage to clients, thereby satisfying the significance requirement.

11.146 Consistent with the common law position, 'likely to result in material loss or damage' is intended to mean that there is a real and not remote chance that loss or damage will occur as a result of the breach.

11.147 The inclusion of contraventions of section 12DA(1) of the ASIC Act in the deemed significance test captures the remaining misleading and deceptive conduct provisions in the credit legislation that are not already captured by the other circumstances in the deemed significance test. This means that all breaches of misleading and deceptive conduct provisions in the credit legislation are taken to be significant and therefore reportable to ASIC. This ensures that the deceptive conduct element of the serious compliance concerns identified by Commissioner Hayne is captured in the definition of 'reportable situation'.

11.148 A general regulation-making power is included to prescribe circumstances in which a breach or likely breach of a core obligation is taken to be significant. This regulation-making power can be used to quickly and effectively respond to emerging trends of non-compliance in the credit sector to ensure the breach reporting regime is fit for purpose. Any regulations made would be subject to disallowance and parliamentary scrutiny.

11.149 The purpose of the deemed significance is to provide greater certainty for industry and to ensure significant breaches are reported to ASIC in a timely manner. For example, where a breach constitutes a contravention of a relevant civil penalty provision or the commission of a relevant offence, the significance of the breach is immediately taken to be satisfied.

11.150 If none of the circumstances in the deemed significance test apply, the breach may still be significant under the second significance test. This test requires consideration of all of the following matters:

•

the number or frequency of similar breaches;

•

the impact of the breach or likely breach on the licensee's ability to engage in credit activities covered by the licence;

•

the extent to which the breach or likely breach indicates that the licensee's arrangements to ensure compliance with those obligations are inadequate; and

•

any other matters prescribed by regulations.

[Schedule 11, item 15, section 50A of the Credit Act]

11.151 Whether a particular breach is significant under the second significance test is determined objectively. This is made clear as the standard for reporting is that there are reasonable grounds to believe a reportable situation has arisen (see new section 50B of the Credit Act).

11.152 This formulation of the significance test mirrors the test in the Corporations Act.

Reporting investigations

11.153 Investigations conducted by credit licensees or their representatives into whether there has been or will be a significant breach of a core obligation also need to be reported to ASIC if the investigation continues for more than 30 calendar days. This means that on the 31st calendar day of such an investigation, it becomes a reportable situation. [Schedule 11, item 15, section 50A of the Credit Act]

11.154 The term 'investigation' is not defined in the legislation and has its ordinary meaning. This reflects that an investigation is likely to vary significantly depending on the size of the licensee's business, their internal systems and processes, and the type of breach.

11.155 The Macquarie Dictionary defines 'investigation' as 'a searching inquiry in order to ascertain facts.' Accordingly, if a credit licensee is considering whether it has conducted an investigation, a relevant factor would be whether there has been some information gathering by the licensee to determine whether a breach has occurred or will occur. Examples of information gathering may include:

•

communicating with representatives or staff of the licensee who may have been involved in the relevant conduct;

•

communicating with potentially affected clients; or

•

seeking specialist or technical advice.

11.156 Merely entering a suspected compliance issue into a risk management system is unlikely to amount to a searching inquiry to ascertain facts, although this will depend on the circumstances in each case.

11.157 The intention is that the term 'investigation' applies irrespective of how the licensee describes an investigation in its internal processes, as long as it satisfies the ordinary meaning of the term.

11.158 The time at which an investigation commences is a matter of fact and is not a subjective determination by the licensee. For example, after receiving a complaint from a client, if the licensee begins to look into the matter or takes steps towards ascertaining whether a significant breach has occurred, this would generally be considered to be when the investigation has commenced.

11.159 A credit licensee is also considered to have conducted an investigation if it outsources the investigation, or if a related entity (such as a parent company) conducts the investigation.

11.160 Even if a licensee does not commence an investigation, there may still be a reportable situation if the licensee has reasonable grounds to believe that they have breached, or will breach a core obligation and the breach is or will be significant. In other words, there may be circumstances where a significant and reportable breach should be clear to a licensee, even without an investigation being conducted.

11.161 Outcomes of investigations that continue for more than 30 calendar days must be reported to ASIC, even if the outcome is that there is no significant breach. The other possible outcomes of such an investigation will either be that there has been a significant breach of a core obligation or there will be a significant breach of a core obligation. The requirement to report these investigation outcomes are captured through the reportable situations (see sections 50A(1)(a), (b) and (d) of the Credit Act). This ensures ASIC has visibility of protracted investigations, and incentivises licensees to prioritise and streamline investigation processes where appropriate. [Schedule 11, item 15, section 50A of the Credit Act]

Additional reportable situations

11.162 Additional reportable situations are not linked to the core obligations or the significance test. These reportable situations arise in relation to a credit licensee if:

•

in the course of engaging in a credit activity, the licensee or its representative has engaged in conduct constituting gross negligence; or

•

the credit licensee or its representative has committed serious fraud.

[Schedule 11, item 15, section 50A of the Credit Act]

11.163 Serious fraud is defined in section 5 of the Credit Act and means an offence involving fraud or dishonesty against an Australian law or any other law that is punishable by imprisonment for life or for a period, or maximum period, of at least three months.

11.164 Conduct that constitutes gross negligence or serious fraud must be reported to ASIC because of the potentially considerable detriment that could be caused to a person as a result of that conduct. This kind of conduct also goes to the licensee or representative's character and suitability to engage in credit activities, which is relevant to ASIC's regulatory remit.

11.165 While investigations about the additional reportable situations are not expressly required to be reported to ASIC as part of the additional reportable situations, they may still need to be reported if they amount to a core reportable situation. That is, if the investigation can be characterised as an investigation conducted by a licensee or its representative into whether there has been or will be a significant breach of a core obligation, and the investigation continues for more than 30 calendar days. This is likely to occur in practice as there is some overlap between the additional reportable situations and the general conduct obligations under section 47 of the Credit Act (which are core obligations).

11.166 The additional reportable situations capture the 'serious compliance concerns' identified by Commissioner Hayne in relation to recommendation 2.8 of the Financial Services Royal Commission that are not already covered by the core reportable situations.

11.167 A regulation-making power is also included to prescribe circumstances in which an additional reportable situation arises. This allows the Government to respond effectively to emerging trends of non-compliance in the credit sector, particularly if those trends of non-compliance are not directly linked to the core obligations. Any regulations made would be subject to disallowance and parliamentary scrutiny.

Self-reporting obligations to ASIC

11.168 A credit licensee must lodge a report with ASIC if there are reasonable grounds to believe that a reportable situation has arisen in relation to the licensee. [Schedule 11, item 15, section 50B of the Credit Act]

11.169 'Reasonable grounds to believe' ensures the breach reporting obligation is objective. There will be reasonable grounds to believe a reportable situation has arisen if there are facts and/or evidence to induce in a reasonable person, a belief that a reportable situation has arisen.

11.170 Each reportable situation is separate from one another. This means for example, that there will be two separate obligations to lodge a report with ASIC if a credit licensee is no longer able to comply with a core obligation and the breach will be significant if it occurs (as this is a reportable situation under section 50A(1)(b) of the Credit Act), and that later eventuates into a significant breach of a core obligation (which is a reportable situation under section 50A(1)(a) of the Credit Act).

Timing for reporting

11.171 A report must be lodged within 30 calendar days after the credit licensee first knows that, or is reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen.

11.172 The terms 'know' and 'reckless' are equivalent to the concepts of 'knowledge' and 'recklessness' in the Criminal Code. A licensee knows of reasonable grounds to believe a reportable situation has arisen if the licensee knows of facts and/or evidence sufficient to induce in a reasonable person a belief that a reportable situation has arisen. In this context, 'reckless' is intended to capture circumstances where, on the facts available, the licensee does not know that there are reasonable grounds to believe a reportable situation has arisen, but:

•

is aware of a substantial risk that there are reasonable grounds to believe a reportable situation has arisen; and

•

having regard to the circumstances known to the licensee, it is unjustifiable to take the risk that there are reasonable grounds to believe a reportable situation has arisen.

11.173 While the licensee must have knowledge of, or be reckless with respect to, whether there are reasonable grounds to believe that a reportable situation has arisen for the reporting timeframe to commence, the question of whether those reasonable grounds exist remains objective.

11.174 The timeframe for reporting gives licensees sufficient time to investigate the circumstances of the breach (if needed) before reporting it to ASIC. This will also likely improve the quality of breach reports and assist ASIC to assess those reports. [Schedule 11, item 15, section 50B of the Credit Act]

How is a reportable situation reported to ASIC?

11.175 The report must be lodged by the credit licensee in the form approved by ASIC. [Schedule 11, item 15, section 50B of the Credit Act]

11.176 The use of an approved form ensures the breach reporting regime is effective, as the reports will need to include all the information and supporting documents required by ASIC to assess the reportable situation and determine whether further action should be taken.

11.177 The approved form will require licensees to include at a minimum the following information:

•

the date the reportable situation occurred;

•

a description of the reportable situation;

•

whether and how the reportable situation has been rectified by the licensee; and

•

the steps that have been or will be taken by the licensee to ensure future compliance.

Where reports are received by APRA

11.178 A report that a credit licensee is required to lodge in relation to its reportable situations is taken to have been lodged with ASIC if:

•

the licensee is also regulated by APRA; and

•

the report is given to APRA containing all of the information that is required in a report in relation to the reportable situation.

[Schedule 11, item 15, section 50B of the Credit Act]

11.179 A credit licensee may need to consider the form approved by ASIC to ensure that it gives APRA a report containing all the information that is required about the reportable situation.

11.180 The licensee will also need to ensure it gives the report to APRA within 30 calendar days after the licensee first knows that, or is reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen. This reflects that this new provision does not operate as a general exemption from the requirement to report, but operates such that a report is taken to have been lodged with ASIC even though it has been physically lodged with APRA.

11.181 There is a general exemption from the requirement to report. This exemption applies if the credit licensee is also regulated by APRA and the auditor or actuary of the licensee has given APRA a written report about the reportable situation within 10 business days after the licensee knows that, or is reckless with respect to whether, there are reasonable grounds to believe that the reportable situation has arisen. [Schedule 11, item 15, section 50B of the Credit Act]

11.182 These provisions recognise that there may be overlaps between the matters that need to be reported under the Credit Act and under other legislation. These provisions reduce the compliance burden on licensees that are dual-regulated, as these licensees will only need to report the matter to one regulator to satisfy their reporting obligations.

Consequences of failing to satisfy self-reporting obligations

11.183 Failing to lodge a report with ASIC as required constitutes an offence with a maximum penalty of two years imprisonment. A fine may also be imposed (see sections 288C and 288D of the Credit Act).

11.184 Strict liability applies in relation to the conduct of lodging a report with ASIC, including whether it is lodged in accordance with the 30-calendar day timing requirement and the prescribed form requirement. [Schedule 11, item 15, section 50B of the Credit Act]

11.185 Applying strict liability in this case is appropriate as requiring proof of fault would undermine deterrence.

11.186 In particular, applying strict liability makes it clear that the prosecution would not need to prove that the credit 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 particular statutory period. 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. This approach is therefore consistent with the principles in the Guide to Framing Commonwealth Offences about applying strict liability.

11.187 However, the prosecution will be required to prove that the credit licensee knew of, or was reckless with respect to, the facts constituting the reasonable grounds to believe that a reportable situation had arisen. This is the fault element for that circumstance under the Criminal Code.

11.188 The prosecution will also need to prove when the licensee first knew of, or was reckless with respect to, the facts constituting that circumstance. Requiring proof of this is central to the offence as it determines when the 30-day period for reporting starts. This will need to be proven notwithstanding the application of strict liability as it is expressly included in section 50B(4).

11.189 The defence of honest and reasonable mistake of fact will be available in relation to the matters to which strict liability apply. This defence will, for example, protect a licensee that has put in place a proper compliance system, and 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.

11.190 In accordance with section 324(3) of the Credit Act, for a credit licensee that is a body corporate, the state of mind of a director, employee or agent of the licensee (or certain other persons) will be attributed to the licensee where that person was engaged in the relevant conduct within the scope of their actual or apparent authority.

11.191 The maximum penalty of two years imprisonment, and/or a fine reflects the seriousness of the offence and aims to encourage compliance with the breach reporting regime. Maximum penalties also provide a court with guidance on how to punish criminal behaviour. The maximum penalty is generally reserved only for the most egregious cases.

11.192 Failure to lodge a breach report also attracts a civil penalty. [Schedule 11, item 15, section 50B of the Credit Act]

11.193 Consistent with other civil penalty provisions in the Credit Act and section 175B of the Credit Act, except to the extent expressly provided otherwise, it is not necessary to prove any state of mind of the person in proceedings for:

•

a declaration of a contravention of the new civil penalty provision; or

•

a pecuniary penalty order in relation to a contravention of the new civil penalty provision.

11.194 Additionally, while the new breach reporting obligation relies on the Criminal Code definitions of 'knowledge' and 'recklessness', this does not import criminal standards of proof, or criminal rules of evidence or procedure in any civil penalty proceedings in respect of a failure to lodge a breach report as required. This is consistent with sections 175B and 202 of the Credit Act.

11.195 The specified financial penalty for the contravention of this civil penalty provision is 5,000 penalty units. However, the maximum penalty applicable under section 167B of the Credit Act is:

•

for individuals, the greater of:

-

5,000 penalty units; or

-

if the court can determine-the benefit derived or detriment avoided because of the contravention, multiplied by three;

•

for bodies corporate, the greater of the following:

-

5,000 penalty units multiplied by 10 (50,000 penalty units);

-

if the court can determine-the benefit derived or detriment avoided because of the contravention, multiplied by three;

-

10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.

11.196 The offence provision will also form part of the infringement notice regime, and regulations will be made for this purpose. This is appropriate as there may be a high volume of contraventions (ranging in severity) of the reporting provisions. The Guide to Framing Commonwealth Offences highlights failing to comply with reporting obligations as an example of a case where issuing infringement notices may be appropriate.

11.197 Minor offences may be caused by poor internal processes. Where this is the case, the use of infringement notices may lead to a faster rectification of these processes, as firms are put on notice by ASIC sooner.

11.198 These enforcement options give ASIC sufficient flexibility to pursue the most appropriate action in each case, which will depend on its assessment of various considerations, including the severity and nature of the reportable situation. These options are also consistent with the existing consequences for failures relating to reporting breaches in the Corporations Act.

Reporting on other credit licensees to ASIC

11.199 A credit licensee will also be required to lodge a report with ASIC if the licensee has reasonable grounds to believe that a reportable situation, other than a reportable situation about investigations, has arisen in relation an individual who:

•

is a mortgage broker; and

•

is any of the following:

-

another credit licensee;

-

an employee of another credit licensee (or a related body corporate of another licensee), acting within the scope of the employee's employment;

-

a director of another credit licensee (or a related body corporate of another licensee), acting within the scope of the director's duties as director; or

-

a representative of another credit licensee, acting within the scope of the representative's authority given by the licensee.

[Schedule 11, item 15, section 50C of the Credit Act]

11.200 A mortgage broker is defined in section 15B of the Credit Act as a licensee or credit representative of a licensee that:

•

carries on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property;

•

does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and

•

in carrying on that business, provides credit assistance in relation to credit contracts offered by more than one credit provider.

11.201 This reporting obligation therefore targets misconduct by individual mortgage brokers. It also recognises that in the industry, other parties such as lenders and aggregators are often well positioned to identify this misconduct.

11.202 In practice, a credit licensee will likely develop reasonable grounds to believe that a reportable situation has arisen about another mortgage broker through a relationship of proximity between the two parties. For example, this may occur because of business dealings between the two parties or through mutual clients.

11.203 A reporting licensee who gives information to ASIC as required generally has the benefit of qualified privilege under section 243 of the Credit Act. This means the reporting licensee has qualified privilege in proceedings for defamation, or is not liable to an action for defamation if the reporting licensee had no malice when making the report to ASIC. A credit licensee who lodges a false report under this section for an improper motive, for example to undermine a competitor, will not have the benefit of qualified privilege in an action for defamation.

11.204 This reporting obligation only applies to other credit licensees. If a credit licensee has reasonable grounds to believe that a reportable situation has arisen about a mortgage broker operating under its own licence, the credit licensee must self-report that matter under section 50B of the Credit Act.

Timing for reporting a breach

11.205 The report must be lodged with ASIC within 30 calendar days after the reporting licensee first knows or is reckless with respect to whether there are reasonable grounds to believe that the reportable situation has arisen about another credit licensee. [Schedule 11, item 15, section 50B of the Credit Act]

11.206 This is consistent with the general timing rules for self-reporting of reportable situations to ASIC.

How is a reportable situation reported to ASIC?

11.207 The report must be lodged by the reporting licensee in the form approved by ASIC. This ensures the report includes the information and supporting documents required by ASIC to assess whether further action should be taken. [Schedule 11, item 15, section 50C of the Credit Act]

Informing the other credit licensee

11.208 The reporting licensee will also need to provide a copy of the report lodged with ASIC to the credit licensee who is the subject of that report. In some cases, this will require the reporting licensee to provide a copy of the report directly to the mortgage broker if the broker holds their own credit licence and is operating under that licence, or to a licensee who is no longer involved with the mortgage broker (for example, a previous employer). [Schedule 11, item 15, section 50C of the Credit Act]

11.209 Upon receiving a copy of the report lodged with ASIC, the licensee who is the subject of that report may need to commence an investigation or report that matter to ASIC under the self-reporting obligation. This reflects that a credit licensee will generally have more comprehensive information about its own reportable situations, which will assist ASIC to assess the reportable situation.

11.210 The copy of the report needs to be provided to the other credit licensee within 30 calendar days after the reporting licensee first knows or is reckless with respect to whether there are reasonable grounds to believe that the reportable situation has arisen. This is the same timeframe for reporting the matter to ASIC.

11.211 A reporting licensee who provides a copy of the report to the other licensee as required will also have the benefit of qualified privilege in an action for defamation. Additionally, a reporting licensee is not liable for an action based on breach of confidence in relation to that conduct. [Schedule 11, item 15, section 50C of the Credit Act]

11.212 This obligation supports the new requirement to be imposed on licensees to take steps to remediate an affected client when they detect misconduct arising either from their own behaviour or that of a representative under their licence (see recommendations 1.6 and 2.9 of the Financial Services Royal Commission).

No need to report if reasonable grounds to believe ASIC is aware

11.213 A credit licensee is not required to lodge a report with ASIC about another licensee if the first licensee has reasonable grounds to believe that ASIC is aware of:

•

the existence of the reportable situation; and

•

all of the information that would otherwise be required in a report about the reportable situation.

[Schedule 11, item 15, section 50C of the Credit Act]

11.214 This is a high threshold that is primarily intended to reduce instances of reporting matters to ASIC that are publicly well known about an individual mortgage broker operating under another credit licence.

11.215 This exemption only applies to the obligation to report on other credit licensees. It does not apply in relation to reporting on the licensee's own matters.

Consequences of failing to satisfy reporting obligations about another credit licensee

11.216 Failure to lodge a report or provide a copy of a report as required attracts a civil penalty. The specified financial penalty for the contravention of these provisions is 5,000 penalty units. [Schedule 11, item 15, section 50C of the Credit Act]

11.217 The maximum pecuniary penalty applicable is:

•

for individuals, the greater of:

-

5,000 penalty units; or

-

if the court can determine-the benefit derived or detriment avoided because of the contravention, multiplied by three;

•

for bodies corporate, the greater of the following:

-

5,000 penalty units multiplied by 10 (50,000 penalty units);

-

if the court can determine-the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three;

-

10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.

11.218 Consistent with other civil penalty provisions in the Credit Act and section 175B of the Credit Act, except to the extent expressly provided otherwise, it is not necessary to prove any state of mind of the person in proceedings for:

•

a declaration of a contravention of the new civil penalty provisions; or

•

a pecuniary penalty order in relation to a contravention of the new civil penalty provisions.

11.219 Additionally, while the reporting obligation relies on the Criminal Code definitions of 'knowledge' and 'recklessness', this does not import criminal standards of proof, or criminal rules of evidence or procedure in any civil penalty proceedings in respect of a failure to lodge a breach report as required. This is consistent with sections 175B and 202 of the Credit Act.

11.220 The civil penalty provisions will also be subject to the infringement notice regime and regulations will be made for this purpose. This is appropriate as there may be a high volume of contraventions (ranging in severity) of these reporting obligations. The Guide to Framing Commonwealth Offences highlights failing to comply with reporting obligations as an example of a case where issuing infringement notices may be appropriate.

11.221 Minor contraventions may be caused by poor internal processes. Where this is the case, the use of infringement notices may lead to a faster rectification of processes, as firms are put on notice by ASIC sooner.

11.222 These enforcement options give ASIC sufficient flexibility to pursue the most appropriate action in each case, depending on its assessment of various considerations, including the severity and nature of the reportable situation. These options are also consistent with the existing consequences for failures relating to reporting breaches in the Corporations Act.

ASIC publication of breach reporting data

11.223 ASIC must publish information about breaches and likely breaches of core obligations that are self-reported by licensees during the financial year. This includes reports lodged with APRA by dual regulated licensees or their auditors and actuaries. [Schedule 11, item 15, section 50D of the Credit Act]

11.224 The publication must contain information about credit licensees that have lodged these reports. This means the publication will contain licensee-level data. [Schedule 11, item 15, section 50D of the Credit Act]

11.225 Subject to any requirements prescribed by the regulations, ASIC has discretion as to the contents and form of the publication. ASIC's publication may include the following kinds of information:

•

the name of the licensee;

•

volume of reported breaches;

•

breakdown of breach reports by corporate group; and

•

the number of breaches compared to the size, activity or volume of the licensee's business.

11.226 ASIC's publication does not need to include information about reports regarding:

•

investigations into whether a significant breach of a core obligation has occurred or will occur, which are reportable situations under section 50A(1)(c);

•

outcomes of those investigations, which are reportable situations under section 50A(1)(d);

•

additional reportable situations-see section 50A(2); or

•

reportable situations relating to other credit licensees made under section 50C.

11.227 ASIC will be required to publish this information on its website within four months after the end of each financial year, starting on the financial year ending on 30 June 2022. [Schedule 11, item 15, section 50D of the Credit Act]

11.228 The information published by ASIC must include any information prescribed by the regulations, which may include personal information under the Privacy Act 1988 about a credit licensee who is an individual. This regulation-making power may be exercised to allow ASIC to publish the names of credit licensees where the licence is held in the name of an individual, as this would constitute personal information under the Privacy Act 1988. This will allow ASIC 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 ASIC's publication. [Schedule 11, item 15, section 50D of the Corporations Act]

11.229 Regulations may also be made to prescribe circumstances in which information does not need to be included in ASIC's publication. This regulation-making power ensures there is an appropriate mechanism to balance the broad requirement on ASIC to publish breach report data at the licensee-level. [Schedule 11, item 15, section 50D of the Credit Act]

11.230 The information must also be organised in accordance with the regulations, if any. [Schedule 11, item 15, section 50D of the Credit Act]

11.231 Regulations made for the purposes of these provisions would be subject to disallowance and parliamentary scrutiny.

11.232 ASIC may also correct any error in, or omission from, a report published under this section. This mirrors Australian Privacy Principles 10 and 13, which are set out in Schedule 1 to the Privacy Act 1988. The correction may be initiated by an affected licensee or by ASIC. [Schedule 11, item 15, section 50D of the Credit Act]

11.233 This supplements ASIC's existing reporting framework to enhance accountability and provide an incentive for improved behaviour. It will also assist industry and consumers to identify areas where significant numbers of breaches or likely breaches are occurring, and allow licensees to target their efforts to improve their compliance outcomes in those areas.

Consequential amendments

Amendments to the Corporations Act

11.234 The existing reporting requirement applying to responsible entities in section 601FC(1)(l) of the Corporations Act is replaced by the new breach reporting regime. In particular, key breaches of the Corporations Act relating to a registered scheme (such as in Chapter 5C of that Act) are captured by the core obligations. Section 601FC(1)(l) of the Corporations Act is therefore repealed to avoid duplication. This streamlines the reporting requirements for responsible entities of registered schemes. [Schedule 11, item 1, section 601FC of the Corporations Act]

11.235 The definitions in section 910A of the Corporations Act are updated to signpost the new definitions introduced by these amendments, including the definition of core obligation, knowledge, recklessness and reportable situation. [Schedule 11, item 2, section 910A of the Corporations Act]

11.236 The civil penalty provision and criminal offence penalties for existing section 912D of the Corporations Act have also been repealed and subsequently replaced as the breach reporting provisions have been rewritten. [Schedule 11, items 7 and 10, section 1317E and Schedule 3 to the Corporations Act]

11.237 Additional headings have also been introduced in Division 3 of Part 7.6 of the Corporations Act to add clarity. [Schedule 11, items 3, 4 and 6, Subdivisions A, B, C and D of Division 3 of Part 7.6 of the Corporations Act]

Amendments to the Credit Act

11.238 The definitions in section 5(1) of the Credit Act are updated to signpost the new definitions introduced by these amendments, including the definition of core obligation, knowledge, recklessness and reportable situation. [Schedule 11, items 12 and 17, sections 5 and 53C of the Credit Act]

11.239 Additional headings have also been introduced in Division 5 of Part 2-2 of the Credit Act to add clarity. [Schedule 11, items 13, 14 and 16, Subdivisions A, B, C and D of Division 5 of Part 2-2 of the Credit Act]

Application and transitional provisions

Amendments to the Corporations Act

11.240 Schedule 11 commences on 1 October 2021. [Clause 2]

11.241 The new breach reporting obligations in sections 912DAA and 912DAB of the Corporations Act apply to reportable situations arising on or after 1 October 2021. This period is designed to give industry participants and ASIC sufficient time to prepare their systems for the change. [Schedule 11, item 9, section 1671B of the Corporations Act]

11.242 Although existing section 601FC(1)(l) and section 912D of the Corporations Act are repealed upon commencement of this Schedule, these provisions continue to apply in relation to breaches and likely breaches that occur before 1 October 2021, if, before 1 October 2021, the licensee knew the breach or likely breach occurred. In this case, those existing provisions will continue to apply irrespective of whether the breach is significant before 1 October 2021, and irrespective of whether, before 1 October 2021, the licensee knew of that significance. [Schedule 11, item 9, section 1671A of the Corporations Act]

11.243 If however, the breach or likely breach occurred before 1 October 2021, but the licensee, on or after 1 October 2021, first knows that the breach or likely breach occurred, the licensee is required to apply the new reporting provisions under section 912DAA. Again, in this case the new provisions will apply irrespective of whether the breach is significant on or before 1 October 2021, and irrespective of whether, before 1 October 2021, the licensee knew of or was reckless with respect to that significance. [Schedule 11, item 9, section 1671B of the Corporations Act]

11.244 This approach ensures there is no gap between the existing reporting obligations and the new reporting obligations introduced by Schedule 11. Whether the old or new regime applies will depend on whether the licensee first knows that the breach occurred either before, or on or after, 1 October 2021. [Schedule 11, item 9, sections 1671 and 1671A of the Corporations Act]

11.245 If a financial services licensee is uncertain about whether a breach, likely breach or reportable situation arose before or after 1 October 2021, or when it first knows or is reckless with respect to the matter, the licensee should report the matter in the prescribed form under the new reporting obligations introduced by this Schedule. Uncertainty may arise for example where there has been a course of continuous misconduct before and after 1 October 2021. This approach will generally be sufficient as the new reporting obligations are broader in scope and will require the licensee to provide more information compared with the existing reporting obligations.

11.246 ASIC will be required to publish information about breach reports starting on the financial year ending on 30 June 2022. [Schedule 11, item 9, section 1671D of the Corporations Act]

11.247 The obligation to give notice to ASIC in section 912DAC applies if a financial services licensee becomes or ceases to be a participant in a licensed market or a licensed CS facility on or after 1 October 2021. Otherwise, sections 912D(2) and (3) of the previous law continue to apply. [Schedule 11, item 9, sections 1671B and 1671C of the Corporations Act]

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

11.248 The new reporting obligations in the Credit Act apply to all reportable situations arising on or after 1 October 2021. [Schedule 11, item 18, items 1 and 2 of Schedule 16 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

11.249 ASIC will be required to publish information about breach reports starting on the financial year ending on 30 June 2022. [Schedule 11, item 18, item 3 of Schedule 16 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

Chapter 12 - Investigating and remediating misconduct (recommendations 1.6 and 2.9)

Outline of chapter

12.1 In addition to the measures described in Chapter 11, Schedule 11 to the Bill implements recommendations 1.6 and 2.9 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 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.

Context of amendments

12.2 A person who carries on a financial services business must hold an Australian financial services licence (section 911A of the Corporations Act). A financial services licensee is subject to general obligations under section 912A of the Corporations Act, including the obligation to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly (section 912A(1)(a) of the Corporations Act).

12.3 A financial services licensee must have in place adequate arrangements for compensating retail clients for loss or damage suffered because of breaches of the Corporations Act by the licensee or its representatives (section 912B of the Corporations Act).

12.4 Similarly, a person must not engage in a credit activity if the person does not hold an Australian credit licence authorising the person 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 do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly (section 47(1)(a) of the Credit Act).

12.5 A credit licensee must also have in place adequate arrangements for compensating consumers for loss or damage suffered because of breaches of the Credit Act by the licensee or its representatives (section 48 of the Credit Act).

12.6 ASIC's Regulatory Guide 256: Client review and remediation conducted by advice licensees provides guidance on the broader remediation framework under general licensee obligations (see sections 912A and 912B of the Corporations Act). The guide also includes guidance in support of these obligations, which Australian credit licensees should also consider in reference to their obligations under the Credit Act.

12.7 Despite these requirements imposed on financial services licensees, the Financial Services Royal Commission found that when an Australian financial services licensee detects that an adviser has engaged in misconduct (whether by giving inappropriate advice or otherwise), entities do not always consider what steps they should take to see whether the adviser may have acted inappropriately in respect of matters other than those that are the immediate focus of attention. Commissioner Hayne found that the result is that the damage done by an adviser may not come to light until long after the event, which works to the detriment of both the affected clients and the entity.

12.8 To address these findings, the Financial Services Royal Commission recommendation 2.9 was that a financial services licensee should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):

•

make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser's misconduct; and

•

where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly.

12.9 Recommendation 1.6 of the Financial Services Royal Commission was that credit licensees should take the same steps in response to detecting misconduct of a mortgage broker as those referred to in recommendation 2.9 for financial advisers.

Summary of new law

12.10 Schedule 11 implements recommendations 1.6 and 2.9 of the Financial Services Royal Commission, which called for Australian financial services licensees and credit licensees to be required, as a condition of their licence, to investigate potential and actual misconduct engaged in by financial advisers and mortgage brokers, and to inform and remediate affected clients.

12.11 The obligation on Australian financial services licensees and credit licensees to investigate and remediate contains two limbs:

•

first, when a licensee detects misconduct, the licensee is required to:

-

within 30 days, inform potentially affected clients of misconduct; and

-

investigate the nature and full extent of any misconduct (including the loss or damage the affected client or consumer has suffered or will suffer) within a reasonable amount of time; and

•

second, once an investigation is complete, the licensee is required to:

-

within 10 days, inform the affected client of the nature and full extent of the misconduct; and

-

within 30 days, remediate the client's or consumer's loss.

12.12 The amendments made by Schedule 11 to implement recommendations 1.6 and 2.9 builds on an existing remediation framework that aims to ensure consumers are remediated in a fair, honest and efficient manner and put back in the position they would have been had the misconduct not occurred. The purpose of recommendations 1.6 and 2.9 is to address a particular sub-set of licensees (those that provide personal advice and credit assistance) and high-risk conduct that has historically remained undetected for undue periods. It does not replace existing obligations, nor remove a person's existing rights to take civil action or complain through alternative dispute resolution processes.

12.13 The existing remediation framework under a licensee's general obligations and the specific obligations under the amendments to notify, investigate and remediate must be considered concurrently. For example, in circumstances where a person falls out of scope at any stage of the obligations under the amendments to notify, investigate and remediate, they must continue to consider the requirements under the existing remediation framework in deciding whether it is fair, honest and efficient to remediate.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to the Corporations Act

12.14 The amendments to the Corporations Act impose the new investigation and remediation obligations. These obligations require Australian financial services licensees to:

•

notify clients affected by misconduct (section 912EA of the Corporations Act);

•

investigate the nature and full extent of misconduct and remediate affected clients (section 912EB of the Corporations Act); and

•

maintain records to show compliance with these obligations (section 912EC of the Corporations Act).

Notifying clients affected by certain reportable situations

Obligation to notify affected clients regarding misconduct

12.15 Under the obligation to notify misconduct, an Australian financial services licensee must take reasonable steps to notify a person if all of the following are satisfied:

•

the licensee or a representative of the licensee provides or has provided personal advice to the person in relation to a relevant financial product;

•

there are reasonable grounds for the licensee to believe that a reportable situation has arisen, and that reportable situation:

-

amounts to a significant breach of a core obligation;

-

amounts to gross negligence;

-

amounts to serious fraud; or

-

is a reportable situation because other circumstances prescribed by the regulations exist; and

•

there are reasonable grounds for the licensee to suspect that both:

-

the person has suffered or will suffer loss or damage as a result of the reportable situation; and

-

the person has a legally enforceable right to recover the loss or damage from the licensee.

[Schedule 11, item 6, section 912EA(1) of the Corporations Act]

12.16 The person that must be notified is the affected client. Notifying the client allows the client to consider their rights and the ways they can mitigate potential loss or damage arising from the reportable situation.

12.17 The circumstances where a licensee detects misconduct that has potentially resulted in loss or damage for a client are provided at sections 912EA(1)(a), (b) and (c) of the Corporations Act.

12.18 First, there must be a person who receives or has received personal advice from the licensee or a representative of the licensee as a retail client in relation to a relevant financial product.

12.19 Personal advice is defined in section 766(3) of the Corporations Act. Generally, personal advice is financial product advice that is given or directed to a person where:

•

the advice has considered one or more of the person's objectives, or

•

a reasonable person might expect the provider to have considered one or more of those matters.

12.20 A representative of a licensee is defined in section 910A of the Corporations Act. This includes an authorised representative of the licensee, an employee or director of the licensee, an employee or director of a related body corporate of the licensee, or any other person acting on behalf of the licensee.

12.21 A retail client is defined in sections 761G and 761GA of the Corporations Act.

12.22 Second, there must be reasonable grounds for the licensee to believe that:

•

a reportable situation that amounts to a significant breach of a core obligation has arisen, or

•

a reportable situation that amounts to either gross negligence, serious fraud, or other circumstances prescribed by the regulations has arisen.

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

12.24 The core obligations of a licensee are defined at the breach reporting obligations under section 912D. These core obligations are discussed from paragraph 11.20.

12.25 What constitutes a significant breach will depend on the circumstances of the case. This is discussed from paragraph 11.25.

12.26 A reportable situation as mentioned in section 912D(2) of the Corporations Act includes gross negligence, serious fraud, and any other circumstances prescribed by the regulations. This is discussed from paragraph 11.51.

12.27 Third, there must be reasonable grounds for the licensee to suspect that the client who has suffered or will suffer loss or damage as a result of the reportable situation also has a legally enforceable right against the licensee to recover the loss or damage.

12.28 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. This threshold relies on the common law meaning of the term 'reasonable grounds to suspect' and is not defined by legislation for the purposes of this section. In determining whether the grounds are reasonable, a person may take into account the facts and circumstances of the situation.

12.29 However, this threshold is lower than that of reasonable grounds to believe in a circumstance. Reasonable grounds to believe require that there are facts that would induce a reasonable person to believe in the truth or existence of the circumstance.

12.30 A person's legally enforceable right to recover loss or damage as mentioned in section 912EA(1)(c)(ii) of the Corporations Act is made with reference to the loss or damage the affected client suffered or will suffer as a result of the reportable situation under section 912EA(1)(c)(i) of the Corporations Act. Therefore, the relevant legally enforceable right against the licensee is the right to seek to recover loss or damage they suffered or will suffer as a result of the reportable situation. In this sense, it does not require that an affected client already has an enforceable judgment against the licensee, but rather, a right to seek recovery of the loss or damage.

12.31 The requirements under section 912EA(1)(c) of the Corporations Act, along with the requirement under section 912EA(1)(a) of the Corporations Act establish the adviser-client relationship between the licensee and the person, who is an affected client. The loss or damage an affected client has suffered or will suffer does not need to be the result of the personal advice, but rather, as a result of the reportable situation.

Example 12.1 : Reasonable grounds to suspect that a person has a legally enforceable right to recover loss or damage

Zebra Services Corporation is an Australian financial services licensee. Zebra Services Corporation has reasonable grounds to believe that one of their employees, Angela, who is an adviser, has committed serious fraud.

Zebra Services Corporation has a list of Angela's clients as at the time of the fraud she is believed to have committed. Based on the circumstances of the fraud, Zebra Services Corporation has reasonable grounds to suspect that five of Angela's clients are affected clients as a result of the reportable situation as they may have a claim against Zebra Services Corporation for the loss or damage suffered as a result of fraud. Zebra Services Corporation must notify these five affected clients under section 912EA of the Corporations Act. Additionally, Zebra Services Corporation must investigate and remediate the reportable situation under section 912EB of the Corporations Act.

12.32 An affected client may have a legally enforceable right to recover loss or damage against the licensee in relation to the reportable situation where there is a potential claim that if pursued by the affected client, may be enforced as a judgment by the court against the licensee. Accordingly, this requires an affected person to have standing to seek loss or damage resulting from the reportable situation and can include circumstances where a court has the discretion to make an order for loss or damage. For example, a client may have a legally enforceable right to recover loss or damage against the licensee for negligence or breach of contract, or where a compensation order may be available (for example, under section 1317HA of the Corporations Act).

Example 12.2 : Legally enforceable right to recover loss or damage - Fees for no service

Greater Flamingo Advisory is an Australian financial services licensee. Greater Flamingo Advisory has reasonable grounds to believe that they have significantly breached a core obligation. This is because they detected that they have engaged in fees for no service conduct, contrary to their obligation under section 912A(1)(a) of the Corporations Act to do all things necessary to ensure that the financial services covered by the licensee are provided efficiently, honestly and fairly.

Greater Flamingo Advisory discovers that they were obliged to provide financial advice to thirty of their clients by the end of the previous financial year. In twenty of these cases, they found breaches of contract where the financial services they promised were not actually performed, or could not have been performed. Greater Flamingo Advisory has found reasonable grounds to suspect that there are twenty clients who may have a claim against Greater Flamingo Advisory for breach of contract for loss or damage as a result of the reportable situation. In the remaining 10 cases, there was no reportable situation.

Greater Flamingo Advisory must notify those twenty affected clients under section 912EA of the Corporations Act. (Additionally, Greater Flamingo Advisory must investigate and remediate the reportable situation under section 912EB of the Corporations Act).

12.33 A client would not have a legally enforceable right where, for example, the underlying cause of action has been extinguished or barred as not enforceable by expiry of the relevant limitation period. However affected clients may still have rights that they are able to pursue through internal dispute resolution and through AFCA. Licensees should take this into account in determining whether they should extend the breadth of their remediation consistent with ASIC's regulatory guidance.

12.34 Similarly, there may be circumstances where a reportable situation would not result in a client with a legally enforceable right against the licensee for loss or damage as a result of that reportable situation. This may occur where, for example, there is no cause of action available to the client for loss or damage as a result of the reportable situation, or where there is no loss or damage. In determining whether there is loss or damage to a client, it is not relevant to consider whether or not that loss or damage is material.

Example 12.3 : No loss or damage as a result of the reportable situation

Mallard Corporation is an Australian financial services licensee. Mallard Corporation has reasonable grounds to believe that it has significantly breached its obligation to ensure that its representatives are adequately trained to provide financial services under section 912A(1)(f). In this case, there were two staff members out of a team of nine who continued to avoid mandatory training, and Mallard Corporation did not enforce the obligation.

Further, Mallard Corporation, through its representatives has provided personal advice to retail clients in relation to relevant financial products.

While there are clients who have received relevant advice from Mallard Corporation and Mallard Corporation was at fault for not enforcing mandatory training, the two staff members who were not adequately trained to provide financial services never provided advice to a retail client of Mallard Corporation.

Accordingly, Mallard Corporation would have no reasonable grounds to suspect that there is a person (who is an affected client) with a legally enforceable right to recover loss or damage as a result of the reportable situation. Therefore, Mallard Corporation does not have an obligation to notify clients under section 912EA of the Corporations Act.

12.35 It is relevant for the licensee to consider a claim that may be enforceable against them as this consideration will assist the licensee's obligation under section 912EB of the Corporations Act to investigate and remediate the reportable situation.

12.36 There may be circumstances where a client has suffered loss or damage as a result of negligent advice which caused them to invest in a particular product and that investment yielded a lower return than they would have received if they invested in a different product with proper advice. However, a client may not suffer loss or damage in all circumstances where they have invested in a product that yielded a lower return than they would have in a different product. For example, where a client knowingly accepted a level of investment risk suited to their circumstances with the objective of obtaining higher returns, the lack of gain or the crystallisation of a loss may not be considered a relevant loss or damage.

Form and period for giving notice

12.37 A notice to an affected client of a reportable situation must be provided in writing and should contain sufficient information to give the affected client an understanding of the nature of the reportable situation and the basis for the suspicion that the client may have suffered or will suffer loss or damage. The notice may include, for example, the date of the reportable situation, a description of the reportable situation, the consequences of the reportable situation, how a client may be affected and information about the investigation that is to be carried out. Where there is a form approved by ASIC for the purposes of the notice, a licensee must notify the affected client in the approved form and include the information or other material required by the form. [Schedule 11, item 6, section 912EA(2) of the Corporations Act]

12.38 The notice must be given to the affected client within 30 days of the licensee first knowing or is being reckless with respect to the misconduct they detect, including that this misconduct has potentially resulted in, or will result in, loss or damage which the client has a legally enforceable right to recover.

12.39 In satisfying this obligation, a licensee has qualified privilege and is protected from an action of defamation in relation to the information contained in the licensee's notice to affected clients. The licensee is also not liable for any action based on breach of confidence.

Consequences of failing to notify affected clients: civil penalty provision

12.40 A licensee who contravenes the obligation to notify an affected client of misconduct is liable for a civil penalty (see section 1317E of the Corporations Act). [Schedule 11, item 6, section 912EA(5) the Corporations Act]

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

12.42 In addition to giving rise to the requirement to notify an affected client, the existence of a reportable situation and reasonable grounds to suspect that the affected client has an enforceable right to recover loss or damage also triggers the obligations to investigate and, where necessary, remediate the affected client. Notifying the affected client means that the client is put on notice that an investigation, and possible remediation, is to follow. If the investigation or remediation does not eventuate or is not completed within the provided timeframes, the affected client can, for example, notify the firm through an internal dispute resolution process. Other options may be to bring the matter to the attention of AFCA or ASIC, or pursue a private remedy. Given the potential incentive from the perspective of a licensee to circumvent these processes by failing to notify the affected client that they have potentially suffered loss or damage, it is necessary and appropriate to impose a civil penalty where the obligation is not complied with.

12.43 It is also necessary and appropriate to impose a civil penalty. This is the case because the imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any loss or damage flowing from the investigated misconduct not being provided to the affected client. Current measures to encourage investigations into misconduct have not been sufficient and the Financial Services Royal Commission found that entities have not always considered what steps they need to take in response to detections of misconduct.

12.44 Further, the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any loss or damage flowing from the investigated misconduct not being provided to the affected client.

12.45 The imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the obligation to investigate and remediate misconduct is consistent with the treatment of other contraventions of the general obligations imposed on an Australian financial services licensee. For example, a civil penalty applies with respect to the general obligation imposed on licensees under section 912A of the Corporations Act 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.

12.46 The declaration of a contravention of a civil penalty provision and pecuniary penalty orders are dealt with in sections 1317J and 1317G of the Corporations Act.

12.47 The maximum penalty applicable to a failure by a financial services licensee to notify an affected client of a reportable situation 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 the general obligations of a financial services licensee.

12.48 Consistent with all pecuniary penalty orders made under section 1317G of the Corporations Act, when considering the penalty for a failure by a financial services licensee to notify an affected client of a reportable situation, the court must take into account all relevant matters. Section 1317G 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.

Investigating and remediating certain reportable situations

Obligation to investigate misconduct

12.49 A financial services licensee must conduct an investigation into the misconduct if all of the following are satisfied:

•

the licensee or a representative of the licensee provides or has provided personal advice to the affected client as a retail client in relation to a relevant financial product;

•

there are reasonable grounds for the licensee to believe that a reportable situation has arisen, and either:

-

that reportable situation amounts to a breach of a core obligation; or

-

that reportable situation amounts to gross negligence or serious fraud, or other circumstances prescribed by the regulations exist; and

•

there are reasonable grounds for the licensee to suspect that both:

-

the person has suffered loss or damage as a result of the reportable situation; and

-

the person has a legally enforceable right to recover the loss or damage from the licensee.

[Schedule 11, item 6, section 912EB(1) of the Corporations Act]

12.50 The circumstances where a licensee detects misconduct that has potentially resulted in, or will result in loss or damage for a client is provided at sections 912EB(1)(a), (b) and (c) of the Corporations Act in the obligation to notify affected clients of misconduct. Accordingly, the threshold for the obligations under section 912EA(1) of the Corporations Act (to notify affected clients of misconduct) and section 912EB(1) of the Corporations Act (to investigate and remediate misconduct) are the same.

12.51 The elements of each requirement relevant to the obligation to notify affected clients of misconduct are discussed at paragraph 12.15.

12.52 The specific obligation to investigate and remediate misconduct by financial advisers is intended to support existing obligations to remediate consumers and therefore to restore trust in the Australian financial services sector.

12.53 The obligation to investigate and remediate misconduct, does not, on its own, create a new cause of action for affected clients in relation to the reportable situation. Along with general law actions, statutes may create a right for a person to seek a compensation order against the licensee for loss or damage (for example, under section 1317HA of the Corporations Act).The availability of a compensation order to a person may form the basis on which a client may have a legally enforceable right to recover loss or damage from a licensee.

Timing and duration of the investigation

12.54 The licensee must commence the investigation within 30 days after the licensee first knows or is reckless with respect to the matters mentioned in sections 912EB(1)(a), (b) and (c) of the Corporations Act (where misconduct detected resulted in, or will result in loss or damage for a client). [Schedule 11, item 6, section 912EB(2) of the Corporations Act]

12.55 The licensee must complete the investigation as soon as reasonably practicable after it is commenced. An investigation may be considered complete when a financial services licensee has considered the matters and done the things provided in section 912EB(3) of the Corporations Act, discussed from paragraph 12.62.

12.56 During the investigation, as affected clients and ASIC have been informed of the misconduct under sections 912EA and 912D of the Corporations Act, respectively, the licensee must complete the investigation within a reasonable amount of time. During this time, an affected client may continue to consider their rights and remedies against the licensee and ASIC may also consider commencing compliance and enforcement action.

12.57 Accordingly, the obligation to investigate and remediate misconduct does not extinguish the right of an affected client to bring an action against the licensee. All of the affected client's rights continue to exist alongside the investigation and remediation process, including rights to complain through internal or external dispute resolution processes.

12.58 The law does not prescribe what a reasonable time for the duration of the investigation is. This provides the licensee with flexibility to accurately and reasonably assess misconduct and the loss or damage caused. The reasonable amount of time for an investigation will depend on the circumstances of the case, including (but not limited to) the size of the licensee's business, the extent and period of the misconduct and the nature of the loss or damage caused by the licensee to affected clients.

12.59 After the completion of the investigation, the licensee must take reasonable steps to notify the affected client of the outcome of the investigation in writing. The notification should contain sufficient information to give the affected client an understanding of the nature of the conduct identified, any related misconduct, a description of how the conduct affected the client's interests, and an assessment of the loss or damage for which the licensee reasonably believes the affected client is entitled to seek recovery. Where there is a form approved by ASIC for the purposes of the notice, a licensee must notify the affected client in the approved form and include the information or other material required by the form. [Schedule 11, item 6, section 912EB(5) of the Corporations Act]

12.60 The notice must be given to the affected client within 10 days after the completion of the investigation.

12.61 In satisfying this obligation, a licensee has qualified privilege and is protected from an action of defamation in relation to the information contained in the licensee's notice about the outcome of the investigation. The licensee is also not liable for any action based on breach of confidence. [Schedule 11, item 6, sections 912EB(6) and (7) of the Corporations Act]

Matters to be considered in the investigation

12.62 In conducting the investigation, the licensee must do all of the following:

•

identify the conduct that gave rise to the reportable situation;

•

quantify the loss or damage that there are reasonable grounds to believe:

-

the affected client has suffered or will suffer as a result of the reportable situation; and

-

the affected client has a legally enforceable right to recover from the licensee; and

•

do anything prescribed by the regulations.

[Schedule 11, item 6, sections 912EB(3) and (4) of the Corporations Act]

12.63 It is intended that investigations are thorough, complete and robust. Investigations should reveal the full details and extent of the relevant conduct. An investigation may reveal further conduct that itself constitutes a reportable situation under section 912D of the Corporations Act and requires a report to be lodged with ASIC under 912DAA of the Corporations Act. If in practice the quality and completeness of investigations is observed to be inadequate, more specific requirements for investigations may be prescribed by regulations. The component steps that comprise the investigation are described below.

12.64 First, a licensee must identify the conduct that gave rise to the reportable situation. This conduct can include an act or omission, or a series of acts or omissions that gave rise to the reportable situation.

12.65 There may be circumstances where a licensee who identifies the conduct that gave rise to the reportable situation is put on notice and discovers that the same conduct or related conduct gives rise to further reportable situations. When this occurs, the licensee must comply with the obligation to report those further reportable situations under section 912DAA of the Corporations Act. In general terms, the obligation to report under section 912DAA of the Corporations Act will arise where there are reasonable grounds for the licensee to believe that a relevant reportable situation has arisen. Accordingly, a licensee must take into account the factual circumstances of the reportable situation and the conduct that led to the reportable situation.

12.66 Further, there may also be circumstances where in identifying the conduct that gave rise to the reportable situation, the licensee may identify more clients that were also affected by the same or similar conduct. Where this occurs, the obligations to notify, investigate and remediate would apply equally to a later identified client as they do to an originally identified client or clients. Where misconduct has occurred in relation to a client, there is an expectation that the advice given to clients in similar circumstances be investigated by the licensee to detect any wider misconduct.

12.67 Second, in the course of the investigation, a licensee must quantify the loss or damage that there are reasonable grounds to believe that:

•

the affected client has suffered or will suffer, and

•

the client has a legally enforceable right to recover.

12.68 It is also prudent for licensees to keep affected clients informed of the progress of the investigation as affected clients can continue to consider their rights and remedies against the licensee.

12.69 The term 'reasonable grounds to believe' is not defined in legislation for the purposes of this provision. Instead, the threshold relies on its common law meaning. This is discussed at paragraph 12.23.

12.70 The amendments do not prescribe how a licensee must determine the quantum of the loss or damage an affected client suffers or will suffer. Generally, in determining the loss or damage arising from the reportable situation, a licensee should have regard to legal principles.

12.71 Typically, a licensee will need to:

•

identify each affected client;

•

determine the nature of the legally enforceable right available to the affected clients;

•

evaluate the type of remedies available to the affected client based on the misconduct; and

•

determine the amount of the payment.

12.72 When investigating and determining loss or damage to affected clients, a licensee should have reference to any underlying liabilities they may have to that client based on causes of action available to the client in relation to the reportable situation.

12.73 The types of legally enforceable rights to recover loss or damage will depend on the circumstances of the case. For example, an affected client may have a legally enforceable right against the licensee to recover loss or damage as a result of the reportable situation where the underlying claim rests on negligence, dishonest conduct, breach of contract, breach of fiduciary duty, or where a compensation order may be available (for example, under section 1317HA of the Corporations Act).

12.74 Third, in conducting the investigation, the licensee must do anything else prescribed by the regulations.

12.75 The approach to include additional requirements in the regulations is intended to ensure effective compliance and the integrity of the provision. This will allow an evaluation of industry practices to ensure that licensees continue to comply with the policy intent of the provision and actively investigate misconduct.

Obligation to compensate the affected client for loss or damage

12.76 A licensee must take reasonable steps to remediate the affected client within 30 days once an investigation under section 912EB(1) of the Corporations Act is complete, and where there are reasonable grounds to believe that:

•

the affected client has suffered or will suffer loss or damage; and

•

the client has a legally enforceable right to recover loss or damage from the licensee.

[Schedule 11, item 6, section 912EB(8) of the Corporations Act]

12.77 Nothing in section 912EB of the Corporations Act precludes the licensee from providing a remedy to an affected client outside of the obligation to investigate and remediate misconduct.

12.78 The obligation to investigate and remediate misconduct is intended to ensure that licensees actively provide a remedy to affected clients where a reportable situation has resulted in loss or damage in relation to which the affected client would have an enforceable right to recover, without requiring the affected client to engage in a court process.

12.79 The term 'reasonable grounds to believe' is not defined in legislation for the purposes of this provision. Instead, the threshold relies on its common law meaning. This is discussed at paragraph 12.23.

12.80 A licensee should consider the facts and circumstances of the case to determine whether they have reasonable grounds to believe that the affected client has:

•

suffered or will suffer loss or damage; and

•

a legally enforceable right to recover that loss or damage.

12.81 As the payment from the licensee is provided on the basis of the loss or damage an affected client suffered or will suffer as a result of the reportable situation, it is not the intention to require licensees to include amounts for damages that do not reflect the loss or damage, such as profit gained by the licensee as a result of the reportable situation, aggravated damages or punitive damages.

12.82 In addition to the requirement that an affected client is compensated for loss or damage suffered, a licensee may also consider other relevant forms of remedies that would complement compensation provided to the affected client. The amendments do not limit the types and combinations of different remedies which a licensee may additionally provide to an affected client having regard to the loss or damage the affected client suffered or will suffer.

12.83 There may be circumstances where non-monetary remediation would be appropriate to accompany the monetary remediation that is required by the amendments. Depending on the circumstances of each case, some possible non-monetary remediation may include the rescission of a contract, assisting a client to transfer to a more appropriate product, and the setting aside of a portion or a whole amount of debt owed to the licensee by the affected client.

12.84 At the completion of the investigation, there may be circumstances where the results of an investigation show that there is no liability under section 912EB of the Corporations Act for a licensee to remediate as the licensee does not have reasonable grounds to believe that a client suffered or will suffer loss or damage to which they have a legally enforceable right to recover. These may include circumstances where at the end of the investigation:

•

the licensee finds that there were no clients affected by the reportable situation; or

•

the client does not have a cause of action, or does not have a legally enforceable right against the licensee in relation to the reportable situation; or

•

the client suffered no loss or damage as a result of the reportable situation.

Example 12.4 : Licensee has no liability to client

Sable Corporation is an Australian financial services licensee. Sable Corporation has notified ASIC under section 912D of the Corporations Act that it has reasonable grounds to believe that there was a significant breach of a core obligation.

Sable Corporation has reasonable grounds to believe that it did not maintain the competence to provide financial services (under section 912A(1)(e) of the Corporations Act) for three months. With respect to this, Sable Corporation has already notified five clients that could potentially be affected.

Sable Corporation investigated the nature and full extent of the misconduct and the outcome of the investigation shows that no client had suffered any loss or damage with respect to the misconduct. The loss or damage suffered by the clients in this case is determined to be nil. Sable Corporation communicates the outcome of the investigation to the five potentially affected clients.

The right of affected client to pursue legally enforceable rights

12.85 For the avoidance of doubt, nothing in this section affects any legally enforceable rights of the affected client to recover loss or damage that the affected client suffers, or will suffer, as a result of a reportable situation, nor does it remove the affected client's right to complain about the outcome or remediation process. [Schedule 11, item 6, sections 912EB(10) and (11) of the Corporations Act]

12.86 The amendments are intended to ensure that licensees investigate and remediate misconduct proactively. The amendments rely on the existing rights of the affected client and do not alter those rights. Accordingly, an affected client's rights are not extinguished by the operation of this section.

12.87 However, a court may take into account the remedy provided by a licensee in relation to a reportable situation. For example, where a licensee has provided a partial remedy to the affected client, the court may take this fact into account to alter its award of damages if an action is brought successfully by the affected client in relation to the same facts. This provision ensures that a client is not enriched unjustly in the same case.

Re-triggering of licensee obligations

12.88 There may be circumstances where during the course of an investigation, or after the investigation, licensee obligations are triggered or re-triggered.

12.89 At any time, including during an investigation, a licensee may have reasonable grounds to believe or suspect that further reportable situations have arisen in accordance with section 912D. Where appropriate, this will also trigger obligations under sections 912EA and 912EB of the Corporations Act to notify affected clients, investigate misconduct and remediate affected clients.

Example 12.5 : Investigation reveals further notifications to ASIC and clients

Tortoiseback Services is an Australian financial services licensee. During Tortoiseback Services' investigation of misconduct in relation to its adviser, Nav, it finds further reasonable grounds to suspect that another adviser working in the same team, Suma, was grossly negligent.

Accordingly, the obligation on Tortoiseback Services to notify ASIC in relation to misconduct on the part of Suma under section 912D of the Corporations Act is triggered. Tortoiseback Services has reasonable grounds to suspect gross negligence on the part of Suma which could potentially affect three of Tortoiseback Services' clients. Therefore, alongside the investigation into Nav, Tortoiseback Services is also required to notify, investigate and remediate clients affected by Suma's misconduct under sections 912EA and 912EB of the Corporations Act.

Consequences of failing to investigate and remediate misconduct: civil penalty provisions

12.90 A licensee who contravenes any of the following is liable for a civil penalty:

•

section 912EB(1) of the Corporations Act - the obligation to investigate certain reportable situations;

•

section 912EB(5) of the Corporations Act - the obligation to notify the outcome of the investigation within 10 days;

•

section 912EB(8) of the Corporations Act - the obligation to remediate the affected client within 30 days.

[Schedule 11, item 6, section 912EB(9) of the Corporations Act]

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

12.92 The imposition of a civil penalty for contravention of the obligations is necessary and appropriate. This is the case because the conduct to be deterred was identified in the Financial Services Royal Commission. In particular, it was found that where a licensee detects misconduct, it should always consider what steps need to be taken to uncover the extent of the conduct beyond the immediate focus of attention. Current measures to encourage investigations into misconduct have not been sufficient and the Financial Services Royal Commission found that entities have not always considered what steps they need to take in response to detections of misconduct.

12.93 Further, the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any loss or damage flowing from the investigated misconduct not being provided to the affected client.

12.94 The imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the obligation to investigate and remediate misconduct is consistent with the treatment of other contraventions of the general obligations imposed on an Australian financial services licensee. For example, a civil penalty applies with respect to the general obligation imposed on licensees under section 912A of the Corporations Act 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.

12.95 The declaration of a contravention of a civil penalty provision and pecuniary penalty orders are dealt with in sections 1317J and 1317G of the Corporations Act.

12.96 The maximum penalty applicable to a failure by a financial services licensee to investigate a reportable situation, notify an affected client of the outcome of the investigation or compensate an affected client 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 the general obligations of a financial services licensee.

12.97 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 investigate a reportable situation, notify an affected client of the outcome of the investigation or compensate an affected client 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.

Obligation to keep records of compliance

12.98 The notification and remediation obligations are intended to require licensees to proactively provide a remedy to affected clients without affected clients needing to involve the courts, ASIC or another regulator. However, to encourage compliance and to allow compliance to be monitored, a licensee must keep records sufficient to enable the licensee's compliance with the obligations to notify, investigate and remediate clients affected by misconduct to be readily ascertained. [Schedule 11, item 6, section 912EC(1) of the Corporations Act]

12.99 The regulations may specify records the licensee must keep. Regulation-making powers have been inserted to allow particular records that must be kept as part of the obligation to be specified. [Schedule 11, item 6, section 912EC(2) of the Corporations Act]

12.100 Allowing the regulations to specify records to be kept will provide the Government with the necessary flexibility to make timely changes in response to changing industry practices and allow the law to adapt to changes in technology. This will help to support licensees to discharge the obligation while ensuring that records required to be kept are appropriate to evidence compliance with the underlying requirement to notify and remediate clients following misconduct. By staying current to industry practices and development in technology, the regulations encourage licensees to be proactive about addressing misconduct, and for them to develop practices to accurately record instances of misconduct and how they have remediated affected clients. At the same time, the regulations, as opposed to another type of legislative instrument, provide more certainty to licensees about their record keeping obligations.

12.101 Allowing the regulations to specify records will provide a flexible approach to ensure the regime only imposes obligations on licensees to the extent appropriate. The regulations would be subject to disallowance and therefore will be subject to appropriate parliamentary scrutiny.

Consequences of failing to keep records of compliance

12.102 A licensee who contravenes the obligation to keep records to show compliance with the obligations to notify, investigate and remediate clients affected by misconduct commits an offence and is liable for five years imprisonment. In considering the imposition of the criminal offence, regard has been had to the Guide to Framing Commonwealth Offences. [Schedule 11, item 6, section 912EC(1) of the Corporations Act]

12.103 The criminal offence aims to deter and punish the behaviour as appropriate while ensuring the effectiveness of the notification and remediation framework. The inclusion of the criminal offence is necessary and appropriate for the following reasons:

•

the Financial Services Royal Commission recommended that where there is sufficient information to suggest that an adviser has engaged in misconduct, licensees must tell affected clients and remediate those clients promptly. The requirement that licensees maintain records is necessary to ensure that the obligation is complied with;

•

the requirement for maintenance of records of compliance is also necessary to ensure that licensees make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser's misconduct;

•

the maintenance of proper records will allow ASIC to monitor compliance with the obligation and to ascertain whether it needs to take further action in relation to a licensee;

•

the obligations encourage structural change in licensee behaviour towards addressing misconduct by requiring records to be kept not just about the misconduct, but also about how they have remediated affected clients.

12.104 The maximum penalty of five years imprisonment reflects the seriousness of the offence and provides a court with guidance on how to punish criminal behaviour. The maximum penalty is generally reserved only for the most egregious cases. The default fault elements in the Criminal Code apply to the corresponding physical elements of the offence. Applying default fault elements is consistent with Part 2.2.4 of the Guide to Framing Commonwealth Offences.

Amendments to the Credit Act

12.105 The amendments to the Credit Act impose the new investigation and remediation obligations. These obligations require Australian credit licensees to:

•

notify consumers affected by misconduct (section 51A of the Credit Act);

•

investigate the nature and full extent of the misconduct and remediate affected consumers (section 51B of the Credit Act); and

•

maintain records to show compliance with these obligations (section 51C of the Credit Act).

Notifying consumers affected by certain reportable situations

Obligation to notify an affected consumer regarding misconduct

12.106 Under the obligation to notify misconduct, an Australian credit licensee must take reasonable steps to notify a consumer (the affected consumer) if all of the following are satisfied:

•

the licensee, or a representative of the licensee, provides or has provided credit assistance to the affected consumer in relation to a credit contract secured by a mortgage over residential property;

•

the licensee, or the representative of the licensee, is a mortgage broker;

•

there are reasonable grounds for the licensee to believe that a reportable situation has arisen, and either:

-

that reportable situation amounts to a significant breach of a core obligation; or

-

that reportable situation amounts to gross negligence, serious fraud and other circumstances prescribed by the regulations; and

•

there are reasonable grounds for the licensee to suspect that both:

-

the consumer has suffered or will suffer loss or damage as a result of the reportable situation; and

-

the consumer has a legally enforceable right to recover the loss or damage from the licensee.

[Schedule 11, item 16, section 51A(1) of the Credit Act]

12.107 The consumer that must be notified is the affected consumer. Notifying the consumer allows the consumer to consider their rights and the ways they can mitigate potential loss or damage arising from the reportable situation.

12.108 The circumstances where a licensee detects misconduct that has potentially resulted in loss or damage for a consumer are provided for by sections 51A(1)(a), (b) and (c) of the Credit Act.

12.109 First, there must be a consumer who receives or has received credit assistance in relation to a credit contract secured by a mortgage over residential property.

12.110 Generally, this obligation requires credit licensees (who are mortgage brokers) to notify affected consumers when they detect misconduct in circumstances where a mortgage broker has provided credit assistance. The term 'credit assistance' is defined at section 8 of the Credit Act. The term 'credit contract' is defined at section 4 of the National Credit Code and generally refers to a contract under which credit is or may be provided.

12.111 A representative of a licensee is defined in section 5 of the Credit Act. This includes an employee or director of the licensee, an employee or director of a related body corporate of the licensee, a credit representative of the licensee, or any other person acting on behalf of the licensee.

12.112 Second, the licensee or the representative of the licensee who provides or has provided that credit assistance must be a mortgage broker.

12.113 The term 'mortgage broker' is defined under section 15B of the Credit Act. It provides that a licensee or a credit representative of a licensee is a mortgage broker if:

•

they carry on a business of providing credit assistance in relation to credit contracts secured by mortgage over residential property;

•

the licensee does not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and

•

in carrying on the business, the licensee provides credit assistance in relation to credit contracts offered by more than one credit provider.

12.114 Generally, this describes mortgage brokers who provide credit assistance over mortgage contracts offered by more than one credit provider. Accordingly, a credit licensee or representative who deals only with mortgage contracts offered by one credit provider is not considered a mortgage broker.

12.115 Third, there must be reasonable grounds for the licensee to believe that:

•

a reportable situation that amounts to a significant breach of a core obligation has arisen, or

•

a reportable situation that amounts to gross negligence or serious fraud has arisen.

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

12.117 The core obligations of a licensee are defined in the breach reporting obligations under section 50A. These core obligations are discussed from paragraph 11.134.

12.118 What constitutes a significant breach will depend on the circumstances of the case. This is discussed from paragraph 11.136.

12.119 A reportable situation as mentioned in section 50A(2) of the Credit Act includes gross negligence, serious fraud, and any other circumstances prescribed by the regulations. This is discussed from paragraph 11.162.

12.120 Fourth, there must be reasonable grounds for the licensee to suspect that the consumer who has suffered or will suffer loss or damage as a result of the reportable situation also has a legally enforceable right against the licensee for the loss or damage.

12.121 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. This threshold relies on the common law meaning of the term 'reasonable grounds to suspect' and is not defined by legislation for the purposes of this section. . In determining whether the grounds are reasonable, a person may take into account the facts and circumstances of the situation.

12.122 However, this threshold is lower than that of reasonable grounds to believe in a circumstance. Reasonable grounds to believe require that there are facts that would induce a reasonable person to believe in the truth or existence of the circumstance.

12.123 A person's legally enforceable right to recover loss or damage as mentioned in section 51A(1)(d)(ii) of the Credit Act is made with reference to the loss or damage the affected consumer suffered or will suffer as a result of the reportable situation under section 51A(1)(c)(i) of the Credit Act. Therefore, the relevant legally enforceable right against the licensee is the right to seek to recover loss or damage the affected consumer suffered or will suffer as a result of the reportable situation. In this sense, the threshold does not require that an affected consumer already has an enforceable judgment against the licensee, but rather, a right to seek recovery of the loss or damage.

12.124 The requirements under section 51A(1)(d) of the Credit Act, along with the requirements under sections 51A(1)(a) and (b) of the Credit Act establish the mortgage broker-consumer relationship between the licensee and the person, who is an affected consumer. The loss or damage an affected consumer suffered or will suffer does not need to be the result of the credit assistance, but rather, as a result of the reportable situation.

Example 12.6 : Reasonable grounds to suspect that a consumer has a legally enforceable right to recover loss or damage

Zebu Home Loans is an Australian credit licensee who is a mortgage broker. Zebu Home Loans has reasonable grounds to believe that one of their employees, Hal, who is an employee mortgage broker, has committed serious fraud.

Zebu Home Loans has a list of consumers served by Hal as at the time of the fraud he is believed to have committed. Based on the circumstances of the fraud, Zebu Home Loans has reasonable grounds to suspect that five of Hal's clients are affected consumers as a result of the reportable situation as they may have a claim against Zebu Home Loans for the loss or damage suffered as a result of fraud. Zebu Home Loans must notify these five affected consumers under section 51A of the Credit Act. Additionally, Zebu Home Loans must investigate and remediate the reportable situation under section 51B of the Credit Act.

12.125 An affected consumer may have a legally enforceable right to recover loss or damage against the licensee in relation to the reportable situation where there is a potential claim that if pursued by the affected consumer, may be enforced as a judgment by the court against the licensee. Accordingly, this requires an affected person to have standing to seek loss or damage resulting from the reportable situation and can include circumstances where a court has the discretion to make an order for loss or damage. For example, a consumer may have a legally enforceable right to recover loss or damage against the licensee for negligence, breach of contract, or where a compensation order may be available (for example, under section 178 of the Credit Act).

12.126 A consumer would not have a legally enforceable right where, for example, the underlying cause of action has been extinguished or barred as not enforceable by expiry of the relevant limitation period. However affected consumers may still have rights that they are able to pursue through internal dispute resolution and through AFCA. Licensees should take this into account in determining whether they should extend the breadth of their remediation consistent with ASIC's regulatory guidance.

12.127 There may be circumstances where a reportable situation would not result in a consumer with a legally enforceable right against the licensee for loss or damage as a result of that reportable situation. This may occur where, for example, there is no cause of action available to the consumer for loss or damage as a result of the reportable situation, or where there is no loss or damage. In determining whether there is loss or damage to a consumer, it is not relevant to consider whether or not that loss or damage is material.

Example 12.7 : No loss or damage as a result of the reportable situation

Marmoset Corporation is an Australian credit licensee who is a mortgage broker. Marmoset Corporation has reasonable grounds to believe that it has significantly breached its obligation to ensure that its representatives are adequately trained to engage in credit services under section 47(1)(g) of the Credit Act. In this case, there were two staff members out of a team of nine who continued to avoid mandatory training, and Marmoset Corporation did not enforce the obligation.

Further, Marmoset Corporation, through its employee mortgage brokers has provided credit assistance over mortgages to consumers.

While there are consumers who have received relevant assistance from Marmoset Corporation and Marmoset Corporation was at fault for not enforcing mandatory training, the two staff members who were not adequately trained never provided credit assistance to a consumer of Marmoset Corporation.

Accordingly, Marmoset Corporation would have no reasonable grounds to suspect that there is a consumer (who is an affected consumer) with a legally enforceable right to recover loss or damage as a result of the reportable situation. Therefore, Marmoset Corporation does not have an obligation to notify consumers under section 51A of the Credit Act.

12.128 It is relevant for the licensee to consider a claim that may be enforceable against them as this consideration will assist the licensee's obligation under section 51B of the Credit Act to investigate and remediate the reportable situation.

Form and period for giving notice

12.129 A notice to an affected consumer of a reportable situation must be provided in writing and should contain sufficient information to give the affected consumer an understanding of the nature of the reportable situation and the basis for the suspicion that the consumer may have suffered or will suffer loss or damage. The notice may include, for example, the date of the reportable situation, a description of the reportable situation, the consequences of the reportable situation, how a consumer may be affected and information about the investigation that is to be carried out. Where there is a form approved by ASIC for the purposes of the notice, a licensee must notify the affected consumer in the approved form and include the information or other material required by the form. [Schedule 11, item 16, section 51A(2) of the Credit Act]

12.130 The notice must be given to the affected consumer within 30 days after the licensee first knows or is reckless with respect to the misconduct they detect, including that the misconduct has potentially resulted in, or will result in, loss or damage which the consumer has a legally enforceable right to recover.

12.131 In satisfying this obligation, a licensee has qualified privilege and is protected from an action of defamation in the licensee's notice about misconduct to affected consumers. The licensee is also not liable for any action based on breach of confidence. [Schedule 11, item 16, sections 51A(3) and (4) of the Credit Act]

Consequences of failing to notify affected consumers

12.132 A licensee who contravenes the obligation to take reasonable steps to notify affected consumers of misconduct is subject to civil penalties. [Schedule 11, item 16, section 51A(1) of the Credit Act]

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

12.134 In addition to giving rise to the requirement to notify an affected consumer, the existence of a reportable situation and reasonable grounds to suspect that the affected consumer has an enforceable right to recover loss or damage also triggers the obligations to investigate and, where necessary, remediate the affected consumer. Notifying the affected consumer means that the consumer is put on notice that an investigation, and possible remediation, is to follow. If the investigation or remediation does not eventuate or is not completed within the provided timeframes, the affected consumer can, for example, notify the firm through an internal dispute resolution process. Other options may be to bring the matter to the attention of AFCA or ASIC, or pursue a private remedy. Given the potential incentive from the perspective of a licensee to circumvent these processes by failing to notify the affected consumer that they have potentially suffered loss or damage, it is necessary and appropriate to impose a civil penalty where the obligation is not complied with.

12.135 It is also necessary and appropriate to impose a civil penalty. This is the case because the imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any loss or damage flowing from the investigated misconduct not being provided to the affected consumer. Current measures to encourage investigations into misconduct have not been sufficient and the Financial Services Royal Commission found that entities have not always considered what steps they need to take in response to detections of misconduct.

12.136 Further, the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any loss or damage flowing from the investigated misconduct not being provided to the affected consumer.

12.137 The imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the obligation to investigate and remediate misconduct is consistent with the treatment of other contraventions of the general obligations imposed on an Australian credit licensee. For example, a general obligation is imposed on licensees under section 47 of the Credit Act to do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly.

12.138 The declaration of a contravention of a civil penalty provision and pecuniary penalty orders are dealt with in sections 166 and 167 of the Credit Act.

12.139 The maximum penalty applicable to a failure by a credit licensee to notify an affected consumer of a reportable situation 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 the other general obligations of a credit licensee.

12.140 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 notify an affected consumer of a reportable situation, 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; and

•

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

Investigating and remediating certain reportable situations

Obligation to investigate misconduct

12.141 An Australian credit licensee must conduct an investigation of misconduct if all of the following are satisfied:

•

the licensee or a representative of the licensee provides or has provided credit assistance to the affected consumer in relation to a credit contract secured by a mortgage over residential property;

•

the licensee, or the representative of the licensee is a mortgage broker;

•

there are reasonable grounds for the licensee to believe that a reportable situation has arisen, and either:

-

that reportable situation amounts to a significant breach of a core obligation; or

-

that reportable situation amounts to gross negligence, serious fraud and other circumstances prescribed by the regulations; and

•

there are reasonable grounds for the licensee to suspect that both:

-

the consumer has suffered loss or damage as a result of the reportable situation; and

-

the consumer has a legally enforceable right to recover the loss or damage from the licensee.

[Schedule 11, item 16, section 51B(1) of the Credit Act]

12.142 The circumstances where a licensee detects misconduct that has potentially resulted in, or will result in loss or damage for a consumer is provided at sections 51A(1)(a), (b) and (c) of the Credit Act in the obligation to notify affected consumers of misconduct. Accordingly, the threshold for the obligations under section 51A(1) of the Credit Act (to notify affected consumers of misconduct) and 51B(1) of the Credit Act (to investigate misconduct) are the same.

12.143 The elements of each requirement are discussed above (regarding section 51A(1) of the Credit Act, the obligation to notify affected consumers of misconduct).

12.144 The specific obligation to investigate and remediate misconduct by mortgage brokers is intended to support existing obligations to remediate consumers and therefore to restore trust in the mortgage broking sector.

12.145 The obligation to investigate and remediate misconduct, does not, on its own, create a new cause of action for affected consumers in relation to the reportable situation. Along with general law actions, statutes may create a right for a person to seek a compensation order against the licensee for loss or damage (for example, under section 178 of the Credit Act). The availability of a compensation order to a person may form the basis on which a consumer may have a legally enforceable right to recover loss or damage from a licensee.

Timing and duration of the investigation

12.146 The licensee must commence the investigation within 30 days after the licensee first knows or is reckless with respect to the matters mentioned in sections 51B(1)(a), (b) and (c) (where misconduct detected resulted in, or will result in loss or damage for a consumer). [Schedule 11, item 16, sections 51B(2) and 51B(4) of the Credit Act]

12.147 The licensee must complete the investigation as soon as reasonably practicable after it is commenced. An investigation may be considered complete when a credit licensee has considered the matters and done the things provided in section 51B(3) of the Credit Act, discussed from paragraph 12.154.

12.148 As affected consumers and ASIC have been informed of the misconduct under sections 51A and 50A of the Credit Act, respectively, the licensee must complete the investigation within a reasonable amount of time. During this time, an affected consumer may continue to consider their rights and remedies against the licensee and ASIC may also consider commencing compliance and enforcement action.

12.149 Accordingly, the obligation to investigate and remediate misconduct does not extinguish the right of an affected consumer to bring an action against the licensee. All of the affected consumer's rights continue to exist alongside the investigation and remediation process, including the affected consumer's rights to complain through internal and external dispute resolutions processes.

12.150 The law does not prescribe what a reasonable time for the duration of the investigation is. This provides the licensee with flexibility to accurately and reasonably assess misconduct and the loss or damage caused. The reasonable amount of time for an investigation will depend on the circumstances of the case, including (but not limited to) the size of the licensee's business, the extent and period of the misconduct and the nature of the loss or damage caused by the licensee to affected consumers.

12.151 After the completion of the investigation, the licensee must take reasonable steps to notify the affected consumer of the outcome of the investigation in writing. The notification should contain sufficient information to give the affected consumer an understanding of the nature of the conduct identified, a description of how the conduct affected the consumer's interests, and an assessment of the loss or damage for which the licensee reasonably believes the affected consumer is entitled to seek recovery. Where there is a form approved by ASIC for the purposes of the notice, a licensee must notify the affected consumer in the approved form and include the information or other material required by the form. [Schedule 11, item 16, section 51B(5) of the Credit Act]

12.152 The notice must be given to the affected consumer within 10 days after the completion of the investigation.

12.153 In satisfying this obligation, a licensee has qualified privilege and is protected from an action of defamation in the licensee's notice about the outcome of the investigation. The licensee is also not liable for any action based on breach of confidence. [Schedule 11, item 16, sections 51B(6) and 51B(7) of the Credit Act]

Matters to be considered in the investigation

12.154 In conducting the investigation, the licensee must do all of the following:

•

identify the conduct that gave rise to the reportable situation;

•

quantify the loss or damage that there are reasonable grounds to believe:

-

the affected consumer has suffered or will suffer as a result of the reportable situation; and

-

the affected consumer has a legally enforceable right to recover from the licensee; and

•

anything prescribed by the regulations.

[Schedule 11, item 16, section 51B(3) of the Credit Act]

12.155 Firstly, a licensee must identify the conduct that gave rise to the reportable situation. This conduct can include an act or omission, or a series of acts or omissions that gave rise to the reportable situation.

12.156 There may be circumstances where a licensee who identifies the conduct that gave rise to the reportable situation is put on notice and discovers that the same conduct or related conduct gives rise to further reportable situations. When this occurs, the licensee must comply with the obligation to report those further reportable situations under section 50B of the Credit Act. In general terms, the obligation to report under section 50B of the Credit Act will arise where there are reasonable grounds for the licensee to believe that a relevant reportable situation has arisen. Accordingly, a licensee must take into account the factual circumstances of the reportable situation and the conduct that led to the reportable situation.

12.157 Further, there may also be circumstances where in identifying the conduct that gave rise to the reportable situation, the licensee may identify more consumers that were also affected by the same or similar conduct. Where this occurs, the obligations to notify, investigate and remediate apply equally to a later identified consumer or consumers as they do to an originally identified consumer. Where misconduct has occurred in relation to a consumer, there is an expectation that the advice given to consumers in similar circumstances is investigated by the licensee to detect any wider misconduct.

12.158 Secondly, in the course of the investigation, a licensee must quantify the loss or damage that there are reasonable grounds to believe that:

•

the affected consumer has suffered or will suffer, and

•

the consumer has a legally enforceable right to recover.

12.159 It is also prudent for licensees to keep affected consumers informed of the progress of the investigation as affected consumers can continue to consider their rights and remedies against the licensee.

12.160 The term 'reasonable grounds to believe' is not defined in legislation for the purposes of this provision. Instead, the threshold relies on its common law meaning. This is discussed at paragraph 12.116.

12.161 The amendments do not prescribe how a licensee must determine the quantum of the loss or damage the affected consumer suffers or will suffer. Generally, in determining the loss or damage arising from the reportable situation, a licensee should have regard to legal principles.

12.162 Typically, a licensee will need to:

•

identify each affected consumer;

•

determine the nature of the legally enforceable right available to the affected consumers;

•

evaluate the type of remedies that are available to and are appropriate for the affected consumer based on the misconduct; and

•

determine the amount of the payment.

12.163 When investigating and determining loss or damage to an affected consumer, a licensee should have reference to any underlying liabilities they may have to that consumer based on causes of action available to the consumer in relation to the reportable situation.

12.164 The types of legally enforceable right to recover loss or damage will depend on the circumstances of the case. For example, an affected consumer may have a legally enforceable right against the licensee to recover loss or damage as a result of the reportable situation where the underlying claim rests on negligence, breach of fiduciary duty, or where a compensation order may be available (for example, under section 178 of the Credit Act).

12.165 Thirdly, in conducting the investigation, the licensee must do anything else prescribed by the regulations.

12.166 The approach to include additional requirements in the regulations is intended to ensure effective compliance and the integrity of the provision. This will allow an evaluation of industry practices and ensure that licensees continue to comply with the policy intention of the provision and actively investigate misconduct.

Obligation to compensate the affected consumer for loss or damage

12.167 A licensee must take reasonable steps to remediate the affected consumer within 30 days after an investigation under section 51B(1) of the Credit Act is completed and where there are reasonable grounds to believe that:

•

the affected consumer has suffered or will suffer loss or damage, and

•

the consumer has a legally enforceable right to recover loss or damage from the licensee.

[Schedule 11, item 16, section 51B(8) of the Credit Act]

12.168 Nothing in section 51B of the Credit Act precludes the licensee from providing a remedy to an affected consumer outside of the obligation to investigate and remediate misconduct.

12.169 The obligation to investigate and remediate misconduct is intended to ensure that licensees actively provide a remedy to affected consumers where a reportable situation has resulted in loss or damage in relation to which the affected consumer would have an enforceable claim, without requiring the affected consumer to engage in a court process.

12.170 The term 'reasonable grounds to believe' is not defined in legislation for the purposes of this provision. Instead, the threshold relies on its common law meaning. This is discussed at paragraph 12.116.

12.171 A licensee should consider the facts and circumstances of the case to determine whether they have reasonable grounds to believe that the affected consumer has:

•

suffered or will suffer loss or damage; and

•

a legally enforceable right to recover that loss or damage.

12.172 As the payment from the licensee is provided on the basis of the loss or damage the affected consumer suffered or will suffer as a result of the reportable situation, it is not the intention to require licensees to include amounts for damages that do not reflect loss or damage, such as profit gained by the licensee as a result of the reportable situation, aggravated damages or punitive damages.

12.173 A licensee may also consider other relevant forms of remedies that would complement the affected consumer. The amendments do not limit the types and combinations of different remedies which a licensee may additionally provide to an affected consumer having regard to the loss or damage the affected consumer suffered or will suffer.

12.174 There may be circumstances where non-monetary remediation would be appropriate to accompany monetary payment. Depending on the circumstances of each case, some possible non-monetary remediation may include the rescission of a contract, and the setting aside of a portion or a whole amount of debt owed to the licensee by the affected consumer.

12.175 At the completion of the investigation, there may be circumstances where the results of an investigation show that there is no liability under section 51B of the Credit Act for a licensee to remediate as the licensee does not have reasonable grounds to believe that a consumer suffered or will suffer loss or damage in relation to which they have a legally enforceable right to recover. These may include circumstances where at the end of the investigation:

•

there was no consumer affected by the reportable situation; or

•

the consumer does not have a cause of action, or does not have a legally enforceable right against the licensee in relation to the reportable situation; or

•

the consumer suffered no loss or damage as a result of the reportable situation.

Example 12.8 : Licensee has no liability to consumer

Salamander Corporation is an Australian credit licensee who is a mortgage broker. Salamander Corporation has notified ASIC under section 50A of the Credit Act that it has reasonable grounds to believe that there was a significant breach of a core obligation.

Salamander Corporation has reasonable grounds to believe that it did not maintain the competence to provide credit services (under section 47(1)(f) of the Credit Act) for 3 months. With respect to this, Salamander Corporation has already notified five consumers that could potentially be affected.

Salamander Corporation investigated the nature and full extent of the misconduct and the outcome of the investigation shows that no consumers suffered any loss or damage with respect to the misconduct. The loss or damage suffered by the consumers in this case is determined to be nil. Salamander Corporation communicates the outcome of the investigation to the five potentially affected consumers.

The right of an affected consumer to pursue legally enforceable rights

12.176 For the avoidance of doubt, nothing in this section affects any legally enforceable rights of the affected consumer to pursue loss or damage that the affected consumer suffers, or will suffer, as a result of a reportable situation. [Schedule 11, item 16, sections 51B(9) and (10) of the Credit Act]

12.177 The amendments are intended to ensure that licensees investigate and remediate misconduct proactively. The amendments rely on the existing rights of the affected consumer and do not alter those rights. Accordingly, an affected consumer's rights are not extinguished by the operation of this section.

12.178 However, a court may take into account the remedy provided by a licensee in relation to a reportable situation. For example, where a licensee has provided a partial remedy to the affected consumer, the court may take this fact into account to alter its award of damages if an action is brought successfully by the affected consumer in relation to the same facts. This provision ensures that the consumer is not enriched unjustly in the same case.

Re-triggering of licensee obligations

12.179 There may be circumstances where during the course of an investigation, or after the investigation, licensee obligations are triggered or re-triggered.

12.180 At any time, including during an investigation, a licensee may have reasonable grounds to believe or suspect that further reportable situations have arisen in accordance with section 50A of the Credit Act. Where appropriate, this will also trigger obligations under sections 51A of the Credit Act to notify affected consumers and 51B of the Credit Act to investigate misconduct and remediate affected consumers.

Example 12.9 : Investigation reveals further notifications to ASIC

Tapir Services is an Australian credit licensee that is a mortgage broker. During Tapir Services' investigation of misconduct in relation to its adviser, Nomos, it finds further reasonable grounds to suspect that another mortgage broker working in the same team, Sutte, was grossly negligent.

Accordingly, the obligation on Tapir Services to notify ASIC in relation to misconduct on the part of Sutte under section 50A is triggered. Because Tapir Services has reasonable grounds to suspect gross negligence on the part of Sutte which could potentially affect three of Tapir Services' consumers. Therefore, alongside the investigation into Nomos, Tapir Services is also required to notify, investigate and remediate consumers affected by Sutte's misconduct under sections 51A and 51B of the Credit Act.

Consequences of failing to investigate and remediate misconduct: civil penalty provisions

12.181 A licensee who contravenes any of the following is liable for a civil penalty:

•

section 51B(1) of the Credit Act - the obligation to investigate certain reportable situations;

•

section 51B(5) of the Credit Act - the obligation to notify the outcome of the investigation within 10 days;

•

section 51B(8) of the Credit Act - the obligation to remediate the affected consumer within 30 days.

[Schedule 11, item 16, section 51B(8) of the Credit Act]

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

12.183 The imposition of a civil penalty for contravention of the obligations is necessary and appropriate for the following reasons:

•

the conduct to be deterred was identified in the Financial Services Royal Commission. In particular, it was found that where a licensee detects misconduct, it should always consider what steps need to be taken to uncover the extent of the conduct beyond the immediate focus of attention;

•

the conduct causes serious harm to people. The imposition of a civil penalty is intended to decrease the instances of investigations not being carried out and any remediation for loss or damage flowing from the investigated misconduct not being provided to the affected consumer;

•

current measures to encourage investigations into misconduct have not been sufficient and the Financial Services Royal Commission found that entities have not always considered what steps they need to take in response to detections of misconduct; and

•

the imposition of a civil penalty fits into the overall legislative scheme. The civil penalty for a contravention of the obligation to investigate and remediate misconduct is consistent with the treatment of other contraventions of the general obligations imposed on an Australian credit licensee. For example, a general obligation is imposed on licensees under section 47 of the Credit Act to do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently.

12.184 The declaration of a contravention of a civil penalty provision and pecuniary penalty orders are dealt with in sections 166 and 167 of the Credit Act.

12.185 The maximum penalty applicable to a failure by a credit licensee to investigate a reportable situation, notify an affected consumer of the outcome of the investigation or compensate an affected consumer 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 the other general obligations of a credit licensee.

12.186 Consistent with all pecuniary penalty orders made under Part 4-1 of the Credit Act, when considering the penalty to be ordered for a failure by a credit licensee to investigate a reportable situation, notify an affected consumer of the outcome of the investigation or compensate an affected consumer 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; and

•

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

Obligation to keep records of compliance

12.187 The notification and remediation obligations are intended to require licensees to proactively provide a remedy to affected consumers without affected consumers needing to involve the courts, ASIC or another regulator. However, to encourage compliance and to allow compliance to be monitored, a licensee must keep records sufficient to enable the licensee's compliance with the obligations to notify, investigate and remediate clients affected by misconduct to be readily ascertained. [Schedule 11, item 16, section 51C(1) of the Credit Act]

12.188 The regulations may specify records the licensee must keep. Regulation-making powers have been inserted to allow particular records that must be kept as part of the obligation to be specified. [Schedule 11, item 16, section 51C(2) of the Credit Act]

12.189 Allowing the regulations to specify records to be kept will provide the Government with the necessary flexibility to make timely changes in response to changing industry practices and allow the law to adapt to changes in technology. This will help to support licensees to discharge the obligation while ensuring that records required to be kept are appropriate to evidence compliance with the underlying requirement to notify and remediate consumers following misconduct. By staying current to industry practices and development in technology, the regulations encourage licensees to be proactive about addressing misconduct, and for them to develop practices to accurately record instances of misconduct and how they have remediated affected clients. At the same time, the regulations, as opposed to another type of legislative instrument, provide more certainty to licensees about their record keeping obligations.

12.190 Allowing the regulations to specify records will provide a flexible approach to ensure the regime only imposes obligations on licensees to the extent appropriate. The regulations would be subject to disallowance and therefore will be subject to appropriate parliamentary scrutiny.

Consequences of failing to keep records of compliance

12.191 A licensee who contravenes the obligation to keep records to show compliance with the obligations to notify, investigate and remediate clients affected by misconduct commits an offence and is liable for 5 years imprisonment. In considering the imposition of the criminal offence, regard has been had to the Guide to Framing Commonwealth Offences. [Schedule 11, item 16, section 51C(3) of the Credit Act]

12.192 The criminal offence aims to deter and punish the behaviour as appropriate while ensuring the effectiveness of the notification and remediation framework. The inclusion of the criminal offence is necessary and appropriate for the following reasons:

•

the Financial Services Royal Commission recommended that where there is sufficient information to suggest that a mortgage broker has engaged in misconduct, licensees must tell affected clients and remediate those clients promptly. The requirement that licensees maintain records is necessary to ensure that the obligation is complied with;

•

the requirement for maintenance of records of compliance is also necessary to ensure that licensees make whatever inquiries are reasonably necessary to determine the nature and full extent of the mortgage broker's misconduct;

•

the maintenance of proper records will allow ASIC to monitor compliance with the obligation and to ascertain whether it needs to take further action in relation to a licensee;

•

the obligations encourage structural change in licensee behaviour towards addressing misconduct by requiring records to be kept not just about the misconduct, but also about how they have remediated affected clients.

12.193 The maximum penalty of five years imprisonment reflects the seriousness of the offence and provides a court with guidance on how to punish criminal behaviour. The maximum penalty is generally reserved only for the most egregious cases. The default fault elements in the Criminal Code apply to the corresponding physical elements of the offence. Applying default fault elements is consistent with Part 2.2.4 of the Guide to Framing Commonwealth Offences.

Application and transitional provisions

12.194 Schedule 11 commences on 1 October 2021. [Clause 2]

12.195 The obligation to investigate and remediate misconduct applies from 1 October 2021.

Amendments to the Corporations Act

12.196 The amendments apply from 1 October 2021. Accordingly, the obligation for an Australian financial services licensee to notify affected clients, and investigate and remediate misconduct applies to reportable situations arising on or after 1 October 2021. [Schedule 11, item 9, section 1671E of the Corporations Act]

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

12.197 The amendments apply from 1 October 2021. Accordingly, the obligation for an Australian credit licensee to notify affected consumers, and investigate and remediate misconduct applies to reportable situations arising on or after 1 October 2021. [Schedule 11, item 18, section 4 of Schedule 16 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

Chapter 13 - Statutory obligation to cooperate (recommendation 6.9)

Outline of chapter

13.1 Parts 1 and 2 of Schedule 12 to the Bill implement recommendation 6.9 of the Financial Services Royal Commission to remove barriers to efficient co-operation and information sharing between APRA and ASIC, including requiring that the regulators notify each other when they reasonably believe there may be material breaches of each other's legislation.

Context of amendments

13.2 The Financial Services Royal Commission considered the historical and current relationship between APRA and ASIC and made recommendations about how the regulators cooperate, share information and notify each other of breaches of the laws administered by the other regulator.

13.3 Recommendation 6.9 of the Financial Services Royal Commission recommended that APRA and ASIC:

•

cooperate with each other;

•

share information to the maximum extent practicable; and

•

notify the other whenever either of the regulators forms the belief that a breach in respect of which the other has enforcement responsibility has occurred.

13.4 The Government's response to the Financial Services Royal Commission committed the Government to removing barriers to information sharing between APRA and ASIC and requiring them to cooperate, share information and notify each other of relevant breaches or suspected breaches, as appropriate.

13.5 Parts 1 and 2 of Schedule 12 give effect to the Government's response to recommendation 6.9.

Summary of new law

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

•

APRA and ASIC to cooperate with each other;

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

Co-operation obligation

13.7 While cooperation is an ongoing part of the current operations of both regulators, in line with recommendation 6.9, Part 1 of Schedule 12 amends the ASIC Act and APRA Act to mandate that the regulators work in cooperation with each other so far as is practicable. The purpose of these new provisions is to require the regulators to support each other in discharging their regulatory functions and powers effectively. [Schedule 12, items 1 and 2, section 10B of the APRA Act and section 12AA of the ASIC Act]

13.8 The new co-operation requirements operate alongside existing co-operation and coordination provisions, which often relate to specific circumstances or areas of regulatory responsibility. [Schedule 12, items 1 and 2, section 10B of the APRA Act and section 12AA of the ASIC Act]

13.9 A failure to cooperate will not invalidate the exercise of a function or power by either regulator, nor give rise to an action or other proceeding for damages. [Schedule 12, items 1 and 2, section 10B of the APRA Act and section 12AA of the ASIC Act]

Information sharing between regulators

13.10 Part 2 of Schedule 12 amends both the APRA Act and ASIC Act to introduce a mandatory information and document sharing scheme between APRA and ASIC. Under the scheme, if either regulator requests information or documents from the other regulator, the regulator must comply with the request and provide the information or documents. A request by a regulator may be amended or withdrawn. [Schedule 12, items 3 and 9, sections 55A and 55B of the APRA Act and sections 122B and 122C of the ASIC Act]

13.11 A regulator does not need to notify any person that it has complied or intends to comply with a request for information or documents under the scheme. This is intended to exclude any requirement for the regulator to give any person the opportunity to make submissions, or to take any submissions into account, when deciding whether to comply with a request under the scheme. [Schedule 12, items 3 and 9, section 55B of the APRA Act and section 122C of the ASIC Act]

13.12 The existing information sharing arrangements in section 56 of the APRA Act and section 127 of the ASIC Act continue to operate to govern the sharing of information outside of the mandatory information and document sharing scheme.

13.13 The documents and information that are subject to the scheme are information in writing or documents that have been given to a regulator. This includes information or documents that are provided to a regulator under compulsory powers. This also includes information or documents that can or must be created as a record in accordance with a law, particularly transcripts of examinations and interviews that have been undertaken by the regulators. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.14 The regulations may specify additional kinds of written information or documents that may be requested. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.15 The requested information or documents must be relevant to the exercise or performance of the requesting regulator's functions and powers. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.16 Information in writing or documents that are provided by a person advising a regulator, such as a consultant or specialist, are also able to be requested under the scheme. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.17 For example, the types of information or documents that can be requested include:

•

audit documents prepared for a company and disclosed to a regulator;

•

information in writing or documents that have been compulsorily collected from a regulated entity;

•

transcripts, notes and records from compulsory examinations that have been made in accordance with statutory requirements;

•

information in writing or documents that have been voluntarily provided to either regulator about the types of financial products a person or company is offering to consumers;

•

mandatory reports or filings provided by a company to a regulator; and

•

a report commissioned and paid for by a regulator and compiled by a consultant.

13.18 There are exclusions to the information and documents that may be requested. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.19 Information or documents that relate to the internal or administrative functions of a regulator are out of scope. This would include material in relation to the day-to-day operation of an agency, such as leases, procurement or tender agreements, staff employment agreements or contracts for services. [Schedule 12, item 3 and item 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.20 Also out of scope is information or documents that disclose a matter in respect of which the regulator or another person has claimed legal professional privilege. Additionally, information or documents acquired by ASIC under the Telecommunications (Interception and Access) Act 1979 cannot be requested by APRA. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.21 The regulations may also exempt kinds of information or documents from being within scope. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.22 The Chair of APRA or the Chairperson of ASIC may make a determination in writing that a request will not be complied with as it would compromise the functioning of the respective regulator. The power to make such a determination is intended to be used only in limited circumstances. [Schedule 12, items 3 and 9, section 55B of the APRA Act and section 122C of the ASIC Act]

13.23 To provide ASIC and APRA with the necessary operational flexibility, the new law does not prescribe the form or method in which the information or documents must be shared, or a timeframe in which the request must be actioned, other than as soon as practicable. This provides the regulators with the opportunity to discuss the nature of the request and the best way to meet it.

13.24 Part 2 of Schedule 12 amends section 56 of the APRA Act to make clear that it is not an offence if an APRA officer gives information or documents to ASIC in response to a request under the mandatory information and document sharing scheme. [Schedule 12, items 4 and 5, section 56 of the APRA Act]

13.25 Further amendments to section 56 of the APRA Act ensure ASIC will be able to use and disclose information it has received from APRA under the mandatory information and document sharing scheme for the performance of ASIC's functions and powers without committing an offence. This provides a level of consistency in comparison to how ASIC can use information it receives from APRA under existing section 56 of the APRA Act. [Schedule 12, items 4 and 5, section 56 of the APRA Act]

13.26 Once information or documents are shared under the mandatory information and document sharing scheme, section 56 of the APRA Act and section 127 of the ASIC Act may apply to govern how information and documents can be used and shared by the receiving regulator.

13.27 Unlike the existing discretionary sharing regime, APRA will not be able to place conditions on protected information or protected documents it shares with ASIC under the mandatory information and document sharing scheme. [Schedule 12, item 6, section 56 of the APRA Act]

13.28 There are other more specific limitations that exist on the use of certain information that may be shared through the mandatory information and document sharing scheme. For example, where a party has claimed privilege against self-incrimination in relation to information or documents given to one regulator, this would apply to the information or documents in the hand of the next regulator.

13.29 There are also a number of protections and limitations on use and disclosure of information that apply under existing Commonwealth legislative provisions or the general law. Some examples of this are:

•

privacy legislation;

•

equitable duties of confidence; and

•

whistleblower protections.

13.30 These protections and limitations will continue to apply to any document or information that has been shared between the regulators in compliance with a request under the scheme. These protections will only limit how each regulator is able to use a document or information after receiving it under a request.

13.31 As previously noted, information that is subject to a claim of legal professional privilege is out of scope of the mandatory information and document sharing scheme. [Schedule 12, items 3 and 9, section 55C of the APRA Act and section 122D of the ASIC Act]

13.32 Part 2 of Schedule 12 makes the required amendments to section 56 of the APRA Act to ensure that the disclosure of protected information or protected documents under the mandatory sharing scheme is authorised for the purposes of privacy legislation. [Schedule 12, item 7, section 56 of the APRA Act]

Notification of breaches of the law

13.33 In addition to the mandatory information and document sharing scheme, Part 2 of Schedule 12 requires APRA and ASIC to notify each other as soon as practicable, when they reasonably believe a material breach of a law for which the other regulator is responsible exists or may exist. [Schedule 12, items 3 and 9, sections 5 and 5D of the APRA Act and section 122E of the ASIC Act]

13.34 The aim of these provisions is to clarify the expectation that where one regulator possesses information about an obvious and significant breach of laws administered by the other, the regulator should pass that information on.

13.35 The requirement for a regulator to have a reasonable belief sets the threshold higher than a mere suspicion. This is an objective test based on the facts and circumstances of each case. [Schedule 12, items 3 and 9, section 55D of the APRA Act and section 122E of the ASIC Act]

13.36 The laws administered by each regulator are complex and wide-ranging, and it would not be reasonable to expect any staff member at a regulator - however expert - to have a full understanding of the laws administered by another regulator.

13.37 It does not require any person to attempt to form a view as to whether a specific law has in fact been breached. However, if it is sufficiently obvious that a significant breach of a law for which the other regulator has responsibility may have occurred, then that regulator must be notified.

13.38 The specific form or timing of the required notification is not prescribed. This provides the regulators with the scope to establish the most efficient system for complying with the legislative requirement.

Consequential amendments

13.39 Part 2 of Schedule 12 makes consequential amendments to the Insurance Act 1973 and the Life Insurance Act 1995 ensuring that information and documents that are regulated by these Acts are able to also be validly shared by APRA and ASIC under the new legislation. [Schedule 12, items 11 and 12, section 109E of the Insurance Act 1973 and section 231E of the Life Insurance Act 1995]

Application and transitional provisions

13.40 The amendments in Parts 1 and 2 of Schedule 12 apply from the later of 1 January 2021 and the day after Royal Assent. The cooperation regime as well as the information and document sharing scheme begin from this date. Requests under the information and document sharing scheme can be made about information or documents produced to APRA or ASIC before the commencement of Part 2 of Schedule 12. [Schedule 12, items 8 and 10]

13.41 Notifications of material breaches of the law by a regulator under the new law can be about material breaches that occurred before, on or after the commencement of Part 2 of Schedule 12. [Schedule 12, items 8 and 10]

Chapter 14 - Formalising ASIC meeting procedures (recommendation 6.11)

Outline of chapter

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

Context of amendments

14.2 Recommendation 6.11 of the Financial Services Royal Commission was that further requirements for ASIC's meeting procedures be formalised and that those requirements be substantially similar to the existing APRA meeting procedures as contained in the APRA Act. This is on the basis that the formalisation of these requirements will serve to reinforce the centrality of collective decision-making in ASIC.

14.3 The ASIC Act requires ASIC to consist of not fewer than three and no more than eight members. The Governor-General appoints members on the nomination of the Minister.

14.4 The ASIC Act provides for the convening of meetings of ASIC members as the Chairperson thinks necessary for the efficient performance of ASIC's functions or where requested by two or more of the members and contains some limited procedural requirements as to how the meetings are held and who is to preside.

14.5 Part 3 of Schedule 12 gives effect to the Government's commitment to implement recommendation 6.11 of the Financial Services Royal Commission to amend the ASIC Act to include provisions dealing with the location of Commissioner meetings, the quorum required, who is to preside, how voting is to occur and the passing of resolutions without meetings.

Summary of new law

14.6 Part 3 of Schedule 12 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.

Comparison of key features of new law and current law

Detailed explanation of new law

14.7 ASIC must hold the meetings that are necessary for the efficient performance and exercise of its functions and powers. Meetings are to be held at the times and places that the Chairperson determines and the Chairperson must convene a meeting if requested in writing by two or more members. [Schedule 12, item 14, section 103 of the ASIC Act]

14.8 A question arising at a meeting is to be determined by a majority of the votes of the members present and voting. The person presiding at the meeting has a deliberative vote and if necessary, also a casting vote. [Schedule 12, item 16, section 107 of the ASIC Act]

14.9 ASIC may regulate proceedings at its meetings as it considers appropriate provided they are consistent with the other requirements in Division 4 of Part 4 of the ASIC Act. [Schedule 12, item 16, section 107A of the ASIC Act]

14.10 In accordance with section 5A of the ASIC Act, the reference to section 33B of the Acts Interpretation Act 1901 in note 1 is a reference to section 33B of the Acts Interpretation Act 1901 as in force on 1 January 2005. [Schedule 12, item 16, section 107A of the ASIC Act]

14.11 Resolutions can be passed without a meeting provided ASIC has determined that resolutions may be passed in accordance with this section and the method to indicate agreement. The resolution is taken to be passed if a majority of members indicates agreement in accordance with the method determined and that majority would have constituted a quorum at a meeting. [Schedule 12, item 16, section 107B of the ASIC Act]

Application and transitional provisions

14.12 The amendments apply from the later of 1 January 2021 and the day after Royal Assent. [Clause 2]

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:

•

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

•

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:

•

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

•

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:

•

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

•

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

•

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:

•

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

•

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;

•

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

•

the product is comprehensive car insurance;

•

the product is exempted by regulation;

•

the person is exempted by ASIC by notifiable instrument; and

•

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:

•

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

•

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

•

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:

•

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;

•

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

•

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.