04 February 2020

Financial Services Royal Commission Draft Legislation - A lot to do before 30 June 2020

This article was written by Jim Boynton and Katherine Forrest.

On Friday the Treasurer released for consultation a raft of proposals to implement 24 of the Government’s responses to recommendations of the Financial Services Royal Commission final report. The consultation period for all the proposals ends on 28 February 2020. 

This alert focuses on some of the key proposals and some initial takeaways. Further in-depth analysis of particular proposals will be released in the coming weeks.

Initial takeaways if the proposals are passed in their current form

  • Most amendments are proposed to take effect on Royal Assent or 1 July 2020 giving little time to implement changes once the legislation is passed. There are limited transitional provisions.
  • Retail financial product distribution must comply with the more extensive hawking prohibitions by 30 June 2020.
  • Breach reporting procedures must change significantly and where personal advice has been given there will be onerous obligations to notify and remediate clients (subject to a 1 April 2021 transition). ASIC will have an expanded role in superannuation regulation from 30 June 2020.
  • If ASIC has reason to suspect a contravention of financial services law, ASIC will be able to make directions in relation to the contravention. Example directions include not to accept new clients, to conduct reviews or audits and to engage people to carry out specific tasks.  This power is far-reaching and provides ASIC with another alternative to enforcement.
  • By 30 June 2020, superannuation trustees must not act in another’s interest (e.g. an agency relationship) other than in acting as a super trustee or providing personal advice. Accordingly, some superannuation trustees must transfer businesses other than personal advice business by 30 June 2020 and may need to revisit obligations to counterparties (e.g. relation to investments and outsourcing).
  • Some trustees of corporate superannuation funds that are not authorised under an Australian financial services licence to deal in superannuation must apply to vary their licences by 30 June 2020.

Non-superannuation or insurance specific proposals

Exposure draft subject

Summary

Fundamental changes to breach reporting, reference checking & a new onerous remediation regime

  • More onerous breach reporting requirements for Australian financial services licensees and a new regime for credit licensees.  ASIC must publish information about reports lodged annually, naming licensees
  • Establishing a compulsory scheme for checking references for prospective financial advisers and mortgage brokers (and credit licensees generally)
  • Requiring Australian financial services licensees and credit licensees to investigate financial advisers’ and mortgage brokers’ misconduct and remediate affected clients

No hawking of financial products

  • Replacing the existing regimes with a more comprehensive regime for all financial products

Enforceability of financial services industry codes

  • Allowing ASIC to designate enforceable code provisions which, if breached, may attract civil penalties, and to create a new mandatory code of conduct framework

Ongoing fee arrangements and disclosure of lack of independence

  • Introducing new obligations for financial services licensees/authorised representatives providing personal financial product advice to retail clients under ongoing fee arrangements (e.g. account holder consent required for fee deductions and annual reviews)
  • Introducing new record-keeping requirements (e.g. for renewal notices given to clients)
  • Requiring financial services licensees/authorised representatives authorised to provide personal advice to a retail client to disclose in writing to the client if they are not independent and why
  • Introducing additional disclosure requirements, such as disclosure of total fees that will be charged and services to be provided during the next 12 months

Financial Regulator Oversight Authority

  • Establishing an independent assessment authority to review the effectiveness of APRA and ASIC, and report on its findings to the Minister

ASIC directions power

  • If ASIC has reason to suspect a contravention of financial services law ASIC will be able to make directions in relation to the contravention

Additional superannuation or insurance proposals

Exposure draft subject

Summary

Trustees of RSEs should hold no other role or office

  • Prohibiting superannuation trustees from having duties other than those arising from or in the course of the performance of its duties as a trustee of a superannuation fund.  Duties arising from a trustee operating investment vehicles, such as managed investment schemes, special purpose vehicles and PSTs that are only open to members of the fund, appear to be excluded from this prohibition

Limits on the payment of advice fees

  • Prohibiting trustees charging advice fees from MySuper
  • Requiring trustees to only charge advice fees from choice products where the fee is charged in accordance with an arrangement agreed to by the member, the member has expressly consented to the trustee charging the fee and the trustee has the consent or a copy of it

Limits on trustee and director indemnities

  • Superannuation trustees and directors not being able to indemnify themselves out of the assets of the fund for criminal, civil or administrative penalties as a result of a breach of Commonwealth law

Superannuation regulator roles & AFSL licensing

  • Adjusting APRA's and ASIC’s roles for superannuation, based on APRA being the prudential regulator and ASIC the conduct and disclosure regulator
  • Giving ASIC joint responsibility for enforceable provisions (based on consumer protection) in the Superannuation Industry Supervision Act
  • Extending Australian financial services licensee regime coverage to superannuation trustee services

Cap on vehicle dealer commissions

  • Providing ASIC with the power to impose a cap on commissions for add-on insurance products and insurance-like products

Deferred sales model for add-on insurance

  • Introducing an industry-wide deferred sales model for the sale of all add-on insurance products, except for policies of comprehensive motor insurance

Duty to take reasonable care not to make a misrepresentation to an insurer

  • Implementing a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts (to replace existing duty of disclosure)

Restricting use of the term ‘insurance’ and ‘insurer’

  • Making it a strict liability offence for a business to describe a product or service that they offer as insurance, if it is not insurance, but where it’s likely that it could mistakenly be believed to be insurance

Further information

Full details of the proposals can be found here.  Most of the proposals are also listed on the Treasury Royal Commission webpage.

Explore our Royal Commission hub to keep up-to-date, access related content and view additional resources.    

We are happy to assist you in considering the proposals and how they impact on your business. Please contact your usual KWM contact if you would like to discuss the proposals further.

Key contacts

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