Removal of exceptions to anti-hawking prohibition

In brief 4 min read

In response to Royal Commission recommendations, amendments to remove exceptions to the existing hawking prohibition have been released for consultation. We analyse the changes, their effects and challenges.

What's changed?

In response to recommendations 3.4 and 4.1 of the Royal Commission Final Report, Treasury has released the Exposure Draft Bill and Exposure Draft Regulations for consultation. The amendments were proposed to take effect from 1 July 2020. However, that was pre-coronavirus and now the Bill will not be introduced before August, with, we assume, a later commencement date. There is no reason to think there will be other changes to the substance of the draft Bill and Regulations.   

The Exposure Draft Explanatory Statement describes the purpose of the amendments as being to remove exceptions to the existing hawking prohibition in the Corporations Act 2001 (Cth), which, Commissioner Hayne criticised for curtailing or reducing the effectiveness of the prohibition. Additionally, they preserve the operation of regulations relating to the right of return and refund for hawked financial products that were made under the repealed sections of the Act but whose effect is retained in the draft Bill.

Under the proposed amendments, sections 922A and 922AA of the Corporations Act will be repealed and replaced. The new s992A still imposes a general prohibition against inviting a retail client to buy or apply for a financial product in the course of, or because of, an unsolicited contact (the general prohibition). It applies both to interests in managed investment schemes and other financial products. These categories were previously separated into dedicated sections.   

There are a number of exemptions to the general prohibition. For example, it does not apply:

• if advice is given by a person who is required under Division 2 of Part 7.7A to act in the client's best interest (eg under an ongoing personal advice arrangement);
• if the product is a listed security or an interest in a listed managed investment scheme;
• to a crowd-sourced funding offer;
• to an interest in a superannuation scheme if the offer or invitation was made by or on behalf of the trustee of the fund; and
• to an offer or invitation in relation to add-on insurance unless the offer is covered by ss 12DU to 12DY of the Australian Securities and Investments Commission Act 2001 (Cth) or other conditions apply.

The definition of 'unsolicited contact' is also amended, and requires that the request is made no earlier than six weeks before the contact; is a positive act from the client (eg a bundled consent included in the broader product terms may not give the client an ability to actively tick that they want to be contacted); and that the request be clear.

The new s992AA gives a legislative right of return and refund for hawked financial products. If, under 1019B, the client has a right to return the financial product within a particular period, it is one month after the end of that period. Otherwise, the client has 14 days after the product was issued or sold.

Challenges

The new clauses have attempted to expand the coverage of the anti-hawking regime, but may not necessarily assist to clarify grey areas in the current drafting, or achieve the best customer outcomes every time. For example, discussions with a client that naturally lead to a request for information about a financial product may be need to be avoided or cut short, as any resulting sale (even if it's weeks later, with no pressure applied) could be 'unsolicited', due to the breadth of the 'because of' test. The drafting creates a causal link where an offer is made potentially weeks after and in digital format, because of unsolicited original contact. The provisions are vague on when the passage of time might break the causal link, leaving the financial service provider to apply, and potentially justify, its judgment.

As well:

• the wording of the new exemption under s992A(i) may imply that offers for superannuation products are not caught by the anti-hawking regime if the person making the offer is doing so on behalf of the trustee of the superannuation fund;
• the new exemption under s992A(j) relating to the sale of insurance is convoluted, and could be misunderstood; and
• regulatory guidance should be revised to address the new clauses, and provide useful and practical examples.

This is one of many new provisions that will apply to financial service participants, with the commencement not necessarily coordinated and now unknown. Potentially affected persons may think it prudent to cease direct outbound calls – at least until they have had time to properly adjust their scripting, monitoring and compliance, to meet these new anti-hawking obligations.