Key components and changes of the Bill
The Government yesterday introduced into Parliament the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 to implement a large number of the Hayne Royal Commission recommendations.
Many provisions have a start date of 1 January 2021, and some don't have a transition period.
We've set out a brief overview of the key parts of the Bill, highlighting key changes from the exposure drafts.
It is worth noting that it does not include any of the changes to ongoing advice fees and superannuation trustees passing on advice fees. We don't know why, and we don't know whether another Bill will follow shortly, or whether we will have to wait until next year. But we don't think it's an indication the Government has changed its mind about these changes.
The Bill will amend the Corporations Act 2001 and the National Consumer Credit Protection Act to add new powers for ASIC in relation to industry codes of conduct. As we noted in our March update, there has been a wave of new voluntary codes appearing in the financial services market, particularly in industries where FinTech is dominant.
The critical function of the Bill has not changed since the Exposure Draft. That is, ASIC may identify a particular code of conduct as a 'mandatory code', or it may declare that a provision of a voluntary code of conduct is an 'enforceable code provision'. For ASIC to do so, it must be satisfied that certain conditions are met.
The most significant differences between the Exposure Draft and the Bill are in the alterations to the conditions that must be met. ASIC no longer needs to be satisfied that all entities that could be covered by the code, are likely to become subscribers to the code. This signifies a minor shift away from an industry focus (ie whether the industry has generally adopted the code) towards a consumer focus (it is appropriate to identify the provisions of the code as enforceable). The definition of 'subscriber' has also been updated. It now includes entities that are no longer subscribers to codes, and applies to their actions during the period that they were bound by the code.
More significant than the the words of the Bill, are the changes to the overall the legislative framework since the Exposure Draft was released. In September we were informed that the responsible lending obligations will be replaced by a broader 'principles based' framework for non-bank lenders. It is possible that this will make the enforceable code powers more relevant to ASIC. It may look to the words of voluntary codes as a mechanism to add another layer of specificity regarding its expectations, and boost its enforcement power regarding consumer protection in the non-bank financial sector.
Schedule 2 - Insurer avoidance of life insurance contracts, and duty to take reasonable care not to make a misrepresentation (recommendation 4.5 and 4.6)
The Bill includes amendments to the Insurance Contracts Act 1984 (Cth), addressing recommendations 4.5 and 4.6 in the Hayne Royal Commission final report. The amendments set out in the Bill do not include any substantial changes from the exposure draft released by Treasury in January 2020.
The amendments will allow life insurers to avoid a life insurance contract on the basis of non-fraudulent misrepresentation or non-disclosure by an insured, only if the insurer would not have been prepared to enter into the contract on any terms. They will apply to any life insurance contract entered into (and in some cases varied) from 1 January 2021 (or the date of Royal Assent, if later).
Insurers will have more time to implement the changes relating to the replacement of the insured's duty of disclosure, with a duty to take reasonable care not to make a misrepresentation in relation to 'consumer insurance contracts'. The provisions will apply to contracts entered into (and in some cases varied) on or after 5 October 2021, unless the insurer opts in earlier.
The Bill will amend the ASIC Act to introduce an industry wide ‘deferred sales model’ (DSM) for the sale of add-on insurance products. As expected, Schedule 3 will come into effect alongside the new anti-hawking provisions (with commencement being 'immediately after' the commencement of those changes on 5 October 2021).
The DSM remains substantially the same as originally proposed under the Exposure Draft released in January. The definition of 'add-on insurance product' and the general prohibition on sales during the deferral period are largely unchanged, although the Bill more clearly distinguishes between the two types of sales that are caught (being offers made in the deferral period, or where the customer has opted-out).
A new consumer remedy has also been introduced, with customers having a right of return or refund where the product was sold in contravention of the provisions. Insurers will need to consider how these provisions are implemented alongside existing processes, including cooling-off periods, and in cooperation with others involved in the sales process, such as brokers.
The Bill will amend the ASIC Act to give ASIC the power to place a cap on commissions that car dealers can receive for the sale of add-on insurance products. The changes are largely as proposed, with just some minor changes to the definition of 'motor vehicle'. The Bill also omits the previously proposed offence for attempts to contravene the caps and for involvement in such a contravention.
These rules will take effect on 1 January 2021 (or the date of Royal Assent, if later).
Schedule 5 of the Bill deals with the Government's proposal to introduce a general ban on the hawking of financial products to retail clients. Broadly speaking, the new rules will consolidate the existing hawking prohibitions in the Corporations Act, into one general prohibition with limited exceptions.
The Exposure Draft was released in January this year, with the proposals initially planned to take effect from 1 July 2020. The Bill includes a new start date of 5 October 2021. The later commencement date should be a welcome delay for businesses impacted by the new ban, given the amount of work anticipated to restructure sales to comply with both the anti-hawking and DSM provisions to be made by Schedule 3.
The definition of 'unsolicited contact' has been amended to replace the fairly vague concept of contact in a form 'that a reasonable person would consider creates an expectation of an immediate response from the other person', with a more concrete concept of 'any other real-time interaction in the nature of a discussion or conversation'. Contact will also only be unsolicited if the consumer did not 'consent' to the contact as required (rather than did not 'request' the contact). The concept of consent is likely to align more closely with existing market consent processes.
There is an exemption for financial advisers who are required to act in the client's best interests. Other exemptions will be provided through regulations. The add-on insurance exemption has been removed.
From 1 January 2021 (or Royal Assent, if later), the Insurance Act 1973 (Cth) will include a new strict liability offence for inappropriately using the term 'insurance' or 'insurer'. There were no material changes from the Exposure Draft.
The handling and selling of insurance claims will become a 'financial service' under the Corporations Act from 1 January 2021 (or the date of Royal Assent, if later). Anyone providing these services to an insurer or an insured, will need to apply for an authorisation under their Australian financial services licence, or otherwise become an authorised representative of a licensee who is authorised to provide these services. A transition period to enable compliance will apply until 30 June 2021, or until 31 December 2021 if an application is submitted to ASIC before 30 June and has not yet been determined.
The definition of the new financial service remains broad, although the Bill specifically carves out 'claimant intermediaries' to clarify that representing insured persons in pursuing claims is not captured by the licensing regime. The definition of 'claims manager' has also been amended from the Exposure Draft to make clear it only applies where the services are provided as part of the person's primary business.
Schedule 8 – Trustees of registrable superannuation entities should have no other duty (recommendation 3.1)
Schedule 8 will introduce a new section 29E(5A) into the SIS Act. It will impose an additional condition on all RSE licences saying the RSE licensee cannot have a duty to act in the interests of another person other than duties arising in the course of performing the RSE licensee’s duties, or exercising the RSE licensee’s powers, as a trustee of a registrable superannuation entity, or providing personal advice. In other words, it is intended to prevent a superannuation trustee operating a business other than the business of operating the superannuation fund business.
The proposed licence condition in Schedule 8 is in the same form as was set out in the Exposure Draft legislation.
The amendment will commence from the later of 1 July 2021 and the day after the Bill receives Royal Assent. However, there is some uncertainty about the date by which RSE licensees will need to comply with the new condition due to a statement in the Explanatory Memorandum for the Bill which provides that existing structures will need to be restructured by 1 January 2022. This is not what is in the Bill, although perhaps it is intended that this transitional period will be provided in associated regulations, which have not been released at the date of publication. APRA will have the power to grant extensions on a case-by-case basis (and may attach conditions to the extension). The Explanatory Memorandum suggests that extensions will only be appropriate where complex restructuring is required to achieve compliance.
Schedule 9 – Adjustment of APRA and ASIC's roles in superannuation (recommendation 3.8, 6.3, 6.4 and 6.5)
These amendments are all about giving ASIC greater powers to regulate and take enforcement action against superannuation trustees.
From 1 January 2021, ASIC will share responsibility with APRA for the administration (supervision and enforcement) of the section 52 and section 52A covenants. These are the duties of the trustees and directors to exercise powers in the best interests of beneficiaries and to exercise care, skill and diligence. ASIC will also join APRA with responsibility for the sole purpose test in section 62. ASIC will have sole responsibility for dispute resolution (and complaints handling). The Commissioner of Taxation will continue to have his share of responsibilities with superannuation data, reporting and payments and self-managed superannuation funds.
Also, from 1 January 2021 the Corporations Act and ASIC Act will be amended to add a 'superannuation trustee service' to the short list of financial services. A person will provide a superannuation trustee service if they operate a registrable superannuation entity as trustee of the entity'.
Leaving aside the curiosity of the definition (given under the SIS Act a trustee of an RSE is the trustee or 'the person who manages the fund', it does raise a question about whether it is possible for there to be more than one trustee of a fund), this amendment will have a big effect. A trustee will add to its already extensive list of obligations all of the Chapter 7 obligations to the operation of its fund – including to operate the fund efficiently, honestly and fairly. In turn this will affect its breach reporting obligations. We will refrain from asking whether this will improve for the lot of fund members.
The Australian financial services licence authorisations of RSE licensees authorised to deal in superannuation products just before commencement date, will be automatically extended to authorise the licensee to provide superannuation trustee services, without the trustee having to make a separate application.
Schedule 10 implements recommendations 1.6 and 2.7 to introduce new referencing checking and information sharing obligations on Australian financial services licensees and Australian credit licensees. The amendments are in the same form as the Exposure Draft, except that they apply from 1 October 2021.
Schedule 11 introduces the new breach reporting and remediation regime for AFSL and ACL holders. It will replace the current breach reporting obligations in section 912D of the Corporations Act.
Earlier this year, the Government consulted on an exposure draft for the regime which was not entirely consistent with Commissioner Hayne's or the ASIC Enforcement Review Taskforce's recommendations for breach reporting reform. We are pleased to see that this Bill addresses a number of these concerns, and has extended the commencement date for the new regime to 1 October 2021.
The Bill will require licensees to lodge a report with ASIC if there are reasonable grounds to believe that a reportable situation has arisen in relation to the licensee, or another licensee who is providing personal advice to retail clients in relation to relevant products, or is a mortgage broker. The core reportable situations largely mirror the current reporting triggers in section 912 of the Corporations Act.
The Bill will also require licensees to notify affected clients (being those that received certain personal advice from a licensee, or credit assistance from a mortgage broker) where there is a reasonable belief that a reportable situation has arisen in respect of that client, and the licensee reasonably suspects the client has or will suffer loss or damage as a result and has a legally enforceable right to recover the loss and damage from the licensee. A licensee must then investigate this matter and must compensate the affected client if the 'reasonable suspicion' in relation to loss becomes a 'reasonable belief'.
Under the regime, ASIC must also publicly publish information on the core obligation breach reports within 4 months of the end of each financial year, with the first publication due on or after the financial year end 30 June 2022.
Schedule 12 – Statutory obligation to cooperate and formalising ASIC meeting procedures (recommendation 6.9 and 6.11)
These new provisions amend the APRA Act and the ASIC and regulate the conduct of APRA and ASIC. They will require APRA to help ASIC and ASIC to help APRA 'in performing and exercising [their] functions and powers effectively'. They will each be required to 'support' the other (which is a rather odd word for legislation), but happily for both, a failure to do so will not mean the regulators' actions are invalid and nor will it form the basis for a claim against either of them.
The Acts will both include provisions dealing with the sharing of information. It is important to note that this is not a free for all. There will need to be written requests which requests specified information. In both cases the Chair may decide information will not be shared if it would compromise the proper functioning of the regulator.
Finally, the regulators will have a mutual obligation to notify the other if they have a reasonable belief that there has been a material breach of a legislative provision for which the other is responsible (we assume they are referring here to a breach by a regulated entity and not by themselves).
This new spirit of cooperation and mutual support will start on 1 January 2021 or the date of Royal Assent if later.