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Unravelled: Consumer protection in the banking, insurance and financial sector

10 March 2017

Written by Senior Regulatory Counsel Michael Mathieson

The Senate Economics References Committee is conducting an inquiry into the regulatory framework for the protection of consumers in the banking, insurance and financial services sector. The terms of reference include 'any failures that are evident in the … current laws and regulatory framework'. Here are my thoughts on the topic.

Vast swathes of financial regulation in Australia are of poor quality and do little to protect the interests of consumers. Indeed, the low quality and sprawling nature of much of that regulation is likely to be adverse to consumers' interests. The interests of consumers are likely to be served best by regulation that is clear and accessible to all participants in the financial system.

Consistent with this, the interests of consumers could be materially advanced by assessing the existing body of financial regulation and improving its quality and clarity. Further, the processes by which much financial regulation is made should change, as existing processes have failed to generate good quality regulation. The task of assessing, and making recommendations to improve, the applicable rules and how they are made may be one for which the Australian Law Reform Commission is well-suited.

To substantiate these comments, here are some observations about eight areas of financial regulation.

Financial product disclosure – disparate disclosure regimes

The rules that currently govern financial product disclosure should be repealed and replaced. The Corporations Act, the Corporations Regulations and various ASIC instruments contain literally hundreds of provisions establishing separate disclosure regimes for different kinds of financial products. The current system is broken and there is no real alternative to abolishing it and starting again. The current system does not serve consumers, or anyone else, well.

Financial product disclosure – fees and costs

The contention that the current financial product disclosure rules should be repealed and replaced extends to ASIC's modifications made in recent years to the disclosure provisions for fees and costs under superannuation and managed investment products.

ASIC's main objective in modifying the provisions was to improve the ability of consumers to compare products. That objective has not been fulfilled.

Financial product advice – duties governing personal advice given to retail clients

The FoFA provisions that were introduced with effect from 1 July 2013 included new duties applying to the provision of personal advice to retail clients – a 'best interests' duty, an 'appropriate advice' duty and a 'conflicts/priority' duty. The pre-existing duty – to have a reasonable basis for personal advice – was repealed. The received wisdom is that these changes represent a strengthening of the applicable duties. That received wisdom is unlikely to be correct.

The 'best interests' duty is not really a duty to act in the client's best interests but rather a duty to follow an appropriate process when preparing personal advice. The 'appropriate advice' is similar to the previous duty to have a reasonable basis for personal advice but, due to drafting problems, it is arguably less effective. The 'conflicts/priority' duty may apply to a broader range of competing interests than does the broadly corresponding general law rule (that a fiduciary must not be in a position of unauthorised conflict) but, where the statutory duty applies, it is arguably less demanding than the general law rule.

Superannuation – successor fund transfers

A trustee of a regulated superannuation fund must not transfer a member's benefits from the fund without the member's consent. An exception applies where the transfer is to a 'successor fund'. APRA has recently prepared draft guidance on the exception. The draft guidance arguably does not accurately describe a trustee's legal obligations and it is possible that it could result in members' benefits being transferred without their consent when they should not have been. The restriction on non-consensual transfers of superannuation benefits is an important consumer protection and it should be administered in a way that gives it full force and effect.

Superannuation – accrued benefits

A Supreme Court judge has recently concluded that a regulation designed to protect superannuation fund members and other beneficiaries of a regulated superannuation fund from the trustee altering their accrued benefits adversely should be 'reviewed and recast by the Commonwealth'. I would respectfully agree.

Superannuation – death benefit nominations

The same judge also concluded that the legislative provisions governing superannuation death benefit nominations should be 'reviewed by the Commonwealth and recast'. Again, I would respectfully agree.

External dispute resolution schemes – independence and appeal rights

An expert panel reviewing the financial system external dispute resolution and complaints framework has made an interim recommendation that the SCT should 'transition' into an industry ombudsman scheme for superannuation disputes. In contrast, a Parliamentary committee has recommended that the Government establish a 'Banking and Financial Sector Tribunal' to replace FOS, CIO and the SCT.

I prefer the recommendation of the Parliamentary committee. External dispute resolution schemes should be independent and users of those schemes should have appeal rights.

Rule-making processes – legislative instruments made by regulators

A very substantial proportional of Australian financial regulation has been made not by Parliament or by Ministers but by regulators, principally ASIC and APRA. This method of rule-making is supported on the basis that it facilitates 'flexibility' to keep up with developments in the financial services sector, which are invariably described as 'rapid'. That may well be so but this method of rule-making comes at a cost – poor quality regulation.

Because of this method of rule-making, the body of regulation is ever-increasing, even if some new rules are paradoxically described as 'deregulation'. And that body of regulation also becomes less coherent, with Chapter 7 of the Corporations Act (as modified by countless ASIC instruments) being Exhibit A. Drafting legislative provisions is a specialist skill, typically found in offices of parliamentary counsel. It seems unrealistic to expect regulators, whose job it is to administer and enforce the law, to also maintain specialist legislative drafting capability.

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