A number of changes have already been made to financial services laws and regulations, and various public consultation processes have commenced, following the release of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Financial Services Royal Commission) in February 2019. With the re-election of the Liberal-National Coalition Government in May 2019, we expect further policy change in this area to be swift. This legal update reviews the implementation of the Final Report recommendations and identifies those areas where reform is likely to be imminent.
Government's response to the recommendations
The Final Report into the Financial Services Royal Commission was tabled by the Government in Parliament on 4 February 2019. The Government agreed to action all 76 recommendations made by Commissioner Hayne in its response to the Final Report - Restoring trust in Australia's financial system.
Legal and regulatory change
A number of changes recommended in the Final Report have already been implemented by the Government or have been the subject of public consultation.
New corporate penalties
The Government has increased the maximum penalty provisions for both criminal and civil penalties with the implementation of the Treasury Laws Amendments (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth).
Civil penalties are now also applicable to breaches of the general obligations of Australian Financial Services Licence (AFSL) holders. If an AFSL holder breaches their general obligations, the pecuniary penalty applicable for body corporates are the greatest of:
- 50,000 penalty units (currently AUD 10.5 million);
- if the Court can determine the benefit derived and detriment avoided because of the contravention – that amount multiplied by 3; or
- 10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision; or
- if the amount worked out under subparagraph (i) is greater than an amount equal to 2.5 million penalty units – 2.5 million penalty units (AUD 525 million).
The new civil penalties will apply in relation to breaches of a civil penalty provision if the conduct constituting the breach occurred wholly on or after 13 March 2019.
- Recommendation 1.3 (Mortgage Broker Remuneration): Following consultation with the mortgage broking industry and smaller lenders, the Government decided to not prohibit trail commissions on new loans. Instead it has tasked the Council of Financial Regulators and the Australian Competition and Consumer Commission to review the operation of trail commissions in three years' time and consider the continuation of upfront commissions.
- Recommendation 1.7 (Removal of Point-of-Sale Exemption): A consultation paper is being prepared by the Financial Services Reform Implementation Taskforce which will enable appropriate consultation to take place in order to implement this recommendation in a manner that ensures balance is achieved between consumer protection and access to products and services.
- Recommendation 1.11 (Farm Debt Mediation): The Government has begun work on a national farm debt mediation scheme with States and Territories to deliver a paper on a preferred model.
- Recommendation 1.15 (Enforceable Code Provisions): From March – April 2019, the Treasury held a public consultation in relation to changes that should be made to enforce provisions of financial services industry codes of conduct. The consultation also considered the enforcement action that should be available to ASIC and consumers to hold financial services firms to account for misconduct in breach of industry codes of conduct.
- Recommendation 2.4 (Grandfathered Commissions): The Government has released draft regulations which will remove the grandfathering arrangements for conflicted remuneration and other banned remuneration from 1 January 2021. The regulations will also provide for the benefits of any previously grandfathered conflicted remuneration remaining in contracts after 1 January 2021 to be passed through to consumers.
- Recommendations 3.6 (No Treating of Employers) and 3.7 (Civil Penalties for Breach of Covenants and Like Obligations): The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Act 2019 has implemented a ban on trustees of superannuation funds using goods and services to influence the choice of fund of for an employee's superannuation contribution. The legislation also introduces civil penalties for superannuation fund trustees for breaches of their best interests duty.
- Recommendation 4.2 (Removing the Exemptions for Funeral Expenses Policies): The Treasury is currently consulting with ASIC on a regulation to remove the exemption for funeral insurance policies whilst also still ensuring the interests of consumers who currently hold policies with funeral insurance firms are protected.
- Recommendation 4.8 (Removal of Claims Handling Exemption): Since the Final Report, the Treasury has completed a consultation process for removing the claims handling exemption from the definition of 'financial service' under the Corporations Act.
- Recommendation 4.9 (Enforceable Code Provisions): As noted above, the Treasury released a consultation paper in March 2019 on making provisions of financial services industry codes of conduct enforceable. These changes will also apply to the General Insurance Code of Practice and the Life Insurance Code of Practice.
- Recommendation 4.11 (Co-operation with AFCA): The Treasury Laws Amendment (AFCA Cooperation) Regulations 2019 commenced on 6 April 2019. These regulations prescribe obligations on compulsory members of the Australian Financial Complaints Authority (AFCA) to:
- take reasonable steps to cooperate with AFCA to resolve any complaint under the AFCA scheme; and
- give reasonable assistance to AFCA and to identify, locate and provide documents and information to AFCA that are reasonably required for AFCA to resolve complaints; and
- give effect to any determination made by AFCA in relation to the complaint.
- Recommendation 4.13 (Universal Terms Review): The Government released a consultation paper on 28 March 2019 on the merits of legislating universal definition, terms and exclusions for default insurance cover with MySuper.
Further to the specific recommendations specified in the Final Report, the Government has also announced a raft of additional proposed reforms including:
- Providing a further AUD 35 million in the 2019-20 budget to support the expansion of the Federal Court of Australia's jurisdiction to corporate crime.
- Allocation of more than AUD 550 million in the 2019-20 budget to corporate regulators to help restore trust in Australia's financial sector. ASIC will receive more than AUD 400 million and APRA will receive more than AUD 150 million.
- Commitment to paying around AUD 30 million in compensation owed to almost 300 consumers and small businesses for the unpaid determinations of the Financial Ombudsman Service and the Credit and Investments Ombudsman.
- Establishment of an independent inquiry to review and assess in three years whether industry practices have changed following the Royal Commission and have led to better customer outcomes.
- Extending AFCA's remit to consider financial complaints dating back to 1 January 2008, providing expanded access to redress for consumers and small businesses harmed by financial misconduct.
Activity by the regulators
The Final Report identified and emphasised the need to change ASIC's enforcement culture by separating enforcement staff from ASIC's non-enforcement contact with regulated entities. ASIC has now established an Office of Enforcement.
From February 2018 to March 2019 there has been:
- a 15% increase in the number of ASIC enforcement investigations;
- a 65% increase in enforcement investigations involving the big six financial services firms (or their officers or subsidiary companies); and
- a 129% increase in wealth management investigations.
ASIC has also increased its supervision of financial services entities. Since October last year it has embedded ASIC officers with five significant financial firms and it is also currently undertaking a major corporate governance review focussed on governance processes and practices relating to the oversight of non-financial risks and variable remuneration.
In April 2019, APRA announced its new enforcement approach which will include:
- adopting a “constructively tough” appetite to enforcement and setting it out in a board-endorsed enforcement strategy document;
- ensuring APRA supervisors are supported and empowered to hold institutions and individuals to account, and strengthening governance of enforcement-related decisions;
- combining APRA’s enforcement, investigation and legal experts in one strengthened support team, and ensuring resources are available to support the pursuit of enforcement action where appropriate; and
- strengthening cooperation on enforcement matters with the Australian
APRA has also announced an enhanced supervisory framework and approach for governance, culture and remuneration applying to all APRA-regulated entities, including through building internal technical expertise and accessing technical specialists outside of APRA.
Following the release of the Final Report, the Government has also undertaken a consultation process on the capability of APRA. The Review Panel is scheduled to report to the Government by 30 June 2019.
Once Parliament resumes in August, we expect to see further legislation introduced to satisfy the recommendations of the Final Report.
We also expect the Government to consult on the implementation of:
- Recommendation 4.1 - Prohibiting the hawking of superannuation and insurance products.
- Recommendation 4.3 - Developing an industry-wide deferred sales model for the sale of any add-on insurance products which the Final Report recommended should be implemented as soon as is reasonably practicable.
- Recommendation 4.4 - Providing ASIC with the ability to cap commissions that may be paid to vehicle dealers in relation to the sale of add-on insurance products.
- Recommendation 4.7 - In 2018, Treasury held a consultation process in relation to the extension of unfair contract term provisions to contracts of insurance. The proposed model suggested amendments to the Insurance Contracts Act 1984 (the ICA). We expect a further exposure draft of the legislation will be released.
Significant funding increases announced for ASIC and APRA in the 2019-20 budget will also mean that, once the budget legislation passes, the regulators will have the necessary funding to significantly increase their level of enforcement action.
We will continue to provide updates on the implementation of the Recommendations in the Final Report.