In its final report, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry made 76 recommendations, with the Government committing to take action on all of them.
10 recommendations were made with regard to financial advice. The government in its response agrees with all of the recommendations.
- Annual renewal and payment: Ongoing fee arrangements must be renewed annually with a written record of the services the client will be receiving each year. Further, no payments should be made from any account held for or on behalf of the client except on the client’s express written authority: Recommendation 2.1.
- Disclosure of lack of independence: A financial adviser who would contravene s 923A of the Corporations Act by using any of the restricted words identified in s 923A(5) (including “independent”, “impartial” and “unbiased”) must, before providing personal advice to a retail client, give to the client a written statement explaining the adviser is not independent: Recommendation 2.2.
- Review of measures to improve the quality of advice: Recommendation to conduct a review of the effectiveness of measures that have been implemented to improve the quality of financial advice. Among other things, that review should consider whether it is necessary to retain the “safe harbour” provision in s 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed: Recommendation 2.3.
- Grandfathered commissions: Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable: Recommendation 2.4.
- Life risk insurance commissions: ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero: Recommendation 2.5.
- General insurance and consumer credit insurance commissions: The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:
- the exemptions for general insurance products and consumer credit insurance products; and
- the exemptions for non-monetary benefits set out in s 963C of the Corporations Act: Recommendation 2.6.
- Reference checking and information sharing: All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers: Recommendation 2.7.
- Reporting compliance concerns: All AFSL holders should be required, as a condition of their licence, to report “serious compliance concerns” about individual financial advisers to ASIC on a quarterly basis: Recommendation 2.8.
- Misconduct by financial advisers: All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice:
- make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and
- where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly: Recommendation 2.9.
- A new disciplinary system: The law should be amended to establish a new disciplinary system for financial advisers that:
- requires all financial advisers who provide personal financial advice to retail clients to be registered
- provides for a single, central and disciplinary body
- requires AFSL holders to report “serious compliance concerns” to the disciplinary body; and
- allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body: Recommendation 2.10.
Further recommendations were made regarding regulators. The government in its response has provided that it agrees with or supports these recommendations.
- Retain “twin peaks” model: The “twin peaks” model of financial regulation should be retained: Recommendation 6.1.
- ASIC enforcement approach: ASIC should adopt an approach to enforcement that:
- takes, as its starting point, the question of whether a court should determine the consequences of a contravention
- recognises that infringement notices should principally be used in respect of administrative failings by entities, will rarely be appropriate for provisions that require an evaluative judgment and, beyond purely administrative failings, will rarely be an appropriate enforcement tool where the infringing party is a large corporation
- recognises the relevance and importance of general and specific deterrence in deciding whether to accept an enforceable undertaking and the utility in obtaining admissions in enforceable undertakings; and
- separates, as much as possible, enforcement staff from non-enforcement related contact with regulated entities: Recommendation 6.2.
- APRA and ASIC: The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that APRA, as the prudential regulator for superannuation. ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers: Recommendation 6.3.
- ASIC as conduct regulator: ASIC as conduct regulator should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions: Recommendation 6.4.
- APRA to retain functions: APRA to retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given: Recommendation 6.5.
- Joint administration of BEAR: ASIC and APRA should jointly administer the BEAR. ASIC should be charged with overseeing those parts of Div 1, 2 and 3 of Pt IIAA of the Banking Act that concerns consumer protection and market conduct matters. APRA should be charged with overseeing the prudential aspects of Pt IIAA: Recommendation 6.6.
- ADI must deal with APRA and ASIC co-operatively: The obligations in s 37C and 37CA of the Banking Act should be amended to make clear that an ADI and accountable person must deal with APRA and ASIC (as the case may be) in an open, constructive and co-operative way. Practical amendments should be made to provisions such as s 37K and 37G(1) so as to facilitate joint administration: Recommendation 6.7.
- Extending the BEAR: Provisions modelled on the BEAR should be extended to all APRA-regulated financial services institutions. APRA and ASIC should jointly administer those new provisions: Recommendation 6.8.
- Co-operation between APRA and ASIC: The law should be amended to oblige each of APRA and ASIC to:
- co-operate with the other
- share information to the maximum extent practicable; and
- notify the other whenever it forms the belief that a breach in respect of which the other has enforcement responsibility may have occurred: Recommendation 6.9.
- Joint co-operation memorandum: ASIC and APRA should prepare and maintain a joint memorandum setting out how they intend to comply with their statutory obligation to co-operate: Recommendation 6.10.
- Meetings: The ASIC Act should be amended to include provisions substantially similar to those set out in s 27–32 of the APRA Act — that deal with meetings: Recommendation 6.11.
- Management accountability principles: Each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR: Recommendation 6.12.
- Capability reviews: APRA and ASIC should each be subject to at least quadrennial capability reviews. A capability review should be undertaken for APRA as soon as is reasonably practicable: Recommendation 6.13.
- New oversight authority: A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects: Recommendation 6.14.
Other important steps included:
- Compensation scheme — Compensation scheme of last resort should be established: Recommendation 7.1.
- Self-reporting of contraventions — Implementation of the recommendations of the ASIC Enforcement Review Taskforce made in December 2017 that relate to self-reporting of contraventions by financial services and credit licensees should be carried into effect: Recommendation 7.2.
- Eliminate exceptions and qualifications — As far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated: Recommendation 7.3.
- Laws should identify norms — As far as possible, legislation governing financial services entities should identify expressly what fundamental norms of behaviour are being pursued when particular and detailed rules are made about a particular subject matter: Recommendation 7.4.
Finally, additional government action was recommended with regard to the following:
- To expand the Federal Court’s jurisdiction in relation to corporate crime.
- Funding should be assigned for financial counselling.
- Extension of legislation for PIP/DDO.
- Superannuation binding death benefit nominations for indigenous people.
- Review of the effects of vertical and horizontal integration in the financial system.
- CCH Parliament’s summary report on the Royal Commission’s final report, 4 February 2019.
- Delivering financial services with reasonable care and skill in CCH’s Australian Company Law Commentary Premium.
- Best interests duty in financial advice.
- Inappropriate advice that does not take proper account of a client’s circumstances.
- Conflicts of interest — financial services licensee.
- Misleading or deceptive conduct in financial services and products.
- Case examples — Misleading or deceptive conduct in finance in CCH’s Australian Competition and Consumer Law Reporter.
- Key elements of best practice for financial advisers in CCH’s Australian Financial Planning Navigator.
- Corporate governance and directors’ duties in CCH’s Australian Legal Compliance: Making it Work.
- Banking Royal Commission.
This article was first published in CCH’s Australian Commercial Law Tracker on Tuesday 5 February 2019.