By Samantha Carroll (Director Governance, Compliance and Regulation), Shaun McGushin (Director Projects & Finance), David Ward (Director Advisory), with the assistance of Daniel Gallagher (Para-legal) of Ash St. Legal and Advisory, in conjunction with Rufina Cheung (Portfolio Lead – Commercial Law) of Wolters Kluwer
Do you represent a bank, insurer, superannuation fund, financial adviser, mortgage broker, retailer, car dealer, financial services entity or company? Your client may wish to consider taking the following steps to prepare for the changes that are coming as a result of the Banking Royal Commission’s recommendations.
- Update Accountability Maps and Statements — One person in a bank responsible for all its products: The government supports the recommendation that there be a single responsible person to ensure that banks take greater care in their systems to ensure they deliver the products promised and charge what they are entitled to. Linking this responsibility to the Banking Executive Accountability Regime (BEAR) will improve the manner in which these products work, and ensure a greater level of accountability. Lenders will need to take steps to implement this effectively. The change will trigger a need to review and update Accountability Maps and Statements.
- Review remuneration structures, remuneration frameworks and Board reporting: The government supports recommendations relating to the supervision of remuneration, limited use of financial metrics for long-term variable remuneration, and annual review of the remuneration system of front-line staff. Remuneration structures will need to be reviewed and amended to ensure they sufficiently address performance for management of non-financial risks and in particular misconduct and compliance. Remuneration frameworks should be reviewed and amended in line with revised prudential standards and guidance, with particular focus on the metrics surrounding long-term incentives and the ability to clawback remuneration that has vested. Board reporting on risk management performance and remuneration will need to be reviewed and enhanced.
- Periodically review culture and governance: The government supports the recommendation that all financial services entities should, as often as reasonably possible, take proper steps to assess their culture and governance; identify any problems; deal with those problems and determine whether changes have been effective. The government also supports the recommendation relating to APRA supervision of culture and governance. There will be a regulatory requirement to periodically review culture and governance.
- Review sales processes to ensure sufficient due diligence: It was recommended that the existing duty of disclosure for consumer insurance contracts should be replaced with a duty to take reasonable care not to make misrepresentations to an insurer. The government agreed to amend the duty of disclosure for consumers to ensure that disclosure obligations do not enable insurers to unduly reject the payment of legitimate claims. The government’s response did not address a duty to not misrepresent. Sales processes will require review to ensure there is sufficient due diligence performed to manage any change in risk as a result of the revised duty.
- Review sales models — Stop hawking: The government agreed that hawking of insurance products should be prohibited. Hawking will be defined to include selling of a financial product during a meeting, call or other contact initiated to discuss an unrelated financial product. Insurers will need to review sales models, particularly call centre sales models which focus on outbound sales and insurance sales models at the point of sale. Insurers may wish to consider phasing out insurance policies traditionally sold through impacted sales models (such as funeral policies and gap insurance).
- Change to a deferred sales model for add-on insurance: A deferred sales model requires consumers to separately engage with the insurance product rather than considering it at the same time as buying a typically much more expensive product. The government agreed to mandate deferred sales for add-on insurance and has tasked Treasury to develop a deferred sales model. Sales models will need to be reviewed and adjusted to respond to the deferred sales model.
- Review insurance policies and standard form documents for unfair contract terms: The government agreed to extend the unfair contract terms laws to insurance contracts. Insurance policy terms and other standard form documentation falling into the regime will require review and amendment for compliance with the regime.
- Amend funeral insurance policies — Funeral insurance companies will need to become licensed: The government agreed to remove an exemption and clarify that the consumer protection laws apply to funeral expenses policies. Insurance policy terms will need to be reviewed and amended to reflect the new duty. If companies do not currently hold an AFSL, they will be required to be licensed under the reform.
- Make structural changes to ensure the trustee is independent: The government has agreed to prohibit trustees of a registrable superannuation entity (RSE) assuming any obligations other than those arising from or in the course of performing the duties of a trustee of a superannuation fund. This will have a significant impact on the operation of RSEs. The trustee must be truly independent, avoid conflicts of interest and act in the best interests of the members. Current arrangements will require review and structural changes may be required.
- Stop deducting advice fees from MySuper accounts — Monitor any decrease in quality of administration: The government has agreed to a recommendation to prohibit deduction of any advice fee (other than for intra-fund advice) from a MySuper account. The change will clearly have an impact on revenue sources if fees are currently charged on MySuper Accounts. Flow on effects such as a decrease in the extent or quality of administration of these accounts should be monitored to ensure obligations continue to be met for these accounts.
- Stop hawking: The government has agreed that hawking of superannuation products should be prohibited. Where these sales processes exist in the sector, they will clearly need to be phased out and ultimately eliminated.
- Prepare for a narrowing of the market: The government has agreed that a person should have only one default superannuation account. On the one hand, this should result in cost savings for the sector; however, it may also narrow the market for some funds particularly if they are industry specific.
- Review Engagement, Gift and Corruption Policies — Stop “treating” employers to get nomination as default fund: The government has agreed to the recommendation that trustees of a regulated superannuation fund, and their associates, should be prohibited from doing any specified acts which may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having its employees become members of the fund. It was recommended that this should be a civil penalty provision. The relevant provisions of the SIS Act will likely be amended to make it clearer that monetary and non-monetary benefits are prohibited to be paid by funds to entice employers to use them as the default employee fund. Engagement, Gift and Corruption Policies for funds will require review to ensure they prohibit this type of conduct and engagement with employers.
- Review remuneration structures — Develop Accountability Maps and Statements — Review HR policies, employment contracts and GRC frameworks — Extension of BEAR to superannuation trustees: The government has agreed to the recommendation that provisions modelled on the BEAR should be extended to all RSE licensees. The BEAR establishes accountability obligations for ADIs and their senior executives and directors. It also establishes deferred remuneration, key personnel and notification obligations for ADIs. RSE licensees, insurers and all other APRA-regulated entities will be required to implement the BEAR including Accountability Maps, Statements and changes to remuneration. Remuneration structures will require review and reform to align with BEAR requirements. In addition to development of Maps and Statements, the BEAR has a consequential reach to Human Resource policies and employment contracts and Governance, Risk and Compliance frameworks in order to be implemented effectively.
- Change fee processes — Annual renewal of ongoing fees: The government has agreed with the recommendation that ongoing fee arrangements (whenever made) must be renewed annually with a written record of the total fees and 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 given at, or immediately after, the latest renewal. These requirements will apply for all clients. Currently, financial advisers only need to seek clients’ agreement for ongoing fees for new clients after 1 July 2013. Although some advisers that already annually renew/fully disclose their fees to their clients may be burdened by more paperwork or enhancement of fee processes and systems, this will place all advisors on equal footing, which, ultimately, will be beneficial to the customers.
- Update disclosure documents — Financial advisers must disclose lack of independence: The government has agreed with the recommendation that financial advisers must, before providing personal advice, give retail clients a written statement explaining simply why they are not independent, in situations where their advice may be influenced by considerations other than the client’s best interests. Relevant disclosure documentation will need to be reviewed and amended to include this disclosure, where applicable.
- End grandfathered commissions by 2021: The government announced it will end grandfathering of conflicted remuneration effective from 1 January 2021. An Exposure Draft Bill titled the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 (“Exposure Draft Bill”), to effect these changes was released on 22 February 2019 with the consultation period ending on 22 March 2019. Under the Exposure Draft Bill, payments of any previously grandfathered conflicted remuneration still in contracts must be rebated to applicable clients who can reasonably be identified. Where this is not practicable (eg volume-based grandfathered conflicted remuneration), the Bill proposes product issuers would pass these benefits to clients indirectly (eg by lowering product fees). During the transition period from 1 July 2019 to 1 January 2021, ASIC will be tasked with monitoring and reporting on the benefits passed on to clients. As a result, arrangements will need to be made to reflect this change during the transition period. On 28 March 2019, an Exposure Draft of the proposed Regulations was also released and closed for consultation on 25 April 2019. Notably, the Draft Regulations propose that in circumstances where the conflicted remuneration relates to a group of clients, the product issuer would determine the amount based on what is “just and equitable” in the circumstances which has attracted some criticism by representatives in the superannuation industry. There are also extensive record-keeping obligations concerning the information which should be kept in connection with rebates to clients. The amendment will obviously have an impact on those advisers currently receiving revenue from grandfathered conflicted remuneration arrangements.
- Become individually registered — Prepare to face possible disciplinary action: The government agreed to introduce a new disciplinary system for financial advisers and individual registration. AFSL holders will be required to be individually registered, with new responsibilities being tied to the license as conditions. Disciplinary action will be tied these conditions, with deregistration as the harshest disciplinary action.
- Review mortgage broking documents and processes — Best interests duty: The government has agreed to introduce a best interests duty for mortgage brokers, and that breaches should be subject to civil penalties. This change will require review of mortgage broking documents, processes and disclosure documents to ensure the “best interests” duty is met and there is adequate evidence held by brokers to establish compliance with the duty.
- Train mortgage brokers — Best interests duty: Further training will be required to uplift brokers’ knowledge and understanding of the best interests duty.
Retailers (including car dealers)
- Prepare to be subject to responsible lending obligations: The Royal Commission recommended that retailers should no longer be exempt from the National Consumer Credit Protection Act 2009 (NCCP Act). This would mean that third-party vendors would be required to only recommend loans that are not unsuitable for the consumer. This reform applies to situations where consumers borrow money to pay for cars, whitegoods, furniture, etc, and they apply for credit at the point of sale, not at the lender’s premises: Recommendation 1.7. The government has agreed to remove the point-of-sale exemption and will carefully consider how to implement this reform. This means retail dealers will have to hold an Australian Credit Licence (ACL) or be appointed a credit representative to broker deals, which would make them subject to the same responsible lending obligations as other brokers. Retail dealers will need to prepare for such changes.
- Amend commission structures and agreements — Cap on commissions for car dealers for add-on insurance: The government agreed to enable ASIC to cap commissions paid to car dealers relating to add-on insurance products. Commission structures and agreements will require review and amendment to ensure compliance.
All companies and financial services entities
- Consider admitting contraventions — Face higher penalties and more litigation: The government supports the recommendations that ASIC should adopt an enforcement approach that starts by considering litigation; limits use of infringement notices; limits use of EUs and pursue admissions in EUs. Penalties are expected to be higher, when ASIC is successful in litigation, or when businesses admit liability and consent to agreed penalties. It is expected that enforcement activity will continue to rise, and ASIC will initiate increased litigation. More litigation increases the uncertainty, legal costs, time-costs and reputational damage faced by businesses. It is expected that there will be a decrease in infringement notices (except for administration breaches) and a decrease in “negotiated outcomes”. ASIC is expected to pursue more robust enforceable undertakings which require regulated entities to admit contraventions, leading to greater reputational damage.
More practical steps which businesses can consider taking in response to the Banking Royal Commission’s recommendations are set out in CCH’s Australian Legal Compliance – Making it Work. Samantha Carroll (Director Governance Compliance and Regulation) and Michelle Bradshaw (Special Counsel) of Ash St. are the new authors of CCH’s Australian Legal Compliance — Making it Work.
Checklists, practical guides, Questions & Answers, comparative case tables, roadmaps, topic guides and in-depth explanations about the various laws that were scrutinised by the Banking Royal Commission can also be found across Wolters Kluwer, CCH’s suite of commercial law content:
- Australian Legal Compliance — Making it Work on IntelliConnect
- Consumer Credit Law on Pinpoint
- Company Law on Pinpoint
- Conflicted remuneration
- Conflicted remuneration — life risk insurance products
- Delivering financial services with reasonable care and skill
- Best interests duty in financial advice
- Best interests duty — providing personal advice to retail clients
- Conflicts of interest — financial services licensee
- Misconduct in respect of financial advice
- Misleading or deceptive conduct in financial services and products
- Competition & Consumer law on Pinpoint
- Insurance law on Pinpoint
- Financial Planning on iKnow
- Key elements of best practice for financial advisers
- Superannuation on iKnow