Previously…. a Range of Inquiries and Reviews
Prior to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) other inquiries into the financial system have highlighted serious issues and driven reforms that have significant implications for companies, including financial services entities. The Royal Commission commented on the recommendations made by some of those inquiries.
Previous reviews and inquiries include:
- the Ramsay Review into the financial system’s external dispute resolution and complaints framework
In response to the Ramsay Review, the Australian Financial Complaints Authority (AFCA) was established and commenced operation from 1 November 2018. The Government subsequently expanded AFCA’s remit to consider past disputes and made Regulations that require all compulsory AFCA members to take reasonable steps to cooperate with AFCA in the resolution of disputes, including by providing all relevant documents. Changes to the AFCA Rules were approved in August 2019, enabling AFCA to name companies when publishing determinations.
In May 2019, ASIC undertook a consultation on changes to its Regulatory Guide 165 Licensing: Internal and external dispute resolution, proposed to be put in place by the end of 2019. One of the drivers for the proposed changes was the new statutory framework for financial services dispute resolution.
- the ASIC Enforcement Review Taskforce, which reported in December 2017
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 implements recommendations made by the ASIC Enforcement Review Taskforce to introduce stronger civil and criminal penalties for misconduct in the corporate and financial sectors.
Legislation to implement other recommendations, concerning ASIC’s powers regarding search warrants, telecommunications interceptions, banning and licensing, is scheduled in the Government’s Banking, Superannuation and Financial Services Royal Commission Implementation Roadmap (Implementation Roadmap) for introduction by the end of 2019. Consultation on exposure draft Bills closed on 9 October 2019.
- the Inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into Whistleblower protections in the corporate, public and not-for-profit sectors The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 commenced in July 2019, introducing substantial penalties for organisations that fail to fulfil their obligations to protect whistleblowers, or to have a whistleblower policy in place and available to their officers and employees by 1 January 2020.
The Royal Commission’s Findings about Ineffective Enforcement, as well as Misconduct
The Royal Commission’s findings about conduct by many financial services entities that was illegal or, at least, fell well short of community expectations, have been widely reported, as has its criticism of ineffective enforcement by ASIC and APRA.
The outcomes of the first capability review undertaken for APRA, as recommended by the Royal Commission, also received wide media coverage. The capability review was critical of APRA’s culture and its tendency to deal with regulated entities “behind the scenes”.
The Implementation Roadmap notes that the Government will:
- establish a financial regulator oversight authority to provide consistent and continuing independent assessment of ASIC’s and APRA’s effectiveness, with legislation to be introduced by 30 June 2020, after consultation and
- provide ASIC and APRA with updated Statements of Expectations, reflecting the Royal Commission’s findings and recommendations.
ASIC has now adopted a “why not litigate” approach to taking enforcement action through the courts, in an attempt to meet the Royal Commission’s, the Government’s and the community’s expectations of the regulator. Financial services entities can expect ongoing regulatory and enforcement activity by ASIC and APRA, consistent with their updated Statements of Expectations and in anticipation of their new oversight authority’s assessment of their performance.
Examples of ASIC’s initiatives in regulatory reform include the proposed changes to internal dispute resolution requirements discussed above, and ASIC’s use of its new product intervention powers.
In relation to enforcement activity, it’s interesting to note that both ASIC (in its responsible lending case against Westpac) and APRA (in its action against IOOF) have recently lost high-profile cases commenced in this environment of higher expectations. Both regulators have had to decide whether to appeal these decisions. ASIC has filed an appeal with the Full Federal Court; APRA has announced it will not appeal.
The Implementation Roadmap — Government Actions
When he announced the Implementation Roadmap, the Federal Treasurer indicated that “the need for change is undeniable, and the community expects that the Government’s response to the Royal Commission will be implemented swiftly”. He contrasted the legislation to implement the Future of Financial Advice Reforms, which was not introduced until almost 23 months after the Parliamentary Joint Committee on Corporations and Financial Services tabled its report (with many changes made since).
In his Foreword to the Implementation Roadmap, the Treasurer stated that:
“Individual firms must make the changes needed to their culture and remuneration practices to put consumers at the core of their business. I expect industry to also align with the urgency and priority the Government is giving to its implementation task.”
According to the Implementation Roadmap, which sets out a timeframe the Treasurer acknowledges is ambitious, the Federal Government’s reforms in response to the Royal Commission will:
- strengthen protection for consumers, small businesses and rural and regional communities
- The Treasury Laws Amendment (Ending Grandfathered Remuneration) Act 2019 received the Royal Assent on 28 October 2019; its main provisions will commence on 1 January 2021.
- Consultation on legislation that would introduce a “best interests” duty for mortgage brokers and reform mortgage broker remuneration closed on 4 October 2019. The Implementation Roadmap has this legislation scheduled for introduction by the end of 2019.
- The legislation to be consulted on and introduced by 30 June 2020 includes a range of measures to improve consumer protections, such as introducing “enforceable code provisions” into ASIC-approved industry codes of conduct.
- ensure strong and effective financial system regulators
The Implementation Roadmap notes that, in the 2019-20 Federal Budget, the Government provided a record level of funding to the regulators, to enable them to “strengthen and intensify their enforcement and supervision activities, and take on expanded responsibilities, as recommended by the Royal Commission”.
As well as increasing ASIC’s powers, and establishing the financial regulator oversight authority (mentioned above), the Implementation Roadmap provides for legislation to be consulted on and introduced by 30 June 2020 regarding:
- breach reporting arrangements, as recommended by the ASIC Enforcement Review, together with the Royal Commission’s recommendations to require financial services and credit licensees to comply with increased information-sharing and reporting obligations, to take action to detect misconduct and, where appropriate, remediate customers for misconduct by financial advisers and mortgage brokers.
- enhance the accountability of financial firms, their senior executives and boards
The Implementation Roadmap notes that lasting change in the culture, governance and remuneration practices of financial services entities will need to be driven by boards and executives. Measures to be implemented by the Government include:
- extending the Banking Executive Accountability Regime (BEAR) to all entities regulated by APRA, including insurers and superannuation funds, as recommended by the Royal Commission. The accountability regime will also be extended to a range of non-APRA regulated entities, to be administered by ASIC. This legislation is to be consulted on and introduced by the end of 2020.
A recent article in the Financial Review suggested that a consultation and draft legislation were being drafted by the Treasury, with input from ASIC, to be released by the end of 2019. The additional entities being considered apparently include the ASX, private health insurers and other large companies that hold AFS licences or credit licences, as they that play a crucial role in the financial system.
- creating a new disciplinary system for financial advisers, including a single, central disciplinary body under legislation to be consulted on and introduced by the end of 2020.
- further improve remediation and redress for consumers and small businesses harmed by misconduct
A compensation scheme of last resort, to ensure the payment of compensation awarded to consumers or small businesses for misconduct, will be established by December 2020 to cover unpaid determinations made under the AFCA Rules.
The Government expects that — apart from the reviews to be conducted in 2022 — by mid-2020, close to 90 per cent of its commitments will have been implemented, and by the end of 2020 legislation will have been introduced to implement the remaining Royal Commission recommendations that require legislation..
The Implementation Roadmap — Industry Implementation
The Implementation Roadmap notes that, to ensure industry is held accountable for the action it needs to take in response to the Royal Commission:
- the House of Representatives Standing Committee on Economics has been requested to inquire into progress made by financial institutions and leading financial services associations, in implementing the Royal Commission’s recommendations
- the Government will establish an independent review in three years’ time to assess the extent to which changes in industry practices have led to improved consumer outcomes and the need for further reform.
Financial services entities must therefore be prepared for increasing levels of regulatory activity and scrutiny, and be mindful of the much heavier civil and criminal penalties that attach to non-compliance.
For companies that are listed on the ASX, it is also necessary to adopt the Fourth Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, and to take account of the major reforms to the ASX Listing Rules.
Any concerns about responding to more onerous regulatory requirements are unlikely to meet much sympathy in the community, given the strong reactions to the widely reported misconduct exposed by the Royal Commission.
Regarding the two recommendations likely to be most enthusiastically embraced by financial services entities — Recommendations 7.3 and 7.4, calling for simplification of financial services laws — the Implementation Roadmap states that the additional funding allocated to the Treasury and the Office of Parliamentary Counsel for implementation-related work in the 2019-20 Budget “includes resourcing for Treasury to begin the longer term task of considering how to simplify the law, consistent with recommendations 7.3 and 7.4 of the Royal Commission”.
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