Company Law – Government responds to Banking Royal Commission with financial sector reform laws
By June Ahern – Company Law Content Editor
On 12 November 2020, the Morrison government introduced the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (the Bill) into Parliament. The Bill will implement a further 21 recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission). A copy of the Banking Royal Commission final report can be accessed here.
The Treasurer, Josh Frydenberg, said that consumers and small businesses will be further protected under the Bill, which is seen as a critical component of restoring trust, confidence and integrity in Australia’s financial system.
The reforms being introduced will further enhance consumer protections by:
- strengthening the unsolicited selling (anti-hawking) provisions, including for superannuation and insurance products, to prevent pressure selling to consumers
- introducing a deferred sales model for add-on insurance products, to promote informed purchasing decisions and prevent inappropriate sales of add-on insurance
- defining the handling and settling of insurance claims as a “financial service”, which will thereby require insurers to behave honestly, efficiently and fairly and comply with other licensing obligations, in order to improve claims-handling practices
- prohibiting the trustee of a superannuation fund from having a duty to act in the interests of another person, other than those arising from their duties as trustee of a superannuation fund, and
- allowing provisions in financial services industry codes to be enforceable, with breaches for non-compliance and the imposition of civil penalties. The objective is to ensure better adherence for industry and better certainty and outcome for consumers.
These changes will be complemented by providing further clarity on the role and responsibilities of the regulators (both ASIC and APRA) and obliging financial institutions to report on breaches, or suspected breaches, of the law. The objective is to ensure that significant misconduct is detected, reported and investigated sooner.
- Schedule 1 – This schedule provides that certain provisions of financial services industry codes be made “enforceable”, where the provision relates to a specific commitment made to the consumer. More broader industry code provisions will not be required to be enforceable. This schedule also provides for the establishment of mandatory financial services industry codes.
- Schedule 2 – Will improve the protections available to consumers of life insurance contracts by preventing insurers from inappropriately cancelling life insurance contracts on the basis of non-disclosure or misrepresentation, unless the insurer can show that it would not have entered into the contract in the circumstances. This schedule also replaces the existing duty of disclosure with a duty for consumers to take “reasonable care” not to make a misrepresentation to an insurer. This new duty aligns more closely with a layperson’s understanding of insurance and removes the need for consumers to “second guess” what the insurer requires to be disclosed.
- Schedule 3 – Implements an industry-wide deferred sales model for add-on insurance products. The Banking Royal Commission highlighted that some of these products often represent poor value for consumers and are sold using pressure-selling tactics. The schedule provides consumers with four days in which to consider their purchase of insurance products with these characteristics. There will be some exceptions to this mandate, namely add-on travel insurance products.
- Schedule 4 – Provides ASIC with the power to impose a cap on commissions that can be paid for add-on insurance products sold by vehicle dealers, in order to prevent inappropriate sales of add-on insurance.
- Schedule 5 – Prohibits the hawking of superannuation and insurance products to retail clients. The new hawking rules apply to all financial products, including managed investment schemes and securities. However, a number of exceptions will be permitted where the risk to consumers is considered to be low.
- Schedule 6 – Protects consumers by preventing anyone from calling themselves an “insurer” unless they are a regulated insurer and preventing anyone from selling a product as “insurance” unless it is an insurance product.
- Schedule 7 – Will enhance consumer protections by defining the handling and settling of insurance claims as a “financial service.” Hence, this will apply Australian financial services licensing (AFSL) requirements, such as general conduct obligations, to entities that handle and settle insurance claims. This will enable ASIC to take regulatory action to prevent and address poor conduct and consumer outcomes.
- Schedule 8 – Body corporate trustees holding a registrable superannuation entity (RSE) licence will be prohibited from having a duty to act in the interest of another person outside of performing its duties as a superannuation trustee and providing personal advice. Schedule 8 of the Bill amends the Superannuation Industry (Superannuation) Act 1993 (SIS Act) to create the new licence condition and implements the government’s response to the Banking Royal Commission recommendation 3.1. This addresses the Banking Royal Commission’s concerns that such duties could conflict with the trustee’s duty to act in the best interests of their superannuation fund members.
- Schedule 9 – Amends the roles and responsibilities of superannuation regulators, including by expanding ASIC’s role as a consumer protection regulator. ASIC’s role in superannuation will now include protecting consumers from harm and market misconduct. The general administration of SIS Act provisions relating to consumer protection and member outcomes will now be shared by APRA and ASIC. The AFSL regime will be expanded to cover the provision of superannuation trustee services. This will ensure that ASIC has access to its full suite of enforcement tools and strengthen ASIC’s ability to take enforcement action and ensure fair remediation of its members.
Existing RSE licensees already holding an AFSL authorising them to deal in superannuation interests will not be required to apply for the new authorisation. Superannuation trustees and directors will be prevented from using trust assets to pay criminal, civil or administrative penalties incurred in relation to a contravention of any Commonwealth law under amendments to the SIS Act’s indemnification rules.
Importantly, the Australian Prudential Regulation Authority (APRA) will remain the regulator responsible for prudential regulation and member outcomes in superannuation, including licensing and supervision of trustees.
Schedule 9 of the Bill implements the government’s response to the Banking Royal Commission recommendations 3.8, 6.3, 6.4 and 6.5.
- Schedules 10 and 11 – Strengthen the existing breach reporting regime for AFSLs and establishes an equivalent breach reporting regime for Australian credit licensees. Tougher breach reporting requirements will ensure that more misconduct is reported, and that reports are provided in a timely manner. It will also strengthen ASIC’s ability to take any necessary enforcement action.
These two schedules will also amend the law to require both AFSLs and credit licensees to investigate misconduct by financial advisers and mortgage brokers, and remediate clients who have suffered loss or damage as a result of that misconduct. This ensures that consumers are being promptly and effectively remediated where required.
Further, these two schedules amend the law to establish a protocol for reference-checking and information sharing about financial advisers and mortgage brokers to ensure that past misconduct is brought to light.
- Schedule 12 – Imposes a statutory obligation on ASIC and APRA to cooperate with each other, share information on request, and notify each other on breaches, or suspected breaches of the law. This is intended to improve collaboration between ASIC and APRA and strengthen the relationship. It will also ensure that any enforcement and disciplinary decisions are based on all available information.
This schedule further formalises ASIC’s meeting procedures and aligns them with those in the Australian Prudential Regulation Authority Act 1998 (Cth) (APRA Act) to reinforce the importance of ASIC decision-making and improve governance.
The Australian Banking Association (ABA) has largely welcomed the reforms and commented that Australia’s banks are “ready for the next phase of implementation of Royal Commission Recommendations” with implementation of the changes remaining “a priority”. The ABA continues to work with the government and regulators on the next round of Banking Royal Commission changes.
The legislation was also welcomed by the Insurance Council of Australia (ICA) as the Bill provides the details necessary for businesses to adjust their operations in order to improve consumer outcomes. The ICA particularly welcomed the clarity provided around the anti-hawking provisions and claims handling obligations, and stressed the need for insurance products to meet community expectations.
Super Consumers Australia welcomed the anti-hawking provisions and the strengthening of regulator powers in particular.
Sources: Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, Parliament of Australia website, 12 November 2020, accessed 13 November 2020.
Explanatory Memorandum, Parliament of Australia website, 12 November 2020, accessed 13 November 2020.
Treasury Department, the Hon Josh Frydenberg MP, Treasurer, Legislation to implement further recommendations of the Banking, Superannuation and Financial Services Royal Commission [Media release], 12 November 2020, accessed 13 November 2020.