Key themes from the recommendations in the Hayne Final Report

As the industry digests the Hayne Royal Commission Final Report, it is worthwhile taking a step back and reviewing the Report’s key themes. They include recommendations around:

Financial and credit products

  • Extend Design and Distribution Obligations to all financial and credit products regulated by ASIC.
  • Remove exemption for certain low value insurance products from definition of financial product and extend ASIC consumer protection provisions to these products.
  • Repeal grandfathering provisions for conflicted remuneration for financial products excluding insurance on 1 January 2021.

Financial advice

  • Require advisers not entitled to use restricted words ‘independent, impartial or unbiased’ to provide a written disclosure before providing personal advice to a retail client, explaining why they are not independent, impartial or unbiased.
  • Require a review of the “best interests” duty by no later than 31 December 2022. (If in significant respects it is found to be ineffective, then repeal the safe harbour exemptions).
  • Require ongoing fee arrangements to be thoroughly documented and renewed annually by the client. (No fees deducted from any account held by the client except with the client’s express written authority renewed annually).
  • Establish new disciplinary system for financial advisers.

Remuneration

  • Greater board scrutiny of remuneration outcomes and more meaningful information to be provided to boards.
  • APRA to revise prudential standards and guidance on remuneration to ensure remunerations systems are used to reduce risk.
  • Remuneration systems to focus on non-financial risks and misconduct – not only financial metrics. APRA to set limits on the use of financial metrics.
  • Annually review design and implementation of remuneration systems for front-line staff (“ensure that the design and implementation of those systems focus on not only on what staff do, but also how they do it “).
  • Banks to fully implement recommendations of the Sedgwick Report.

Superannuation and insurance

  • BEAR to be extended to insurers and superannuation funds.
  • Civil penalties for superannuation fund trustees who fail best interests duty.
  • Unfair contract terms regime to apply to insurance policies.

Mortgage brokers

  • Mortgage brokers to be subject to the same laws that apply to financial advisers including a best interests duty.
  • Mortgage broker fees and commissions framework significantly overhauled.
  • Mortgage brokers be regulated in the same way as financial advisers, after a transition period.

Farm debt mediation

  • Establish national farm debt mediation scheme.
  • Ensure farm debt mediation is managed by experienced agricultural bankers.

BEAR

  • Core tenets of BEAR to be extended to ASIC and APRA management structures.
  • Extended to apply to all APRA regulated financial institutions (including insurers and superannuation funds). Extend the regime to AFSL and ACL holders, market operators and clearing and settling facilities.
  • Jointly administered by ASIC and APRA, with ASIC overseeing consumer protection and market conduct and APRA overseeing prudential aspects.
  • APRA to determine, under section 37BA (4) of the Banking Act 1959, an additional responsibility of accountable persons for end-to-end management of product design, delivery, maintenance and remediation.
  • To be amended so that ADIs and accountable persons must deal with ASIC in an open, constructive and co-operative way.

ASIC

  • ASIC to endorse new “why not litigate” approach to enforcement.
  • Enforceable undertakings, infringement notices and non-enforcement contact to be limited to administrative matters.
  • To have power to approve industry codes including codes relating to all APRA-regulated institutions and ACL holders.
  • To be given oversight of those parts of the BEAR that concern consumer protection and market conduct matters.

ASIC & APRA

  • ASIC to be primary conduct and disclosure regulator and APRA to have prudential responsibility.
  • Independently-chaired regulatory oversight body for ASIC and APRA to be established.
  • Apply accountability principles consistent with the BEAR, to ASIC & APRA.
  • Regular capability reviews of both regulators.

Breach reporting

  • Extension of the breach reporting regime to Australian credit licensees.
  • Significant breaches (and suspected breaches still under investigation) to be reported with 30 days.
  • Law to be amended to clarify that significance is an objective concept.
  • Increased criminal penalties and new civil penalties for failure to breach report.

Industry Codes

  • Industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, contravention of which will constitute a breach of the law.
  • Provisions of the new Banking Code (2018) relating to contract between bank and customer /guarantor designated as ‘enforceable code provision’.

Criminal charges

  • Twenty-four referrals to Commonwealth DPP including three major banks relating to fees-for-no-service.

Leave unchanged

  • Key concepts in responsible lending process and exemption for small business lending.
  • Vertical integration as a product and advice model in the financial system.
  • ‘Twin peaks’ model of financial system regulation.
  • Absence of non-executive and independent directors in ASIC and APRA executive structures.

 

Comment

The Hayne Final Report is stinging in its condemnation of a culture of non-compliance with the law and industry codes by major banks and the businesses they own, in the financial advice, superannuation and insurance sectors.

But it is also proportionate in its detailed menu of recommendations to reform financial services law, reduce conflicts of interest in the provision of financial services, and improve the effectiveness of regulators to deter and punish misconduct or conduct which falls below community standards.

There are welcome recommendations to establish a new, independent oversight authority for ASIC and APRA, to apply the BEAR accountability obligations to both agencies and also subject each to regular capability reviews.

The report is particularly interesting in its analysis of:

  • The six norms of conduct underlying the general obligations of AFS and ACL holders, and their piecemeal reflection in the Corporations Act and NCCP Act.
  • The cultural reasons within the ASIC and APRA for past inertia when faced with recalcitrant banks and financial services firms.
  • Managing conflicts of interest in relation to financial services intermediaries, notably mortgage brokers, in the interests of better consumer outcomes
  • The effectiveness and enforceability of industry codes.
  • How boards should now understand the close connection between compensation, incentive and remuneration practices and regulatory, compliance and conduct risks.

 

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