Consumer lending: Direct lending
Consumer lending: Intermediated home lending
Recommendation 1.1 – The NCCP Act
The NCCP Act should not be amended to alter the obligation to assess unsuitability.
Recommendation 1.2 – Best interests duty
The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision.
Recommendation 1.3 – Mortgage broker remuneration
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
Consumer lending: Intermediated lending for vehicles and other consumer goods
Recommendation 1.4 – Establishment of working group
A Treasury-led working group should be established to monitor and, if necessary, adjust the remuneration model referred to in Recommendation 1.3, and any fee that lenders should be required to charge to achieve a level playing field, in response to market changes.
Recommendation 1.5 – Mortgage brokers as financial advisers
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Recommendation 1.6 – Misconduct by mortgage brokers
ACL holders should: • be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and • take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers.
Recommendation 1.7 – Removal of point-of-sale exemption
The exemption of retail dealers from the operation of the NCCP Act should be abolished.
Access to banking services
Recommendation 1.8 – Amending the Banking Code
The ABA should amend the Banking Code to provide that: • banks will work with customers: • – who live in remote areas; or • – who are not adept in using English, to identify a suitable way for those customers to access and undertake their banking; • if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow AUSTRAC’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage; • without prior express agreement with the customer, banks will not allow informal overdrafts on basic accounts; and • banks will not charge dishonour fees on basic accounts. Lending to small and medium enterprises
Recommendation 1.9 – No extension of the NCCP Act
The NCCP Act should not be amended to extend its operation to lending to small businesses.
Recommendation 1.10 – Definition of ‘small business’
The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.
Recommendation 1.11 – Farm debt mediation
A national scheme of farm debt mediation should be enacted.
Recommendation 1.12 – Valuations of land
APRA should amend Prudential Standard APS 220 to: • require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and • provide for valuation of agricultural land in a manner that will recognise, to the extent possible: • – the likelihood of external events affecting its realisable value; and • – the time that may be taken to realise the land at a reasonable price affecting its realisable value.
Recommendation 1.13 – Charging default interest
The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.
Recommendation 1.14 – Distressed agricultural loans
When dealing with distressed agricultural loans, banks should: • ensure that those loans are managed by experienced agricultural bankers; • offer farm debt mediation as soon as a loan is classified as distressed; • manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst; • recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and • cease charging default interest when there is no realistic prospect of recovering the amount charged.
Enforceability of industry codes
Recommendation 1.15 – Enforceable code provisions
The law should be amended to provide: • that ASIC’s power to approve codes of conduct extends to codes relating to all APRA-regulated institutions and ACL holders; • that industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, which are provisions in respect of which a contravention will constitute a breach of the law; • that ASIC may take into consideration whether particular provisions of an industry code of conduct have been designated as ‘enforceable code provisions’ in determining whether to approve a code; • for remedies, modelled on those now set out in Part VI of the Competition and Consumer Act, for breach of an ‘enforceable code provision’; and • for the establishment and imposition of mandatory financial services industry codes.
Recommendation 1.16 – 2019 Banking Code
In respect of the Banking Code that ASIC approved in 2018, the ABA and ASIC should take all necessary steps to have the provisions that govern the terms of the contract made or to be made between the bank and the customer or guarantor designated as ‘enforceable code provisions’.
Processing and administrative errors
Recommendation 1.17 – BEAR product responsibility
After appropriate consultation, APRA should determine for the purposes of section 37BA(2)(b) of the Banking Act, a responsibility, within each ADI subject to the BEAR, for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products.Financial advice
Ongoing fee arrangements
Lack of independence
Recommendation 2.1 – Annual renewal and payment The law should be amended to provide that ongoing fee arrangements (whenever made): • must be renewed annually by the client; • must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and • may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.
Recommendation 2.2 – Disclosure of lack of independence
The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.
Quality of advice
Recommendation 2.3 – Review of measures to improve the quality of advice
In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022. Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.
Recommendation 2.4 – Grandfathered commissions
Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.
Recommendation 2.5 – Life risk insurance commissions
When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, 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. Professional discipline of financial advisers
Recommendation 2.6 – 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 section 963C of the Corporations Act.
Recommendation 2.7 – 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, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’.
Recommendation 2.8 – 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 2.9 – 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 given to a retail client (whether by giving inappropriate advice or otherwise): • 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 2.10 – 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, 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.Superannuation
3.3 Superannuation Trustees’ obligations
Recommendation 3.1 – No other role or office
The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
Recommendation 3.2 – No deducting advice fees from MySuper accounts
Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.
Recommendation 3.3 – Limitations on deducting advice fees from choice accounts
Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met.
Recommendation 3.4 – No hawking
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product. Nominating default funds
Recommendation 3.5 – One default account
A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.
Recommendation 3.6 – No treating of employers
Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act 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 one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC.
Recommendation 3.7 – Civil penalties for breach of covenants and like obligations
Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.
Recommendation 3.8 – Adjustment of APRA and ASIC’s roles
The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3.
Recommendation 3.9 – Accountability regime
Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.Insurance
Manner of sale and types of products sold: Hawking
Specific steps in respect of particular products: Add-on insurance
Recommendation 4.1 – No hawking of insurance
Consistently with Recommendation 3.4, which prohibits the hawking of superannuation products, hawking of insurance products should be prohibited.
Recommendation 4.2 – Removing the exemptions for funeral expenses policies
The law should be amended to: • remove the exclusion of funeral expenses policies from the definition of ‘financial product’; and • put beyond doubt that the consumer protection provisions of the ASIC Act apply to funeral expenses policies.
Recommendation 4.3 – Deferred sales model for add-on insurance
A Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive motor insurance). The model should be implemented as soon as is reasonably practicable.
Recommendation 4.4 – Cap on commissions
ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.
Pre-contractual disclosure and representations
Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer
Part IV of the Insurance Contracts Act should be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (and to make any necessary consequential amendments to the remedial provisions contained in Division 3).
Recommendation 4.6 – Avoidance of life insurance contracts
Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. Unfair contract terms
Recommendation 4.7 – Application of unfair contract terms provisions to insurance contracts
The unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act. The provisions should be amended to provide a definition of the ‘main subject matter’ of an insurance contract as the terms of the contract that describe what is being insured. The duty of utmost good faith contained in section 13 of the Insurance Contracts Act should operate independently of the unfair contract terms provisions. Claims handling Status of industry codes
Recommendation 4.8 – Removal of claims handling exemption
The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’.
Recommendation 4.9 – Enforceable code provisions
As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes. In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’.
Recommendation 4.10 – Extension of the sanctions power
The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code.
External dispute resolution
Recommendation 4.11 – Co-operation with AFCA
Section 912A of the Corporations Act should be amended to require that AFSL holders take reasonable steps to co-operate with AFCA in its resolution of particular disputes, including, in particular, by making available to AFCA all relevant documents and records relating to issues in dispute.
Recommendation 4.12 – Accountability regime
Over time, provisions modelled on the BEAR should be extended to all APRA-regulated insurers, as referred to in Recommendation 6.8.
Group life policies
Recommendation 4.13 – Universal terms review
Treasury, in consultation with industry, should determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.
Recommendation 4.14 – Additional scrutiny for related party engagements
APRA should amend Prudential Standard SPS 250 to require RSE licensees that engage a related party to provide group life insurance, or who enter into a contract, arrangement or understanding with a life insurer by which the insurer is given a priority or privilege in connection with the provision of life insurance, to obtain and provide to APRA within a fixed time, independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements.
Recommendation 4.15 – Status attribution to be fair and reasonable
APRA should amend Prudential Standard SPS 250 to require RSE licensees to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable.Culture, governance and remuneration
Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance
In conducting prudential supervision of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices. Recommendations 5.2 and 5.3 explain and amplify aspects of this Recommendation.
Recommendation 5.2 – Supervision of remuneration – aims
In conducting prudential supervision of the design and implementation of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should have, as one of its aims, the sound management by APRA-regulated institutions of not only financial risk but also misconduct, compliance and other non-financial risks.
Recommendation 5.3 – Revised prudential standards and guidance
In revising its prudential standards and guidance about the design and implementation of remuneration systems, APRA should: • require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct; • require the board of an APRA-regulated institution (whether through its remuneration committee or otherwise) to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks, and reducing the risk of misconduct; • set limits on the use of financial metrics in connection with long-term variable remuneration; • require APRA-regulated institutions to provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and • encourage APRA-regulated institutions to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions.
Recommendation 5.4 – Remuneration of front line staff
All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it.
Recommendation 5.5 – The Sedgwick Review
Banks should implement fully the recommendations of the Sedgwick Review.
Culture and governance
Recommendation 5.6 – Changing culture and governance
All financial services entities should, as often as reasonably possible, take proper steps to: • assess the entity’s culture and its governance; • identify any problems with that culture and governance; • deal with those problems; and • determine whether the changes it has made have been effective.
Recommendation 5.7 – Supervision of culture and governance
In conducting its prudential supervision of APRA-regulated institutions and in revising its prudential standards and guidance, APRA should: • build a supervisory program focused on building culture that will mitigate the risk of misconduct; • use a risk-based approach to its reviews; • assess the cultural drivers of misconduct in entities; and • encourage entities to give proper attention to sound management of conduct risk and improving entity governance.Regulators Twin peaks
ASIC’s enforcement practices
Recommendation 6.1 – Retain twin peaks
The ‘twin peaks’ model of financial regulation should be retained.
Recommendation 6.2 – ASIC’s approach to enforcement
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.
Superannuation: Conduct regulation
Recommendation 6.3 – General principles for co-regulation
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, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system; and • as the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers. Effect should be given to these principles by taking the steps described in Recommendations 6.4 and 6.5.
Recommendation 6.4 – ASIC as conduct regulator
Without limiting any powers APRA currently has under the SIS Act, ASIC 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.
The BEAR: Co-regulation
Recommendation 6.5 – APRA to retain functions
APRA should 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 6.6 – Joint administration of the BEAR
ASIC and APRA should jointly administer the BEAR. ASIC should be charged with overseeing those parts of Divisions 1, 2 and 3 of Part IIAA of the Banking Act that concern consumer protection and market conduct matters. APRA should be charged with overseeing the prudential aspects of Part IIAA.
Recommendation 6.7 – Statutory amendments
The obligations in sections 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 section 37K and section 37G(1) so as to facilitate joint administration.
Recommendation 6.8 – Extending the BEAR
Over time, provisions modelled on the BEAR should be extended to all APRA-regulated financial services institutions. APRA and ASIC should jointly administer those new provisions.
Co-ordination and information sharing
Recommendation 6.9 – Statutory obligation to co-operate
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 6.10 – 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. The memorandum should be reviewed biennially and each of ASIC and APRA should report each year on the operation of and steps taken under it in its annual report.
Recommendation 6.11 – Formalising meeting procedure
The ASIC Act should be amended to include provisions substantially similar to those set out in sections 27–32 of the APRA Act – dealing with the times and places of Commissioner meetings, the quorum required, who is to preside, how voting is to occur and the passing of resolutions without meetings.
Recommendation 6.12 – Application of the BEAR to regulators
In a manner agreed with the external oversight body (the establishment of which is the subject of Recommendation 6.14 below) each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR.
Recommendation 6.13 – Regular 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 6.14 – A 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. The authority should be comprised of three part-time members and staffed by a permanent secretariat. It should be required to report to the Minister in respect of each regulator at least biennially.Other important steps
External dispute resolution
Recommendation 7.1 – Compensation scheme of last resort
The three principal recommendations to establish a compensation scheme of last resort made by the panel appointed by government to review external dispute and complaints arrangements made in its supplementary final report should be carried into effect.
ASIC Enforcement Review Taskforce Government Response
Recommendation 7.2 – Implementation of recommendations
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. Simplification so that the law’s intent is met
Recommendation 7.3 – 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 7.4 – Fundamental 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.