Australian Financial Services Regulation Centre

The 3 volume Financial Services Royal Commission Final Report and the Government’s Response were released in February 2019.

Commissioner Hayne made 76 recommendations dealing with banking (including consumer and small business lending), financial advice, superannuation, insurance, culture, governance and remuneration, regulators and other matters.

Principles
The principles Commissioner Hayne followed in making the recommendations were:

Simplifying the law so that its intent is met
A general recommendation was that, as far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated. He said the first, and essential, step to take is to reduce exceptions and carve outs.

Conflicts
Where possible, conflicts of interest and conflicts between duty and interest should be removed. Conflicts of interest and conflicts between duty and interest should be eliminated rather than ‘managed’.

Regulators and compliance
The recommendations sought to improve the effectiveness of the regulators in deterring misconduct and ensuring that there are just and appropriate consequences for misconduct.

Culture, governance and remuneration
He concluded that because primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who manage and control them, effective leadership, good governance and appropriate culture within the entities are fundamentally important. And culture, governance and remuneration are closely connected. Supervision must extend beyond financial risk to non‑financial risk and that requires attention to culture, governance and remuneration.

Increasing protections
Some recommendations sought to change, or add to, the law, or industry codes of conduct, in ways that will increase protections to consumers from misconduct or conduct that falls below community standards and expectations.

The Government accepted the following recommendations:

• ending the grandfathering of the conflicted remuneration provisions for financial advisers effective from 1 January 2021 and, in addition to the Royal Commission’s recommendation, requiring that any grandfathered conflicted remuneration at this date be rebated to clients;
• ensuring superannuation fund members only have one default account (for new members entering the system);
  clarifying and strengthening the unsolicited selling (anti-hawking) provisions, including for superannuation and insurance products;
• prohibiting the deduction of any advice fees (other than intra-fund advice) from MySuper accounts;
• 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;
• establishing a comprehensive national scheme for farm debt mediation;
• supporting the elimination of default interest on loans in areas impacted by natural disasters;
• supporting the appointment of receivers or any other form of external administrator only as a remedy of last resort;
• supporting more inclusive practices for Aboriginal and Torres Strait Islander persons;
• removing the exemption for funeral expenses policies from the definition of financial products for the purposes of the Corporations Act and ensuring that it is clear that the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (ASIC Act) apply to funeral expenses policies;
• mandating deferred sales for add-on insurance products;
• amending the law to provide the Australian Securities and Investments Commission (ASIC) with additional powers to approve and enforce industry code provisions;
• extending the unfair contract terms provisions to insurance contracts;
• clarifying ASIC and APRA’s regulatory roles and powers in superannuation, with ASIC becoming the primary conduct regulator;
• ensuring regulators have access to appropriate powers by creating civil penalties for specific breaches of the law for superannuation trustees and directors;
• creating an independently-chaired regulator oversight body for ASIC and APRA;
• conducting regular capability reviews of both financial regulators, with a capability review of APRA commencing in 2019; and
• expanding the jurisdiction of the Federal Court to cover corporate criminal misconduct to expedite the consideration of cases brought by regulators.

The Government said it would “take action” on all recommendations subject to matters raised by the Productivity Commission Report on Financial Sector Competition in respect of mortgage broking.

The immediate agreed changes were:

• extension of the proposed Design and Distribution Obligations to apply to National Credit Act products and ASIC Act products and the ASIC Product Intervention Powers to apply to ASIC Act products;
• extending the BEAR to all Australian Prudential Regulation Authority (APRA)-regulated entities such as insurers and registrable superannuation entities;
• establishing an industry-funded compensation scheme of last resort to be administered by AFCA;
• expanding the remit of AFCA for a period of 12 months to accept applications for disputes dating back to 1 January 2008 (the period covered by the Royal Commission) for disputes that fell within AFCA’s thresholds.
• With respect to the National Credit Act, the Government agreed with the Commissioner’s findings that ‘not unsuitable’ remains the appropriate standard for responsible lending obligations and that the Act should not be amended to extend its operation to lending to small businesses.

The Government also agreed to review the payment of trail commissions to mortgage brokers in three years’ time and to remove the point-of-sale exemption of retail dealers from the operation of the Act.