Financial Planning

Royal Commission wrap-up: External Disputes and Codes of Practice

18 June 2019

Jayson Forrest

Jayson Forrest is the managing editor of Money & Life Magazine.

Part 4 of Money & Life’s review of the Royal Commission’s recommendations into Misconduct in the Banking, Superannuation and Financial Services Industry examines External Dispute Resolution and Consumer Compensation, and Codes of Practice, Regulators and Culture. This article focuses on how these recommendations specifically impact licensees and planners.

This article is the fourth part of a wrap-up of some of the key recommendations made by Commissioner Kenneth Hayne that may affect the provision of financial advice. These key recommendations have been broken up into six sections:

  1. Financial advice
  2. Superannuation
  3. Insurance
  4. External Dispute Resolution and Consumer Compensation
  5. Codes of Practice, Regulators and Culture
  6. Additional Government measures

The FPA’s full response to all six sections of the Royal Commission’s Final Report can be accessed here.

SECTION 4. External Dispute Resolution and Consumer Compensation

Recommendation 4.11 – Cooperation with AFCA

Section 912A of the Corporations Act should be amended to require that AFSL holders take reasonable steps to cooperate 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.

FPA comment: The FPA supports measures that improve the timeliness of reporting by financial services entities to co-operate with AFCA to resolve disputes, and the enforcement of reporting deadlines by the regulators.


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.

FPA comment: The FPA does not support this recommendation. Commissioner Hayne has backed the recommendations in the Ramsay Review’s supplemental final report to establish a limited compensation scheme of last resort. The Ramsay Review recommended a scheme be prospective, funded by industry and available where an AFCA, court or tribunal decision has awarded compensation which has not been paid.

The Government has agreed to follow Recommendation 7.1 and has made a number of other commitments, including to extend the jurisdiction of AFCA to 1 January 2008 for a 12 month period.

The major impact on financial planners will be on the mechanism to fund the scheme. It is not clear how this would operate or the quantum of funding, however, it would be another impost on all financial advisers who are already managing substantial increases in regulatory costs. The FPA has raised this issue consistently over the past three years, as the Government has looked to transition to a user pays regulatory funding model.

It is worth noting that initial comments from the Opposition are that it considers the scheme recommended by the Ramsay Review is the minimum required to compensate consumers who have suffered detriment. There is potential that the Opposition will announce it will support a broader compensation option.

A compensation scheme funded by an industry contribution would require legislation to establish and it is likely to take some time for the Government to draft it and get it through the Parliament.

In order for the FPA to support the implementation of a compensation scheme of last resort, the FPA will continue to recommend that the Government acts on the recommendations of the ‘Compensation arrangements for consumers of financial services’ report by Richard St. John, April 2012, in order to properly address the reasons consumers have failed to be compensated.

Only after these issues are addressed,  should a compensation scheme of last resort be implemented where these measures fail to deliver consumer compensation.

SECTION 5. Codes of Practice, Regulators and Culture

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.

FPA comment: The FPA supports this recommendation. As one of only two organisations with an ASIC approved code, the FPA understands the importance and rigour required around the code approval process and ensuring subscribers are able to be held accountable to the rules under a code.

Industry codes play an important role in prescribing norms of behaviour for a covered population and provide professions, in particular, with an ability to establish a set of standards which generally exceed the minimum requirements of the law.

To this point, the FPA has expressed significant concern in a number of consultations that in general, proposed financial services codes simply replicate existing legal obligations and fail to properly hold subscribers accountable to breaches, which therefore create unsatisfactory outcomes for consumers.

For this reason, the FPA welcomes and supports the ability to make ‘enforceable code provisions’ and that where identified, mandatory financial services industry codes will be required to better protect consumers, raise standards above minimum legal requirements and hold financial services providers accountable for misconduct and poor consumer outcomes as defined by their peer group.

There is no initial impact on FPA members, however, as codes are updated or approved by ASIC, members will need to ensure they comply with ‘enforceable code provisions’ of codes which they are covered by and be aware of the accountability provisions.


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.

FPA comment: This recommendation is directed at financial service entities, rather than the Government or regulators. Commissioner Hayne notes that this recommendation is phrased in general, rather than prescriptive, terms because it is intended to apply to all financial services entities. He cautions any entities from assuming that this does not apply to them and notes that addressing issues with an entity’s risk culture is a fundamental step in preventing future misconduct.

Consideration of risk culture in an organisation is a key responsibility of leadership at the board and executive level. This recommendation should be read as reflecting and building upon the other recommendations made in the final report.


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.

FPA comment: For a long period of time, there has been a large amount of concern raised from within the industry about the effectiveness of infringement notices and Enforceable Undertakings as a deterrent and as an appropriate consequence for systemic breaches.

The FPA supports Recommendation 6.2 and suggests the new regulatory oversight body should be required to assess ASIC’s adoption of Hayne’s recommended approach to enforcement, as part of its assessment of the effectiveness of the regulator’s performance of its functions.


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) each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR.

FPA comment: The FPA supports the intent of this recommendation and the Commissioner’s view that APRA and ASIC apply the core tenets of the BEAR to their management structure.

It is, however, vital that the new independent regulatory oversight body assess whether the time and cost of implementing and managing the BEAR tenets is outweighed by a positive impact on the regulators’ performance.


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.

FPA comment: The FPA agrees with Commissioner Hayne’s view that capability reviews present an opportunity to consider the operational abilities and requirements of the regulators, and assist both the regulator and the Government by identifying resourcing and capability gaps. This is vital to ensuring ASIC is, and continues to be, fit for purpose.

The FPA supports this recommendation and Commissioner Hayne’s statement that the “Responsibility for the periodic review should rest with the oversight authority” (page 471).


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.

FPA comment: Hayne’s view is that the essential role of the oversight body should be to assess:

* the effectiveness of each regulator in discharging its functions and meeting its statutory objects;

* the performance of the leaders and decisionmakers within the regulator; and

* how the regulator exercises its statutory powers.

Importantly, Hayne has stated that an important consideration will be how effective the agencies are in enforcing the laws within their remit, and the number of proceedings filed, or infringement notices issued, will say little about ASIC’s enforcement culture unless the decisions behind those numbers are evaluated.

The FPA supports the establishment of a new independent regulatory oversight body for ASIC and APRA. This is a measure the FPA has long called for to ensure the appropriate independent assessment of ASIC’s performance, its ongoing ability to appropriately and effectively perform its role, and to improve the transparency of the regulator’s performance.

The FPA supports Hayne’s view that the Council of Financial Regulators should not be appointed as the new regulatory oversight body.


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.

FPA comment: The recommendations made by the ASIC Enforcement Review in relation to self-reporting of breaches will provide greater clarity for the industry, which will lead to a more consistent approach to self-reporting and help prevent further harm to consumers impacted by such breaches.

Breach reporting standards are able to be set by ASIC through regulatory guidance and may therefore be implemented reasonably quickly. Licensees will need to familiarise themselves with the new breach reporting standards once they have been finalised.


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.

FPA comment: The FPA has a long held concerns about the over prescriptive and complex nature of the regulatory environment for the provision of financial advice, and the risk that this would and has led to a ‘tick-a-box’ approach to compliance by some licensees.

The FPA supports regulation that is simple, effective and with consistent application across the industry. Noting this, removing exemptions from the law will be a generally complex process with the potential for many unintended consequences, and is therefore likely to be a long-term process for Government to implement in terms of existing laws, but would be more likely to be implemented as the standard as new laws are created.


Please note: Due to space restrictions, this article only outlines the key recommendations from the Final Report that specifically impact licensees and planners in relation to External Dispute Resolution and Consumer Compensation, and Codes of Practice, Regulators and Culture.

To read the FPA’s full response to the Royal Commission’s Final Report into ‘Misconduct in the Banking, Superannuation and Financial Services Industry’, click here.