Proposal to legislate the government response to 20 Hayne recommendations

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Hayne omnibus Bill) which proposes to legislate the government's response to 20 Hayne recommendations (and one additional commitment) was introduced into the House of Representatives on 12 November 2020.

Announcing the introduction of the Bill, Treasurer Josh Frydenberg said that it is another 'major step forward in completing the implementation of the Hayne Royal Commission'.

A high level overview of some of the key measures (and proposed commencement dates) is below.

Schedule 1: Enforceable code provisions

Schedule 1 proposes to legislate the government's response to Hayne recommendation 1.15 (enforceable industry code provisions).

Broadly, Schedule 1 proposes to:

• 'build on' the existing codes framework contained in the Corporations Act 2001 (Cth) (Corporations Act) and the National Consumer Credit Protection Act 2009 (NCCP Act) to allow ASIC to designate enforceable code provisions in approving voluntary financial sector industry codes.
• ASIC will be able to take enforcement action where enforceable provisions are breached. Breach of an enforceable code provision in an ASIC approved industry Code could attract civil penalties (including pecuniary penalties of up to 300 penalty units) and/or other administrative enforcement action by ASIC.
• Schedule 1 also proposes to introduce a framework for establishing government-instituted mandatory codes of conduct for the financial services industry through regulations.
• Government-mandated industry Codes would be enforceable by ASIC. Breach of any mandatory code of conduct provision could attract enforcement action by the regulator and breach of any designated civil penalty provision could attract civil penalties (including pecuniary penalties of up to 1,000 penalty units) and/or other ASIC enforcement action.

Commencement: (Subject to the passage of the legislation), Schedule 1 will commence on 1 January 2021 or the day after Royal Assent (if later).

Schedule 2: Insurer avoidance of life insurance contracts, and duty to take reasonable care not to make a misrepresentation

Schedule 2 proposes to legislate the government's response to Hayne Recommendations 4.5 (duty to take reasonable care not to make a misrepresentation to an insurer) and 4.6 (avoidance of life insurance contracts).

Broadly,

• Part 1 of Schedule 2 proposes to implement the government's response to Hayne recommendation 4.6 by amending the Insurance Contracts Act 1984 (ICA) to limit the circumstances in which an insurer can avoid a contract of life insurance because of a non-fraudulent misrepresentation or non-fraudulent failure to comply with the duty of disclosure by the insured to the insurer.
• Part 2 of Schedule 2 proposes to implement the government's response to Hayne recommendation 4.5 by introducing a duty for insureds to take reasonable care not to make a misrepresentation to the insurer on entering into, varying, extending or renewing a consumer insurance. This new duty will replace the existing duty of disclosure.

Commencement: (Subject to the passage of the legislation), the changes is Part 1 will apply to any life insurance contracts that are entered into from 1 January 2021 or the day after Royal Assent (if later). The changes in Part 2 will apply to consumer insurance contracts that are entered into on or after 5 October 2021.

Schedule 3: Deferred sales model for add on insurance

Schedule 3 proposes to legislate the government's response to Hayne recommendation 4.3 (deferred sales model for add-on insurance).

Broadly, Schedule 3 proposes to:

• amend the ASIC Act to implement an industry wide deferred sales model for the sale of add-on insurance products (ie insurance products that are sold alongside, or in relation to, the offer or sale of a principal good or service). The explanatory memorandum includes a diagram summarising this deferred sales model at p65.
• The deferred sales model will not apply to: a) products that are the subject of an ASIC product intervention order which imposes a deferred sales period; b) comprehensive car insurance; c) products exempted by regulations; d) persons that ASIC exempts by notifiable instrument; and e) products recommended by financial advisers.
• It's also proposed to make failure to comply with various aspects of the proposed new requirements an offence.
• The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (also introduced on 12 November) proposes to amend the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Commencement: (If enacted) the changes in Schedule 3 will commence 'immediately after the commencement of Schedule 5) ie 5 October 2021, or the day after Royal Assent (if later).

Schedule 4: Caps on motor vehicle add-on insurance commissions

Schedule 4 proposes to legislate the government's response to Hayne recommendation 4.4 (cap on add-on insurance commissions).

Broadly Schedule 4 proposes to impose a cap on the amount of add-on insurance commissions that may be paid to vehicle dealers in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle.

Commencement: (Subject to the passage of the legislation), the proposed changes in Schedule 4 will apply from 1 January 2021 or the day after Royal Assent (if later).

Schedule 5: Banning the hawking of financial products

Schedule 5 of the Bill proposes to legislate the government's response to Hayne recommendations 3.4 (banning hawking of superannuation products) and 4.1 (banning the hawking of insurance products).

Broadly Schedule 5 proposes to 'strengthen the existing hawking prohibition' in the Corporations Act 2001 (Cth) by replacing the three separate prohibitions for the hawking of financial products, securities, and interests in managed investment schemes with one general prohibition on 'offers to sell or issue financial products to a retail client in the course of, or because of, unsolicited contact'.

The amendments in Schedule 5 also give consumers the power to specify how they can be contacted and the power to withdraw or vary consent to be contacted at any time.

Contravention of the prohibition will remain an offence of strict liability.

Unsolicited contact

• Currently 'unsolicited contact' is undefined in the legislation. The Bill clarifies that 'unsolicited contact' as 'contact to which the consumer did not consent which is made by telephone call, face to face meetings, or any other real-time interaction in the nature of a discussion or conversation'.
• Prior consent: The explanatory memorandum states that 'a person can only offer to sell or issue a financial product to a consumer if the consumer has specifically consented to being contacted for the purpose of making the offer for that product, or where the offer was reasonably within the scope of the consumer’s consent'. In order for consent to be valid, the consumer must give it before the contact occurs.

Application

• The prohibition applies to 'offers to sell or issue financial products to a retail client in the course of, or because of, unsolicited contact'. The explanatory memorandum makes clear that offers/requests/invitations for products that are not financial products such as roadside assistance, are not covered.
• The hawking rules will apply to the person (including a body corporate) who undertakes the prohibited activity ie it is not limited to the provider of a financial service product.
• The changes will also strengthen the existing prohibitions on offers of financial products, securities and interests in managed investment schemes made during the course of/because of, unsolicited contact with a consumer.
• Exceptions:
  • The explanatory memorandum states that the hawking rules will not prevent a person from contacting an existing client about a financial product that has already been purchased or that is provided under a contract which is still in force.
  • In the superannuation context, superannuation trustees will be 'permitted to contact existing fund members about their benefits, including in relation to changes to their insurance held through superannuation' but will not be able to make unsolicited contact with their members to offer/request/invite them to apply for the issue of a new superannuation product.
  • The explanatory memorandum flags that 'a further exception is expected to be introduced' through the regulations to allow product issuers to contact customers about renewals of contracts that involve the creation of a new financial product, including the renewal of an expired contract. This exception will not apply to contact that occurs more than 30 days after the contract expires.

Commencement: (Subject to the passage of the legislation) the changes in Schedule 5 will commence from 5 October 2021 or the day after Royal Assent (if later).

Schedule 6: Restricting the use of the terms insurance and insurer

Schedule 6 proposes to legislate an 'additional commitment' made by the government in response to Hayne recommendation 4.2 (restrict the ability of firms to use terms such as 'insurer' and 'insurance').

Broadly, Schedule 6 proposes to restrict the ability of firms to use the terms 'insurer' and 'insurance' to only those firms that have a 'legitimate interest' in using terminology and to introduce penalties for non-compliance.

Commencement: (Subject to the passage of the legislation) the changes in Schedule 6 will commence from 1 January 2021 or the day after Royal Assent (if later).

Schedule 7: Removing the claims handling exemption for insurance

Schedule 7 proposes to legislate the government's response to Hayne Recommendation 4.8 (Removal of claims handling exemption for insurance).

Schedule 7 proposes to make the handling and settling of insurance claims a financial service under the Corporations Act. This means that:

• people who provide claims handling services (insures, certain tradespeople, insurance claims managers, certain insurance brokers and certain financial advisers) will be required to hold an Australian financial services licence covering claims handling or be authorised by another person with an Australian financial services licence covering claims handling.
• Australian financial services licensees with licences covering claims handling must comply with the general obligations in section 912A of the Corporations Act.
• people representing a consumer to pursue a claim must hold an Australian financial services licence covering claims handling if they obtain a benefit for that service. If the consumer is a retail client, the licensee must have a compliant internal dispute resolution system, be a member of AFCA and give a Financial Services Guide to the consumer.
• Australian financial services licensees who offer to settle a general insurance claim using a cash payment must provide the consumer with a Cash Settlement Fact Sheet if the consumer is a retail client.

Commencement: (Subject to the passage of the legislation) the changes in Schedule 7 will commence on 1 January 2021 or the day after Royal Asset (if later).

Schedule 8: Trustees of registrable superannuation entities should have no other duty

Schedule 8 proposes to legislate the government's response to Hayne recommendation 3.1 (trustee of a superannuation fund should be prohibited from having any obligations other than those arising from or in the course of its performance of its duties as trustee of a superannuation fund).

Schedule 8 proposes to impose an additional condition on RSE licences held by a body corporate trustee. The condition would prohibit the RSE licensee from having a duty to act in the interests of another person, except in the course of: a) performing the RSE licensee’s duties and exercising the RSE licensee’s powers as a trustee of a registrable superannuation fund; or b) providing personal advice.

Commencement: (Subject to the passage of the legislation), the changes in Schedule 7 will apply from 1 July 2021 or the day after Royal Assent (if later).

Schedule 9: ASIC and APRA coregulation arrangements in superannuation

Schedule 9 proposes to legislate the government's response to Hayne recommendations 3.8 (adjustment of APRA and ASIC's roles); 6.3 (general principles of co-regulation); 6.4 (ASIC as conduct regulator); and 6.5 (APRA to retain functions).

Broadly, Schedule 9 proposes to:

• expand ASIC’s role in superannuation to make ASIC 'generally responsible for consumer protection, market integrity, disclosure and record keeping'
• extend the AFSL regime to cover a broader range of activities undertaken by APRA-regulated superannuation trustees (through the creation of a new type of financial service: providing a superannuation trustee service)
• extend the existing indemnification provisions in the Superannuation Industry (Supervision) Act 1993 (SIS Act) to prevent trustees and directors from using trust assets to pay a criminal, civil or administrative penalty incurred through contravention of a provision of the Corporations Act or ASIC Act.

Commencement: (Subject to the passage of the legislation) the changes in Schedule 9 will commence on 1 January 2021 or the day after Royal Assent (If later).

Schedule 10: Reference checking and information sharing protocol

Schedule 10 proposes to implement the government's response to Hayne recommendations 1.6 (misconduct by mortgage brokers) (partial response) and 2.7 (reference checking and information sharing).

Schedule 10 proposes to introduce a new reference checking and information sharing obligation on Australian financial services licensees and Australian credit licensees, in respect of mortgage brokers and financial advisers. Broadly the changes in Schedule 10:

• require Australian financial services licensees and Australian credit licensees, as an obligation under their licence, to comply with new reference checking, information sharing and record keeping protocols to be made by ASIC in the form of legislative instruments under the Corporations Act and the Credit Act
• create a civil penalty for non-compliance with the obligation.

Commencement: (Subject to the passage of the legislation) the changes will apply from 1 October 2021.

Schedule 11: Breach reporting and remediation

Schedule 11 proposes to implement the government's response to Hayne recommendations 1.6 (misconduct by mortgage brokers) (partial response); 2.8 (reporting compliance concerns); 2.9 (misconduct by financial advisers); and 7.2 (implementation of the ASIC Enforcement Review recommendations) (partial response).

Broadly, Schedule 11 proposes to introduce a new breach reporting regime for Australian Financial Service Licensees and Australian Credit Licensees.

• Reportable situations: The kinds of situations that will need to be reported to ASIC will be expanded to include: a) investigations into whether a significant breach has occurred or will occur if the investigation continues for more than 30 days and the outcomes of those investigations; b) conduct that constitutes gross negligence or serious fraud; c) conduct that amounts to misleading or deceptive conduct under the financial services law; and d) serious compliance concerns about individual financial advisers operating under another licence. Currently licensees are required to report breaches and likely breaches that are significant but are not required to report investigations.
• To clarify the matters that should be reported the existing test for when a breach or likely breach is significant with two separate tests:
  • a 'deemed significance' test which deems that a breach of a 'core obligation' is taken to be significant if certain circumstances apply
  • a test based on the existing significance test, which determines whether a breach is significant based on consideration of: a) the number or frequency of similar breaches; b) the impact of the breach or likely breach on the licensee’s ability to provide financial services covered by the licence; c) the extent to which the breach or likely breach indicates that the licensee’s arrangements to ensure compliance with those obligations are inadequate; and d) any other matters prescribed by regulations.
• Licensees (Australian credit licensees and Australian Financial Services Licensees) will also be required to lodge a report with ASIC if the licensee has reasonable grounds to believe that a reportable situation, other than a reportable situation about an investigation, has arisen in relation to financial advisers and mortgage brokers respectively.
• Licensees will be required to lodge breach reports with ASIC in the prescribed form, within 30 calendar days 'after the licensee first knows that, or is reckless with respect to whether there are reasonable grounds to believe, a reportable situation has arisen'.
• Failing to lodge a report with ASIC will constitute an offence with a maximum penalty of two years imprisonment. A fine may also be imposed. The explanatory memorandum states that 'applying strict liability in this case is appropriate as requiring proof of fault would undermine deterrence'.
• ASIC will be required to publish data about breach reports on its website.
• Schedule 11 also imposes a new obligation on Australian financial services licensees and Australian credit licensees who are mortgage brokers to investigate misconduct and promptly remediate affected clients.

Commencement: (Subject to the passage of the legislation) the changes will take effect from 1 October 2021.

Schedule 12: Statutory obligation for ASIC/APRA to cooperate

Schedule 12 proposes to implement the government's response to Hayne recommendations 6.9 (Statutory obligation for APRA and ASIC to co-operate and share information) and 6.11 (formalise ASIC meeting procedures).

Parts 1 and 2 of Schedule 12 include measures to remove barriers to efficient co-operation and information sharing between the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Under the changes:

• APRA and ASIC are required to cooperate with each other in the performance of their functions and powers, so far as is practicable.
• APRA and ASIC are required to comply with a request in writing for information and documents from each other (with some limitations). The Chair of APRA or ASIC are able make a determination in writing that a request will not be complied with if it would 'compromise the functioning of the respective regulator'. The explanatory memorandum states that this power 'is intended to be used only in limited circumstances'.
• APRA and ASIC are required to notify each other when they reasonably believe there may be material breaches of each other’s legislation.
  Part 3 of Schedule 12 formalises ASIC meeting procedures. The proposed changes are 'substantially similar' to the requirements set out in the APRA Act dealing with the times and places of meetings, how voting is to occur and the passing of resolutions without meetings.

Commencement: (Subject to the passage of the legislation) the changes will take effect from 1 January 2021 or the day after Royal Assent (if later).

Response to the introduction of the Bill

In a statement welcoming the introduction of the Bill, the Australian Banking Association (ABA) CEO Anna Bligh said that 'Australian banks have already been acting on the findings of Commissioner Hayne and remain fully engaged for this next phase'. Ms Bligh said that banks will 'continue to work with the Government and regulators on the next round of changes and will be ready for their implementation from next year'.

Consumer groups have welcomed the introduction of the Bill, but have also raised concerns

Consumer Groups  (The Consumer Action Law Centre, CHOICE, Financial Rights Legal Centre, Financial Counselling Australia) welcomed the release of the Bill and in particular the ban on hawking of financial products but have reiterated their concerns about the proposed roll back of responsible lending obligations. However, the groups also raised concerns about the 'potential exemption for travel insurance from some of the insurance reforms' on the basis that it will leave consumers without sufficient protection from 'unscrupulous sales tactics'. Gerard Brody CEO of Consumer Action Law Centre also reiterated the groups' concern about the proposed roll-back of responsible lending laws. Mr Brody said,

'Unfortunately, we have seen the Government backflipping on some of their Banking Royal Commission commitments already. In particular, the proposed scrapping of responsible lending protections would directly contravene the very first recommendation by Commissioner Hayne. Reducing consumer protection in lending makes no sense ethically, morally, or economically. It will risk explosive debt and more suffering among our most vulnerable'.

Similarly, Super Consumers Australia welcomed the introduction of the Bill and in particular the introduction of anti-hawking measures which it considers will provide important protections for superannuation members and will 'ultimately boost retirement savings of Australians'. Xavier O’Halloran, Director of Super Consumers Australia said,

'The cost of being sold into a poor quality super fund can mean the difference between a comfortable retirement or struggling to pay the heating bill. We’re especially pleased that the new legislation makes it crystal clear that it’s illegal to hawk a member of a MySuper product into a choice product offered by the same fund. The complementary reforms announced in the Federal Budget to end the creation of duplicate accounts make it even more important that people end up in a single quality fund and are not sold a lemon'.

Super Consumers Australia also welcomed the measures to strengthen 'the arm of the regulator and allow them to protect individual members who have had their retirement savings jeopardised by the misconduct of superannuation funds'. However, the group called on the government to take action to implement Hayne recommendations on financial advice.

'We note that the government is still to act on Hayne’s recommendations on financial advice, in particular the charging of ongoing advice from superannuation. As the Royal Commission found, in many cases this advice was of little to no value and had a serious impact on eroding people’s retirement savings. We look forward to the government introducing this legislation as soon as possible to support the advice market in transitioning to provide higher quality, more affordable assistance to Australians'.