On 28 September 2022, the Senate referred the provisions of the Bills to establish the proposed Financial Accountability Regime (FAR) and the proposed Compensation Scheme of Last Resort (CSLR) to the Economics Legislation Committee for inquiry and report by 20 October 2022. A progress report released by the Committee on the 20th October requested additional time. The Committee's Final Report was released on 24 October 2022.
The Final Report recommends the passage of all four Bills – Financial Accountability Regime Bill 2022; Financial Sector Reform Bill 2022; Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 – without amendment.
Views on the proposed FAR
According to the report, the 'majority of submissions' received in response to the consultation, including submissions from the Australian Banking Association (ABA) and the Australian Institute of Company Directors (AICD) supported the passage of the FAR Bills on the basis that the proposed FAR would: a) improve the operating culture of entities across the banking, insurance and superannuation sectors; b) increase transparency and accountability in these sectors; and c) help to restore public trust in the financial system.
Having said this, the report flags the issue of individual civil penalties as an area where stakeholders hold differing views.
Submissions from consumer group CHOICE and separately, from the University of Wollongong's Dr Andy Schmulow, raised concerns that the proposed FAR does not include individual civil penalties for executives who breach their FAR obligations.
Conversely, submissions from the AICD, ABA and Financial Services Council (FSC) supported the approach in the Bill on the basis that such penalties would be both unwarranted and unnecessary. According to the report, this view is (broadly) backed by Treasury, and was also accepted by the Committee.
The Committee's view is that:
'accountability measures, such as the existence of banning powers and deferred remuneration arrangements, will complement existing penalties for entities and accountable persons contained in the Corporations Act. On balance, the committee believes that such measures will effectively guide behaviour and are the final step of implementing the recommendations made by Commissioner Hayne'.
As flagged, the Committee ultimately recommended that all the Bills (including the Bills to establish the proposed FAR) be passed without amendment.
Coalition Committee members stated that they 'support the passage of the Financial Accountability Regime Bill 2022 and the Financial Sector Reform Bill 2022' and offered no additional comments on the question of civil penalties.
The Greens representative on the Committee, Senator Nick McKim recommended (in 'additional comments') the inclusion of civil penalties in the FAR.
Views on the proposed Compensation Scheme of Last Resort (CSLR)
According to the report, though there was overall support for the establishment of a CSLR, stakeholders were divided on the appropriate scope, design and funding model for the proposed scheme.
In particular, the report highlights the proposed levy framework as a contentious issue with some stakeholders raising concerns that the proposed CSLR levy would have negative impacts on industry (due to the associated potential increase in costs) and would not be sustainable for industry members. Other stakeholders, the report flags, are supportive of a forward-looking industry funded CSLR and the rationale for the proposed framework.
The Committee's view is that no changes to the proposed funding model are required. The report states:
'The committee recognises the concerns raised by stakeholders within the financial services sector regarding the proposed CSLR. While the committee acknowledges these concerns, it is reassured that Treasury has engaged in an extensive consultation and design process with industry, and that this process has produced a rational framework that addresses those concerns. The committee is persuaded by the evidence from Treasury and other submitters in the financial services sector who articulated their support for a forward-looking industry funded CSLR'.
In 'additional comments' on the report, Coalition Senators state they have 'reservations' about the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 and Financial Services Compensation Scheme of Last Resort Levy Bill 2022, though they do not state that this will prevent them from supporting the passage of the Bills.
On the issue of the levy framework, recommendations offered by Coalition Senators include that consideration should be given to 'amending the Bill to limit Ministerial discretion on further and special levies and to provide clarity to the market'.
Greens Senator Nick McKim does not offer any additional comments on the proposed CSLR.
Views on the proposed SACC Reforms
Schedule 4 of the Financial Sector Reform Bill 2022 would, if enacted, implement the government's response to the 2016 Small Amount Credit Contract Laws Review (SACCs review) which identified that 'existing consumer protections for small amount credit contracts [and consumer leases] are insufficient and that enhancements to the regulatory regime are required to ensure it is fit for purpose'.
According to the report, views were divided on the proposed changes. The report comments: 'While some stakeholders argued that the proposed reforms may lead to worse consumer outcomes, other stakeholders were adamant that the proposed changes were long overdue and would result in better outcomes for consumers'.
The Committee was not persuaded by arguments by industry that reform is not required and/or may lead to unintended negative consequences for consumers. The Committee's view is that the proposed reforms are justified in order to 'enhance' consumer protections for vulnerable consumers, and that no change to Schedule 4 is required. The Committee comments:
'The committee is acutely aware of the harm that unsuitable SACCs and consumer leases can cause vulnerable members of the community, and strongly supports the proposed enhancements to consumer protections for these products. In addition to protecting vulnerable members of the community, the committee believes the reforms proposed by the government will promote financial inclusion through the introduction of a new protected earnings amount and a cap on costs for consumer leases. The committee believes these reforms will reduce the risk that consumers are left unable to pay for their basic needs or will default on their other commitments. Given the reviews and inquiries in recent years which support action being taken, and the fact that the substantive legislation was proposed and consulted by the previous government, the committee is firmly of the view that the strengthening of the law is crucial to protect vulnerable consumers who continue to fall into financial hardship and cyclical debt because of unregulated practices'.
In their 'additional comments' Coalition senators expressed 'concern' about some aspects of the proposed changes in Schedule 4 but again, did not indicate any express intention to oppose the Bill on this basis. Coalition senators did offer a recommendation that consideration should be given to 'any unintended negative impacts of the Protected Earnings Amount within the Financial Sector Reform Bill 2022 on financial exclusion, quality of life and consumer outcomes and industry viability'.
Outlook for the passage of the Bills
Prior to the release of the Senate Report, ASIC Commissioner Sean Hughes observed that the Bills have bipartisan support, but that given the parliamentary sitting calendar it is unlikely that they will be enacted until after the October budget sittings.
Though there can be no certainty about the timing of the passage of the Bills, there does not appear to be anything in the Senate Committee's report to suggest that this is no longer the case (though there is some chance they may be passed this week - they are currently at second reading stage in the Senate).
Given that the Senate is not due to sit (after this week) until 21 November, and assuming the passage of the Bills through the senate by the end of November, the earliest the FAR would apply (for the banking sector) would be May 2023 (six months after the Financial Accountability Regime Bill receives Assent) and May 2024 for the insurance and superannuation sectors (18 months after the Financial Accountability Regime Bill receives Assent).
[Source: Senate Standing Committee on Economics Inquiry into the Financial Accountability Regime Bill 2022 [Provisions] and Financial Sector Reform Bill 2022 [Provisions] and Financial Services Compensation Scheme of Last Resort Levy Bill 2022 [Provisions] and Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 [Provisions] Final Report 24/10/2022]
Interested in this (and similar) topics?
Subscribe to alerts and our weekly wrap up of key financial services, risk, regulatory and ESG developments.