October reforms – last minute developments
October 2021 is a big month for regulatory compliance. Reforms which have commenced include:
changes to breach reporting obligations for financial services and credit licensees;
the new ASIC protocol for reference checking and information sharing;
the design and distribution obligations (“DDO”);
anti-hawking reforms;
the deferred sales model for add on insurance products; and
changes to ASIC’s dispute resolution requirements.
Recently there have been a number of releases of guidance, legislative instruments and regulations in relation to these reforms.
Design and distribution obligations
ASIC Corporations (Design and Distribution Obligations Interim Measures) Instrument 2021/784 was made on 1 October 2021 and commenced on 5 October 2021. This instrument gives temporary effect to the proposed amendments to DDO which the Government announced in August 2021, until legislation is made to implement these amendments. The instrument:
amends the Corporations Act 2001 (Cth) (the “Corporations Act”) to clarify that the retail and wholesale client definitions apply to the DDO provisions in the Act in the same way as they apply to the rest of Chapter 7 of the Corporations Act;
amends the Corporations Act to remove the requirement for product distributors to report complaints or information specified by the issuer when there are no such matters to report for the reporting period (i.e. a “nil return” is not required);
amends the meaning of “excluded conduct” to clarify that it includes giving a disclosure document under Part 6D.2 of the Corporations Act or a Product Disclosure Statement under Part 7.9 of the Corporations Act in the course of providing personal advice about a financial product;
amends the Corporations Regulations 2001 (Cth) to make clear that employers remain exempt from DDO when they provide a PDS for their default fund to employees; and
exempts from DDO non-cash payment facilities (aside from debit cards, credit products and stored value facilities), foreign exchange contracts that settle immediately, margin lending facilities provided to non-natural persons, and cashless welfare arrangements.
ASIC Corporations (Amendment) Instrument 2021/785 was made on 1 October 2021 and commenced on 5 October 2021. This instrument amends the meaning of “product distributor” under the ASIC Corporations (Basic Deposit and General Insurance Product Distribution) Instrument 2015/682 (ASIC Instrument 2015/682) to clarify that employees of licensees are not regulated persons for the purposes of DDO, and also amends ASIC Class Order [CO 14/1262] so that the application of DDO extends to 31-day notice term deposits.
ASIC has also published an information sheet (INFO 264) on DDO for financial advisers and Australian financial services licensees who are advice licensees which explains how DDO applies when personal advice is given.
Anti-hawking
The Financial Sector Reform (Hayne Royal Commission Response) (Hawking of Financial Products) Regulations 2021 (Cth) made on 5 August 2021 and effective from 5 October 2021 amend the Corporations Regulations 2001 (Cth) to include exceptions to the hawking prohibition.
An offer, request or invitation will not breach the hawking provisions if it is made in the course of contact initiated by the consumer for any purpose and the offer, request or invitation relates to a basic banking product or a term deposit with a maximum term of 5 years (if the consumer can withdraw funds during that 5 years by providing the product issuer with 31 days or less notice). Contact is consumer initiated if the consumer takes positive steps to contact the offeror and the contact is not made in response to previous contact initiated the offeror (e.g. returning a missed phone call).
The other exceptions to the hawking prohibition provided in the Regulation are:
Offers relating to listed securities or listed interests in managed investment schemes made by financial services licensees over the phone.
Offers for the issue or sale of securities made by a financial services licensee through whom the client has bought or sold securities in the last 12 months.
Offers for the issue or sale of interests in managed investment schemes made by a financial services licensee through whom the client has acquired or disposed of an interest in a managed investment scheme in the previous 12 months.
Crowd source funding offers.
Offers, invitations or requests relating to employee share schemes.
Offers of medical indemnity insurance which are made to healthcare or medical professionals.
Offers, requests or invitations in relation to interests in insolvency litigation funding schemes and litigation funding arrangements.
Offers for the issue or sale of a financial product that is substantially similar to a financial product that the consumer already holds with the offeror(such as offers to renew an insurance policy).
ASIC Corporations (Amendment and Repeal) Instrument 2021/799 was made on 21 September 2021 and came into effect on 5 October 2021. It makes consequential amendments to some existing ASIC legislative instruments by updating statutory references to the hawking prohibition. It also repeals two ASIC legislative instruments, the ASIC Corporations (Securities and Managed Investment Scheme Hawking Relief) Instrument 2017/184 (“2017/184”) and the ASIC Corporations (Life Risk Insurance and Consumer Credit Insurance) Instrument 2019/839 (“2019/839”). 2017/184 had provided relief from the hawking prohibition so that it did not apply to securities and interests in managed investment schemes, while 2019/839 had prohibited unsolicited telephone sales of direct life insurance and consumer credit insurance unless the consumer was provided with personal advice by the offeror or a person acting on the offeror’s behalf.
ASIC also released its finalised update regulatory guide RG 38 The hawking prohibition on 23 September 2021. A draft version of this updated guide had been released by ASIC in July 2021.
Breach reporting
ASIC Corporations and Credit (Breach Reporting—Reportable Situations) Instrument 2021/716 was made on 13 August 2021 and commenced on 5 October 2021. It notionally modifies the law to exclude non-compliance with standards set out in ASIC legislative instruments on internal dispute resolution (“IDR”) (which made certain IDR standards mandatory) from the categories of situations deemed to be “significant” breaches of core obligations.
The Financial Sector Reform (Hayne Royal Commission Response - Breach Reporting and Remediation) Regulations 2021 (Cth) were made on 5 August 2021 and commenced on 1 October 2021. The Regulations prescribe civil penalty provisions and key requirements in the Corporations Act, the Credit Act and the National Credit Code that are not taken to be significant (and therefore may not be reportable) under the relevant breach reporting regime if those provisions are contravened. They also allow for certain breach reporting offences and civil penalty provisions to be subject to an infringement notice, and make minor and technical amendments.
ASIC Credit (Breach Reporting—Prescribed Commonwealth Legislation) Instrument 2021/801 was made on 28 September 2021 and commenced on 1 October 2021. Earlier in September 2021, the Government announced that it intended to make some technical amendments to the breach reporting reforms, including an amendment to the National Consumer Credit Protection Act 2009 (Cth) (the “Credit Act”) to limit the reporting of breaches of “core obligations” in other Commonwealth laws relating to credit activities. The amendments would limit the other Commonwealth laws to the Banking Act 1959 (Cth), the Corporations Act, the Financial Sector (Collection of Data) Act 2001 (Cth), the Financial Sector (Shareholdings) Act 1998 (Cth), and the Financial Sector (Transfer and Restructure) Act 1999 (Cth). This will align the breach reporting requirements for the Credit Act with those of financial services licensees under the Corporations Act, which specifies the other Commonwealth laws. The legislative instrument provides temporary relief for three years to limit the other Commonwealth legislation covered by the core obligations for credit licensees to those other Acts. (Note though that the consumer protection provisions in the Australian Securities and Investment Commissions Act 2001 (Cth) are also included as core obligations, as these are separately referred to in the legislation).
ASIC also published its finalised updated regulatory guide on breach reporting, Regulatory Guide RG 78 Breach reporting by AFS licensees and credit licensees on 7 September 2021.
Dispute resolution
ASIC Corporations, Credit and Superannuation (Amendment) Instrument 2021/753 was made on 28 September 2021 and commenced on 30 September 2021. This instrument incorporates by reference the most recent version of Regulatory Guide 271 Internal Dispute Resolution (“RG 271”) and also removes enforceability from paragraphs 87, 99, 100, and 113 of RG 271 to avoid duplicating existing legal requirements under the Credit Act, the Corporations Act and the Superannuation Industry (Supervision) Act 1993 (Cth).
Reference checking and information sharing protocol
ASIC Corporations and Credit (Reference Checking and Information Sharing Protocol) Instrument 2021/429 was made on 19 July 2021 and commenced on 1 October 2021. This instrument sets out the ASIC reference checking and information sharing protocol which applies in relation to financial advisers and mortgage brokers from 1 October 2021.
Deferred sales model for add-on insurance products
ASIC (Information under the Deferred Sales Model for Add-On Insurance) Instrument 2021/632 was made on 26 July 2021 and commenced 5 October 2021. This instrument sets out the information to be given to a customer, and the form and manner in which the information is to be given, in order to start an add-on insurance deferral period.
The Australian Securities and Investments Commission Amendment (Deferred Sales Model) Regulations 2021 (Cth) were made on 16 September 2021 and commenced on 5 October 2021. The Regulations amend the Australian Securities and Investments Commission Regulations 2001 (Cth) (the “ASIC Regulations”) to prescribe when a consumer is taken to have entered a commitment to acquire certain classes of products or services. The Regulations also amend the ASIC Regulations to exempt specific classes of add-on insurance products from the deferred sales model. There are exemptions for comprehensive motor vehicle or vessel insurance products, compulsory third party motor vehicle insurance products, home and contents insurance products, home building insurance products, landlord insurance products, limited motor vehicle or vessel insurance products, transport and delivery insurance products, travel insurance products, business-related add-on insurance products, and superannuation-related add-on insurance products.
ASIC also released its regulatory guide RG 275 The deferred sales model for add-on insurance on 28 July 2021.
Patrick Dwyer and Kathleen Harris
Legal Directors