In late 2013 the Australian Government established a Financial System Inquiry and has released their response in October 2015.
Of the 44 recommendations released by the Financial System Inquiry, the Government has accepted all but one. The implementation of such recommendations is stated as being beyond 2016 and there are many which will impact AFSL and ACL holders alike.
The recommendations cover a wide range of financial services, including the training of representatives, ASIC’s powers regarding product intervention and change of control of licensees, new banning powers and the renaming of general advice.
We have summarised the various recommendations below which we think will most impact the industry and in particular, the industry participants which we deal with on a regular basis. These include:
- Technology Neutrality – the Government has agreed to amend various instances of legislation which need to be technology neutral. This is where there is currently technology-specific legislation that impedes innovation and competition and prevents the implementation of the most up to date technology. As the Government works to amend this legislation, this should effectively allow for greater innovation for existing AFSL and ACL holders to implement new technologies in the provision of financial services.
- Innovative Disclosure – ASIC has already released Regulatory Guide 221 which provides information regarding the facilitation of digital disclosure for providers of financial services. In support of this, the Government has agreed to recommendation 23 of the FSI’s report to remove regulatory impediments to innovate product disclosure and communication with clients. The Government intends to develop legislation to promote innovative disclosure and finalise such legislative changes in 2017.
- ASIC’s product intervention power – the FSI report suggests implementing a proactive product intervention power which enhances the regulatory toolkit of ASIC where there is a risk of significant consumer detriment. The Government has agreed to enable ASIC to modify or ban harmful financial products where this risk exists. For many in the industry, this recommendation signals a new stage of ASIC power, allowing them to ban various financial products on the basis of consumer detriment. Whilst the implementation of any product ban would be subject to consultation with industry, this recommendation gives ASIC considerable power to act to alter the industry considerably, if a ban were to occur.
- ASIC’s power to ban individuals – whilst ASIC already has the power to ban individuals from providing financial services, recommendation 24 of the FSI’s report includes the power for ASIC to ban individuals from management within financial firms. The Government have advised they will develop this legislation in the coming years.
- Stronger regulatory tools for ASIC – these stronger tools will enable ASIC to approve changes of control for licensees and consider a broader range of factors when determining whether an applicant satisfies the fit and proper test in licence applications. Whilst it is not clear at this stage what ASIC’s powers will entail, it is reasonable to assume that changes in control of AFSLs will be required to meet certain requirements and would be most likely need to be assessed and approved by ASIC prior to the finalisation of the change in control taking place. In relation to the fit and proper test, it remains to be seen the types of factors which ASIC will consider, however it is likely these will raise the bar for applicants and their nominated Responsible Managers.
- Competency of advisers – the Government’s approval of recommendation 25 indicates that legislation will be introduced in mid-2016 which deals with the issue of raising the professional standards of advisers. The recommendation states that the minimum standards for advisers providing financial product advice on Tier 1 products should include:
- A tertiary degree;
- Competence in specialised areas, where relevant; and
- Ongoing professional development, including technical skills, relationship skills, compliance and ethical requirements.
- Renaming general advice – this recommendation seeks to address the issue that consumers do not understand the difference between personal and general advice. Industry consultation will be conducted prior to the finalisation of the new term. The challenge will be to find a new term which provides greater consumer understanding.
Many of the changes signal a move towards greater intervention by ASIC and increasing the standards of the industry as a whole. Some of the changes (e.g. enabling ASIC to approve changes of control to licences) is a significant change to the level of intervention of government, particularly in what would ordinarily be a private transaction (i.e. the sale of a business). Other changes (e.g. improving the competency of advisers) signals a move towards the professionalisation of the industry, which appears to be in line with changes introduced by the Future of Financial Advice legislation in 2013 and the ban on conflicted remuneration in an attempt to move the industry towards a fee for service model.
It remains to be seen how these recommendations will be implemented and the timing of each, including the time allocated for consultation with industry stakeholders, however industry should be prepared for such changes and the impact it will have on their operations.