Changes to breach reporting obligation laws are on the horizon and are set to expand the circumstances in which breaches must be reported. Thus, these changes are likely to significantly increase the volume of breach reporting. The proposed new laws are to be introduced into Parliament by mid 2020, to come into effect from 1 April 2021.
What will the changes mean for AFSL Holders?
The changes released in the exposure draft Royal Commissions Response Bill (2020 Measures) include new and additional reportable circumstances. As currently drafted, Australian Financial Services (“AFS”) licensees will be required to report on the following:
- investigations into a specified or likely breach that has occurred or will occur and the outcome of those investigations;
- report breaches of certain ‘core’ obligations including s912A (general licensee obligations and s912B (compensation arrangement obligations) under the Corporations Act 2001; and
- report on whether the AFS licensee has engaged in conduct constituting ‘gross negligence’ or ‘serious fraud’.
In addition to the above breach reporting changes, the proposed new laws will broaden what constitutes a significant and reportable breach to include contraventions of civil penalty provisions. Therefore, the significance test no longer remains an entirely subjective test. Subjectivity of breach reporting can result in inconsistent reporting amongst AFS licensees in terms of timelines and matters reported. The proposed changes require the test for when a breach or likely breach is significant to include objectively determinable criteria, to result in more consistent reporting.
What will the changes mean for ACL Holders?
As a breach reporting regime currently does not exist for Australian Credit Licence holders, the proposed amendments will introduce a comparable breach reporting regime to what is required for AFS licensees. The Bill proposes changes to the National Consumer Credit Protection Act 2009 (“NCCP Act”), which will require Australian Credit licensees to report breaches and other reportable circumstances, in the same manner as AFS licensees. The NCCP Act will also add new reference checking and information sharing obligations on Australian Credit licensees.
The New ‘Reportable Situations’ for Breaches
The recommended circumstances in which breaches must be reported, to be known as ‘reportable situations’, are:
| Reporting | AFS and Australian Credit licensees must lodge a report with ASIC if there are reasonable grounds to believe a reportable situation has arisen in relation to the licensee. Breaches will need to be reported within 30 days, lodged electronically in a prescribed form. |
| Objective test | An objective test will be introduced to determine the significance of breaches, replacing what was previously a subjective test. |
| Core reportable situations | Obligations arise to report breaches of ‘core’ obligations, including breaches of s912A and s912B of the Corporations Act, or the general conduct obligations on credit licensees under s47 of the NCCP Act. Any breach constituting a contravention of a civil penalty provision, or one likely to result in loss or damage to a client, are taken to be significant. |
| Additional reportable situations | Reporting obligations will arise for situations based on ‘gross negligence’ or ‘serious fraud’. |
| Investigations | AFS and Australian Credit licensees will be required to report on what investigations are being conducted into whether a breach has occurred, and the outcomes of such investigations. Outcomes of investigations must be reported within 10 calendar days. |
| Financial advisers under another AFSL | AFS licensees will be obligated to report on financial advisers operating under another AFS licensee, when there are reasonable grounds to suspect a reportable situation has arisen. Reports will be required to be submitted to both ASIC and the financial adviser’s AFS licensee. An equivalent obligation will arise for mortgage brokers under another ACL. |
| Published breaches | ASIC will be required to publish breach report data on the reportable situations reported by AFS and Australian Credit licensees. |
| Notifying affected customers | Clients of financial advisers and mortgage brokers will be required to be notified where certain reportable situations arise and there are reasonable grounds to suspect that the customer will suffer loss or damage as a result of the reportable situation. |
| Information sharing | The proposed changes will introduce the requirement for AFS and Australian Credit licensees to share information about financial advisers and mortgage brokers to other AFS or Australian Credit licensees as part of reference checking protocols. This includes reporting any poor conduct that the AFS or Australian Credit licensee is aware of. |
| Breaching reporting obligations | A breach of the reporting obligations will carry criminal and civil penalties. |
As noted in the table above, the proposed changes extend the obligations beyond ‘dobbing yourself in’ for breaches, to being obligated to report financial advisers working under other AFS licensees if there are reasonable grounds to suspect a reportable situation has arisen.
By increasing the number of breaches reported to ASIC, the intention is that consumer protections will be strengthened, and the breach reporting regime will be clarified. It also allows ASIC to identify and address any emerging trends of non-compliance.
Background Information
The draft legislation implements recommendations 1.6, 2.7, 2.8, 2.9 and 7.2 from the Financial Services Royal Commission, in relation to strengthening breach reporting.
Further Reading
- Exposure Draft Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures) Bill 2020
- Financial Services Royal Commission – Enhancing consumer protections and strengthening regulators
If you would like to speak to us about how the proposed legislation could affect your business, please contact us.
