Self reporting of contraventions by financial services and credit licensees

The Treasury has released a paper on changes to the AFS self-reporting regime for comment.  The closing date for submissions is Friday, 12 May 2017.

The self-reporting regime for Australian Financial Services licensees (AFS licensees) has come under scrutiny over the last decade or so in the media and in a series of inquiries into banking or banking and financial services related misconduct. Concurrently, ASIC has publicly outlined concerns with the effectiveness of some aspects of the existing regime.

The Taskforce has conducted preliminary analysis of these issues, with the benefit of ongoing targeted consultation with industry and other stakeholders. This has enabled the Taskforce to develop preliminary positions on a set of reforms aimed at enhancing the current regime and making it more effective.

The paper poses reforms that would:

  • clarify when the reporting obligation is triggered – reducing compliance costs and delays in reporting, and removing uncertainty about when and whether a reporting obligation exists in the circumstances;
  • increase accountability for licensees, and their employees and representatives by expanding the class of reports that must be made to expressly include misconduct by individual advisers and employees;
  • introduce new and heightened penalties for non-reporting, giving ASIC greater flexibility to impose a range of penalties in response to a failure to report;
  • require ASIC to publish data on breach reports for major licensees; and
  • introduce an equivalent reporting regime for credit licensees (who are currently subject only to annual compliance reporting).

The taskforce invites all interested parties to make a submission on the positions outlined in this paper.

 

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).

Federal Court declares Melbourne licensee breached FOFA laws

For the first time we get a read on how the Future of Financial Advice (FOFA) reforms will be interpreted by the courts.

ASIC says the Federal Court has found that Melbourne-based financial advice firm NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) (NSG) breached the best interests obligations of the Corporations Act introduced under the Future of Financial Advice (FOFA) reforms.

This is the first finding of liability against a licensee for a breach of the FOFA reforms.

This matter relates to financial advice provided by NSG advisers on eight specific occasions between July 2013 and August 2015. On these occasions, clients were sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable, and unnecessary financial arrangements.

NSG consented to the making of declarations against it and after a hearing on 30 March 2017 the Court was satisfied that declarations ought to be made.

The Court found that NSG’s representatives:

  • breached s 961B of the Corporations Act by failing to take reasonable steps to ensure that they provided advice that complied with the best interests obligations; and
  • breached s 961G of the Corporations Act by failing to take reasonable steps to ensure that they provided advice that was appropriate to its clients.

Those breaches amounted to a contravention by NSG of s 961L of the Corporations Act, which provides that a financial services licensee must ensure its representatives are compliant with the above sections of the Act.

The Court made the declarations based on the following deficiencies in NSG’s processes and procedures:

  • NSG’s new client advice process was insufficient to ensure that all necessary information was obtained from, and given to, the client;
  • NSG’s training on legal and regulatory obligations was insufficient to ensure clients received advice which was in their best interests;
  • NSG did not routinely monitor its representatives nor identify deficiencies in the knowledge or skills of individual representatives;
  • NSG did not conduct regular or substantive performance reviews of its representatives;
  • NSG’s compliance policies were inadequate, and did not address its representatives’ legal or regulatory duties, and in any event, were not followed or enforced by NSG;
  • there was an absence of  regular internal audits, and the external audits conducted identified issues which were not adequately addressed nor recommended changes implemented; and
  • NSG had a “commission only” remuneration model, which meant that representatives would only be compensated by way of commission for sales of life insurance products and superannuation rollovers.

ASIC Deputy Chairman Peter Kell said, “This finding, the first of its kind, provides guidance to the industry about what is required of licensees to ensure representatives comply with their obligations to act in the best interests of clients and provide advice that is appropriate”.

ASIC has sought orders that NSG pay pecuniary penalties in relation to the declarations made. A date for the hearing on penalty will be fixed by the Court.

Background

On 3 June 2016, ASIC commenced proceedings against NSG in the Federal Court (refer: 16-187MR).

Separately ASIC announced:

ASIC has banned Mr Adrian Chenh and Mr Bill El-Helou from providing financial services for a period of five years each following an ASIC investigation.

ASIC’s investigation found that Mr Chenh and Mr El-Helou provided advice to clients that was in breach of the best interests duty introduced under the Future of Financial Advice (FOFA) reforms.

ASIC found that Mr Chenh and Mr El-Helou had:

  • failed to act in the best interests of clients in that the advice provided did not leave them in a better position;
  • failed to provide advice that was appropriate to the clients; and
  • failed to provide financial services guides, product disclosure statements and statements of advice.

An additional finding was made that Mr El-Helou was not adequately trained, or not competent, to provide financial services.

ASIC deputy Chairman Peter Kell said, ‘Financial advisers must act in the best interests of their clients and provide advice that is appropriate. ASIC is committed to raising standards in the financial advice industry.’

Mr Chenh and Mr El-Helou both have a right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decisions. Mr Chenh has exercised his right of appeal and filed an application for review on 21 March 2017.

Background

ASIC has commenced proceedings against NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) (NSG) for breaches of the “best interests obligations” contained in the Corporations Act, and is seeking declarations of breaches and financial penalties (refer: 16-187MR).  A hearing on liability occurred on 30 March 2017.

Both Mr Chenh and Mr El-Helou, previously representatives at NSG, gave financial product advice, particularly in relation to superannuation and insurance.

ABA Responds To Code of Banking Review

The Australian Bankers’ Association has today released its response to the independent review of the Code of Banking Practice, supporting the vast majority of recommendations.

“The Code is central to making sure banks do the right thing by their customers,” ABA Executive Director – Retail Policy Diane Tate said.

“Significant changes will be made to the Code to raise standards in banking and deliver on the industry’s commitment to make banking better.”

Some of the changes customers can expect in a new Code include:

  • Plain-English language so that Australians can better understand their banking rights and responsibilities.
  • An easier way to cancel credit cards or reduce the credit limit, and a commitment by banks when offering cards to assess someone’s ability to pay the full credit limit in a reasonable time period.
  • A new dedicated section for small businesses, and a commitment by banks to simplify terms and conditions and give more notice when loan contracts change.
  • Increased help for people experiencing, or at risk of, financial difficulty, so they can take control of their finances.

“Of the 99 recommendations, the banking industry supports 61 in full. There are 29 recommendations that we support in principle or in part, and the remaining nine we either need more time to consider, or are not in a position to adopt,” Ms Tate said.

“There are also a number of related Federal Government reviews underway which we need to take into account before we can finalise our work on some of the recommendations.

“By accepting the vast majority of recommendations, banks are demonstrating they are taking action to change as well as being honest about the things which are more complex to resolve.

“In most cases where the industry does not support a recommendation, we have put forward an alternative that addresses the underlying intent of the recommendation.”

Ms Tate said the banking industry committed to an independent review of the Code which is now complete.

“Mr Phil Khoury, the independent reviewer, consulted widely as part of his review and it is clear the Code needs to change to meet the evolving needs of customers and the wider community.

“The new Code will have a clear commitment to ethical behaviour by banks, in a similar way that the Banking and Finance Oath demonstrates a personal commitment to high ethical standards.

“The Code will be redrafted in plain English so it is easier to read and our customers can better understand banks’ commitments to them, as well as their rights and responsibilities,” she said.

Ms Tate said the industry would work with stakeholders and other interested parties to redraft the Code.

“The industry recognises it is important for customers that we make these changes as soon as possible. We are aiming to have a new Code redrafted by the end of the year. This timeframe is ambitious, but we are determined to deliver change fast, while taking care to get it right.

“While the Code has legal effect through subscribing banks’ terms and conditions, we have heard we need to do more to give customers confidence in the Code. That’s why the ABA will work with the Australian Securities and Investments Commission on approving the Code, and on giving greater powers to the Code Compliance Monitoring Committee.

“Banks will need time to make any necessary changes to adopt the new Code. At this stage we anticipate a transition period of 12 months, but this will be revisited once we have a new Code.

“We will publish quarterly progress updates on the redraft and implementation of the Code, so customers can have confidence we’re delivering on our commitment to make banking better,” Ms Tate said.

More information, including a response to each of the recommendations, is available here.

The “not supported” recommendations are:

  • Clause 28 of the Code should be amended to include a new provision that a signatory bank may, at its discretion, decide to waive a small unsecured debt if the bank is provided with evidence that the person is in long term financial hardship and the circumstances warrant a compassionate approach.
  • The Code should specify that a guarantee is unenforceable if the signatory bank fails to comply with the pre-execution requirements. Similarly non-compliance with a post execution requirement means that the guarantee is unenforceable in relation to debt or costs that accrue after that time.
  • The Code should be amended to prohibit signatory banks from signing a guarantor, who has not been legally advised, until at least the third day after the provision of all required information to the guarantor.
    This provision should also apply to a guarantor of a small business credit facility below $5 million with an exception at the election of a sole director guarantor, a trustee guarantor or a commercial asset financing guarantor.
  • Clause 29 of the Code should specify that a credit facility is unenforceable against a person who is accepted as a co-debtor but who, the signatory bank should have known, was not receiving a substantial benefit under the credit facility. In the case of a credit facility for the purpose of a small business, the clause 29 obligation should only apply to a credit facility below $5 million.
  • The Code should specify that a guarantee is unenforceable if the signatory bank fails to comply with the pre-execution requirements. Similarly non-compliance with a post execution requirement means that the guarantee is unenforceable in relation to debt or costs that accrue after that time.
  • The Code should be amended to include a new obligation that prohibits banks from offering a credit card credit limit increase to a Code customer, other than in response to a customer-initiated specific request for a higher credit limit. The drafting should make it clear that the requirement for a customer-initiated specific request is not met by the customer ‘opting in’ to the bank making credit limit increase offers to the customer.
  • The Code should be amended to include:
    a) A prohibition on signatory banks charging Code customers interest on the portion of their credit card balance that is paid off by the due date.

The “additional time” recommendations are:

  • The Code should be amended to prohibit a signatory bank from enforcing a credit facility against:
    a) a customer who is an individual; or
    b) a small business customer where the credit facility is below $5 million,
    if the customer has complied with loan payment requirements and has acted lawfully.
    The ABA should consult with stakeholders including the Australian Small Business and Family Enterprise Ombudsman about any exceptions, for example, to permit enforcement of a small business credit facility where an insolvency event has occurred.
  • Clause 29 of the Code should be redrafted to require a co-debtor to receive a “substantial benefit” under the credit facility and a signatory bank to make reasonable enquiries to ensure that this is the case (thereby reversing the position currently achieved by the words “it is clear, on the facts known to us”). In the case of a credit facility for the purpose of a small business, the clause 29 obligation should only apply to a credit facility below $5 million.
  • The Code should either:
    a) restrict signatory banks from charging a home loan customer for lenders mortgage insurance more than the actual cost incurred by the signatory bank net of any discount or commission paid by the insurer to the signatory bank and require a signatory bank to pass on to a home loan customer any rebate of premium that the signatory bank receives if the customer repays or refinances their loan; or
    b) impose a disclosure regime whereby signatory banks disclose to their customers any discount, commission or rebate obtained by the bank at the inception of the policy and at the time of cancellation of the policy.

 

 

ASIC accepts enforceable undertaking from Barclays entities

Yesterday, ASIC accepted an enforceable undertaking (EU) from three Barclays foreign financial service providers (FFSPs):

  • Barclays Capital Inc. (BCI) domiciled in the United States of America
  • Barclays Capital Asia Limited (BCAL) domiciled in Hong Kong, and
  • Barclays Capital Securities Limited (BCSL) domiciled in the United Kingdom,

collectively ‘the Barclays entities.’

As part of the terms of the EU, the Barclays entities will contribute $500,000 to The Ethics Centre for research and development into the provision of financial services to Australian clients.

The EU was accepted by ASIC following concerns about significant breaches of the conditions of the ASIC class order licensing exemptions relied on by the Barclays entities, including the failure to notify ASIC of breaches within the required time.

The Barclays entities failed to disclose to clients that they were exempt from holding an Australian Financial Services licence (AFSL) and are regulated by the relevant overseas regulatory authority. BCI and BCAL are not able to demonstrate that the requisite disclosure was made to clients since first commencing reliance on the ASIC class order licensing exemption, in 2004 and 2006 respectively. BCSL is not able to demonstrate that the requisite disclosure to clients had been made across a 10 year period from 2004 to 2014. BCI also failed to notify ASIC of certain offshore investigation and enforcement matters within the time required of FFSPs.

ASIC was particularly concerned that the Barclays entities failed to report these material breaches within the 15-day time frame and as a consequence excluded themselves automatically from the benefit of the ASIC class order licensing exemptions.

To maintain the availability of the services provided by the Barclays entities to the Australian wholesale sector ASIC has granted the Barclays entities conditional individual relief from the obligation to hold an AFSL.

The duration and number of breaches together with the failure to report breaches in time demonstrated serious, systemic weaknesses in the compliance controls implemented by the Barclays entities to meet their Australian regulatory obligations.

Under the terms of the EU the Barclays entities must engage an ASIC approved independent expert to, among other things:

  • review and test the compliance framework implemented by the Barclays entities following the reporting of breaches, to meet the relevant conditions of the ASIC licensing exemption; and
  • report any deficiencies and make recommendations on how to rectify those deficiencies to ensure effective and enduring compliance with the relevant conditions of the ASIC licensing exemption.

ASIC Commissioner Cathie Armour said, ‘Foreign financial services providers relying on a class order licensing exemption must have effective and enduring measures to ensure compliance with the conditions set out in these instruments, including the fundamental obligations relating to disclosure and reporting.’

‘Entities that fail to self-report a breach of their obligations to ASIC within the required time will be subject to automatic and indefinite exclusion from the licensing exemption provided by these instruments.’

ASIC releases findings of CommInsure investigation

ASIC has released a public report today on its investigation into the life insurance business of CommInsure (the trading name of The Colonial Mutual Life Assurance Society Limited).

ASIC has been conducting an extensive investigation and examination of CommInsure’s practices, including reviewing over 60,000 documents and interviewing staff. ASIC obtained files from dispute resolution schemes, spoke to consumer advocacy organisations, and obtained independent medical and legal advice.

Key outcomes of ASIC’s investigation are:

1. CommInsure had trauma policies with medical definitions that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis. However, this was not against the law. This is because the law allows an insurer to set out the level of cover its policy provides, including out of date medical definitions as long as these are clearly disclosed in the policy.

It is important to recognise that a consumer can end up with a life insurance policy that has out of date medical definitions in two ways (both of which we found applied to CommInsure)

  1. Insurers can sell consumers policies which already have outdated medical definitions. Although this is not against the law, it is clearly out of step with community expectations, given that consumers cannot be expected to know whether a medical definition is already outdated when they purchase life insurance. The life insurance industry has recognised this, and under the new life insurance code of practice will take steps to minimise the risk that medical definitions are out of date when policies are sold.
  2. As life insurance is a long term product, a consumer can end up  with a life insurance policy where previously current medical definitions have become out of date over time. This occurs because life insurers are legally required to maintain a consumer’s cover, and cannot easily update a policy or change its terms. While this is an important consumer protection, it creates a ‘legacy products’ issue in the life insurance industry. The Government is considering this industry-wide issue further in response to a recommendation of the Financial System Inquiry.

2. CommInsure has since updated its medical definitions, including for heart attack and severe rheumatoid arthritis. CommInsure had previously announced that it would apply its updated heart attack definition back to May 2014. In response to ASIC’s concerns that its heart attack definition was out of date from at least October 2012, CommInsure has now voluntarily agreed to apply its updated heart attack definition back to October 2012. This is the date at which global cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack. CommInsure will now commence the process of identifying affected consumers and making payments as appropriate. ASIC welcomes CommInsure’s revised position on this matter.

3. Following a thorough investigation, ASIC found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions.

4. In the course of the investigation, ASIC identified a number of areas where CommInsure needs to make improvements to its claims handling processes. Areas of improvement were also identified by Deloitte in their independent review of CommInsure’s claim handling. Such improvements included, for example, better and more timely communications with consumers and enhanced training and assistance for claims managers. ASIC will work with CommInsure to make sure these improvements are implemented as quickly as possible. ASIC has requested CommInsure to undergo a further implementation review by an independent expert in mid-2018, to test the effectiveness of the changes, and provide additional assurance that CommInsure is making the necessary improvements to its business. CommInsure has agreed to this request.

5. ASIC is continuing to investigate concerns that CommInsure’s advertising and promotion of life insurance policies to consumers contained potentially misleading or deceptive information in the period before March 2016. We will provide a further update on this aspect of our investigation when appropriate.

ASIC’s investigation also examined CommInsure’s surveillance processes and looked at whether there was any compromise of a CommInsure database. No breaches of the law were uncovered, but areas for improvement were identified, and further details of these issues are set out in the investigation report.

The investigation

As part of our investigation, ASIC:

  • obtained approximately 60,000 documents for consideration, including significant amounts of emails
  • interviewed a range of individuals, including customer representatives (financial and legal advisors, at the request of the customers)
  • conducted compulsory examinations
  • reviewed client files from CommInsure, the Financial Ombudsman Service (FOS) and the Superannuation Complaints Tribunal (SCT)
  • obtained external legal advice
  • obtained independent expert medical advice
  • engaged extensively with APRA
  • engaged extensively with CommInsure and its independent reviewers, and
  • liaised with FOS and the SCT and consumer law groups in relation to CommInsure matters to understand the issues faced by consumers.

In October 2016, ASIC released Report 498, Life insurance claims: An industry review.

Wider industry reforms to insurance claims handling

ASIC also conducted an industry wide review of life insurance claims handling with a report in October 2016 (refer: 16-347MR). A range of the concerns ASIC has identified in relation to Comminsure were also identified as industry-wide issues in ASIC’s report, and there are measures being undertaken by ASIC and industry to address these issues, including better public reporting on claims outcomes.

Following ASIC’s industry wide review, the Government agreed in October 2016 with ASIC’s recommendation that the exemption for insurance claims handling under the Corporations Act be reviewed as well as reviewing the penalties available for miscoduct in relation to claims handling and the coverage under Unfair Contracts Terms legislation.

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

How large financial advice firms have dealt with poor advisers

ASIC has today released the findings of its review of how Australia’s largest financial advice firms have dealt with past poor advice and non-compliant advisers, including how these firms have dealt with affected customers.

The review—which forms part of ASIC’s broader Wealth Management Project—was focussed on the conduct of the financial advice arms of AMP, ANZ, CBA, NAB and Westpac. It arose out of serious concerns about past adviser misconduct, and had the broad objective of lifting standards in major financial advice providers.

The review looked at:

  • how the firms identified and dealt with non-compliant conduct by their advisers between 1 January 2009 and 30 June 2015
  • the development and implementation by the firms of large-scale review and remediation frameworks to remediate customers impacted by non-compliant advice, and
  • the processes used to monitor and supervise the firms’ advisers, focussing on background and reference-checking, the adviser audit process and use of data analytics.

ASIC Report 515 Financial advice: Review of how large institutions oversee their advisers (REP 515) covers the key findings of this review and also provides an update on ASIC’s actions against the advisers who have been identified as raising serious compliance concerns, as well as the institutions’ progress in developing review and remediation programs.

As of 31 December 2016, ASIC had banned 26 advisers identified in this review who demonstrated serious compliance concerns, and has ongoing investigations or surveillance activities in relation to many others.

A total of approximately $30 million has been paid to 1,347 customers who suffered loss or detriment as a result of non-compliant conduct by advisers during the period of this review. (This amount is in addition to the compensation being paid by the institutions as part of the ‘fee for no service’ compensation payments set out in Report 499 Financial advice: Fees for no service (REP 499)).

ASIC Deputy Chairman Peter Kell said, ‘ASIC’s report sets out the significant work that has been done by the major financial advice institutions to implement large-scale review and remediation programs to identify and remediate customers impacted by poor advice given in the past. ASIC is working closely with these institutions as they deal with customers who have been affected by the past non-compliant advice. The programs all have third-party oversight and assurance.’

‘ASIC acknowledges the work undertaken by the financial advice institutions to improve their practices, and broader compliance approach, since the period of conduct under review, supported by recent legislative and regulatory reforms.

‘However, there is further work to be done to assist in re-building consumer trust and confidence in the financial advice industry,’ he said.

ASIC identified a number of areas of concern where further improvements need to be made, including:

  • failure to notify ASIC about serious non-compliance concerns regarding adviser conduct
  • significant delays between the institution first becoming aware of the misconduct and reporting it to ASIC
  • inadequate background and reference-checking processes, and
  • inadequate audit processes to assess whether the advice complied with the ‘best interest’ duty and other obligations.

Mr Kell said, ‘Failure or delay in notifying ASIC of suspected serious non-compliant conduct significantly affects our ability to take appropriate enforcement or other regulatory action. More importantly, it may also result in an increased risk of customer detriment as so-called ‘bad apple’ advisers continue to work in the industry.’

‘Strengthening breach reporting requirements will be an important issue in the current review of ASIC’s enforcement powers announced by Government in October 2016,’ he said.

ASIC acknowledged the Australian Bankers’ Association’s recently announced Reference Checking and Information Sharing Protocol. ‘There will be considerable focus on the operation of this protocol, and we encourage the industry to take a rigorous approach to ensure it is effective so that we see rapid improvements in the checking and provision of adviser references,’ said Mr Kell.

ASIC also welcomes the development of data analytics and key risk indicator tools by all of the advice institutions to improve the early identification of potentially non-compliant advice.

ASIC has developed a number of checklists for all advice licensees and compliance consultants to consider when:

  • conducting background and reference checks before appointing a new adviser (refer Appendix 2 of REP 515)
  • auditing  advisers to assess their compliance with the best interests duty and related obligations when providing personal advice (refer Appendix 3 of REP 515), and
  • developing and implementing Key Risk Indicators to identify high-risk advisers (refer Appendix 4 of REP 515).

‘It is critical that customers are able to get financial advice they can trust. ASIC expects internal processes to support core values of putting the customer first and where there are failings, for advice firms to act quickly to provide a response in the interests of their customers. This is a message for both large and small advice firms,’ Mr Kell said.

 

ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017

ASIC briefs O’Dwyer on remuneration review

From Australian Broker.

The Australian Securities and Investments Commission (ASIC) has briefed Financial Services Minister Kelly O’Dwyer about its broker remuneration review, suggesting a shift away from volume-based commissions and soft dollar incentives.

 

As reported by the Australian Financial Review, the regulator also recommended increased disclosure by banks with vertically integrated business models.

ASIC handed the report over to O’Dwyer on Wednesday (15 March).

The regulations are likely to eliminate volume-based incentives from the industry as they have the potential to encourage brokers to write more loans then necessary.

Soft incentives such as sponsorships, overseas trips and prestigious industry events for high end brokers will also be on the chopping block.

Despite these recommendations, AFR said that the ASIC report endorses the core commission-based remuneration system used by brokers.