Australia – ASIC Enforcement Review – Industry Codes In The Financial Sector.

 

17 October, 2017

 

 

The ASIC Enforcement Review Taskforce has made a preliminary recommendation that the financial sector – or parts of it – move from a self-regulatory models (ie industry codes) to a "co-regulatory model".

 

According to the Taskforce's recommendation, which it says hopes "may have the potential to enhance consumer trust and confidence in the sector", a co-regulatory model would involve a combination of self-regulation with a degree of oversight by ASIC. 

 

The Taskforce has expressly declined to call for the content of codes to be incorporated into statute or regulation. Nonetheless, as it is proposed non-compliance with a code would result in customers being entitled to redress, these could significantly impact on those parts of the financial sector subject to them. 

 

On 28 June 2017, the Taskforce released a Position and Consultation Paper on industry codes in the financial sector. The paper seeks to address two issues which the Taskforce says are key:

 

• the benefits of industry codes not being available to many consumers because not all players in relevant industry subsectors subscribe to existing industry codes; and
• industry codes not being required to contain a minimum set of consumer protections and standards of enforceability because there is currently no requirement for ASIC to approve industry codes and they may only be approved upon application. As a result, only one of 11 codes in the financial services industry has received ASIC approval under section 1101A of the Corporations Act.

 

Having considered international practices in the UK, Canada and Hong Kong, the Taskforce's paper rejects calls for financial sector codes to be incorporated into statute or regulation and, instead, proposes that the existing code regime be strengthened by mandatory participation and compulsory ASIC approval.  

 

In effect, for financial sector activities that are specified by ASIC as requiring coverage by an industry code, the proposed regime would introduce a "co-regulatory model" whereby:

 

• the content of, and governance arrangements for, relevant codes would be subject to approval by ASIC. Approved codes would set out base level (rather than "best practice") service standards for industry participants;
• the content of the code would remain a matter for industry to determine (ie self-regulatory), consistent with the broad criteria set by ASIC;
• industry participants that engage in specified activities would be required to subscribe to relevant approved codes;
• approved codes would be binding on, and enforceable against, industry participants by contractual arrangements with an incorporated code body (and, possibly, through contracts with customers);
• in the event of non-compliance with the code, customers would be entitled to seek appropriate redress through the industry participants' internal and external dispute resolution arrangements; 
• the code body would monitor the adequacy of, and industry compliance with, the approved code and report to ASIC periodically on these matters. In addition, industry participants would be required to monitor their ongoing compliance with the code and report periodically to the code body;
• the code body would keep the code under review on an ongoing basis and, if required, adapt it to changing market conditions.

 

As noted in the paper, codes can give rise to enforceable rights in court actions—see for example our article on the Code of Banking Practice as a new source of liability in our October 2016 edition of What's New?. As noted in that article, the status of the Code of Banking Practice in terms of enforceability in the courts has not always been entirely clear, and the current proposals would give such codes more teeth. It therefore remains to be seen just how far, under a co-regulatory model, various codes will introduce further sources of liability for industry participants, but it is an important development to watch.

 

Submissions on the paper closed on Wednesday, 26 July 2017. The Taskforce is expected to provide its recommendations to the Government later this year.

For further information, please contact:

 

Ian Bolster, Partner, Ashurst

ian.bolster@ashurst.com