6 February, 2018
The banking industry under the microscope
2017 was another busy year of reform in the banking sector, culminating with the Government's announcement of a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in November.
There has of course been a lot going on outside the Royal Commission. To help navigate these developments and proposed reforms, we:
- examine the developments which took place in 2017 as a result of ASIC's continued focus on the financial advice industry; and
- identify the status of key reform proposals relevant to financial and regulatory investigations and disputes.
Please click on the image to enlarge.
Source: ASIC enforcement statistics for the 12 months to June 2017 from ASIC Enforcement Outcomes: July to December 2016 (REP 513) and ASIC Enforcement Outcomes: January to June 2017 (REP 536)
ASIC's focus on the financial advice industry
2017 saw two important developments in ASIC's focus on the financial advice industry:
- the release of ASIC Report 515 – Financial Advice: Review of how large institutions oversee their advisers; and
- the decisions in the first case brought by ASIC alleging contraventions of the “best interests obligations” introduced as part of the Future of Financial Advice reforms.
ASIC Report 515
Report 515 outlines ASIC's observations from ASIC's Wealth Management Project, a project to review how large financial institutions oversee their financial advisers. It sets out ASIC's expectations around compliance in areas such as breach reporting, adviser file audits, supervision and monitoring through data analytics, background checks, remediation and culture in advice businesses.
There were a number of key messages in the report including the importance of timely breach reporting, the effectiveness of data analytics to help identify high risk advisers and non-compliant advice and the need for clear and transparent communication in any effective remediation program. The report also includes a checklist of the factors for advice licensees and compliance consultants to consider when auditing advisers to determine whether they have demonstrated compliance with the best interests duty and related obligations when providing personal advice.
For more information, see our Financial Services Update of 21 March 2017.
The first Future of Financial Advice case
2017 also saw the conclusion of the first case brought by ASIC against a financial services licensee for alleged breaches of the best interests duty introduced under the Future of Financial Advice reforms.
ASIC brought proceedings against a Melbourne-based financial advice firm alleging contraventions of both the statutory best interests duty (s 961B of the Corporations Act 2001 (Cth)) and the appropriate advice duty (s 961G). The firm held an Australian Financial Services Licence, permitting it to advise retail clients about life insurance and superannuation products through its representatives.
Following joint submissions on liability, which included admissions of contraventions, Moshinsky J made declarations that the firm had contravened s 961K(2) and s 961L of the Corporations Act 2001: Australian Securities and Investments Commission, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345.
Shortly before the penalty hearing commenced, ASIC and NSG reached agreement on the level of penalties and joint submissions were presented in support of the proposed $1m penalty.
Applying the High Court decision in Commonwealth v Director, Fair Work Building Industry Inspectorate[2015] HCA 46 allowing the Court to have regard to an agreed position on civil penalty, Moshinsky J held that he was satisfied that the matters set out in the agreed statement of facts warranted the consequences of the "substantial penalty" of $1m, as the contraventions by NSG were "very serious in nature": Australian Securities and Investment Commission, in the matter of Golden Financial Group Pty Ltd (formerly NSG Services Pty Ltd) v Golden Financial Group Pty Ltd (No 2) [2017] FCA 1267.
As the first civil penalty imposed on a financial services licensee for breaches of the best interests duty, the penalty decision provides some guidance on the attitude of ASIC and the Courts as to what is an appropriate penalty where there have been "serious" contraventions of the best interests and appropriate advice duties. The conduct here was systemic, and included a lack of proper training on FOFA obligations, an organisational emphasis on sales over compliance, and, importantly, a failure to act when issues with financial advice were identified.
For more information, see our Regulatory Update of 8 November 2017 (which looks at the penalty decision) and our June 2017 edition of What's New? (which examined the liability decision).
Status of key reform proposals
The following table provides a snapshot of some key reform proposals relevant to financial and regulatory investigations and disputes.
For further information, please contact:
Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com
