FAAA warns against repeating breach reporting ‘mistakes’

In April, the Tax Practitioners Board (TPB) released an exposure draft of an information sheet on breach reporting – TPB Information Sheet D53/2024. It said the goal of the information sheet is to “understand the breach reporting obligations” that will apply under sections of the Tax Agent Services Act 2009 from 1 July 2024.

Despite most of the Financial Advice Association Australia’s (FAAA) members being Qualified Tax Relevant Providers and therefore not covered under the TPB breach reporting regime, the association used its submission to point out the issues faced under the Australian Financial Services Licensee reportable situations regime.

“The FAAA, as a professional association representing financial advisers, is very familiar with the Reportable Situations (Breach Reporting) regime that applies in the financial services sector,” it said in its submission.

“We are therefore aware of the challenges that come with defining what is a ‘significant breach’ and ensuring that a regime of this nature is applied consistently across the broader industry.”

The FAAA took aim at the AFSL reportable situations regime and the mistakes made when it was “significantly modified” in 2021 on the back of recommendations in the 2019 royal commission final report.

“These changes added significantly to the complexity of the scheme and the cost of applying it in a business context. These changes also included an obligation to report financial advisers from other licensees, where there were reasonable grounds to conclude misconduct had occurred,” the submission said.

“Those reforms made the mistake of unnecessarily lowering the threshold of what needed to be reported to ASIC, which has significantly increased the volume of reports and the workload for all in operating this regime.

“ASIC have recently expressed concerns about what they consider to be under-reporting. There is evidently inconsistent application of the obligation across the industry, however particularly in comparison between large licensees and some smaller licensees.”

In November 2023, ASIC released its second publication on information lodged under the reportable situations regime, which revealed that 16,000 reports were made between 1 July 2022 and 30 June 2023.

Notably, only 9 per cent of all Australian Financial Services (AFS) licensees and credit licensees lodged a report during this time – a figure the corporate regulator noted was much lower than expected.

This was in addition to 71 per cent of all reports being lodged by just 21 licensees.

“We will be taking stronger measures to achieve enhanced compliance with the regime, including by undertaking a range of surveillance activities and potential enforcement action,” ASIC said in the report.

In its submission to the TPB, the FAAA said it is “critical” that obligations are properly understood, and that “clear guidance” is provided.

“In our view, the TPB can leverage this experience in the financial services sector and ensure that materiality is appropriately applied and cost implications for industry are carefully considered,” it said.

While it noted that the TPB has put significant effort into explaining what a significant breach is, this is still “very complex and confusing”.

“It is likely that many practitioners would need to get legal advice. This is problematic as it will be costly, however it will also increase the risk that people will not report, as it is too confusing and costly,” the FAAA said.