Breach reporting regime ‘virtually impossible’: AFA

The draft Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 has moved to strengthen the breach reporting regime for licensees, mandating AFSL holders report serious compliance concerns about advisers or other licensees to ASIC on a quarterly basis.

The requirements will come into effect from 1 October.

In a submission to Treasury, the AFA has cautioned the legislation will cause a “substantial increase in the scale and complexity” in self-reporting, with an impact “much greater than was appreciated when the bill was drafted”.

The body has urged the government to consider a deferral for commencing the new regime and to make certain civil penalty provisions exempt from the law.

“Our serious concern with respect to the implications of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, is that it is significantly moving away from the concept of significant breach reporting and that this new regime will involve an exponential increase in the number of breaches that need to be reported and many of these will be of a largely administrative nature,” Phil Anderson, acting chief executive of the AFA, stated in the submission.

“The other key point that commissioner Hayne made in his interim report was the need to review and reduce the complexity of the requirements of the Corporations Act. Unfortunately, the new breach reporting regime represents a substantial increase in the scale of complexity and in our view, this is virtually impossible for a small financial advice licensee to comply with.”

The AFA has talked to its members on the bill, informing Treasury that there are “serious concerns many of them have with the implications”.

A licensee told the AFA that after reporting four breaches in 2020, it expects the new law to escalate its annual figure to 198.

The compliance regime for advice is complex, making minor breaches of an administrative nature common, the submission noted, despite not necessarily to the detriment of the consumer.

Some licensees have been fined for failing to notify ASIC within 30 business days that one of their advisers had passed the FASEA exam, the AFA noted, despite the test not being a mandatory requirement until 1 January 2022.

The number of breaches relating the FASEA exam are only expected to pick up in the coming years.

“It is important to note that licensees will need to carefully review each potential breach and for licensees that lack in-house lawyers or compliance resources, they will need to seek external guidance before deciding to report a breach,” the submission said.

“It is this cost, along with the extra management time and oversight that will be necessary, that will have a very material impact on the cost of financial advice. Ultimately clients will end out paying for this.”

Further, fee disclosure statement breaches, such as late submission to ASIC and not including the amount of each fee clients paid under the ongoing fee arrangement, as well as product disclosure statement breaches, are expected to incur a high number of violations that need to be reported, despite being mostly administrative errors.

“Whilst we support the importance of the Fee Disclosure Statement and renewal processes, we do not believe that individual breaches of these obligations are significant and should not warrant reporting to ASIC,” the submission said.