‘Excessively broad’: FAAA pushes back on breach reporting regime

According to the Financial Advice Association Australia (FAAA), the current breach reporting regime is “excessively broad and is capturing matters that are not worthy of being self-reported to ASIC or consuming ASIC’s focus and time”.

In August, the Australian Securities and Investments Commission (ASIC) announced a consultation on the proposed extension of three legislative instruments for a further five years.

Among these is ASIC Corporations and Credit (Breach Reporting—Reportable Situations) Instrument 2021/716, which modifies the Corporations Act to exclude “certain forms of non-compliance from being deemed ‘significant’ breaches of core obligations”, about which AFS licensees and credit licensees must lodge breach reports under the Corporations Act.

It also extends the period in which AFS licensees and credit licensees may report certain breaches that relate to an earlier reported breach.

In its submission to the consultation, the FAAA was supportive of the provision to exclude trivial misleading and deceptive conduct, while also noting that the extended period to report a subsequent matter is “appropriate”.

However, the association said that related instruments are “not readily discoverable”, arguing that this legislative instrument “highlights the importance of the reforms to the Corporations Act that have been proposed by the Australian Law Reform Commission (ALRC)”.

In January, the ALRC delivered its final report, Confronting Complexity: Reforming Corporations and Financial Services Legislation, in which it found that the legislation governing Australia’s financial services industry is a tangled mess – difficult to navigate, costly to comply with, and unnecessarily difficult to enforce.

In the report, judges described the current laws as being like “porridge”, “tortuous”, treacherous”, and “labyrinthine”, while others called the legislation “broken”. Complexity in the existing legislation is not an isolated problem – it costs businesses, consumers, investors, and the economy at large, the report noted.

Record-keeping obligations

ASIC also consulted on extending Class Order [CO 14/923] Record-keeping obligations for Australian financial services licensees when giving personal advice, which modifies the Corporations Act to insert a new section 912G that imposes “specific record-keeping requirements when AFS licensees or their representatives (including advice providers) give personal advice to retail clients”.

Responding to this section of the consultation, the FAAA said it is continuing to advocate for “greater regulatory capacity for financial advisers to rely upon their professional judgement, rather than the type of prescriptive record-keeping obligations that are set out in this Class Order”.

“This view is consistent with the values and standards in the Code of Ethics, and has also been reflected in the deliberations with respect to the Quality of Advice Review and the government’s Delivering Better Financial Outcomes (DBFO) reforms,” the submission said.

“The obligations in Class Order 14/923 generate a high amount of activity and effort to comply with, particularly as they relate to 912G(2)(a) and 912G(2)(b). Compliance with these obligations has caused a significant increase in the cost of providing financial advice.”

The association also argued that, given the class order is currently 10 years old, there have been a number of changes within the Corporations Act that impact the usefulness of its provisions, adding that the expected removal of the safe harbour steps in the next tranche of DBFO reforms would also “significantly impact the relevance of this Class Order”.

There are also a number of areas within CO 14/923 that are either confusing or not fit for purpose, the FAAA said, such as the retention of records obligation continuing to apply even if a financial services licensee ceases to operate.

“While professional judgement and the Code of Ethics should be the focus, the pending consultation on the government’s Tranche 2 DBFO reforms offers an opportunity to build certain provisions of the Class Order into obligations in the primary legislation,” the submission said.

“We encourage ASIC to advocate for the appropriate obligations within this Class Order to be subject to a thorough consultation process as part of the DBFO reform agenda. Any necessary and appropriate provisions should be incorporated into the Corporations Act.

“We suggest Class Order [CO 14/923] Record-keeping obligations for Australian financial services licensees when giving personal advice, in its current form, is not a useful part of the legislative framework and should not be extended, other than as a short-term measure in a modified and simplified form.”