Christmas comes early for ASIC: Unwrapping the gift of the Better Advice Act

This year, for ASIC, Christmas came early when on 28 October 2021, the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Act 2021 (“Better Advice Act”) was assented to.

The Better Advice Act implements a common wish list item from the royal banking commission report and Tax Practitioners Board (TPB) Review, which is to establish a single disciplinary body for financial advisers, and compulsory registration for advisers providing retail client advice. The Better Advice Act also delivers on the federal government’s announcement in late 2020 to wind up FASEA and transfer its functions to the relevant minister.

The centerpiece of this Better Advice Act, however, is the widening of the Financial Services and Credit Panel’s responsibilities and its appointment as the single disciplinary body for financial advisers.

Until now, ASIC, by its own admission,[i] has been under-resourced and lacking precision tools needed to appropriately sanction misconduct. Consequently, it has been limited to its blunt-force instrument of banning orders to the most serious offenders. This has left ASIC to largely focus its attention on licensees and those advisers whose advice or conduct pose a risk to the public.

The upgraded Financial Services and Credit Panel – ASIC’s new toolkit

Who is the Financial Services and Credit Panel?

The Financial Services and Credit Panel (FSCP) already exists, sitting alongside ASIC’s current administrative processes to assist with administrative matters in relation to retail financial services and credit activities. However, on 1 January 2022, when we welcome in the new year, a “super charged” version of the FSCP will emerge, heralding a new disciplinary system for financial advisers.

The FSCP will consist of at least two industry participants, which ASIC will appoint from a list of eligible persons, and be chaired by an ASIC staff member.

What disciplinary tools will the FSCP have?

Once convened, the FSCP will tear open the wrapping on an extensive selection of tools to unleash at its discretion. For instance, administrative action may be taken against an adviser by issuing warnings or reprimands; directions may be handed down to take specific training, supervise, counsel or report; orders can be made suspending or cancelling an adviser’s registration; infringement notices may be issued, and finally, recommendations to ASIC can be made, seeking it to apply to the court for a civil penalty. Additionally, the FSCP will also be able to accept enforceable undertakings from advisers as an alternative to an administrative action.

Before issuing an infringement notice, or taking other administrative action against an adviser, the FSCP will be required to give the financial adviser a notice detailing the relevant circumstances, action it proposes, and the adviser’s right to request a hearing or make a submission to the FSCP.

The selection of the tool for the occasion will depend on the nature and severity of the matter.

What matters will the FSCP have oversight to take disciplinary action against?

There are two types of matters that can be referred to the FSCP; the first are “restricted penalty provisions”, and the second are “specified circumstances”.

Restricted penalty provisions

These matters are “serious enough to warrant financial penalties as a sanction, but are not characterised as a criminal offence”.[ii] Such provisions apply when an adviser has failed to meet education and training standards or additional training standards in the case of tax (financial) advice services, breaches the Code of Ethics, and breaches obligations that apply for provisional advisers and supervisors of provisional advisers. Failure to be duly registered also falls under this category of provisions.

Specified circumstances

Specified circumstances are matters that constitute a contravention of a financial adviser’s obligations under the Act, or relate to the suitability of the adviser to provide personal financial advice. Special circumstances occur when the FSCP “reasonably believes” that the financial adviser has contravened a financial services law or has been involved in another person’s contravention of a financial services law.

Additionally, these include circumstances where the adviser has become insolvent, been convicted of fraud, or the panel “reasonably believes” the financial adviser is not a “fit and proper person” to provide advice.

In determining whether an adviser is fit and proper, the FSCP must take into consideration factors it considers relevant, including (but not limited to) an adviser’s previous banning or disqualifications, refusal to give effect to an AFCA determination, insolvency, being the subject of information given to ASIC or another authority, previous offences the adviser has been convicted of in the last 10 years, being subject to a disciplinary action, or any other factors as prescribed by regulations.

The factors that the FSCP must consider in determining whether an adviser is fit and proper are adapted from the fit and proper test ASIC applies when deciding to grant an AFSL or make a banning order. There is a slight difference to the FSCP’s fit and proper test and ASIC’s test since the FSCP does not have power to take action against financial services licensees, which can also be body corporates, and body corporates have a broader range of obligations under the Act than financial advisers.[iii]

How will the FSCP’s use of tools differ between restricted penalty provisions and special circumstances?

For restricted penalty provisions, the FSCP will have the discretion, if it “reasonably believes” that a financial adviser has contravened a restricted penalty provision, to take administrative action (by use of an “instrument”, discussed below), issue an infringement notice or make a recommendation to ASIC that it seeks a civil penalty from the court.

When a special circumstance exists or has occurred, the FSCP may take administrative action against an adviser.

Instruments

Not to be confused with a legislative instrument, the FSCP, may take administrative action against an adviser by issuing an “instrument”. An instrument gives the FSCP the necessary precision to carefully craft an appropriate action against an adviser for alleged breaches of a restricted penalty provision breach. (Note the emphasis on alleged, as only a court of law can make a finding of contravention). Instruments may give directions to undertake specific training, counselling, supervision, need for reporting to ASIC, or to suspend or prohibit an adviser’s registration.

To make an instrument, the FSCP must give an adviser written notice of its proposed sanction (proposed action notice) and inform the adviser of their right to make a submission, request a hearing, apply to the AAT for a merits review.

If an instrument is in force, an adviser can apply to ASIC to request that the instrument be varied or revoked. ASIC then decides whether to request the FSCP to review the original instrument. This power is likely to be used where there is a change in circumstances on which the instrument was originally made.

The proposed action notice must also state whether the proposed instrument would be disclosed on the Financial Adviser Register (FAR). Unless otherwise granted by the FSCP, the adviser will have 28 days to respond, and a failure to do so may result in the FSCP proceeding with its proposed sanction. Failure by an adviser to comply with an instrument is a contravention of a civil penalty provision, for which ASIC may apply to the court for a civil penalty.

If the FSCP proposes an instrument to reprimand or issue a warning, the adviser does not need to be offered an opportunity to request a hearing or make a submission.

Infringement notices

Another tool at the FSCP’s disposal is the use of infringement notices that it can issue for alleged restricted civil penalty provisions. Infringement notices must detail the alleged contravention, the infringement amount, and give the adviser notice of their right to request a hearing or make a submission. The adviser will have 28 days to reply, unless the FSCP grants otherwise. Infringement notices must be issued no more than 12 months after the alleged contravention occurred.

For a single contravention, the infringement amount is 12 penalty units. If the adviser decides to pay the infringement notice, ASIC must disclose on the FAR the details of the infringement notice, a statement that the adviser has complied, and that compliance with the infringement is not an admission of guilt or liability by the adviser, nor is the adviser regarded as having contravened the provision specified by paying the infringement amount.

Infringement notices are for less serious contraventions that “supplement existing criminal and civil procedures” and to remedy the current enforcement framework by facilitating the imposition of a relatively small financial penalty for relatively minor contraventions of the Act that would be resource-intensive to otherwise be pursued through the courts.[iv]

What will happen at a hearing if the adviser requests one?

If an adviser requests a hearing after receiving a proposed action or infringement notice, they can decide not to appear. The purpose of the hearing is to serve as an inquiry and provide the adviser the opportunity to provide more information, and help the FSCP decide on an appropriate course of action. An adviser who appears at a hearing will need to make an oath or affirmation and can choose to be represented by a lawyer or another person if approved by the FSCP prior.

Once a hearing has taken place, the FSCP may decide to take no action, proceed with its proposed instrument, issue a different instrument, give a warning or reprimand, or use a combination of such tools, such as issuing an infringement notice and providing an instrument to reprimand. The FSCP may also decide to recommend that ASIC seek a civil penalty from the court. If ASIC makes an application to the court and the court finds that the adviser has breached a restricted penalty provision, the court will make a declaration of the contravention and the financial adviser will be required to pay the court’s pecuniary penalty order. ASIC will also include a record of the contravention on the FAR.

In addition to the requirement to hold a hearing when it is requested by an adviser in the above circumstances, the FSCP must also hold a hearing when it is delegated by ASIC to make an banning order under section 920A(1) of the Act or section 90(1) of the National Consumer Credit Protection Act 2009, and the FSCP proposes that a banning order be made against an adviser.

Centralising Financial Adviser Registrations

Aside from the above changes taking place, the Better Advice Act also covers forthcoming registration changes affecting financial advisers and tax (financial) advisers currently registered through the TPB. The aim of the new registration system is “to improve accountability and transparency of the financial services sector”.[v]

The changes to registrations will occur in two steps. The first, commencing no later than 1 January 2023, will require financial services licensees to apply to ASIC to register their representatives and will not be open to provisional financial advisers. From 1 January 2023, it will be an offence to provide personal financial advice while unregistered.

The commencement date for the second stage is yet to be announced and will require advisers to apply to the registrar directly for registration.

What changes will apply to tax (financial) advisers?

“Qualified tax relevant provider” is a new term introduced by the Better Advice Act, defined as a person who is a financial adviser and meets the additional education and training standards for the provision of tax (financial) advice, determined by the minister.

From 1 January 2022, tax (financial) advisers must meet additional educational and training standards to be a qualified tax relevant provider, and the new disciplinary and registration regime, discussed above, will also apply to them.

Farewelling FASEA and 2021

As the year draws to a close, so too does the era of FASEA; and from 1 January 2022, the federal government’s announcement back in December 2020 that FASEA would be wound up, will come to pass. FASEA will transfer its functions to the minister responsible for administering the Act and ASIC Act 2001. The relevant minister will no longer have the power to appoint a standard-setting body, but will be directly responsible for the standard setting including educational standards, principles for the adviser exam and a Code of Ethics. ASIC will play a role in administering the exam in accordance with the principles approved by the minister.

What can financial advisers expect from the Better Advice Act?

Apart from imposing yet another fee on the financial advice industry, the Better Advice Act has the potential to significantly ramp up the number and type of regulatory outcomes against individual advisers.

Provided the FSCP is adequately resourced, more financial advisers are likely to come to the attention of the new disciplinary body where ASIC uncovers evidence of poor advice or poor conduct by financial advisers.

So, when we return from our Christmas holidays to start 2022, we await to see how quickly ASIC puts its new toolkit to use. It will only be a matter of time before we know whether updating ASIC’s blunt tools with more precise instruments will have the desired effect of improving its craft.

[i] See Louise Macaulay’s statements provided to commissioner Kenneth Hayne at the royal banking commission hearing on 27 April 2018.

[ii] Explanatory Memorandum, Financial Sector Reform (Hayne Commission Response – Better Advice) Bill 2021 (EM), p 30, para 1.119.

[iii] EM, p 21, para 1.66.

[iv] EM, p 29, para 1.114.

[v] EM, p 9, para 1.1.

Clarisse Berenger, lawyer at Holley Nethercote Lawyers