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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021



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ISSN 1328-8091

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BILLS DIGEST NO. 5, 2021-22 2 AUGUST 2021

Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 Paula Pyburne Law and Bills Digest Section

Contents

Purpose of the Bill ........................................................... 3

Structure of the Bill ......................................................... 3

Background ..................................................................... 3

Improving standards of licensed financial advisers .... 3 Stakeholder concerns about FASEA .......................... 4

Banking Royal Commission ......................................... 4

Review of the Tax Practitioners Board ........................ 5

Committee consideration ................................................ 6

Senate Standing Committee on Economics ................ 6 Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Policy position of non-government parties/independents...................................................... 6

Position of major interest groups..................................... 7

Financial implications ...................................................... 7

Statement of Compatibility with Human Rights................ 7

Parliamentary Joint Committee on Human Rights ..... 7 Key issues and provisions ................................................ 7

Establishing financial services and credit panels ........ 7 Panel members.......................................................... 7

Stakeholder comments ............................................. 8

Panel meetings .......................................................... 8

Decisions without meetings ...................................... 8

Panel hearings ........................................................... 9

Strict liability offences ............................................. 10

Scrutiny of Bills Committee ..................................... 10

FSCP decisions ........................................................... 11

Powers with respect to a relevant provider ........... 11

Date introduced: 24 June 2021

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Parts 1 and 2 of Schedule 1 on 1 January 2022; Part 3 of Schedule 1 at the same time as item 1150 of Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020; Schedule 2 on the earlier of a day to be fixed by Proclamation or four years after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at August 2021.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 2

Matters for an FSCP ................................................. 11

Other administrative actions by an FSCP ................ 11 Scrutiny of Bills Committee ..................................... 12

Varying or revoking an instrument ......................... 13

Warnings and reprimands ......................................... 13

Fit and proper person test ...................................... 14

Minister takes on the functions of FASEA ................. 14 Other matters .......................................................... 15

Scrutiny of Bills Committee ..................................... 15

Stakeholder comments ........................................... 15

Authorisation to provide personal advice................. 16 Application for registration of providers .................. 16 Registration by ASIC ................................................ 17

Stakeholder comments ........................................... 17

Regulation of tax (financial) advisers ........................ 17

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 3

Purpose of the Bill The purpose of the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 (the Bill) is to establish a new disciplinary system for financial advisers.

Structure of the Bill The Bill comprises two Schedules.

Schedule 1 has three Parts:

• Part 1 contains the main amendments which are to be made to the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Corporations Act 2001

• Part 2 contains additional amendments to the Freedom of Information Act 1982 (FOI Act), the National Consumer Credit Protection Act 2009 (Consumer Credit Act) and the Tax Agent Services Act 2009 (TAS) and

• Part 3 contains contingent amendments to the Corporations Act.

Schedule 2 contains those amendments to the Corporations Act which will commence within the next four years.

Background

Improving standards of licensed financial advisers In 2017, the Federal Government enacted the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (2017 Act), the purpose of which was to set the education, training and ethical standards of licensed financial advisers in Australia.1 It was a response to earlier inquiries and reports which recommended changes to improve different aspects of the professional, ethical and education standards in the financial services industry.2

The 2017 Act inserted subsection 921X(1) into the Corporations Act to empower the Minister to declare that a body corporate is the standards body. Accordingly, under the Corporations (Standards Body) Declaration 2017 the Financial Adviser Standards and Ethics Authority Ltd (FASEA) was declared to be the relevant standards body.

Currently, section 921U of the Corporations Act requires the standards body to make determinations by legislative instrument about approved educational qualifications, approved exams to be undertaken and requirements for professional development3 and to make a code of ethics by legislative instrument.4 The Code of Ethics applied from 1 January 2020.5 In addition, the standards body is empowered to approve or refuse to approve foreign qualifications.6

1. For information about the originating Bill see: P Pyburne, Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016, Bills digest, 58, 2016-17, Parliamentary Library, Canberra, 2017. 2. For instance, see the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS), Inquiry into proposals to lift the professional, ethical and education standards in the financial services industry, PJCCFS, Canberra, December 2014,

Recommendation 5, pp. 29-30; and Senate Economics References Committee, Agribusiness managed investment schemes: bitter harvest, The Senate, Canberra, March 2016. 3. Corporations Act, subsection 921U(2). 4. Corporations Act, paragraph 921U(2)(b). The Financial Planners and Advisers Code of Ethics 2019 was registered on the Federal Register of Legislation on 11 February 2019 and commenced 30 days after that date. 5. Financial Adviser Standards and Ethics Authority (FASEA), Code of Ethics standard commences 1 January 2020, FASEA website. 6. Corporations Act, subsection 921V.

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Stakeholder concerns about FASEA However, commencement of the Code of Ethics was met with some concern by financial advisers that it would ‘smash the business models of some firms’.7 In response to those views, Stephen Glenfield, Chief Executive of FASEA is reported to have said:

It’s a code about lifting standards, ethical behaviour and professionalism. It’s asking advisers to put the interests of the clients first at all times, which is the hallmark of any profession. It doesn’t ban specific products or forms of remuneration such as commissions, but it will challenge advisers to act in the best interests of the client and provide value.8

There were also concerns about the time limit for existing financial advisers to meet the qualification and examination requirements set by FASEA.9 The Government subsequently approved an extension of time so that existing advisers must complete the FASEA exam by 1 January 2022 (one additional year) and meet FASEA's qualification requirements by 1 January 2026 (two additional years).10

However, in December 2020, the Government announced that it would be ‘expanding the operation of the Financial Services and Credit Panel (FSCP) within the Australian Securities and Investment Commission (ASIC)’ to function as ‘a single, central disciplinary body’ for financial advisers. This would ‘leverage its extensive expertise and existing governance structures, avoiding the need to establish a new body to perform this role’.11 In addition the Government announced that it would:

… move the standard-making functions of the Financial Adviser Standards and Ethics Authority (FASEA) to Treasury, with the standards to be set by legislative instrument. Remaining elements of FASEA’s role, including administering the adviser examination, will be incorporated into the FSCP’s expanded mandate. These reforms will further streamline the number of bodies involved in the oversight of financial advisers, resulting in FASEA being wound up.12 [emphasis added]

Banking Royal Commission The Bill responds to Recommendation 2.10 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) which commenced in December 2017.13 The final report by Commissioner Hayne recommended, amongst other things, that the law should be amended to establish a new disciplinary system for financial advisers that:

• requires all financial advisers who provide personal financial advice to retail clients to be registered

• provides for a single, central, disciplinary body

7. J Kehoe and A Vickovich, ‘New ethics code faces adviser backlash’, AFR Weekend, 4 January 2020, p. 3. 8. Ibid.

9. Explanatory Memorandum, Treasury Laws Amendment (2019 Measures No. 3) Bill 2019, p. 11 states: ‘Until September 2019, the approved exam was only available in capital cities. Accordingly, the timeframe for completing the exam will be extended to ensure that all existing advisers, including rural and regional advisers, will have at least two years to sit the exam’.

10. J Hume (Assistant Minister for Superannuation, Financial Services and Financial Technology), FASEA extension Bill passes Parliament, media release, 17 June 2020. Relevant legislative amendments were contained in Schedule 2 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020.

11. J Frydenberg (Treasurer) and J Hume (Assistant Minister for Superannuation, Financial Services and Financial Technology), Strengthening and streamlining oversight of the financial advice sector, joint media release, 9 December 2020, p. 2. 12. Ibid.; see also: A Vickovich and J Kehoe, ‘Financial adviser ethics watchdog to be put down’, Australian Financial Review, 11 December 2020, p. 9. 13. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Letters Patent,

14 December 2017.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 5

• requires Australian Financial Services License (AFSL) holders to report ‘serious compliance concerns’ to the disciplinary body and

• allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.14

Commissioner Hayne provided the rationale for the recommendation stating:

A single, central disciplinary body for financial advisers is important because it will ensure that appropriate disciplinary consequences are imposed where a licensee fails to impose them, and that the disciplinary consequences imposed on a financial adviser can extend beyond the adviser’s employment with or appointment by a particular licensee.

ASIC currently has the power to make banning orders, which extend beyond an adviser’s relationship with a particular licensee. But there are several reasons why I do not consider it appropriate to continue to rely on ASIC’s existing powers as the sole means by which to impose disciplinary consequences that extend beyond a particular licensee.

First, a banning order will not be an appropriate response every time a financial adviser fails to adhere to the standards expected of him or her. There is an important role for less serious sanctions in demonstrating that particular conduct is unacceptable and encouraging or requiring individuals to change their behaviour …

Second, because a banning order is a serious sanction, and because ASIC has limited resources, ASIC tends to direct its investigation and enforcement activities to the most obviously serious cases … A body dedicated to the investigation of matters concerning individual advisers could be expected to consider a broader range of cases than ASIC currently does.

Third … the process involved in making a banning order is time-consuming … the body should have available to it a range of sanctions varying in severity, the most serious of which must be the cancellation of the registration of a financial adviser.15 [emphasis added]

Review of the Tax Practitioners Board The amendments in the Bill also respond to recommendations made in the Independent Review of Tax Practitioners Board (the Review) which was tasked to ensure that tax agent services are provided to the public in accordance with appropriate standards of professional and ethical conduct.16

The final report of the Review (Review report) made 28 recommendations.17 Relevant to this Bills Digest, recommendation 7.1 states:

… in alignment with implementing Recommendation 2.10 of the Final Report of the Financial Services Royal Commission, a new model be developed for regulating tax (financial) advisers in consultation with ASIC, FASEA, the TPB [Tax Practitioners Board] and Treasury. This new model should incorporate the following features:

(a) single point of registration for individuals

(b) requirement to abide by only the one code of conduct and

14. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, (Banking Royal Commission), Final report, v. 1, Banking Royal Commission, Canberra, 2019, recommendation 2.10, p. 28. 15. Ibid., pp. 215-216. 16. Treasury, Review of the Tax Practitioners Board—terms of reference, Treasury website, 2019. 17. Treasury, Independent Review of the Tax Practitioners Board, Final report, Treasury, Canberra, 31 October 2019.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 6

(c) any disciplinary action involving the provision of tax advice is decided by experts from the tax profession.

Until the new model is developed the status quo should be retained.18 [emphasis added]

The Bill implements these recommendations by establishing a single disciplinary body thereby reducing ‘regulatory overlap’.19

Committee consideration

Senate Standing Committee on Economics The Bill has been referred to the Senate Standing Committee on Economics (the Economics Committee) for inquiry and report by 28 July 2021.20 That time was extended to 30 July 2021. The Economics Committee received 16 submissions.

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) raised the following concerns in relation to the drafting of the Bill:

• the presence of strict liability offences21

• the reversal of the evidential burden of proof22

• that significant matters are to be set out in delegated legislation—rather than in the primary statute23 and

• the inclusion of a ‘no-invalidity clause’.24

Each of these is discussed in detail under the heading ‘Key issues and provisions’ below.

Policy position of non-government parties/independents At the time of writing this Bills Digest, there have been no comments in relation to the Bill by non-government parties or independent Members and Senators.

18. Ibid., p. 14. 19. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 10. 20. The terms of reference for the inquiry, submissions to the Economics Committee and the Committee’s final report (when published) are available on the inquiry homepage.

21. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2021, 13 July 2021, p. 6. 22. Ibid., p. 7. 23. Ibid., p. 9. 24. Ibid., p. 10. A legislative provision that provides that an act done or decision made in breach of a particular statutory

requirement or other administrative law norm does not result in the invalidity of that act or decision, may be described as a 'no-invalidity' clause.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 7

Position of major interest groups Stakeholders were generally supportive of the Bill—in particular, the establishment of a single disciplinary body.25 In addition stakeholders welcomed the winding up of FASEA26—with some reiterating their earlier concerns about the manner in which FASEA had undertaken its role.27

Individual comments are canvassed below under the heading ‘Key issues and provisions’.

Financial implications According to the Explanatory Memorandum:

Funding for this measure was provided to the Department of Treasury in the 2021-22 Budget. This included $2.5 million in 2021-22 to fund the ongoing operational costs of FASEA and its wind-up costs after its industry funding agreement ceases on 30 June 2021.28

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.29

Parliamentary Joint Committee on Human Rights At the time of writing this Bills Digest the Parliamentary Joint Committee on Human Rights had not made any comment in relation to the Bill.

Key issues and provisions

Establishing financial services and credit panels Item 12 in Part 1 of Schedule 1 to the Bill inserts proposed Part 9—Financial Services and Credit Panels into the ASIC Act. This will be the single disciplinary body for financial advisers.

Panel members Under proposed Part 9:

• the Minister may make a written determination setting out persons who are eligible to be appointed to FSCPs—in particular the Minister must be satisfied that the relevant persons have experience or knowledge in at least one of the following fields: business, administration of companies, financial markets, financial products and financial services, law, economics, accounting, taxation and /or credit activities and credit services30

25. See, for instance, Maurice Blackburn Lawyers, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 2], 7 July 2021, p. 1; Institute of Public Accountants, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 6], 9 July 2021, p. 3.

26. See, for instance, SMSF Association, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 7], 7 July 2021, p. 2. 27. See, for instance, Stockbrokers and Financial Advisers Association, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions],

[Submission No. 1], 6 July 2021, p. 1. 28. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 8. 29. The Statement of Compatibility with Human Rights can be found at pages 79-88 of the Explanatory Memorandum to the Bill. 30. ASIC Act, proposed subsections 141(1) and 141(2).

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 8

• it is for ASIC to appoint members to the FSCP in writing.31 If a determination by the Minister as laid out above is in effect, the person appointed to the FSCP must be specified in that determination32

• FSCPs comprise a Chair and at least two other members. Importantly, the Chair must be a staff member of ASIC33 and

• panel members are to be paid allowances in accordance with a determination made under the Remuneration Tribunal Act 1973. In the absence of such a determination, the Minister may prescribe allowances by legislative instrument.34

Stakeholder comments There is disquiet among some stakeholders that the FSCP does not comprise at least ‘one consumer voice’. For instance, Maurice Blackburn Lawyers considers that ‘it would be difficult for consumers (including victims of poor corporate behaviours) to have confidence in a system where their voice is not embedded in the decision making process’.35 Super Consumers Australia echoes that sentiment.36

On the other hand, Benjamin Marshan of the Financial Planning Association of Australia told the Economics Committee during public hearings about the Bill:

… we’re reasonably comfortable with the proposed panel make-up that is drafted in the legislation. We have always been of a view that the profession and the peers of the profession should sit in judgement over the conduct of their peers, and we think the make-up of the panels makes sense to provide that professional framework for considering whether or not you have upheld the standards of the profession and whether or not you’ve complied with the laws and regulations of that profession.37

Panel meetings The Bill contains the rules for FSCP meetings including that the Chair must preside at all meeting,38 the number of members constituting a quorum39 and voting.40 In particular, questions are to be determined by a majority of the votes of the members of the panel who are present and voting.41 The Chair of the panel has a deliberative vote and, if the votes are equal, a casting vote.42 In addition, the Chair is entitled to hold all or part of a meeting using technology that allows a person to participate in a meeting without being physically present.43

Decisions without meetings The Bill empowers the FSCP to make decisions without meetings. Essentially, the FSCP is deemed to have made a decision at a meeting in the following circumstances:

31. ASIC is also empowered to terminate the appointment of a panel member at any time. Corporations Act, proposed section 145. 32. ASIC Act, proposed subsections 140(1) and (2). 33. ASIC Act, proposed subsections 139(3) and (4). 34. ASIC Act, proposed section 143. 35. Maurice Blackburn Lawyers, Submission to the Senate Standing Committee on Economics, op. cit., p. 2. 36. Super Consumers Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector

Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 8], n.d., p. 3. 37. B Marshan (Head of Policy, Strategy and Innovation, Financial Planning Association of Australia), Evidence to the Economics Legislation Committee, Inquiry in the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021,

Proof committee Hansard, 16 July 2021, p. 20. 38. ASIC Act, proposed section 149. 39. ASIC Act, proposed section 151. 40. ASIC Act, proposed section 152. 41. ASIC Act, proposed subsection 152(1). 42. ASIC Act, proposed subsection 152(2). 43. ASIC Act, proposed section 153.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 9

• the Chair of the panel informs the other members of the panel of the proposed decision, or makes reasonable efforts to do so

• a majority of the members of the panel who are entitled to vote on the proposed decision indicate agreement with the decision and

• the panel has earlier determined that it may make decisions of that kind without meeting and has determined the way in which members are to indicate agreement with proposed decisions.44

Panel hearings Under the Bill the FSCP must hold a hearing if it proposes to make a decision about imposing a banning order (if ASIC has delegated that power to the FSCP)45 in respect of a person and the person requests that the panel hold a hearing.46

The FSCP may hold a hearing if ASIC so requests in relation to a decision to vary or withdraw an undertaking47 or a decision to vary or revoke instruments affecting relevant providers.48

The Bill requires that a hearing of the FSCP be conducted with as little formality and technicality and as much expedition as a proper consideration of the matter permits. Whilst the FSCP is not bound by the rules of evidence, it must, nevertheless observe the rules of natural justice.49 As with panel meetings, the FSCP may conduct all or part of a hearing using technology that allows each person to participate in the hearing without being physically present.50

The FSCP must notify an affected person of the time and date of a hearing, where it will take place and, if technology may be used, the nature of the technology.51 A person does not need to appear at a hearing of the FSCP and may, instead, lodge a written submission of the matters which he or she wishes the panel to take into account.52

Whilst the person about whom the decision is to be made (the affected person) is not required to attend, the Chair of the FSCP at, or prior to a hearing, may by written summons given to a person (other than the affected person) require that person to appear to give evidence, to produce specified documents, or to do both, and may also require the person to attend from day to day unless excused. In that case, the FSCP may take evidence on oath or affirmation that the evidence the person will give will be true.53 According to the Explanatory Memorandum to the Bill this ‘ensures that the panel is able to obtain access to all of the information it needs to make its decision, without displacing the privilege against self-incrimination’.54

44. ASIC Act, proposed subsections 156(1) and (2). 45. Note that item 34 in Part 1 of Schedule 1 to the Bill repeals and replaces subsection 920A(3) of the Corporations Act to make clear that ASIC retains the power to make a banning order in certain circumstances. 46. ASIC Act, proposed subsection 157(2). 47. The power for ASIC to make this request is contained in proposed paragraph 171E(3)(a) of the ASIC Act. 48. The power for ASIC to make this request is contained in proposed subsection 921N(2) and proposed paragraph 921N(4)(a) of

the Corporations Act which are inserted by item 49 in Part 1 of Schedule 1 to the Bill. 49. ASIC Act, proposed subsections 159(1) and (2). Natural justice is characterised by: (i) the principle that a decision maker must afford a person whose interests will be adversely affects by a decision an opportunity to present his, or her, case; (ii) the

principle that a decision maker must not have an interest in the matter to be decided, or bring to the matter a prejudiced mind; and (iii) the principle that an administrator’s decision must be based on logically probative evidence. Source: Salemi v Mackellar (No. 2) [1977] HCA 26. 50. ASIC Act, proposed subsections 159(3) and (4). 51. ASIC Act, proposed section 160. 52. ASIC Act, proposed section 162. 53. ASIC Act, proposed section 165. 54. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 34.

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Strict liability offences The Bill creates a suite of criminal offences relating to the operation of FSCPs.55 Specifically a person commits an offence:

• if the person does an act or omits to do an act which results in the obstruction or hindering of the FSCP or a member of the FSCP in the performance or exercise of any of the panel’s functions and powers56

• if the person does an act or omits to do an act which results in the disruption of a hearing57 and

• if the person gives evidence at a hearing of the FSCP which is false or misleading. In that case, it is a defence that the person reasonably believed that the evidence was true and not misleading when it was given.58

The maximum penalty for each of those offences is two years’ imprisonment.

The Bill also contains offences of strict liability59 where:

• a person fails to comply with a requirement of a summons

• a person fails to comply with a requirement to make an oath or affirmation and

• a person fails to comply with a requirement to answer a question or produce a document.60

In each of those cases the maximum penalty is 50 penalty units.61

An additional offence of strict liability arises if a person publishes evidence given before the FSCP where there is a direction restricting the publication of that evidence. The maximum penalty for the offence is 120 penalty units.62

Scrutiny of Bills Committee The Scrutiny of Bills Committee expressed concern at the inclusion of strict liability offences in the Bill on the grounds that, in the absence of a requirement for the prosecution to prove fault, the offence will be made out if it can be proven that the defendant engaged in the impugned conduct.63 Its particular concern arose in relation to the offence arising if a person publishes evidence given before the FSCP where there is a direction restricting the publication of that evidence.64

The Committee noted that the Explanatory Memorandum set out the rationale for the offence but did not consider that the explanation provided an adequate justification for the amount of the penalty.65 That being the case, the Scrutiny of Bills Committee drew the attention of Senators to its concerns.66

55. ASIC Act, proposed sections 168-171A. 56. ASIC Act, proposed subsection 168(1). 57. ASIC Act, proposed subsection 168(2). 58. ASIC Act, proposed section 169. 59. The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise

honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. 60. ASIC Act, proposed section 170. 61. The value of a penalty unit is currently $222: section 4AA of the Crimes Act 1914 and Notice of Indexation of the Penalty Unit Amount. This means that the maximum penalty is equivalent to $11,100. 62. ASIC Act, proposed section 171A. The maximum penalty is equivalent to $26,640. 63. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2021, op. cit., p. 6. 64. Ibid.

65. Ibid., p. 7. 66. Ibid.

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FSCP decisions

Powers with respect to a relevant provider Item 49 in Part 1 of Schedule 1 to the Bill repeals and replaces Division 8B of Part 7.6 of the Corporations Act. Proposed Division 8B outlines the power of the FSCP to take action against a relevant provider.67 A relevant provider is an individual who is authorised to provide personal advice to retail clients in relation to relevant financial products, either as the holder of an Australian financial services licence, or on behalf of the licensee being:

• a financial services licensee

• an authorised representative of a financial services licensee or

• an employee or director of a financial services licensee, or a body corporate related to the financial services licensee.68

According to the Explanatory Memorandum to the Bill an FSCP:

… does not have the power to take action against financial services licensees and authorised representatives that are not financial advisers. Disciplinary action against these entities will continue to be administered by ASIC, using ASIC’s existing powers under the ASIC Act and the Corporations Act, which includes the power to cancel or suspend a licence, or to commence criminal or civil proceedings.69

Matters for an FSCP The Bill identifies a number of restricted civil penalty provisions. An FSCP may issue an infringement notice,70 take other administrative action or recommend to ASIC that it seek a civil penalty for a contravention71 of those provisions being:

• education and training standards72

• additional education and training standards for the provision of tax (financial) advice services73

• the Code of Ethics74

• the obligations of a provisional financial adviser, or the supervisor of a provisional financial adviser75 and

• the requirement to be registered to provide financial advice.76

Other administrative actions by an FSCP Within Division 8B, proposed section 921K of the Corporations Act empowers the FSCP to make an instrument in relation to a provider in the following listed circumstances:

• the financial adviser becomes insolvent

• the financial adviser is convicted of fraud

67. Item 4 in Part 1 of Schedule 1 to the Bill inserts the definition of relevant provider into subsection 5(1) of the ASIC Act. It has the same meaning as in Part 7.6 of the Corporations Act. 68. Corporations Act, section 910A. 69. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 18. 70. Corporations Act, proposed subsection 1317DAM(1A) inserted by item 77 in Part 1 of Schedule 1 to the Bill; and proposed

sections 1317DATA-1317DATC inserted by item 86 in Part 1 of Schedule 1 to the Bill. 71. Corporations Act, proposed section 921Q. 72. Corporations Act, proposed section 921BA. 73. Corporations Act, proposed section 921BB. 74. Corporations Act, proposed section 921E. 75. Corporations Act, proposed subsection 921F(8) inserted by item 47 in Part 1 of Schedule 1 to the Bill. 76. Corporations Act, proposed section 921Y.

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• an FSCP reasonably believes that the financial adviser is not a fit and proper person to provide financial advice

• an FSCP panel 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

• the financial adviser has at least twice been linked to a failure or refusal to give effect to a determination made by the Australian Financial Complaints Authority (ACFA) or

• the financial adviser has been an officer of two or more corporations that have been unable to pay their debts.

The decision to make an instrument is reviewable by the Administrative Appeals Tribunal (AAT) in accordance with the Administrative Appeals Tribunal Act 1975.77 The kinds of written instrument are:

• a direction that a relevant provider undertake specified training, receive specified counselling or supervision or report specified matters to ASIC

• a registration suspension order suspending the relevant provider’s registration for a period specified in the order or

• a registration prohibition order cancelling the registration of a relevant provider at a time set out in the order and providing that the relevant provider is not to be registered until after the prohibition end day also specified in the order.78

The power to make an instrument is qualified. The FSCP must not make an instrument unless either of the following has occurred:

• it gave the relevant provider a proposed action notice79 detailing the instrument to be made and the circumstances giving rise to it and either no submission or request for a hearing was made by the provider; or a submission or request for a hearing was made within the response period set out in the notice and the FSCP has taken the submission into account or held the hearing80 or

• it gave the relevant provider a proposed action notice in relation to a different instrument or an infringement notice in relation to the same circumstances; a submission or request for a hearing was made and the panel has taken into account the submission or held the hearing.81

Such an instrument comes into force when a copy of it is given to the relevant provider along with a statement of reasons in accordance with the requirements of proposed section 921M of the Corporations Act. However, a failure to comply with those requirements does not affect the validity of the instrument.82

Scrutiny of Bills Committee According to the Scrutiny of Bills Committee:

A legislative provision that provides that an act done or decision made in breach of a particular statutory requirement or other administrative law norm does not result in the invalidity of that act or decision, may be described as a ‘no-invalidity’ clause. There are significant scrutiny concerns with no-invalidity clauses, as these clauses may limit the practical efficacy of judicial review to provide a remedy for legal errors. For example, as the conclusion that a decision is not invalid means that the decision-maker had the power (for instance, jurisdiction) to make it, review of the decision on the grounds of jurisdictional

77. Corporations Act, proposed paragraph 921V(1)(a). 78. Corporations Act, proposed section 921L. 79. Corporations Act, proposed section 921P sets out the information which must be contained in a proposed action notice. 80. Corporations Act, proposed paragraph 921K(2)(a). 81. Corporations Act, proposed paragraph 921K(2)(b). 82. Corporations Act, proposed subsection 921M(3).

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 13

error is unlikely to be available. The result is that some of judicial review's standard remedies will not be available.83

Proposed subsection 921M(3) is such a clause. The Committee noted that the Explanatory Memorandum ‘does not contain a justification for the inclusion of a no-invalidity clause’ and has asked the Minister to provide ‘advice as to why it is considered necessary and appropriate’ in this instance.84

Varying or revoking an instrument Where such an instrument as set out above is in effect ASIC may, on its own initiative, request the FSCP to make a decision to vary or revoke the instrument.85

In the alternative, the relevant provider may apply to ASIC for an instrument to be revoked or that a specified variation be made.86 The options available to ASIC having received the application are to request the FSCP to make a decision to vary or revoke the instrument or to decide not to make such a request.87

Where ASIC makes the request, the FSCP must decide whether to revoke the relevant instrument or to vary the instrument in the manner requested or in some other way.88 In that case, the FSCP must provide written notice of its decision and a statement of reasons for that decision to the relevant provider (and to the licensee if any) as well as to ASIC. Where the FSCP makes a decision to refuse to vary or revoke the instrument, notice needs only to be given to the relevant provider.89

Warnings and reprimands Under the Bill, either ASIC or the FSCP may give a written warning or reprimand to a relevant provider. These are new sanctions for financial advisers who have breached their obligations under the Corporations Act.

Proposed section 921S of the Corporations Act requires ASIC to give a relevant provider a written warning or reprimand where ASIC reasonably believes that one or more of the following circumstances exists:

• the relevant provider is not a fit and proper person90 to provide personal advice to retail clients in relation to relevant financial products—the relevant test being set out in proposed section 921U (discussed below) but subject to the spent convictions scheme outlined in Part VIIC of the Crimes Act 1914

• the relevant provider has contravened a financial services law or

• a circumstance set out in proposed paragraphs 921K(1)(a), (b), (e), (f) or (g) (being matters about which the FSCP may make an instrument).

83. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2021, op. cit., p. 10. 84. Ibid. 85. Corporations Act, proposed subsection 921N(2). 86. Corporations Act, proposed subsection 921N(3). 87. Corporations Act, proposed subsection 921N(4). 88. Corporations Act, proposed paragraphs 921N(5)(a)-(c) and 921N(6)(a). 89. Corporations Act, proposed paragraphs 921N(5)(c), (d) and (e) and 921N(6)(b). Proposed paragraph 921V(1)(b) provides that

these decisions are reviewable by the AAT. 90. Corporations Act, section 913BB sets out the matters to which ASIC must have regard in determining whether a person is a fit and proper person for the purposes of deciding whether to make a banning order under section 920A. It is a slightly different

test than the one outlined in the Bill.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 14

In addition to having the reasonable belief as set out above, the giving of a written warning or reprimand occurs where ASIC has not convened an FSCP in relation to the relevant circumstance and has not exercised or proposed to exercise its powers under the corporations legislation against the relevant provider.91 Such a sanction is considered to be ‘administrative’ in nature.92

Proposed section 921T of the Corporations Act empowers an FSCP to give a relevant provider a written warning or reprimand in similar circumstances.93

Fit and proper person test The fit and proper person test requires regard to be had to any relevant matter, including (but not limited to) whether the financial adviser has ever been:

• subject to a suspension or a cancellation of their Australian Financial Services Licence or their Australian credit licence

• banned or disqualified under the Corporations Act or the Consumer Credit Act or under other relevant state and territory legislation

• linked to a refusal or failure to give effect to a determination made by the Australian Financial Complaints Authority (AFCA)

• an insolvent under administration

• the subject of information given to ASIC, or an authority of a state or territory

• convicted of an offence in the last ten years

• the subject of disciplinary action by a FSCP in the last ten years or

• other matters prescribed by Regulations (if any).94

Minister takes on the functions of FASEA Once FASEA is wound up on 1 January 2022, its functions will be transferred to the Minister. Item 42 in Part 1 of Schedule 1 to the Bill inserts proposed subsection 921B(6) into the Corporations Act so that the Minister is empowered to:

• approve bachelor or higher degrees, or equivalent qualifications

• approve principles for the conduct of an exam

• set requirements for work and training and

• set requirements for continuing professional development for a relevant year.

The Bill inserts similar education and training requirements to be met by tax (financial) advice services.95 According to the Explanatory Memorandum:

From 1 January 2022, financial advisers who meet the additional education and training requirements to provide tax (financial) advice services may do so without being registered under the Tax Agent Services Act 2009.96

91. Corporations Act, proposed paragraphs 921S(1)(b)-(c). Proposed section 921T of the Corporations Act empowers the FSCP to issue a written warning or reprimand in near equivalent terms. 92. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 32. 93. Corporations Act, proposed paragraph 921V(1)(c) provides that the decision is reviewable by the AAT. 94. Corporations Act, proposed section 921U. 95. Corporations Act, proposed section 921BA, inserted by item 43 in Part 1 of Schedule 1 to the Bill. 96. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 13.

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 15

Other matters Item 45 in Part 1 of Schedule 1 to the Bill repeals and replaces section 921E of the Corporations Act and item 49 repeals Division 8C of Part 7.6 (including paragraph 921U(2)(b)) so that it is the Minister who makes the Code of Ethics rather than FASEA. A relevant provider must comply with the Code of Ethics. Under the Bill, the Code of Ethics that was made and in force immediately before 1 January 2022 continues in force.97 Item 48 inserts proposed section 921G into the Corporations Act empowering the Minister to approve foreign qualifications.

Matters relating to tax (financial) advice services are discussed under that heading below.

Scrutiny of Bills Committee The Scrutiny of Bills Committee was concerned that proposed section 921E ‘provides the Minister with a broad discretionary power to mandate a Code of Ethics in circumstances where there is no guidance on the face of the bill as to how the power should be exercised’.98 The Committee stated:

Additionally, the Committee’s consistent scrutiny view is that significant matters, such as the contents of an enforceable Code of Ethics, should be contained in primary legislation unless a sound justification for the use of delegated legislation is provided. In this instance the explanatory memorandum contains no justification as to why there is no detail regarding the matters to be included in the Code of Ethics on the face of the primary legislation.99

The Committee has requested the Minister’s advice in relation to its concerns.100

Stakeholder comments Stakeholders have expressed the view that the winding down of FASEA is a good thing. In its evidence to the Economics Committee during public hearings, the spokesperson for the Stockbrokers and Financial Advisers Association, Judith Fox, was critical of some aspects of FASEA’s performance stating:

There was absolutely no-one on that board with any expertise or understanding of stockbroking and investment advice.

… all of the educational requirements are suitable for financial planning. We support those qualifications for financial planners, but they’re completely unsuitable for our industry. The exam, also, was geared towards financial planning, and so that was quite a challenge for people who were working in stockbroking and investment advice. They were being asked questions on insurance, aged care and Centrelink. Stockbrokers and investment advisers do not deal with those matters.

We just felt that it was a board that really didn't understand our industry …101

Similarly, spokesperson for the Association of Financial Advisers Ltd, Philip Anderson stated:

We support the winding down of FASEA at the end of 2021 and the transfer of existing responsibilities to the Minister and ASIC. There is more work for FASEA to do over the remainder of 2021, including the ongoing administration of the exam and the review of the FASEA code of ethics. It is our view that there is still room for sensible changes to some of the FASEA standards, including better recognition of prior

97. Corporations Act, proposed section 1684P inserted by item 98 in Part 1 of Schedule 1 to the Bill. 98. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 10, 2021, op. cit., p. 9. 99. Ibid. 100. Ibid. 101. J Fox (CEO, Stockbrokers and Financial Advisers Association), Evidence to the Economics Legislation Committee, Inquiry in the

Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, Proof committee Hansard, 16 July 2021, p. 2.

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study, as expressed in the 2017 professional standards explanatory memorandum, and an increase in technical and reduction in ethics hours that are required under the CPD [continuing professional development] standard.102

Importantly, the transitional provisions in relation to education and training standards operate so that an instrument that was made before 1 January 2022 which was in force before that day remains in force on and after that day.103

Authorisation to provide personal advice Item 44 of Part 1 in Schedule 1 to the Bill repeals existing sections 921C and 921D and inserts proposed section 921C which operates so that ASIC must not grant a license to provide financial advice to a person who has not:

• completed an approved degree or equivalent qualification

• passed the financial adviser exam

• undertaken at least one year of work and training in accordance with the requirements prescribed by the Minister and

• completed the additional education and training standards (if any) for the provision of tax (financial) advice services—if the licence is intended to cover the provision of tax (financial) advice services.104

Further, the holder of an AFSL must not authorise a person to provide personal advice to clients on the licensee’s behalf if any of the following apply:

• the person has not met the education and training standards and passed the exam

• the person has not undertaken at least one of year work and training (professional year) and

• if the person is to provide tax (financial) advice services the person has not satisfied the requirements for tax (financial) advices services outlined above.105

Application for registration of providers A relevant provider must not provide personal advice unless the provider’s registration is in force.106

The Bill sets out the two-stage process for the registration of financial advisers being:

• stage 1 is a one-off obligation for financial services licensees to apply to ASIC to register their financial advisers by providing additional information on their authorised advisers. ASIC will use the information to update the Register of Relevant Providers (the Register)107 and

• stage 2 will be administered by the Australian Taxation Office using the new Australian Business Registry System and involve individual financial advisers applying to register themselves.108

102. P Anderson (Acting CEO, Association of Financial Advisers Ltd), Evidence to the Economics Legislation Committee, Inquiry in the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, Proof committee Hansard, 16 July 2021, p. 11.

103. Corporations Act, proposed section 1684M. 104. Corporations Act, proposed subsection 921C(1). 105. Corporations Act, proposed subsection 921C(2). 106. Corporations Act, proposed section 921Y. 107. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 12;

Corporations Act, proposed Division 8C. Current division 8C of Part 7.6 is repealed by Item 49 of Schedule 1. 108. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 12; Stage 2 will commence on a day to be fixed by Proclamation, but no later than four years after Royal Assent. The relevant

amendments are at Schedule 2 of the Bill.

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Registration by ASIC ASIC must refuse to register a relevant provider if there is a banning order or a disqualification order in force against the provider. Where a registration prohibition order is in force, ASIC must refuse to register the provider until after the end day specified in the order.109

The registration remains in force until the earliest of:

• the cancellation time specified in a registration prohibition order made against the relevant provider

• the time when a banning order against the relevant provider takes effect and

• for the holder of an Australian financial services licence—the date it ceases to be in force110

• otherwise—when the licensee ceases to authorise the relevant provider to give financial advice to retail clients on the licensee’s behalf.111

Existing section 922Q of the Corporations Act establishes the Register and sets out what information must be contained in the Register. Items 68-73 amend section 922Q to update the provisions dealing with the contents of the Register to reflect the changes in the Bill—including for example the requirement that all relevant providers must be registered and whether the relevant provider provides a tax (financial) service.112

Stakeholder comments Some stakeholders firmly agreed with the move towards registration of individual advisers. According to the Institute of Public Accountants, ‘this would be consistent with other professions which rely on individual responsibility and accountability’.113 CPA Australia also welcomed the measure.114

Regulation of tax (financial) advisers One purpose of the Bill is to implement recommendation 7.1 of the Independent Review of Tax Practitioners Board ‘by reducing regulatory overlap and ensuring that the new disciplinary regime for financial advisers also applies to individual tax (financial) advisers’.115

It achieves this by requiring a person who provides tax (financial) advice be registered as a tax agent or be a financial adviser who has met the additional education and training standard to provide tax (financial) advice services under the Corporations Act. Accordingly, the Bill empowers the Minister to determine by legislative instrument any or all of the following requirements for a person who provides a tax (financial) advice service:

• completion of one or more specified bachelor or higher degrees, specified qualifications or courses

• a requirement that the person has undertaken specified work and training

• a requirement for continuing professional development.116

109. Corporations Act, proposed subsections 921ZC(1)-(3). 110. Corporations Act, proposed section 921ZD. 111. Corporations Act, proposed section 921ZE. 112. Corporations Act, proposed paragraphs 922Q(ua) and (ub). 113. Institute of Public Accountants, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector

Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 6], 9 July 2021, p. 3. 114. CPA Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 [Provisions], [Submission No. 9], 9 July 2021, p. 3. 115. Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021, p. 10. 116. Corporations Act, proposed subsection 921BB(1).

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Financial Sector Reform (Hayne Royal Commission Response - Better Advice) Bill 2021 18

Items 106-141 in Part 2 of Schedule 1 to the Bill make consequential amendments to the Tax Agent Services Act.

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