Disclosure? It’s all Dutch to me

On 14 October 2019, ASIC released Report 632 “Disclosure: Why it shouldn’t be the default” a joint report on the effectiveness of disclosure written with the Dutch Authority for the Financial Markets (AFM).

The report’s conclusions, “supported by 33 case studies across 5 jurisdictions”, confirmed that:

• Disclosure does not ‘solve’ the complexity in financial services markets;
• Disclosure must compete for consumer attention and influence;
• the effectiveness of disclosure varies from person to person and from situation to situation;
• disclosures (and disclaimers) can work in unanticipated and undesirable ways; and
• warnings don’t always work as intended.

In practice, these public admissions on the limitations of disclosure should inspire Licensees and advisers to prioritise understanding over technical disclosure. In fact, it may signal a more flexible regulatory approach and a renewed focus on intent, engagement and outcomes.

“it is also incumbent on industry not to hide behind technical compliance with disclosure obligations.”

— REP 632 “Disclosure: Why it shouldn’t be the default”, p52

Given that disclosure is necessary, but not sufficient , to protect consumers ASIC have announced their willingness to use their enhanced regulatory toolkit to achieve their goals. Their strategic focus on fairness and professionalism will be supported by:

• enhanced supervisory approaches, including the Close and Continuous Monitoring (CCM) program;
• use of their Product Intervention Powers; and
• increased promotion of regulatory technology (regtech).

The end of conflicts

In her media release dated 15 October 2019, Jane Hume, the Assistant Minister for Superannuation, Financial Services and Financial Technology (in conjunction with the Treasurer, Josh Frydenberg) celebrated the Government’s success in securing the passage through parliament of the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019.

Passed by both Houses on 14 October 2019, the legislation provides that grandfathered conflicted remuneration will be banned from 1 January 2021 and product issuers will be required to rebate the amounts to consumers.

The Bill received Royal Assent on 28 October 2019.

Thanks, but no thanks

On 11 October 2019, the Treasurer, Josh Frydenberg and the Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, announced that the Government had chosen to prioritise Royal Commission’s recommendation for a new single disciplinary body for financial advisers.

The Government intends to establish the new body by 2021, subject to the passage of (as yet undrafted) legislation, but consider this approach to be a more sustainable solution than the code monitoring function proposed to be offered by the industry associations.

In their media release (19-280MR) ASIC announced that it would make a legislative instrument to provide relief to Australian financial services (AFS) licensees from their obligation to register with an ASIC-approved compliance scheme by 1 January 2020.

ASIC have proposed a three-year exemption from this obligation but AFS licensees will still be required to take reasonable steps to ensure that their representatives comply with the code from 1 January 2020.

Happy Birthday Compulsory Super

The Treasurer, Josh Frydenberg, announced a review of the retirement income system on 27 September 2019 (27 years after the establishment of compulsory superannuation).

The independent review will look at the three pillars of the existing retirement income system

• a means-tested Age Pension;
• compulsory superannuation; and
• voluntary savings, including home ownership.

The Terms of Reference state that the Review will identify:

• how the retirement income system supports Australians in retirement;
• the role of each pillar in supporting Australians through retirement;
• distributional impacts across the population and over time; and
• the impact of current policy settings on public finances.

A consultation paper will be released in November 2019 and the final report is expected to be provided to Government by June 2020.

This review responds to the recommendation made by the Productivity Commission in their report Superannuation: Assessing Efficiency and Competitiveness .

A storm in a (self-managed) teacup

In October 2019, ASIC’s decision to release a fact sheet titled “Self-managed super funds: Are they for you” while urging consumers to question whether SMSFs are right for them (19-277MR) sparked an immediate response from the advice industry.

While focusing on appropriateness, ASIC simply referred to their 2018 Report SMSFs: Improving the quality of advice and member experiences (REP 575) and reiterated the ‘red flags’ that often indicate inappropriate SMSF advice. In their experience, SMSF recommendations are often inappropriate when:

1. the client has a low superannuation balance, and would have a limited ability to make future contributions;
2. the client wants a simple superannuation solution;
3. the client wants to delegate all of the running of the SMSF to a paid advice-provider;
4. the client wants to delegate all of the investment decision making to someone else;
5. the client does not have a lot of time to devote to managing their financial affairs;
6. the client has little experience making investment decisions;
7. the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee); and
8. the client has a low level of financial literacy.

Risky business

In early October, (19-271MR) ASIC Corporate Governance Taskforce released the Director and officer oversight of non-financial risk report urging companies to exercise more vigilance and prudence in identifying and managing non-financial risks.

“Boards cannot afford to ignore the oversight of non-financial risks. As we have seen, all risk can have financial consequences. If not well managed, non-financial risks carry very real financial implications for companies, their investors and customers”

— James Shipton, ASIC Chair

Predominantly focused on the oversight and management of compliance risk, ASIC’s report identified that:

• Management often operated outside of board-approved risk appetites for non-financial risks, particularly compliance risk.
• Boards often failed to identify, or hold management accountable for, activities that were outside the business’ stated risk appetite.
• Reporting often ineffectively communicated the company’s risk position relative to their agreed risk appetite.
• Reporting about material compliance risks was often impenetrable or unclear.
• Board risk committees (BRCs) often meet irregularly, devote insufficient time to their duties and need to be more actively engaged in managing material risks in a timely and effective manner.

The (unsuccessful) rise of the machines

On 18 October 2019, ASIC announced (19-286MR) that Lime FS Pty Ltd (Lime FS), had voluntarily shut down two digital advice tools following ASIC’s concerns. ASIC’s concerns related to the automated financial product advice provided by Lime FS’ corporate authorised representatives, Plenty Wealth Pty Ltd (Plenty Wealth) and Lime Wealth Pty Ltd (Lime Wealth).

Contrary to previous ASIC guidance, Lime FS’ robo-advice solutions failed to meet the “legal obligations required of human advisers – .. advice must be appropriate to the client and comply with the best interests duty.”

More specifically, the release noted that “ASIC was concerned that the level of inquires made by the online tools about client objectives, financial situation and needs, were inadequate. In some instances, the recommendations generated by the tools were in conflict with client goals or with other recommendations also generated by the tools.”

“Carefully crafted” but personal: ASIC v Westpac

On 28 October 2019, ASIC announced (19-293MR) that Full Federal Court had reversed an earlier Federal Court decision to find that calls made to clients by Westpac Securities Administration Limited (WSAL) and BT Funds Management Limited (BTFM) had, in fact, been personal advice.

The Federal Court had previously found that the sales campaigns did not provide personal advice.

The Full Court, on appeal, found that the ‘carefully crafted telephone campaign’ adopted by the Westpac subsidiaries exploited clients trust in, and reliance on, Westpac. Throughout the campaign, O’Bryan J noted, “Westpac pursued its own self-interest and disregarded the best interests of its customers”.

The decision provides clarity on the differences between personal and general advice.

Consistent with Report 632, the Full Court looked beyond the formal disclosures and scripted communications adopted by the entities to instead focus on the context of those communications and the asymmetrical relationship between the parties.

“What is advice, and whether it is personal or general, are questions most readily answered by a consideration of the communication or exchange in its whole relational context. They are questions not to be answered by picking over individual and decontextualised parts of a whole communication or exchange.”

— Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187 at 12