“It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key.” — Unsuccessful exam candidate (or Winston Churchill)
The adventure begins
“It’s a dangerous business, Frodo, going out your door. ”
— J.R.R Tolkein
You may recall that in his paean for the financial services industry, Commissioner Hayne recommended (Recommendation 2.10) that the law should be amended to establish a new disciplinary system that:
- requires all financial advisers who provide personal financial advice to retail clients to be registered;
- provides for a single, central, disciplinary body;
- requires 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.
In 2019, the government announced their intention to introduce legislation by June 2021 to establish a new disciplinary body by expanding the operation of the existing Financial Services and Credit Panel (FSCP) within the Australian Securities and Investment Commission. Taking inspiration from King Solomon, the Government also announced that FASEA would be divided with ASIC and Treasury sharing FASEA’s responsibilities. With regulatory overlap addressed and oversight streamlined, financial advisers and licensees could relax knowing that their uncertainty, and their compliance burden, had been significantly reduced.
Except, the proposed legislation wasn’t passed and the current situation is far from clear.
I’d like to speak with your supervisor
You might be asking yourself, who is supervising the FASEA Code of Ethics (The Code); has or will The Code change? What does enforcement look like now and in the future? What are the ramifications of not complying with The Code?
There have been copious articles written on the subject, a lot of them confused, frustrated and conflicted.
In short right now:
- You supervise;
- The Treasury might change the code when they take possession of their new mandate and FASEA closes down; and
- ASIC may take enforcement action when it receives breach reports.
Come 1 January 2022 (if the draft Bill passes):
- ASIC’s Financial Services and Credit Panel (FSCP) will be expanded to take on the function of a single disciplinary body;
- FASEA will be wound up and The Treasury will be given the power to change the standards by legislative instrument;
- The FSCP can take action against a financial adviser for non-compliance with The Code;
- A failure to comply with The Code is a contravention of a restricted penalty provision; and
- The FSCP will impose an infringement notice if you do not comply with The Code.
Right now, s921E of the Corporations Act requires that a relevant provider must comply with The Code. Per s910A the Code of Ethics means the Code of Ethics as in force from time to time made by the standards body under s921U(2)(b). The Code of Ethics is the FASEA Code of Ethics.
From 1 January 2020, financial advisers were required to comply with The Code.
On 14 November 2019, ASIC confirmed they would not be monitoring or enforcing individual compliance with the FASEA Code of Ethics, and that the new single disciplinary body will displace the role of compliance schemes in monitoring and enforcing the code.
The Treasury recently (19 April – 14 May 2021) consulted on a draft Bill Single Disciplinary Body for Financial Advisers | Treasury.gov.au, which amends the Corporations Act, ASIC Act, National Consumer Credit Protection Act 2009 and the Tax Agent Services Act 2009, and is set to commence on 1 January 2022. This Bill covers a number of amendments, which include:
- An expansion of ASIC’s Financial Services and Credit Panel to issue infringement notices or recommend ASIC seek a civil penalty and or impose and administrative sanction;
- New penalties and sanctions;
- New annual registration obligation for financial advisers;
- Wind up of FASEA and transfer of its standards functions to the Minister and ASIC; and
- Regulation of tax (financial) advisers.
Let’s have a look at FSCP’s arsenal and their ability to blast you out of your financial planner pants, skirt, jorts or stubbies.
Who can be the subject of the FSCP?
The FSCP will consider breaches by financial planners or advisers including tax(financial) advisers who are authorised to provide personal advice to retail clients. A person giving general advice only will not be subject to the FSCP.
ASIC is required to convene the FSCP if ASIC reasonably believes that a financial adviser has failed to comply with his or her obligations under the Corporations Act, and for which ASIC does not make a banning order.
An important distinction here is the fact that the FSCP will not have the power to take action against financial services licensees.
What kind of breaches will the FSCP consider?
Broadly there are six circumstances that, when they arise, are matters that will be referred to the FSCP where the adviser:
- Is in a position that compromised their ability to practice as a financial adviser (i.e., they are insolvent, under administration, convicted of fraud, have been an officer of 2 or more corporations and have been unable to pay their debts, or not be a fit and proper person).
- May have contravened a financial services law (i.e., breach of code of ethics, failing to fulfil annual consent requirements, accepting conflicted remuneration and breach of education standards).
- Has been involved with someone else’s breach of a financial services law (i.e., they may have been developed an environment or business model that led to contravention, even if specific acts were performed by others).
- Provides advice without being registered.
- Fails to respond to follow a previous sanction applied by the FSCP.
- Fails to respond to a determination made by the Australian Financial Complaints Authority (AFCA) – threshold the adviser must have twice been linked to a failure or refusal to give effect to such a determination.
What sanctions can the FSCP impose?
A range of administrative sanctions, an infringement notice or recommend that ASIC commence court proceedings seeking a civil penalty.
Administrative sanctions:
- A warning or reprimand
- Directions to the adviser to undertake additional training or supervision
- Suspending or cancelling he adviser’s registration for a specified period
Infringement notice:
- Infringement notice amount for an alleged contravention of a restricted civil penalty provision is 12 penalty units for a single contravention which is currently $2,664.
A failure to comply with The Code is a contravention of a restricted penalty provision and the FSCP may issue an infringement notice or make a recommendation to ASIC for an alleged contravention by a financial adviser and seek a civil penalty.
When will this epic adventure begin?
Assuming the Bill is passed (which has not happened yet), the FSCP can take action against a financial adviser:
- for an act or an omission that occurs, or a circumstance that arises, on or after 1 January 2022.
- can issue an infringement notice or make a recommendation to ASIC for an alleged contravention by a financial adviser of a restricted civil penalty provision, for an act or omission to do an act on or after 1 January 2022.
So, for now you must continue your epic adventure of self-supervision and compliance with The Code. ASIC may take enforcement action when it receives breach reports. And keep a look out for the passage and approval of the draft Bill. As always, we will keep you posted!
