On 19 October 2016, the Federal Government established the ASIC Enforcement Review Taskforce to review the ASIC enforcement regime (Taskforce), following the findings of the Financial System Inquiry and the perceived need to strengthen the regulation of the financial services industry.
As part of the Federal Government’s ASIC reform package announced last year, $57 million was allocated to increasing surveillance and enforcement in relation to, among other things, breach reporting.
On 11 April 2017, the Treasury released a consultation paper in relation to proposed reforms to the self-reporting regime for Australian financial services licensees (AFS licensees) under the Corporations Act 2001 (Cth) (Act).
Self reporting regime
The existing self-reporting regime has come under scrutiny in recent times in the media and in a series of inquiries into banking and financial services related misconduct. ASIC has also publicly outlined concerns with the effectiveness of some aspects of the existing regime, including failures to notify it about serious concerns regarding adviser conduct and significant delays in the reporting of misconduct to ASIC.
The consultation paper sets out a number of preliminary reforms to enhance the existing regime. In reaching its preliminary views, the Taskforce had regard to the self-reporting regimes in jurisdictions including the United Kingdom, United States, Hong Kong, Singapore and Canada.
The current self-reporting regime
Under the current self-reporting regime set out in section 912D of the Act, AFS licensees must report in writing to ASIC, where:
- the AFS licensee breaches or is likely to breach its relevant obligations; and
- the breach, or likely breach, is "significant".
The threshold for whether a breach is "significant" is determined having regard to the factors set out in section 912D(1)(b) of the Act. This includes the number of similar previous breaches; the impact of the breach on the licensees’ ability to provide the financial services covered by its license; the extent to which the breach indicates the licensee's compliance arrangements are inadequate; and the actual or potential financial loss to the licensee's client or the licensee itself.
This test has been criticised as giving rise to ambiguity as to whether the threshold for the obligation to report is triggered in any given circumstance.
The key proposed reforms
The key proposed reforms to this regime and the Taskforce's findings and recommendations are intended to:
- reduce ambiguity around whether a breach is significant and must be reported to ASIC by introducing an objective “reasonableness” test, with reference to the existing matters set out in section 912D(1)(b) of the Act;
- avoid any ambiguity around the appropriate time for reporting a breach (and delays occasioned in determining whether the circumstances in question give rise to a significant breach) by clarifying that a report should be made at such time as the AFS licensee “becomes aware or has reason to suspect that a breach has occurred, may have occurred or may occur”;
- enhance accountability for AFS licensees by expanding the class of reports that must be made to expressly include misconduct by individual advisers and employees, to allow ASIC to take necessary steps to remove individuals in order to protect consumers (this would bring Australia into line with international jurisdictions);
- introduce civil penalty and infringement notice regimes for non-compliance and increase the range of enforcement options, including the criminal penalty for non-reporting;
- require ASIC to publish data on breach reports for major licensees; and
- introduce an equivalent reporting regime for credit licensees (which are currently subject only to annual compliance reporting).
The Taskforce has called for submissions in response to the consultation paper by 12 May 2017, with a view to then providing its recommendations to the Government by late September 2017.
If the Government ultimately accepts recommendations along the lines of those outlined in the Taskforce’s consultation paper, insurers may expect to see an increase in claims arising from alleged non-compliance with a more stringent self-reporting regime. However, it is hoped that in the long term the proposed changes will see a reduction in more costly claims arising from breaches and/or misconduct within financial services institutions that go unreported.