Government proposes new ACL obligations

Among the proposals is the implementation of recommendation 2.7 and, in part, recommendation 1.6 of commissioner Kenneth Hayne’s final report, which would:

• require an Australian financial services licensee (AFSL) and an Australian credit licensee (ACL), as an obligation under their licence, to comply with a reference checking and information-sharing protocol to be made by ASIC in the form of legislative instruments under the Corporations Act and the Credit Act; and
• creating a civil penalty for non-compliance with the obligation.

The draft bill therefore seeks to impose the new reference-checking and information-sharing obligation in section 47 of the Credit Act.

The amendments to the Credit Act would impose the protocol on Australian credit licensees in relation to mortgage brokers in generally the same manner as they relate to Australian financial services licensees.

The amendment aims to ensure that there is consistent practice throughout the industry, and that employment information will be available about all financial advisers and mortgage brokers.

This would mean that any past misconduct conducted by a licensee that is moving from one industry to another (for example, a financial planner that then seeks to become a broker) can be ascertained more readily than currently.

It also ensures that AFSL and ACL holders who fail to undertake reference checking and information sharing regarding a prospective employee are subject to a civil penalty.

The obligation to undertake reference checking about a prospective mortgage broker will apply in relation to a mortgage broker appointed on and after 1 April 2021. 

Likewise, the obligation to share information about representatives will apply to a request for information made on and after 1 April 2021.

Example of how this will be used

The explanatory memorandum provides the following example to demonstrate how the new reference checking and information sharing regime would prevent a person being appointed to a position in one industry where they have engaged in misconduct in the other. It reads:

"Vincent worked as a financial adviser with Company Alpha, an Australian financial services licensee. Vincent stole money from a client and Company Alpha terminated his employment. One year later, Vincent applies for a position as a financial adviser with Company Bravo, another Australian financial services licensee.

"Company Bravo undertakes its obligation to check references and contacts Company Alpha (with Vincent’s consent).

"Company Alpha satisfies its obligation to share information with another Australian financial services licensee and informs Company Bravo that Vincent was terminated for stealing money from a client. Company Bravo declines to offer Vincent a position.

"After two years, Vincent realises that, owing to his misconduct, it will be difficult for him to find further employment as a financial adviser. He decides to seek work as a mortgage broker and applies for a position with Company Charlie, an Australian credit licensee.

"Because Vincent had previously worked as a representative of an Australian financial services licensee, Company Charlie undertakes its obligation to check references and contacts Company Alpha (with Vincent’s consent).

"Company Alpha undertakes its obligation to share information with an Australian credit licensee and informs Company Charlie of Vincent’s conduct. Company Charlie declines to offer Vincent a position."

The government’s newly proposed obligation is part of its overall response to the commission’s recommendations concerning the conduct of mortgage brokers, which includes the introduction of a best interests duty and the ratification of a ban on conflicted remuneration.

The draft bill is open to consultation, with stakeholders invited to submit responses by 28 February.

The government noted that it expects to introduce the legislation in mid-2020.  

The issue being addressed

At present, AFSL holders are subject to general obligations under section 912A of the Corporations Act, including the obligation to “take reasonable steps” to ensure that its representatives comply with the financial services laws of the Corporations Act.

Meanwhile, ACL holders are subject to general conduct obligations under section 47 of the Credit Act.

In support of such obligations, ASIC’s Regulatory Guide 104 and Regulatory Guide 205 set out measures for monitoring and supervising AFSL and ACL representatives.

ASIC’s guidance expects AFSL and ACL holders to undertake appropriate background checks before appointing new representatives, which could take the form of referee reports, searches of ASIC’s register of banned and disqualified persons and police checks.

However, commissioner Hayne found that licensees were falling short of ASIC’s expectations, prompting his call for new legal obligations.

As a result, the government has tabled its new proposals to address the perceived shortcomings in line with the royal commission’s recommendations.

Are you interested in the issues shaping the roles of mortgage and finance brokers? Don’t miss your chance to hear about all the big ideas for the year ahead, and gain the tools you need to position your business for growth and prosperity. Book your ticket to the Better Business Summit today.  

 [Related: Government legislates ban on conflicted remuneration]