Consultation launches on broker reference checking

The recommendation came after it was found that AFS licensees were not doing enough to communicate between themselves about the background of prospective employees – with this lack of information-sharing potentially increasing the risk of “bad apples” staying within industry undetected.

Given that the royal commission also sought to more closely align mortgage brokers and financial advisers (including introducing a best interests duty for brokers), it was also recommended that a similar obligation should apply to credit licensees in respect of mortgage brokers.

The draft legislation – which was generally welcomed by industry heads – was released at the beginning of the year and, on 12 November 2020, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was introduced into Parliament outlining that the new obligations would commence on 1 October 2021.

ASIC has now released for consultation its draft protocol and has said that it will issue an information sheet containing guidance on the obligations in due course. 

Written permission must be granted by the candidate

The consultation document outlines that ASIC expects that licensees will be required, as a specific obligation under their licence, to comply with the ASIC protocol.

Specifically, a licensee must comply with the obligation in relation to:

• a former, current or prospective representative of a licensee (e.g. a representative of a licensee that is seeking employment with another licensee as a financial adviser or mortgage broker); and 
• a licensee who is an individual (i.e. a current licensee who is seeking to work for another licensee as a financial adviser or mortgage broker representative).

The protocol will apply to those seeking a job for which they will provide personal advice or credit assistance (for example, mortgage broker representatives of a credit licensee providing credit assistance on credit contracts secured by mortgages over residential property).

It would also cover 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), to ensure that information can be ascertained more readily than currently.

It outlines that licensees will need to take reasonable steps to obtain a reference for prospective representatives when recruiting, as part of a screening process. This includes seeking the written consent of the prospective representative and requesting a reference from a referee using a template reference request (provided by ASIC).

The template request asks for:

• background information on a prospective representative (for example, their previous responsibilities and period of employment);
• compliance audits of a prospective representative (for example, when compliance audits were undertaken and their outcomes);
• the conduct of a prospective representative (for example, any breaches or poor conduct issues); and 
• ongoing matters (such as any unresolved investigations or inquiries).

Should written consent not be given by the prospective representative, ASIC outlines that the recruiting licensee must not request a reference from a referee licensee about that person. This aims to meet privacy principles regarding personal information.

Referees will generally be given 10 business days to respond to the request in writing (or 20 business days if agreed to in advance between both parties). 

However, ASIC does not forbid a licensee from employing someone if the referee fails to comply or if they receive “adverse information about a prospective representative in a reference”.

ASIC explains: “In these circumstances, the recruiting licensee should consider how they will comply with their general conduct obligations if they decide to employ or authorise the prospective representative. 

“For example, licensees will need to ensure that the prospective representative is adequately trained, is competent and complies with the relevant legislation. This may require the licensee to undertake additional background checks or assessments before employing or authorising the prospective representative if a reference is not available, as well as additional monitoring and supervision after they are employed or authorised.”

References could cover last five years of work

It also proposes that those hiring may seek additional references from former licensees that employed or authorised a prospective representative within the last five years to “obtain a more comprehensive picture of a prospective representative’s conduct and performance over a longer period”.

“This may highlight, for example, any systemic issues relating to the prospective representative, including repeated conduct or performance issues that demonstrate the prospective representative is not responding to remedial action,” the regulator says.

However, a referee is not obliged to give information about conduct of the prospective representative that occurred more than five years before the reference is given to the recruiting licensee.

A licensee must also keep written records that are complete and accurate and that demonstrate compliance with the obligations of the ASIC protocol, for at least five years.

ASIC has said that while contraventions of the obligation would result in a civil penalty under the bill, ASIC may also take administrative action if a licensee does not comply with the ASIC protocol. This could include suspending or cancelling the licence or imposing additional licence conditions.

The consultation closes on 29 January 2021.

The final legislative instrument is expected to be released by June 2021.

You can read the full consultation paper, here.

[Related: New draft legislation tentatively welcomed]