Six months after the Financial Services Royal Commission wrapped up its work, that of the Federal Government, ASIC and APRA is underway, with all three recently setting out their progress so far, and what's ahead.
Overall, we're seeing a clear uptick in investigations and enforcement activity, and the introduction of some legislative changes. But it's clear that the Federal Government will be busy over the next 24 months to implement the bulk of the outstanding recommendations and commitments.
The Federal Government's Financial Services Royal Commission Implementation Roadmap
On 19 August 2019, the Morrison Government released the Financial Services Royal Commission Implementation Roadmap which sets out how it will deliver on its previous commitment to take action on all 76 of the Royal Commission's recommendations. Of the 76 recommendations, 54 were directed to the Government; in addition, the Government also previously announced an additional 18 commitments to address issues raised in the FSRC Final Report.
The Implementation Roadmap summarises the actions that the Government has taken to date. Since the Final Report was received from Commissioner Hayne, the Government has taken action on 15 of its commitments – addressing 8 out of the 54 recommendations directed to the Government and 7 of its 18 additional commitments.
These actions include:
- the introduction in April of the Treasury Law Amendment (AFCA Co-operation) Regulations requiring all compulsory AFCA members to take reasonable steps to co-operate with AFCA in the resolution of disputes;
- a commitment to undertaking regular capability reviews, starting with APRA in March 2019;
- a new Act to extend ASIC's Product Intervention Powers and the Design and Distribution Obligations imposed on financial service licensees, passed in April; and
- extending AFCA's remit to consider financial complaints from consumers and small businesses dating back to 1 January 2008.
As part of its August update, the Government provided a two-year implementation outlook based on a number of key themes:
Strengthening protections for consumers, small business and rural and regional communities
The Government is taking action to align the interests of financial services entities with the interest of consumers and address the potential conflicts that arise between these interests – key measures include ending the grandfathering of financial adviser conflicted remuneration, creating a best interests duty for mortgage brokers, reforming mortgage broker remuneration, and progressing consumer protections in insurance and superannuation.
Ensuring strong and effective financial system regulators
The Government acknowledges the importance for financial services regulators to have the resources and powers they need to strengthen and intensify their approach to enforcement and supervision, and to enhance deterrence. This is exemplified in, amongst other things, providing ASIC with $404.8 million (an increase of 25%) and APRA with $151.7 million (an increase of 30%) worth of funding as part of the Budget for 2019-20.
As part of its regulatory reform agenda, the Government proposes:
- updated Statements of Expectations for ASIC and APRA, reflecting the Royal Commission's findings and recommendations; and
- a new financial regulatory oversight authority to ensure that ASIC and APRA are effective in delivering on their mandated responsibilities.
The Government has said that restoring trust in Australia's financial system requires permanent changes to corporate culture and governance practices. The Government has already introduced the Banking Executive Accountability Regime (BEAR) which ensures that senior executives and directors of APRA-regulated entities are held to heightened standards of accountability for financial misconduct. As part of their reform agenda, the Government plans to extend the BEAR to a broader range of conduct and non-prudentially regulated entities – ASIC will oversee the administration of the regime.
In addition to this, the Government is going to keep a close watch on the implementation of the Royal Commission recommendations. The Government has requested that the House of Representatives Standing Committee on Economics inquire into the progress made by financial institutions in implementing the Royal Commission's recommendations. In addition to this, the Government has previously announced that it will establish an independent review in three years' time to assess the extent to which changes in industry practices have led to improved consumer outcomes.
Further improving consumer and small business access to redress
The Government's reform agenda encompasses a number of consumer centric policies to ensure consumers and small businesses are afforded access to redress when they suffer from financial misconduct. Key measures for the Government are to establish a compensation scheme of last resort by no later than December 2020 and to strengthen the regulatory framework for financial institutions' remediation processes by giving ASIC and AFCA additional powers.
Timelines for implementation
At this stage, the Government expects to have 90% of the commitments implemented by mid-2020.
By the end of 2019 the Government will consult and introduce legislation to support a further 10 Royal Commission recommendations and additional commitments. This includes legislation that introduces a best interests duty for mortgage brokers, regulates mortgage broker remuneration, puts an end to grandfathered commissions received by financial advisers and extends ASIC's investigatory, licensing and banning powers.
The Government's remaining reform agenda items will be introduced into legislation by the end of 2020.
ASIC Enforcement Update – January to June 2019
On 18 August 2019, ASIC released Report 625 – an overview of ASIC's enforcement outcomes, priorities and cases during the period 1 January 2019 to 30 June 2019. The update covers enforcement outcomes relating to corporate governance, financial services, financial markets and small businesses.
In the post-Royal Commission world, ASIC has made a conscious effort to adopt a "why not litigate" policy when undertaking its enforcement work, as was recommended by the Royal Commission.
ASIC's update confirmed the establishment of its Office of Enforcement – a functional body within ASIC that is responsible for carrying out their key enforcement activities that sits separately from ASIC's regulatory teams. The Office of Enforcement comprises two specialist enforcement teams: Markets Enforcement and Financial Services Enforcement. The Office of Enforcement will continue to work on the 13 matters referred to ASIC by the Royal Commission as well as matters examined as case studies during the Royal Commission hearings.
It is apparent from the update that ASIC has adopted a more aggressive approach to its regulation and enforcement approach in a post Royal Commission environment; between July 2018 and July 2019, ASIC has increased:
- the number of ASIC enforcement investigations by 20%;
- enforcement investigations involving the big six financial institutions by 51%; and
- investigations into wealth management services offered by financial institutions by 216%.
APRA's response to royal commission recommendations – August Update
APRA has previously stated it was pleased that many of the recommendations made in the FSRC Final Report were consistent with its submissions to the Royal Commission. These include:
- the preservation of the twin peaks regulatory architecture, and APRA's current mandate;
- broadening BEAR to other industries; and
- a strengthening and realignment of regulatory powers by the Parliament to provide a greater role for ASIC.
APRA's August 2019 update sets out further guidance on how the regulator is tracking in implementing the Royal Commission recommendations that were directed to it.
APRA is engaged in a period of consultation in relation to key recommendations. Of particular note is that:
- In March 2019, APRA released proposed revisions to APS 220 (Credit Risk Management) in March 2019 (with a final version of the standard to be implemented later in 2019);
- In June 2019, APRA released a consultation letter to all ADIs welcoming submissions from industry relating to the introduction of an end-to-end responsibility for products for each institution subject to the BEAR. Consultation for this proposal closed on 23 August 2019;
- APRA is developing its own accountability statements of the kind required under the BEAR – these will be published by the end of 2019, subject to finalisation of APRA's new organisation structure.
- APRA's post-implementation review of the superannuation prudential framework identified a number of proposed enhancements that will strengthen the requirements on trustees when selecting an insurer for superannuation products. APRA will be consulting on proposed changes to the prudential framework later this year with a view to finalising enhancements in 2020.
- APRA released for consultation a draft Prudential Standard CPS 511 Remuneration. Consistent with the Financial Stability Board's guidance on compensation principles and practices, the draft standard requires entities, amongst other things, to design remuneration systems to encourage management of non-financial risks and reduce the risk of misconduct, as well as make regular assessments of the effectiveness of their remuneration systems in encouraging the mitigation of non-financial risks and misconduct.APRA intends that a final standard will be determined by the first half of 2020;
- APRA is in the process of developing an enhanced approach to the supervision of governance, culture, remuneration and accountability within regulated institutions – the regulator intends to publish a statement of its approach by the end of 2019; and
- APRA and ASIC are progressing work on their updated Memorandum of Understanding, which is on track to be published by the end of 2019.