In an attempt to clean up "less serious misconduct" in the financial advice sector, the government has recently introduced the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Act 2021 which comes into effect on 1 January 2022. The key reforms under the Act include:
- expanding the role of the Financial Services and Credit Panel (FSC Panel) within ASIC to operate as a single disciplinary body for financial advisers;
- creating new penalties and sanctions for financial advisers who have breached their obligations under the Corporations Act 2001;
- granting ASIC new powers to refer certain misconduct to the FSC Panel;
- granting the FSC Panel powers to give warnings or reprimands, commence administrative action, issue infringement notices or recommend that ASIC apply to the court for a civil penalty;
- winding up the Financial Adviser Standards and Ethics Authority, transferring its functions to ASIC and the Minister responsible for administering the Corporations Act;
- implementing a two-stage registration system for financial advisers;
- from 1 January 2023, requiring all financial advisers who provide personal advice to be registered; and
- requiring all persons who provide tax (financial) advice services to be a registered tax agent or a financial adviser who has met the additional education and training standard to provide those services.
The FSC Panel
The FSC Panel will become the single disciplinary body for financial advisers who provide personal advice and will hear complaints of both a legal and an ethical nature. The FSC panel will be chaired and assisted by ASIC, and must comprise of a minimum of two industry participants appointed by the relevant Minister.
The Better Advice Bill is also expected to be supported by a number of new regulations, including the proposed Financial Sector Reform Amendment (Hayne Royal Commission Response—Better Advice) Regulations 2021. An exposure draft of the proposed regulations was released by the Government for consultation in September 2021, and the regulations are also expected to come into force on 1 January 2022. As currently drafted, they compel ASIC to convene a FSC Panel where ASIC has not exercised, or does not propose to exercise, any of its powers under the Corporations Act in certain circumstances, namely where:
- the relevant provider becomes an insolvent under administration;
- the relevant provider is convicted of fraud;
- ASIC reasonably believes that the relevant provider is not a fit and proper person to provide personal advice to retail clients;
- ASIC reasonably believes that the relevant provider has contravened certain requirements, such as the education or training requirements of the Corporations Act, or the relevant provider has provided unregistered personal advice;
- ASIC reasonably believes the relevant provider has engaged in a serious contravention of a financial services law; or
- the relevant provider has been involved in the serious contravention of a financial services law.
Once convened, the FSC Panel may take administrative action against a financial adviser, including by issuing a written warning, directions to undertake specified training, supervision, counselling or reporting, or orders suspending or cancelling the adviser's registration. For certain misconduct, the FSC Panel may give the financial adviser an infringement notice or recommend that ASIC apply to the court for a civil penalty. Alternatively, the FSC Panel may accept an enforceable undertaking.
A decision by the FSC Panel is amenable to judicial review. This means that the financial adviser may apply to the Administrative Appeals Tribunal for a merits review of the panel's decision.
Registration scheme for personal advice
The Better Advice Act also implements a two-stage registration process for financial advisers:
- Stage 1 registration involves a one-off obligation on the part of financial services licensees to apply to ASIC to register their financial advisers. From 1 January 2023, it will be an offence to provide personal financial advice while unregistered. This means that all financial advisers are required to be registered to avoid contravening a civil penalty provision.
- Stage 2 registration, which commences by proclamation, requires eligible individuals to apply to the Registrar to register themselves and renew their registration annually.
New penalties
The Better Advice Act also creates a number of new restricted civil penalty provisions which apply to financial advisers. Contravention of a restricted penalty provision is serious enough to warrant financial penalties as a sanction, but is not otherwise characterised as a criminal offence.
The new restricted civil penalty provisions that apply to financial advisers are:
- failure to meet education and training standards;
- failure to comply with the Code of Ethics;
- providing personal advice while unregistered;
- failure to meet provisional relevant provider requirements; and
- failure for tax (financial) advisers to meet requirements for continuing professional development.
ASIC must not apply to the court for a civil penalty in respect of a contravention of these provisions unless the FSC Panel has recommended that ASIC do so, except where the FSC Panel issues an infringement notice and it remains unpaid. This ensures that the FSC panel has a central role in decision-making concerning the appropriate sanction for these contraventions.
Given the new penalties, financial advisers (and the licence holders under which they operate) must familiarise themselves well with their existing legal and ethical obligations, including by not providing personal advice unless registered to do so, as well as their training and professional development requirements. Importantly, advisers must not expect that minor transgressions of a legal, ethical or competency-based nature will go unnoticed, with ASIC and the FSC Panel expected to use their respective powers under the Act liberally.