The release of the final report of the Financial Systems Inquiry (FSI) brings us a step closer to a significant shift in conduct regulation in Australia.
As we have previously reported, Australia seems set to join a UK and European trend away from regulation driven by disclosure towards an approach where product providers bear the responsibility of ensuring products are targeted and purchased by consumers to whom they are appropriate. According to the FSI, that obligation should be reinforced by a stronger and more proactive regulator with a flexible toolkit of powers to allow intervention in product design and distribution arrangements where significant consumer detriment may otherwise occur.
The key consumer protection recommendations are as follows.
- Product design and distribution: The FSI has recommended a product governance obligation be imposed on product providers, with significant penalties for breach. It will require product providers to take into account a range of factors throughout the life cycle of the product to ensure that products are created and distributed only to appropriate consumers.
- Product intervention powers: An extremely flexible and invasive suite of temporary powers is recommended to enable ASIC to take proactive steps to mitigate detriment to consumers. The toolkit of additional powers may include the ability to require an amendment to terms and conditions, issue a warning to consumers or, at its most extreme, prohibit the distribution of products.
- Innovative product disclosure: To address perceived shortfalls in the existing PDS disclosure regime, the FSI recommends encouraging innovative approaches for product providers to deliver key product information.
- Aligning the interests of product providers and consumers: The FSI has made a number of recommendations targeted at remuneration and commission arrangements that are aimed at ensuring that providers are not incentivised to engage in poor sales practices, particularly in life insurance and stockbroking.
- Raising the competency of advisors: To ensure products are appropriately distributed, it is recommended that financial advisors have higher level qualifications, particularly in respect of products categorised as Tier 1. The FSI had recommended that these changes be considered and implemented by Government as a matter of priority.
- Use of calculators and other tools to aid consumers, particularly for the home insurance market: In light of evidence of extensive under insurance in the home and contents market, the FSI has endorsed ASIC’s support for more prescriptive requirements around the use of online calculators and better guidelines in the general insurance market.
Much of the above closely resembles recent changes to law and regulation in the UK. As a global firm we have seen these developments first hand and have assisted our clients in preparing for them and ensuring ongoing compliance. We would be pleased to discuss with you the recommended changes and how they may impact your business if implemented.