CPD: Financial Advice Regulatory Digest – through a consumer protection lens

Introduction

Along with disclosure, financial literacy, and financial advice, financial services regulation is one of the four accepted pillars of financial consumer protection^[1].

Staying abreast – and ideally ahead – of regulatory developments is therefore a key responsibility of licensees and advisers, not purely from a legal/compliance perspective, but in order to demonstrate a genuine commitment to caring for their clients.

Advisers themselves know how rapidly the regulatory landscape evolves, and whilst the implementation of QAR recommendations may – or may not – signal at least a temporary pause in regulations directly affecting advice, financial advisers are just one part of a vast and complex ecosystem, and ongoing change across that ecosystem inevitably sees a significant volume of changes where the impact on advisers is more indirect, but nevertheless real.

In this article, we will examine some of the most current/topical regulatory developments with a consumer protection focus, with a view to providing advisers a practical, birds-eye view of the issues affecting them and their clients now and into the future. Areas explored will include ASIC, and their strategic and enforcement priorities, the federal government and its legislative agenda, and other members of the broader consumer protection system, such as AFCA.

Understanding where ASIC is coming from

Every year, ASIC publicly announces its enforcement priorities for the year ahead^[2].

For 2023, these priorities were:

• enforcement action targeting poor design, pricing, and distribution of financial products
• misleading conduct in relation to sustainable finance including greenwashing
• misconduct involving high risk products including crypto assets
• combating and disrupting investment scams
• protecting financially vulnerable customers
• misleading and deceptive conduct relating to investment products
• misconduct in the superannuation sector
• failures by providers of general insurance
• misconduct that involves misinformation through social media
• governance and directors duties failures
• manipulation in energy and commodities derivatives markets
• unfair contract terms (including insurance).

Tuning into the consumer ‘Zeitgeist’

At the time of writing, the 2024 enforcement priorities had not been released, however a glimpse at the above list illustrates the extent to which the focus areas very much evolve in line with key trends such as technology, consumer behaviour, and financial product innovation. That greenwashing, DDO compliance, crypto, scams, general insurance claims and finfluencers were all in ASIC sights very much reflects the zeitgeist of the last few years, marked by many major trends such as the surge in ESG investing, the rise of the finfluencers, and the growing scourge of online financial scams.

(This list itself is a handy primer for advisers considering all the issues that could be affecting their own clients).

Looking ahead, it is likely that ASICs future enforcement priorities will be extensively shaped by two key inputs, one being their own strategic priorities (which form part of their medium-term strategic plans), and the other on-the-ground market developments over recent times. We explore both these points further, firstly by examining ASIC’s published strategic priorities for the next few years, and then by revisiting the significant market and regulatory developments of the last year.

ASIC Strategic priorities

ASIC releases a 5-year corporate plan, on a rolling 12-month basis. This plan outlines its priorities over the next five years to protect consumers via a ‘fair, strong, and efficient financial system for all Australians’.

ASIC’s 2023 – 27 Corporate Plan^[3], released in August 2023 comprises 4 Strategic Priorities, and 6 current strategic projects.

Regulatory recap

Revisiting the most significant regulatory developments of the last year reinforces suspicion that the pace of change remains relentless. Amongst the developments attracting the most media attention, and likely being most impactful to advisers, were those in the areas of greenwashing, QAR, complaints and remediation, breach reporting, retirement incomes, and crypto currencies. Many of these were the subject of the more than 20 Reports issued by ASIC throughout the year^[5], notably:

• REP 760 Insurance in superannuation
• REP 762 Design and distribution obligations (Investment products)
• REP 766 Implementation of the Retirement Incomes Covenant
• REP 775 Insights from the reportable situations regime, and
• REP 763 ASICs greenwashing interventions.

Greenwashing in the headlines

Although research says that over 80% of clients want their adviser to present ESG options^[6], in reality many advisers are still reluctant to engage in ESG conversations with their clients. In some cases this could be due to a fear that conversations about ESG might stray into conversations on divisive political topics (climate change for example).

In other cases, it might be through fear of greenwashing. Indeed, in a recent survey of financial advisers by Investment Trends, 47% said greenwashing was increasingly challenging their ability to recommend responsible investments^[7]. This fear might be justified given the increasing number of fund managers and superannuation funds being pursued by ASIC after falling foul of the law.

Two high profile cases detailed in the above-mentioned ASIC REP 763 are those against Vanguard and Mercer^[8].

More recently, ASIC also took action against superannuation fund Active Super^[9].

Having already taken court action against these three, the corporate regulator is warning everyone that they are actively trawling through websites, disclosure documents, and marketing materials, searching for instances where the investment reality doesn’t live up to the marketing ‘spin’.

Indexed products and investments outsourcing a problem

In the cases of both Vanguard and Mercer, it was discovered that products described as being ethically screened (the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and Mercer Super’s Sustainable Plus options), in fact invested in companies involved in gambling, the production and distribution of alcohol, and the production of fossil fuels).

In the case of Active Super, ASIC’s action was against the overall fund, rather than a specific investment option.

In a media release^[10], ASIC said Active “represented on their website that they eliminated investments that posed too great a risk to the environment and the community, including tobacco manufacturing, oil tar sands and gambling” and that they had added Russia to their list of excluded countries, following the invasion of Ukraine.

Despite this, ASIC is arguing the fund’s holdings include holdings in tobacco packaging, gambling, Russian entities, and companies involved in the mining and oil tar sand industries.

While in all three cases poor processes and controls (rather than deliberate deception) seem to be the root cause, all cases highlight the risks involved when funds rely on outsourced investment management, and/or invest fully or partially in indexes, where the make-up of that index is not directly in their control. While screening out undesirable investments should still be possible in both scenarios, the involvement of external parties and the loss of direct control over investment selection introduces an extra layer of complexity and therefore risk, and herein lies a big lesson for advisers in choosing ESG options.

Just how much control does the fund manager have over the underlying investments?

Sadly, this problem is only going to get bigger.

This could be embarrassing for some of the larger industry funds in particular, many who are known for pressuring companies to become greener, and yet don’t come out favourably when the spotlight is turned on them. Just recently, for example, Australia’s largest super fund, Australian Super, has been in the cross hairs of industry monitors Market Forces, who has accused the fund of backing a top fossil gas producer after they threw their support behind management at Woodside’s latest AGM^[11].

Complaints and remediation

In September 2023, ASIC released the findings of its review into the remediation processes of licensees^[12]. This review followed the late 2022 release of its remediation guidelines via RG 277.

The headline finding was that the remediation policies and procedures of some licensees were inconsistent with RG 277, and could lead to poor consumer outcomes.

Specific failures identified by the review included:

Remediation review periods: some licensees were found to have policies that could inappropriately narrow the scope of remediation review periods

Use of ‘beneficial assumptions’: licensees did not always consider beneficial assumptions as a mechanism to enable efficient remediations.

Foregone returns or interest: some licensees had pre-determined rates for specific products or scenarios, with inadequate controls to ensure they were appropriate in the circumstances.

Reasonable endeavours: licensees are expected to make reasonable endeavours to contact and pay affected consumers, with reasonableness to be determined on a case-by-case basis. The review found examples of prescriptive approaches, such as a predefined number of contact attempts, which may be insufficient in certain circumstances.

Oversight and controls: to ensure fair and timely remediation, licensees should have governance frameworks with appropriate oversight and accountability. The review found a general lack of focus on fairness in governance frameworks.

Commenting on the review findings, ASIC deputy chair Karen Chester flagged more scrutiny on remediation policies and outcomes in the future, saying: “Licensees need to be proactive, timely and fair in their approach to consumer remediation. Going forward, while ASIC will generally not oversee remediation programs, we will consider regulatory action where licensees fail to deliver fair and timely remediation to affected consumers”^[13].

AFCA has its say on complaints too

In November 2023, AFCA published its latest data on complaints^[14], including those relating to financial advice.

That data showed complaints about inappropriate advice and failure to act in a clients’ best interests were the most common types of complaint in the investment and advice category for the 22/23 financial year.

But while the trend in complaint volume was down (if those relating to one specific company were excluded), with the number of advice complaints closed 2257 – down over 20% from the previous year – the Authority remains concerned about the time taken to resolve complaints.

While the average time taken to resolve all investments and advice complaints was 125 days, advice specific complaints were taking around 230 days to complete, more than double the ideal of 90 days, and up on the previous year.

AFCA and the misclassification of wholesale/sophisticated investors

At the same time as releasing their 22/23 data, AFCA also clarified another issue of direct relevance to financial advisers and their clients^[15].

AFCA Financial Advice and Investments Ombudsman Shail Singh told AFCA members they are close to updating their operation guidelines, putting sophisticated and professional investors outside their remit, except in cases where it can be shown the investor was misclassified (using the example of a widow who inherits a wholesale investor portfolio and does not understand the consequences).

Crypto and QAR legislation watch

Rounding out our consumer protection regulatory digest, it is worth recapping the recent legislative endeavours of the Financial Services Minister Stephen Jones.

The Australian government released its long-awaited regulatory regime in October 2023, designing a framework designed to limit the scams and fraud seen as rife throughout the crypto industry^[16].

At the heart of the regime – the legislation for which is expected to be tabled in 2024 – is a requirement for all crypto exchanges to become AFSL holders, an obligation which experts say could wipe out the vast majority of Australian exchanges.

Finally, in the spirit of leaving the best until last, at the time of writing, Minister Jones has just released the first tranche of QAR-related legislation for consultation^[17].

This includes legislation relating to:

• Recommendation 7: clarifying the legal basis for superannuation trustees reimbursing a member’s financial advice fees from their superannuation account
• Recommendation 8: streamlining ongoing fee renewal and consent requirements and removing the requirement to provide a fee disclosure statement
• Recommendation 10: providing more flexibility on how FSG requirements can be met
• the retention of life and general insurance commissions, and permitting superannuation fund trustee to pay advice fees if requested by the client.

There were several notable absences from that legislation, including those that were expected (such as that relating to the provision of advice by super funds, which is slated for release in late 2023), and those that were unexpected (SOA simplification and the scrapping of safe harbour provisions).

Responding to criticism about the lack of SOA clarity (recently identified as the most discussed topic across the popular Ensombl adviser platform), Minister Jones reiterated that both SOA simplification and the Safe Harbour changes remained on the agenda but simply required more work^[18].

QAR timeline – 2025?

With consultation on tranche one closing at the end of 2023, final legislation won’t be expected to come into effect until at least the middle of 2024, and there is a sense among some observers that – given the lower priority generally attached to this type of legislation – even that may be optimistic.

Noting Jones’ comments about the SOA/Safe Harbour changes, Tahn Sharpe of Inside Adviser took a more pessimistic view^[19], suggesting that if Jones failed to meet his Christmas deadline, and factoring in the inevitable consultation required for those specific items, it was not far-fetched to suggest that Tranche 1 may not actually be passed as a complete package before the 2025 Federal Election. By which time, who knows?

Summary

Staying abreast and even ahead of the ever-evolving regulatory landscape is imperative for financial advisers committed to genuine client care. The article delves into recent and anticipated regulatory developments through a consumer protection lens, emphasising the multifaceted challenges faced by financial advisers in an intricate ecosystem.

The focus on ASIC’s 2023 enforcement priorities underscores the regulator’s commitment to addressing issues ranging from sustainable finance and investment scams to governance failures, reflecting the dynamic nature of market trends. Notably, the examination of greenwashing cases involving major players like Vanguard and Mercer highlights the growing importance of ESG considerations and the risks associated with outsourced investment management.

The spotlight on remediation processes, AFCA’s stance on complaint resolution times, and the evolving landscape of crypto and QAR legislation further underscore the need for advisers to stay vigilant and adaptable. As the regulatory tempo shows no sign of slowing, advisers must not only align with current priorities but also anticipate future shifts in the regulatory agenda, influenced by technological advancements, consumer behaviour, and market dynamics.

The challenges and lessons outlined in this article underscore the ongoing commitment required to ensure effective consumer protection in the financial advice space.

 

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References:
[1] https://treasury.gov.au/sites/default/files/2019-03/02-Consumer-Financial-Protection.pdf
[2] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-302mr-asic-announces-enforcement-priorities-for-2023/
[3] https://www.allens.com.au/insights-news/insights/2023/08/ASIC-and-APRA-strategic-priorities/
[4] https://asic.gov.au/about-asic/corporate-publications/asic-corporate-plan/
[5] https://asic.gov.au/regulatory-resources/find-a-document/reports/
[6] https://www.moneymanagement.com.au/news/financial-planning/esg-imbalance-between-client-and-adviser
[7] https://www.ifa.com.au/news/33534-advice-improves-investors-esg-understanding
[8] https://download.asic.gov.au/media/ao0lz0id/rep763-published-10-may-2023.pdf
[9] https://www.lawyersweekly.com.au/the-bar/37919-asic-commences-proceedings-against-active-super-for-alleged-greenwashing
[10] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-215mr-asic-commences-greenwashing-case-against-active-super/
[11] https://www.investordaily.com.au/regulation/53943-australiansuper-targeted-over-clear-cut-case-of-greenwashing
[12] https://asic.gov.au/about-asic/news-centre/news-items/asic-calls-on-licensees-to-strengthen-remediation-procedures/#:~:text=Remediation%20review%20periods%20%E2%80%93%20RG%20277,caused%20loss%20to%20a%20consumer.
[13] https://www.professionalplanner.com.au/2023/09/asic-calls-out-lack-of-focus-on-fairness-in-remediation/
[14] https://www.professionalplanner.com.au/2023/11/advice-complaints-still-take-too-long-to-resolve-afca/
[15] Ibid.
[16] https://www.afr.com/technology/small-crypto-exchanges-to-suffer-wipeout-with-new-rules-20231017-p5eczw
[17] https://treasury.gov.au/consultation/c2023-462698
[18] https://www.professionalplanner.com.au/2023/11/qar-draft-legislation-tackles-fee-consent-and-super-fees-but-other-key-parts-missing-for-now/
[19] https://insideadviser.com.au/advice-reform-stalls-as-jones-dithers-on-soa-safe-harbour-changes/