Jaime Lumsden Kelly

With the ongoing Coronavirus pandemic, more businesses are communicating with clients electronically. But what are your options when you need to supply or sign documents?

Financial professionals must give their clients certain documents, including:

• Product Disclosure Statements;
• Financial Service Guides;
• Statements of Advice;
• Correspondence and instructions; and
• Contracts.

These are usually given as hard copies or occasionally emailed. Now that remote working is the norm, companies need to deliver documents electronically.

Can disclosure documents be delivered electronically?

Yes, ASIC has provided guidance on giving disclosure documents electronically. The documents can be:

• Emailed to clients as attachments;
• Emailed to clients as a hyperlink; or
• Hosted online.

Do I need to get a client’s consent to deliver documents electronically?

Yes. Before you provide documents to customers electronically you must receive their consent. The only exception is if you use the ‘publish and notify’ method.

Customers can give express positive consent or consent can be reasonably inferred from the customer’s conduct. For example, if a customer gives you their email address when they supply their personal details.

You must:

• Record the consent;
• Ensure customers can retract their consent at any time; and
• Comply as soon as is reasonably practical if a client retracts their consent (which may be immediately in some cases).

What is the publish and notify method?

To reduce the administrative burden and lower the risk of non-compliance you can use the “publish and notify” method for disclosure documents. This involves publishing documents online and notifying your clients that they’re available.

You need to notify clients that you intend to provide documents electronically and give them 7 days to opt out. You should not send any disclosure documents electronically until the full 7 days have passed because otherwise you will be in breach of your disclosure obligations if someone opts out after the document is provided and before the 7 days has expired.

Once the 7 days has expired, you can notify clients that the disclosure is available digitally by:

• Email;
• SMS;
• An app notification;
• On social media; or
• Another digital message.

The message should include:

• A hyperlink or similar connection; or
• Instructions on how to access or download the disclosure.

Even if a client never accesses the disclosure, you will have provided the disclosure compliantly.

General principles to follow when sending disclosure documents electronically

Whether you email documents or links, or use the “publish and notify” method, you should follow these principles for disclosure documents:

• Make it easy to retrieve and read: Any hyperlinks provided to customers must be accessible at any time (within a reasonable timeframe). This means you need to maintain the same hyperlink; 
• Clearly identify all documents: Identify what the document is in its title and your communication;
• Ensure your communication is received: You need to make reasonable efforts to make sure the disclosure is received. This means you need a process to follow up ‘undeliverable’ messages and have at least one other way of contacting your clients (e.g. mobile phones);
• Don’t expose clients to security risks: This means you shouldn’t send documents in a form that makes them easy to copy or may encourage clients to relax their own cyber-security. For example, sending your clients links may encourage them to let their guard down and click on other potentially dangerous links;
• Ensure your clients can keep a copy: Your clients must be able to download and store the documents so they can refer back to them. This means they shouldn’t be in a form that will corrupt or can be altered easily;
• Maintain version control: Clients should be able to prove which version of the document they relied on. You could maintain version control in the document or make sure clients can only access one version;and 
• Ensure clients can change their mind: Clients must be able to opt-out of receiving online disclosures easily at no cost and at any time.

You also need to ensure that your online systems and platforms are fully operational.

Can I also get signatures and give instructions electronically?

It’s not uncommon for documents to be emailed, printed, signed, scanned and emailed back. But not everyone has access to the necessary facilities. Being able to sign documents and give instructions electronically would be easier.

Documents can be ‘signed’ electronically provided that there is an effective method of:

• Identifying the person providing the electronic signature; and
• Making sure the person intended to execute the document.

This needs to be:

• Reliable and appropriate for the purpose: For example, sensitive or personal documents would have a higher standard than a document that is not as sensitive; or
• Proven in fact: This means you can prove that you’ve identified the signatory and their intention to sign.

Some methods you can use include:

• Docusign which is readily available;
• Use checkboxes and “I agree” buttons online, as long as it complies with the above rules;
• Give clients a password to verify their identity. They would need to login to a password-protected part of your site to accept their contracts;
• Use two-factor authentication where clients must enter a code that you text to them; or
• Use security questions to verify their identity.

By Jaime Lumsden and Lydia Carstensen

The post Delivering documents electronically appeared first on AdviserVoice.

Jaime Lumsden Kelly

Financiers who distribute through retailers may need to vary their licence in preparation for the end of the point-of-sale (POS) exemption.

The exemption was flagged to go by the Royal Commission. The credit representative model is the most obvious one to replace it. This will place financiers in a similar position to those who distribute insurance through the same or similar networks—but there’s a catch.

Authorisations work differently on AFS and credit licences

Insurers with AFS licences are able to appoint representatives without needing to vary their licence. However, authorisations work differently on credit licences. In most cases, financiers won’t be able to appoint credit representatives without varying their credit licence.

On both AFS and credit licences, there are two key types of authorisations relating to the transaction (ignoring the question of advice). For AFS licences, these authorisations are broadly arranged as:

• Issuer, and anyone acting on behalf of the issuer; and
• Agents of the client.

This is intuitive and works. It means that an insurer’s agent or anyone who performs part of the insurer’s tasks needs the same authorisation as the insurer. This makes sense because the insurer is delegating part of its activities.

For credit licences the authorisations are arranged as follows:

• Credit providers and lessors; and
• Everyone else – including intermediaries of all kinds, whether they act for the financier or the borrower.

This is not based on practical functions like the AFS licence authorisations. Credit authorisations are based on whether you’re a lender or lessor or not. So if you’re not a lender you need a different authorisation even if you’re acting on behalf of the lender.

The practical implications of this are that credit providers need one authorisation to run their lending business, and another if they want to appoint agents or delegate certain functions. So if a credit provider wants a credit representative to act on their behalf they need another authorisation.

While some credit providers have both authorisations, many financiers will only have a lending authorisation. This means anyone who doesn’t currently appoint credit representatives or operate their own intermediaries or credit assistance providers, will not be able to appoint credit representatives. Examples include Flexirent, Flexicards, Latitude Finance and ZipMoney.

Obtaining new authorisations may not be easy

Many credit providers who want to appoint their retailers as credit representatives will need to vary their licence to obtain the authorisation they need. But lenders may find it challenging to secure this authorisation. This is because lenders will need to nominate a Responsible Manager (RM) with expertise in acting as an intermediary to support the new authorisation.

Most existing RMs will not have this expertise unless they’ve worked for a broker or other intermediary before. This requirement is ridiculous because an RM who is competent in overseeing lending activities should be equally competent to oversee those lending activities when delegated to a credit representative. However, it remains to be seen whether ASIC will accept an RM’s experience as transferable because there’s no clear guidance on this point.

Historically, ASIC has been willing to accept an RM’s experience as transferable for similar financial services. For example, it has accepted general insurance competence demonstrated via reinsurance experience or life insurance experience demonstrated via general insurance experience in personal accident and illness. But in recent years ASIC has been less flexible with its competency requirements.

It can also take between 4 and 12 months (in some rare cases) to vary a credit licence. So if you’re a credit provider who is considering appointing your POS retailers as credit representatives, you should consider varying your credit licence sooner rather than later.

If you need help assessing your RM’s competence, varying your credit licence, or determining how to manage your arrangements when the POS exemption ends, please contact us.

By Jaime Lumsden Kelly

The post Lenders may need to vary their licence to sell at POS appeared first on AdviserVoice.

Geoff Atkins

Sale of so-called ‘add-on insurances’ has been widely criticised in Australia for some time. Here’s why:

• High pressure sales methods
• Poor value products, poorly understood
• Sometime a consumer is not even able to claim on the product
• Very high commissions for distributors
• Difficulty for buyers in making a considered decision

Regulatory scrutiny has been intense and regulatory action is well and truly underway – the extent of the customer remediation programs revealed by ASIC gives some evidence of this. However, there is still a long way to go before we have a confirmed regulatory approach to these product areas and the relevant markets have adjusted (or possibly disappeared).

What aspects of the changes are still unknown?

1. What products, distribution arrangements and customers will specific add-on provisions apply to?
2. In particular, in what situations will the deferred sales model (DSM) be required?
3. What will be the rules for the deferred sales model(s)?
4. Is the anti-hawking reform relevant and how does it interact with the deferred sales model?
5. Where do the Product Design and Distribution Obligations and the expected low value product regime fit in?

The Product Dimension – What ‘add-on insurance’ should be regulated?

Conceptually defining add-on insurance is not difficult – it is an insurance policy sold alongside a primary purchase of a product or service, including a credit product. This is not the same as saying that all such products should have extra regulation – at a detailed level the regulatory perimeter will need to be set with specificity.

The Code Governance Committee for the GI Code of Practice published a report in 2018 Who sells insurance? that identified more than 20 add-on products. An example along with our views on the potential regulatory boundaries is:

Logically, one could see circumstances where an add-on product sold through one channel does not risk consumer detriment while the same product sold through another channel could. We think it is unlikely, though, that the regulatory boundary will consider different selling situations.

Deferred sales

The extent and details of a DSM(s) is the topic of greatest immediate concern. Commissioner Hayne recommended that a Treasury-led working party develop the model “as soon as is reasonably practicable” – is this likely to take three months or three years?

In the meantime people are considering the following sources of comparison:

(a) The new (1 July 2019) Code of Banking Practice
(b) ASIC’s earlier discussions and consultations
(c) The UK models for CCI and GAP.

The Banking industry has bitten the bullet and included a series of requirements for CCI including a four-day deferred sale of CCI on credit cards and personal loans (Chapter 18 of the new COBP).

ASIC’s 2017 report into car-yard sales gave a thorough explanation of the perceived issues. A subsequent Consultation Paper 294 on DSM for motor dealers postulated anywhere from four days to 30 days deferral and possibly longer for extended warranty because the product does not give cover until other warranties have expired.

Learnings from the UK

The Treasury working group will undoubtedly look to overseas experience to guide its deferred sales model.

The UK has acted on deferred sales for two products – CCI (called Payment Protection Insurance or PPI in the UK) back in 2011 and Guaranteed Asset Protection (GAP) in 2015.

The deferral periods are seven days for CCI and four days for GAP, although the consumer can voluntarily complete the purchase after one day. There are other detailed aspects to the rules such as the information that must be given to consumers and the ability to buy the products stand-alone.

The UK Financial Conduct Authority reviewed the effects of the GAP legislative change in 2018 and came to the conclusion that under a deferred sales model:

• Customers engaged more with the decision-making process and the number of consumers who shopped around more than doubled;
• Add-on GAP insurance sales were 16% to 23% lower than previously because customers had the chance to decide whether they actually wanted GAP insurance; and
• GAP insurance prices are on average 2% to 3% lower than previously, but a stand-alone product still has an average premium less than half of an add-on product.

Other important findings included:

• The sales person still plays an important role in convincing consumers to buy add-ons like GAP (while salesperson influence dropped, it retains equivalent importance to other factors such as convenience);
• Attempts to break the point-of-sale advantage for ‘sold’ product are more likely to reduce total purchases, rather than divert consumers to the stand-alone.
• Add-on sellers play an important role in introducing the product to buyers, and standalone sellers tend to rely on add-on sellers introducing the consumer to the ‘concept’ of the insurance (in the absence of add-on sellers, the stand-alone market may be smaller and/or would need to invest more in sales).

While there is no certainty that the effects of a deferred sales model will play out in the same way in Australia, the UK results suggest that consumers experience better outcomes because they have more choice as to what they purchase and time to decide if they want the insurance.

We were surprised that the drop in sales volumes for GAP was not greater. With premiums remaining flat, we would expect the higher selling costs to have reduced margins for distributors and insurers.

There are other weapons in the regulatory arsenal

While attention is currently focused on a deferred sales model, there are other regulatory tools to deal with add-on insurance.

The anti-hawking recommendation might have a major impact on add-on sales depending on how the scope of anti-hawking is defined. It would be highly desirable that they are part of the same set of regulatory provisions rather than being independent (and possibly inconsistent) requirements.

The other important regulatory intervention for add-on insurance is the product design and distribution obligations, already legislated and effective in April 2021. Add-on products will be challenging for design and distribution obligations, and we expect will need to include a framework for assessing whether a product is of ‘low value’ to some or all consumers.

Finity’s view:

More regulation of add-on insurances has been flagged for some time and we are already into implementation, but still with many unanswered questions.

Most distributors and insurers have decided whether they see add-on insurance as part of their future business models, but for those deciding to continue there is much work ahead. The known withdrawals from the market so far seem to have been driven by reputation risk.

We expect most market participants (distributors and the specialist insurers) to adapt rather than withdraw. Selling costs will be higher (that is expenses not commission) and margins will be thinner.

DSM regulations should be applied to a narrow range of products, not all add-on insurances. Our reasons are firstly that there is a risk of onerous changes being applied that are against consumer interests rather than protecting them, and secondly that the DDO and ASIC’s Product Intervention Powers are a more nuanced set of measures that should focus directly on consumer interests.

The Fold’s view:

We agree with Finity’s view as set out above.

We also note that in our opinion, any withdrawals from the market will not take place as a result of the deferred sales model, but as a combination of other changes to the legislative environment, such as the design and distribution obligations.

We take this position because the obligations imposed under a deferred sales model are likely to be less onerous than being required to design a product for targeted markets or re-design a product to ensure that it is not unfair or is consistent with revised duty of disclosure requirements.

We think it is important for the industry to be heavily involved in any consultation on this recommendation. As there has been no prior consultation or discussion about regulating add-on insurance outside the motor dealer channel, we think it is unlikely that the regulators will have yet formed a view or have much prior exposure to the multitude of distribution channels and the differences in selling models in the market. For this reason, the industry should assist in shaping the regulation.

We also think it is appropriate for this recommendation to apply narrowly at first (ie only in relation to a limited range of types of insurance) and then gradually implemented in relation to other types of add-on insurance (as appropriate) to make it less likely that there will be unintended consequences, such as consumer detriment, from these changes.

By Geoff Atkins and Jaime Lumsden Kelly

The post Royal Commission response: Add-on insurance appeared first on AdviserVoice.

How will you assess a credit card holder’s capacity to pay?

This is the first post in a two part series on the new responsible lending rules for credit cards. Tighter new rules mean that credit card providers must assess credit card applications more strictly.

While not mandatory, other lenders and brokers should apply the same rules to their loan applications.

What has changed?

In the past, credit card contracts were assessed as unsuitable if the applicant couldn’t repay the minimum monthly repayment for that limit. Under the new rules, credit card providers must make their assessment based on whether the applicant can repay the entire credit card limit within 3 years. If a credit card applicant cannot repay the full credit limit in 3 years, it’s assumed that they will be in substantial hardship. This is because a consumer who cannot afford to repay the limit within 3 years will probably pay a staggering amount of interest that will take an extraordinarily long time to repay. If the applicant is in substantial hardship, the credit card provider must decline the application as being unsuitable.

Other lenders and brokers may be affected

Technically, this new rule doesn’t apply to other lenders or brokers even when they’re assessing an application from a borrower who holds a credit card. This means that when assessing the suitability of a mortgage or a car loan, the credit licensee can assume that only the minimum monthly repayment will be made on the credit card.

But all lenders and brokers have an obligation to reject a credit contract if it would place the consumer into substantial hardship. If the inability to repay a credit card within 3 years is considered to be a substantial hardship when assessing a credit card application, how can it also not be substantial hardship, if a consumer will no longer be able to repay their credit card within 3 years because they’re meeting new repayment obligations on a car or home loan?

These two scenarios highlight a problem

In scenario 1, an applicant with a $500,000 mortgage applies for a $15,000 credit card. When assessing the credit card, the provider determines that the applicant is unsuitable because they won’t have enough income to repay their credit card limit in full within 3 years. So the credit card provider declines the application.

In scenario 2, the same applicant already has a $15,000 credit card and then applies for a $500,000 mortgage (on identical terms as in the first scenario). The licensee is only required to consider whether the applicant can make the minimum monthly repayment on their credit card when determining if they will suffer substantial hardship. On this basis, the licensee approves the mortgage.

The end result for the applicant is the same in both scenarios. They have a $500,000 mortgage and a $15,000 credit card limit. So how can we say that they are in substantial hardship in one scenario but not in the other? It’s an absurd outcome that the same person could be approved or declined for a credit product just because they applied for them in a particular order.

Over time, the courts and AFCA may seek to align the obligations of all credit providers and brokers. In the meantime, ASIC has said it expects all credit licensees to apply the rule to existing credit cards by 1 July 2019. This means credit providers and brokers should consider the implications of this situation when determining how they will assess a credit card holder’s capacity to pay and substantial hardship for other loan applications.

In the next post, we’ll look at what interest rate and fees to apply when considering the repayment amounts of existing cards, if repaid in 3 years.

By Jaime Lumsden Kelly

The post New credit card rules affect all lenders and brokers appeared first on AdviserVoice.

Jaime Lumsden Kelly

There is no legal requirement for ASIC to “approve” Responsible Managers (RMs), but that’s exactly what’s happening in practice. It’s now creating problems for licensees and RMs.

The letter of the law

Under the law, an RM is legally appointed from the date the AFS licensee determines. This appointment then triggers a requirement for the licensee to notify ASIC within 20 business days of the change. While credit licensees need to notify ASIC of any changes once a year when they lodge their annual compliance certificate.

There is nothing in the law that says the appointment is only effective when ASIC approves the RM. This is something that is often misunderstood. 

What has changed?

In the past, ASIC would send a letter to licensees acknowledging that they had received their notification about RM changes and life went on. ASIC did not routinely assess whether an RM met the competence requirements of the law. Licensees assessed and maintained their own organisational competence.

In recent years, this has changed. While an RM is still legally appointed from the date the licensee determines, whether they remain on the licence is increasingly subject to ASIC’s review and opinion.

Before a licensee can be sure that an RM will remain on their licence long-term, that person will be assessed by ASIC.They review a detailed history of that person’s experience to determine if they are competent to oversee the provision of financial services or credit activities. This means that ASIC is effectively reviewing whether licensees are complying with their organisational competence obligations in light of the experience of its RMs.

The new process is problematic for everyone involved

This new process has created uncertainty and both licensees and RMs are hesitant to fully commit to a role until ASIC has rubber-stamped the arrangement. Licensees are increasingly reluctant to employ RMs, because they aren’t sure if they will have ongoing work for them. Similarly, potential RMs are reluctant to accept an employment offer from a licensee if they can’t be sure of job security.

The problem is exacerbated because it can take ASIC 4 to 12 months to process changes to RMs. These delays make it difficult for licensees and potential RMs to maintain a “holding pattern” while ASIC completes its review. It also raises several questions.

When should a licensee secure an RM? What if the RM gets a better offer? What happens to their licence if they lose an RM as they wait? Do they need to find a new RM and start the process all over again? What if that person can’t easily be replaced?

How can licensees overcome this issue?

Some licensees are forced to go to an external provider to source an RM which makes this issue difficult to manage. Training existing staff to fill these roles and creating internal succession plans is a more viable solution. By having staff internally who can be tapped to fill the role on short notice, licensees can mitigate the uncertainty of needing to recruit new RMs externally.

The argument is even more compelling for difficult authorisations, such as managed investment schemes, derivatives and custodial services. This is because there are relatively few qualified RMs and competition for their services is stiff.

By Jaime Lumsden Kelly

The post Do responsible managers need ASIC approval? appeared first on AdviserVoice.

Jaime Lumsden Kelly

Small business lenders are in the spotlight following ASIC’s report on unfair contract terms in small business loans. With ASIC setting clear expectations about how small business lenders will amend their contracts, it’s important to get this right.

Who is protected?

A small business employs less than 20 employees (excluding casual employees), meaning the first issue to be resolved is whether one or both parties is a small business.

Does the contract need to have a certain dollar value?

Yes – to qualify for protection, the contract must be a standard contract and either:

• 12 months or less in duration with an upfront price payable of less than $300,000; or
• More than 12 months in duration with a contract value of less than $1,000,000.

What is ‘standard’?

A standard contract is one for the supply of goods or services or for the sale of land where, for example:

• the small business isn’t given a real opportunity to discuss or negotiate the terms of the contract;
• the contract was prepared before discussions between the parties; or
• the terms of the contract are not specific to one party or to the particular transaction.

What’s an unfair term?

A term which causes significant unbalance to someone’s rights and obligations, would cause them detriment if it was relied on, and is not reasonably necessary to protect the legitimate interests of the party relying on it is unfair.

This includes terms that allow one party to:

• unilaterally change the contract terms or vary the price;
• limit or avoid their liability or obligations in an unjustified manner;
• restrict the ability for a party to terminate the contract;
• lock the other party into automatically renewing the contract;
• assign contract rights without consent;
• impose excessive fees, penalties or interest rates;
• limit a party’s right to sue or the evidential burden that applies if a party commences legal proceedings; or
• restrict the other party’s rights of redress or interfere with their access to insurance.

Terms required by law or which set the price of the contract are not unfair.

The onus is on the (big) business relying on the term to prove the term is not unfair. Obviously, clear and transparent clauses where a reasonable balance has been struck between the interests of the parties are less likely to be unfair.

Things to consider

ASIC ‘s view is that certain ‘standard’ clauses in loan agreements are unfair. This includes:

• entire agreement clauses, allowing the lender to deny responsibility for representations made outside the contract;
• broad indemnity clauses, requiring the borrower to indemnify for the lenders fault; and
• unilateral variation clauses, enabling lenders to vary without agreement from the borrower.

ASIC also considers that clauses setting out non-monetary defaults have a high risk of being unfair clauses, including:

• financial indicator covenants (such as LVR) triggering defaults where there is no material risk to the lender;
• material adverse change events of default clauses, giving lenders discretion to treat a loan as in default for unspecified ‘material adverse changes’; and
• other non-monetary defaults, which give lenders rights that are disproportionate to the credit or other risks e.g. rights to call defaults even where the borrower has met regular repayments.

If you have any questions or need help redrafting your standard contracts, we’re more than happy to assist.

Author: Jaime Lumsden Kelly

The post Business lending unfair contracts appeared first on AdviserVoice.

Is your advice business using chatbots to service clients?

Many financial services businesses now use technology, such as algorithms and chatbots, to help attract and service their customers.

While some organisations may create their own chatbot software, most use a third party technology provider. In these cases, generally the software is licensed by the developer to the licensee organisation with or without support services. It may be hosted by the developer, or self-hosted by the organisation. Generally the chatbot is branded by the licensee organisation so that users interacting with the chatbot feel like they are interacting directly with the licensee organisation.

As chatbots ‘speak’ to customers it raises some interesting questions. In particular, is a financial service being provided, and if so, who is providing that financial service? Is it the developer, or the licensee organisation, and does it depend where the software is hosted?

Let’s take the example of a chatbot that has been licensed to a financial services business and is supported by the software provider.

Is any financial advice being provided?

A chatbot may be providing a financial service if it:

• Is dealing in a financial product. This may happen if the services it provides results in an issue, application, acquisition, variation or disposal of a financial product; or
• Contains content that is financial product advice. This is an opinion or recommendation that is intended to influence a consumer to make a decision about a financial product. It also covers opinions or recommendations that a reasonable person may consider as being intended to influence a decision.

Whether a chatbot is providing financial product advice to customers will depend on the questions and responses that are approved by the business licensing the chatbot software. If responses containing advice are approved by the licensee organisation, and the chatbot is capable of tailoring such a response based on the consumer’s particular circumstances, then it will be personal advice. If there is no tailoring capability, it’s general advice.

Generally, it’s presently unlikely that chatbots will provide personal advice to a customer, as this requires more complex algorithms of the type used for robo-advice. Such a chatbot would be, in essence, a robo-adviser.

A chatbot could also be ‘dealing’ in financial services if the customer enters into a financial transaction as they interact with the chatbot, such as if an insurance application can be lodged with a chatbot or a policy issued.

If financial product advice is provided or the chatbot deals in financial services, then you need to determine who is actually providing that service.

Who is providing the financial services?

In the past, financial services were provided by people over the phone, through email or in person. Chatbots have now eliminated the need for a human operator, but it’s not the human the chatbot replaces – it is the technology the human operator uses that is replaced.

That is, it becomes possible for a corporate entity to speak directly with its customers without interfacing through an employee. Instead, the company uses the technological communications conduit of the chatbot, instead of a phone or email service combined with a human operator.

Because of this, chatbots cannot be assumed to be providing the service that was provided by the human who has been eliminated. Rather, chatbots are a piece of infrastructure that uses content, and that content needs to be authored and approved by someone. It’s that person who is now providing the financial service that the human operator once did.

The business who creates the chatbot technology isn’t necessarily the same as the one who creates and approves the content – this is usually the business who has licensed the software.

A software business that licenses a chatbot to a financial services business can’t be responsible for the services its technology provides, even if they offer support, customer service or even hosting services.

Think of it like this – Google isn’t providing a financial service when someone gives financial advice over Gmail. The person providing the service is the one who creates the content of the email. This means that businesses who create content for chatbots need to be aware of what services the chatbots are providing, because they may need to hold an AFS or credit licence and make sure that they’re compliant with the financial services or consumer credit laws.

By Jaime Lumsden Kelly

The post Are chatbots providing financial services? appeared first on AdviserVoice.

Jaime Lumsden Kelly

This is the third article in The Fold’s series on the ASIC Enforcement Review Taskforce’s third Position and Consultation paper on Strengthening ASIC’s licensing powers (the Position Paper).

The Position Paper contemplates several changes to the concept of control that will broaden ASIC’s powers and may create more uncertainty for businesses.

The concept of group control is fraught with issues

The Position Paper introduced a new concept – the group of controllers. This is perplexing because section 50AA of the Corporations Act contemplates that only one person can have control of a company. That section specifically states that if two people can determine the outcome of a decision together, then neither has control.

Introducing the concept of group control over a licensee raises a lot more issues than it solves.

For example, if one member of the group fails to meet the fit and proper test, can ASIC take action? After all, it would be unfair for ASIC to cancel or suspend a licence if an individual, who is not in a position to individually exert control over the licensee, fails the test.

One solution to address this issue could be that ASIC’s powers only apply when more than 50% of the controlling group fail to meet the fit and proper person test. However, even this approach is difficult when the controlling group could change week to week or even day to day, depending on how shareholders and other managers align on particular issues.

Before the concept of a group of controllers is introduced, these and other potential issues need to be thought through and ironed out.

Practical control is difficult to assess

The concept of “control” isn’t just about what rights an entity has to control a licensee. It also extends to practical influence and patterns of behaviour. This is a very broad definition that raises many questions, particularly when trying to identify whether a change of control has occurred.

Currently, a licensee must notify ASIC within 10 days of becoming aware of a change in control. ASIC wants to tighten this by requiring the licensee to notify them within 10 days of the change in control occurring. Once ASIC receives the notice, they will then assess whether the new controllers are fit and proper to control the licensee. ASIC also wants to introduce penalties if the licensee doesn’t notify them.

In my experience, change of control notices are usually only lodged when there has been a change of ownership of more than 50% of the issued share capital. That’s due to the fact it is otherwise difficult to pinpoint when practical control changes because:

• Practical control is a subjective assessment, but ownership of share capital is objective;
• The person responsible for reporting, like the Compliance Manager, often has no oversight over practical control as they may not attend board or management meetings; and
• Human ego makes it unlikely that a majority owner will admit that they have ceded control to another.

Practical control can also shift often. For example, if a company has two equal shareholders but one holds practical control, their control may shift temporarily to the other shareholder if they are on holidays or fall ill. In a company with three equal shareholders, control may shift between different groups of two shareholders, depending on how shareholders ally with each other to make decisions.

In this scenario, it’s not appropriate to issue multiple change of control notifications. It’s also an inefficient use of ASIC’s resources for them to assess compliance with the fit and proper test each time practical control shifts.

The definition of control needs to be restricted

These issues highlight why the definition of control, when it comes to assessing whether a controller is a fit and proper person, should be limited to shareholders.

This would bring the Australian regime in line with other countries, including the UK, Hong Kong and Singapore.

In the Position Paper, ASIC introduces the concept of pre-approving a change of control. While good in theory, this is impractical unless the control test is changed. After all, it’s possible to delay a transfer of shares, but it’s not always possible for a controller to avoid a change of control occurring because the controller is injured or unwell.

By restricting the change of control requirements so they only apply to changes in shareholdings, businesses can plan their transactions and ASIC can avoid an unnecessary increase in its compliance workload.

In the next post, I’ll explore ASIC’s powers to assess organisational competence when there is a change of control.

By Jaime Lumsden Kelly

The post It’s time to change the definition of control appeared first on AdviserVoice.

Limited licensees have been at a disadvantage compared to full licensees.

Ever since the accountants’ limited licence regime was introduced, limited licensees have been at a disadvantage compared to full licensees.

Red tape is unnecessarily complicated

The application process for limited licensees is unnecessarily onerous. Even full licensees have never had to comply with some requirements, such as the need to make multiple declarations about their financial status.

Accountants have also lost the ability to appoint Responsible Managers (RM) who don’t have 3 years’ regulated experience due to an ASIC policy change for financial services relating to SMSFs.

This is at odds with ASIC policy for full licensees, who can appoint an RM using a broad range of experience. We are aware of RMs who are competent in general insurance because of unregulated reinsurance experience, RMs competent in alternative risk management models because of insurance experience, and RMs competent in Australia due to a mix of unregulated overseas experience and regulated Australian experience.

This inconsistency has created a huge issue for licensed accountants with RMs who wish to retire, or have fallen ill unexpectedly. If an accountant needs to change their RM before the third anniversary of their licence, they will need to contract someone to fill that role, because no new RMs will now meet ASIC’s competency requirements for SMSFs prior to that date.

Accountants who provide tax advice are most impacted

ASIC’s decision to modify the “tax advice exemption” for licensees has a significant impact on licensed accountants and their employees.

Previously, any person could comfortably provide tax advice without holding an Australian Financial Services licence, even if it was also financial product advice. This was because the exemption meant the tax advice was treated as if it was not a financial service at all. If it’s not treated as a financial service, then it’s not regulated, regardless of whether the accountant is licensed or not.

To rely on the exemption, the person giving the tax advice must:

• Not receive a benefit if the client acquires the financial product recommended in the advice (other than fees paid by the client, or an associate, such as the SMSF trustee or another member); and
• Provide a warning statement if the client is a retail client. No warning is required for wholesale clients when relying on this exemption. The warning for retail clients must:
  • Tell them that the person giving the advice is not licensed;
  • Warn them that taxation is only one issue which should be considered when making decisions about financial products; and
  • Advise the client to consider advice from a licensee or authorised representative before acquiring the product.
    While ASIC correctly identified that a licensee would not be able to comply with this exemption, because they could not make a statement that they were “not licensed”, in attempting to solve that problem, new problems were created.

ASIC could have simply solved this conundrum by modifying the disclosure – “this advice is not subject to financial services regulatory protection” would have been sufficient.

While this change affects all licensees, the most far-reaching consequences are for accountants operating under the limited licence regime because it has created substantial discrepancies in the treatment of tax advice between licensed and unlicensed accountants.

For example, an accountant who is advising a client on whether (and how) to establish a pension based on tax outcomes will:

• If unlicensed—rely on the tax advice exemption and give the required warning; or
• If licensed (or employed by a licensee)—need to give the client an SoA and comply with the best interests duty.

This is particularly challenging for tax accountants who provide no SMSF financial services but who are nonetheless employed by a licensee as they may no longer rely on the tax advice exemption.

The outcome is absurd and ignores the core need – to protect the consumer. If a consumer is adequately protected without an SoA or the best interests duty when dealing with an unlicensed accountant, then why do they need greater protection from a licensed accountant?

This issue has been brought to ASIC’s attention but it remains to be seen whether it will be resolved or if something new will be inflicted upon accountants instead.

By Jaime Lumsden Kelly

The post Accountants get the short end of the stick – again appeared first on AdviserVoice.

Jaime Lumsden Kelly

The ASIC Enforcement Review Taskforce released its third Position and Consultation paper in June 2017 (the Position Paper). The paper explores how to strengthen ASIC’s licensing powers. Over the next five posts I’ll outline the good, the bad and the rather ugly consequences of some of the proposed changes and suggest some alternatives.

Kicking off the series, let’s look at ASIC’s powers in relation to the fit and proper person test.

There needs to be consistency

Under the current AFS regime, licensees’ Responsible Managers must pass the test of “good fame or character.” This is not as stringent as the “fit and proper person” test that applies to credit licensees’ Responsible Managers. So it makes sense that ASIC wants to bring both of the regimes under the same, higher standard.

But, I don’t think it’s appropriate to extend the test as a blanket rule. If we look overseas to countries like Hong Kong, Singapore and the UK, some industries are often not subject to these tests, specifically:

• General insurance;
• Life insurance;
• Payments systems;
• Basic deposit products;
• Simple foreign exchange; and
• Financial planning.

It would be better if the fit and proper person test did not apply to licensees that provide these services exclusively.

ASIC’s resource constraints are impacting investors

It is also proposed that the fit and proper person test be extended to “controllers” of a licensee. This would also grant ASIC the power to refuse, suspend or cancel licences where the controllers are not fit and proper people.

If there is a change of control, a licensee is currently required to notify ASIC within 10 business days of becoming aware of the change. Under the proposed new powers, ASIC would then consider the new controller to determine if they are a fit and proper person. If the new controller does not pass the fit and proper test then ASIC would be able to suspend or cancel the licence.

During this time a business would be able to continue to trade so sales can proceed without being delayed by the regulator’s assessment. While ASIC hasn’t proposed a pre-approval process, the possibility of this hasn’t been entirely ruled out either.

Assessing whether a controller is fit and proper is resource-intensive. ASIC already has a resourcing problem, with our clients experiencing processing times of between 8 and 12 months for AFS licences and upwards of 7 months for credit licences. The assessment of whether new controllers are fit and proper people (either before or after the completion of the transaction) will probably delay licensing applications even more.

Ironically, long processing times have in part created a secondary market for licences, and ASIC is now trying to solve its resourcing problems by increasing its compliance powers. Implementing these powers will increase their workload and only exacerbate the underlying problem.

ASIC’s powers should be restricted if circumstances change

If ASIC is granted the power to suspend or cancel a licence when there is a change of control, it has the potential to destroy the value of an investment when there’s been no misconduct—to the detriment of any other shareholders who are fit and proper people. This could result in the value of a shareholder’s investment in the licensee being lost, in whole or part, due to no fault of their own.

This power also has the potential to harm consumers where a licensee can no longer service them on short notice, particularly people who are:

• In the middle of a transaction (for example if they’ve received advice about life insurance but the placement of their policy is pending);
• Actively managed (for example clients of managed discretionary accounts); or
• Relying on the licensee’s systems to manage their own investments, like users of IDPS services.

Of course, these concerns exist whenever a licence is suspended or cancelled, but they can be avoided.

We can look towards the Hong Kong system for a better approach. In Hong Kong, the Securities and Futures Commission can restrict the powers of a substantial shareholder without affecting their licence.

For example they may prevent the shareholder from being involved in the management of the business, deem any votes they cast as void, and take any other steps if necessary. This approach protects the licence, its clients, and other shareholders, while ensuring that the controller in question cannot affect the business.

By Jaime Lumsden Kelly

The post When is it fit and proper for ASIC to cancel licences? appeared first on AdviserVoice.