Macquarie Securities (Australia) Limited (‘Macquarie’) has paid a penalty totalling $300,000 to comply with an infringement notice given by the Markets Disciplinary Panel (‘the MDP’).
The MDP had reasonable grounds to believe that Macquarie contravened
the market integrity rules that deal with the provision of regulatory
data to ASX and Chi-X.
Over a four-year period from July 2014 to July 2018, Macquarie
transmitted approximately 42 million orders to ASX and Chi-X that
included incorrect regulatory data or omitted required regulatory data.
Over the same period, Macquarie also submitted approximately
377,000 trade reports to ASX and Chi-X with the same deficiencies.
The kinds of regulatory data that was incorrect or missing was information about:
‘capacity’: a notation to identify whether Macquarie was acting as principal or agent;
‘origin’: a notation to identify the person on whose instructions Macquarie was acting; and
‘intermediary’: the AFSL number of an intermediary using Macquarie’s automated order processing system.
The MDP emphasised that the provision of accurate regulatory data
enhances market transparency and ensures an orderly market. The
provision of incorrect or missing regulatory data to market operators
impedes informed regulatory decision-making by market operators and by
ASIC.
The MDP found that while Macquarie intended to comply with the market integrity rules, there were weaknesses in the configuration and integration of Macquarie’s systems, its processes for on-boarding new clients and its control framework.
The MDP considers Macquarie’s conduct to be negligent, having regard
to Macquarie’s poor design and implementation of updates to key systems,
the high number of orders and trade reports containing incorrect or
missing data, the multiple categories of incorrect or missing data and
the length of time the problems persisted without detection by
Macquarie.
Given Macquarie’s scale, market share and high market flows, the MDP
considers that market participants such as Macquarie have greater
potential and capacity to undermine market integrity. A market
participant such as this should carry a greater responsibility to
properly manage the risks that flow from their conduct. If that risk is
poorly managed, the financial consequences to the market participant
should be commensurately greater.
The MDP noted that, once Macquarie became aware of the scale of the
issues, which it reported to ASIC, it undertook a comprehensive review
to identify the causes, and promptly implemented remedial measures.
Brokers should be applying new credit card assessment rules to their loan applications, the solicitor director of The Fold Legal has suggested. Via The Adviser.
The Australian Securities and Investments Commission (ASIC) last year announced
new assessment criteria that is to be used by banks and credit
providers when assessing new credit card contracts or credit limit
increase for consumers.
Under
the changes, credit licensees are required to assess whether a credit
card contract or credit limit increase is “unsuitable” for a consumer
based on whether the consumer could repay the full amount of the credit
limit within the period prescribed by ASIC.
ASIC outlined last year that,
as part of the new measures, credit licensees undertaking responsible
lending assessments for “other credit products”, including mortgages,
should ensure that the consumer “continues to have the capacity to repay
their full financial obligations” under an existing credit card
contract, within a “reasonable period”.
Speaking
of the new rules, Jaime Lumsden Kelly, solicitor director of The Fold
Legal, has suggested that, while it is not mandatory for brokers, both
lenders and brokers should apply the same rules to their loan
applications.
Writing in a
blog post for The Fold Legal, Ms Lumsden Kelly elaborated: “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
three years.
“If a credit
card applicant cannot repay the full credit limit in three years, it’s
assumed that they will be in substantial hardship. This is because a
consumer who cannot afford to repay the limit within three 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,” she said.
While
the rule doesn’t “technically” apply to other lenders or brokers, the
lawyer added that “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 three 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 three years because they’re
meeting new repayment obligations on a car or home loan?” she said.
Ms Lumsden Kelly gave the following scenarios as an example to illustrate the point.
In
the first scenario, 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 three
years. So the credit card provider declines the application.
However,
if 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,” she said.
“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.”
The Fold Legal
solicitor concluded: “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.”
She urged any brokers unsure of how the rules affect their business or credit obligations to contact a lawyer.
Following an ASIC investigation, Citigroup will refund over $3 million to 114 retail customers for losses arising out of structured product investments offered by Citigroup between 2013 and 2017. Citigroup will also write to over 1000 customers remaining in the products to provide them an opportunity to exit early without cost.
ASIC investigated Citigroup’s sale and provision of general advice to
customers for fixed coupon structured products, which are complex,
capital at risk products tied to the performance of reference shares.
ASIC was concerned that while Citigroup considered its financial
advisers to be providing general advice, elements of its practice may
have led some customers to believe that Citigroup was providing personal
advice.
Citigroup’s practices included its advisers asking customers about
their personal circumstances, such as their tolerance for risk, and
providing financial education about benefits and risks to customers who
had no previous experience of investing in structured products.
Financial advisers have higher obligations and disclosure requirements
when providing personal advice.
From 1 January 2018, as a result of ASIC’s investigation, Citigroup
ceased selling structured products to retails clients under a general
advice model.
Citigroup will shortly start contacting affected customers. The
remediation will be completed by 10 September 2019, will be
independently assured and Citigroup will report to ASIC once the process
is complete.
ASIC has warned Australian financial services licensees that offer over-the-counter derivatives to retail investors located overseas could be breaking laws abroad, with Chinese authorities having alerted the watchdog that some online platforms have engaged in illegal activity, via InvestorDaily.
Regulators
in jurisdictions including Europe, Japan, North America and China have
restricted or prohibited the provision of certain OTC derivatives, such
as binary options, margin foreign exchange and other contracts for
difference (CFDs) to mitigate harm to retail investors.
ASIC has
expressed concern that some OTC derivative issuers that hold AFSLs may
be marketing or soliciting overseas clients to open accounts with
Australia-based licensees on the basis of avoiding overseas intervention
measures.
The regulator said is it considering whether breaching
overseas laws is consistent with obligations under Australian law to
provide services ‘efficiently, honestly and fairly’.
ASIC is also
considering whether it will see AFSL holders could be making misleading
or deceptive statements about the scope or effect of their license.
“AFS licensees who break the law in overseas
jurisdictions, or who mislead retail investors about their services
undermine the integrity of the Australian licensing regime,”
commissioner Cathie Armour said.
“ASIC will not tolerate that conduct.”
Chinese
authorities have already informed ASIC that “some online platforms are
illegally engaged in forex margin trading activities”.
Under Chinese law, no institution or agency has approval to carry out margin foreign exchange trading.
Temporary
product intervention measures have also been extended in Europe by the
European Securities and Markets Authority, with authorities in the UK
and Germany introducing permanent measures including anti-avoidance
provisions.
“AFS licensees offering OTC derivatives to overseas
retail clients should, as a matter of priority, seek advice on the
legality of their offerings to these clients,” commissioner Armour said.
“Any non-compliant activities should cease immediately and be notified to ASIC and the relevant overseas authorities.”
ASIC has released KordaMentha Forensic’s final report on CBA’s advice compensation program under its additional licence conditions.
CBA has offered approximately $9.3 million to customers whose advice has been reviewed as a result of the licence conditions imposed by ASIC in August 2014.
ASIC had imposed additional conditions on the Australian financial
services (AFS) licences of CBA’s Commonwealth Financial Planning Ltd and
Financial Wisdom Ltd with the consent of the licensees in August 2014,
and appointed KordaMentha Forensic as the independent expert to monitor
the licensees’ compliance with the additional licence conditions.
ASIC took this action because the licensees did not apply review and
remediation processes consistently to customers of 15 financial
advisers, disadvantaging some customers. The additional licence
conditions required that CBA offer compensation for inappropriate advice
that caused financial loss (where applicable) and offer affected
customers up to $5,000 to get independent advice from an accountant,
financial adviser or lawyer.
KordaMentha Forensic has produced five reports since the licence conditions took effect. In the first report, the Comparison Report, KordaMentha
Forensic identified inconsistencies in treatment of clients and
required the licensees to correct the inconsistencies for approximately
2,740 customers.
In the second report, the Identification Report,
KordaMentha Forensic found that the licensees had taken reasonable
steps in 2012 to identify which clients of the 15 advisers had to be
included in the compensation program.
KordaMentha Forensic also found that the licensees had taken
reasonable steps to identify other potentially high-risk advisers, but
that the licensees had not adequately reviewed advice given by 17 of
those advisers. To address this, KordaMentha Forensic prescribed the
scope of the additional reviews (of the 17 advisers) that the licensees
had to undertake.
KordaMentha then produced three additional reports describing the
licensees’ compliance with the conditions, the additional steps that the
licensees were required to take, and the compensation outcomes. Compliance Report Parts 1 & 2 assessed
the steps taken by the licensees to communicate with and compensate
(where applicable) customers of 15 former advisers for advice provided
between 2003 and 2012.
Compliance Report Part 3 described
the licensees’ review of the 17 potentially high-risk advisers and
KordaMentha Forensic’s conclusion that the licensees should apply the
compensation program to customers of five of those advisers.
In the final report, Compliance Report Part 4,
published today, KordaMentha Forensic covers the last of CBA’s advice
compensation program under the licence conditions. The report states
that CBA has offered a further $2.3 million to 232 clients of the five
advisers. This is in addition to:
$4.95 million (including interest) offered to customers of different
advisers under the licence conditions (reported in KordaMentha
Forensic’s Compliance Report Parts 1 & 2);
$1.9 million (including interest) offered to additional customers as
a result of CBA’s review outside the licence conditions. The need for
these reviews was identified during the licence conditions process.
This means that CBA has offered approximately $9.3 million to
customers whose advice has been reviewed as a result of the licence
conditions imposed by ASIC in August 2014.
ASIC has welcomed the passage of key financial services reforms contained in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) legislation introducing:
a design and distribution obligations regime for financial services firms; and
a product intervention power for ASIC
The design and distribution obligations will bring accountability for
issuers and distributors to design, market and distribute financial and
credit products that meet consumer needs. Phased in over two years,
this will require issuers to identify in advance the consumers for whom
their products are appropriate, and direct distribution to that target
market.
The product intervention power will strengthen ASIC’s consumer
protection toolkit by equipping it with the power to intervene where
there is a risk of significant consumer detriment. To take effect
immediately, this will better enable ASIC to prevent or mitigate
significant harms to consumers.
These reforms were recommended by the Financial System Inquiry in
2014 and represent a fundamental shift away from relying predominantly
on disclosure to drive good consumer outcomes.
ASIC Chair James Shipton said the reforms were a critical factor in
the development of a financial services industry in which consumers
could feel confident placing their trust.
‘These new powers will enable ASIC to take broader, more proactive
action to improve standards and achieve fairer consumer outcomes in the
financial services sector. This will be a significant boost for ASIC in
achieving its vision of a fair, strong and efficient financial system
for all Australians,’ he said.
‘This will also provide invaluable assistance to ASIC as we all seek
to rebuild the community’s trust in our banking and broader wealth
management industries. And we note the overwhelming level of support
this attracted from across the Parliament.’
Mr Shipton also welcomed the amendments to the original legislation,
which extended the reach of these reforms, providing a comprehensive
framework of protection for most consumer financial products. It will
also empower ASIC to intervene in relation to a wider range of products
where ASIC identifies a risk of significant detriment to consumers.
ASIC has released new research revealing many consumers confuse ‘general’ and ‘personal’ advice exposing them to greater risk of poor financial decisions.
The ASIC report, Financial advice: Mind the gap (REP
614), presents new independent research on consumer awareness and
understanding of general and personal financial advice, identifying
substantial gaps in consumer comprehension.
“This disturbing gap in understanding whether the advice they are
getting is personal or not means many consumers are under the false
premise their interests are being prioritised, when no such protection
exists,” said ASIC Deputy Chair, Karen Chester.
Millions of Australians will likely seek financial advice at some
stage in their lives. When they do, it is critical they understand
whether that advice is personal, whether it is tailored to their
circumstances and does the adviser have a legal obligation to act in
their interest.
“The survey not only revealed consumers are not familiar with the concepts of general and personal advice, but only 53 per cent of those surveyed correctly identified ‘general’ advice. And even when provided the general advice warning, nearly 40 per cent of those surveyed wrongly believed the adviser had an obligation to take their personal circumstances into account,” Ms Chester said.
The report highlights the importance of consumer awareness and
understanding of the distinction between personal and general advice
with the Future of Financial Advice (FOFA) protections only applying
when personal advice is provided. These include obligations for advisers
to act in their client’s best interests, to provide advice that is
appropriate to their client’s personal circumstances and to prioritise
their client’s interests. These obligations do not apply when general
advice is provided.
“The survey also revealed that the responsibilities of financial
advisers, when providing general advice, is not well understood. Nearly
40 per cent of those surveyed were unaware that advisers were not required by law to act in their clients’ best interests,” Ms Chester said.
ASIC anticipates the need for financial advice to grow, reflecting an
ageing population and many financial products, especially retirement
products, becoming more complex. ASIC reports that much of the advice is
likely to be general advice, and while appropriate in some
circumstances, it is inevitably of limited use.
“ASIC is seeing increased sales of complex financial products under
general advice models – so not tailored to personal circumstances –
leaving many consumers, especially retirees, exposed to the potential
risk of financial loss. And whilst the Financial Services Royal
Commission, and the Government’s response, dealt with the most egregious
risks of hawking of complex financial products, consumer confusion
about what is personal and general advice needs to be addressed,” Ms
Chester said.
The report’s findings reinforce those of the Murray Financial System
Inquiry and the Productivity Commission reports on the financial and
superannuation systems. Those reports made recommendations about the use
of the term ‘general advice’, which is likely to lead to false consumer
expectations as to the value of and protections afforded advice
received.
Ms Chester said, “This consumer research is timely. It comes as the
Government is considering policy recommendations on financial advice
from the Productivity Commission’s twin reports on Australia’s financial
and superannuation systems. And at a time when the financial system
itself undergoes much change, following the intense scrutiny of the
Financial Services Royal Commission, including considering new financial
advice and distribution business models”.
The report includes quantitative and qualitative research
commissioned by ASIC and undertaken by independent market research
agency, Whereto Research. The research used hypothetical advice
scenarios to test consumer recognition of when general and personal
advice was being provided, and awareness of adviser responsibilities
when being given each type of advice.
Report 614 Financial advice: Mind the gap is the first stage
in ASIC’s broader research project into consumer experiences with and
perceptions of the financial advice sector. Additional research by ASIC
will get underway in 2019 to identify a more appropriate label for
general advice and consumer-test the effectiveness of different versions
of the general advice warning.
ASIC today released an update on the fees for no service (FFNS) further review programs undertaken by six of Australia’s major banking and financial services institutions.
ASIC’s ongoing supervision of the review programs undertaken by AMP,
ANZ, CBA, Macquarie, NAB and Westpac (the institutions) has shown that
most of the institutions are yet to complete further reviews – i.e. reviews to identify systemic FFNS failures beyond those already identified and reported to ASIC since 2013.
ASIC Commissioner Danielle Press said the institutions had taken too
long to conduct these reviews, and welcomed the Government’s commitment
to give ASIC new directions powers that could speed up remediation
programs in the future.
‘These reviews have been unreasonably delayed. ASIC acknowledges that they are large scale reviews – they relate to systemic failures over long periods with reviews going back six to 10 years and cover 36 licensees from the six institutions that currently authorise more than 7,000 advisers]. However, we believe the institutions have failed to sufficiently prioritise and resource their reviews, particularly as ASIC advised them to commence the reviews in mid-2015 or early 2016.
‘We are pleased the Government has agreed to adopt recommendations from the 2017 ASIC Enforcement Review Taskforce Report,
which includes a directions power. This would allow ASIC to direct AFS
licensees to establish suitable customer review and compensation
programs,’ she said.
The main reasons for delays by the institutions are:
poor record-keeping and systems within the institutions, which mean
that in many cases they have been unable to access customer files for
review;
failure by some institutions to propose reasonable customer-centric
methodologies to identify and compensate customers despite ASIC’s clear
articulation of expectations. (For example, ASIC rejected a few of the
methodologies such as a requirement for customers to ‘opt-in’ to the
review and remediation program, and a proposal to assess if there had
been a ‘fair exchange of value’ with customers instead of assessing
whether customers received the specific services they paid for); and
some institutions have taken a legalistic approach to determination
of the services they were required to provide. (For example, ASIC’s view
is that if the agreement requires an annual review, the mere offer of
an annual review is not sufficient.)
Overview of ASIC’s FFNS work
ASIC’s large-scale FFNS supervisory work includes overseeing:
the institutions’ programs to compensate customers impacted by the
reported failures to provide advice services paid for by customers (compensation programs); and
the institutions’ reviews to determine whether there were further
systemic FFNS failures beyond those already identified and reported to
ASIC (further reviews).
Under the compensation programs, AMP, ANZ, CBA, NAB and Westpac have
collectively paid or offered approximately $350 million in compensation
to customers who were charged financial advice fees for no service at
the end of January 2019. Additionally, the institutions have provisioned
more than $800 million towards potential compensation for further
systemic FFNS failures. However, these reviews are incomplete.
Along with supervision of the compensation programs and further reviews undertaken by the institutions, ASIC
is also conducting a number of FFNS investigations and plans to take
enforcement action against licensees that have engaged in misconduct.
ASIC said the royal commission’s recommendations reinforce and will inform the implementation of steps ASIC has been taking as part of a strategic program of change that commenced in 2018 to strengthen its governance and culture and to realign its enforcement and regulatory priorities; via InvestorDaily.
“There are 12 recommendations that are directed at ASIC, or where the
Government’s response requires action now by ASIC, without the need for
legislative change. ASIC is committed to fully implementing each of
these,” ASIC said in a statement.
“Many of the recommendations made by the Royal Commission involve
reforms ASIC advocated for in its earlier submissions to the Royal
Commission and, in some cases, in earlier reviews and inquiries.”
These include:
• an expanded role for ASIC to become the primary conduct regulator in superannuation;
• the extension of Banking Executive Accountability Regime (BEAR)-
like accountability obligations to firms regulated by ASIC, with their
focus being on conduct;
• the end of grandfathering of Future of Financial Advice (FOFA) commissions;
• the extension of the proposed product intervention powers and
design and distribution obligations to a broader range of financial
products and services;
• the extension of ASIC’s role to cover insurance claims handling and
the application of unfair contract terms laws to insurance;
• reforms to breach reporting; and
• ASIC being provided with a directions power
Recommendation 1.8 – Amending the Banking Code
ASIC confirmed it will commence work immediately with the banking
industry on appropriate amendments to the banking code in relation to
each of these recommendations.
Recommendation 4.9 — Enforceable code provisions
ASIC will work with industry in anticipation of the parliament
legislating reforms in relation to codes and ASIC’s powers to provide
for ‘enforceable code provisions’.
“This work will include a focus on which code provisions need to be
made ‘enforceable code provisions’ on the basis they govern the terms of
the contract made or to be made between the financial services provider
and the consumer,” the regulator said.
“ASIC will also continue to work within the existing law to improve the quality of codes and code compliance.”
Recommendation 2.4 — Grandfathered commissions
The royal commission recommended that grandfathering provisions for
conflicted remuneration should be repealed as soon as is reasonably
practicable.
The government has agreed to end grandfathering of conflicted remuneration effective from 1 January 2021.
Consistent with the government’s response to this recommendation,
ASIC said it will monitor and report on the extent to which product
issuers are acting to end the grandfathering of conflicted remuneration
for the period 1 July 2019 to 1 January 2021.
“This will include consideration of the passing through of benefits
to clients, whether through direct rebates or otherwise,” ASIC said.
Recommendation 2.5 — Life risk insurance commissions
The royal commission recommended that when ASIC conducts its review
of conflicted remuneration relating to life risk insurance products and
the operation of the ASIC Corporations (Life Insurance Commissions)
Instrument 2017/510, it should consider further reducing the cap on
commissions in respect of life risk insurance products.
The final report recommended that unless there is a clear
justification for retaining those commissions, the cap should ultimately
be reduced to zero.
ASIC today confirmed it will implement this recommendation.
“ASIC will consider this recommendation and factors identified by the
Royal Commission in undertaking its post implementation review of the
impact of the ASIC Corporations Life Insurance Commissions Instrument
2017/510, which set commission caps and clawback amounts, and which
commenced on 1 January 2018,” the regulator said.
As noted by the royal commission, and consistent with the government’s timetable, ASIC’s review will take place in 2021.
Recommendation 6.2 — ASIC’s approach to enforcement
The regulator said actions are already underway to adopt an approach
of enforcement that considers whether a court should determine the
consequences of a contravention.
In particular, ASIC has adopted a ‘Why not litigate?’ enforcement stance and initiated an internal enforcement review (IER).
“ASIC’s Commission has determined to create a separate Office of
Enforcement within ASIC and this will be implemented in 2019,” the
regulator said.
“ASIC will take the IER report and the Royal Commission’s comments on
it into account, as it makes its final changes to its enforcement
policies, procedures and decision-making structures to deliver on its
‘Why not litigate? enforcement stance.”
Recommendation 6.10 — Co-operation memorandum
Together with APRA, ASIC has agreed to implement this recommendation,
including in relation to any statutory obligation to cooperate, share
information and notify APRA of breaches or suspected breaches, that the
Government puts in place as part of its response to Recommendation 6.9.
Recommendation 6.12 — Application of the BEAR to regulators
The royal commission recommended that both APRA and ASIC internally
formulate and apply a management accountability regime similar to those
established by BEAR.
ASIC agrees to implement this recommendation. In anticipation of the
Government’s establishment of the external oversight body, ASIC will
commence work on developing accountability maps consistent with the
BEAR.
ASIC will consider the approach of the Financial Conduct Authority in
implementing this recommendation. ASIC will develop and publish
accountability statements before the end of 2019.
ASIC is appealing last year’s landmark Federal Court decision, determinedto prove two Westpac subsidiaries provided personal financial advice despite not being licensed to do so, via Financial Standard.
In
December 2018, Justice Jacqueline Gleeson determined Westpac Securities
Administration Limited (WSAL) and BT Funds Management (BTFM) had
breached the Corporations Act in 2014, during two telephone campaigns in
which staff recommended the rollover of superannuation accounts to
Westpac/BT super products.
However,
the judge said ASIC failed to prove the phone calls constituted
personal financial advice. Under their respective AFSLs, WSAL and BTFM
are only licensed to provide general advice.
ASIC has now filed an
appeal of the decision, seeking greater clarity and certainty as to the
difference between general and personal advice for consumers and
financial services providers.
“The
dividing line between personal and general advice is one of the most
important provisions within the financial services laws. It directly
impacts the standard of advice received by consumers,” ASIC deputy chair
Daniel Crennan said.
“This is why ASIC brought this test case and
ASIC believes further consideration by the full court of the Federal
Court is necessary to better inform consumers and industry.”
The
case concerned 15 phone calls which the judge determined to be general
advice “because the callers did not consider one or more of the
objectives, financial situation and needs of the customers to whom the
advice was given.”
However, in 14 of the 15 calls, the law was
breached by the implication that the rollover of super funds into a BT
account was recommended. While not dishonest, the product advice was not
provided efficiently, honestly and fairly, the judge deemed.
