How four adviser breaches could escalate to 198
It will be virtually impossible for small financial planning firms to comply with the new breach reporting regime proposed to be imposed on the industry via the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Regulations 2021: Breach Reporting legislation, according to the Association of Financial Advisers (AFA).
What is more, the AFA has cited member feedback which suggests that four breaches reported by a licensee in 2020 could be escalated to as many as 198 under the new regime.
In a submission filed with the Treasury, the AFA has strongly complained that the breach reporting measures contained in the legislation go well beyond what was proposed in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“We believe that the impact is much greater than was appreciated when the bill was drafted, and we have therefore recommended that the Government consider a deferral of the commencement of this new regime,” the AFA has said.
“Our serious concern with respect to the implications of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, is that it is significantly moving away from the concept of significant breach reporting and that this new regime will involve an exponential increase in the number of breaches that need to be reported and many of these will be of a largely administrative nature,” it said.
“The other key point that Commissioner Hayne made in his interim report was the need to review and reduce the complexity of the requirements of the Corporations Act,” the AFA said. “Unfortunately, the new breach reporting regime represents a substantial increase in the scale of complexity and in our view, this is virtually impossible for a small financial advice licensee to comply with.”
Pointing to member consultation, the AFA said it had held a number of discussions with its licensee partners and was well aware of the serious concerns that many of them had about the implications of the legislation.
“In one case, a licensee who had four breaches reported in 2020, expected on the basis of the new legislation, that this would increase to 198,” it said. “Their feedback suggests that the exclusion of civil penalty matters for the failure to deliver an FSG [financial services guide] and a PDS [product disclosure statement] would only marginally decrease the number of breaches that would need to be reported.
“For context, financial advice licensees are required to undertake a detailed audit of a number of financial advice files for each adviser every year. This process inevitably results in a number of matters being identified, even for those advisers with a good compliance track record. The vast majority of these matters would involve no consumer detriment and are largely administrative or record keeping matters.
“The reality is that the compliance regime for financial advice is very complex, and this means that minor breaches are common. It does not in any way suggest that the quality of the advice is poor, or that the clients are at a greater risk of the prospect of detriment.
“In the context of what has been rapidly rising costs for financial advisers and their licensees over recent years, we are motivated to ensure that the cost impact of this reform is not excessive. It is important to note that licensees will need to carefully review each potential breach and for licensees that lack in-house lawyers or compliance resources, they will need to seek external guidance before deciding to report a breach. It is this cost, along with the extra management time and oversight that will be necessary, that will have a very material impact on the cost of financial advice. Ultimately clients will end out paying for this.”
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