Australian Financial Services Licensees are bound by a plethora of obligations. One such obligation is for breach reporting for Australian Financial Services Licencesees for any ‘significant’ breach or potential breach to the Australian Securities and Investments Commission (ASIC). Understanding these obligations, and the processes involved where the existence of a breach is at issue, is helpful for clients as the loss sustained by you or your business may be relevant to the characterisation of the breach. The strictness of the laws in place serve to highlight the weight placed on protecting consumers from unsatisfactory licensee conduct, and the importance of the financial services industry more generally.
In the face of a potential breach, licensees must provide a written statement within 10 days, but only where this breach meets the criteria of a ‘significant breach’. In determining whether a breach is ‘significant’ ASIC will consider several factors as outline in section 912D(1)(b) of the Corporations Act 2001 (Cth). These factors include, but are not limited to, the frequency of past breaches, the consequences of the breach upon the provision of services, the inference which can be made regarding the adequacy of compliance arrangements, how this will impact recipients of those services in terms of loss, and any other factors prescribed by the regulations as relevant.
Section 912D of the Act also makes clear that such a breach is confined to those obligations prescribed under sections 912A and 912B. These relate to general obligations and obligations in the context of compensation arrangements provided to retail clients. According to ASIC Regulation Guide 78, the obligations under sections 912A and 912B can be summarised to include:
– An obligation to ensure services are supplied efficiently, honestly and fairly;
– An obligation to comply with the conditions of the licence;
– An obligation to maintain the resources necessary to provide financial services and carry out supervisory arrangements (except where the licensee is a body regulated by APRA);
– An obligation to be competent in the provision of financial services;
– An obligation to have trained and competent representatives;
– An obligation to ensure representatives comply with the relevant laws;
– An obligation to maintain a functioning dispute resolution system for retail clients;
– An obligation to maintain a functioning risk management system (except where the licensee is a body regulated by APRA); and
– An obligation to have compensation arrangements in place for retail clients.
The Regulatory Guide provides an example of where a significant breach may occur – where a financial services representative provides inappropriate financial advice. In this example, the obligations which may be breached from the above list would most likely regard a failure of the entity and its representatives to comply with the relevant law. When considering the example in the context of the list in section 912D(1)(b), this may indicate that the licensee’s arrangements to ensure compliance were inadequate and that there may be some loss to the client as a consequence of the services provided. Importantly, if this scenario were to play out and the licensee failed to report the breach, the licensee could be liable to a penalty of $8,500, imprisonment for 1 year or both (where the licensee is an individual), or a $42,500 fine (where the licensee is a company). (see sections 1311 and 1312)
It is clearly useful for both Australian Financial Services Licensees and clients of financial services to understand the obligations on breach reporting for Australian Financial Services Licensees for any significant breaches, as well as the ramifications for failure to report a breach. It should be acknowledged that, in the current climate, ASIC is approaching contraventions of these laws very strictly. Honesty and candour are always advised.
For more information regarding obligations for providing financial services in Australia check out our Understanding Australian Financial Services Licences page. If any of the issues in this article are relevant to you please get in touch today.
This article was authorised by Warwick Heeson.