Overview: The Commonwealth Government’s 2017–2018 Budget initiatives released on 9 May will target three principal regulatory components in the financial services sector over the short and longer term, in particular:
- reforms to dispute resolution capturing financial services, superannuation, trustee services, banking, finance and insurance
- expanding the powers of the Australian Prudential Regulation Authority (APRA) relating to authorised deposit-taking institutions (ADIs) and targeting the accountability of directors and executives of ADIs
- measures to enhance competition in the financial services sector including the establishment of a dedicated unit within the ACCC to undertake regular inquiries concerning competition in financial system.
Meridian Lawyers will release further detailed guidance on each of these matters as they develop.
The Federal Budget affirms and institutes the central recommendation of the Ramsay Review to establish a new authority to be known as the Australian Financial Complaints Authority (AFCA), which will be the sole external dispute resolution scheme for the financial sector.
From 1 July 2018, AFCA will replace:
- the Superannuation Complaints Tribunal (SCT)
- the Financial Ombudsman Service (FOS)
- the Credit and Investments Ombudsman (CIO)
AFCA will be supervised by ASIC, which will have the power to issue a general direction to ensure AFCA complies with legislative and regulatory requirements.
All Australian Financial Services Licensees and financial sector firms will be required to be members of AFCA, which will have an enhanced power to monitor how member firms deal with complaints internally and its decision will be binding on all firms.
The SCT, FOS and CIO will keep operating until 1 July 2020, to work through their existing complaints.
AFCA will hear disputes within a limit of no less than $500,000 for consumer disputes and $1 million for small business disputes, together with an unlimited jurisdiction for disputes relating to guarantees and superannuation.
The federal government will also consult about compensation caps relating to mortgages and general insurance products and whether disputes about these should move to a higher compensation cap of $1 million. The current FOS limit is $500,000.
Full details about AFCA have yet to be released. It seems that AFCA will be able to hear disputes of a higher value so that more customers and small businesses will have their disputes heard and be able to access fair compensation.
AFCA will be governed by an independent board, with an independent chair and equal numbers of directors with industry and consumer backgrounds and be wholly funded by industry. AFCA will commence operations from 1 July 2018.
Care will need to be taken with the implementation of AFCA as its jurisdiction will cover some highly technical disputes particularly in the area of life insurance, disability claims and superannuation.
Banking Executive Accountability Regime (BEAR)
In response to the call by the opposition for a Royal Commission into the banking sector, the Commonwealth Government has responded in the Federal Budget by introducing a range of measures to increase the accountability of ADIs, including in the form of a Banking Executive Accountability Regime (BEAR), which will be imposed on banks’ directors and executives.
Under the BEAR proposal, all ADIs will be required to implement a register of senior executives and directors and to inform APRA before making a senior appointment.
Further, an ADI will be required to provide an ‘accountability map’ for senior executives’ roles and responsibilities to enable APRA to scrutinise and monitor compliance. The register will be supported by powers to remove a bank executive in the event of non-compliance and increased civil and criminal penalties.
Of particular note, consistent with post-GFC regulatory reform proposals in the banking sector, the Commonwealth Government will introduce reforms to bank executive remuneration, which is aimed at ensuring that a remuneration package and its associated incentives is structured to encourage executives to shift their focus on longer term consequences and results of their management decisions.
In this regard, the federal government proposes a mandate that a minimum of 40% of an ADI executive’s variable remuneration (60% for certain senior executives such as the CEO) be deferred for a minimum period of four years.
In addition to the proposal to establish a dedicated unit within the ACCC to undertake regular inquiries into specific competition issues affecting the financial system (referred to above), it is proposed that the Productivity Commission will undertake a specific inquiry into the costs and benefits of increasing access to and improving the use of data, subject to privacy considerations.
Consistent with the recommendations of the Financial Systems Inquiry (Murray Inquiry), the Productivity Commission will be commissioned to conduct an inquiry into the state of competition in the financial system. The inquiry will assess if increasing access to data could enhance consumer outcomes, better inform decision making, and facilitate greater efficiency and innovation in the financial system.
The Productivity Commission Review will commence on 1 July 2017 with an inquiry period of 12 months to complete the review report.
If you have any inquiries in relation to the impact of the above proposals on the financial services sector in the following areas please contact:
Michael Bracken, Principal: Financial Services – Corporate, regulatory, government policy, prudential and governance
Sharlene Wellard, Principal: Employment and executive remuneration in the financial services sector
Catherine Osborne, Consultant: Litigation, dispute resolution and regulatory enforcement in the financial services sector