October regulatory changes and updates to anti-hawking guidance
Over the last couple of years, the Federal Government has introduced new laws in response to the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The measures implemented under these new laws seek to improve consumer protection and enhance the supervisory role of financial regulators. Much of the regulatory change resulting from these laws came into effect in early October, including several ASIC regulatory reforms:
Product Design and Distribution Obligations (RG 274 Product design and distribution obligations) – see our previous blog
Breach reporting obligations (RG 78 Breach reporting by AFS licensees) – see our previous blog
Dispute Resolution (RG 271 Internal dispute resolution replaces RG 165 Licensing: Internal and external dispute resolution) – see our previous blog
Updates to the anti-hawking guidance (RG 38 The hawking prohibition)
Deferred sales model for add-on insurance (RG 275 The deferred sales model for add-on insurance)
In the initial stages of the range of new obligations, ASIC intends to take a reasonable approach if regulated entities use their best efforts to comply.
As the design and distribution obligations, breach reporting and dispute resolution are covered in previous Hall Advisory blogs, this blog focuses on the recently released anti-hawking guidance and its interaction with the new deferred sales model for add-on insurance.
Updated Regulatory Guide 38 The hawking prohibition
In September 2021, ASIC published the final updated regulatory guidance on the general prohibition of hawking financial products, for which provisions are set out in s992A and 992AA of the Corporations Act 2001. The updates to RG 38 flow from recommendations from the Royal Commission – specifically Recommendations 3.4 and 4.1 – which led to amendments to the relevant provisions of the Corporations Act.
The findings of the Royal Commission indicated the existing hawking prohibitions in legislation did not sufficiently protect consumers from harm, particularly as retail clients of superannuation and insurance products were swamped with sales calls. The changes are designed to prevent providers from approaching consumers with unwanted products through cold-calls or other unsolicited contact.
As revealed during the Royal Commission proceedings, consumers offered products through unsolicited contact can result in harmful and poor consumer outcomes. The anti-hawking reforms position consumers to better control their financial product purchasing decisions, now requiring positive, voluntary and clear consumer consent before financial services providers can contact consumers.
Who does the anti-hawking regime apply to?
The anti-hawking regime applies to those who offer financial products for issue or sale to retail clients (defined in s761G of the Corporations Act). However, it does not apply when an offer, request or invitation is made to a retail client while providing that client with personal financial product advice. The prohibition of hawking activity is not limited to the provider but extends to the actions of all employees, agents and representatives of an AFS licensee.
The regime does not apply to all financial products. As noted in the Corporations Regulations, there are some financial products and situations excluded from the hawking prohibitions, including:
An offer for the issue or sale of listed securities or an interest in a listed managed investment scheme that is made by telephone by an AFS licensee;
An offer for the issue or sale of securities or an interest in a managed investment scheme that is made by an AFS licensee through whom the retail client has acquired or disposed of a securities product or an interest in a managed investment scheme in the preceding 12 months;
A crowd-sourced funding offer;
Low value non-cash payment facilities;
Property rental schemes;
Managed discretionary account providers;
Mortgage investment schemes with no more than twenty (20) investors; and
Where superannuation funds contact an employer to discuss the employer’s choice of default fund for employees who do not elect their choice of fund for superannuation guarantee payments.
Key features of the anti-hawking reforms
The key features of the updates to RG 38 are:
Application to all financial products (as defined in the Corporations Act);
A definition of ‘unsolicited contact’ that extends the prohibition from in-person meetings and telephone calls, to any ‘real-time interaction in the nature of a conversation or discussion’ without consumer consent;
That consumer consent to contact must be positive, voluntary, clear and capable of being reasonably understood;
That consent only be valid for six weeks from the date it is given and may be withdrawn by the consumer at any time; and
A statutory right of return for consumers where the hawking prohibition has been breached.
Though a separate regime, the obligations under the anti-hawking provisions interact with other consumer protection provisions such as the product design and distribution obligations and the deferred sales model regime for add-on insurance products.
Interaction with the deferred sales model regime for add-on insurance
In July 2021, ASIC also released a new regulatory guide (RG 275 The deferred sales model for add-on insurance) to implement a new deferred sales model for add-on insurance, as set out in the Australian Securities and Investments Commission Act 2001 (ASIC Act). This new regulation also took effect from 5 October 2021.
Like the anti-hawking reforms, the deferred sales model was introduced following a recommendation of the Royal Commission from the findings of several issues in the add-on insurance market, including poor-value products, unfair sales practices and outcomes, and worse claims outcomes than in other insurance markets. To address these issues, the deferred sales model introduces a mandatory four-day pause between the sale of a principal product or service and the offer or sale of add-on insurance. The deferral period is to promote informed purchasing decisions and enable and encourage consumers to consider the merits of the insurance offered and to consult alternative providers.
There are several add-on insurance products not subject to the deferred sales model under the ASIC Act. These exceptions are:
Products offered in the course of a financial adviser providing personal advice where the best interests duty applies and the add-on insurance product relates to a principal product or service recommended in the course of providing advice.
Add-on insurance products subject to a product intervention order under Part 7.9 of the Corporations Act that imposes a deferral period during which the product must not be sold.
Comprehensive motor vehicle insurance (for loss or damage resulting from an accident, fire, theft or malicious acts) sold as an add-on insurance product, where the individual wholly or partly owns the vehicle or has leased the vehicle for at least four months’ use.
Certain classes of add-on insurance products specified in the regulations (or by an ASIC instrument) as exempt from s12DQ, 12DR and/or 12DS of the ASIC Act. These classes include: compulsory third party insurance for motor vehicles; third party property damage, fire and theft insurance for motor vehicles; comprehensive insurance for boats, motorcycles, motorhomes, caravans, and trucks; insurance sold within superannuation (including group life insurance); postage and delivery of consumer goods insurance; home building insurance; home and contents insurance; and landlord insurance. The Government will continue to consult with stakeholders on any additional exemptions that may be appropriate.
In relation to the anti-hawking provisions, an offer, request or invitation relating to an add-on insurance product is not subject to the hawking prohibition during any add-on insurance deferral period. Unless excepted by regulation, add-on insurance products are subject to the hawking prohibition before and after the deferral period. However, if an add-on insurance product is exempt from the deferred sales model regime, the hawking regime will apply.
Complying with the anti-hawking reforms
Though the anti-hawking provisions and guidance promote good conduct and seek to improve consumer outcomes, the requirements may be challenging for financial product providers to implement from an operational perspective. Product providers need to be clear on at what point of a consumer interaction the hawking prohibitions apply. Where do you draw the line? By now, providers should have reviewed their product distribution networks and sales process to comply with the new anti-hawking provisions, including developing strategies to obtain clear consumer consent.
It’s important to get this right as a breach of the general prohibition is a strict liability criminal offence and offenders may be subject to monetary penalties (for corporations) and imprisonment and monetary penalties (for individuals).
Given the range of new regulations simultaneously taking effect and the impact of COVID on business operations, ASIC is adopting a soft implementation approach and accepting best efforts from regulated entities in the initial stages.
How Hall Advisory can help
To help you implement and comply with this raft of regulatory changes in your organisation, we offer the following services:
Specialist compliance advice on the application of requirements in specified circumstances.
Development and implementation of compliance frameworks to support regulatory change.
Implementation of governance, risk and compliance systems (GRC) to manage regulatory obligations. We have partnered with ReadiNow as our preferred GRC solution, but also assist clients with the use of a wide range of systems.
Independent reviews of internal policies and business processes implemented to meet new requirements.
Investigation of breaches and incidents associated with regulatory obligations and implementation of compliance uplift programs.
Contact us today and let’s start with a confidential, no-obligation conversation about how we can help you.