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Tuesday 7 September 2021

21-235MR ASIC publishes guidance on breach reporting

ASIC today released regulatory guidance to help credit and Australian Financial Services (AFS) licensees to meet new breach reporting obligations.

Set to commence on 1 October 2021, the breach reporting reforms address long-standing concerns about breach reporting by making the reporting consistent, clearer and timely across the industry.  

ASIC Deputy Chair Karen Chester said, ‘The new reporting obligations address long held concerns on the quality and timeliness of breach reporting. ASIC analysis in 2018 revealed it took more than 4 years (on average) for large financial institutions to identify incidents that proved to be significant breaches. Today’s remediation tally reveals how much consumer harm these delays caused, and ultimately at great cost to those firms.’

The breach reporting reforms were made law in December 2020, some 9 months before commencement. They flow from the Financial Services Royal Commission and findings of Treasury’s Enforcement Review Taskforce.

Compliance breaches happen in all businesses. Breach reporting is integral for Board oversight and risk management by licensees. It is also needed for ASIC’s system wide regulatory oversight.

‘The Government’s new reporting obligations put strong guard rails in place that will benefit firms and consumers alike’, said Ms Chester.

‘The new obligations will help firms identify and act swiftly on the breaches that matter, making sure they get the attention they deserve. Licensees and boards will have greater confidence they are doing the right thing by consumers, and ultimately their firm and shareholders.

‘The new obligations also benefit consumers by allowing ASIC to better identify and swiftly address systemic problems. There will be greater transparency for consumers and firms with the publication of breach reporting data by ASIC from late 2022’, said Deputy Chair Karen Chester.

ASIC’s guidance was greatly enhanced by the constructive submissions and valuable insights received from industry through the consultation.

‘Industry feedback meant we can now accommodate batch uploading of reports where they derive from a single root cause.  This will significantly reduce the reporting burden for licensees’, said Ms Chester.

ASIC has also responded to industry feedback by incorporating some 15 more working examples in the guidance.

AFS licensees will have to report breaches that they discover after 1 October 2021, even if the breach occurred before that date.  However, credit licensees do not have to report breaches that occurred before 1 October even when identified after 1 October 2021. As a result, credit licensees will have a relatively gradual implementation upon commencement.

ASIC today also published INFO 259 which sets out actions that must be taken by licensees to notify affected customers of a breach of the law, investigate the breach and remediate impacted customers. This implements a new obligation that applies to licensees of financial advisers and mortgage brokers in certain situations.

Consistent with ASIC’s recent  statement, we will take a reasonable approach in the initial stages of these new obligations provided industry participants are using their best efforts to comply (21-213MR).  

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Background

The new breach reporting obligations implement Recommendations 1.6, 2.8, 2.9 and 7.2 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and are set out in Schedule 11 of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020.

For AFS licensees, they strengthen and clarify the existing reporting obligations.  Some of the new features different to AFS licensee’s existing obligation include:

  • deeming certain breaches to be significant, such as a breach which results in material loss or damage to a customer
  • creating an obligation to report an investigation into whether there is a reportable situation where that investigation continues for more than 30 days, and
  • requiring licensees to lodge breach reports with ASIC in a prescribed form within 30 calendar days after the licensee first knows, or is reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen.  AFS licensees currently have 10 business days within which to report.

For credit licensees, this is the first time they will be obliged to report certain breaches of the law to ASIC.  Their obligation to report is almost identical to that of AFS licensees. The reform benefit credit licensees by bringing them into line with their AFS counterparts which may prove advantageous for partnerships with AFS licensees down the track.

The reforms also oblige ASIC to publish data about breach reports annually on its website. This obligation does not commence until Quarter 4, 2022. ASIC will consult separately on this obligation.

ASIC Report 594 Review of selected financial services groups’ compliance with the breach reporting obligation sets out compliance of 12 entities including the big four banks with their existing breach reporting obligation. Published in September 2018, this review found significant failings by financial institutions, including that major financial groups:

  • took on average over 4 years to identify incidents that were later determined to be significant breaches; and
  • took on average 150 days from starting an investigation to lodging a breach report with ASIC. 

In April 2021, ASIC issued Consultation Paper 340, seeking stakeholder feedback on proposed updates to RG 78 (21-080MR). ASIC received 30 written submissions and attended numerous meetings with industry.

ASIC recently made a legislative instrument to modify the law so that breaches of its enforceable IDR standards are not deemed “significant” and so not automatically reportable under the reforms.  As a result, licensees will not be obliged to report minor and technical breaches of the IDR standards that are unlikely to cause detriment to consumers, creating an unnecessary reporting burden: see ASIC Corporations and Credit (Breach Reporting—Reportable Situations) Instrument 2021/716 (legislation.gov.au)

Last updated: 07/09/2021 10:31