GRC Conference: Regulatory Panel
A speech by ASIC Commissioner Sean Hughes at the Governance Risk Compliance Institute (GRC) Conference: Regulatory Panel, Melbourne, 17 October 2019
Check against delivery
Thank you and good morning.
Obey the law. Do not mislead or deceive. Be fair. Provide services that are fit for purpose. Deliver services with reasonable care and skill. When acting for another, act in the best interests of that other.
Of course, you will recognise these as Commissioner Hayne’s six norms of conduct from the Royal Commission Interim and Final Reports.
I want to start my remarks today by reminding you of these. And I want to let them hang heavy in the air a moment.
Responses to the Royal Commission are being treated with immediacy – by a Government focused on restoring trust in the financial system, by regulators who want to avoid repeats, and by the industry and its players who want to restore their reputations. All of this is desirable, but we must ensure that responses are not reactionary, and that change is not fleeting. It must be enduring. And I suggest that it need not be any more complicated than translating those six norms into practice. As compliance and risk professionals, make this your role. Be an influence for good in your organisations.
This morning I will focus my remarks on the importance of fairness – remember ‘be fair’ is one of the six norms, and it is an ASIC focus. In this context, I will also tell you about our review of total and permanent disability insurance published this morning. I’m sure you will come to the same conclusion we have: this insurance is not delivering what the community expects.
I will share some reflections on the challenge of getting the balance right when it comes to regulatory responses post-Royal Commission, and by reference to our responsible lending guidance review. And, before concluding, I’ll remind you of three areas for improvement you can champion in your organisations.
At ASIC we have been regularly emphasising the need for a greater emphasis on fairness and professionalism throughout the industry. Professionalism as your standard and fairness embraced and embedded in everything you do.
What is fairness? Fairness manifests in providing services and products which are accessible to consumers, function in a way that consumers are led to expect, and take into account consumers’ needs and interests. Fairness is also rectifying mistakes or misconduct quickly and effectively.
Through our regulatory actions we are focused both on promoting industry behaviour that leads to fairer outcomes for consumers, and on stepping up our efforts to respond to unfair conduct.
First, a few examples illustrative of our focus on promoting industry behaviour that leads to fairer consumer outcomes:
- So that we can check that the financial consumers of tomorrow are getting the right start, we are reviewing school banking programs. We want to understand the motivations for participating in, and behaviours encouraged by, school banking programs to ensure they serve the interests of young Australians. We will also consider the transparency of the implementation of these programs and seek to understand the impacts that these programs can have on students, parents and school communities.
- With the interests of vulnerable consumers – especially vulnerable Indigenous consumers – in mind, we are focused on the issue of gratuitous concurrence. Gratuitous concurrence is the cultural tendency to state agreement with a particular proposition or question, regardless of whether the person in fact does agree with it. It means that consumers may agree to purchase financial products or services even when they have not decided it meets their needs or if they even have a need. It can be used by salespeople, either deliberately or unwittingly, to close a deal. Addressing this issue comes down to the basic principles of fairness and respect. The Royal Commission shed light on this issue, and ASIC – including our Indigenous Outreach Program team – will ensure the spotlight stays on it.
- For the benefit of everyday ‘average’ Australians, we are consulting on using our product intervention power to introduce a deferred sales model for add-on financial products sold with a new or used vehicle. The deferred sales model would introduce a pause or break in the sales process – proposed to be four-days – to clearly separate the offer of the add-on financial product from the sale of the car and to mitigate the risk of firms strategically overwhelming the consumer with offers, information and choices. Our objective is to address consumer detriment through a combination of complementary reforms so that, amongst other beneficial outcomes, add-on products are redesigned to better consumer needs, are no longer sold where they offer no benefit to the consumer, and sales processes are fairer, more interactive and assist consumers to make better decisions.
Secondly, what can you expect from our ‘stepped up response’ to unfair conduct?
We are focused on effective and accelerated enforcement action, particularly cases that have a high deterrence value and those responding to egregious misconduct – for example, involving vulnerable consumers. Importantly, the cornerstone obligations owed by Australian Financial Services licensees under s912A of the Corporations Act, including to provide financial services ‘efficiently, honestly and fairly’, now attract meaningful penalties. Up to $1.05 million for individuals and $525 million for companies.
We will also make use of our enhanced regulatory toolkit that now features a product intervention power and the design and distribution obligations commencing in April 2021. These new powers enable ASIC to take broader, more proactive action to improve standards and achieve fairer consumer outcomes in the financial services sector.
The great strength of the product intervention power is that it allows us to focus on reducing significant detriment to consumers, rather than stepping in only after a breach of the law. We have made one product intervention order so far (in the short-term credit industry), we are in the deliberation phase regarding another proposed intervention (retail OTC binary options and CFDs), and we are consulting on the deferred sales model for add-on insurance products proposed intervention I mentioned a moment ago.
The upcoming design and distribution obligations, which commence April 2021, focus industry on prioritising consumer needs – obliging you to design and offer products and services that deliver value (not surprises) and are sold fairly. The regime is designed in a way that places responsibility with you to consider your products in light of your customers’ objectives, financial situation and needs. We expect industry to actively take up this responsibility. I encourage you all to look at what you need to do in your own organisations to monitor consumer outcomes and prepare for DDOs.
As well as evolution driven by our expanded toolkit, our regulatory style and approach evolves based on new insights and understanding, including from the behavioural sciences. Take disclosure. On Monday evening we released a joint report with the Dutch Authority for the Financial Markets on the limitations of disclosure. It presents more than 10 years of case studies where mandated disclosure and warnings have failed to deliver intended consumer outcomes or even worse, have backfired. I encourage you all to read this report.
Relying on lengthy disclosures that consumers do not understand or skip past is not fair. Overwhelming consumers with more pieces of paper will not rebuild trust. We all need to shift away from an over-reliance on disclosure to protect consumers.
We recognise that disclosure documents contribute to market transparency and efficiency. But they generally do not enhance consumer decision making nor permit real-time comparison of products and services. Disclosure is necessary but not sufficient. Instead of over-relying on disclosure, we will look to use targeted powers like the product intervention power more often.
ASIC’s total and permanent disability (TPD) insurance review
Hot off the press this morning is our report on the findings and recommendations from our thematic review of total and permanent disability (TPD) insurance in Australia.
Titled Holes in the safety net: a review of TPD insurance claims, our report details significant industry-wide problems with the design of TPD insurance and the claims handling process that mean many consumers cannot rely on this cover when they need it most.
Over 12 million Australian workers automatically pay for TPD cover through their superannuation to provide financial protection when they are so sick or injured that they can never work again. ASIC expects industry to make urgent changes to ensure this cover provides real value. Fairness requires as much.
We collected data on 35,000 TPD claims and commissioned consumer research. We found that:
- Nearly half a million Australians, often working in casual roles or high-risk occupations, are covered by a very narrow TPD policy definition that only pays out in the most catastrophic circumstances if they are unable to perform several ‘activities of daily living’ (known as ADL cover) such as feeding, dressing or washing themselves.
- 3 out of 5, or 60% of claims assessed under this narrow cover are declined. This is five times higher than the average declined claim rate for all other TPD claims - 12%. Clearly, insurers and superannuation trustees are not delivering on the promise of what the community would expect.
- Poor claims handling processes contributed to some consumers withdrawing their claims – 1 in 8, or 12% of claims lodged with insurers did not proceed to a decision.
- Insurers lacked key claims data to help them effectively manage the risk of consumer harm – including being able to identify the value of products to consumers and key problem points in their claims handling processes. It is inexcusable that insurers did not use, or in some cases even collect, data to enable them to identify the very poor consumer outcomes. This seems to be the sort of bread-and-butter governance, risk and compliance controls that should be in place.
Recalling Commissioner Hayne’s norms – particularly: Be fair. Provide services that are fit for purpose. Deliver services with reasonable care and skill – it is apparent that urgent change is required.
Getting the balance right
Senator the Hon Mathias Cormann, speaking at the Risk Advice Summit in Sydney on 24 September 2019, noted the need for government intervention to be balanced and said it is up to regulators and politicians to find the right balance. He said, “The key is always to only have as much regulation as is necessary, to get that balance right between consumer protection, competitiveness, the viability of the industry and affordable quality advice.” Warning of the risk of regulatory overreach he said, “Whenever things go fundamentally wrong, which they have at times in the past, the risk always is of regulatory overreach and you have to be very careful that doesn’t happen.”
At ASIC we agree that the right balance is important. We welcome reforms that can drive meaningful change in the financial system, address practices of concern and improve consumer outcomes and wellbeing. We recognise the importance of the post-Royal Commission legislative reforms, and of getting them right. The law reform package is significant and on an accelerated timeline.
We are dedicating significant resources to support the development and implementation of reform measures and will continue to provide input to Treasury on policy and legislative design. We also believe that a project of this scale needs industry buy-in and support, and that the consumer voice must not be lost. The harms identified by the Royal Commission and sought to be addressed by the recommendations, should be kept squarely in mind. So too should Commissioner Hayne’s recommendation for simplification of the law and elimination of legislative exceptions and qualifications.
To the question of regulatory overreach, we think that much of the heavy lifting can be done by industry doing the right thing. As Commissioner Hayne stated, the responsibility for change rests with corporate Australia. And ASIC’s role – sitting as we do in the position of fourth line of defence – is to be an agent provocateur for change. If you’re looking for a roadmap on doing the right thing, Commissioner Hayne’s six norms and the CBA Prudential Inquiry’s ‘should we not can we’ question provide excellent guidance.
At ASIC we face the challenge of getting the regulatory settings right with our responsible lending guidance review. We recognise this is an important area and that industry is requesting more and clearer guidance.
While there has not been any change in responsible lending laws since RG 209 was last updated in 2014, ASIC considered it was timely to review the guidance in response to changes to technology, judicial comment, industry reviews conducted by ASIC and the Royal Commission.
In response to our February consultation paper we received 72 submissions; 64 of them non-confidential. We followed up the consultation with two days of public hearings, a process we have not utilised for many years. That we chose to do this reflects the importance we, and industry, attach to responsible lending and our guidance. We heard from 19 stakeholders including major banks, brokers and aggregators, consumer groups, technology providers, academics, and AFCA. The hearings were open for public viewing and streamed online, attracting an audience of over 2,000 listeners.
We are currently preparing a response to the submissions and the information obtained through the public hearings with a view to updating RG 209 by the end of the year.
In deciding to appeal the Federal Court’s decision in the Westpac case, we are seeking to clarify the application of the law. We consider the decision creates uncertainty about what is required for a lender to comply with its obligation to assess whether a loan is unsuitable for the borrower. And we regard the decision – finding as it did that Westpac had not breached the responsible lending rules and that a lender may do what it wants in the assessment process – as inconsistent with the legislative intention of the responsible lending regime.
Three areas for improvement
On a near final thought, three areas for improvement that you can champion in your organisations:
- Value regulatory engagement and cooperation. In a 2019 survey on regulatory engagement conducted by the Governance Institute and LexisNexis 50% of respondents described their regulatory approach as defensive or reactive and 40% said they had no strategy for dealing with regulators. Clearly, the right approach is to be proactive and cooperative. The question of cooperating with regulators is not simply a legal one and indeed I would argue is not even primarily a legal one in today’s environment.
- Do better on breach reporting. Breach reporting should be part of the entity’s overall governance and risk management process. It should be part of the process to identify areas for improvement, fix errors and importantly action customer remediation in a timely way. Our September 2018 report on compliance with breach reporting obligations found serious, unacceptable delays in the time taken to identify, report and correct significant breaches of the law among Australia’s most important financial institutions. Breach reporting has been a focus of our Close and Continuous Monitoring program, and while we have seen some improvements it continues to be an area for attention.
- Obey the law. Laws are not optional. They are to be obeyed and enforced. This is clearly the view shared also by Commissioner Hayne. ‘Obey the law’ is the first of his six norms. And he went on to emphasise that everyone must obey the law – not just those who are willing to do so. And, that they must comply with all applicable laws – not just with those bits of the law they find to be commercially acceptable. Compliance risk should be managed with this fundamental truth kept squarely in mind.
In closing, a fair, strong and efficient financial system for all Australians is ASIC’s vision statement. But it is a vision that all of us, the regulators and the regulated, should strive towards together.
As compliance and risk professionals, be the influence for good in your organisations. Elevate fairness, promote professionalism, and drive the enduring change that we all want to see in the industry. I recognise that your position is not an easy one, nor is your messaging often popular. However, it is essential that you do your jobs well and call out failures in consumer outcomes, risk management and effectiveness of controls, especially where they give rise to real harms.