Key regulatory developments and issues
An address by Alan Cameron, AM, Chairman, Australian Securities and Investments Commission to the ICA Conference, Canberra, 12 August 1999 where he discussed:
- ASIC, one year on, including our relationship with APRA and the ACCC
- CLERP 6, including the insurance industry's claim to uniqueness, and our role in the process
- our policy on competencies and related issues
- misleading and deceptive conduct.
- 1. ASIC - one year on
- 2. CLERP 6
- 3. Insurance, GST & misleading and deceptive conduct
- 4. Conclusion
On 3 March 1999 the Government released what are known as the "CLERP 6 Proposals" in a paper entitled Financial Products, Service Providers and Markets - An Integrated Framework. These proposals represent the latest development of the Government's Corporate Law Economic Reform Program. They also represent the next stage of the implementation of the Financial System Inquiry Report (also known as the Wallis Report). The first stage of that implementation occurred on 1 July last year when the regulatory structure was significantly reformed. For a copy of this paper go to the Treasury website.
Since that time, as you will be aware, ASIC has become responsible for monitoring and promoting market integrity and consumer protection across the financial system¹. More particularly, for present purposes, since that date ASIC has been the regulator responsible for the administration of various parts of the:
- Insurance Act 1973;
- Insurance (Agents and Brokers) Act 1984;
- Insurance Contracts Act 1984; and
- Life Insurance Act 1995²
The Government, having reformed the regulatory structure along "Wallis lines" now seeks to reform the content of the regulation in a similar way. The vision for the financial services industry which emerged from the Wallis process and which has been adopted by the Government is, in essence, that there should be an integrated regulatory framework so that functionally-convergent financial services should be regulated in a harmonised way, for the benefit both of service providers and consumers.
CLERP 6 is still under consultation in the Treasury. It is not anticipated that the legislation will be passed in its final form before mid 2000. It is therefore not possible for me to be definitive about how these proposals will ultimately be administered by ASIC, but I know that they are of great interest to you. Further, ASIC is already administering the various laws to which I have referred, as well as the Corporations Law, and there are outstanding issues concerning matters such as competencies, which can and should be progressed even as the CLERP process continues.
This morning I plan to discuss:
- ASIC - one year on, including our relationship with APRA and the ACCC;
- CLERP 6, including the insurance industry's claim to uniqueness, and our role in the process;
- Our policy on competencies and related issues; and
- GST, misleading & deceptive conduct and the ACCC.
1. ASIC - one year on
1.1 Regulatory responsibilities post Wallis
There may still be some confusion in the market regarding the roles played by the different regulatory organisations, post Wallis. Let me re-state our roles.
ASIC's role concerns the relationship between institutions and individual consumers. ASIC looks after consumers ensuring they receive proper disclosure, are dealt with fairly by qualified people, continue to receive useful information about their investment and have proper complaints handling procedures.
APRA, on the other hand, focuses on the overall viability of those institutions. APRA looks after the health of the institution as a whole so that the community can be confident in its ability to meet its obligations to its customers collectively.
The ACCC has much the same jurisdiction as it did pre Wallis, with the significant exception being that their role for consumer protection in the finance sector has been taken over by ASIC, and the consumer protection provisions under the Trade Practices Act have now been mirrored under the ASIC Act 1989.
There are obviously overlaps between those issues relevant to examining the financial safety of an institution and those involved in promoting consumer protection and market integrity. The dividing lines are not always absolutely clear cut. The three agencies must therefore work closely together to ensure there are no regulatory gaps or overlaps.
The Wallis Report recommended restructuring the way that regulators conduct their business to ensure that the regulatory regime works in a practical, effective and efficient manner. The convergence of the financial sector is reflected in the establishment of two regulators which have responsibilities of a functional kind across the whole of the sector. One will be with prudential regulation on the one hand and consumer protection and market integrity on the other. The continuing development of ASIC is guided by the regulatory philosophy and approach on which the ASC was based, but takes into account the additional responsibilities given to ASIC by the Government. Our regulatory mandate also reflects the objectives of securities regulation identified by the International Organisation of Securities Commissions, namely:
- the protection of investors;
- ensuring that markets are fair, efficient and transparent; and
- the reduction of systemic risk³.
ASIC aims to be a regulator that is capable of making balanced judgements based on a consideration of both the immediate and broader economic impact of our regulatory intervention, on both consumers and market participants, such as yourselves.
1.2 How is activity between ASIC, APRA and the ACCC coordinated ?
- I am a member of the APRA board;
- There are mechanisms in the law to facilitate coordinated activity, including a new law permitting cross-delegations of power between ASIC and APRA;
- Compliance and enforcement activities involving both ASIC and APRA's jurisdiction are to be coordinated and rationalised where possible;
- We are ensuring that document lodgment procedures are as simple as possible and do not entail giving the same information to both ASIC and APRA;
All three agencies recognise that cooperation is vital to promote confidence in the financial system as well as the confident and informed participation of all stakeholders in the system. Memoranda of Understanding ("MOU") and Information Sharing Agreements have been signed with both APRA and ACCC. Within the framework of the MOU, we are working together to achieve compliance and enforcement outcomes.
ASIC and APRA have formalised arrangements in areas of common interest where co-operation is essential for the effective and efficient performance of our respective functions. The memorandum of understanding setting out these arrangements includes matters such as the establishment of a co-ordination committee, policy development, mutual assistance, information-sharing, and international representation in regulatory fora and training initiatives.
Under the MOU with APRA, the two agencies will notify each other of any proposed changes in regulatory policy which affect the market or any regulatory decisions likely to impact on the other's area of responsibility. The coordination committee will ensure that there is continual exchange of information between ASIC and APRA. This is to include assessments of the health of the financial areas which each body supervises, any major developments in the financial sectors that each supervises relevant to the performance of their regulatory responsibilities and information on individual regulated areas which raise particular concerns.
Is this working, one year on? Yes, but not yet as well as I and the leadership of APRA would like. We still hear industry saying that an ASIC person is asking about a matter which should more directly concern APRA, and vice versa. Perhaps the industry person has not yet fully absorbed the relationship either, of course; but we know we can still do better. Policies with effects across the industry sectors need to be coordinated as they are being written, not after the event. Our consumer publications would be even useful if produced jointly. Nevertheless, my membership of the APRA board in particular has helped both regulators to identify issues of actual or potential overlap earlier, and deal with them better.
As mentioned earlier, ASIC has the new consumer protection powers in relation to the provision of financial services and products in Division 2 of Part 2 of the
Australian Securities and Investments Commission Act 1989. These powers are modelled on the consumer protection powers of the Trade Practices Act 1974.
Since July last year, ASIC has taken two important steps in the implementation of its new responsibilities towards consumers.
First, late last year ASIC established the Consumer Advisory Panel to provide consumer input into ASIC policy and enforcement work and to expand the way ASIC consults with consumers of financial products. The new body will also provide feedback and suggestions from consumers of the much broader range of financial services for which ASIC is now responsible and promote information exchange with consumers.
Secondly, earlier this year ASIC also created the Office of Consumer Protection to provide high level advice to the commission on consumer protection issues in the financial services sector. The Office will work with and support the Consumer Advisory Panel, guide ASIC's consumer research efforts and coordinate enforcement and compliance.
We perceive that some in industry might think that these developments may mean that ASIC is somehow captured by the consumer lobby. Let me remind you, that ASIC was taking over from a regulator with a high degree of credibility in the consumer movement, and needed to have some credibility itself if it was to succeed. We could not credibly claim to protect consumers if we had no established way of communicating, both giving and receiving information, from a diverse and scattered constituency. Industry has well established means of talking with us, and through your council and numerous other industry groups, we do hear of your concerns and we are able to share information and perspectives on issues. Our Panel, and our Office of Consumer Protection, are designed to ensure balance in our approach.
1.3 Our first year in insurance
Clearly, the main issue for your industry has been the Sydney hailstorm, ,of which we have heard so much already this morning. Let me say at once how well we believe you, as an industry, have handled this disaster. Your response reflects very well on the industry, and I would congratulate you for that very much. Remarkably few issues have been raised with the schemes or with us.
(a) Flood insurance
Let me then turn to some of the issues we have been looking at, starting with flood insurance. Like you, we see this as a major issue.
ASIC is currently reviewing the adequacy of:
- disclosure in policy documents regarding flood cover and exclusions; and
- claims handling processes adopted by insurance companies re flood claims.
This project entails a review of standard "inclusions" and "exclusions" in insurance policies relating to flood and water damage and will encompass a review of claims complaints we receive relating to flood cover issues. George Pooley, who did the review of the General Insurance Code of Practice identified flood issues as causing some significant consumer concerns. Pooley recommendations include that there should be simpler English disclosure to make it easy for persons living in flood areas to identify whether or not they have cover, and, placing of stickers drawing the attention of prospective policy owners to the relevant disclosures.
We look forward to working with the ICA to achieve better disclosure and claims handling.
(b) Insurance brokers campaign
In February 1999, ASIC's National Intelligence and Analytical Service (NIAS) completed a report which identified all entities that advertised in the Yellow Pages as Insurance Brokers that were not registered in ASIC's Brokers Administration System (BAS). This report concluded that a substantial number of entities (ultimately 327) that were not registered in BAS, were advertising in the yellow pages.
On 19 March 1999, ASIC commenced a national campaign in which all entities that were identified by the NIAS report were contacted to seek an explanation for their apparent non-compliance with the provisions of the Insurance (Agents and Brokers) Act. Over the next few months follow up contact was made with some of these entities and approximately 120 surveillance visits were conducted nationally.
There were some important issues that were uncovered by the campaign. The most notable of which involves the degree of uncertainty that exists over the extent to which registered brokers can delegate their responsibilities to agents. ASIC is currently considering this issue, and I will say no more about it at this stage.
(c) General insurance enforcement results
We have commenced a number of investigations throughout the year that have related to insurance. Most of these matters have involved insurance intermediaries with the relevant misconduct involving concealment of fees (by brokers) and a failure to forward on premiums (agents and brokers).
We have been particularly concerned by those instances where brokers have failed to forward on premiums (Charlette and Dandenong Insurance Brokers) and do not have a binder agreement. In these instances we have taken action to inform clients that they may be uninsured and have also obtained orders under Division 2 Part2 of the ASIC Act to protect consumers.
2. CLERP 6
2.1 The role of the regulator in law reform
I should say from the outset that ASIC's role in the CLERP 6 process has been, and is, quite limited. The CLERP 6 proposals are not proposals of ASIC; they are the Government's proposals. ASIC will, ultimately, be the administrator of any legislative provisions that result from this process. As such, ASIC has an obligation to contribute to the law reform debate. But ASIC is merely one of many participants in that debate. It is for the Government and the community to decide what the regulatory framework will be, not ASIC.
CLERP 6 is very important; it is the substance of Wallis; to date, we have only had the form. In this context, it would have been unhelpful at best, irresponsible at worst, if we had not made our contribution, and we have done so publicly; visit our home page at
www.asic.gov.au to see our views in full.
2.2 The 'unique' insurance industry
The challenge for all of us in implementing the CLERP 6 proposals is to achieve balance in the regulatory regime, with consistency of regulation on the one hand, to allow consumers to compare products and make informed decisions about their purchases, and industry specifics on the other - the special features of particular products. After listening to Alan Mason, I believe we can now use the word 'special' rather than 'unique'. The objective is to have consumers adequately protected over the entire spectrum of financial products available in the market.
ASIC acknowledges that the general insurance industry, has some important unique features that need to be taken into account in the structuring of the regulatory regime that will eventuate under the CLERP process. Some of these features include:
- most insurance products are annually (or periodically) renewable and are not long-term as is the case for most investment products;
- insurance is usually dependent upon the applicant's disclosure of information about the risks to be insured (eg. An insurer needs to know the location of your house and any security devices in it to assess whether it will assume the risk, and if so, at what price). The underwriting exercise and claims assessment process do distinguish risk insurance from other financial products;
- there is a wider range of intermediaries than for most other financial services. Such activity has implications for licensing, duty of disclosure and liability which need to be addressed; and
- the business of insurance probably has the most extensive use of direct marketing.
These all have implications which need to be taken into account. Whilst the goal of ensuring like products and services are treated in a like way is one which ASIC endorses, it recognises that the regime must be flexible enough to accommodate differences between products, market structures and ways of doing business, and that the regime operates in a clear and certain way.
We do not underestimate the challenge involved in establishing a disclosure regime flexible enough to accommodate products as diverse as bank deposits and general insurance, but if that can be achieved, industry should eventually reap an efficiency dividend.
2.3 Some specifics
Let me deal specifically with three aspects of this paper :
Subject to some transitional arrangements, a financial service provider will need to apply for a licence. Conceivably that licence could extend to all financial products. It will be much more common that the licensee will seek to advise only in a limited range of financial products.
The application will be made to ASIC. There are 5 standard criteria. ASIC will need to be satisfied that the applicant:
- has appropriate financial resources and internal controls;
- has relevant competence, skill and experience;
- will discharge the obligations of a licensee in an efficient, honest and fair manner;
- has adequate systems in place for the training and supervision of its representatives; and
- can demonstrate ongoing compliance with the law
CLERP 6 is designed to promote flexibility in the financial system. ASIC will have to be practical in the way that it examines licence applications in order to make sure that the requirements for obtaining a licence are suited to the intended business of the licensee. For example, a licensee who only provides advice on insurance products may not need the same level of financial resources as another licensee who holds client funds or who accepts counter-party risk.
ASIC will be able to impose licence conditions, subject to an applicant's right to a hearing. So, for example, if an applicant was to indicate in their licence application that they would only perform certain activities, the licence conditions will make that clear. Breach of conditions can lead to revocation of the licence.
One of the key licence criteria is that the licensee must have adequate systems for the training and supervision of its representatives. The CLERP 6 model is largely based on the model applied to securities licensees, namely the model of a licensee who is responsible for the training, supervision and conduct of their authorised representatives.
A representative is any person who acts for a licensee in carrying on a financial services business. It will include agents and employees who carry out activities that fall within the licence. This will include the advising, selling, arranging contracts and so on.
Who does not have to become an authorised representative ?
CLERP 6 has indicated that staff who perform administrative tasks such as answering routine administrative inquiries, or collecting money or who merely provide information without giving advice, will not need to be authorised.
However, it is often a fine line between giving 'factual information' and giving 'advice'. Where is that line drawn? This is the million dollar question and the answer depends entirely on the circumstances at hand. Take, for example, the following situation:
Investor A calls an administrative staff member at your firm and states that they have decided to take out household insurance cover with Everlasting Insurance Limited for $200,000, but excluding reinstatement cover - that "should be right, shouldn't it?" Are they seeking advice or reassurance? If the staff member answers, yes, are they giving information or advice? A fine line - I will not cross it today.
(i) Interim policy statement
By the end of August, ASIC will release an Interim Policy Statement ("IPS") on the Training and Supervision of Authorised Representatives. The IPS offers licensees a number of choices on how representatives' training (or in some cases the individual representative) can be assessed as meeting our standards.
We realised the need for alternatives following the negative industry response to a consultative paper released in February 1998 in which we proposed that all representatives would be individually required to demonstrate their personal competency under the ANTA framework. While a number of industry participants supported this proposal, a larger number of key industry groups opposed it.
(ii) The framework
Our approach is to give regulatory guidance to licensees by setting out a framework which encompasses:
- specifying ASIC's requirements of knowledge, skills and integrity for representatives;
- setting an appropriate educational level at which these requirements should be demonstrated within a training program; and
- establishing a mechanism for independently assessing the quality of training programs being undertaken to ensure consistency of standards throughout the financial services industry.
Our framework has been developed following wide public consultation with participants in the financial services and training industries, professional and industry organisations and consumer representatives. Over the last nine months we have consulted with over 150 individuals. No doubt some of the people in this room have participated in the focus groups dealing with the development of this policy about training standards. Comments made at these focus groups have been very useful in helping ASIC to develop a flexible policy. ASIC is very grateful for the time that people take to help us in that way. We will have further consultation after CLERP 6 has been enacted to ensure consistency with the revised legislation and to consider implementation issues.
The framework that ASIC has proposed in the IPS is consistent with that outlined in the February 1999 paper but has been amended in some areas as a result of comments received during the consultation process.
Licensees can demonstrate to ASIC that their representatives who provide financial services to retail consumers are adequately trained if the representatives have undergone education or training programs which have been formally assessed as meeting ASIC's standards of knowledge, skills and ethical standards at an appropriate cognitive level.
The focus of the policy is on assessment of programs. However, because of the retrospective nature of the policy, there will be some need for assessment of individual representatives eg. existing representatives who have undertaken programs some years ago, or have no formal qualifications. In these cases, the licensee will be required to make sure that those representatives are individually assessed on a formal basis as meeting our standards.
(iii) What are licensees' training and supervising responsibilities?
Under the current Law, licensees are responsible for training and supervising their authorised representatives in the duties carried out under the licence. These duties will continue after the CLERP 6 proposals are enacted. The IPS gives guidance to licensees on how they can meet their obligations under the Law to ensure that their authorised representatives providing financial advice to retail consumers.
1.have undertaken education and training that meet ASIC's requirements for knowledge, skills and integrity;
2.are trained at an educational level that is appropriate to their activities and clients' needs. We have set out two educational levels for use by licensees. Most representatives will have to undergo training at the Tier 1 level. This level broadly equates to the skills required at the 'diploma' level under the Australian Qualifications Framework. Tier 2 programs should only be undertaken by representative who sell or advise on products that require limited client needs analysis eg specific purpose risk products, deposit taking products, or do not provide advice eg. carry out execution trades. This level broadly equates to the "Certificate III" level in the Australian Qualifications Framework.
3.have been individually assessed or trained in programs that have been accredited by an ASIC authorised assessor (authorised assessor) as meeting ASIC's requirements for knowledge, skills and integrity; and
4.undertake continuing training and supervision. Licensees should implement policies and procedures for making sure that their representatives are:
- undertaking continuing training programs to maintain and update the knowledge and skills needed for their duties;
- adequately supervised when providing services to clients.
ASIC's requirements set out the knowledge, skills and integrity required for an authorised representative, as well as setting out the educational levels at which these should be demonstrated.
ASIC recognises that there is a diverse range of activities performed by representatives in the financial services industry, covering a wide range of products. The requirements have been drafted in a fashion which recognises this. This diversity will increase after the CLERP 6 proposals are enacted. We acknowledge that there is also a considerable amount of training and education currently undertaken by representatives using a range of training methodologies and a well developed network of training courses and providers. The IPS acknowledges this and sets out training procedures that are both flexible and practical.
(iv) When do licensees have to comply with our requirements?
All existing licensees and life agents will have until 1 October 2001 to demonstrate that their representatives' education and training meet ASIC's requirements for knowledge, skills and integrity. Persons who will be required to be licensed following enactment of CLERP will have a transitional period of two years to comply with our requirements.
This will give existing and future licensees enough time to:
- review their policies about educating and training their representatives;
- revise, where necessary, their training programs to meet ASIC's requirements for knowledge, skills and integrity; and
- arrange for their programs to be assessed by an ASIC authorised assessor.
A final Policy Statement will not be released until the CLERP 6 proposals become law, so there will be plenty of opportunity for interested parties to become used to the new training requirements. However, unless CLERP 6 substantially alters from what is presently proposed, the 1 October 2001 date will remain.
3. Insurance, GST & misleading and deceptive conduct
The view expressed in the Wallis Report was that market integrity and delivering consumer protection are closely linked. That was the reason, as mentioned earlier, the Government gave ASIC powers exercisable within the financial services sector which mirror those under the consumer protection provisions of the Trade Practices Act 1974. In respect of competition, however, the Trade Practices Act continues to have universal application and to be administered by the ACCC.
The Trade Practices Act places clear obligations on businesses with respect to pricing claims. Businesses should not make representations (actual or implied) that are misleading or deceptive or are likely to mislead or deceive. Claims or statements must be correct and the context in which they are presented must not be misleading. The provisions in the Trade Practices Act are repeated in the Australian Securities and Investments Commission Act with respect to financial services pricing claims.
Now the new tax reforms (which include the GST) are law, care should be taken in making any representations about the impact these tax changes will have on prices or the existence of tax related obligations in pricing claims. This includes insurance premiums.
As mentioned earlier, ASIC and ACCC entered into a co-operation agreement in July last year. Under this agreement the ACCC and ASIC agree to refer complaints relating to consumer protection in financial services to the more appropriate agency, exchange information where it is permitted by law and, if required, undertake joint responses to problems in the market. Both agencies are working together to ensure that consumers are protected with respect to price increases in financial products resulting from GST.
In the long term misleading and deceptive conduct will be regulated by the ACCC. Therefore, to avoid regulatory duplication and to ensure consistency, ASIC will pass over GST related misleading and deceptive conduct matters to the ACCC. Therefore, notwithstanding the general proposition that ASIC has replaced the ACCC with respect to consumer protection, the ACCC will take the lead in respect of allegations of false and misleading conduct with respect to the GST; I am not sure how you will regard that outcome, but I believe it demonstrates that both agencies are sensitised to the issues of overlap, and will actively avoid such risks.
I must mention the Y2K issue, if only to emphasise that we are concerned with how your industry will handle the inevitable complaints that will arise when some things, hopefully small, don't go well early in the New Year.
We have already raised this issue with the various complaints handling schemes, but the primary means of dealing with complaints is through your companies, and phones must be answered at this time to avoid causing greater distress to the public. The regulators won't be at the beach; nor should you be!
There has been a great deal of change and re-organisation in the financial regulatory regime, over a relatively short period of time. And there will be further change. CLERP 6 will bring about some of the most significant changes that the insurance industry will have experienced for many years. However, it is important to remember that we are still in a transition period. It is not always easy to change the way in which we do things, and by that I mean the regulators and business, without some hiccups or disruptions.
With this in mind, ASIC will work with the other regulators and Government to achieve the optimum balance between flexibility, innovation, and the need to provide business with maximum certainty and predicability of regulation. We will also continue to build on our close links to the marketplace through formal liaison and will actively listen to our stakeholders. But in order for us to do that, you need to keep talking.
ASIC looks forward to working with the ICA and the insurance industry to meet the challenges ahead.