ASIC has indicated it will take a “reasonable” approach to initial enforcement of the six reforms to hit the industry in October, after acknowledging the disruption to business systems in a period of change compliance experts are calling ‘Red October’.
The suite of Hayne royal commission recommendation reforms is spearheaded by the long-awaited design and distribution laws, extended breach reporting and reference checking obligations for licensees.
New anti-hawking provisions, a deferred sales model for add-on insurance products and updated requirements for internal dispute resolution round out the changes.
“While these reforms have been in the pipeline for some time, ASIC recognises they require significant changes to businesses’ systems and processes and take effect at the same time industry is facing other challenges, including from COVID-19 and renewed lockdowns,” the regulator stated recently.
“We therefore recognise there will be a period of transition as industry finalises implementation of additional compliance measures, and ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply.”
ASIC said it will take into account the “context” that the firms are operating in (ie the scope of changes particular firms need to make) and the current operating environment with respect to the pandemic.
It also acknowledged that final guidance on two of the reforms has not been released yet.
Despite the measure of understanding, ASIC warned market participants that it will crack down if firms are deliberately negligent or putting consumers in danger.
“ASIC’s initial approach extends to technical or inadvertent breaches, where firms have systems changes underway and act quickly to address problems as they arise. However, where firms are not acting in good faith or where we detect conduct causing actual harm, we will not hesitate to enforce the law,” ASIC stated.
According to Assured Support chief executive Sean Graham, his team of compliance consultants have taken to calling the October period ‘Red October’, such is the alarming congestion of reforms to hit the industry.
“There’s just so much change with such significant impact, you need to at least be conscious of it in your calendar,” Graham tells Professional Planner.
Graham says that while the lion’s share of responsibility falls on product providers to prepare for the design and distribution obligations, the reform will also be significant for advisers and licensees.
“The product providers need to make sure a TMD (Target Market Determination) goes out but if there’s a complaint about the product the adviser will need to escalate,” he explains. “The adviser will often be the first one that needs to report a problem, there’s cascading pieces to the process and they’re one of the links.”
ASIC may be slightly less forgiving on licensees that fail to comply with the new reference checking obligations, Graham reckons, because the firms that show neglect in this area send the wrong message. Licensees are both required to seek out reference checks on advisers and brokers they employ, as well as provide those checks for those that have departed their firm.
“There are still groups that are refusing to do it, they won’t provide compliance reports or show adviser files,” Graham says. “I think ASIC might come down harder on this one, possibly even with surveillance.”
Heightened breach reporting rules is also being flagged as a significant impost for licensees, with Allens Partner James Campbell saying the “onerous” new regime will add further cost and complexity to the sector.