New breach reporting regime a substantial increase in complexity: AFA

In a submission to the Treasury, the AFA has cautioned the legislation will cause a “substantial increase in the scale and complexity” in self-reporting, with an impact “much greater than was appreciated when the bill was drafted”.

“Our serious concern with respect to the implications of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 is that it is significantly moving away from the concept of significant breach reporting and that this new regime will involve an exponential increase in the number of breaches that need to be reported and many of these will be of a largely administrative nature,” acting chief executive of the AFA, Phil Anderson, stated in the submission.

“The other key point that commissioner Hayne made in his interim report was the need to review and reduce the complexity of the requirements of the Corporations Act. Unfortunately, the new breach reporting regime represents a substantial increase in the scale of complexity, and in our view, this is virtually impossible for a small financial advice licensee to comply with.”

The AFA said it had held a number of discussions with the body’s licensee partners, and are well aware of the serious concerns that many of them have with the implications of this legislation. 

“In one case, a licensee who had four breaches reported in 2020, expected on the basis of the new legislation, that this would increase to 198. Their feedback suggests that the exclusion of civil penalty matters for the failure to deliver an FSG and a PDS would only marginally decrease the number of breaches that would need to be reported,” Mr Anderson said.

In its submission, the AFA said that the compliance regime for advice is complex, making minor breaches of an administrative nature common, despite not necessarily to the detriment of the consumer.

An example is the recent licensees that have been fined for failing to notify ASIC within 30 business days that one of their advisers had passed the FASEA exam, Mr Anderson noted, despite the test not being a mandatory requirement until 1 January 2022. The number of breaches relating to the FASEA exam is only expected to pick up in the coming years.

The body has urged the government to consider a deferral for commencing the new regime and to make certain civil penalty provisions exempt from the law.

“For context, financial advice licensees are required to undertake a detailed audit of a number of financial advice files for each adviser every year,” Mr Anderson said. 

“This process inevitably results in a number of matters being identified, even for those advisers with a good compliance track record. The vast majority of these matters would involve no consumer detriment and are largely administrative or record-keeping matters.

“The reality is that the compliance regime for financial advice is very complex, and this means that minor breaches are common. It does not in any way suggest that the quality of the advice is poor, or that the clients are at a greater risk of the prospect of detriment.”

In the context of what has been rapidly rising costs for financial advisers and their licensees over recent years, the AFA stated that it is motivated to ensure that the cost impact of this reform is not excessive. 

“It is important to note that licensees will need to carefully review each potential breach, and for licensees that lack in-house lawyers or compliance resources, they will need to seek external guidance before deciding to report a breach,” Mr Anderson added.

“It is this cost, along with the extra management time and oversight that will be necessary, that will have a very material impact on the cost of financial advice. Ultimately, clients will end out paying for this.”