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Happy New (Financial) Year! Don’t miss important wage and super changes in FY16

Increase in minimum wage

From the 1st July 2015, the Fair Work Commission (FWC) has increased the national minimum wage by 2.5%.  This change will result in an increase from $640.90 to $656.90 per week or $17.29 per hour.

The slightly lower increase from last financial year’s 3% increase, is due to several factors including the:

  • growth in unemployment rate from its recent low of 4.9 per cent in March 2011, to 6.1 per cent in April 2015; and
  • lower growth in consumer prices and aggregate wages growth over the past year.

This change will apply to employees who are in the national system (i.e. covered by the Fair Work Act 2009 (Cth) (Fair Work Act)) and not covered by an award or agreement.

Employees who are in the national system and covered by a modern award, will also have their minimum rate increased by 2.5%. This then involves a flow-on to the other rates in the award.

This change will not apply to employees who are covered by the State systems. They will have their minimum rate set by the relevant State tribunal, and you should be aware of any changes that might be coming as a result of these decisions.

As for the impact on your business, if an employee is paid above the award rate for their classification there is no requirement to increase their salary by 2.5%. To avoid being red-carded, we suggest all employers check the wages paid to staff at or near award level. The website of the Fair Work Ombudsman has a handy PayCheck Plus tool for this purpose.

Failure to comply with the new minimum wage from 1 July 2015 can have significant consequences for an employer, including:

  • claims for underpayment of wages to the Fair Work Ombudsman, the Federal Court or the Federal Circuit Court;
  • actions for breaches of the Fair Work Act, which can result in fines of up to $51,000 per breach ($54,000 once the new penalty rate comes into effect – see below); and
  • detection of breaches by a Fair Work Inspector conducting a random workplace compliance audit – leading to enforcement action.

Superannuation guarantee: no increase (9.5%)

There will be no increase in compulsory employer superannuation contributions this new financial year, or any financial year, until possibly 30 June 2021, or when the government changes.

This means that the compulsory contribution amount remains at the amount introduced last year, being 9.5%.

Superannuation is an area which most clearly reflects the strategies of the political party in government.  When it was in power, the Labor Government had intended 2015/6 to herald an increase to 10%, while the Coalition Government has deferred the 10% increase it originally intended for 2018, to 2021.

Assuming that the current government’s strategy applies for the foreseeable future, the eventual increase to a 12% superannuation rate just might occur in 2025.

Increase in high income threshold

The high income threshold for unfair dismissal claims under the Fair Work Act will increase from 1 July 2015 from $133,000 to $136,700.

The threshold affects 3 main entitlements:

  • employees who earn more than the high income threshold and who aren’t covered by a modern award or enterprise agreement, can’t make an unfair dismissal claim;
  • employees who are covered by a modern award and have agreed to a written guarantee of annual earnings that is more than the high income threshold, don’t get modern award entitlements. However, they can make an unfair dismissal claim; and
  • the maximum amount of compensation payable for unfair dismissal is capped at either half the high income threshold (ie $65,000), or 6 months of the dismissed employee’s wage – whichever is less.

Increase in penalty unit

The Senate has passed the Crimes Legislation Amendment (Penalty Unit) Bill 2015 (Bill) which has resulted in an increase to the value of a penalty unit.

The Bill amends the Crimes Act 1914 (Cth) to increase the value of the penalty unit for Commonwealth criminal offences from $170 to $180.

According to the Explanatory Memorandum:

  • this amendment is broadly consistent with inflation since the penalty unit amount was last adjusted in 2012; and
  • the increase will only apply to offences committed on or after the date that the amendment comes into force – it won’t affect current proceedings for Commonwealth offences.

The new penalty unit amount will come into effect on 31 July 2015 so beware of committing an offence after that date!

Anti-Bullying in the Fair Work Commission
Now that the anti-bullying jurisdiction has moved beyond its ‘infant’ status, employers should have a finer awareness of their obligations and duties under the Fair Work Act and how to avoid becoming a statistic at the FWC.

An analysis of the Quarterly Reports and case decisions produced by the FWC has revealed:

  • fewer claims than predicted: before the introduction of the anti-bullying provisions in January 2014, the FWC predicted it would receive about 3500 ‘stop-bullying’ applications per year; in 2014 it received around 700;
  • ‘unreasonable behaviour': from FWC judgments, the following conduct is understood to constitute unreasonable behaviour: aggressive and intimidatory conduct, belittling or humiliating comments, victimisation, spreading malicious rumours, practical jokes or initiation, exlcuding from work related events, unreasonable work expectations;
  • ‘reasonable management action': is the defence used by employers.  The FWC has refined this concept to mean that the employer’s action must be lawful and not ‘irrational’, to avoid being considered bullying. In reaching its decision, the FWC will consider the context in which the management action occurred.
  • othe key principles that have emerged from FWC judgments include:
    • conduct that occurred before 1 January 2014 (when the bullying legislation was introduced) may be relevant and can be considered by the FWC, but this is in the context of it being linked to other conduct occurring after that date;
    • the provisions no longer apply if the employee ceases working for the employer. An employee can still make an application during his/her term of notice of termination, but it would be unlikely to succeed because employment is about to end and the threat of future bullying is thus removed; and
    • confidentiality of proceedings cannot be guaranteed. The mere prospect of embarrassment or distress to a party from being identified will not be enough to justify an order of confidentiality.

Another key principle that has emerged from FWC decisions to date is an understanding of when conduct will be considered to be ‘at work’. In general there must be a ‘substantial connection’ to work, but the alleged bully does not have to be ‘at work’ at the relevant time.

See our previous blog on cases discussing what constitutes ‘the workplace’ in the modern working environment.

And, just a reminder, bullying at work under Section 789FD(1) of the Fair Work Act states that a worker is bullied at work when:

  • another individual or group of individuals repeatedly behaves unreasonably towards the worker; and
  • that behaviour creates a risk to health and safety.

Further guidance can be found in the FWC’s recently released ‘Anti-bullying benchbook‘.

Reflect WHS in your annual report

Safe Work Australia recently announced that the Civil Aviation Safety Authority (CASA) is the winner of the Work Health and Safety Reporting Award at this year’s Australasian Reporting Awards.

The Work Health and Safety Reporting Award recognises excellence in reporting on the management of and performance in work health and safety. Safe Work Australia Chief Executive Officer, Michelle Baxter is encouraging all businesses to include WHS reporting in their annual report.
It is not too late to include work health and safety as part of your 2014-15 annual report. For inspiration just have a look at the CASA 2013-2014 annual report or the annual report of one of the other finalists (eg BHP Billiton).

Penalties for poor corporate culture – will ASIC ‘nudge’ your organisation?

ASIC has recently announced an approach to surveillance reviews which will include an examination of organisational culture. In addition, it has asked a Senate committee to consider laws that would allow it to punish individuals and companies for poor organisational culture.

Poor culture is not industry-specific

Although ASIC’s recent speeches have been directed at, and have used examples of, the practices of the financial services industry, the issue of managing organisational culture risk is common to all organisations.

Our article ‘Why effective policy management is critical to organisational success’ provides guidance on developing a desirable corporate culture.

In many ways, culture comes from above. The nature of an organisation’s culture is set by its leadership team – the board and senior management – through management, the execution of strategies, and practices that set the tone for an organisation.

ASIC made this point last year when, in another speech, Mr Medcraft noted that directors should ensure that the compliance function strongly drives a culture of compliance.

The bottom line is that ASIC is sending a message to directors that they have a duty not only to ensure the viable functioning of a business, but also to ensure that a culture of regulatory compliance, risk management and proper corporate governance exists and is enforced in their organisation.

ASIC speeches

ASIC’s concern about poor organisational culture has been repeatedly emphasised in recent speeches given by its Chairman Greg Medcraft.

On 3 June 2015 Mr Medcraft presented to a Senate Estimates hearing, remarking that ‘it is a sad fact that bad culture leads to bad conduct and this inevitably leads to poor outcomes for consumers’. Given there is a strong connection between poor culture and poor conduct, ASIC thinks culture is a major risk to:

  • investor and consumer trust and confidence; and
  • the fair orderly and transparent operation of our markets.

Mr Medcraft announced that ASIC intends to incorporate culture into its risk-based surveillance reviews. For AFS Licensees, this could result in ASIC determining that a licence should be revoked because the culture of the Licensee breaches its obligation under section 912A of the Corporations Act 2001 (Cth) (the Corporations Act) to provide its services ‘efficiently, honestly and fairly’.

ASIC believes that breaches of the Corporations Act caused by cultural conduct should attract civil penalties and administrative sanctions.

It seems that ‘culture risk’ should now be added to an organisation’s risk register – if it wasn’t already there.

What can I do to improve culture?

In a speech delivered to the Annual Stockbrokers Conference on 25 May 2015, Mr Medcraft stated that the culture within a firm – its shared values and assumptions – has a positive influence on behaviour and good or bad culture can lead to good or bad market practices.

In the same speech he introduced the ‘3 C’s’ framework on culture risk for organisations.

The ‘3 Cs’ stand for:

  1. communication;
  2. challenge; and
  3. complacency.

Those 3 elements are important influencers of an organisation’s culture as follows:

1. Communication

Communication of conduct expectations needs to be clear, concise and effective. This includes communication that is proactive and regularly and consistently repeated across the organisation.

2. Challenge

Organisations:

  • should challenge existing practices to determine whether current conduct is appropriate;
  • need to foster an environment where employees are encouraged to escalate concerns without fear of retribution; and
  • should consider rewarding staff for speaking up.

3. Complacency:

Don’t be complacent. Conduct should be continually reviewed, enforced and validated.

Civil penalties for a bad corporate culture?

You may be surprised to know that ASIC is asking for a change in the law to allow it to prosecute companies for a poor corporate culture. In his opening statement, Mr Medcraft said that in addition to administrative action (revoking an AFS License), ‘we think that when an officer breaches a law ASIC administers – and culture is responsible – then the officers and the firm should be responsible’.

Mr Medcraft is referring to section 12.3 of the Criminal Code Act 1995 (Cth) (the Criminal Code), which defines ‘corporate culture’ as ‘an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place’.

The Criminal Code also states that ‘this Code applies to bodies corporate in the same way as it applies to individuals. … A body corporate may be found guilty of any offence, including one punishable by imprisonment’.

The Criminal Code introduces the concept that criminal responsibility should attach to organisations where the corporate culture encourage situations which lead to the commission of offences. The provisions make organisations accountable for their general managerial responsibilities and policy.

ASIC is asking for the introduction of civil penalties relating to poor corporate culture to apply to the Corporations Act provisions that it administers. Civil penalties require a lower standard of proof than criminal offences (‘the balance of probabilities’ as opposed to ‘beyond reasonable doubt’).

ASIC has used the opportunity to give evidence before the Senate committee to ask for these changes in the law, stating that ‘the Financial System Inquiry recommended a broad review of penalties, and this would be an opportune time to consider these issues’.

How can your reflect the ‘three Cs’ in your organisation?

The answer lies in your organisation’s governance and risk frameworks and the policies, procedures and practices which form part of them.

According to Mr Medcraft, if ‘ASIC find that the policies, procedures and practices in an entity don’t influence good conduct, it raises a red flag with us. It tells us to look harder, as there are likely to be problems within that entity. And, we will look to apply the right nudge to change behaviour.’

To avoid ASIC ‘nudging’ your organisation, it might be timely to review your risk and compliance frameworks to ensure they are tailored towards the delivery of a robust culture that promotes trust and confidence in your organisation.

Lawyers and Real Estate Agents to feel the force of new AML/CTF regulations

The proposed second tranche of Australia’s AML/CTF regime is designed, amongst other things, to ensure that lawyers, real estate agents and jewellers are required to comply with the obligations under Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act).

Whilst the failure to introduce this second tranche of reforms has been the elephant in the room for nearly 10 years, the recent media attention on large property transactions in Australia involving overseas investors has reignited this debate and applies considerable pressure on the Federal Government to act.

The $39 million sale of Villa Del Mare in Point Piper, Sydney, caused controversy when its forced re-sale was ordered by the Federal Treasurer once it was discovered that the purchase by a Chinese national had allegedly breached the Government’s foreign ownership rules under the Foreign Acquisition and Takeovers Act 1975 (Cth) (the FAT Act). Under the FAT Act, a ‘foreign person’ must seek Government approval before acquiring an interest in certain types of residential real estate.

On 9 June the Federal Treasurer announced that the Foreign Investment Review Board has 195 cases of potential breaches of the FAT Act under investigation – adding further ammunition to the argument for the scope of AML/CTF Act to be extended to ensure that all aspects of real estate transactions involving overseas investors are adequately regulated.

Second tranche of regulation

In an attempt to tighten the investment rules, the Government has proposed various initiatives, including penalising third parties such as real estate agents, lawyers and accountants, who assist individuals or corporations to purchase property in contravention of the FAT Act.

Real estate agents are vulnerable to the risk of money laundering and terrorism financing through illicit investments in property. The investments can be made through a chain of transactions in real estate to disguise the source of funds. Various other methods of concealing and integrating large funds into the legitimate economy through real estate are outlined in AUSTRAC’s ‘Strategic analysis brief: Money laundering through real estate‘.

Lawyers are vulnerable because their services can be used to conduct transactions of behalf of foreign investors, establish trusts and other structures to hide identity, recover fictitious debts and make payments through trust accounts.

It’s not ‘new’ news that these industries are being targeted by the Government for AML/CTF regulation. The AML/CTF Act was always intended to be implemented in two tranches. The first tranche, relating to ‘designated services’ in the financial and gambling sectors and bullion dealers, was implemented by 2008. The second tranche is the extension of the AML/CTF obligations to real estate agents, jewellers and professionals such as accountants and lawyers. The impact of the global financial crisis meant that the second tranche was delayed.

Now, as Australia’s property industry is apparently in a bubble, there is increased focus on the foreign beneficiaries of property transactions in Australia and renewed calls for the AML/CTF Act to be amended.

The recently released FATF Mutual Evaluation Report on Australia’s AML/CTF Regime which criticised Australia’s failure to introduce the second tranche has also provided further impetus for change.

What will AML/CTF Act amendments look like?

Although draft legislation is yet to be released by the Government, it’s anticipated that the second tranche of AML/CTF regulation will be similar to the current compliance obligations imposed under the AML/CTF Act and also the Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules).

Under the new regime real estate agents and other new ‘reporting entities’ will be required to:

  • implement a risk-based AML/CTF program;
  • carry out a risk assessment of customers, designated services, methods of delivery for designated services and the foreign jurisdictions; 
  • understand the nature and purpose of the business relationship with our customers and the control structures of non-individual customers; and
  • carrying out minimum customer identification and verification procedures. 

If the new laws are introduced, members of the new industries who will become reporting entities under the AML/CTF Act will see their compliance obligations increase.  Their existing compliance programs should also be reviewed.

Hopefully by the date of their introduction, Standards Australia will have confirmed whether or not the new compliance standard ISO 19600:2014 Compliance Management – Guidelines will be adopted as an AS/NZS standard.

How can CompliSpace help?

CompliSpace provides a range of ongoing training services including high impact workshops designed for financial services executives and Responsible Managers. These practical group sessions are designed to keep attendees up-to-date with the latest industry changes, real life case studies and fast-track the practical development of new knowledge and skills.

Further details of our next sessions can be found here: http://www.complispace.com.au/afsl-executive-workshop

CPD certificates and training material will be provided post workshop.

3 June 2015: Workplace Relations Update for Executives On-the-Go

Bank manager dismissed for romantic conflict of interest

A branch manager at Westpac was dismissed after he failed to disclose a relationship with an employee that created a conflict of interest. He applied to the Fair Work Commission for relief under unfair dismissal provisions, but was unsuccessful. It must be noted that the basis  for his dismissal was not  having a relationship with an employee per se, but that he failed to disclose a relationship with an employee who was initially his direct report, and the consequences which flowed from that failure.

Mr Mihalopoulos was a long-time employee of the Bank, being promoted through the ranks until he become the bank manager of a regional branch in 2012. In February 2014, he became involved in a romantic relationship with one of the employees at his branch, Ms A. Ms A reported directly to Mr Mihalopoulos.  Both parties were married at the time the affair began. Mr Mihalopoulos and Ms A moved in together in March 2014.

This relationship was kept from Mr Mihalopoulos’s employees, and from his supervisors. When asked by his manager on a number of occasions if he was in a relationship with Ms A, Mr Mihalopoulos  denied the relationship.

Under the terms of Mr M’s contract of employment, he was required to disclose to his employer any likely conflict of interest. He also received online training on Westpac’s conflict of interest policy, which included training in what constituted an actual, potential and apparent conflict. The last situation being one where a third party might reasonably perceive that there was a conflict. Mr Mihalopoulos’s contract of employment also included provision for dismissal for dishonesty.

Mr Mihalopoulos was responsible for conducting performance appraisals on Ms A, and sought to influence salary and promotion decisions (a normal part of his role) to Ms A’s benefit.

This relationship eventually turned sour, with an Apprehended Violence Order (AVO) made against Mr Mihalopoulos. He was later charged and found guilty of breaching that order after contacting Ms A, as well as for malicious damage. For these offences, he was given a bond, with no conviction being recorded.

Following the court action, Mr Mihalopoulos’s supervisor met with him and provided him with a letter outlining the allegations against him, including that he:

  • was dishonest about the relationship with Ms A;
  • exposed the Bank to reputational damage by breaching the AVO; and
  • failed to appreciate the conflict of interest.

After following appropriate procedures, when Mr Mihalopoulos’s was eventually dismissed, Mr M applied to the Commission for reinstatement, arguing that dismissal was disproportionate to his actions.

The Commission was quite clear in finding that, contrary to his contract of employment,  Mr M was in a potential conflict of interest situation which he dishonestly failed to disclose to his employer. It said that:

to be blunt it should be obvious to any reasonably intelligent person that for a manager in an organisation such as [the Bank] to form a romantic relationship with a direct subordinate creates the potential for a conflict of interest’. It went on to find that Mr Mihalopoulos’s failure to disclose his relationship with Ms A ‘constitutes a valid reason for [his] dismissal‘,

and dismissed his application.

It should be noted that Ms A was considered on objective grounds to be one of the top performing employees in her branch, however this did not negate the perception of bias arising from the conflict of interest.

This case illustrates a number of the issues which make relationships between direct reports and co-workers an area that gives rise to sleepless nights for employers – apart from the obvious dangers of conflict of interest or perceived conflict of interest, both of which can lead to poor decisions, poor staff morale and lowered productivity while the rumours flow.  And there is always the risk of relationships going sour, and as in this case, matters escalating to court cases which result in reputational damage to the employer.

Office romances are not rare, so an employer should give some thought to how such situations should be managed. In this case, the Westpac supervisor indicated that had the relationship been disclosed, arrangements could have been made to move one of the parties to another branch. The issue becomes far more complex in smaller organisations. It is clear however, that a policy prohibiting fraternisation between co-workers certainly does not stop what appears to be nature taking its course.

Breach of a ‘golden rule’ of safety not enough to avoid unfair dismissal

A worker has been been awarded compensation after the Commission found that he was unfairly dismissed, despite finding that he broke a ‘golden rule’ of safety. Once again, the importance of following due and proper process in a dismissal has been affirmed.

The worker, Mr Auberson, was a rigger engaged on a project being run by Clough Downer Joint Venture Construction Pty Ltd (CDJVC). His duties were to work in a crew with a crane operator, a pipe fitter and another rigger.

The company had a set of ‘Safety Golden Rules’ that were displayed at various locations on site, read out and discussed each day. The relevant ‘Golden Rule’ is succinctly stated as ‘NEVER work at height without fall protection’. The Golden Rules stipulated that breaches would be investigated and may result in disciplinary action and dismissal.

On the day in question, a safety assessment was prepared requiring a harness to be worn when working at a height above 1.8 metres, and where no other fall protection (such as a handrail) existed. On commencing a job involving moving a pipe by crane, Mr Auberson checked the safety assessment and assessed that the job was ‘under the workable height’. He proceeded to stand with one foot on a pipe rack, and one foot on a beam, holding a line attached to the pipe being moved into position. He was also directing the crane driver using a hand signal or radio. He claimed that he was controlling the risk of a fall by:

  • having three points of contact; and
  • being under the workable height.

A manager then became concerned about his work, and called him off the job he was working on. There were then claims that he was standing on the pipes in contravention of accepted practice. After being called off, there was a discussion between work supervisors. He then climbed back onto the pipe rack, but denied that he was told not to do so. Mr Auberson then completed landing the pipe.

Work was stopped and a discussion about the work practice with work supervisors ensued. New safety assessments were prepared.

Four days later, Mr Auberson was stood down on full pay, and given a letter alleging safety breaches relating to the working at heights Golden Rule. A meeting was held a couple of hours later, where Mr Auberson was expected to respond to the allegations detailed in the letter. His explanations were not accepted and his employment was terminated the next day.

The Commission, when examining these events, found that Mr Auberson did breach the Golden Rule about working at height, and this was a valid reason for his dismissal. Addressing the allegation that Mr Auberson disobeyed a direction about the work practice, the Commission found that the direction alleged to have been given to him – that he not continue with the job – was not in fact given in those terms.

However, in following the process at the workplace, the Commission found that Mr Auberson was not given an opportunity to respond to the reasons for his dismissal. The letter was provided to him only 90 minutes before a meeting to discuss those allegations.  This was found to be an insufficient period for him to properly prepare his response to the allegations. While he was afforded the opportunity of a support person, he had no opportunity to meet with that person prior to the meeting. His dismissal was found to be unjust and unreasonable.

This case illustrates what should now be a familiar adage in workplace relations. A dismissal for the right reasons, but in the wrong way, will lead to a finding of unfair dismissal. Not even a breach of a ‘Golden Rule’ is exempt from this.

Mr Auberson was then awarded compensation, calculated at 12 weeks’ pay, minus  40% for his own contribution towards the situation that lead to his dismissal. The total was $8,831.78.

 

The right to have legal representation at the Fair Work Commission depends on the facts

Recent decisions by the Commission serve to remind employers that there is no automatic right for them to be represented by lawyers in matters before the Fair Work Commission. The objective is for employees and employers to have roughly equal footing to achieve a fair outcome. This would not be served where an employer may have access to significantly greater legal firepower, but it does take into account that employees represented by large unions are likely to have access to very experienced advocates.

Under section 596 of the Fair Work Act 2009 (Cth) (the Act) an employer can only be represented in the Commission by a lawyer with permission.

That permission may only be granted if:

(a) it would enable the matter to be dealt with more efficiently, taking into account the complexity of the matter; or

(b) it would be unfair not to allow the employer to be represented because they are unable to represent themselves effectively; or

(c) it would be unfair not to allow the employer to be represented taking into account fairness between the employer and other persons in the same matter.

The Act provides examples of circumstances in which the Commission might grant permission, including where a person is from a non-English background or has difficulty reading or writing, or where a small business is a party to a matter and has no specialist human resources staff while the other party is represented by an industrial association or another person with experience in workplace relations advocacy.

Clearly, this right is not intended to benefit large, ASX-listed employers with large and experienced human resources teams – unless the matter is ‘complex’.

This was the situation that Asciano Services Pty Ltd found itself in recently when it sought permission to be represented by lawyers in unfair dismissal proceedings.

Asciano’s application had been challenged by its former employee’s representative, the Rail, Tram, and Bus Industry Union.

The Union submitted that Asciano should not have legal representation because:

  • it could represent itself using its own qualified personnel;
  • the matter was not complex;
  • Asciano is a large organisation with significant resources and a sophisticated human resources department; and
  • the basis of section 596 of the Act was ‘to put everyone on an equal footing.’

Ultimately, these factors persuaded the Commission that Asciano should be refused permission to have legal representation.

What does this mean for employers? The Commission’s decision provides some useful indicators of when an application for legal representation may or may not be granted.

Factors in favour of allowing representation

  • a complex matter of law to be determined;
  • no internal legal team;
  • no internal human resources team;
  • no specialist personnel;
  • the non-availability of internal legal, human resources or other specialist personnel (if any) to attend a hearing; and
  • unfairness.

Factors against allowing representation

  • internal legal team;
  • internal human resources team; and
  • other specialist personnel.

The Commission will be looking  at the facts of each case in making a determination. In another recent decision involving Greyhound Australia Pty Ltd (Greyhound), the Commission allowed Greyhound to have legal representation because even though it had human resources staff, their lack of advocacy experience compared to the union representing the other party would have meant that ‘an inequality or disparity would exist.’

Responsible Managers – Why bother with ongoing professional training and development once you have an AFS Licence?

Unlike many other professionals, Responsible Managers (RMs) appointed under an Australian Financial Services (AFS) Licensee are not required by ASIC to complete a minimum hours of professional training and development each year.

As anyone who’s applied for a new or varied Australian Financial Services Licence (AFSL) will know, ASIC requires detailed documentation to demonstrate the competency of each person appointed as a RM for the AFSL. This is to ensure that RMs satisfy the first leg of the competency requirements of s 912A(1)(e) of the Corporations Act 2001 (Cth) (the Corporations Act). Namely, that the licensee maintain its competence to provide the financial services covered by its AFSL.

ASIC sets out in Regulatory Guide 105 the minimum qualifications levels and the years of relevant work experience for each RM at the application stage. However, when it comes to the second leg of maintaining the competency requirements in the Corporations Act, ASIC takes a far less rigorous approach. Essentially, ASIC allows licensees to self-regulate how they maintain the ongoing competence of their RMs. This self-regulatory approach is broadly described in RG 105 as:

  • AFS Licensees should have measures in place to ensure they maintain their organisational competence at all times, including:
    • reviewing their organisational competence on a regular basis and whenever their RMs or business activities change;
    • maintaining and updating the knowledge and skills of their RMs; and
    • keeping records to show the Licensee has reviewed its organisational competence and what steps have been taken to maintain its organisational competence; and
  • AFS Licensees should document their measures in some form, as in ASIC’s view, it is more difficult to show compliance where documentation is not in place.

Importantly, ASIC requires no minimum number of hours of professional training and development each year, nor annual compliance certification or independent audit.

The only ASIC threat is a possible surveillance visit, but with an increasingly large number of AFSL holders, plus budget constraints, it’s little wonder that ASIC rarely scrutinises how licensees maintain the ongoing competence of their RM. This in turn easily leads to many AFSL holders taking a ‘don’t bother too much’ attitude towards this obligation. But, it’s not too hard to take a few practical steps each year to satisfy this requirement, as explained below.

As an AFS Licensee what action should I take?

Most RMs regularly read industry publications and attend industry meetings and seminars in order to keep abreast of developments with competitors, their industry and regulation.

So it’s not a big step, with the end of the financial year fast approaching, to:

  • ask each RM to update their records of what they’ve done this last each year to maintain and update their knowledge and skills; and
  • at your next Board Meeting, review and minute any changes in your business activities and what steps you’ve taken to maintain the organisational competence of your RMs.

If ASIC’s not fussed, why should we be?

Despite the only ASIC threat being a possible surveillance visit, it’s important to remember that what that visit might uncover may lead to other entities showing huge interest in whether an RM is ensuring that the AFS Licensee is maintaining its expertise through professional training.  Namely: lawyers and litigation funders.

If the acts or omissions of a RM result in the AFS Licensee breaching its obligations under the Corporations Act (eg by providing inappropriate advice) pecuniary and criminal penalties may result.  If the RM is a director or officer, they may be personally liable for breaches of the Corporations Act.

Furthermore, if those breaches cause loss to clients, litigation may be threatened and if the class of affected clients is large enough, a class action could result.

How can CompliSpace help?

CompliSpace provides a range of ongoing training services including high impact workshops designed for financial services executives and Responsible Managers. These practical group sessions are designed to keep attendees up-to-date with the latest industry changes, real life case studies and fast-track the practical development of new knowledge and skills.

Further details of our next sessions can be found here: http://www.complispace.com.au/afsl-executive-workshop

CPD certificates and training material will be provided post workshop.

A Perfect Storm – Australia’s Anti-Money Laundering and Counter-Terrorism Financing Regime

Since its commencement almost 10 years ago, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act) has created a complex set of obligations for entities (reporting entities) required to implement AML/CTF programs. The AML/CTF Act, and associated Rules, are also heavily regulated by a well-resourced and well-funded regulator (AUSTRAC) so it is not an area to be taken lightly.

However, significant events over the last few months have created a ‘perfect storm’ within the Australian AML/CTF landscape, requiring existing reporting entities to ensure that their AML/CTF Programs are watertight, robust and in line with regulator expectations. Failure to do so will result in lengthy and time-consuming regulator communications, increased likelihood of enforcement action and reputational damage within the market.

1. Poor Scorecard for Australia

The recently released Financial Action Task Force (FATF) report on Australia’s AML/CTF regime provides feedback on the effectiveness of measures put in place within Australia to address global standards.

Let’s be clear from the outset: the report shows a fair bit of room for improvement. After the adoption of the AML/CTF Act in 2006, the creation of an ever-expanding list of additional AML/CTF Rules (71 chapters and counting), annual compliance reporting, internal/external Independent Review requirements and a very active regulator, FATF still found that Australia was ‘compliant’ or ‘largely compliant’ in only 24 of its 40 recommendations.

This is not good news for Australia, and forward-thinking reporting entities should be aware of this constructive feedback.  The findings of the FATF report will ultimately trickle down to existing reporting entities, and be enforced through the AML/CTF regulator, AUSTRAC. So, expect more changes to the AML/CTF Act and Rules over the next few months and years.

2. Sheer Volume of Requirements

After the adoption of the AML/CTF Act in 2006, the AML/CTF Rules have expanded to 71 chapters which include annual compliance reporting and independent review requirements for reporting entities.

Significant AML/CTF Rule changes commenced in June 2014 in relation to Customer Due Diligence (CDD) (see our previous blog). Reporting entities are only just coming to terms with these changes, spanning five or six Chapters of the Rules, even with a relatively long implementation window. However, expect plenty more changes to the AML Act and Rules over the next few months and years after the shortfalls identified by the FATF in the current regime.

3. Tougher Enforcement Action

As the AML/CTF regulator, AUSTRAC has used its enforcement powers to issue a range of enforceable undertakings, infringement notices, remedial directions and fines against several reporting entities.

Perhaps the most widely used enforcement power is the desk or on-site compliance review. Whilst the likelihood of a client using your services to launder money may be low, the risk of an AUSTRAC desk or site review is high. Such assessments can often take several weeks and months to resolve if your AML/CTF Program does not address the key requirements and meet AUSTRAC expectations.

Perhaps the most ominous feedback from the recent FATF report (see our blog) was the finding that Australia should ‘consider opportunities to further utilise its formal enforcement powers to promote further compliance by reporting entities through judicious use of its enforcing authority’.

It is interesting to note that since the FATF visit to Australia last year AUSTRAC has already issued two infringement notices, cancelled six remittance registrations and issued fines across the bookmaking and remittance sectors.

4. New CEO and Increased Funding

Further fuel has been added to the fire with the appointment of new AUSTRAC CEO Paul Jevtovic late in 2014, adding focus, impetus, and drive to the regulation of the AML/CTF legislation in Australia.

The fairly critical FATF assessment of Australia’s AML/CTF regime will provide Mr Jevtovic with enough political leverage to introduce tougher supervision in Australia. Throw in a $20 million funding increase and reporting entities can only expect to see more of the regulator over the coming years.

* The Financial Action Task Force (‘FATF’) is the global body responsible for setting and monitoring international standards on combatting money laundering, terrorist financing and other related threats to the integrity of the international financial system.

How Can CompliSpace Help

CompliSpace provides a range of AML/CTF content and services, including assisting reporting entities to create and then maintain tailored Part A and Part B programs.

Training and testing modules covering key aspects of each AML/CTF Program will be provided to ensure that staff are trained on specific AML/CTF policies and procedures adopted by the business. On an ongoing basis, CompliSpace provides updated policies and procedures in line with changes to the AML/CTF Act, Rules or best practice.

Please contact James Cozens to discuss your AML/CTF Program requirements further.

 

ASX proposes updates to guidance on analyst and investor briefings

On 6 March 2015 the Australian Securities Exchange (the ASX) released a consultation paper (the Paper) on proposed changes to Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B (GN 8). The changes expand upon the existing ASX guidance given in relation to analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises.  The Australian Securities and Investments Commission was consulted by ASX about the changes.

The consultation period closed on Friday 24th April and the ASX received submissions from seven different entities, a mix of both publicly listed companies, law firms and industry associations (Submissions).

Not all the feedback was positive.

Why the changes?

In the Paper, the ASX acknowledges that GN 8 was only recently subject to a major re-write in May 2013.  The re-write included substantially updated materials on earnings guidance, de facto earnings guidance, earnings surprises and correcting analyst forecasts.

But ‘developments since then have indicated to ASX that listed entities and their advisers would benefit from further guidance in these areas.’  One such development was the imposition of a $1.2 million fine on Newcrest for its well-publicised poor continuous disclosure practices.  The release of ASIC Report 393: Handling of Confidential Information, which deals with the release of confidential information by ASX listed entities in investor and analyst briefings and unannounced corporate transactions, was another development.

Earnings surprise

The majority of the ASX’s proposed changes relate to the divisive and difficult topic of updating the market in relation to earnings.

Generally, the ASX is of the view that the way an entity should manage earnings expectations, in accordance with the continuous disclosure requirements in LR 3.1, is through a market announcement, not selective disclosures to analysts.

The ASX further clarifies what circumstances would or wouldn’t prompt the need for a market announcement:

  • market sensitive earnings surprise’ is a situation where an entity’s reported earnings differ so significantly from market expectations that a reasonable person would expect information about its reported earnings to have a material effect on the price or value of its securities – requiring a disclosure; and
  • ‘earnings surprise’ a situation where an entity’s reported earnings differ from the consensus estimate, but not necessarily to the extent that a reasonable person would expect information about its reported earnings to have  a material effect on the price or value of its securities – disclosure not required.

The question for entities to answer then involves an exercise of discretion and judgement, being: if there is an earnings surprise, is it ‘market sensitive’?

Earnings guidance

The ASX inserts a pargraph into section 7.1 of GN 8 confirming that subject to the existing exceptions and ‘all thing being equal’, it is ‘perfectly acceptable’ for an entity to have a policy of not providing earnings guidance to the market.

However, the ASX makes it clear that if earnings guidance is published, an entity will have made a ‘positive representation’ to the market that will set expectations in the market, and if the entity expects its earnings to differ from the published guidance, it will be in a position where it needs to assess whether the difference will be ‘market sensitive’ and require a disclosure – as per the question discussed above.

The ASX clarifies what the consequences could be for an entity that does not exercise its judgement correctly in that situation, being a potential breach of LR 3.1 and sections 674 and 1041H of the Corporations Act 2001 (Cth) (misleading conduct).

Correcting analyst forecasts and consensus estimates

Analyst forecasts and consensus estimates are relevant indicators of market expectations and an entity is obliged to make a disclosure if it becomes aware that earnings for a current reporting period will differ so much from market expectations that the information meets the test of ‘market sensitive’ information.

Section 7.4 of the Paper provides further clarification on when an entity should make corrections in light of market expectations.

It’s interesting that, as one of the publicly available submissions commented, there is no ASX definition of ‘consensus’.

What has been the reaction to the proposed changes?

The Submissions generally support ASX’s proposed changes.  That said, they also offer suggestions and criticisms.

The Australasian Investor Relations Association (AIRA), in particular, disagrees with some of the new guidance, as reported by the Financial Review.

AIRA Chief Executive Ian Matheson is quoted in that report as saying that ‘under the proposal the ASX makes the rules more complicated while also telling companies that they can ignore big errors in consensus analyst expectations if the company doesn’t provide any guidance of its own.’

In its submission to the ASX, AIRA elaborates further and believes that the amendments are unhelpful because they:

• go beyond the level of guidance that is necessary and appropriate from ASX in so far as the “guidance” relates to provisions of the Corporations Law and not the Listing Rules;
• fail to appreciate that what the ASX views as “guidance” will be viewed by many if not most listed entities as tantamount to regulatory requirements; and
• (as a consequence of the preceding two bullet points) will result in a less informed market and greater potential for earnings surprises–contrary to the best interests of both issuers and investors.
It remains to be seen if ASX incorporates some of the feedback it received into the final version of GN 8.

What does this mean for you?

Entities should be reviewing their disclosure policies in light of the proposed changes to GN 8.

Once ASX finalises GN 8, intended to be effective from 1 July 2015, changes may be required, particularly if an entity has policies and procedures in relation to earnings guidance.

CompliSpace will also be reviewing the final GN 8 and will update our disclosure policy for ASX-listed clients.

 

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