Financial Services Update

In this edition:

  • MDA: A new regime
  • Record-keeping for AFS licensees
  • Credit crunch: ASIC key wins on ACL issues
  • Responsible Manager Workshops: Melbourne and Sydney

MDA: A new regime

ASIC has had a busy year dealing with a backlog of regulatory issues which were put on hold due to the Financial Services Inquiry. The latest issue to be addressed is the Managed Discretionary Account (MDA) regime.

ASIC has updated the MDA regime with the introduction of the ASIC Corporations (Managed Discretionary Accounts) Instrument 2016/968 and revised RG 179 Managed discretionary account services.

When do I need to comply with the new regime?

The below are key dates for entities affected by the MDA regime to keep in mind:

  • 1 October 2016: for AFS licensees who were first authorised to deal in or provide financial product advice in relation to an MDA after 1 October 2016.
  • 1 October 2017: for AFS licensees who were first authorised to deal in or provide financial product advice in relation to an MDA prior to 1 October 2016. However, a licensee may opt into the new regime before 1 October 2017 by publishing a notice on its website that it will rely on the Instrument in relation to MDA services.
  • 1 October 2018: for MDA providers currently offering MDAs under ASIC’s regulated platform no-action letter. The new regime required you to obtain an MDA specific licence authorisation.

What are the major changes?

      1. Increased disclosure requirements

The new regime is heavily focused on additional disclosure requirements that are clear, concise and effective. The increased disclosure requirements relate to:

a) Financial Service Guides (FSG) – including MDA service fees and costs, outsourcing arrangement and the risks of non-limited recourse products (where applicable).

b) MDA Contracts – including fees and costs, the difference between acquiring financial products directly and through the MDA service and how the contract can be terminated, including the provision of the MDA termination policy to the client upon request.

c) Investment Program – detailed investment strategy which provides sufficient information to enable a client to form an opinion about the suitability of the strategy.

d) Annual investment statement must now include specific information about total fees and costs.

     2. Termination of MDA services

In addition to increased disclosure to clients relating to termination of an MDA contract, MDA operators will need to have a written policy in place which addresses how a client’s portfolio assets will be dealt with and that is available to be provided to the client upon request.

     3. Explicit consent for non-limited recourse products

MDA Operators will need to obtain the express client consent, separate and in addition to the MDA Contract, before investing in non-limited recourse products such as contracts for difference and leveraged OTC derivatives.

Following the client’s consent, MDA operators must provide the client with a written statement which includes information about how the product works, any significant risks and prominent warnings, other features of the product which may be material to the client’s decision to invest in the product, the degree of leverage at least one prominent example that illustrates in dollar terms of the risk of the potential liability of a person holding the product.

      4. Timeframe for breach reporting

The timeframes for breach reporting has been increased to 10 days in line with the general AFSL requirement in s912D.

      5. Conflicts of interest

The new regime mirrors the requirements of managed investment schemes and MDA Operators must ensure that they act in the client best interest and prioritises the client’s interest over its own.

And a friendly reminder…

ASIC has also reminded MDA Operators of their requirements to act in the best interest of clients and to ensure that they have processes and procedures that ensure its representatives comply with this obligation when provided MDA services.

What do I need to do?

MDA operators (and advisers) should start thinking about their plan for transitioning to the new requirements. In particular, licensees should start reviewing their FSGs, MDA contracts, policies and procedures in preparation for the new requirements.

Record-keeping obligations for AFS licensees

ASIC has updated Class Order 14/923 Record-keeping obligations for Australian financial services licensees when giving personal advice.

The amendments to the record-keeping obligations:

  • confirm that Australian financial services licensees must have access to records for the period of time in which the records are required to be kept, even if a person other than the licensee holds the records; and
  • make explicit that authorised representatives who are advisers must keep records, and give the records to their authorising licensee if the licensee requests the records for the purposes of complying with financial services laws.

We suggest that as part of any review activities undertaken of agreements with third parties and authorised representatives that you give specific consideration to record-keeping obligations to ensure that the new requirements are being met.

Credit crunch: ASIC key wins on ACL issues

In the past two weeks, ASIC has had two notable successes against Australian credit licensees.

Responsible lending obligations of Payday lenders

The first relates to Cash Converters who have entered into an enforceable undertaking following concerns that it failed to meet its responsible lending obligations.

For a three year period between 2013-2016, Cash Converters processed requests for small loan amounts via its website. In doing so, it didn’t make reasonable inquiries into consumers’ income and expenses, particularly in situations where the loan was presumed by the credit legislation to be unsuitable, for example, the ability of the consumer to repay the loan. Further, Cash Converters didn’t take reasonable steps to verify consumers’ expenses. Instead of assessing the actual expenses recorded in a consumer’s bank statements, Cash Converters applied an internally-generated assumed benchmark that had no relationship to the real expenses of the individual consumer. The result of these failures led to approximately 118,000 incorrectly issued small loans.

Under the enforceable undertaking, Cash Converters is required to:

  • refund eligible consumers $10.8 million in fees through a consumer remediation program overseen by an independent expert who will report to ASIC; and
  • engage that same independent expert to review its current business operations and compliance with the consumer credit regime and report to ASIC.

The enforceable undertaking is in addition to $1.35 million paid by Cash Converters in relation to infringement notices issued earlier this year in relation to related failures.

Consumer protection: ASIC successful in unconscionability claims

The second credit case relates to the judgment issued by the Federal Court against Mr Lindsay Kobelt who was found to have engaged in unconscionable and unlicensed conduct.

Mr Kobelt is an owner and operator of Nobby’s Mintabie General store in an Aboriginal community in remote South Australia. From 2008 Mr Kobelt provided a form of credit known as ‘book up’, which allows the customer to buy goods now and pay for them later. Ordinarily, it is an informal line of credit with no set repayments or formal documentation.

However, Mr Kobelt’s book up practices were exploitative: consumers were required to provide their debit cards, PINs and details of their income to Mr Kobelt, who then used the information and cards to withdraw all or nearly all of the customer’s money from their bank account on or around the day they were paid. Over a 2 year period, Mr Kobelt withdrew just under $1 million from the accounts of 85 customers.

The Federal Court found that Mr Kobelt’s book up practices tied his customers to him, leaving them with little practical alternative but to continue shopping at Nobby’s Mintabie General store. By taking possession of the customer’s key cards, and using them on the first day of the pay periods, he was depriving the customers of their independence.

Contraventions of s12CB of the ASIC Act and s29 (1) of the National Credit Act can attract fines of up to $340,000. A date for the penalty hearing is yet to be set.

CompliSpace Responsible Manager Training Workshop: Melbourne and Sydney

CompliSpace is running High Impact Training for Financial Services Executives On-The-Go in Melbourne on 14 December and Sydney on 16 December.

If you are an AFS license holder, you must ensure that your responsible managers and representatives receive ongoing training. Our interactive, “on-the-go” workshops are designed to keep you up-to-date with the latest industry changes, real-life case studies and exercises and fast-track the practical development of new knowledge and skills.

Training is delivered in an interactive workshop environment providing attendees with:

  • a simple framework for understanding your core AFSL obligations;
  • practical guidance on current regulatory issues and trends; and
  • CPD points for attendees.

To learn more and to register click here for the Melbourne Workshop and here for the Sydney Workshop.

This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. Please contact us on (02) 9299 6105 and we will be happy to assist.

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