The government has released the draft legislation implementing 22 recommendations and two additional commitments which arose from the Hayne Royal Commission, including recommendations 1.6 and 2.7 which establish a compulsory scheme for checking references for prospective financial advisors and mortgage brokers.
Before the royal commission began, under ASIC’s Regulatory Guide 104, both Australian financial services licensees and Australian credit licensees were meant to undertake appropriate background checks before appointing new representatives, through referee reports, searches of ASIC’s register of banned and disqualified persons or police checks.
However, despite this requirement's existence, the royal commission found financial services licensees weren’t doing enough to communicate the backgrounds of prospective employees amongst themselves, highlighting that licensees “frequently fail to respond adequately to requests for references regarding their previous employees" and that they do not “always take the information they receive seriously enough”.
As such, financial advisers facing disciplinary action from an employer were able to simply leave and find another to employ them.
Recommendation 1.6 and 2.7 seek to address this systemic weakness.
The latter looks to promote better information sharing about the performance history of financial advisers, focusing on compliance, risk management and advice quality, while the former made sure this change is extended to mortgage brokers as well.
According to the draft legislation, the reporting obligation “targets misconduct by and serious compliance concerns about individual mortgage brokers” and “recognises that in the industry, other parties such as lenders and aggregators are often well positioned to identify this misconduct”.
Obligation to undertake reference checking and information sharing
New law: Both Australian financial services licensees and Australian credit licensees are subject to a specific obligation to undertake reference checking and information sharing regarding a former, current or prospective employee.
Current law: Australian financial services licensees are subject to general obligations, including taking reasonable steps to ensure its representatives comply with the financial services laws and credit legislation.
Civil penalty for failure to undertake reference checking and information sharing
New law: Australian financial services licensees and credit licensees who fail to undertake reference checking and information sharing regarding a prospective employee are subject to a civil penalty.
Current law: No equivalent.
The proposed legislation will be in consultation until 28 February, with interested parties invited to make a submission before the deadline.
