24 September 2019

ASIC Enforcement Review Taskforce: Draft legislation regarding enhanced ASIC licensing powers and banning powers

In this article, we outline briefly proposed amendments to ASIC’s powers regarding financial services licensing and banning orders under the Corporations Act 2001 (Cth) (Corporations Act) and the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) arising out of the Government’s implementation of recommendations made by the ASIC Enforcement Review Taskforce Report.

Key points

  • The proposed amendments modify and align Australian financial services licence (AFSL) and Australian credit licence (ACL) requirements by:
    • in relation to applicants for an AFSL, extending and changing the ‘good fame and character’ requirement to a ‘fit and proper person’ test;
    • deeming AFSL applications and variation requests to be withdrawn if the applicant fails to provide information or audit reports requested by ASIC;
    • ensuring an AFSL or ACL can be suspended or cancelled if the licensee fails to provide the authorised services within six months of receiving the licence;
    • increasing criminal penalties and introducing civil penalties to the Corporations Act in respect of false or misleading information in documents provided to ASIC, to ensure consistency with existing penalties in the Credit Act.
  • The proposed amendments strengthen ASIC’s powers in relation to both the provision of financial services and credit activities to ban persons by:
    • expanding the grounds on which ASIC can make a banning order against a person; and
    • empowering ASIC to make additional types of banning orders against a person.
  • The proposed amendments will align ASIC’s banning powers in the context of the AFSL regime with its banning powers under the ACL regime.

Background

The ASIC Enforcement Review Taskforce was commissioned the Government in late 2016, which has a mandate to review the enforcement regime of the Australian Securities and Investments Commission (ASIC).  In 2017, we wrote about the ASIC Enforcement Review Taskforce’s consultation in respect of licensing requirements here.

The ASIC Enforcement Review Taskforce Report (Report) was provided to the Government in December 2017.

In April 2018, the Government agreed, or agreed-in-principle, to all of the recommendations made by the Report.

Overview of draft legislation

On 11 September 2019, the Treasury released for public consultation draft legislative amendments implementing certain recommendations relating to search warrants, access to telecommunications interception information, licensing, and banning orders.

Legislation implementing other recommendations of the Report in relation to a stronger penalty framework in the Corporations Act, ASIC Act, Credit Act and Insurance Contracts Act 1984 (Cth) dealing with corporate and financial sector misconduct has become law in March 2019, as we reported in Financial Services in Focus - Issue 21.

The proposed amendments to licensing requirements and banning orders are set out in the exposure drafts Financial Regulator Reform (No. 1) Bill 2019: (Licensing), Financial Regulator Reform (No. 1) Bill 2019: (Penalties) and Financial Regulator Reform (No. 1) Bill 2019: Banning orders.

Proposed changes to the AFSL regime

The following table provides a comparison to the current and proposed laws in respect of the AFSL regime.  Parts of the text are underlined to highlight the differences between the proposed and current regimes.

Current AFSL regime

Proposed AFSL regime

‘Good fame and character’ test changed to ‘fit and proper person’ test with broader application
ASIC must not grant an AFSL unless they are satisfied that there is no reason to believe the applicant (where the applicant is a natural person) or its responsible managers, partners, or trustees (where the applicant is not a natural person) are not of ‘good fame and character’. Under the proposed regime, the ‘good fame and character’ test is replaced with a ‘fit and proper person’ test (see below).

Where the applicant is not a natural person, the test is also extended to the applicant’s controllers.

The following factors are relevant to a ‘good fame and character’ test:

  • Dishonesty convictions within the last ten years
  • Held a suspended or cancelled AFSL
  • Received banning order or disqualification order
  • Any other matter that ASIC considers relevant
The following factors are relevant to a ‘fit and proper person’ test:

  • Convictions within the last ten years
  • Held a suspended or cancelled AFSL or ACL
  • Received banning order or disqualification order
  • Previously disqualified from managing corporations
  • Previously banned from credit activities under State/Territory law
  • Linked to a failure to give effect to an Australian Financial Complaints Authority (AFCA) determination
  • Previously insolvent
  • Any information given to ASIC by a State/Territory
  • Any other matter that ASIC considers relevant
ASIC is not required to apply the ‘good fame and character’ test to AFSL variation applications. ASIC must apply the ‘fit and proper person’ test to AFSL variation requests.
New consequences for false or misleading information in documents provided to ASIC
ASIC may not refuse to grant an AFSL because the application was materially misleading, contained a material omission, or contained false or misleading information. ASIC may refuse to grant an AFSL because the application, or any information, report or statement provided by the applicant in response to ASIC’s written request is materially misleading, contained a material omission, or contained false or misleading information.
It is an offence to:

  • Knowingly submit a document to ASIC that is materially false or misleading
  • Submit a document to ASIC that is materially false or misleading without taking reasonable steps to avoid the document being materially false or misleading
It is an offence to:

  • Knowingly submit a document to ASIC that is materially false or misleading
  • Submit a document to ASIC that is materially false or misleading without taking reasonable steps to avoid the document being materially false or misleading

Civil penalties apply if you:

  • Knowingly submit a document to ASIC that is materially false or misleading
  • Submit a document to ASIC that is materially false or misleading without taking reasonable steps to avoid the document being materially false or misleading
An application is deemed withdrawn if the applicant fails to provide information in the specified time
ASIC currently has no power to deem an AFSL application or AFSL variation application withdrawn if the applicant does not provide requested information. An AFSL application or AFSL variation application is deemed to be withdrawn if the applicant fails to provide to ASIC information requested by ASIC within the specified time.
Applicant must confirm that there has been no material changes in information provided to ASIC
This is not required under the current regime. Where ASIC proposes to grant a licence or a variation, applicants must confirm that there have been no material changes in any information that has already been provided to ASIC in, or in connection with, the application.
AFSL is suspended or cancelled if the licensee fails to provide financial services within six months
Currently, ASIC may suspend or cancel an AFSL if the licensee ceases to carry on a financial services business. ASIC may suspend or cancel an AFSL if the licensee does not provide a financial service covered under the AFSL within six months of the licence being granted or if the licensee ceases to carry on a financial services business.
Licensee must notify ASIC of a change in within 30 business days or face penalties
Currently, AFS licensees must notify ASIC of a change in control of the business within ten business days of becoming aware of the changes. AFS licensees must notify ASIC of a change in control of the business within 30 business days of the change becoming effective or face penalties.

The proposed ACL regime contains requirements in relation to ACL licensees that are equivalent to the proposed AFSL regime.

Proposed changes to ASIC’s banning powers under the AFSL regime

The following table provides a comparison to the current and proposed laws in respect of ASIC’s banning powers under the AFSL regime.  Parts of the text are underlined to highlight the differences between the proposed and current regimes.

Current AFSL regime

Proposed AFSL regime

Modify existing grounds for imposing banning orders
ASIC may make a banning order against a person if there is reason to believe the person is of good fame or character. ASIC may make a banning order against a person if there is reason to believe the person is not a fit and proper person.
ASIC may make a banning order against a person if they are not adequately trained or competent to provide financial services. ASIC may make a banning order against a person if there is reason to believe the person is not adequately trained or competent to provide financial services, perform the functions of an officer, or control an entity that carries on a financial services business.
ASIC may make a banning order against a person if they are an insolvent under administration. ASIC may make a banning order against a person if they are an insolvent under administration or a Chapter 5 body corporate.
Provide additional grounds for imposing banning orders
These grounds do not exist under the current regime. ASIC may make a banning order against a person if:

  • Linked to at least two past failures to give effect to an AFCA determination
  • Within the last seven years, has been the officer of two or more corporations that have been wound up*
  • Where the person is not a natural person, if its officers or trustees have banning orders imposed against them, or banning orders could be made against them

*If this is the sole ground for the banning order, the maximum length of the order is five years.

Expand the types of banning orders available to ASIC
A banning order may prohibit a person from:

  • Providing any financial services

Providing specified financial services in specified circumstances or capacities

A banning order may prohibit a person from:

  • Providing any financial services
  • Providing specified financial services in specified circumstances or capacities
  • Controlling an entity that carries on a financial services business
  • Performing any function involved in a financial services business
  • Performing specified functions involved in a financial services business

The proposed amendments will align ASIC’s banning powers in the context of the AFSL regime with their banning powers in the ACL context.

General observations

The draft legislation following other recent developments in financial services licensing.  On 5 July 2019 ASIC released Information Sheet 240 AFS Licensing - Requirements for certain applicants to provide further information (INFO 240) which requires the following entities to provide additional information to ASIC when applying for an AFSL:

  • bodies corporate;
  • APRA-regulated bodies; and
  • applicants proposing to offer certain financial services and products, or provide certain financial services in specified circumstances.

Coupled with ASIC’s extended processing times for granting or varying a licence and the additional information required in INFO 240, the draft legislation regarding licensing requirements will (if enacted) make it even more difficult for new applicants to obtain an AFSL or vary an AFSL.

If the amendments are approved, then applicants will need to take care to ensure that the information they provide is accurate and timely, because of the increased penalties applicable to false or misleading information in a document provided to ASIC, and ASIC’s new power to deem an application or variation request withdrawn if the applicant fails to provide the document to ASIC within the specified time.  Pre-application due diligence is required.  Complying with AFCA determinations is critical to the success of an application, and indeed being able to provide financial services.

Applying for a licence or varying a licence has never been less perfunctory.  Should you require assistance with applying for a new or varied financial services licence or credit licence, please let us know.

Contact

  • Fluent in Hebrew -Conversational

Harry has represented a number of listed public companies, large private companies and government organisations...

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Vince Battaglia is an experienced funds management and financial services practitioner.  He has worked in global and national law firms, as well as at ASIC.

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