Time for senior managers to look sharp

Change is in the pipeline for senior managers of AFS and credit licensees. The Government has released draft legislation addressing this and other aspects of the report of the ASIC Enforcement Review Taskforce, which was released in December 2017.

The Government has already legislated to implement some of the taskforce’s recommendations, particularly in relation to increasing penalties for non-compliance with the law.

Its latest move is to address some of the recommendations in various pieces of draft legislation addressing:

  • the extension of ASIC’s banning powers, including in relation to senior managers of licensees
  • requirements for a natural person AFS licensee or a responsible officer of an AFS licensee to be a “fit and proper person”
  • the alignment of penalties for false and misleading statements in AFS licence applications and credit licence applications
  • search warrants and interception agencies.

One of the pieces of draft legislation, Draft Financial Regulator Reform (No. 1) Bill 2019: Banning orders proposes that ASIC has grounds for banning a person if it has reason to believe that the person is not a fit and proper person to:

  • provide one or more financial services (or, in the case of credit, engage in one or more credit activities)
  • perform one or more functions as an officer of an entity that carries on a financial services business (or, in the case of credit, a person who engages in credit activities)
  • control an entity that carries on a financial services business (or, in the case of credit, another person who engages in credit activities).

If the legislation came into effect, ASIC would also have power to ban a person if it had reason to believe that the person was not adequately trained or competent to do one or more of the items listed in the bullet points above.

The banning power would also be extended by introducing grounds for banning a person who:

  • has, at least twice, been linked to a refusal to give effect to an AFCA determination;
  • is not an individual (for example, it might be a company) and ASIC is satisfied it could make a banning order (or it has made a banning order) against an officer of the company where that officer is involved in the financial services business; or
  • is “multiple trustees of a trust” and ASIC is satisfied that it could make a banning order (or it has made a banning order) against any of the trustees of the trust.

When it comes to the AFS regime, these requirements would replace the current provision which allows ASIC to ban a person on the basis that they are not of good fame and character.

For the credit regime, these requirements would extend the current fit and proper person provisions.

The list of items to which ASIC must have regard when determining whether someone is a fit and proper person is longer than the list which currently applies to assessing good fame and character under the AFS regime and that which applies to assessing whether someone is fit and proper under the credit regime. For example, for a person ASIC is considering banning from financial services, it includes the need to consider whether the person has ever been banned from engaging in a credit activity.

ASIC would also have the power to ban a person who has been an officer of two or more licensees (whether credit or AFS licensees, or a combination of both) which have been unable to pay their debts and which have been wound up. While other banning orders could be permanent or for a specified period, a banning order of this kind could only be for a period of up to five years.

The draft legislation proposes a tweak to the way a banning order is made. Currently, it is made by serving it on the person to be banned. Under the changes, it would be made by ASIC making the order in writing. There would then be a separate provision requiring ASIC to provide a copy to the person against whom it is made.

This would stop a person obstructing a banning order from being made by making it difficult for ASIC to serve it on them.

The effect of a banning order would be potentially broader under the proposed changes than is possible currently.

ASIC could use a banning order to prohibit a person from:

  • providing any financial services (or, in the case of credit, engaging in any credit activities)
  • providing specified financial services (or, in the case of credit, engaging in specified credit activities) in specified circumstances or capacities
  • controlling an entity that carries on a financial services business (or, in the case of credit, another person who engages in credit activities)
  • performing any function in the carrying on of a financial services business (or, in the case of credit, any function involved in the engaging in of credit activities) (including as an officer, manager, employee or contractor or in some other capacity)
  • performing specified functions involved in the carrying on of a financial services business (or, in the case of credit, involved in the engaging in of credit activities).

The proposed extensions to banning powers are partly intended to address the issue that ASIC has been unable to take action against people who do not themselves provide financial services or engage in credit activities but move from licensee to licensee in a management role. However, the extensions have significant repercussions for all employees in a financial services or credit business.

The proposed new banning order powers would enable ASIC to ban anyone in your business from playing any role in any financial services or credit business. While it would only enable ASIC to ban someone in particular circumstances, one of these circumstances is particularly broad. It is if ASIC has reason to believe that the person is not adequately trained or competent to provide financial services or engage in credit activities, perform functions as an officer of the person or entity carrying on the business, or control the person or entity carrying on the business.

The proposed new banning powers would be backed up by powers under which ASIC could seek an order from a Court disqualifying a person in a manner which would have a similar effect to a banning order.

Consultation in relation to this draft legislation (and the associated pieces of draft legislation) is open until 9 October 2019.

TIP: The proposed extension of banning powers has significant repercussions for senior managers of licensees. It may also have flow-on effects to the licensees themselves. For example, fewer people may wish to take on senior management roles in financial services and credit businesses and those in such roles may seek remuneration commensurate with the increased risk they face. A licensee will also need to plan for the risk that a key person in the business is banned, posing a threat to the licensee’s ability to meet its obligations to maintain organisational competence and to have adequate human resources. Consider whether your licensee wishes to make a submission in relation to the proposed changes.