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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 14 – PENALTIES, ENFORCEMENT, COMPLAINTS AND DISCIPLINARY MATTERS
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The Financial Services Legislation Amendment Bill ups the ante on penalties for breaches and allocates liability for contraventions of the new duty provisions.

A Financial Advisers Disciplinary Committee continues to play a role in assessing compliance with the requirements of the regime by a subset of participants, and FMA is also given some new enforcement powers. But has a level playing field been achieved?

The broad structure remains similar to the Financial Advisers Act 2008 (‘FAA’): pecuniary penalties can be awarded, and disciplinary action can be taken against some but not all. The big changes? The breadth of duties that must be complied with, the size of the penalties, the participants in the crosshairs, and FMA’s new enforcement powers.

In brief:

In this fourteenth – and final – in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss how the new regime will be enforced and the potential costs of getting it wrong, including:

  • the increase in penalties
  • the broader mix of enforcement mechanisms
  • the selective application of disciplinary actions.

In the Series so far:

1 – confirmation of the proposed reforms
2 – key concepts
3 – the FAP conundrum
4 – key changes to the FSP Act
5 – transitioning to the new regime
6 – offshore advisers
7 – the Code of Conduct and Code Working Group
8 – the new regime for custodial services
9 – the new statutory conduct obligations
10 - the scope of the new regime
11 - corporate advice
12 - wholesale clients
13 - exclusions to the new regime 

In full:

Duties, penalties, and liability

The scope for penalties has expanded, due to the number of new duties applying. As set out in the ninth Insight in this Series, new sections 431H to 431O (‘Duty Provisions’) of the Financial Markets Conduct Act 2013 (‘FMCA’) impose the same duties on all financial advice providers, financial advisers, and nominated representatives who give regulated financial advice. Financial advice providers that engage financial advisers or nominated representatives are subject to two further duties: to ensure the compliance of their financial advisers and nominated representatives, and to have clear and effective processes and controls in place for managing advice given by their nominated representatives.

The maximum level for pecuniary penalties has been increased from the level of penalties able to be imposed under the FAA regime and brought into line with the existing scheme of the FMCA. This means financial advice providers will be exposed to a maximum penalty for each breach of $600,000. For a breach of new sections 431O and 431X (relating to false or misleading statements or omissions), higher pecuniary penalties will apply: up to the greatest of the consideration for the relevant transaction, three times the amount of the gain made or the loss avoided, and $5 million.

Enforcement mechanisms

To ensure the quality of financial advice and financial advice services, a wide variety of enforcement mechanisms will be put in place by the Bill.

For contraventions of the Duty Provisions:

  • financial advice providers will be subject to pecuniary penalties for their own contraventions, and for those of their financial advisers and nominated representatives
  • financial advisers will not be liable for pecuniary penalties, but may be subject to disciplinary actions or a deregistration or suspension order by FMA
  • nominated representatives will not be subject to any statutory enforcement mechanisms.

A defence will be available to providers who can demonstrate that they took all reasonable steps to prevent a contravention by their financial adviser. No defence will be available in respect of nominated representatives’ contraventions.

The new enforcement regime reflects the greater level of control a financial advice provider is expected to have over nominated representatives compared to financial advisers. Nominated representatives will have no public record of their indiscretions, no registration to maintain, and no individual accountability for their actions – other than under their employment or engagement contract with the provider. The jury is out as to whether individual contractual measures, combined with the statutory duty for providers to have clear and effective processes and controls in place for managing advice given by nominated representatives, will be enough to manage the risk of recalcitrant nominated representatives.

FMA orders

FMA’s powers to give direction orders will be extended to giving orders affecting financial advisers (but not nominated representatives). In particular, FMA will be able to direct the Registrar of Financial Service Providers to deregister, or to prevent or suspend the registration of a financial adviser.

Disciplinary complaints

The scope for complaints to the Financial Advisers Disciplinary Committee increases under the Bill to cover all of the Duty Provisions, one of which requires compliance with a code of conduct. Under the FAA complaints to the Disciplinary Committee could only be brought for breaches of the code of conduct.

FMA’s duty to refer complaints to the Disciplinary Committee under the FAA is adjusted by the Bill to become a discretion, reflecting FMA’s expanded enforcement powers. The Disciplinary Committee will have its existing FAA toolkit of powers, plus two new powers: to direct the Registrar of Financial Service Providers to deregister or to suspend a financial adviser’s registration.

Critically, disciplinary actions continue to be limited to one group in the regime: financial advisers. Breaches by financial advice providers and nominated representatives will be outside the scope of disciplinary action. Is this fair and appropriate?

Conclusion

Financial advice providers will bear the brunt of the impact of potentially bigger penalties and the full extent of FMA’s enforcement toolkit. Financial advisers will be subject to disciplinary action and/or deregistration or suspension orders but do not face the risk of civil liability, and nominated representatives face no personal statutory sanctions.

We think that limiting the Disciplinary Committee’s jurisdiction to financial adviser conduct is a missed opportunity. It also provides an unfortunate disincentive to adopting a financial advice provision model that relies on financial advisers. Concerns remain over recidivist non-compliant nominated representatives not being flushed out.

Start a conversation

If you would like a specific briefing on this or any other aspect of the Bill or what the proposed reforms may mean for your business, or would like advice on what you can do now to plan for the new regime please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, or Tom McLaughlin  on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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