ASIC proposes changes to record-keeping obligations of AFS licensees

ASIC has released a consultation paper setting out its proposal to update the record-keeping obligations for Australian Finance Services (AFS) licensees when the licensee or its representative provides financial product advice to retail clients.  The changes are designed to bring the record-keeping obligations in line with the Future of Financial Advice (FOFA) and Stronger Super reforms implemented recently.

The legislative changes required to implement the FOFA reforms had the effect that the standard AFS licence condition in condition 57(b) of the Pro Forma 209 Australian financial services licence conditions, no longer applies to new records created by AFS licensees from 1 July 2013.  This was largely due to the repeal of section 945A of the Corporations Act 2001 (Cth) (Act).

What are the proposed record-keeping obligations?

Section 912A of the Act imposes a number of statutory duties on AFS licensees, including (but not limited to):

  • a duty to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and

  • a duty to have an adequate dispute resolution system.

ASIC considers that the record-keeping obligations imposed on AFS licensees should be such that they help industry participants understand what records they must keep to demonstrate compliance with the licensee’s duties at law.  The changes are seen as forming an important risk management tool for licensees.

ASIC proposes to modify the law, by issuing a class order, requiring that when an AFS licensee or its representatives provide personal advice to retail clients, the licensee must retain a record of the following matters for at least seven years from the date that the personal advice is provided:

  • the information relied on and the action taken by the advice provided that show the advice provider has acted in the best interests of the client for the purposes of section 961B(1) of the Act;

  • if section 961B(2) is being relied on to show that section 961B(1) has been complied with, the information relied on the action taken by the advice provider that satisfy the safe harbour steps in section 961B(2);

  • the advice, including reasons why advice is considered to be ‘appropriate’ within the meaning of section 961G of the Act;

  • where an advice provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the advice provider, or one of their specified related parties, the information relied on and the action taken by the advice provider that show the advice provider has given priority to the client’s interests when giving the advice for the purposes of section 961J of the Act;

  • any ongoing fee arrangement entered into with the client within the meaning of section 962A of the Act;

  • any assignment of an ongoing fee arrangement;

  • a fee disclosure statement given to the client under Division 3 of Part 7.7A of the Act;

  • a renewal notice given to the client under Division 3 of Part 7.7A of the Act;

  • any notification from a client given under Division 3 of Part 7.7A that they elect to renew their ongoing fee arrangement; and

  • any fees charged after the termination of an ongoing fee arrangement.

The proposed record-keeping obligations will not extend to personal advice where the modified best interests duty applies, that is, the obligations will not apply to advice given in relation to:

  • basic banking products only;

  • general insurance products only;

  • a combination of basic banking and general insurance products; or

  • a combination of general insurance and other products.

Proposed approach to enforcement

ASIC intends to adopt a facilitative approach to breaches of the proposed record-keeping obligations that occur until 30 June 2014 in recognition of the fact that the FOFA and Stronger Super reforms have put business to considerable expense and effort in implementing new information technology systems and compliance protocols.  ASIC will take a measured approach to inadvertent breaches, provided that the AFS licensee is making reasonable efforts to comply. 

However, deliberate or systemic breaches of the proposed record-keeping obligations will be met with stronger regulatory action from ASIC.

When are the changes likely to be implemented?

Submissions on the proposals as set out in ASIC’s consultation paper 214 are required by 23 October 2013. 

It is expected that ASIC will issue the class order giving effect to the changes in around November to December 2013.