Information sharing and stricter reporting obligations are key to most reforms to financial services law since the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Service Industry.
Mortgage brokers are about to be subject to the double-edged sword that is the Mortgage Broker Referral Regime, expected to come into play for all brokers appointed on or after 1 October 2021.
Providing access to information readily and quickly is crucial in pushing Australia’s financial services towards a compliance culture. Central to Commissioner Hayne’s Final Report was the belief that “AFS licensees are not doing enough to share information about the background of prospective financial advisers”.
Without adequate communicative platforms, advisers, mortgage brokers, and other bad apples subject to disciplinary actions can ‘roll’ or ‘shop around’ for new employers oblivious to their wrongdoings. Weeding out these rolling bad apples has been a continual source of angst in the recruitment process of AFS licensees.
Traditionally, AFS licensees have had to rely upon former employers for references, often which were declined, sparse, or not weighed with adequate consideration. To combat this issue, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 is introducing new obligations for reference checking of financial advisers.
Under this reform of the Corporations Act and Credit Act, AFS Licensees and Australian Credit Licensees will be expected to comply with referencing checking and information-sharing protocols or suffer the imposition of a civil penalty for non-compliance.
For mortgage brokers and financial advisers, this new system will mean that past misconduct, past employment information, and previous employer references will be on display for all prospective employers.
For employers, this reform will impose an obligation to share information, disciplinary notes, and provide references for current and previous employees.
Practically, the reform will provide a directive for prospective employers to request information regarding potential financial advisor or mortgage broker hires. This request creates an obligation upon previous or current employers to provide the necessary information to complete a thorough background and compliance check on the potential hire.
These references cannot be limited to mere niceties. Referees will be expected to comment on the individual’s background information such as responsibilities and period of employment, the outcome of any compliance audits, conduct, breaches, or poor behaviour notes, and any ongoing investigations or inquiries of which the individual is the subject. Referees will also be limited to providing a response within 10 business days of each request.
Those advisers that are concerned that their application may be rejected on the basis of their references should take comfort in the notion that ASIC is not imposing an obligation on prospective employers to reject an individual subject to an adverse reference check. At most, these reforms place an expectation on potential employers to consider how they will effect their compliance obligations given the background and nature of a potential hire. This may result in an increase in training regimes, hardened compliance frameworks, supervision, or stringent employment conditions.
Ultimately, this regime is aimed at bad apples, with a history of poor conduct, inappropriate advice, and potential to cause harm to consumers. The sharp edge of the dagger prevents advisers from hiding from consequences and shopping around for naïve new employers. While this may be unsettling for those with something to hide, it is a useful weapon for AFS licensees and compliant advisers looking to better the delivery of financial services.
It is our recommendation that AFS Licensees and Australian Credit Licensees start developing their reference request and response procedure. Streamlining and organising templates for requests and responses will prove beneficial as the regime takes on speed.
The consult for the system closed on 29 January 2021. It is expected that this structure will come into play for mortgage brokers appointed or requests for information made on or after 1 October 2021.
Craig Green, Partner
Susan Forrest, Partner
Taylor Green, Lawyer