Posted December 2, 2020
Posted By Meghann Cannon
Stopping the rolling bad apples! ASIC releases its draft reference checking protocol.
Prepared by Jodi Ainsworth.
ASIC has called for comments on its draft reference checking and information sharing protocol and associated information sheet, which set out proposed new reference checking obligations for licensees employing or authorising a financial adviser or mortgage broker.
The Protocol stems from a new bill recently introduced into Parliament, which implements some of the recommendations arising from the Financial Services Royal Commission. These recommendations are directed at AFS licensees not sufficiently sharing information about advisers or taking information which has been shared seriously. This had created the problem of so-called ‘rolling bad apple’ advisers being able to move from one AFS licensee to another.
Proposed new steps for reference checking
ASIC already expects that licensees will undertake background and reference checks as part of their general obligations. These reforms additionally propose the following from October 2021.
- New specific licence requirement: Licensees will have a specific requirement on their AFS licence to comply with the Protocol.
- For retail personal advice or credit assistance: The Protocol will apply to the reference checking of representatives who will provide personal advice to retail clients or credit assistance.
- Reasonable steps to be taken to obtain references: The Protocol requires licensees to take “reasonable steps” by requesting the representative’s written consent to request a reference, and then requesting that reference from the representative’s “referee licensee”. If written consent from the representative is withheld, the reference cannot be requested, and it seems that the licensee will need to consider its general conduct obligations in deciding whether or not to recruit the representative.
- “Referee licensees” include current AND former licensees: The “referee licensee” includes current and former licensees, depending on the prospective representative’s employment circumstances in the previous years. If that person holds a licence in their own right, the recruiting licensee would need to ask that person for a reference about themselves.
- Template reference consent and reference request form: ASIC is proposing that licensees will use its template forms to meet the Protocol obligations.
- 10-day mandated response time: Licensees must comply with a reference request within 10 business days, unless an extension is agreed (up to 20 business days).
- Updates to references may be required: where there are “ongoing matters” related to a representative’s conduct when a reference request is made, the referee licensee may need to provide updates to the recruiting licensee.
- Contact point at licensees required: Licensees would need to have a contact point in their organisation for reference checking, and keep records demonstrating compliance with the Protocol for 5 years.
- Protection from defamation and breach of confidentiality: to protect licensees from the threat of defamation and encourage sharing of information, a limited qualified privilege will apply in relation to information which a licensee is obliged to give under the Protocol about a current or former representative. Also, licensees would not be liable for a breach of confidence in these circumstances.
- Penalties for failure to comply: If they fail to comply, licensees may be subject to a civil penalty, and also risk having their licence suspended, revoked or made subject to additional conditions.
Practical implications – has ASIC struck the right balance?
When recruiting, as is the case currently, it seems that licensees will be free under the Protocol to decide not to act upon the references they obtain. Where this happens, we suggest that careful file notes should be taken as to what steps the licensee took, in recruiting the adviser, to satisfy their general obligations.
For all relevant licensees, this Protocol will require a review of how they are storing records relating to their representative’s conduct and performance. In the future, information will need to be quickly and easily accessible should a request for a reference be received. Also, licensees will need to ensure that appropriate written consent is sighted before any information about a current or former representative is released.
There seems to be some concern within the industry about the potential for disgruntled licensees to give spiteful references about existing advisers wanting to leave or previous advisers who have already left. This has prompted calls for support for a central register of adviser information, similar to the US FINRA system, to be adopted instead. Whilst this may help address the issue disgruntled licensees, we query whether this would create a heavier compliance burden across the board for licensees.
In our view, ideally any new reference system would protect against the ‘rolling bad apples’, but still allow licensees flexibility in how they manage their advisers, clarity as to what their obligations entail, and also not create an unnecessary new layer of compliance. The Protocol seems to lay the foundation for creating such a system, but many details in the Protocol remain up the in air. We will watch this space with interest!
Do you have a view on this? ASIC wants to hear it!
ASIC has stated that it is keen to fully understand the impact of its proposals and has posed a number of questions on the detail of the Protocol. You can submit your comments to ASIC by 21 January 2021 – details are provided in the ASIC consultation paper available at https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-333-implementing-the-royal-commission-recommendations-reference-checking-and-information-sharing/