The Senate’s standing committee for the scrutiny of bills is calling for the incoming best interests duty to be updated to clearly outline what constitutes conflicted remuneration and the circumstances in which it is banned.
In late November, the updated best interests duty bill for mortgage brokers – the Financial Sector Reform (Hayne Royal Commission Response–Protecting Consumers (2019 Measures)) Bill 2019 – was tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020.
In the bill, the government has enshrined a ban on the payment of conflicted remuneration, which includes volume-based and soft-dollar remuneration, in line with the Combined Industry Forum’s (CIF) reforms.
The bill has defined conflicted remuneration as any benefit, whether monetary or non-monetary, that is:
- given to a licensee, or a representative of a licensee, who provides credit assistance to consumers that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the credit assistance provided (including, therefore, the choice of credit contract or credit provider or the choice of whether to provide credit assistance or not); or
- given to a licensee, or a representative of a licensee, who acts as an intermediary and because of the nature of the benefit of the circumstances in which it is given, could be reasonably expected to influence whether or how the licensee or representative acts as an intermediary.
If the legislation is ratified, the ban on the payment and receipt of conflicted remuneration would take effect on 1 July 2020 and would only apply to credit contracts entered into on or after the effective date.
However, the Senate’s standing committee for the scrutiny of bills has now called for the primary legislation to be updated to specifically outline what constitutes conflicted remuneration and the circumstances in which it is banned, unless a sound justification is provided.
The standing committee argued that proposed section 158NA provides that the regulations may prescribe additional circumstances in which a benefit will be conflicted remuneration, as well as the circumstances where a benefit will not be conflicted remuneration.
The bill also includes a number of proposed civil penalty provisions that ban the acceptance or giving of conflicted remuneration in circumstances that will be prescribed in the regulations. The penalty for each of the provisions is 5,000 penalty units.
The committee said it has “consistently raised scrutiny concerns” about framework bills that only contain the broad principles of a legislative scheme and rely heavily on delegated legislation to determine the scope and operation of the scheme.
“As the detail of the delegated legislation is generally not publicly available when Parliament is considering the bill, this considerably limits the ability of the Parliament to have appropriate oversight over new legislative schemes,” the committee said in its most recent Scrutiny Digest.
“Consequently, the committee’s view is that significant matters, such as what constitutes conflicted remuneration and the circumstances in which it is banned, should be included in primary legislation unless a sound justification is provided.”
For example, the committee noted that the explanatory memorandum for the legislation states that “the ability to prescribe by regulation what is and is not conflicted remuneration provides flexibility for the regime to efficiently and effectively respond to changes in industry practice and to ensure that the new regime operates for the benefit of consumers”.
The memorandum continues: “Regulations also give effect to the ban on conflicted remuneration. This provides flexibility to provide the circumstances in which conflicted remuneration is banned.”
The committee has argued that “the need for flexibility does not, of itself, provide an adequate justification for leaving significant matters to delegation legislation”.
“In this instance, it is unclear why these matters cannot be included on the face of the primary legislation,” it found, with the committee adding that its concerns were “further heightened” by the high civil penalties that can be imposed.
As such, the committee is now requesting the Treasurer to provide more detailed advice as to:
- why it is considered necessary and appropriate to leave the circumstances in which a benefit will or will not be conflicted remuneration, as well as the circumstances in which conflicted remuneration is banned, to regulations; and
- whether it is appropriate for the bill to be amended to include at least high-level guidance in relation to these matters on the face of the primary legislation.
The Treasurer is expected to respond to this request by Thursday, 19 December.