12 February 2020

Financial Services Royal Commission draft legislation: Stricter hawking rules

This article was written by Eliza Forsyth, Amanda Beattie, and Jim Boynton.

The proposed Hawking of Financial Products Bill introduces a general prohibition on the offer for sale, issue or transfer of financial products to retail clients arising from “unsolicited contact” by the provider.  This goes beyond the recommendations in the Final Report which were limited to superannuation products (recommendation 3.4) and insurance products (recommendation 4.1).  The general prohibition extends to requests or invitations by the provider for a consumer to make a request to be contacted (to prevent the prohibition being circumvented).  Some of the current exemptions which permit the hawking of products in certain circumstances  will be amended or not maintained.  

Key takeaways

  • The prohibition applies to the offer for sale, issue or transfer of financial products (as defined in the Corporations Act) to retail clients arising from “unsolicited contact”. There are limited exclusions.
  • Before offers of a financial product can be made, a consumer must have made a positive, clear and reasonably specific request for contact about that product or type of product.
  • The amendments are proposed to take effect on 1 July 2020 leaving industry little time make changes. It might be necessary to:
    • amend scripts for call centres, branch staff and others and change operating rules for online tools such as chatbots
    • update record keeping systems to record client requests and withdrawn requests
    • amend distribution, referral and outsourcing contracts
    • update systems, procedures and controls
    • train staff and other representatives on the changes
  • Advertising and the publication of statements remain permitted and subject to the existing restrictions within the Corporations Act (such the requirement to refer to the offer document). The draft explanatory memorandum suggests that non-real time contact with consumers, such as offers for sale made via email, would not fall foul of the general prohibition.
  • From 1 July 2020, failure to comply with any of the safeguard conditions in relation to a consumer request will render the contact “unsolicited contact” under the proposed Bill. From 1 July 2020, providers will need to have systems in place to accurately record information about consumer requests to be able to demonstrate compliance with the safeguard conditions. 
  • ASIC retains the right to exempt certain products or classes of products from the prohibition.
  • A breach of the prohibition is a strict liability offence, meaning the subjective intention of the provider (or third party) when contacting the consumer is not relevant. Products sold, issued or transferred arising from a breach of the general prohibition give the consumer a right of return and refund (to be exercised within a specified time).  The maximum penalty for an offence is 6 months imprisonment or 60 penalty units for a natural person (consistent with current hawking penalties).
  • Further clarity or regulatory guidance is likely to be required for certain aspects of the Bill, such as for some aspects of the “unsolicited contact” conditions.

 

The proposed changes in detail

One general prohibition

The general prohibition will replace the 3 current prohibitions.

In its most simple form, the general prohibition proposed means that if a consumer has not asked to be contacted about a particular product or type of product, it will be unlawful for a provider (or third party acting on its behalf) to contact the consumer in real-time and attempt to sell that or any other financial product.  It will also be unlawful to induce the consumer to make a request through leading questions or prompts.  The general prohibition applies to financial products – it does not apply in circumstances such as the selection of insurance options within a superannuation interest which are not standalone products. 

Exclusions from the general prohibition

Many of the current exclusions to the existing prohibitions are included as exclusions from the general prohibition but in some cases not on exactly the same terms.  Further it is not clear if some of the other current exclusions in regulations and ASIC legislative instruments will be maintained.  Entities that rely on current exclusions should review current practices to ensure they will comply.

A statutory definition of “unsolicited contact” – two general scenarios

The proposed general prohibition provision (section 992A) introduces a statutory definition of “unsolicited contact”, a recommendation made within the Final Report to ensure that providers have clarity about what they can and cannot do when selling financial products. 

What is “unsolicited contact” in relation to a financial product – two scenarios

Scenario 1

The contact is wholly or partly by telephone, face-to-face meeting or any other real-time medium (e.g. an online chat) where an immediate response would be expected

and

The consumer did not request the contact

Scenario 2

The contact is wholly or partly by telephone, face-to-face meeting or any other real-time medium (e.g. an online chat) where an immediate response would be expected

and

The consumer requested the contact but one or more of the safeguard conditions are not satisfied

The safeguard conditions (Scenario 2) 

Where a consumer has made a request for a financial product, there is an extensive list of safeguard conditions which must be met in order to avoid breaching the general prohibition.  The table below sets out these conditions. 

Condition to be met

Guidance within the Explanatory Memorandum

The consumer must make a request for that product

Or

A reasonable person would have thought that the offer for sale or issue was reasonably within the scope of the consumer’s request

  • Requests must be made for each different product or type of product. 

  • Being reasonably within the scope of the request may be ascertained by considering:
    • the purpose or function of the request;
    • the products within the class requested; or
    • the products which respond to the associated risks

  • A consumer contacting an insurer to request products to manage the risk of an inability to earn income would reasonably include a range of different products that could manage this risk.

The request must be a positive act by the consumer

  • A consumer filling in an online form to request that a provider contact them about a product would be a positive act.

  • Failure to opt out of future contact by a provider would not be a positive act.

The request must be clear, and the consumer must understand what they are requesting

  • Whether the consumer understands will depend on the circumstances, but further clarity or regulatory guidance is likely to be necessary for this condition.

  • A general request will not be sufficiently clear, for example, a consumer walking into a bank and saying, “tell me about your products”. 

The contact must only be made in the form requested by the customer

  • The EM suggests the Bill is intended to give consumers greater control over their decision to purchase financial products.  We note that this requirement appears to go beyond the Final Report’s recommendations and may pose implementation challenges for providers where new technology means are requested (in the absence of a reasonableness requirement within the condition).

The provider must contact the consumer within six weeks after the request was made

  • This condition is intended to prevent providers from contacting consumers years after an initial request is made.

  • We note that providers will need to put in place controls to ensure that contact is not made after the six-week period.

The request was not withdrawn by the consumer before the provider makes contact.  The request may be withdrawn or varied at any time and by any means. The provider should also consider any variations to the request

  • Withdrawal of a request is immediate.

  • We recommend that providers train their staff about recognising withdrawal of a request and responding immediately (which may require further regulatory guidance).

There appears to be a degree of overlap between the conditions which is likely to make it challenging for providers to understand what they need to do in order to satisfy each condition. 

Applicable from 1 July 2020

The hawking amendments are proposed to commence on 1 July 2020.  The consultation period for all proposals ends on 28 February 2020. 

Further information

Explore our Royal Commission hub to keep up-to-date, access related content and view additional resources.   

We are happy to assist you in considering the proposals and how they impact your business. Please contact your usual KWM contact if you would like to discuss the report further.

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