A busy schedule of regulatory change in the financial services industry next year will have an impact on the way investors deal with financial advisers, credit providers, dispute resolution service and others.

Here is a summary of some of main changes that will occur.

Life insurance commissions. Following ASIC’s move in June to cap life insurance commissions, a transition period starts in January. The cap will be 80 per cent of the premium in the first year of the policy, with a maximum trailing commission of 20 per cent of the premium in all subsequent years. The cap will drop to 70 per cent in January 2019 and 60 per cent in January 2020. A formula has also been set for clawbacks; 100 per cent of the commission if the policy lapses in the first year and 60 per cent in the second year.

Mandatory data breach notification. From February, any organisation subject to the Privacy Act will have to give notice to affected individuals and the Office of the Australian Information Commissioner when a security breach compromises customer information.

Insolvency reform. Under new safe harbor arrangements, directors will only be liable for debts incurred while their company was insolvent. The reforms also include changes to the enforceability of ‘ipso facto’ clauses in contracts, which allow a party to terminate a contract upon the occurrence of a specific event, such as the appointment of an administrator, regardless of the performance of the counterparty. Courts will have power to stay such clauses. The reforms will be fully operational by July.

Australian Financial Complaints Authority. A new external dispute resolution body will take over the functions of the Superannuation Complaints Tribunal, the Financial Ombudsman Service and the Credit and Investments Ombudsman. A transition team, led by former Reserve bank deputy governor Malcolm Edey, is working towards a July 1 start.

Compulsory comprehensive credit reporting. Announced but not yet legislated, from July 1 the four major banks will be required to provide 50 per cent of their comprehensive credit data to credit bureaus, increasing to 100 per cent a year later. The Government has yet to decide whether it will mandate comprehensive reporting for other credit providers.

Flex commissions banned. A flex commission is an arrangement where an intermediary who sells a consumer loan earns a larger commission from the credit provider if the interest rate (contract annual percentage rate) is above a benchmark or base rate. ASIC has been critical of the way these are used, especially in the car dealership sector. A ban on flex commissions will take effect on November 1.

Financial advice education and training requirements. Looking further ahead to 2019, from January new advisers will be required to hold a relevant degree level qualification before they are eligible to commence a supervision year, at the end of which they will have to sit an examination. Established advisers will have until 2021 to pass an exam and until 2024 to reach a standard equivalent to a degree. A new body, the Financial Adviser Standards and Ethics Authority, will be responsible for governing the conduct of advisers.

Consumer credit reforms. Also scheduled for 2019, consumer lease contracts will be regulated, introducing caps on lease payments and other consumer protections. Rules covering small loans will also be tightened.

The Government has a number of other matters in the works that may or may not be legislated in the coming year.

• Treasury has released draft legislation for consultation, which allows a wide range of innovative financial services activities to be tested without the need for full compliance with ASIC licensing requirements. This fintech “regulatory sandbox” will extend the scope of activities beyond the rules introduced by ASIC last year.
• Increased ASIC and APRA enforcement powers. The ASIC Enforcement Review Taskforce has recommended that ASIC be given a “directions power”, which would allow it to direct a financial services or credit licensee in the conduct of their business to address or prevent a compliance failure. Treasury has released a draft bill that would give APRA stronger crisis management powers.
• The Government has withdrawn a series of bills that deals with superannuation fund governance, after failing to get cross-bench support in the Senate. However, it plans to press ahead with the reforms, which include independent director on trustee boards, more focus on the suitability of MySuper products and a stronger best interest duty for directors.