Hawking of financial products

In response to recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission), Parliament has now passed a tranche of reforms contained in the Financial Sector Reform (Hayne Royal Commissions Response) Act 2020.

This law will ban the hawking of financial products, in line with recommendations 3.4 and 4.1 of the Royal Commission final report.

These recommendations followed Hayne’s findings that the interpretation of the existing legislation did not effectively protect consumers from harm, and that there was widespread misconduct relating to the hawking of financial products to consumers for whom the product was not designed. These amendments aim to:

• Provide consumers greater power in making decisions to purchase financial products;
• Prevent pressure selling of financial products;
• Discourage techniques that may detract from consumers making informed decisions; and
• Allow appropriate consumer protection.

Commencement date and application

The hawking provisions will take effect as of 5 October 2021. This aligns with the timing of other related reforms, such as the deferred sales model for add-on insurance, the Design and Distribution Obligations and the Duty not to Misrepresent. The interaction between the anti-hawking provisions and the deferred sales model requirements for add-on insurance products is explored later.

The hawking provisions apply to ‘financial products’ being issued or sold to ‘retail clients’. The definition of ‘financial products’ includes products such as insurance, superannuation, shares, interests in managed investment schemes and currency trading, while the definition of ‘retail client’ differs based on the financial product. This operates to ensure that offers, requests or invitations about financial products made to sophisticated investors or wholesale clients are not prohibited (as these clients are deemed to be more capable of assessing value).

The crux of the changes

 What is the ‘general prohibition’?

The hawking provisions will be underpinned by a single ‘general prohibition’. This general prohibition seeks to replace the three currently separate hawking prohibitions – one general prohibition, one for managed investment scheme interests, and one for securities.

The single general prohibition stipulates that a person must not issue, sell, request or invite the purchase of a financial product if the consumer is a retail client and this is made in the course of, or because of, an unsolicited contact with the consumer.

Under this amended prohibition, a person is still prohibited from offering a financial product for issue or sale. In addition, a person is also prohibited from requesting or inviting a consumer to ask or apply for or purchase a financial product. This extension will mean organisations cannot circumvent the prohibitions by asking a consumer to request a financial product or fill in an application.

What is ‘unsolicited conduct’?

Under the current hawking provisions, ‘unsolicited contact’ is not defined. Under the new law, ‘unsolicited contact’ is contact made by telephone call, face to face meetings, or any other real-time interaction in the nature of a discussion or conversation, that a consumer did not consent to.

In order for a consumer to have consented, they must make a positive, voluntary and clear request to be contacted about the financial product. Additionally, consent is valid for six weeks from the time the contact is initiated. Consumers also have the power to specify how they can be contacted, and to withdraw or vary this at any point. This shifts the power to be contacted into the consumer’s hands.

However, the industry is likely to need further guidance on ‘unsolicited contact’ and what kind of contact can be considered a causal connection. ASIC will need to take a fresh look at its Regulatory Guide 38. 

How do the hawking provisions interact with the requirements under the deferred sales model?

This tranche of reforms introduces a deferred sales model for the sale of add-on insurance products. Add-on insurance products are those products that are offered or sold in connection with the acquisition of a principal good or service. Under these reforms, these add-on products cannot be sold to the consumer for at least four days after the commitment to the principal good or service. These products can then be sold up to six weeks afterwards, at which time the deferred sales period ends and the anti-hawking requirements would apply to further contact.  

What does this mean for organisations?

We recommend that organisations take stock of how far they have progressed with planning, implementing and transitioning current regulatory programs of work, and look at streamlining where possible. This may require a bolstering of resourcing in the short-term, or the re-allocation and re-prioritisation of business needs. 

We recommend organisations closely examine the way they and their distributors currently obtain access to consumers to distribute financial products and identify where unsolicited sales under the new provisions may be, or be at risk of, occurring. For some organisations, we expect the reforms will result in fundamental changes to their operating model particularly for those organisations that are highly reliant on cross-selling and outbound sales. For others, it may be less onerous and require some cessation of cross-selling and updating to scripting and staff training.  

Whilst COVID-19 related extensions may have provided organisations with some breathing space on some of the regulatory reform requirements, it has also meant there is now somewhat of a bottleneck when it comes to implementation. With so much reform impacting the financial services sector, organisations need to build out a sustainable regulatory strategy to understand and implement the reforms, including how they intersect, what their impact will be on existing business models, as well as continue their BAU operations.