FINANCIAL SECTOR REFORM BILL 2022 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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FINANCIAL SECTOR REFORM BILL 2022

2022 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES FINANCIAL ACCOUNTABILITY REGIME BILL 2022 FINANCIAL SECTOR REFORM BILL 2022 FINANCIAL SERVICES COMPENSATION SCHEME OF LAST RESORT LEVY BILL 2022 FINANCIAL SERVICES COMPENSATION SCHEME OF LAST RESORT LEVY (COLLECTION) BILL 2022 EXPLANATORY MEMORANDUM (Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Table of Contents Glossary................................................................................................. iii General outline and financial impact ...................................................... 1 Financial Accountability Regime .................................. 5 Financial services compensation scheme of last resort ................................................................................... 65 Financial services compensation scheme of last resort levy ............................................................................ 87 Consumer credit reforms ......................................... 111 Statement of Compatibility with Human Rights ........ 169

Glossary This Explanatory Memorandum uses the following abbreviations and acronyms. Abbreviation Definition ADI Authorised Deposit-taking Institution AFCA Australian Financial Complaints Authority APRA Australian Prudential Regulation Authority ASIC Australian Securities and Investments Commission ASIC supervisory cost recovery levy The levy framework established by the ASIC framework Supervisory Cost Recovery Levy Act 2017 Banking Executive Accountability Regime The Banking Executive Accountability Regime in Part IIAA of the Banking Act 1959 Code National Credit Code at Schedule 1 to the National Consumer Credit Protection Act 2009 Corporations Act Corporations Act 2001 Credit Act National Consumer Credit Protection Act 2009 Credit Transitional Act National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 CSLR Compensation Scheme of Last Resort Financial Accountability Regime The Financial Accountability Regime introduced in the Financial Accountability Regime Bill 2022 Financial Services Royal Commission Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Financial Services Royal Commission Final The Final Report of the Royal Commission Report into Misconduct in the Banking, Superannuation and Financial Services Industry the Guide to Framing Commonwealth The Attorney-General's Department's A Offences Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 edition ICCPR International Covenant on Civil and Political Rights

Glossary Abbreviation Definition Ramsay Review The Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework the Regulator Under the Financial Accountability Regime, generally, the Regulator is both APRA and ASIC. However, if an accountable entity does not hold an Australian financial services licence or an Australian credit licence, then the Regulator for that accountable entity and its significant related entities and accountable persons is only APRA. SACCs Review The Small Amount Credit Contract Laws Review

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 General outline and financial impact Financial Accountability Regime Outline The Financial Accountability Regime Bill 2022 introduces a new accountability regime for the banking, insurance and superannuation industries. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 make consequential amendments to relevant Acts to support the Financial Accountability Regime. Date of effect The Financial Accountability Regime Bill 2022 commences the day after Royal Assent. The regime will apply to the banking industry six months after commencement of the Financial Accountability Regime Bill 2022 and to any new entrants beyond that, from the time they become an ADI or a non-operating holding company. The regime will apply to the insurance and superannuation industries 18 months after commencement of the Financial Accountability Regime Bill 2022, and to any new entrants beyond that, from the time they become licensed. Schedule 1 Part 1 and Schedule 2 to the Financial Sector Reform Bill 2022 commence the day after Royal Assent, at the same time as the Financial Accountability Regime Bill 2022 commences. Schedule 1 Part 2 to the Financial Sector Reform Bill 2022 will commence the date the regime applies to the banking industry. That date will be six months after commencement of the Financial Accountability Regime Bill 2022. Proposal announced This proposal was announced on 4 February 2019 as part of the former Government's response to the Financial Services Royal Commission. Financial impact Nil. 1

General outline and financial impact Human rights implications The Financial Accountability Regime Bill 2022 does not raise any human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 do not raise any human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. Regulation Impact Statement The Financial Services Royal Commission Final Report has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement for the purposes of the Government decision to implement this reform. The Financial Services Royal Commission Final Report can be accessed through the Australian Parliament House website.1 Financial services compensation scheme of last resort and levy framework Outline Together Schedule 3 to the Financial Sector Reform Bill 2022, the Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 establish the CSLR. The CSLR is intended to support confidence in the financial system's external dispute resolution framework. The scheme will provide compensation where a determination issued by AFCA remains unpaid and the determination relates to a financial product or service within the scope of the scheme. The Commonwealth will fund the establishment of the scheme and its operation in the first year. A levy will be imposed on the financial services industry to fund the scheme in future years. Date of effect The establishment of the scheme and the supporting levy framework commences on the day after Royal Assent. The operator of the scheme can begin to make compensation payments under the scheme from 1 July 2023. 1 https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22publicatio ns%2Ftabledpapers%2Fbc83795c-b7fa-4b42-a93b-fa012cffffc2%22 2

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Proposal announced This proposal was announced on 4 February 2019 as part of the former Government's response to the Financial Services Royal Commission. Financial impact All figures in this table represent amounts in $m. 2022-23 2023-24 2024-25 2025-26 -2.7 0.5 -0.1 -1.6 Human rights implications Schedule 3 to the Financial Sector Reform Bill 2022 raises human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 does not raise any human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 raises human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. Regulation Impact Statement The Financial Services Royal Commission Final Report has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement for the purposes of the Government decision to implement this reform. The Financial Services Royal Commission Final Report can be accessed through the Australian Parliament House website.2 2 https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22publicatio ns%2Ftabledpapers%2Fbc83795c-b7fa-4b42-a93b-fa012cffffc2%22 3

General outline and financial impact Consumer credit reforms Outline Schedule 4 to the Financial Sector Reform Bill 2022 amends the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases, while ensuring these products can continue to fulfil an important role in the economy. Date of effect The amendments generally commence on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent. The anti-avoidance measures in Schedule 4 to the Financial Sector Reform Bill 2022 commence on the day after the Financial Sector Reform Bill 2022 receives Royal Assent. Proposal announced Schedule 4 implements the Government's response to the SACCs Review. The Final Report of the Review was provided to the Government on 3 March 2016. Financial impact Nil. Human rights implications Schedule 4 to the Financial Sector Reform Bill 2022 raises human rights issues. See Statement of Compatibility with Human Rights -- Chapter 5 of this Explanatory Memorandum. Regulation Impact Statement The SACCs Review has been certified as being informed by a process and analysis equivalent to a Regulation Impact Statement. The SACCs Review can be accessed through the Australian Parliament House website.3 The annual compliance cost is estimated to be $17.62 million. 3 https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22publications/ta bledpapers/88aaae8c-48cd-49c4-af69-96a0f0d7360d%22 4

Financial Accountability Regime Table of Contents: Outline of chapter .................................................................................. 5 Context of amendments ......................................................................... 6 Summary of new law.............................................................................. 7 Detailed explanation of new law ............................................................ 9 Entities regulated under the Financial Accountability Regime ......... 9 Obligations of accountable persons under the Financial Accountability Regime ................................................................... 18 Obligations of accountable entities under the Financial Accountability Regime ................................................................... 19 Administration of the Financial Accountability Regime .................. 31 Ensuring compliance of the obligations imposed under the Financial Accountability Regime ................................................................... 35 Enforcement and penalties ............................................................ 40 Miscellaneous provisions .............................................................. 52 Commencement, application, and transitional provisions .................... 58 Transitional arrangements for the banking industry ...................... 59 Transitional arrangements for insurance and superannuation industries ....................................................................................... 62 Outline of chapter 1.1 This chapter provides an overview of the Financial Accountability Regime. 5

Financial Accountability Regime Context of amendments 1.2 The Australian financial system is central to the economy and plays an essential role in promoting economic growth. Decisions taken by directors and senior executives of financial institutions are important and have flow on effects for the Australian economy and for consumers. 1.3 A key objective of the Financial Accountability Regime is to improve the operating culture of entities in the banking, insurance and superannuation industries and to increase transparency and accountability across these industries--both in relation to prudential matters and conduct related matters. 1.4 The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 enacted the Banking Executive Accountability Regime, which commenced on 1 July 2018. The Banking Executive Accountability Regime is an accountability framework for directors and senior executives of ADIs (entities that carry on banking business) and their subsidiaries. 1.5 The Financial Services Royal Commission made a number of recommendations relating to extending the Banking Executive Accountability Regime to other APRA regulated industries and to have APRA and ASIC jointly administer the extended regime. 1.6 These recommendations include: • recommendation 3.9--to extend provisions modelled on the Banking Executive Accountability Regime to registrable superannuation entity licensees; • recommendation 4.12--to extend provisions modelled on the Banking Executive Accountability Regime to insurers regulated by APRA; • recommendation 6.6--to have APRA and ASIC jointly administer the Banking Executive Accountability Regime; • recommendation 6.7--to make it clear that ADIs and their accountable persons must deal with both APRA and ASIC in an open, constructive and cooperative way; and • recommendation 6.8--to have APRA and ASIC jointly administer the extended regime. 1.7 The Financial Accountability Regime is the Government's implementation of those Financial Services Royal Commission recommendations. The regime is designed to improve the risk and governance cultures of Australia's financial institutions by imposing a strengthened responsibility and accountability framework for those institutions and the directors and the most senior and influential executives (accountable persons) of those institutions. 6

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Summary of new law 1.8 The Financial Accountability Regime imposes four core sets of obligations: • accountability obligations--which require entities in the banking, insurance and superannuation industries and their directors and most senior and influential executives to conduct their business in a certain manner (i.e. honesty and with care, skill and diligence); • key personnel obligations--which require entities in the banking, insurance and superannuation industries to nominate senior and influential executives to be responsible for all areas of their business operations; • deferred remuneration obligations--which require entities in the banking, insurance and superannuation industries to defer at least 40 per cent of the variable remuneration (for example, bonuses and incentive payments) of their directors and most senior and influential executives for a minimum of 4 years, and to reduce their variable remuneration for non-compliance with their accountability obligations; and • notification obligations--which require: - entities in the banking, insurance and superannuation industries to meet the core notification obligations by providing the Regulator with certain information about their business and their directors and most senior and influential executives; and - for entities above a certain threshold, which will be determined by rules made by the Minister, to meet the enhanced notification obligations, by preparing and submitting accountability statements and accountability maps. 1.9 The Financial Accountability Regime will apply to the banking industry six months after the commencement of the Financial Accountability Regime Bill 2022, and to any new entrants beyond that, from the time they become an ADI or authorised non-operating holding company. The Banking Executive Accountability Regime will be repealed when the obligations under the Financial Accountability Regime begin to apply to the banking industry. 1.10 The Financial Accountability Regime will apply to the insurance and superannuation industries from 18 months after commencement of the Financial Accountability Regime Bill 2022 and to any new entrants beyond that, from the time they become licensed. 7

Financial Accountability Regime 1.11 The entities to which the Financial Accountability Regime applies are referred to as accountable entities. These entities are: • ADIs; • authorised non-operating holding companies of ADIs; • general insurers; • authorised non-operating holding companies of general insurers; • life companies; • registered non-operating holding companies of life companies; • private health insurers; and • registrable superannuation entity licensees (or RSE licensees). 1.12 The Financial Accountability Regime also provides for the regulation of the directors and most senior and influential executives of accountable entities who: • have actual or effective senior executive responsibility for management or control of the accountable entity or its relevant group; or • hold particular responsibilities and/or positions prescribed in the rules made by the Minister. 1.13 The directors and senior executives who are regulated under the Financial Accountability Regime are referred to as accountable persons. 1.14 The Financial Accountability Regime imposes accountability obligations on accountable persons, requires accountable persons be registered, and gives the Regulator power to disqualify someone from being an accountable person of an entity or a class of entities regulated by the regime. The Regulator may also direct an accountable entity to reallocate the responsibilities of its accountable persons to address prudential risks or risks of significant and systemic non- compliance. 1.15 The Financial Accountability Regime will be jointly administered by APRA and ASIC. The Financial Accountability Regime Bill 2022 sets out the powers the Regulators can exercise under the regime and their shared responsibilities. However, ASIC's powers under the regime only provides for ASIC to be able to regulate entities licensed under financial services law or credit legislation. The Financial Accountability Regime Bill 2022 refers to APRA and ASIC collectively (or just to APRA, where it is the sole regulator) as the Regulator. 8

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Detailed explanation of new law 1.16 The object of the Financial Accountability Regime is to impose a strengthened accountability framework for certain entities in the banking, insurance and superannuation industries, and their directors and most senior and influential executives. [Section 3 to the Financial Accountability Regime Bill 2022] 1.17 The Financial Accountability Regime will achieve this by placing accountability obligations on certain entities within these industries, referred to as accountable entities. Some corporate groups may have multiple accountable entities. [Section 9 to the Financial Accountability Regime Bill 2022] 1.18 Some of the legal obligations in the Financial Accountability Regime will require an accountable entity to take reasonable steps to ensure that its significant related entities (for most entities, its significant subsidiaries) act in accordance with the regime. However, those significant related entities will not generally be subject to direct legal obligations under the regime. [Sections 12 and 20(e) to the Financial Accountability Regime Bill 2022] 1.19 The Financial Accountability Regime also places legal obligations on the directors and most senior and influential executives of accountable entities, referred to as accountable persons. [Section 10 to the Financial Accountability Regime Bill 2022] 1.20 The Financial Accountability Regime Bill 2022 provides a number of definitions to establish the new legislative framework and ensure that the regime interacts effectively with existing legislation. [Section 8 to the Financial Accountability Regime Bill 2022] Entities regulated under the Financial Accountability Regime Accountable entities under the Financial Accountability Regime 1.21 The Financial Accountability Regime imposes obligations on accountable entities in the banking, insurance and superannuation industries. 1.22 An accountable entity is generally an entity which holds a licence to carry on a banking, insurance or superannuation business. Accountable entities are the primary entities which are regulated under the Financial Accountability Regime. 9

Financial Accountability Regime 1.23 In the banking sector, the following bodies corporate are accountable entities: • an ADI under the Banking Act 1959; • an authorised non-operating holding company under the Banking Act 1959. [Section 9(1) to the Financial Accountability Regime Bill 2022] 1.24 For the insurance and superannuation industries the following bodies corporate will be accountable entities under the Financial Accountability Regime: • for general insurance: - a general insurer under the Insurance Act 1973; - an authorised non-operating holding company of a general insurer under the Insurance Act 1973; • for life insurance: - a life company registered under the Life Insurance Act 1995; - a registered non-operating holding company of a life company under the Life Insurance Act 1995; • for private health insurance--a private health insurer under the Private Health Insurance (Prudential Supervision) Act 2015; and for superannuation--a licensed trustee of a superannuation entity (a registrable superannuation entity licensee (a RSE licensee) under the Superannuation Industry (Supervision) Act 1993). [Section 9(3) and (4) to the Financial Accountability Regime Bill 2022] 1.25 To be an accountable entity, a body corporate must also be a constitutionally covered body. A body will be a constitutionally covered body, if: • it is a constitutional corporation; • it carries on a business of banking, insurance or superannuation; or • its conduct affects, or could affect, a constitutional corporation or a body that carries on a business of banking, insurance or superannuation. [Sections 9(1)(b), 9(3)(b), and 13 to the Financial Accountability Regime Bill 2022] 1.26 The Financial Accountability Regime will have a staggered application to the banking, insurance and superannuation industries. 1.27 The banking industry will transition from the Banking Executive Accountability Regime to the Financial Accountability Regime six months 10

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 after commencement of the Financial Accountability Regime Bill 2022. [Section 9(2) to the Financial Accountability Regime Bill 2022] 1.28 The deferred remuneration obligations under the Financial Accountability Regime will apply when the decision to provide remuneration occurs in first financial year that begins six months after the Financial Accountability Regime begins to apply to the banking industry. [Schedule 2, item 11 to the Financial Sector Reform Bill 2022] 1.29 Once the Financial Accountability Regime starts applying to the banking industry, the regime will apply to new entrants from the time they become an ADI or a non-operating holding company under the Banking Act 1959. [Section 9(2)(c) to the Financial Accountability Regime Bill 2022] 1.30 The Financial Accountability Regime will apply to the insurance and superannuation industries 18 months after commencement of the Financial Accountability Regime Bill 2022. [Section 9(3) and (4) to the Financial Accountability Regime Bill 2022] 1.31 Once the Financial Accountability Regime starts applying to the insurance and superannuation industries, the regime will apply to new entrants from the time they become licensed. [Section 9(4)(c) to the Financial Accountability Regime Bill 2022] Obligation on accountable entities in relation to their significant related entities 1.32 The Financial Accountability Regime imposes some obligations on an accountable entity in relation to its significant related entities. 1.33 An accountable entity's significant related entities can include entities that are incorporated and operate outside of Australia, as well as entities within Australia. This approach recognises that financial services are often provided by large international corporate businesses and the activities of foreign entities can have a significant effect on the provision of services in Australia. Significant related entities of accountable entities in the banking and insurance industries 1.34 For the banking and insurance industries, an entity will be a significant related entity of an accountable entity if it is: • a subsidiary of the accountable entity; and • the effect of the subsidiary on the accountable entity is material and substantial. [Section 12(1) to the Financial Accountability Regime Bill 2022] 11

Financial Accountability Regime 1.35 The Financial Accountability Regime Bill 2022 contains a list of factors to assist consideration of whether the relationship between an accountable entity and another entity is sufficiently material and substantial to make the other entity a significant related entity. Such factors include the nature and scale of the entity's business or activities, any interdependency between the entity and the accountable entity, any organisational, financial or administrative arrangements between the entity and the accountable entity, as well as any other relevant factor. [Section 12(4) of the Financial Accountability Regime Bill 2022] 1.36 The relationship between an accountable entity and another entity will be sufficiently material and substantial if the other entity's business activity has the potential if disrupted, to have a significant impact on the accountable entity or its relevant group's business operations or its ability to manage risks effectively. 1.37 The Financial Accountability Regime recognises that related entities' operations may be significant to the accountable entity's business. For example, consumers often associate a wide range of financial services and activities provided by a corporate group under the accountable entity's brand. Poor behaviour by a significant related entity can have a negative effect on the accountable entity's brand and public standing and has the potential to adversely affect the prudential reputation of the accountable entity itself. 1.38 In general, a given significant related entity can only be related to one accountable entity, its closest parent accountable entity. This rule provides clarity around the operation of the regime and ensures that each significant related entity is the sole responsibility of one accountable entity. [Section 12(2) of the Financial Accountability Regime Bill 2022] 1.39 A significant related entity must be a constitutionally covered body. [Sections 12(1)(c) and 13 to the Financial Accountability Regime Bill 2022] 12

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Diagram 1.1 --Accountable entities and their significant related entities The below corporate group contains four accountable entities from the banking, insurance and superannuation industries. Each accountable entity has obligations in relation to the conduct of its significant related entities. However, there are other entities in the group that are not regulated under the Financial Accountability Regime. Significant related entities in the superannuation industry 1.40 A significant related entity of an accountable entity that is a registrable superannuation entity licensee can be a wider variety of entities than a significant related entity in the banking and insurance industries. 1.41 Significant related entities of registrable superannuation entity licensees can be: • subsidiaries of the licensee; • other related bodies corporate of the licensee (such as parent and sibling entities); and • entities with certain control relationships with the licensee. [The definition of 'connected entity' in section 8 and section 12(3) to the Financial Accountability Regime Bill 2022; see also section 10 to the Superannuation Industry (Supervision) Act 1993 and section 50AAA to the Corporations Act] 1.42 Different related entities are covered by the Financial Accountability Regime for registrable superannuation entity licensees as they may have a different 13

Financial Accountability Regime operating structure to other types of accountable entities. In particular, a connected entity of a registrable superannuation entity licensee could have a material and substantial impact on the licensee but may not be a subsidiary of the licensee. These connected entities can be significant related entities of registrable superannuation entity licensees. 1.43 Additionally, unlike other accountable entities, a related entity can be a significant related entity of more than one registrable superannuation entity licensee. 1.44 The four cumulative requirements to determine whether a body corporate is a significant related entity of an accountable entity that is a registrable superannuation entity licensee are that the body corporate: • is a connected entity of the accountable entity, as defined by section 8; • has a material and substantial effect on the accountable entity or the business or activities of the accountable entity (or the body corporate's business or activities have such an effect); • is a constitutionally covered body within the meaning of section 13; and • is not an accountable entity itself. [Section 12(3) to the Financial Accountability Regime Bill 2022] 1.45 Factors to assist consideration of whether the relationship between an accountable entity and another entity is sufficiently material and substantial to make the other entity a significant related entity are set out in section 12(4). Such factors include the nature and scale of the entity's business or activities, any interdependency between the entity and the accountable entity, any organisational, financial or administrative arrangements between the entity and the accountable entity, as well as any other relevant factor. [Section 12(4) to the Financial Accountability Regime Bill 2022] 14

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Diagram 1.2 -- Significant related entities of registrable superannuation entity licensees The below corporate group contains three accountable entities: two registrable superannuation entity licensees and a general insurer. Subsidiary C is a significant related entity to both superannuation entities and the insurer. The other associated entity is a significant related entity to both superannuation entities, as are subsidiaries A and B. More than one accountable entity will be responsible for each of the significant related entities. 15

Financial Accountability Regime Diagram 1.3 -- Significant related entities of a not-for-profit registrable superannuation entity licensee The below corporate group contains one accountable entity (the registrable superannuation entity licensee) and five connected entities of the registrable superannuation entity licensee. Entities A, B and E are significant related entities of the registrable superannuation entity licensee. Accountable persons under the Financial Accountability Regime 1.46 The conduct of a business is ultimately determined by its directors and its most senior and influential executives. These directors and executives of accountable entities are regulated by the Financial Accountability Regime as accountable persons. 1.47 The Financial Accountability Regime places a series of obligations on accountable persons such as requirements to act with honesty and integrity, and with due skill, care and diligence and deal with APRA and ASIC in an open, constructive and cooperative way. Breaches of these obligations can result in a person becoming disqualified from being an accountable person. [Sections 21 and 42 to the Financial Accountability Regime Bill 2022] 1.48 A person is an accountable person if the person: • holds a position in an accountable entity or a significant related entity of an accountable entity; and • has senior executive responsibility for management or control of the accountable entity or a significant or substantial part or aspect of the operations of the accountable entity or the accountable entity and its group of significant related entities. [Section 10(1) and (6) to the Financial Accountability Regime Bill 2022] 16

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.49 An accountable person also includes a person who: • holds a position in an accountable entity that is of a kind prescribed in the rules made by the Minister; or • has a prescribed responsibility in or in relation to an accountable entity as specified in the rules made by the Minister. [Section 10(2) to (4) to the Financial Accountability Regime Bill 2022] 1.50 Accountable persons with specified responsibilities will primarily be persons appointed or employed by an accountable entity or its significant related entity, but could also include contractors and independent service providers (such as a consultant in charge of human resources for an accountable entity). [Section 10(2) to (4) to the Financial Accountability Regime Bill 2022] 1.51 The rules made by the Minister may identify a kind of responsibility or position by reference to the level or area of responsibility. The rules may identify responsibilities within all or a class of entities that are subject to the Financial Accountability Regime. [Section 10(2) to (4) to the Financial Accountability Regime Bill 2022] 1.52 One person can be an accountable person of multiple accountable entities and can hold multiple prescribed responsibilities or positions listed in the rules made by the Minister. An accountable person may also be employed by a body other than the accountable entity or one of its significant related entities. 1.53 In practice, accountable persons will typically include the directors and senior executives of an entity, such as the Chief Executive Officer and officers reporting directly to the Chief Executive Officer. Lower-level executives are generally not expected to be accountable persons under the Financial Accountability Regime. 1.54 For a foreign accountable entity in the banking or insurance industries, the accountable person's responsibilities will relate to the Australian branch of the entity, rather than to the entity as a whole. [Section 10(5) to the Financial Accountability Regime Bill 2022] 1.55 Despite the above, the Regulator can exclude certain responsibilities from the obligations under the Financial Accountability Regime. This means that persons with only those excluded responsibilities or positions will not be accountable persons. This Regulator can provide for the exclusions: • in relation to a particular entity - by written notice to the entity; or • in relation to a class of entities - by rules made by the Regulator. [Section 11(1) to (4) to the Financial Accountability Regime Bill 2022] 17

Financial Accountability Regime 1.56 The written notice by the Regulator is not a legislative instrument. [Section 11(5) to the Financial Accountability Regime Bill 2022] Obligations of accountable persons under the Financial Accountability Regime 1.57 The Financial Accountability Regime sets out accountability obligations for accountable persons that relate to both conduct-related and prudential matters. [Sections 18 and 21 to the Financial Accountability Regime Bill 2022] 1.58 An accountable person is required to act with honesty and integrity, and with due skill, care and diligence. The person must also act in a manner that prevents actual or likely adverse impact to their accountable entity's prudential standing, where standing is considered within the entity's industry as well as among the general public. [Section 21(1)(a) and (c) to the Financial Accountability Regime Bill 2022] 1.59 The accountability obligations of accountable persons extend beyond those in the Banking Executive Accountability Regime by: • extending the requirement for accountable persons to deal in an open, constructive and cooperative way with both APRA and ASIC; and [Section 21(1)(b) to the Financial Accountability Regime Bill 2022] • introducing a new obligation for accountable persons to take reasonable steps to prevent matters from arising that would (or would be likely to) result in a material contravention by their accountable entity of certain financial sector laws. [Section 21(1)(d) to the Financial Accountability Regime Bill 2022] 1.60 The Financial Accountability Regime Bill 2022 provides guidance on what amounts to taking reasonable steps to support proactive compliance by accountable persons and accountable entities. This includes taking appropriate action both to prevent, and in response to, non-compliance or suspected non-compliance rather than a set-and-forget attitude. [Section 22 to the Financial Accountability Regime Bill 2022] 1.61 The new obligation for accountable persons to take reasonable steps to prevent breaches of certain financial sector laws will only be triggered by material and significant breaches. The focus on significant contraventions ensures an accountable person does not face unduly serious consequences for involvement in occasional minor or technical contraventions. 1.62 However, a large number or repeated occurrence of minor breaches could indicate a systemic issue of non-compliance which could amount to a material contravention. Similarly, taking reasonable steps to prevent a material contravention does not mean an accountable person can operate or set up compliance systems that allow non-material breaches. 18

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.63 An accountable person would only be required to take reasonable steps to ensure compliance by the accountable entity with the certain financial sector laws that are relevant to their area of responsibility. 1.64 An accountable person will be held accountable to the extent they were involved in and responsible for a contravention of obligations under the Financial Accountability Regime. If multiple accountable persons have the same responsibility for the same accountable entity, each person is liable for any breaches in relation to that responsibility. This approach is to prevent accountable persons from avoiding their obligations under the regime by shifting responsibility to other accountable persons. [Section 21(2) to the Financial Accountability Regime Bill 2022] 1.65 An accountable person must comply with each of their accountability obligations. For instance, not acting with due diligence would result in the accountable person failing to meet their accountability obligations. 1.66 If an accountable person fails to comply with any of these obligations, their variable remuneration will need to be reduced by the accountable entity or significant related entity by an amount proportionate to the failure. [Section 25(1) to the Financial Accountability Regime Bill 2022] 1.67 Failure to comply with an obligation may also result in the Regulator taking other enforcement actions under the Financial Accountability Regime. For example, the Regulator could seek to disqualify someone from being an accountable person or could seek to have an accountable person's responsibilities reallocated. [Sections 42 and 65 to the Financial Accountability Regime Bill 2022] 1.68 However, protections for whistle-blowers under Part 9.4AAA of the Corporations Act will be available in relation to the Financial Accountability Regime. [Schedule 1, item 31 to the Financial Sector Reform Bill 2022] Obligations of accountable entities under the Financial Accountability Regime 1.69 The obligations for accountable entities under the Financial Accountability Regime relate to both conduct and prudential matters. [Section 20 to the Financial Accountability Regime Bill 2022] 1.70 Accountable entities must comply with each of their accountability obligations, key personnel obligations, deferred remuneration obligations, and notification obligations (as described below). [Section 15(1) to the Financial Accountability Regime Bill 2022] 19

Financial Accountability Regime 1.71 If an accountable entity fails to comply with an obligation, it may be subject to a civil penalty of up to 50,000 penalty units, three times the value of the benefit derived or detriment avoided by the entity, or 10 per cent of the entity's annual turnover up to 2.5 million penalty units for each contravention (for more detail, see the sections below on civil penalties). [Sections 80 to 83 to the Financial Accountability Regime Bill 2022] 1.72 Contravention may also result in other enforcement action being taken in relation to the accountable entity. For example, the Regulator may enter an enforceable undertaking with the entity, or issue a direction to it, to resolve non-compliance. APRA and ASIC may also be able to take enforcement action under other relevant legislation, such as the Banking Act 1959. [Part 4 of Chapter 3 to the Financial Accountability Regime Bill 2022] Accountability obligations of accountable entities 1.73 An accountable entity must take reasonable steps to conduct its business with honesty and integrity, with due skill, care and diligence, and in a manner that prevents actual or likely adverse impact on its prudential standing and reputation. [Section 20(a) and (c) to the Financial Accountability Regime Bill 2022] 1.74 The obligation to take reasonable steps to prevent both actual and likely impacts on the accountable entity's prudential standing is designed to encourage proactive compliance. The entity's prudential standing is considered within its industry as well as more broadly, among the general public. 1.75 The Financial Accountability Regime accountability obligations extend beyond those currently in the Banking Executive Accountability Regime: an accountable entity must take reasonable steps to deal in an open, constructive and cooperative way with both APRA and ASIC. [Section 20(b) to the Financial Accountability Regime Bill 2022] 1.76 An accountable entity is also required to take reasonable steps to ensure that: • its accountable persons comply with their own accountability obligations; and [Sections 20(d) and 21 to the Financial Accountability Regime Bill 2022] • its significant related entities comply with the accountability obligations of an accountable entity as if it were an accountable entity. [Section 20(e) to the Financial Accountability Regime Bill 2022] 1.77 An accountable entity must comply with each obligation. For instance, not acting with due skill would result in the accountable entity failing to meet its accountability obligations. The obligations are designed to complement and support the obligations under other legislative requirements (such as the general obligations under section 912A of the Corporations Act and the 20

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 obligations under section 52 of the Superannuation (Industry Supervision) Act 1993). Key personnel obligations of accountable entities 1.78 The Financial Accountability Regime requires an accountable entity to ensure that the responsibilities of relevant accountable persons collectively cover all parts or aspects of its business, including the business of its relevant group. [Section 23(1)(a) to the Financial Accountability Regime Bill 2022] 1.79 This obligation includes having accountable persons who are responsible for each of the responsibilities and positions prescribed in the rules made by the Minister. [Section 23(1)(a)(ii) and (iii) to the Financial Accountability Regime Bill 2022] 1.80 An accountable entity must comply with any directions given by the Regulator and take steps to ensure that its significant related entities do the same. [Section 23(1)(c) and (d) to the Financial Accountability Regime Bill 2022] 1.81 An accountable entity must ensure each of its accountable persons and those of its significant related entities have not been disqualified from being accountable persons by the Regulator. [Sections 23(1)(b) and 24(1)(b) to the Financial Accountability Regime Bill 2022] 1.82 Accountable entities are not required to have accountable persons for responsibilities which have been excluded by the Regulator. [Section 23(2) to the Financial Accountability Regime Bill 2022] 1.83 Foreign accountable entities in the banking and insurance industries are only required to comply with the key personnel obligations in relation to the operations of their Australian branches. [Section 23(3) to the Financial Accountability Regime Bill 2022] Timing of key personnel obligations 1.84 Generally, an accountable entity must ensure each of its accountable persons and those of its significant related entities are registered with the Regulator before the person starts occupying a role as an accountable person. [Sections 23(1)(b) and 24 to the Financial Accountability Regime Bill 2022] 1.85 However, to support accountable entities to comply with the key personnel obligations, and to promote efficient practices, the Financial Accountability Regime provides flexibility for: • temporary and unforeseen vacancies; 21

Financial Accountability Regime • directors appointed at general meetings; and • new entities entering the industry. [Section 24(2) to (7) to the Financial Accountability Regime Bill 2022] 1.86 Accountable persons filling temporary vacancies or unforeseen vacancies have up to 90 days after becoming an accountable person to be registered. This grace period applies where the incumbent position-holder is expected to return, or there is intention to make a permanent appointment, within 90 days of the position becoming vacant. This can include situations where an individual is temporarily replacing an accountable person due to illness, or an individual fulfils a vacancy on a temporary basis until a new permanent accountable person is appointed. [Section 24(2 )to the Financial Accountability Regime Bill 2022] 1.87 Appointing an accountable person to fill a permanent position on a fixed-term contract will not constitute a temporary vacancy to which this longer period for registration will apply (the vacancy itself must be temporary). 1.88 An accountable person who is appointed as director of an accountable entity at a general meeting has up to 30 days to be registered. This approach simplifies the registration process as the entity has 30 days after the successful candidate is appointed to register them as an accountable person, rather than having to submit applications ahead of the meeting for all candidates, only to later retract those of the unsuccessful candidates. [Section 24(3) to the Financial Accountability Regime Bill 2022] 1.89 An entity that becomes an accountability entity after the application of the Financial Accountability Regime to the industry the entity is licensed for will have 30 days to register their accountable persons. The 30-day time period commences from the date the entity becomes an accountable entity. This 30- day period does not apply to entities when they are renewing a licence. [Section 24(4) of the Financial Accountability Regime Bill 2022] 1.90 These longer periods for registration are intended to support compliance with the obligations in the Financial Accountability Regime and should not be used to avoid registration or notification obligations. 1.91 The Regulator can adjust these longer periods for registration: • for an individual entity - by written notice to the entity; or • for a class of entities - by Regulator rules. [Section 24(2 or (5) to the Financial Accountability Regime Bill 2022] 1.92 The Regulator can adjust the period for registration to a longer or shorter period. A decision to shorten the period by written notice is a reviewable decision and is therefore subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal (see below for more on 22

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 reviewable decisions and merits review). [Section 24(2) to (6), and section 91, to the Financial Accountability Regime Bill 2022] 1.93 A written notice setting out the Regulator's determination of a new period for a particular entity prevails over rules which would also apply to the entity. [Section 24(6) to the Financial Accountability Regime Bill 2022] Deferred remuneration obligations of accountable entities 1.94 The Financial Accountability Regime requires accountable entities to control payment of an accountable person's variable remuneration, such as bonuses and incentive payments, in various ways. 1.95 Specifically, the Financial Accountability Regime obliges each accountable entity to: • defer payment of at least 40 per cent of each accountable person's variable remuneration for a minimum period of four years; • have a remuneration policy that requires the variable remuneration of an accountable person to be reduced if they fail to comply with their accountability obligations; • not pay the portion of variable remuneration that has been reduced in accordance with the remuneration policy; and • take reasonable steps to ensure that their significant related entities comply with the above. [Sections 25(1), 27, and 28 to the Financial Accountability Regime Bill 2022] 1.96 The requirement to defer variable remuneration ensures that accountable persons have clear incentives to promote effective risk management when making decisions which have longer-term impacts. It also ensures that accountable persons are properly held to account for decisions that have negative future consequences. 1.97 In the event of contravention, the amount an accountable person's variable remuneration is reduced by is determined by the relevant accountable entity or significant related entity. The amount of the reduction must be proportionate to the accountable person's failure to comply with the person's obligations. The reduction does not need to relate to the period in which the failure occurred, and the accountable person may not have any variable remuneration left after the reduction. [Section 25(2) to the Financial Accountability Regime Bill 2022] 23

Financial Accountability Regime 1.98 The deferred remuneration obligations under the Financial Accountability Regime apply to variable remuneration, which is remuneration conditional on the accountable person achieving particular objectives such as performance metrics and service requirements. [Section 26(1)(a) to the Financial Accountability Regime Bill 2022] 1.99 The deferred remuneration obligations apply to variable remuneration paid in cash and also other forms of remuneration such as shares and options. The obligations also apply to remuneration paid directly by the accountable entity and other entities in the corporate group to which the accountable entity belongs. [Section 25(3) to the Financial Accountability Regime Bill 2022] 1.100 The deferred remuneration obligations will apply in relation to variable remuneration paid by other entities in a corporate group only if it is wholly or partly related to the person's work performing the role of an accountable person. [Section 25(3) to the Financial Accountability Regime Bill 2022] 1.101 The Regulator can also determine certain types of remuneration to be included or excluded from the deferred remuneration obligations. The Regulator is able to do this: • for an individual entity - by written notice to the entity and each accountable person who is impacted; or • for a class of entities - by making Regulator rules. [Section 26(1)(b) and (2) to (4) and (7) to the Financial Accountability Regime Bill 2022] 1.102 A person who becomes an accountable person after the Regulator makes a determination to include or exclude certain types of renumeration from the deferred remuneration obligations must be notified of the determination if the person is impacted by it. [Section 26(5) to the Financial Accountability Regime Bill 2022] 1.103 Written notice of a determination that particular remuneration is or is not variable remuneration is not a legislative instrument. [Section 26(6) to the Financial Accountability Regime Bill 2022] 1.104 Decisions of the Regulator relating to a determination of variable remuneration by written notice are subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal. [Sections 26(3) and 91 to the Financial Accountability Regime Bill 2022] Minimum amount of variable remuneration to be deferred 1.105 Generally, the deferred remuneration obligations under the Financial Accountability Regime requires at least 40 per cent of an accountable person's variable remuneration for the relevant financial year to be deferred. The 24

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 meaning of financial year is specific to each accountable entity. [Section 27(1) and (7), and the definition of 'financial year' in section 8 to the Financial Accountability Regime Bill 2022] 1.106 The value of a person's variable remuneration that is deferred will generally be the value of the remuneration if it had been paid to the person at the start of the deferral period. However, the Regulator will have power to determine or prescribe an alternative way to work out that value. [Section 27(2) to the Financial Accountability Regime Bill 2022] 1.107 The Regulator's power to make determinations and rules can be used for particular forms of remuneration such as shares and options. If the Regulator exercises such power, the value of a person's variable remuneration that is deferred is worked out on the basis of the written determination from the Regulator (if applicable in relation to a specific entity) or on the basis of rules made by the Regulator in relation to a class of entities (if applicable). [Section 27(2) to (5) to the Financial Accountability Regime Bill 2022] 1.108 The Regulator must provide a copy of a determination to each accountable person who is impacted by it at the time of the determination. A person who becomes an accountable person after the determination is made and is impacted by it must be notified of the determination by the relevant accountable entity or significant related entity. [Section 27(4) and (5) to the Financial Accountability Regime Bill 2022] 1.109 Written notice of a determination of how to calculate the minimum amount of variable remuneration to be deferred is not a legislative instrument. [Section 27(6) to the Financial Accountability Regime Bill 2022] 1.110 Decisions of the Regulator relating to variable remuneration are subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal. [Sections 27(3) and 91 to the Financial Accountability Regime Bill 2022] Minimum period of deferral 1.111 Generally, the deferred remuneration obligation under the Financial Accountability Regime requires an accountable person's variable remuneration to be deferred for at least four years. [Section 28(1) to (4) to the Financial Accountability Regime Bill 2022] 1.112 The minimum deferral period may be shorter than four years: • if a person stops being an accountable person due to death, or serious illness, disability or incapacity; or [Section 28(4) of the Financial Accountability Regime Bill 2022] 25

Financial Accountability Regime • if the Regulator determines other circumstances allowing for a shorter deferral period, either: • by written notice for a particular entity; or • by Regulator rules for a class of entity. [Section 28(4) to (6) to the Financial Accountability Regime Bill 2022] 1.113 An accountable person may have a shorter minimum deferral period on the occurrence of one of the listed circumstances without approval from the Regulator. However, the shorter minimum deferral period will not end until the accountable entity is reasonably satisfied that the person has complied with their accountability obligations, based on information available at the time. If the accountable entity is never so satisfied, the default approach of four years applies, and the amount of deferred remuneration may be reduced by an amount proportionate to the failure to meet the accountability obligations. [Section 28(4) to the Financial Accountability Regime Bill 2022] 1.114 The deferral period will start on the later of: • the day after the day on which the decision was first made for the accountable person to be able to earn the amount of variable remuneration; or • the first day of the performance period, if the variable remuneration is measured by reference to that period. [Section 28(2) to the Financial Accountability Regime Bill 2022] 1.115 If the variable remuneration is remuneration of a kind determined by the Regulator or prescribed by rules made by the Regulator, then the deferral period may start on the day determined by the Regulator. [Section 28(3) to the Financial Accountability Regime Bill 2022] 1.116 The deferral period is intended to be consistent with provisions of APRA's prudential standard to regulate remuneration in regulated industries (Prudential Standard CPS 511 Remuneration), that also requires deferral of variable remuneration for an overlapping class of persons in those industries. This approach will provide for consistent compliance requirements under the two frameworks. 1.117 If an accountable entity discovers that an accountable person is likely to have breached their accountability obligations during the deferral period, then the deferral period will be extended until such time as the entity completes its investigation of the breach. [Section 28(4) to the Financial Accountability Regime Bill 2022] 26

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Circumstances where the deferred remuneration obligations do not apply 1.118 The deferred remuneration obligations do not apply to an accountable person whose deferred variable remuneration in a particular financial year for the accountable person's entity would be less than a certain threshold. The threshold is set at $50,000 with a power for the Minister to make rules determining a different amount. [Section 29 to the Financial Accountability Regime Bill 2022] 1.119 The deferred remuneration obligations do not apply to an accountable person while the person is filling a temporary or an unforeseen vacancy, who is not registered or required to be registered under the Financial Accountability Regime because they only hold the position for 90 days or less. [Section 30 to the Financial Accountability Regime Bill 2022] 1.120 The deferred remuneration requirements do not apply to ordinary salary and wages, to an accountable person whose total remuneration does not include any variable remuneration, nor to variable remuneration which relates to other work an accountable person may have performed outside their role as an accountable person. Notification obligations of accountable entities 1.121 The Financial Accountability Regime requires an accountable entity to provide the Regulator with particular information about the entity and its accountable persons. 1.122 All accountable entities are required to comply with the core notification obligations, while a subset of entities are required to comply with the enhanced notification obligations. These obligations are important to ensure the Regulator has up to date information about the nature and influence of entities and persons who are subject to the Financial Accountability Regime. [Section 31 to the Financial Accountability Regime Bill 2022] Core notification obligations that apply to all accountable entities 1.123 Each accountable entity must notify the Regulator of certain events relating to the accountable persons of the entity, as well as to certain breaches of obligations under the Financial Accountability Regime by the entity or its accountable persons. [Sections 31(1)(a) and 32 to the Financial Accountability Regime Bill 2022] 1.124 There are two new events that must be notified to the Regulator beyond the events requiring notification under the Banking Executive Accountability Regime. They are when: 27

Financial Accountability Regime • the accountable entity has reasonable grounds to believe that it has breached its key personnel obligations; and • a material change occurs to information about an accountable person on the register of accountable persons. [Section 32(d)(i) and (e) to the Financial Accountability Regime Bill 2022] 1.125 The Financial Accountability Regime also requires accountable entities to take reasonable steps to ensure their significant related entities comply with these requirements as if they were accountable entities. [Section 31(1)(b) to the Financial Accountability Regime Bill 2022] 1.126 Generally, the notification must be provided within 30 days of the event occurring. The notice must be provided using the form approved by the Regulator. [Section 31(6) and (7) to the Financial Accountability Regime Bill 2022] 1.127 The Regulator can extend this compliance period in the Regulator rules. [Section 31(6)(b) of the Financial Accountability Regime Bill 2022] Enhanced notification obligations - accountability statements and maps 1.128 In addition to the core notification obligations, accountable entities that meet an enhanced notification threshold are required to provide the Regulator with an accountability statement for each of the entity's accountable persons and an accountability map. [Section 31(2) to the Financial Accountability Regime Bill 2022] 1.129 An accountability statement is a document that contains: • a comprehensive statement of the accountable person's responsibilities, and any other matters determined in the Regulator rules; and • a declaration by the accountable person that the content of the statement is accurate, and that the person understands their accountability obligations. [Section 33 to the Financial Accountability Regime Bill 2022] 1.130 An accountability map is a document outlining all the accountable persons in a group comprised of the accountable entity and its significant related entities, the responsibilities of each accountable person and the lines of reporting and responsibility between those accountable persons, and any other matters determined in the Regulator rules. [Section 34 to the Financial Accountability Regime Bill 2022] 1.131 The Minister can make rules to prescribe the threshold for determining which accountable entities will need to comply with the enhanced notification requirements. Despite subsection 14(2) of the Legislation Act 2003, these rules may incorporate a matter contained in an instrument or writing as in force or 28

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 existing from time to time if it is published on a website maintained by the Regulator. That is, the incorporation of certain documents by reference will not be limited to the instrument as at the date of incorporation. This is necessary to ensure that the rules align with current standards or guidance. [Section 31(3) to (5) to the Financial Accountability Regime Bill 2022] 1.132 The rules can only incorporate material as it exists from time to time from non- legislative instruments if that material is published by APRA and ASIC on their websites. This limitation will ensure only credible, relevant material may be incorporated. [Section 31(3) to (5) to the Financial Accountability Regime Bill 2022] 1.133 The accountability statement of an accountable person must accompany the person's application for registration. [Section 41(2)(d) to the Financial Accountability Regime Bill 2022] 1.134 An accountability map must be provided to the Regulator within 30 days of an entity becoming subject to the Financial Accountability Regime, or within the period set in the Regulator rules. [Section 31(2)(c) and (5) to the Financial Accountability Regime Bill 2022] 1.135 Generally, an accountable entity must ensure the Regulator is notified of any material change to the accountability map and accountability statement(s) within 30 days of the change occurring. The Regulator rules can prescribe a different period for compliance. [Section 31(2)(b) and (d) to the Financial Accountability Regime Bill 2022] 1.136 The Financial Accountability Regime also requires accountable entities to take reasonable steps to ensure their significant related entities provide accountability statements and update the Regulator of material changes as if they were accountable entities. [Section 31(2)(e) to the Financial Accountability Regime Bill 2022] 1.137 The Banking Executive Accountability Regime required all ADIs to provide accountability maps and statements to APRA, and to notify APRA of all changes to accountability maps and statements. The Financial Accountability Regime reduces the regulatory burden and compliance costs by only requiring accountable entities that meet the enhanced notification threshold to prepare and submit accountability maps and statements and to notify the Regulator of material changes to these documents. The Regulator may provide guidance on what constitutes material changes. 29

Financial Accountability Regime Circumstances where accountable entities and accountable persons are not subject to the obligations of the Financial Accountability Regime 1.138 The Minister has the power to exempt a particular accountable entity or a class of entities from the obligations of the Financial Accountability Regime. Where this is done, those obligations will not apply to the accountable entity, to any of its significant related entities, or to an accountable person of the entity. [Sections 15(2)(a), 16 and 18(2) to the Financial Accountability Regime Bill 2022] 1.139 The power to exempt an accountable entity or a class of accountable entities from the Financial Accountability Regime is required to ensure the regime applies appropriately to the regulated industries and to avoid any potential unintended consequences from the application of the regime. 1.140 This power ensures that the regime can operate flexibly and be appropriately targeted. For instance, there may be instances where the Financial Accountability Regime may act as a barrier to entry for some small new entrants and the ability to exempt entities or classes of entities from the regime may facilitate competition in the market. 1.141 The exemption power is broadly framed to avoid constraining relevant considerations due to the diversity of industries regulated by the Financial Accountability Regime, and the complexity and unforeseen nature of the issue the exemption power is seeking to address. An exemption for classes of accountable entities is a legislative instrument and is therefore subject to Parliamentary disallowance. 1.142 The obligations of the Financial Accountability Regime apply to a foreign accountable entity (in the banking or insurance industries), but only to the operations of the entity's branch in Australia. The obligations apply to the same extent to an accountable person of such an entity or any of its significant related entities. [Sections 15(2)(b) and 18(2) to the Financial Accountability Regime Bill 2022] 1.143 An accountable entity or an accountable person can be exempted from a particular obligation of the Financial Accountability Regime if the Regulator is satisfied that complying with the obligation would breach a foreign law. The Regulator must provide written notice to the accountable person or entity to exempt them from that obligation. [Sections 15(3), 17, 18(4), and 19 to the Financial Accountability Regime Bill 2022] 1.144 Certain decisions of the Regulator relating to these exemptions are subject to reconsideration by the Regulator, and to review by the Administrative Appeals 30

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Tribunal (see below for more on reviewable decisions and merits review). [Sections 17, 19, and 91 to the Financial Accountability Regime Bill 2022] Administration of the Financial Accountability Regime General administration 1.145 The Financial Accountability Regime will be administered and enforced by both APRA and ASIC. This will ensure the regime is regulated from both a prudential perspective as well as a conduct and consumer outcomes-based perspective. [Section 36 to the Financial Accountability Regime Bill 2022; Schedule 1, items 1 and 16 to the Financial Sector Reform Bill 2022, section 3 to the Australian Prudential Regulation Authority Act 1998 and section 12A to the Australian Securities and Investments Commission Act 2001] 1.146 ASIC will only exercise regulatory and enforcement powers under the Financial Accountability Regime in relation to an accountable entity that has either an Australian financial services licence or an Australian credit licence, its significant related entities, and accountable persons of these entities. The Financial Accountability Regime Bill 2022 identifies which provisions this limitation applies to. However, ASIC will be able to maintain the register of accountable persons, share information, and make legislative instruments (Regulator rules) with APRA in relation to all accountable entities and persons. [Section 36 to the Financial Accountability Regime Bill 2022] 1.147 To ensure a cohesive approach, APRA and ASIC must enter into an arrangement outlining their general approach to administering and enforcing the Financial Accountability Regime within 6 months of the commencement of the Financial Accountability Regime Bill 2022. If this does not occur, the Minister may determine an arrangement for this purpose. [Section 37 to the Financial Accountability Regime Bill 2022] 1.148 APRA and ASIC are required to reach agreement before exercising certain powers or performing certain functions under the Financial Accountability Regime except in administering the Register of accountable persons, sharing information, and for certain compliance and enforcement decisions. [Section 38 to the Financial Accountability Regime Bill 2022] 1.149 A failure by the Regulators to enter into an arrangement relating to the administration of the Act, to reach an agreement, or a failure by ASIC to adhere to the scope of its enforcement powers towards certain entities, does not invalidate the performance or exercise of the relevant function or power. [Sections 36(2), 37(5) and 38(4) to the Financial Accountability Regime Bill 2022] 31

Financial Accountability Regime 1.150 The no-invalidity clauses are necessary to provide certainty to regulated entities regarding the performance or exercise of a function or power under the Financial Accountability Regime and to ensure the enforcement of the Regime is not compromised. The enforcement powers of the Financial Accountability Regime are designed to combat serious regulatory issues such as prudential risk to the Australian financial system or significant and systemic consumer harms. As such, invalidity of regulatory action due to a Regulator's failure to comply with certain procedural matters could cause significant harm to consumers. 1.151 The no-invalidity clauses are designed to ensure regulatory certainty while forming part of a balanced regulatory framework which includes redress mechanisms which may apply to the regulatory action. The Financial Accountability Bill 2022 expressly provides for merits review of certain decisions made under the regime by the Administrative Appeals Tribunal. Judicial review of an exercise of power or performance of function by APRA or ASIC is also available, unless on the grounds of jurisdictional error solely in relation to one Regulator not having the other's agreement to act, or their arrangement for administration not being in place or available on their website. [Section 95 to the Financial Accountability Regime Bill 2022] Information sharing and protections 1.152 APRA and ASIC may share information that is obtained, produced, or disclosed for the purposes of the Financial Accountability Regime Bill 2022. APRA and ASIC are also required to share certain information necessary to enable the joint administration and enforcement of the regime. These arrangements are in addition to information-sharing frameworks available to APRA and ASIC under other legislation. [Section 39 to the Financial Accountability Regime Bill 2022] 1.153 One regulator does not need to notify any person that it plans to, or has, shared information with the other regulator. This will enable APRA and ASIC to efficiently perform their functions as joint regulators for the Financial Accountability Regime. While the natural justice hearing rule will not apply to the act of information sharing between the regulators, this is a limited restriction as procedural fairness will still be afforded in relation to uses of the shared information. This approach ensures the interests of affected persons are taken into account in making substantive decisions. [Section 39(5) to the Financial Accountability Regime Bill 2022] 1.154 Disclosure of information under this information sharing power constitutes an authorisation by an Australian law for the purpose of Australian Privacy Principle 6 of the Privacy Act 1988. [Section 39(6) to the Financial Accountability Regime Bill 2022; Schedule 1, item 11 to the Financial Sector Reform Bill 2022] 32

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.155 Most information obtained or disclosed under the Financial Accountability Regime will be 'protected information' within the meaning of each regulator's enabling legislation. This means that the information will be subject to APRA's and ASIC's standard secrecy and confidentiality obligations. This approach protects confidential information of financial services businesses, and encourages entities to be open and honest in their dealings with APRA and ASIC. 1.156 Schedule 1 to the Financial Sector Reform Bill 2022 achieves this by amending relevant definitions of protected information, protected document, and prudential regulation framework law to include information obtained or disclosed under the Financial Accountability Regime. Schedule 1 to the Financial Sector Reform Bill 2022 also introduces a prohibition into the Australian Securities and Investments Commission Act 2001 to protect against the disclosure of information that is protected information because of the Financial Accountability Regime. [Schedule 1, items 1, 5 to 11, 16 and 17 to the Financial Sector Reform Bill 2022; sections 3 and 56 to the Australian Prudential Regulation Authority Act 1998; sections 12A and 127 to the Australian Securities and Investments Commission Act 2001] 1.157 Exemptions to the secrecy provisions will allow for the appropriate sharing of information by APRA and ASIC. A defendant bears an evidential burden in relation to sharing of information on the reliance of these exemptions. Shifting the evidential burden to the person who disclosed the information is justified and not unduly onerous as the information subject to the new provisions would be peculiarly within the knowledge and control of the defendant. [Schedule 1, items 1, 5 to 11, 16 and 17 to the Financial Sector Reform Bill 2022; sections 3 and 56 to the Australian Prudential Regulation Authority Act 1998; sections 12A and 127 to the Australian Securities and Investments Commission Act 2001] 1.158 The amendments to the secrecy obligations will apply regardless of whether the information was obtained before or after the commencement of the Financial Accountability Regime. [Schedule 1, item 20 and Schedule 2, item 31 to the Financial Sector Reform Bill 2022; section 340 to the Australian Securities and Investments Commission Act 2001] 1.159 Information obtained or disclosed under the Financial Accountability Regime that is protected information (as defined by the enabling legislation for APRA and ASIC) will be exempt from the Freedom of Information Act 1982. This exemption already exists for protected information held by APRA. Schedule 1 to the Financial Sector Reform Bill 2022 extends the exemption to also cover information obtained or disclosed under the Financial Accountability Regime that is held by ASIC. 33

Financial Accountability Regime [Schedule 1, item 17 to the Financial Sector Reform Bill 2022, section 127 to the Australian Securities and Investments Commission Act 2001; Schedule 1, items 1 and 5-9 to the Financial Sector Reform Bill 2022, section 56(11) to the Australian Prudential Regulation Authority Act 1998] Registration of accountable persons 1.160 APRA and ASIC must jointly establish and maintain a register of accountable persons covered by the Financial Accountability Regime. The register will enable clear oversight of the accountable persons of each accountable entity and its significant related entities. The register will include details in relation to each accountable person's role, for example, name and date of registration. [Section 40 to the Financial Accountability Regime Bill 2022] 1.161 Information from the register may be made public at the discretion of APRA and ASIC. This allows the regulators to balance the need for confidentiality of sensitive information about financial services businesses with the need for public accountability and transparency. [Section 40(5) to the Financial Accountability Regime Bill 2022] 1.162 To register an accountable person, their accountable entity must: • submit a complete application in the approved form to the Regulator; • give a signed declaration the accountable entity is satisfied the person is suitable to be an accountable person; and • if the accountable entity meets the enhanced notification threshold - provide an accountability statement for the accountable person. [Section 41(2) to the Financial Accountability Regime Bill 2022] 1.163 The Regulator can request further information in relation to an application from the accountable entity. The accountable entity must comply with the request. [Sections 20(b) and 41(3) to the Financial Accountability Regime Bill 2022] 1.164 Where a person is an accountable person of multiple accountable entities, the person must be registered by each accountable entity. [Sections 24(1)(a) and 41(1) to the Financial Accountability Regime Bill 2022] 1.165 The Regulator is required to register an accountable person within the later of 21 days after an application is made, or 21 days after the day that any further requested information is given to the Regulator by the accountable entity. [Section 41(4) and (5) to the Financial Accountability Regime Bill 2022] 34

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Ensuring compliance of the obligations imposed under the Financial Accountability Regime Information-gathering powers 1.166 The Regulator may request information from accountable entities, significant related entities or accountable persons, for the purpose of administering or enforcing the Financial Accountability Regime. The information requested may relate to any entity or person that may be regulated under the regime, or to the related body corporate or connected entity of a regulated entity. [Section 62(1) to (3) to the Financial Accountability Regime Bill 2022] 1.167 The request must be made in accordance with certain requirements as to its purpose and content. It may be fulfilled in hard copy or electronic form, consistent with standard practice. [Section 62(4) to (6) to the Financial Accountability Regime Bill 2022] 1.168 This provision is similar to APRA's existing information-gathering powers in section 62 of the Banking Act 1959, with necessary changes to tailor the provision to the Financial Accountability Regime. 1.169 Failing to comply with a request for information is an offence subject to a maximum penalty of 200 penalty units (see below for more on the offence provisions under the Financial Accountability Regime). [Section 63 to the Financial Accountability Regime Bill 2022] Investigation powers 1.170 The Regulator has powers to investigate an accountable entity or its significant related entity if the Regulator has reason to believe the entity or an accountable person of the entity may have contravened obligations under the Financial Accountability Regime. These powers are similar to those in Part VIII of the Banking Act 1959, with necessary changes to ensure the provisions are tailored to the regime. 1.171 The Regulator commences an investigation by appointing an investigator. The investigator can delegate any or all of their powers and functions to APRA or ASIC staff members, to assist with the investigation. [Section 45 to the Financial Accountability Regime Bill 2022] 1.172 The standard requirements for appointments made by APRA to be made by certain people (such as a chair of APRA) do not apply to the appointment of investigators or other appointments under the Financial Accountability Regime. 35

Financial Accountability Regime [Schedule 1, items 2 and 3 to the Financial Sector Reform Bill 2022, section 48 of the Australian Prudential Regulation Authority Act 1998] 1.173 The Regulators may act cooperatively as the investigation is carried out. However, the single investigator will lead the conduct of the investigation. 1.174 The investigated entity is required to assist the investigation by providing access to information including books, accounts and documents, that are relevant to the investigation. The investigator may also require any person to produce such materials if they have reasonable grounds to believe that the person has knowledge of or access to the information. Materials may be provided in hard copy or electronic form. [Sections 46 and 47(1) to the Financial Accountability Regime Bill 2022] 1.175 An investigator may, by written notice, require the person to produce any or all relevant documents within a certain time period, but must provide at least 14 days' notice. [Section 47(2) to the Financial Accountability Regime Bill 2022] 1.176 It is an offence not to provide information or access to materials relevant to an investigation when required to do so by the investigator. The maximum penalty for such non-compliance is 50 penalty units for the entity being investigated, and 30 penalty units for other persons. The different penalties are appropriate as entities regulated under the Financial Accountability Regime should be more familiar with its operation and hence their contraventions attract a higher penalty. [Sections 46(2) and 47(3) to the Financial Accountability Regime Bill 2022] 1.177 If the entity fails to provide information or access to materials when required to do so by the investigator, it commits an offence on the first day and a continuing offence for each subsequent day of non-compliance. [Section 46(3) to the Financial Accountability Regime Bill 2022] 1.178 It also an offence to alter, destroy or conceal materials known to be relevant to an investigation, with a maximum penalty of two years' imprisonment. [Section 48 to the Financial Accountability Regime Bill 2022] 1.179 The penalties and offences for non-compliance with an investigation are consistent with equivalents in the Banking Executive Accountability Regime, on which they were modelled. For more information on penalties and offences, see the dedicated sections below. 1.180 The Regulator's power to appoint an investigator, and the requirements to assist the investigator, do not affect the operation of other provisions in the Financial Accountability Regime. [Section 46(4) to the Financial Accountability Regime Bill 2022] 36

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Examinations 1.181 To assist an investigation, the investigator may give notice in writing requiring a person to appear for an examination. This power ensures an investigator can undertake in person procedures as well as operating remotely, and can consider matters within the examinee's knowledge which are not written down or capable of production under the investigatory powers. [Section 49 to the Financial Accountability Regime Bill 2022] 1.182 The investigator must provide 14 days prior notice of an examination. The person attending the examination may be required to answer questions from the investigator under oath or affirmation. The examination may be recorded and conducted in the presence of persons such as lawyers, and an officer of both APRA and ASIC (irrespective of which regulator appointed the investigator). To reinforce privacy and accountability considerations, it is an offence to be present at an investigation without authorisation, subject to a maximum penalty of 30 penalty units. [Sections 49 to 51 to the Financial Accountability Regime Bill 2022] 1.183 A written record may be produced from the statements made by the person at the examination. The person must be given a copy of the written record but it may be subject to any conditions imposed by the investigator. It is an offence to fail to comply with these conditions, subject to a maximum penalty of 6 months' imprisonment. [Section 52 to the Financial Accountability Regime Bill 2022] 1.184 It is also an offence not to comply with any other requirement relating to examinations, subject to a maximum penalty of 30 penalty units. [Section 53 to the Financial Accountability Regime Bill 2022] 1.185 The penalties relating to examinations are consistent with penalties in the Banking Executive Accountability Regime (for more see the below section on penalties). Evidentiary use of certain material 1.186 Any of the statements made by a person at an examination may be used as evidence against the person in a proceeding or in other proceedings, subject to certain rules and exceptions. These provisions are based on Part VIII of the Banking Act 1959. [Sections 54 to 61 to the Financial Accountability Regime Bill 2022] 37

Financial Accountability Regime Auditors and actuaries under the Financial Accountability Regime 1.187 To support enforcement of the Financial Accountability Regime, obligations imposed on auditors and actuaries of certain entities under the Banking Act 1959 and other industry Acts administered by APRA will be extended to cover the Financial Accountability Regime (once the regime starts to apply). 1.188 In particular, Schedule 1 to the Financial Sector Reform Bill 2022 requires auditors and actuaries to assist APRA with investigations into breaches of the Financial Accountability Regime. Schedule 1 to the Financial Sector Reform Bill 2022 requires: • an auditor of an ADI, an authorised non-operating holding company or a subsidiary to provide information that will assist APRA in performing its functions under the Financial Accountability Regime; [Schedule 1, items 25 to 27 to the Financial Sector Reform Bill 2022; sections 16B, 16BA and 16C to the Banking Act 1959] • an auditor or actuary of a general insurer, an authorised non-operating holding company or a subsidiary to provide information to APRA that will assist APRA in performing its duties under the Financial Accountability Regime; [Schedule 1, items 42 to 44 to the Financial Sector Reform Bill 2022, sections 49 to 49B to the Insurance Act 1973] • an auditor or actuary of a life company, a registered non-operating holding company or a subsidiary to provide information that will assist APRA in performing its functions under the Financial Accountability Regime; [Schedule 1, items 53 to 57 and 59 to 63 to the Financial Sector Reform Bill 2022, sections 88 to 89 and 98 to 99 to the Life Insurance Act 1995] • an actuary of a private health insurer to provide information that would assist APRA performing its functions under the Financial Accountability Regime; and [Schedule 1, items 78 to 81 to the Financial Sector Reform Bill 2022, sections 110 to 113 to the Private Health Insurance (Prudential Supervision) Act 2015] • an auditor or actuary of a superannuation entity to provide information when there is likely to have been a breach of the Financial Accountability Regime, by amending the definition of regulatory provision. [Schedule 1, items 86, 88 and 89 to the Financial Sector Reform Bill 2022, sections 38A, 129 and 130A to the Superannuation Industry (Supervision) Act 1993] 38

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.189 Consequences for failing to comply with these or other obligations of the Financial Accountability Regime include termination of the auditor or actuary's appointment. Schedule 1 to the Financial Sector Reform Bill 2022 requires: • an ADI to remove an auditor from their appointment for failing to properly perform functions and duties under the Financial Accountability Regime; [Schedule 1, item 28 to the Financial Sector Reform Bill 2022, section 17(2)(a) to the Banking Act 1959] • a general insurer to end an auditor or actuary's appointment if the general insurer is satisfied that the auditor or actuary has failed to provide APRA with relevant information in relation to breaches of the Financial Accountability Regime; [Schedule 1, item 38 to the Financial Sector Reform Bill 2022, section 43 to the Insurance Act 1973] • a life company to end the appointment of an auditor or actuary if the life company is satisfied that the auditor or actuary has failed to provide APRA with relevant information in relation to breaches of the Financial Accountability Regime; and [Schedule 1, items 52 and 58 to the Financial Sector Reform Bill 2022, sections 85 and 94 to the Life Insurance Act 1995] • a private health insurer to terminate an actuary's appointment if the private health insurer reasonably believes that the actuary has failed to provide APRA with relevant information in relation to breaches of the Financial Accountability Regime. [Schedule 1, items 76 to 77 to the Financial Sector Reform Bill 2022, section 107 to the Private Health Insurance (Prudential Supervision) Act 2015] 1.190 The Financial Accountability Regime also provides APRA additional powers to direct auditors and actuaries in relation to breaches of the regime. Schedule 1 to the Financial Sector Reform Bill 2022 allows APRA to: • refer an auditor or actuary to a professional association, or apply to a court to disqualify an auditor or actuary if APRA considers that the auditor or actuary has failed to perform their duties under the Financial Accountability Regime; [Schedule 1, items 39 to 41 to the Financial Sector Reform Bill 2022, sections 44 and 48 to the Insurance Act 1973] • direct a life company to remove an auditor or actuary if they have failed to perform their duties under the Financial Accountability Regime; and 39

Financial Accountability Regime [Schedule 1, item 64 to the Financial Sector Reform Bill 2022, section 125A to the Life Insurance Act 1995] • direct the removal of an auditor or actuary for a superannuation entity, or direct a matter to an auditor or actuary's professional organisation for breaches of the regime. [Schedule 1, items 91 and 92 to the Financial Sector Reform Bill 2022, sections 131AA and 131A to the Superannuation Industry (Supervision) Act 1993] Enforcement and penalties 1.191 The Financial Accountability Regime has a variety of mechanisms for enforcement, once a contravention or likely contravention has been established. These mechanisms align with those in existing financial services law, and in particular are drawn from the Banking Executive Accountability Regime to ensure continuity and consistency of approach. 1.192 Enforcement mechanisms under the Financial Accountability Regime include: • directions powers; • disqualification; • enforceable undertakings; • injunctions; • civil penalties; and • some limited criminal offences. 1.193 Consistent with standard practice, the enforcement mechanism used will reflect the circumstances of the case. Contravention of the core obligations of the Financial Accountability Regime could trigger many enforcement mechanisms and civil penalties (i.e. disqualification of an accountable person, or directions to an accountable entity to comply with the regime or reallocate responsibilities of an accountable person). Non-compliance with an investigation or request for information from the Regulator could constitute an offence. The Regulator may also seek court orders for compliance or an injunction, or enter an enforceable undertaking with the relevant entity. Directions Compliance directions 1.194 The Regulator can direct an accountable entity to take action to address actual or likely non-compliance with obligations under the Financial Accountability 40

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Regime. A similar power exists under the Banking Act 1959 and other legislation regulating APRA-regulated institutions. 1.195 The Regulator can give an accountable entity a direction if the Regulator believes the accountable entity, an accountable person of the entity, or of one of its significant related entities: • contravened obligations under the Financial Accountability Regime; or is likely to contravene obligations under the Financial Accountability Regime, and the direction is necessary to prevent that non-compliance. [Section 64(1) to the Financial Accountability Regime Bill 2022] 1.196 The directions can include directions to cause the accountable entity or any of its significant related entities to: • take a specific action; • undertake an audit; • make changes to internal systems and practices; • reconstruct, amalgamate or otherwise alter part of the entity's structure or that of its relevant group; and • not take a specific action. [Section 64(2) to the Financial Accountability Regime Bill 2022] 1.197 The direction must: • be given to the accountable entity in writing; • identify the grounds on which it is given (i.e. the breach or likely breach which forms the basis of the order); • specify a period for compliance; and • state that the accountable entity could commit an offence if it fails to comply with the direction. [Section 64(3) to the Financial Accountability Regime Bill 2022] 1.198 An accountable entity or significant related entity may comply with a direction despite anything in the entity's constitution or any contract to which the entity is a party. A direction does not, except in limited cases, affect the obligations of parties under such contracts. The Federal Court may make an order on how such contracts operate. [Sections 64(5) - (7) and 77 to the Financial Accountability Regime Bill 2022] 1.199 Notice of a decision to give, vary or revoke a direction must be provided to the accountable entity and to any relevant accountable person and significant related entity. Decisions by the Regulator to give, vary, or revoke directions, or 41

Financial Accountability Regime to refuse to do so, are subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal. [Sections 64(4) and 91 - 95 to the Financial Accountability Regime Bill 2022] 1.200 Non-compliance with a direction may attract a civil penalty and may also be an offence. The maximum penalty for an accountable entity or an officer of an accountable entity which commits an offence by not complying with a direction is 50 penalty units (see more on penalty and offence provisions below). [Sections 66 and 80 to the Financial Accountability Regime Bill 2022] Directions to reallocate responsibilities 1.201 The Regulator can direct an accountable entity to reallocate the responsibilities of an accountable person of the entity or of its relevant group (including of a significant related entity). [Section 65 to the Financial Accountability Regime Bill 2022] 1.202 The power is designed to be used in exceptional circumstances to direct an accountable entity to reallocate the responsibilities of accountable persons of its relevant group in order to minimise prudential risk or risks of serious non- compliance. A similar power exists under the Banking Executive Accountability Regime, with the power in the Financial Accountability Regime expanded to cover serious non-compliance risks. 1.203 In order to make a reallocation direction the Regulator must be satisfied that the current allocation of responsibilities has given or is likely to give rise to: • a prudential risk; or • a risk of significant and systemic non-compliance with financial laws. [Section 65(1) to the Financial Accountability Regime Bill 2022] 1.204 The Regulator must have regard to the responsibilities set out in the accountability statement, where a statement for the accountable person has been given. [Section 65(2) to the Financial Accountability Regime Bill 2022] 1.205 A direction to reallocate responsibilities must be given in writing, specify a period by which the direction must be complied with, and state that the accountable entity could commit an offence or be liable to a civil penalty if it fails to comply with the direction. [Section 65(3) to the Financial Accountability Regime Bill 2022] 1.206 Notice of a decision to give, vary or revoke a direction must be provided to the accountable entity, the person whose responsibility is to be reallocated, the person to whom the responsibility is reallocated, and - if applicable - to the significant related entity of the accountable persons. [Section 65(4) to the Financial Accountability Regime Bill 2022] 42

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.207 Decisions by the Regulator to give, vary, or revoke directions - or to refuse to do so - are subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal. The direction is not a legislative instrument. [Sections 65 and 91 - 95 to the Financial Accountability Regime Bill 2022] Other provisions relating to directions 1.208 Information about directions may be provided by the Regulator to the Minister, on the Regulator's own initiative or on request by the Minister. [Section 78 to the Financial Accountability Regime Bill 2022] 1.209 If a direction relating to non-compliance or a direction to relocate responsibilities is inconsistent with rules made by the Minister or the Regulator rules, the direction prevails over the rules, to the extent of the inconsistency. [Section 79 to the Financial Accountability Regime Bill 2022] Offences for failing to comply with directions 1.210 An accountable entity commits an offence if it does not comply with a direction from the Regulator. The maximum penalty is 50 penalty units. Failure to comply with a direction to reallocate responsibilities may also contravene civil penalty provisions of the Financial Accountability Regime Bill 2022. [Sections 66(1) and (2), and 80 to the Financial Accountability Regime Bill 2022] 1.211 A director, senior executive, or other senior employee of an accountable entity commits an offence if they fail to take reasonable steps to ensure that the accountable entity complies with a direction from the Regulator. The maximum penalty is 50 penalty units. The offence applies more broadly than just accountable persons because of the importance of ensuring compliance with the Regulator's directions to the administration and enforcement of the Financial Accountability Regime. [Section 66(3) and (4) to the Financial Accountability Regime Bill 2022] 1.212 Schedule 1 to the Financial Sector Reform Bill 2022 amends the Financial Regulator Assessment Authority Act 2021 to allow individuals working for the Financial Regulator Assessment Authority to disclose the fact that directions have been given under the Financial Accountability Regime. [Schedule 1, items 32 and 33 to the Financial Sector Reform Bill 2022, section 40 to the Financial Regulator Assessment Authority Act 2021] 1.213 Schedule 1 to the Financial Sector Reform Bill 2022 amends the Payment Systems and Netting Act 1998 to ensure the directions given under the Financial Accountability Regime operate consistently with the legal framework governing payment systems in Australia. 43

Financial Accountability Regime [Schedule 1, items 71 to 73 to the Financial Sector Reform Bill 2022, section 5 to the Payment Systems and Netting Act 1998] Secrecy provisions relating to directions under the Financial Accountability Regime 1.214 The Regulator may determine that secrecy arrangements apply to a direction given under the Financial Accountability Regime. This can be done if the Regulator considers it is necessary to protect certain customers of accountable entities, or to promote financial system stability in Australia. [Section 67 to the Financial Accountability Regime Bill 2022] 1.215 Where secrecy arrangements apply to a direction, a directed accountable entity or another person (such as an employee or contractor of the entity) commits an offence for disclosing information revealing the fact that the direction was given, except in limited circumstances. The maximum penalty for contravening the secrecy arrangements is two years imprisonment. [Section 68 to the Financial Accountability Regime Bill 2022] 1.216 The secrecy arrangements do not apply where the information: • has already been lawfully made available to the public; • is disclosed to a legal representative to seek legal advice; • is disclosed in a manner that is authorised under law or by a legislative instrument made under the Financial Accountability Regime; or • is disclosed to another person who is subject to the secrecy arrangements for the purposes of one of the other exemptions. [Sections 69 to 76 to the Financial Accountability Regime Bill 2022] Disqualification of accountable persons 1.217 The Regulator can disqualify a person from being an accountable person for a period if the Regulator is satisfied that the accountable person has breached their accountability obligations under the Financial Accountability Regime. 1.218 The power to disqualify an accountable person is required as accountable persons have significant power in accountable entities (which themselves are central to the Australian financial system) and should exercise due skill, care and diligence in relation to their roles. In some cases, the appropriate remedy for contravention of the Financial Accountability Regime will be that the current or former accountable person will not be able to hold such a role in future. 1.219 The Regulator can disqualify a person if they have breached their accountability obligations and their disqualification is justified, having regard to the seriousness of the breach. [Section 42 to the Financial Accountability Regime Bill 2022] 44

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.220 A person can be disqualified from being an accountable person from an accountable entity, a significant related entity, or a class of such entities. The Regulator must give written notice to the accountable person and the accountable entity, and if relevant to the significant related entity, to give them an opportunity to make submissions. The disqualification takes effect from the date specified in the notice. [Section 42(2) to (7) to the Financial Accountability Regime Bill 2022] 1.221 The Regulator may vary or revoke a disqualification if the Regulator considers it appropriate, or on application of the disqualified person. To do so, the Regulator must give written notice of the variation or revocation to the affected accountable person and to relevant accountable entities or significant related entities. The variation or revocation takes effect from the day the determination was made. [Section 43 to the Financial Accountability Regime Bill 2022] 1.222 A written notice making, varying or revoking disqualification is not a legislative instrument. [Sections 42(8) and 43(4) to the Financial Accountability Regime Bill 2022] 1.223 An accountable entity breaches its key personnel obligations if it appoints an accountable person who has been disqualified. [Section 23(1)(b) to the Financial Accountability Regime Bill 2022] 1.224 In addition to a contravention of key personnel obligations, an accountable entity or significant related entity commits an offence if it appoints an accountable person who has been disqualified under the Financial Accountability Regime. Allowing a disqualified person to act as an accountable person of the entity also constitutes an offence. There are two possible offences: a strict liability offence with a penalty of 60 penalty units, and a fault-based offence with a penalty of 250 penalty units. While there is no ambiguity as to whether a person is disqualified or not, if it can be established that an accountable entity or significant related entity intentionally appointed or allowed a disqualified person to act as its accountable person, a higher penalty would be imposed. These penalties and offences are consistent with the penalties in the Banking Executive Accountability Regime, on which they were modelled for continuity. The offences and penalties also comply with the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. [Section 44 to the Financial Accountability Regime Bill 2022] 1.225 Decisions by the Regulator to disqualify a person, to vary or revoke a disqualification, or to refuse to vary or revoke a disqualification, are subject to reconsideration by the Regulator, and to review by the Administrative Appeals Tribunal. [Section 91 to the Financial Accountability Regime Bill 2022] 45

Financial Accountability Regime Enforceable undertakings 1.226 The Regulator can accept enforceable undertakings in relation to the Financial Accountability Regime, including from any accountable entity. Undertakings may relate to any matter in relation to which the Regulator has a power or function under the regime. For example, an undertaking may relate to compliance with the regime by an accountable entity or by an accountable person. 1.227 The Regulator can enforce enforceable undertakings in the Federal Court. 1.228 Enforceable undertakings will be accepted and enforced under Part 6 of the Regulatory Powers (Standard Provisions) Act 2014, with modifications set out in the Financial Accountability Regime Bill 2022 to ensure all relevant kinds of undertakings can be accepted. [Section 84 to the Financial Accountability Regime Bill 2022] Injunctions 1.229 The Regulator may apply for an injunction in the Federal Court to uphold the requirements of the Financial Accountability Regime. The Court may grant an injunction requiring or restraining conduct, for instance to restrain a person from engaging in conduct that contravenes a direction given by the Regulator. The Court may also grant an injunction by consent of all parties to the relevant proceedings. 1.230 Injunctions will be enforced under Part 7 of the Regulatory Powers (Standard Provisions) Act 2014, with modifications set out in the Financial Accountability Regime Bill 2022 to ensure it works under the regime. [Section 85 to the Financial Accountability Regime Bill 2022] Civil penalties for contravention of the Financial Accountability Regime 1.231 Civil penalties apply in relation to contravention of obligations under the Financial Accountability Regime. The civil penalties are designed to deter and punish malfeasance and non-compliance with the obligations of the regime, and are part of the standard suite of enforcement tools. Strong penalties are warranted given the importance of the regulated industries to the broader economy, and to ensure that incurring a civil penalty is not considered a mere cost of doing business. 1.232 A civil penalty may be incurred for each contravention. To determine the amount of each penalty, the Financial Accountability Regime provides a flexible method modelled on that used in corporations and consumer legislation. 46

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.233 An accountable entity that contravenes its obligations under the Financial Accountability Regime may be subject to a civil penalty. [Section 80 to the Financial Accountability Regime Bill 2022] 1.234 The maximum penalty for a body corporate, including an accountable entity, is calculated using a formula where the maximum penalty is at least 50,000 penalty units. The maximum penalty may be greater depending on the benefit derived or detriment avoided by the entity, and the entity's annual turnover. [Section 83(1) and (2) to the Financial Accountability Regime Bill 2022] 1.235 The maximum penalty for a person other than a body corporate, including an accountable person, is calculated using a formula where the maximum penalty is at least 5,000 penalty units. The maximum penalty may be greater depending on the benefit derived or detriment avoided by the person. [Section 83(1) and (3) to the Financial Accountability Regime Bill 2022] 1.236 A person can face a civil penalty if they assist another person to contravene a civil penalty provision under the Financial Accountability Regime. An example of such an ancillary contravention is an accountable person aiding an accountable entity to contravene its accountability obligations. [Section 81 to the Financial Accountability Regime Bill 2022] 1.237 The civil penalties in the Financial Accountability Regime are consistent with some of the existing relevant legislative regimes, including the Corporations Act, Insurance Contracts Act 1984, Australian Securities and Investments Commission Act 2001, and The Credit Act, and are comparable to those in the Banking Executive Accountability Regime. 1.238 The Regulator has the power to commence civil penalty proceedings in the Federal Court. Civil penalty provisions will be enforced under Part 4 of the Regulatory Powers (Standard Provisions) Act 2014, with modifications to provide for the maximum penalties set out above, and to ensure that additional matters relevant to the Financial Accountability Regime are taken into account by a court in determining the appropriate penalty. [Sections 82 and 83 to the Financial Accountability Regime Bill 2022] Offences 1.239 The Financial Accountability Regime also provides for offences relating to non-compliance with an investigation, request for information, or directions made by the Regulator, the appointment of disqualified accountable persons, and legal professional privilege. 1.240 Most of the offence provisions in the Financial Accountability Regime Bill 2022 replicate existing offences in the Banking Act 1959 that apply in relation to the Banking Executive Accountability Regime. It is appropriate to maintain the treatment of this conduct as a criminal offence to provide 47

Financial Accountability Regime continuity between the regimes, and due to the serious nature of the wrongdoing involved (see Chapter 2 of the Guide to Framing Commonwealth Offences). The strong deterrent effect of a criminal sanction is necessary for the Financial Accountability Regime because of the central role that directors and senior executives of entities operating in the Australian financial system play in the Australian economy. [Sections 44 to 53, 63, 66, and 68 to the Financial Accountability Regime Bill 2022] 1.241 This rationale also applies to offences for failure to comply with a condition of a notice which relates to disclosure of information. These offences and their maximum penalties accord with the treatment of failing to comply with a condition of a notice issued by a Regulator under the Banking Act 1959. For consistency, these offence penalties also align with penalties for disclosure of information about a direction that is covered by a secrecy determination of the Regulator. [Sections 68, 92(2) and 94(5) to the Financial Accountability Regime Bill 2022] 1.242 For clarity, the Financial Accountability Regime Bill 2022 applies Chapter 2 of the Criminal Code such that the physical elements of the offence are set out in the conduct provision. [Section 86 to the Financial Accountability Regime Bill 2022] 1.243 Any contravention of an offence provision or a civil penalty provision includes a reference to a contravention of the conduct provision. [Section 87 to the Financial Accountability Regime Bill 2022]. 1.244 Five offences include a custodial sentence as the maximum penalty. These penalties are justified either because of the serious nature of the offence, involving dishonesty or an attempt to compromise regulation of the Financial Accountability Regime, or because of the serious consequences that committing the offence may have on the economy where the offence involves secrecy relating to directions. [Sections 48, 52, 68, 92, and 94 to the Financial Accountability Regime Bill 2022] 1.245 Pecuniary penalties relating to offences in the Financial Accountability Regime Bill 2022 are generally not large, and are suitably proportioned when applied to corporations and individual persons consistent with the Guide to Framing Commonwealth Offences. A court has its usual discretion to order a penalty up to the maximum amount prescribed by the legislation to suit the circumstances of the case. [Sections 44 to 53, 63, 66, and 68 to the Financial Accountability Regime Bill 2022] 1.246 In practice, it is intended that a court would determine which method provides the greatest penalty, and then use discretion to impose an appropriate penalty up to that amount. 48

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Court orders for compliance 1.247 If the Regulator certifies that a person has failed to comply with a requirement of the Financial Accountability Regime, the Federal Court may order that person to comply. [Section 90 to the Financial Accountability Regime Bill 2022] Impact of non-compliance with obligations under the Financial Accountability Regime in relation to other laws Disqualification under other regimes 1.248 Non-compliance with the Financial Accountability Regime may result in consequences under other regimes. 1.249 Schedule 1 to the Financial Sector Reform Bill 2022 makes amendments which disqualify a person from: • being a director, senior manager or auditor of an ADI or an authorised non-operating holding company if they have been convicted of an offence under the Financial Accountability Regime; [Schedule 1, item 29 to the Financial Sector Reform Bill 2022, section 20 to the Banking Act 1959] • being a director or senior manager of a general insurer, an authorised non-operating holding company or a corporate agent if the person has committed an offence under the Financial Accountability Regime; [Schedule 1, item 37 to the Financial Sector Reform Bill 2022, section 25 to the Insurance Act 1973] • being a director, principal executive officer or otherwise act for a life company if the person has committed an offence under the Financial Accountability Regime; and [Schedule 1, item 67 to the Financial Sector Reform Bill 2022, section 245 to the Life Insurance Act 1995] • acting as an officer or an appointed actuary of a private health insurer if the person has committed an offence under the Financial Accountability Regime; and [Schedule 1, items 82 and 83 to the Financial Sector Reform Bill 2022, sections 119 and 120 to the Private Health Insurance (Prudential Supervision) Act 2015] • being a trustee, actuary or auditor of a superannuation entity if the person has contravened obligations under the Financial Accountability Regime. 49

Financial Accountability Regime [Schedule 1, items 87 and 90 to the Financial Sector Reform Bill 2022, sections 126H and 130D to the Superannuation Industry (Supervision) Act 1993] 1.250 A breach of an obligation under the Financial Accountability Regime can also inform decisions of the Regulator under other laws. This includes where the Regulator decides to revoke or refuse to grant a licence, or in relation to winding up companies. 1.251 For instance, Schedule 1 to the Financial Sector Reform Bill 2022 makes necessary amendments to other Acts so that a breach of the Financial Accountability Regime can be used by APRA as the basis to: • revoke the authorisation of an ADI or its authorised non-operating holding company; [Schedule 1, items 21 and 22 to the Financial Sector Reform Bill 2022, sections 9A and 11AB, to the Banking Act 1959] • revoke a general insurer's authorisation or the authorisation of a non- operating holding company of a general insurer; [Schedule 1, items 35 and 36 to the Financial Sector Reform Bill 2022, sections 15 and 21 to the Insurance Act 1973] • refuse to register a life company, or vary or revoke a life company's registration or the registration of a life company's non-operating holding company; and [Schedule 1, items 49 to 51 to the Financial Sector Reform Bill 2022, sections 21, 26 and 28C to the Life Insurance Act 1995] • cancel a private health insurer's registration. [Schedule 1, items 74 and 84 to the Financial Sector Reform Bill 2022, sections 21 and 168 to the Private Health Insurance (Prudential Supervision) Act 2015] 1.252 A breach of the Financial Accountability Regime can also be considered by APRA when: • granting and imposing conditions on RSE licenses, by including the Financial Accountability Regime in the definition of RSE licensee law; and [Schedule 1, item 85 to the Financial Sector Reform Bill 2022, section 10 to the Superannuation Industry (Supervision) Act 1993] • a general insurer is being put under judicial management for failing to comply with certain laws. [Schedule 1, items 45 to 47 to the Financial Sector Reform Bill 2022, sections 62M, 62W and 62ZOY to the Insurance Act 1973] 1.253 The amendments to provisions which allow for the revocations of licences of insurers and superannuation entities apply regardless of whether the relevant breaches occur prior to the commencement of the Financial Sector Reform 50

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Bill 2022. [Schedule 2, items 24 and 26 to 28 to the Financial Sector Reform Bill 2022] Entities in financial distress 1.254 The Financial Sector Reform Bill 2022 also makes amendments to other Acts to ensure the Financial Accountability Regime interacts appropriately with legislative schemes that govern entities in financial distress. 1.255 Specifically, Schedule 1 to the Financial Sector Reform Bill 2022: • ensures proceedings against a body corporate for an offence against the Financial Accountability Regime will not prevent the winding-up of the body corporate and that the regime will still apply while a statutory manager has been appointed under the Banking Act 1959; [Schedule 1, items 23, 24 and 30 to the Financial Sector Reform Bill 2022, sections 15D and 69BA to the Banking Act 1959] • ensures proceedings against a body corporate for an offence against the Financial Accountability Regime will not prevent statutory or judicial management and that the regime will still apply while a statutory or judicial manager has been appointed under the Life Insurance Act 1975; [Schedule 1, items 65, 66 and 68 to the Financial Sector Reform Bill 2022, sections 166, 179AY and 248 to the Life Insurance Act 1995] • ensures that the institution of proceedings against a body corporate under the Financial Accountability Regime does not prevent judicial management or winding-up under the Insurance Act 1973; [Schedule 1, item 48 to the Financial Sector Reform Bill 2022, section 129AA to the Insurance Act 1973] • ensures the appointment of an external or terminating manager of a health benefits fund, does not affect the operation of the Financial Accountability Regime; and [Schedule 1, item 75 to the Financial Sector Reform Bill 2022, section 84 to the Private Health Insurance (Prudential Supervision) Act 2015] • expands the ability of a court to stop the payment of money to protect certain creditors for certain breaches of legislation to include breaches of the Financial Accountability Regime; [Schedule 1, item 93 to the Financial Sector Reform Bill 2022, section 313 to the Superannuation Industry (Supervision) Act 1993] 51

Financial Accountability Regime 1.256 Schedule 1 to the Financial Sector Reform Bill 2022 amends the Financial Sector (Transfer and Restructure) Act 1999 to allow businesses undertaking a restructure because of an order under the Financial Accountability Regime to take advantage of the regulatory relief under that Act. [Schedule 1, item 34 to the Financial Sector Reform Bill 2022, section 36B to the Financial Sector (Transfer and Restructure) Act 1999] Miscellaneous provisions Indemnification and insurance for accountable entities 1.257 A significant related entity must not indemnify an accountable entity against the consequences of breaching the Financial Accountability Regime, or pay insurance premiums insuring the entity against those consequences. This prohibition also applies to a body corporate in the same corporate group as the accountable entity. [Section 97(1) and (4) to the Financial Accountability Regime Bill 2022] 1.258 Any arrangement that purports to indemnify or insure an accountable entity against liability, or to exempt them from liability, contrary to that prohibition is void. [Section 97(3) to the Financial Accountability Regime Bill 2022] 1.259 This prohibition does not apply to legal costs. [Section 97(2) to the Financial Accountability Regime Bill 2022] 1.260 There is no prohibition under the Financial Accountability Regime relating to indemnification of, or payment of insurance premiums relating to, accountable persons. Privilege against self-incrimination and legal professional privilege 1.261 A person cannot refuse to give information or to provide documents on the basis of the privileges against self-incrimination or exposure to a penalty. However, if an individual makes a valid claim to privilege before producing the information, that information is not admissible as evidence against the individual in criminal proceedings, other than proceedings in respect of the falsity of the information. [Section 88 to the Financial Accountability Regime Bill 2022] 1.262 A lawyer can refuse to comply with the requirement to provide information or to produce a document if doing so would breach legal professional privilege. However, this exception does not apply if the person to whom the information relates consents to the lawyer releasing the information. If the lawyer refuses to comply, the lawyer must instead disclose the name of the person to whom (or 52

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 on whose behalf) the privileged communication was made. If a lawyer fails to comply with these requirements, the lawyer commits an offence subject to a maximum penalty of 30 penalty units. [Section 89 to the Financial Accountability Regime Bill 2022] 1.263 These provisions are necessary for the efficient regulation of the Financial Accountability Regime, ensuring that access to information relevant to an investigation is not denied. The approach taken balances the public interest in accountability among vital financial services with protection of individual privileges. To strike the right balance, the abrogation of the privilege against self-incrimination is limited, such that information produced after making a valid claim is not admissible in evidence against the individual in criminal proceedings, and the sharing of such information is limited by the information sharing provisions in the regime and each Regulator's information protection regimes. 1.264 Protections for whistle-blowers under Part 9.4AAA of the Corporations Act will be available in relation to the Financial Accountability Regime. [Schedule 1, item 31 to the Financial Sector Reform Bill 2022; Section 1317AA to the Corporations Act] Liability provisions Conduct of directors, employees and agents 1.265 It may be necessary to establish the state of mind of an individual in proceedings for offences under the Financial Accountability Regime Bill 2022. In these circumstances, it is sufficient to show that an employee or agent of the individual engaged in the relevant conduct and had the relevant state of mind. State of mind includes knowledge, intention, opinion, belief or purpose. [Section 100 to the Financial Accountability Regime Bill 2022] 1.266 The relevant conduct is limited to conduct by an individual's employee or agent within the scope of actual or apparent authority, and will not be attributed to the individual where that individual can establish that they exercised due diligence to avoid the conduct. [Section 100 to the Financial Accountability Regime Bill 2022] 1.267 An individual will not be imprisoned if they are convicted of an offence as a result of conduct or a state of mind being attributed to them under section 100(1)-(2) of the Financial Accountability Regime Bill 2022. [Section 100(3) to the Financial Accountability Regime Bill 2022] 53

Financial Accountability Regime Protection from liability 1.268 Actions and omissions for the purpose of complying with a direction or a secrecy requirement of the Financial Accountability Regime do not attract liability if it was reasonable for the person to have acted or omitted to act. This protection applies to a person who is an employee, agent, officer or senior manager of an accountable entity, or a member of an accountable entity's group, or accountable entity or member of an accountable entity's group. This protection is necessary to, for example, allow an accountable entity and its senior management (or other relevant persons) to promptly and fully comply with a direction given by the Regulator to address prudential risks or non- compliance with obligations. This protection complements protections already available for officers and staff of the Regulators, for instance those involved in issuing the direction and monitoring its implementation. [Section 102 to the Financial Accountability Regime Bill 2022] 1.269 Persons performing functions or duties, or exercising powers, under the Financial Accountability Regime Bill 2022 are also protected from liability if the function or duty is performed, or power exercised in good faith and without negligence. Protection from liability will enable persons who are required to perform functions or exercise powers to do so without being obstructed by the possibility of a continuous stream of repeated challenges to the performance of those functions or duties, or the exercise of those powers when done in good faith and without negligence. [Section 101 to the Financial Accountability Regime Bill 2022; Schedule 1, item 12 to the Financial Sector Reform Bill 2022; section 58 to the Australian Prudential Regulation Authority Act 1998] 1.270 These protections from civil and criminal liability are necessary to support compliance with the Regime and minimise prudential risk. They also support compliance with the Financial Accountability Regime by concentrating enforcement on intentional and malicious contraventions, rather than inadvertent breaches which may arise during a genuine attempt to comply with the Regime. 1.271 The prescribed protections from liability in the Financial Accountability Regime are intended to work alongside each other and not to limit the operation of each other, or that of section 58 of the Australian Prudential Regulation Authority Act 1998 or section 246 of the Australian Securities and Investments Commission Act 2001. [Section 103 to the Financial Accountability Regime Bill 2022] Merits review of decisions made by the Regulator 1.272 Certain decisions of the Regulator are subject to merits review. Reviewable decisions, and the persons affected by each type of decision, are listed in the table in section 91 of the Financial Accountability Regime Bill 2022. Such 54

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 decisions are described throughout this explanatory memorandum where the substantive provisions are explained. [Section 91 to the Financial Accountability Regime Bill 2022] 1.273 Where a decision is reviewable, the Regulator must give all persons affected by the decision the reasons for the decision and information about the person's review rights. [Section 92(1) to the Financial Accountability Regime Bill 2022] 1.274 To seek review, a person affected by a reviewable decision may first apply for the Regulator that made the original decision to reconsider the decision. The Regulator must reconsider the decision within 60 days and notify the applicant of the outcome by written notice. If the Regulator does not notify the applicant in that time, the decision is taken to be affirmed. [Sections 93 and 94 to the Financial Accountability Regime Bill 2022] 1.275 A notice to an affected person of a reviewable decision, or of a reconsideration decision, may contain conditions relating to disclosure of information about the reasons for the decision. For example, the Regulator may include a non- disclosure condition in a notice relating to a decision about a direction. 1.276 It is an offence to not comply with a condition in a notice that relates to disclosure. The maximum penalty for not complying with a notice condition is two years imprisonment, aligning with the penalty for disclosure of information about a direction that is subject to secrecy arrangements in section 68 of the Financial Accountability Regime Bill 2022, and accords with the treatment of failing to comply with a condition of a notice issued by APRA in the Banking Act 1959. [Sections 92(2) and 94(5) to the Financial Accountability Regime Bill 2022] 1.277 However, a person may disclose information for the purpose of seeking administrative review of, or obtaining legal advice about, a direction covered by a secrecy provision without committing an offence. [Sections 96 to the Financial Accountability Regime Bill 2022] 1.278 Following internal reconsideration of the decision, a person affected by the decision may seek review of the reconsidered decision by the Administrative Appeals Tribunal. A review by the Tribunal is conducted in accordance with the Administrative Appeals Tribunal Act 1975. [Section 95 to the Financial Accountability Regime Bill 2022] 1.279 Certain decisions of the Minister and of the Regulator are not subject to merits review, consistent with the Administrative Review Council's publication "What Decisions Should be Subject to Merits Review?". 1.280 Decisions which are legislation-like in character, and decisions which are procedural or preliminary as they precede a substantive decision, are not suitable for administrative review. 55

Financial Accountability Regime 1.281 Likewise, other decisions are not reviewable where the benefits of not providing administrative review outweigh the objectives of providing it. This applies to decisions of the Regulator and the Minister that are made in favour of the affected person by reducing the scope of their responsibilities or by providing flexibility or an exemption from compliance with the Financial Accountability Regime. In addition, challenges to the Minister's decision not to exempt an accountable entity may undermine public and industry confidence in the prudential and financial system and create financial uncertainty. If requested, the Minister must provide reasons for the decision, as required by section 13 of the Administrative Decisions (Judicial Review) Act 1977. [Sections 11(2) and 16(2) to the Financial Accountability Regime Bill 2022] Rule-making powers 1.282 The Minister may make rules, known as the Minister rules, prescribing matters under the Financial Accountability Regime Bill 2022. The Minister rules may cover matters required or permitted by that Bill to be prescribed by the Minister rules, as well as anything necessary or convenient for carrying out or giving effect to that Bill. [Section 104 to the Financial Accountability Regime Bill 2022] 1.283 The Regulator may also make rules, known as the Regulator rules, prescribing matters that are required, permitted, necessary or convenient to prescribe by such rules under the Financial Accountability Regime Bill 2022. [Section 105 to the Financial Accountability Regime Bill 2022] 1.284 The Minister rules and the Regulator rules may not create an offence or civil penalty, provide certain enforcement powers, impose a tax, or directly amend the primary law. The rules are legislative instruments and will therefore be subject to disallowance and appropriate parliamentary scrutiny. [Section 104(2) and 105(2) to the Financial Accountability Regime Bill 2022] Application of the Financial Accountability Regime 1.285 The Financial Accountability Regime applies within Australia and its external territories, capturing conduct (including that of the Crown) that occurs or has an impact within Australia's jurisdiction. This means the Regulator's powers can be applied to entities and persons within Australia in relation to conduct which occurs within Australia, as well as conduct which occurs offshore and has impacts within Australia. [Sections 5 to 7 to the Financial Accountability Regime Bill 2022] 1.286 For example, in relation to offshore conduct, the Regulator could register or disqualify an accountable person who is a foreign citizen based overseas. The Regulator could also take enforcement action towards an Australian accountable entity in relation to the conduct of its offshore accountable person 56

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 or significant related entity, in order to establish and address a contravention of that accountable entity's obligations or a risk to its prudential standing or prudential reputation - such as investigating the accountable entity and giving it a direction to comply with the Financial Accountability Regime or reallocate responsibilities of an accountable person. 1.287 The Regulator can administer and enforce the Financial Accountability Regime within Australia. While the regime binds the Crown, it does not render the Crown liable for an offence. [Sections 5 to 7 to the Financial Accountability Regime Bill 2022] Other miscellaneous provisions 1.288 APRA and ASIC must include information about investigations conducted under the Financial Accountability Regime in their respective annual reports from the 2023-24 financial year onwards. The information each regulator provides should deal with its own investigations and joint investigations, but need not cover investigations conducted solely by the other regulator. [Schedule 1, item 13 and Schedule 2, item 32 to the Financial Sector Reform Bill 2022, section 59 to the Australian Prudential Regulations Authority Act 1998; Schedule 1, items 18 and 20 to the Financial Sector Reform Bill 2022, sections 136, 340 and 341 to the Australian Securities and Investments Commission Act 2001] 1.289 However, APRA and ASIC are not authorised to disclose information about the affairs of a particular person as part of the information included in their annual reports. [Schedule 1, item 14 to the Financial Sector Reform Bill 2022, section 59 of the Australian Prudential Regulation Authority Act 1998; Schedule 1, item 19 to the Financial Sector Reform Bill 2022, section 136 to the Australian Securities and Investments Commission Act 2001] 1.290 The Financial Accountability Regime Bill 2022 does not have the effect of creating a cause of action that would not have existed without it being enacted. [Section 98 to the Financial Accountability Regime Bill 2022] 1.291 The Commonwealth is liable to pay compensation if the operation of the Financial Accountability Regime results in an acquisition of property otherwise than on just terms, including the transition from the Banking Executive Accountability Regime. [Section 99 to the Financial Accountability Regime Bill 2022 and Schedule 2, item 3 to the Financial Sector Reform Bill 2022] 1.292 Schedule 2 to the Financial Sector Reform Bill 2022 creates a series of definitions to aid in the transitional arrangements and clarifies it does not limit 57

Financial Accountability Regime the application of the Acts Interpretations Act 1901. [Schedule 2, items 1 and 2 to the Financial Sector Reform Bill 2022] 1.293 Fees, charges or penalties paid to APRA under the Financial Accountability Regime are not credited to APRA's Special Account. [Schedule 1, item 4 to the Financial Sector Reform Bill 2022, section 53 to the Australian Prudential Regulation Authority Act 1998] 1.294 Simplified outlines of the key aspects of the Financial Accountability Regime are provided throughout the Financial Accountability Regime Bill 2022 to assist readers. [Section 4, 14 and 35 to the Financial Accountability Regime Bill 2022] Commencement, application, and transitional provisions 1.295 The Financial Accountability Regime Bill 2022 commences on the day after Royal Assent. [Section 2(1) to the Financial Accountability Regime Bill 2022] 1.296 Part 1 of Schedule 1 and Schedule 2 to the Financial Sector Reform Bill 2022 commence at the same time as the Financial Accountability Regime Bill 2022. Part 2 of Schedule 1 to the Financial Sector Reform Bill 2022 commences on the date the Regime begins to apply to the banking industry, six months after the commencement of the Financial Accountability Regime Bill 2022. [Section 2 to the Financial Sector Reform Bill 2022] 1.297 Obligations under the Financial Accountability Regime will not apply to accountable entities immediately after that date of commencement. Instead, the Financial Sector Reform Bill 2022 provides for a staggered application of the obligations under the Financial Accountability Regime to the different industries in the financial system. 1.298 The Financial Accountability Regime will first apply to the banking industry (ADIs and their authorised non-operating holding companies). Entities in the banking industry are currently subject to the obligations under the Banking Executive Accountability Regime. The Financial Sector Reform Bill 2022 therefore provides for specific transitional arrangements so that these entities can be transitioned from the Banking Executive Accountability Regime to the Financial Accountability Regime. 1.299 The Financial Accountability Regime Bill 2022 provides for a deferred application of the Financial Accountability Regime to the insurance and superannuation industries so that they have sufficient time to adjust their systems and processes before they are subject to the obligations under the regime. 58

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Transitional arrangements for the banking industry 1.300 The majority of the obligations under the Financial Accountability Regime will apply to the banking industry six months after the Financial Accountability Regime Bill 2022 commences. [Section 9(2) to the Financial Accountability Regime Bill 2022] 1.301 Once the Financial Accountability Regime starts applying to the banking industry, ADIs and their authorised non-operating holding companies will become accountable entities and the Banking Executive Accountability Regime will be repealed. [Schedule 1, Part 2 to the Financial Sector Reform Bill 2022, items 94 - 107] 1.302 Accountability statements provided to APRA under the Banking Executive Accountability Regime will automatically transition to become accountability statements under the Financial Accountability Regime. [Schedule 2, item 13 to the Financial Sector Reform Bill 2022] 1.303 APRA and ASIC may jointly make rules prescribing transitional arrangements under the Financial Sector Reform Bill 2022. [Schedule 2, item 34 to the Financial Sector Reform Bill 2022] Transitioning of accountable persons 1.304 Accountable persons of entities in the banking industry will automatically have their registration transitioned from the Banking Executive Accountability Regime to the Financial Accountability Regime. This only applies where the person will continue to be an accountable person under the Financial Accountability Regime. While re-registration of accountable persons is not necessary, the transition from the Banking Executive Accountability Regime to the Financial Accountability Regime would most likely result in material changes to the details of the responsibilities of those accountable persons and the Regulator must be notified of any such changes. [Schedule 2, items 4 and 13 to the Financial Sector Reform Bill 2022] 1.305 Any applications to register accountable persons under the Banking Executive Accountability Regime that are pending at the time the Financial Accountability Regime commences, will be considered to be applications for registration under the Financial Accountability Regime. [Schedule 2, item 6 to the Financial Sector Reform Bill 2022] 1.306 A person who became an accountable person under the Banking Executive Accountability Regime on a temporary basis (i.e. due to an unexpected vacancy or acting for a short period) will be taken to be a new temporary accountable person when the Financial Accountability Regime starts to apply 59

Financial Accountability Regime to the banking industry. [Schedule 2, item 7 to the Financial Sector Reform Bill 2022] 1.307 Entities can register new accountable persons in the 30 days prior to the Financial Accountability Regime applying to the banking industry. [Schedule 2, item 8 to the Financial Sector Reform Bill 2022] Deferred remuneration 1.308 The Financial Accountability Regime deferred remuneration obligations for the banking industry will apply when the decision to provide remuneration occurs in first financial year that begins six months after the Financial Accountability Regime applies to the banking industry. [Schedule 2, item 11 to the Financial Sector Reform Bill 2022] 1.309 Remuneration that was decided to be provided to an accountable person before the first financial year starting six months after the Financial Accountability Regime applies to the banking industry will still be subject to the deferred remuneration rules under the Banking Executive Accountability Regime. [Schedule 2, item 10 to the Financial Sector Reform Bill 2022] 1.310 The deferred remuneration obligations under the Banking Executive Accountability Regime will also continue to apply despite the repeal of the Banking Executive Accountability Regime to accountable persons who do not transition to Financial Accountability Regime until the period for the deferral finishes. [Schedule 2, item 12 to the Financial Sector Reform Bill 2022] Continuing application of the Banking Executive Accountability Regime 1.311 The Banking Executive Accountability Regime will apply to the banking industry before the application of the Financial Accountability Regime. [Schedule 2, item 18 to the Financial Sector Reform Bill 2022] 1.312 The Banking Executive Accountability Regime will be repealed once the Financial Accountability Regime starts applying to the Banking industry. [Schedule 1, Part 2 to the Financial Sector Reform Bill 2022] 1.313 However, some obligations under the Banking Executive Accountability Regime will continue to apply to the banking industry after the application of the Financial Accountability Regime to enable the effective transition from the Banking Executive Accountability Regime. 1.314 This means that: • APRA must still be notified of relevant changes in an accountability statement or an accountability map, or of a notification event, under 60

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 the Banking Executive Accountability Regime; [Schedule 2, item 14 to the Financial Sector Reform Bill 2022] • directions to reallocate responsibilities given under the Banking Executive Accountability Regime will continue to have force as directions under the Financial Accountability Regime; [Schedule 2, item 15 to the Financial Sector Reform Bill 2022] • directions for non-compliance given under the Banking Executive Accountability Regime will continue to have force, despite the repeal of the Banking Executive Accountability Regime; [Schedule 2, item 19 to the Financial Sector Reform Bill 2022] • enforceable undertakings and injunctions under the Banking Executive Accountability Regime will continue to have force, despite the repeal of the Banking Executive Accountability Regime; and [Schedule 2, item 21 to the Financial Sector Reform Bill 2022] • APRA will continue to be able to exercise its powers under the Banking Executive Accountability Regime to investigate non- compliance in the same manner and subject to the same obligations as before the application of the Financial Accountability Regime (including secrecy obligations). [Schedule 2, item 29 to the Financial Sector Reform Bill 2022] 1.315 The Financial Accountability Regime can be used to take action in relation to breaches of the Banking Executive Accountability Regime. Specifically, under the Financial Accountability Regime: • a non-compliance direction may be made in relation to breaches of the Banking Executive Accountability Regime; [Schedule 2, item 16 to the Financial Sector Reform Bill 2022] • an accountable person may be disqualified in relation to breaches under the Banking Executive Accountability Regime; [Schedule 2, item 9 to the Financial Sector Reform Bill 2022] • any accountable person disqualified under the Banking Executive Accountability Regime will continue to be disqualified under the Financial Accountability Regime on similar terms; and [Schedule 2, item 5 to the Financial Sector Reform Bill 2022] • the authority of an ADI may be revoked in relation to breaches of the Banking Executive Accountability Regime, regardless of whether the breach was before or after the application of the Financial Accountability Regime to the ADIs. [Schedule 2, item 17 to the Financial Sector Reform Bill 2022] 61

Financial Accountability Regime 1.316 Information collected under the Banking Executive Accountability Regime can be used to investigate breaches under the Financial Accountability Regime. This can occur regardless of whether the relevant breach occurred before or after the commencement of the Financial Accountability Regime. However, the restrictions on sharing information between APRA and ASIC in relation to such information brought in as part of the Financial Accountability Regime will apply to that information. [Schedule 2, items 29, 30, 31 and 33 to the Financial Sector Reform Bill 2022] 1.317 Decisions made under the Banking Executive Accountability Regime can continue to be reviewed under the Banking Executive Accountability Regime, according to the existing review procedures. [Schedule 2, item 20 to the Financial Sector Reform Bill 2022] 1.318 Schedule 1 to the Financial Sector Reform Bill 2022 makes a consequential amendment to the Credit Act. Currently the Credit Act relies on the definition of large ADI under the Banking Act 1959. As this definition is repealed along with the Banking Executive Accountability Regime, Schedule 1 to the Financial Sector Reform Bill 2022 introduces an instrument making power into the Credit Act which allows a Minister to define a large ADI for the purpose of that Act. [Schedule 1, items 69 and 70 to the Financial Sector Reform Bill 2022, section 5 to the National Consumer Protection Act 2009] Transitional arrangements for insurance and superannuation industries 1.319 The Financial Accountability Regime will apply to the insurance and superannuation industries from 18 months after commencement of the Financial Accountability Regime Bill 2022. The Financial Accountability Regime will apply in full to the accountable entities in the insurance and superannuation industries from that date. [Section 9(4) to the Financial Accountability Regime Bill 2022] 1.320 This will include the deferred remuneration obligations, which will apply to remuneration that was determined after the start of the first financial year after the Financial Accountability Regime applies to the insurance and superannuation industries. [Schedule 2, item 23 to the Financial Sector Reform Bill 2022] 1.321 Accountable entities in the insurance and superannuation industries can apply to register accountable persons under the Financial Accountability Regime 30 days before the Financial Accountability Regime applies to them. [Schedule 2, item 22 to the Financial Sector Reform Bill 2022] 62

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 1.322 The amendments to the Life Insurance Act 1995 apply in relation to pending applications of life companies to be registered under that Act, when the Financial Accountability Regime applies. [Schedule 2, item 25 to the Financial Sector Reform Bill 2022] 63

Financial services compensation scheme of last resort Table of Contents: Outline of chapter ................................................................................ 65 Context of amendments ....................................................................... 65 Summary of new law............................................................................ 66 Detailed explanation of new law .......................................................... 67 Establishment of the CSLR operator ............................................. 67 Minister may authorise the CSLR operator ................................... 67 Mandatory requirements for the CSLR operator ........................... 68 Compensation payments under the scheme ................................. 69 AFCA Fees.................................................................................... 75 Powers of the CSLR operator ....................................................... 76 Powers of the Minister ................................................................... 79 Regulating the CSLR operator ...................................................... 80 Financial matters ........................................................................... 81 Other Amendments ....................................................................... 84 Outline of chapter 2.1 This chapter describes the establishment and operation of the CSLR. All legislative references in this chapter are to the Corporations Act, unless otherwise stated. Context of amendments 2.2 The Australian financial system is central to the Australian economy and plays an essential role in promoting economic growth and stability. A well- functioning framework for resolving disputes within the financial system is 65

Financial services compensation scheme of last resort necessary to safeguard consumer trust and confidence, and to ensure the system continues to meet the needs of its users. 2.3 The first comprehensive review of the financial system external dispute resolution framework was commissioned in April 2016. The Ramsay Review was undertaken by an expert panel chaired by Professor Ian Ramsay and recommended a new financial system dispute resolution framework. AFCA was established in response, and it commenced operations on 1 November 2018. 2.4 AFCA provides independent external dispute resolution and deals with consumer complaints against financial firms. AFCA is a one-stop shop for most complaints concerning insurance, banking, credit provision and superannuation; and provides an alternative to going to court. AFCA is empowered by the law to make binding determinations requiring financial firms to compensate consumers. 2.5 In February 2017, the expert panel was asked to make recommendations on the establishment, merits and possible design of a financial services CSLR. A Supplementary Final Report was provided on 6 September 2017. 2.6 The Supplementary Final Report to the Ramsay Review observed that existing arrangements were not adequate to ensure that users of the financial system were compensated for losses where an external dispute resolution scheme, tribunal or court makes a finding of misconduct and a subsequent award in favour of the consumer. This issue is compounded in situations of insolvency as consumers who are awarded damages by a court, or who are entitled to a payment following a determination from AFCA, are ranked as unsecured creditors. 2.7 As such, the Supplementary Final Report to the Ramsay Review recommended that a CSLR be established in Australia. 2.8 The Financial Services Royal Commission Final Report later recommended that the three principal recommendations made in the Supplementary Final Report should be carried into effect. Summary of new law 2.9 The objective of the CSLR is to provide compensation to eligible consumers where they have an AFCA determination in their favour and where the relevant financial firm has not paid the consumer in accordance with the determination. 2.10 The Minister may authorise a person to be the operator of the CSLR if the Minister is satisfied the mandatory requirements will be met. This includes that the operator is a company limited by guarantee and not operated for profit. 2.11 Where AFCA has made a determination under which a complainant is owed an amount from a financial firm and the financial firm has failed to pay the 66

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 complainant, the complainant may apply to the operator of the CSLR for payment. If the eligibility criteria are met, the operator of the CSLR must compensate the complainant, up to $150,000. Detailed explanation of new law Establishment of the CSLR operator 2.12 Division 1 of new Part 7.10B of the Corporations Act establishes the CSLR [Schedule 3, item 3, section 1059 to the Financial Sector Reform Bill 2022] 2.13 Like the arrangements for the establishment and conduct of AFCA, the operator of the CSLR must be a not-for-profit company limited by guarantee that is authorised by the Minister to operate the scheme. Minister may authorise the CSLR operator 2.14 The Minister may authorise a person, which must be a company, to operate the CSLR. Once authorised, the operator of the CSLR will be known as the CSLR operator. The Minister may also vary or revoke the authorisation and impose conditions on the authorisation. 2.15 It is appropriate for the Minister to be empowered to authorise the operator of the CSLR as it will enable the Minister to consider the specific needs of the scheme and authorise an operator that is best placed to administer the scheme effectively and responsibly. 2.16 Importantly, the Minister's power is limited by mandatory requirements provided in the Corporations Act. The Minister must be satisfied that the company to be authorised will meet the mandatory requirements. [Schedule 3, item 3, section 1060 to the Financial Sector Reform Bill 2022] 2.17 The Minister's authorisation, including a variation or revocation to an authorisation, must be made by notifiable instrument. The use of a notifiable instrument as the Minister's authorisation (including a variation or revocation of such authorisation) is administrative in character and does not amend the operation of the legislation. The authorisation may include conditions on the authorisation of the company. The requirement that the authorisation is made by notifiable instrument enables public notification and transparency in relation to the Minister's decisions. [Schedule 3, item 33, section 1060 to the Financial Sector Reform Bill 2022] 67

Financial services compensation scheme of last resort Mandatory requirements for the CSLR operator 2.18 The mandatory requirements are grouped into four categories: organisational, operator, operational, and compliance. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] Organisational requirement 2.19 The organisational requirement is that the CSLR operator must not charge a fee to any applicant seeking compensation, nor require the applicant to pay a fee or charge to any other entity if it is in relation to their application. This reflects the policy intention that the scheme is free for consumers. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] Operator requirements 2.20 The operator requirements are aimed at ensuring that the CSLR operator is a company limited by guarantee, operates as a not-for-profit, and maintains amounts paid to it for the purposes of the scheme. 2.21 The operator requirements also impose requirements for the operator's board. Particularly, the operator's constitution must provide that the Chair of the board is an independent member appointed to the board by the Minister. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] 2.22 The operator's constitution must also provide that, within six months after the Minister authorises the company as the operator, the board must include as a member: • a person who is on the AFCA board; and • a person who is a fellow of the Institute of Actuaries of Australia and has at least five years' experience in actuarial analysis. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] 2.23 The Minister's appointment of an independent member must be made by written instrument. Consistent with the Legislation (Exemptions and Other Matters) Regulation 2015 the instrument of appointment is not a legislative instrument. [Schedule 3, item 3, section 1061 to the Financial Sector Reform Bill 2022] 2.24 The requirement for an AFCA board member to be a CSLR board member reflects the need for the CSLR operator to have a close and effective working relationship with AFCA. The requirement for an actuarial expert to also be a board member recognises the importance of this discipline to the operator in relation to its calculation of amounts to be levied against financial services entities (see Chapter 2 of this Explanatory Memorandum). 68

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Operational requirements 2.25 The operational requirements include that the CSLR operator operates in accordance with its constitution and the law. The operator must manage its money in a manner that is efficient, effective, and economical. These terms are intended to take their natural meaning having regard to the context. For example, efficient operation involves achieving appropriate value for monies spent, effective operation involves an assessment of the extent to which spending achieves intended outcomes or results, and economical operation generally relates to minimising cost. The operator is also required to have the appropriate expertise to carry out its central functions of assessing claims for compensation and estimating scheme costs. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] Compliance requirements 2.26 The compliance requirements are that any conditions specified by the Minister in the authorisation, as well as any other requirements provided for in regulations, are complied with by the CSLR operator. [Schedule 3, item 3, section 1062 to the Financial Sector Reform Bill 2022] Compensation payments under the scheme 2.27 Division 2 of new Part 7.10B of the Corporations Act provides for payment of compensation under the scheme, including provision for making an application, eligibility for compensation, and the amount of compensation to be paid. 2.28 The operator of the CSLR cannot consider the merits or facts of a dispute between a consumer and an AFCA member underlying an AFCA determination. Rather, the CSLR operator is required to make a compensation payment to the consumer if conditions prescribed in the Corporations Act are met. Generally, the CSLR operator must make a payment of compensation to a consumer if: • the consumer is eligible for compensation, including that a relevant AFCA determination has been made in respect of the consumer; • the consumer makes an application under the CSLR; and • the consumer has accepted the offer of compensation. 2.29 The process for the payment of compensation, including eligibility and the amount of compensation to be paid, is discussed below. 69

Financial services compensation scheme of last resort Eligibility for a compensation payment 2.30 Broadly, a consumer is eligible for compensation under the CSLR if: • a relevant AFCA determination requires an amount to be paid by an entity to the consumer - in this instance, the relevant entity at the time of the determination being made may not be a legal person due to deregistration and if so, is no longer a member of the AFCA scheme; • the consumer notifies AFCA that the amount has not been paid within 12 months after the day the determination was made, or any such longer period as AFCA agrees; • if applicable, AFCA has taken appropriate steps to require the amount to be paid and, after these steps are taken, the consumer remains unpaid; • the consumer is not eligible to receive payment under another statutory scheme; and • the CSLR operator reasonably believes that the relevant entity that is or was an AFCA member, having regard to their financial position, is unlikely to fully pay the amount. [Schedule 3, item 3, section 1064 to the Financial Sector Reform Bill 2022] 2.31 The discretion for AFCA to allow a longer period ensures that where the person was unable to notify AFCA within 12 months of the day the determination was made, AFCA has the discretion to extend the period. For example, it would be reasonable for AFCA to provide a longer period for relevant AFCA determinations that were made before the CSLR commences. Appropriate steps by AFCA 2.32 Compensation under the CSLR is intended to be a last resort only. To reflect this, compensation is only payable after AFCA takes steps to require the amount determined by AFCA to be paid by an AFCA member to the consumer. However, AFCA is not expected to undertake any steps if the relevant entity has ceased to be a member of the AFCA scheme. 2.33 Where relevant, the amendments set out a number of steps which AFCA might consider appropriate in the circumstances to bring about payment from the financial services entity. 2.34 These steps involve: • seeking an explanation from the AFCA member; • explaining to the AFCA member the consequences of failing to comply with the determination, including cancellation of an Australian Financial Services Licence or Australian Credit Licence; 70

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • discussing with the AFCA member a reasonable payment plan; and • if the entity has entered into a form of external administration, a step may be for AFCA to assess whether the entity will pay the consumer. [Schedule 3, item 3, section 1064 to the Financial Sector Reform Bill 2022] Relevant AFCA determination 2.35 Compensation under the CSLR is limited to compensation for a relevant AFCA determination made in respect of a consumer. A relevant AFCA determination: • relates to a complaint made by the consumer against a financial services entity which, at the time the complaint was made, was an AFCA member - in this instance, the relevant entity is a person at the time the complaint is made; • requires the entity to pay an amount to the consumer and the determination is accepted by the person; and • is about a particular kind of product or service (see below). [Schedule 3, item 3, section 1065 to the Financial Sector Reform Bill 2022] 2.36 To be a relevant AFCA determination, the determination must relate to one or more of the following products or services: • engaging in credit activity (within the meaning of the Credit Act) as a credit provider or other than as a credit provider. • providing financial product advice that is personal advice provided to a person as a retail client about one or more products that include at least one relevant financial product; • dealing in securities for a person as a retail client, other than issuing securities. [Schedule 3, item 3, section 1065 to the Financial Sector Reform Bill 2022] 2.37 The term credit provider has the same meaning as in any part of the Credit Act other than Part 3-2CA). [Schedule 3, item 3, section 1065 to the Financial Sector Reform Bill 2022] 2.38 A relevant AFCA determination may relate to an unpaid determination made before or after the commencement of the CSLR. This means that compensation under the CSLR is available in relation to relevant AFCA determinations since the beginning of the AFCA scheme on 1 November 2018. 71

Financial services compensation scheme of last resort Applying for a compensation payment 2.39 The CSLR operator does not monitor relevant AFCA determinations to ascertain whether payments are made by the AFCA member to the consumer and, consequently, whether compensation is available under the CSLR. Instead, for compensation to be provided, the consumer must make an application to the CSLR operator. 2.40 A consumer may make an application, in the approved form, to the CSLR operator for compensation for a relevant AFCA determination. [Schedule 3, item 3, section 1066 to the Financial Sector Reform Bill 2022] 2.41 An application for compensation under the CSLR must contain the information required by the approved form. Where relevant, the consumer must declare any amounts they received in relation to their claim - for example, as an unsecured creditor in an insolvency process. [Schedule 3, item 3, section 1066 to the Financial Sector Reform Bill 2022] 2.42 The application must be made within 12 months from the day the determination was made or such longer period as AFCA agrees with the person. The discretion to provide a longer period is beneficial to consumers and will allow the CSLR operator to provide consumers with a longer period to claim where doing so is reasonable (for example where health or other extenuating circumstances prevented the consumer from lodging an application within 12 months). 2.43 A consumer may amend their application at any time before the CSLR operator makes an offer of compensation, and may withdraw their application at any time before the person accepts an offer of compensation. [Schedule 3, item 3, section 1066 to the Financial Sector Reform Bill 2022] Amount of compensation payments 2.44 The maximum amount of compensation that may be offered to the consumer under the CSLR is limited to the compensation cap of $150,000. [Schedule 3, item 3, section 1067 to the Financial Sector Reform Bill 2022] 2.45 If the AFCA determination is for a greater amount, the amount in excess of $150,000 is not compensable under the CSLR but remains a debt owed to the consumer which can be pursued outside of the CSLR. 2.46 The amount offered to the consumer under the CSLR must reflect any amounts received by the consumer as a creditor in an external administration process where the payment relates to the matters covered by the determination. This is intended to include scenarios where, for example, the AFCA member company is being liquidated and the liquidator pays the consumer a portion of the amount they were owed by the company under the relevant AFCA determination. The legislative note confirms that the CSLR operator cannot add any discretionary amounts in addition to that which appears in the relevant 72

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 AFCA determination, for example, amounts of interest at the discretion of the operator. [Schedule 3, item 3, section 1067 to the Financial Sector Reform Bill 2022] 2.47 Similarly, the amount offered to the consumer under the CSLR must reflect any amounts to which the consumer is eligible under a statutory compensation scheme where the eligibility for compensation relates to the matters covered by the determination. [Schedule 3, item 3, section 1067 to the Financial Sector Reform Bill 2022] 2.48 Also, the amount offered to the consumer under the CSLR must reflect any amounts that have already been paid to the consumer, if the payments are of a kind prescribed by the regulations. 2.49 The regulation power is necessary and appropriate because it is not possible to prescribe all amounts that should be taken into account when determining the amount payable in primary law. Rather it is essential that the regulations can prescribe additional criteria to allow the scheme to adapt to changing circumstances to ensure the scheme operates as a CSLR. The regulations are subject to disallowance and therefore subject to additional parliamentary scrutiny. Offer, acceptance, notification and payment 2.50 If a person is eligible for compensation for a relevant AFCA determination, the CSLR operator must make a written offer to the person. [Schedule 3, item 3, section 1068 to the Financial Sector Reform Bill 2022] 2.51 The offer must include an explanation of the CSLR operator's right of subrogation if compensation is paid (see "Subrogation of rights" below). [Schedule 3, item 3, section 1068 to the Financial Sector Reform Bill 2022] 2.52 At any time before the consumer accepts the offer, the operator may vary or revoke the offer. This is limited to circumstances where the operator reasonably believes that: • there is an error relating to the offer; • there is fraud relating to the offer; • there is a change in circumstances affecting the person's eligibility for the amount of compensation in the offer or the amount of compensation in the offer; or • other exceptional circumstances exist that justify the variation or revocation. [Schedule 3, item 3, section 1068 to the Financial Sector Reform Bill 2022] 73

Financial services compensation scheme of last resort 2.53 Merits review is not available in relation to the operator's decision to vary or revoke an offer. While the decision involves the operator exercising some form of discretion, the discretion is limited to situations that relate to integrity and proper administration of the scheme. 2.54 The discretion is appropriately limited and does not allow the operator to vary or revoke an offer of compensation for reasons other than those provided in the legislation. 2.55 Exceptional circumstances may include circumstances where the CSLR operator receives additional information that affects the legality of arrangements. For example, for revocation of an offer, an exceptional circumstance might be where an Enduring Power of Attorney arrangement is purported to be in place and the CSLR operator receives information indicating that the applicant does not have the necessary authority to seek the compensation on behalf of the person to whom the compensation is due. This could be due to purported fraud by the applicant or due to the lack of finality of purported arrangements. 2.56 Another circumstance may be where, following an offer of compensation to the consumer, the consumer receives an amount of compensation relating to the determination through another avenue, for example as an unsecured creditor to an insolvency process. In this circumstance, the consumer is no longer eligible for the full amount offered. The CSLR operator may vary the offer, reducing the amount offered to reflect the amount received in the insolvency process. 2.57 Where an offer is varied, the consumer may choose to not accept the offer and may make another application if they are not satisfied with the CSLR operator's decision. 2.58 After the offer is made, the person has 90 days to notify the operator whether they accept the offer. If the consumer does not provide this notification, the person is taken to have withdrawn their application for compensation. If this happens, and the consumer still seeks compensation under the scheme, they will need to make another application. [Schedule 3, item 3, section 1069 to the Financial Sector Reform Bill 2022] 2.59 Where a consumer is not eligible for compensation under the scheme, the operator must notify the consumer and provide reasons why the consumer is not eligible for compensation. [Schedule 3, item 3, section 1068 to the Financial Sector Reform Bill 2022] Subrogation of rights 2.60 When a consumer is paid compensation under the scheme, their rights and remedies against the financial firm that is in external administration are assigned to the CSLR operator to pursue against the firm. The subrogation is limited to the amount of compensation paid by the operator. [Schedule 3, item 3, section 1069A to the Financial Sector Reform Bill 2022] 74

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 2.61 This allows the CSLR operator to take the place of the consumer in relation to any legal rights and remedies the applicant may have against the firm stemming from the AFCA determination. This is intended to allow the CSLR operator to recover, in the external administration of the financial firm, amounts that would otherwise have been payable to the consumer as a creditor of the firm. 2.62 Subrogating rights to the CSLR operator to the extent of the amount compensated under the scheme is also intended to prevent the consumer from receiving both compensation under the scheme and an amount as a creditor of the firm in liquidation, for example. 2.63 Where the compensation paid to the consumer under the CSLR is less than the amount owed to the consumer (for example because the amount owed exceeds the compensation cap of $150,000) the right to the amount in excess of the amount compensated under the CSLR remains with the consumer to pursue against the firm or the external administrator of the firm. [Schedule 3, item 3, section 1069A to the Financial Sector Reform Bill 2022] AFCA Fees 2.64 AFCA incurs costs in assessing complaints and making determinations. Generally, these are paid for by the financial firm against which a complaint has been made. These fees are central to the ongoing operation of AFCA. 2.65 There are instances where the firm does not or is unable to pay AFCA fees, for example where a firm becomes insolvent. For these cases, the CSLR is designed to reimburse AFCA's fees. The reimbursement occurs in relation to fees associated with eligible complaints - regardless of whether the complaint is determined in favour of the complainant or the financial firm. 2.66 The reimbursement of AFCA fees is funded by a levy. Who pays the levy depends on whether the fee is an AFCA accumulated unpaid fee or an AFCA unpaid fee, and whether the AFCA unpaid fee relates to a pre-CSLR complaint. The CSLR levy framework is explained in Chapter 2 of this Explanatory Memorandum. [Schedule 3, items 1 and 3, sections 761A, 1069B and 1069C to the Financial Sector Reform Bill 2022] 2.67 These fees are the sum of fees that were charged to--but never paid by--firms that were subject to a complaint that AFCA has finalised. The fee must relate to a complaint that is within the scope of the CSLR. Similar to enforcing a determination (see "Appropriate steps by AFCA" above), where possible, AFCA is also required to take reasonable steps to recover its fees. 75

Financial services compensation scheme of last resort 2.68 AFCA's accumulated unpaid fees relate to costs incurred by AFCA in relation to relevant AFCA determinations between the commencement of AFCA and the day the Financial Sector Reform Bill 2022 is introduced into the House of Representatives. The cost of these fees is met by a one-off levy on the top ten banking and insurance groups in Australia (see Chapter 3 of this Explanatory Memorandum for more details on this one-off levy). [Schedule 3, item 3, section 1069C to the Financial Sector Reform Bill 2022] 2.69 AFCA's unpaid fees apply to in-scope fees incurred by AFCA following introduction of the Financial Sector Reform Bill 2022 into the House of Representatives and are be funded as part of the annual levy process as outlined in Chapter 3 of this Explanatory Memorandum below. [Schedule 3, item 3, section 1069B to the Financial Sector Reform Bill 2022] Notification and reimbursement of fees 2.70 The recovery of AFCA fees requires AFCA to notify the operator of the CSLR of the relevant sum of AFCA's fees. For accumulated unpaid fees, this is a one-off notification of fees that have accumulated from the commencement of the AFCA scheme up to the day the Financial Sector Reform Bill 2022 is introduced into the House of Representatives. For the ongoing payment of AFCA's unpaid fees, AFCA must notify the CSLR operator on a monthly basis. [Schedule 3, item 2, section 1058B to the Financial Sector Reform Bill 2022] 2.71 As soon as practicable after notification, the CSLR operator must pay to AFCA an amount equal to the fees notified. However, this reimbursement can only commence after the start of the first levy period or a later day prescribed in the regulations. 2.72 It is appropriate for the legislation to allow the regulations to prescribe a later day to ensure that sufficient amounts have been levied under the CSLR levy framework before the operator of the CSLR is obliged to pay amounts to AFCA for unpaid fees. [Schedule 3, items 1 and 3, sections 761A, 1069B and 1069C to the Financial Sector Reform Bill 2022] Powers of the CSLR operator Obtaining information 2.73 The CSLR operator has the power to obtain information that is relevant to an application for compensation. If the operator has a reasonable belief that a person is capable of giving information to the operator that is relevant to a compensation claim, the operator may require the person to give the 76

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 information by writing or produce any documents. [Schedule 3, item 3, section 1069D to the Financial Sector Reform Bill 2022] 2.74 The Corporations Act provides the manner in which information is to be produced, including detail on notice requirements and deadlines, as well as how information gathered in this way may be used by the operator. 2.75 ASIC is not subject to the operator's power to obtain information in this way (though ASIC may share information with the CSLR operator (see "Information sharing"). 2.76 Except for when there is a reasonable excuse, it is an offence for a person to not comply with a notice to provide information given by the CSLR operator. The maximum penalty for failing to provide information is 30 penalty units. [Schedule 3, item 3, section 1069D to the Financial Sector Reform Bill 2022] 2.77 Failing to comply with a notice to provide information given by the CSLR operator is a strict liability offence. [Schedule 3, item 3, section 1069D to the Financial Sector Reform Bill 2022] 2.78 A strict liability offence is appropriate in this circumstance as it is necessary to ensure the integrity of a regulatory regime. Where a party fails to comply with a notice, it can prevent the CSLR from being able to assess claims and provide accurate offers of compensation. This could have a serious detriment for consumers applying for compensation. Further, the failure to provide information could undermine the effectiveness of the CSLR. 2.79 The strict liability offence is intended to reduce non-compliance with the operator's notification and is necessary to bolster the integrity of the CSLR. Strict liability is particularly beneficial to regulators such as ASIC as they need to deal with offences expeditiously to maintain public confidence in the CSLR. 2.80 The strict liability offences in Schedule 3 to the Financial Sector Reform Bill 2022 meet all the conditions listed in the Guide to Framing Commonwealth Offences. The fines for the offences do not exceed 30 penalty units. The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences. 2.81 The defence of 'reasonable excuse' is available for someone who has not complied with a notice to provide information given by the operator. This defence is justified as the various types of legal entities and the complex business arrangements of financial entities make it difficult to predict what valid reasons may exist for being unable to provide the information. The large diversity of complex business arrangements are also why offence-specific defences that are tailored to the circumstances cannot be designed. By including the defence of reasonable excuse, the court can assess the reason for 77

Financial services compensation scheme of last resort non-compliance against the circumstances that exist in a particular case and determine whether the failure to comply with the notice to produce information was justified. 2.82 For these reasons, it is appropriate for a person to be penalised if they fail to comply and for the offence to be a strict liability offence. 2.83 If a person who is, or was, a member of the AFCA scheme does not comply, the CSLR operator must notify ASIC and AFCA. This notification requirement enables these organisations to take action as appropriate. [Schedule 3, item 3, section 1069D to the Financial Sector Reform Bill 2022] Information Sharing 2.84 The CSLR operator's powers include a framework for sharing information between the operator and AFCA. Staff of these entities are authorised for the purposes of the Privacy Act 1988 to use or disclose information for the purposes of the enabling the operation and application of the CSLR. Staff of the CSLR operator are also authorised to share information with ASIC, the Information Commissioner, and the Commissioner of Taxation if the disclosure would assist these entities to perform their functions or exercise their powers. 2.85 Use or disclosure for the purposes of this framework includes, making a record of, disclosing the information, producing the relevant document or permitting access to the document. [Schedule 3, items 2 and 3, sections 1058A and 1069E to the Financial Sector Reform Bill 2022] Reporting by CSLR operator 2.86 If a compensation payment is made, the operator is required to notify ASIC of the details of the financial firm that was the subject of the AFCA determination and details of its failure to pay the determined amount to the consumer. [Schedule 3, item 3, section 1069F to the Financial Sector Reform Bill 2022] 2.87 Also, if the operator becomes aware that the financial firm has entered into external administration, the operator must notify the relevant external administrator the amount of compensation paid. This is intended to allow the administrator to take into account the receipt of compensation by a consumer who might be a creditor in the administration of the firm. [Schedule 3, item 3, section 1069F to the Financial Sector Reform Bill 2022] Publishing reports 2.88 In addition to any reports that the CSLR operator must prepare under the Corporations Act, the operator must prepare a report for each levy period. The 78

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 report must contain the information prescribed by regulations and must be published on the operator's website. [Schedule 3, item 3, section 1069G to the Financial Sector Reform Bill 2022] 2.89 It is necessary and appropriate for the regulations to prescribe particular information to be included in the operator's report as this will ensure that the report contains relevant information and allow the reporting requirements for the scheme to adjust to the operating environment. The regulations will be disallowable and subject to Parliamentary scrutiny. Powers of the Minister 2.90 The CSLR is funded by an industry levy framework, described in detail in Chapter 2 of this Explanatory Memorandum. Generally, the framework involves an annual levy which is subject to a cap on the amount that may be levied against a particular sub-sector. 2.91 If required, a further levy may be imposed which, again, is subject to the sub-sector levy cap. 2.92 However, where the CSLR operator determines that the value of claims in a financial year is set to exceed one or more of the sub-sector levy caps, the operator must notify the Minister. The notification to the Minister must include any information prescribed by the regulations. [Schedule 3, item 3, section 1069F to the Financial Sector Reform Bill 2022] 2.93 This regulation-making power is appropriate in the circumstance as the notification to the Minister might include any other relevant information (e.g. information about the sub-sector with the estimated shortfall, size and number of expected claims, any impact of the revised estimate on the financial system) to assist the Minister in making the determination. 2.94 The notification triggers the Minister's power to make a determination specifying one or more actions to address the estimated shortfall. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 2.95 First, the Minister may determine that particular compensation payments are paid over a number of periods, rather than in a lump sum. This is intended to have the effect of spreading the costs to the CSLR over a longer period, allowing the levy in subsequent levy periods to catch up on the shortfall while still providing the consumer with the amount determined by AFCA in the relevant AFCA determination (up to the compensation cap). [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 2.96 The second and third options relate to imposing a special levy. This is discussed in Chapter 2 of this Explanatory Memorandum. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 79

Financial services compensation scheme of last resort 2.97 The purpose of the determination is to ensure that the scheme can respond to unexpected events that cause the value of claims made, or estimated to be made, to exceed the amounts levied. 2.98 This mechanism enables compensation payments to continue to be made, and not delayed until further amounts can be levied through a subsequent annual levy cycle. 2.99 The Minister's determination must be made by legislative instrument. As a legislative instrument, the determination is subject to disallowance and subject to additional parliamentary scrutiny. 2.100 This also ensures that the CSLR is able to operate with sufficient safeguards within an evolving and dynamic financial system while maintaining its ability to be responsive and tailored to particular unforeseen events. It is not possible to provide such safeguards in primary legislation because it may involve detailed specifications, calculations and formulas based on unexpected events occurring in the financial system. 2.101 Further, the Minister's power to exercise their discretion has been sufficiently constrained with reference to the principles outlined in the Ramsay Review which ensures the scheme is designed to limit reliance on ad-hoc funding through a carefully calibrated levy calculation methodology, and by clearly specifying the circumstances where a Ministerial determination is warranted. Regulating the CSLR operator 2.102 The CSLR operator is regulated by ASIC. ASIC may, by legislative instrument, issue to the CSLR operator regulatory requirements relating to its compliance with the mandatory requirements. [Schedule 3, item 3, section 1069K to the Financial Sector Reform Bill 2022] General Directions to CSLR operator 2.103 ASIC may issue a written notice to the CSLR operator if the operator does not comply with the mandatory requirements that apply to the operator, conditions set by the Minister at the time of authorisation, or other regulatory requirements set by ASIC. [Schedule 3, item 3, section 1069L to the Financial Sector Reform Bill 2022] 2.104 This first notice - a notice of intention to issue a direction - gives the operator a chance to resolve issues before a more formal direction is issued. The notice gives the operator notice of the specific measures that ASIC may require if ASIC subsequently issues a direction. 2.105 If, after a notice of intention to issue a direction, ASIC makes an assessment that the CSLR operator has still not complied with the requirements, ASIC can issue a direction. A direction must be made in writing and specify when the 80

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 operator needs to take action. ASIC may subsequently choose to vary or revoke a direction in writing. 2.106 An ASIC direction is not a legislative instrument. This clarification is merely declaratory of the law as such a direction would not be a legislative instrument within the meaning of section 8 of the Legislation Act 2003. The clarification is intended to assist readers and does not operate as an exemption from the Legislation Act 2003. [Schedule 3, item 3, section 1069L to the Financial Sector Reform Bill 2022] 2.107 It is an offence for the CSLR operator to not comply with an ASIC direction. The maximum penalty for not complying with an ASIC direction is 100 penalty units for an individual and 1,000 penalty units for a company, with penalties applying for each day or part of a day that the offence is committed. Failure to comply may also result in ASIC seeking a court order to compel the operator to comply. [Schedule 3, item 3, sections 1069J, 1069K and 1069L to the Financial Sector Reform Bill 2022] Financial matters Estimate of costs for first levy period 2.108 For the scheme's first levy period, the Commonwealth will provide funding to the CSLR operator to meet the initial estimate of claims, fees, and costs. 2.109 Commonwealth funding of the first year of the scheme does not include AFCA's accumulated unpaid claims and fees. These costs will be met by a one-off levy on the ten largest financial firms during the first levy period. 2.110 To ensure the funding provided by the Commonwealth in the first levy period is consistent with funding requirements in subsequent levy periods, the CSLR operator is required to undertake the standard estimate process having regard to actuarial principles that will apply in later years and notify the Commonwealth of the estimate by way of a notifiable instrument. 2.111 The estimate made separately for each eligible sub-sector must include: • an amount that the operator reasonably believes will be payable as compensation under the scheme for the levy period for the sub-sector (excluding amounts relating to pre-CSLR complaints made before the commencement of the CSLR--amounts related to these complaints are obtained by a one-off levy against the ten largest financial firms which is described in "Levy for unpaid claims, and AFCA's unpaid fees for complaints made to AFCA before accumulation recovery day" in Chapter 3 of this Explanatory Memorandum); 81

Financial services compensation scheme of last resort • the sum of AFCA's unpaid fees expected for each of the months in the first levy period that the operator reasonably believes will be attributable to the sub-sector (other than fees relating to pre-CSLR complaints); • the sum of AFCA's unpaid fees expected for each of the months ending on or after the accumulation recovery day but before the first levy period that the operator reasonably believes will be attributable to the sub-sector (other than fees relating to pre-CSLR complaints); • the capital reserve establishment cost for the first levy period that the operator reasonably believes is attributable to the sub-sector (see "Initial estimate of claims, fees, and costs" in Chapter 3 of this Explanatory Memorandum); and • the operator's expected administrative costs for the first levy period that the operator reasonably believes is attributable to the subsector. [Schedule 3, item 3, section 1069M to the Financial Sector Reform Bill 2022] 2.112 Once the operator determines the initial estimates of claims, fees and costs for the first levy period, the amendments provide that the Commonwealth must pay the CSLR operator an amount equal to the total of these estimates. The payment is expected to be authorised and made as part of the annual appropriations process. 2.113 To ensure transparency and good governance, the amendments further provide for a reconciliation process to occur as soon as practicable after the end of the first levy period. The reconciliation process provides the operator with an opportunity to adjust future estimates regardless of whether a surplus or a deficit is returned. [Schedule 3, item 3, sections 1069N and 1069M to the Financial Sector Reform Bill 2022] 2.114 The operator's role as the estimator of claims, fees and costs is central to the design of the levy framework. It is appropriate for the CSLR operator to make the estimate of the first levy period costs by notifiable instrument as the information in the instrument is an estimation based on actual flows of complaints to AFCA and applications to the CSLR and other fees and costs that have been incurred or are estimated to be incurred. The estimate is derived from the criteria set out in the primary law and is administrative in character. 2.115 The instrument being a notifiable instrument, rather than a legislative instrument, does not constitute an exemption from the requirements of the Legislation Act 2003. As a notifiable instrument, the estimate must be published on the Federal Register of Legislation - this provides public access to the authoritative form of the instrument. 82

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Payment to the CSLR operator 2.116 For the second and subsequent levy periods, the amounts collected by ASIC under the levy framework enter the Consolidated Revenue Fund and, by standing appropriation, are paid to the CSLR operator. The amount appropriated is equal to the amount levied. 2.117 A standing appropriation is justified because the timely administration of payments is central to the operation of any compensation scheme, including the CSLR. To ensure accountability, the appropriation is constrained to a fund that consists of levies collected solely for the purposes of the levy framework explained in Chapter 2 of this Explanatory Memorandum. 2.118 Other safeguards include a requirement for the operator to use the funds only for the types of payment described in the amendments. [Schedule 3, item 3, sections 1069P and 1069Q to the Financial Sector Reform Bill 2022] Application of money 2.119 Money held by the CSLR operator must only be applied for the purpose of operating the scheme. [Schedule 3, item 3, section 1069Q to the Financial Sector Reform Bill 2022] 2.120 Where the CSLR operator holds money that is not immediately required for the purposes of operating the scheme, it may invest that money on deposit with an ADI (generally, a bank) or in Commonwealth, State or Territory securities. 2.121 For money the operator holds for establishing and restoring the capital reserve, the CSLR operator may invest the money with an ADI or in Commonwealth, State or Territory securities. 2.122 The limitation on investing money is not intended to prevent the CSLR operator from purchasing capital assets or expending on capital activities required to effectively administer the scheme. [Schedule 3, item 3, section 1069R to the Financial Sector Reform Bill 2022] Recovery of overpayments 2.123 The CSLR operator may recover amounts from a person if the amount paid exceeds the amount properly payable to the person. This includes taking action against the person in the Federal Court or the Federal Circuit and Family Court of Australia (Division 2) [Schedule 3, item 3, section 1069S to the Financial Sector Reform Bill 2022] 83

Financial services compensation scheme of last resort Other Amendments Power to cancel licences 2.124 Where the CSLR operator has paid an amount to a consumer in accordance with an AFCA determination (in place of the person, body corporate, partnership, or trustee against which the determination was made), the operator is required to report the fact of the payment to ASIC. 2.125 Where this occurs, ASIC must cancel an Australian financial services licence held by the relevant person, body corporate, partnership, or trustee. This must occur by written notice. [Schedule 3, items 9, 11, 13 and 15, sections 915B to the Financial Sector Reform Bill 2022] 2.126 Likewise, where the relevant person, body corporate, partnership or trustee, is the holder of an Australian credit licence, ASIC must cancel the licensee's licence. This must occur by written notice. [Schedule 3, item 20, section 54 to the Financial Sector Reform Bill 2022] 2.127 The cancellation of an Australian financial services licence or an Australian credit licence is not subject to merits review. AFCA determinations involve a thorough examination of the relevant issues. AFCA members are often sophisticated, experienced and well-resourced participants. In these matters, parties with an Australian financial services licence or an Australian credit licence have the opportunity to articulate their case, and provide all relevant information, regarding the facts of the matter before AFCA. 2.128 The unavailability of merits review is justified because cancelling of the Australia financial services licence or Australian credit licence comes as a result of a process where the licensee had an opportunity to argue their case in an AFCA hearing and has subsequently failed to pay the consumer the amount determined. As an industry body, AFCA provides an appropriate review process, and further merits review is not necessary. [Schedule 3, item 17, section 1317C to the Financial Sector Reform Bill 2022] 2.129 ASIC may also suspend or cancel an Australian financial services licence or an Australian credit licence if the licensee is liable to pay the annual CSLR levy, any late penalty in relation to the levy or any shortfall penalty payable in relation to the levy. ASIC may suspend or cancel the relevant license if any one of these levies or penalties have not been paid in full in the 12 months following when they were due. Administrative review is available for this decision. [Schedule 3, items 8, 10, 12 and 14, section 915B; and item 19, section 54 to the Financial Sector Reform Bill 2022] 84

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Banning orders 2.130 ASIC may make a banning order preventing a relevant individual, body corporate, partner, or trustee from holding an Australian financial services licence where that person is required to pay an amount in accordance with a relevant AFCA determination and the CSLR operator has paid that compensation in their place. The banning order power enables ASIC to ban a person if at the time the payment is made by the CSLR operator, they are the individual licensee, an officer in the body corporate, a partner in the partnership or the trustee of the trust. This power is subject to administrative review. [Schedule 3, item 16, section 920A(1) to the Financial Sector Reform Bill 2022] 2.131 ASIC may also make a banning order, preventing a relevant individual, body corporate, partner, or trustee from holding an Australian credit licence where that person is required to pay an amount in accordance with a relevant AFCA determination and the CSLR operator has paid that compensation in their place. The banning order power enables ASIC to ban a person if at the time the payment is made by the CSLR operator, they are the individual licensee, an officer in the body corporate, a partner in the partnership or the trustee of the trust. This power is subject to administrative review. [Schedule 3, item 21, section 80 to the Financial Sector Reform Bill 2022] Deregistration and reinstation of registration 2.132 ASIC may also deregister a company where the company is liable to pay the annual CSLR levy, any late penalty in relation to the levy or any shortfall penalty payable in relation to the levy. ASIC may deregister a company if any one of these levies or penalties have not been paid in full in the 12 months following when they were due. The effect of deregistration is that the company ceases to exist (see section 601AD). [Schedule 3, item 6, section 601AB to the Financial Sector Reform Bill 2022] 2.133 As Australia's corporate regulator, and because it is responsible for issuing levy notices and collecting levies under the CSLR levy framework (as explained in further detail in Chapter 3 of this Explanatory Memorandum), ASIC is well positioned to assess the levy liability of companies and make deregistration decisions as needed. 2.134 As provided by the levy framework, companies also have an opportunity to apply for a waiver of the levy to ASIC where exceptional circumstances may justify such a waiver, and this decision is subject to administrative review. As a result, the failure to pay a levy or related levy penalty amount and be subject to ASIC to deregister a company is a final step in a long reviewable process. 85

Financial services compensation scheme of last resort [Section 17 of the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 2.135 ASIC may reinstate the registration of a deregistered company if ASIC receives an application to the reinstatement of the company's registration and the levy and any associated penalty as outlined above are paid in full. [Schedule 3, item 7, section 601AH to the Financial Sector Reform Bill 2022] 86

Financial services compensation scheme of last resort levy Table of Contents: Outline of chapter ................................................................................ 87 Context of amendments ....................................................................... 88 Summary of new law............................................................................ 88 Detailed explanation of new law .......................................................... 89 Annual levy - first levy period ........................................................ 89 Annual levy - second levy period and each later levy period ........ 89 Revised estimate of the annual levy .............................................. 93 Ministerial determination - special levy ......................................... 94 Levy for unpaid claims, and AFCA's unpaid fees for complaints made to AFCA before accumulation recovery day ........................ 98 When levy is due for payment and late payment ......................... 100 Other features of the levy framework .......................................... 101 Commencement, application, and machinery provisions ............ 108 Outline of chapter 3.1 This chapter provides an overview of the Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022, which together create the levy framework that underpins the industry funding model for the CSLR. 87

Financial services compensation scheme of last resort levy Context of amendments 3.2 The Supplementary Final Report to the Ramsay Review recommended that a CSLR is established in Australia. The Financial Services Royal Commission Final Report later recommended that the three principal recommendations made in the Supplementary Final Report should be carried into effect. 3.3 Part of the Government's commitment to the scheme was that it would be funded by the financial services industry. Summary of new law 3.4 The levy framework creates a tax to be levied against relevant industry entities to fund the CSLR. 3.5 An annual levy is payable by persons who are members of a sub-sector within the meaning of the levy framework established by the ASIC Supervisory Cost Recovery Levy Act 2017. The annual levy covers amounts that the CSLR operator estimates will be payable to applicants under the compensation scheme and to AFCA as unpaid complaints handling fees, as well as amounts to build and maintain a capital reserve, and to cover the CSLR operator's and ASIC's administrative costs. 3.6 The total amount of annual levy payable is determined by the CSLR operator in a legislative instrument. Amounts payable by individual firms in a sub- sector will be worked out in accordance with a method to be prescribed in the regulations - drawing on concepts in place for the similar calculations for ASIC supervisory cost recovery levy framework. 3.7 Amounts to be paid under the levy framework will be subject to caps. The overall scheme levy cap is $250 million - this is the total amount that can be levied in a levy period on all persons across all sub-sectors. A sub-sector levy cap of $20 million will also apply - this is the amount of levy that may be imposed for any levy period on all persons in a particular sub-sector. The sub- sector levy cap may be increased in the regulations and may also be exceeded where a relevant Ministerial determination is made. 3.8 In some circumstances, the flow of expected compensation claims may cause the CSLR operator to revise its estimate of the amounts needed in a levy period. Where a revised estimate exceeds a sub-sector levy cap, the Minister may determine to levy amounts against a sub-sector in excess of a sub-sector levy cap or levy amounts against a sub-sector that was not liable for the initial annual levy. The Minister is not required to exercise either of these options (or the option described in Chapter 2 of this Explanatory Memorandum regarding paying compensation in instalments). 88

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 3.9 Australia's ten largest banking and insurance groups (excluding health insurers and superannuation groups) pay a one-off levy to fund a backlog of accumulated unpaid claims (and associated AFCA unpaid fees) relating to complaints given to AFCA between 1 November 2018 up to the day the Financial Sector Reform Bill 2022 was introduced into the House of Representatives. Detailed explanation of new law 3.10 The CSLR's levy framework contains a primary funding mechanism ('annual levies'), and if needed, a secondary funding mechanism ('further levies') if the annual levy collected is insufficient or likely to be insufficient to meet the initial estimate of costs, fees, and claims. 3.11 The levy framework also contains a special funding mechanism ('special levy') that involves a Ministerial determination where the revised estimate of costs, fees, and claims exceeds the sub-sector levy cap. 3.12 ASIC, on behalf of the Commonwealth, is responsible for issuing levy notices and collecting all levies imposed under the scheme. [Sections 13 and 16 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Annual levy - first levy period 3.13 For the first levy period, the sum reflecting the costs for the first levy period-- the equivalent of which for later levy periods is paid by members of relevant sub-sectors--is paid by the Commonwealth. 3.14 The funding arrangement, including the CSLR operator's estimate of first year costs, is described in "Estimate of costs for first levy period" in Chapter 2 of this Explanatory Memorandum. Annual levy - second levy period and each later levy period 3.15 The annual levy is payable by a person if the person is a member of a sub- sector and, if any conditions are prescribed in the regulations, the conditions are met in relation to the person. Levy will be imposed on a person if the person meets the criteria at any time during the qualifying period, that is the 12-month period starting 24 months before the start of the levy period. 89

Financial services compensation scheme of last resort levy [Definitions of 'sub-sector' and qualifying period' in sections 7 and 8 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.16 The definition of sub-sector aligns with its meaning in the ASIC Supervisory Cost Recovery Levy Act 2017. The regulations made under that Act group together similar entity types, which are regulated by ASIC, into industry sub- sectors. The sub-sectors that will be in scope for the annual levy will be derived from those industry sub-sectors and will be prescribed in the regulations. [Sections 7 and 8 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.17 As a sub-sector will be one of the industry sub-sectors prescribed in the regulations made for the ASIC Supervisory Cost Recovery Levy Act 2017, allowing the regulations to prescribe the sub-sectors that are in-scope for the annual levy is necessary and appropriate to allow for sub-sectors that are liable to the annual levy to adjust and adapt to any changes made to the regulations of that Act. 3.18 If a person is a member of more than one sub-sector for the same levy period (and meets the other conditions prescribed, if any), they are subject to the annual levy in relation to each of those sub-sectors for the levy period. 3.19 For the purposes of the levy framework, a levy period is a financial year starting on or after the 1 July 2023. [Definition of 'levy period' in section 7 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.20 The amount of annual levy imposed on a person and a sub-sector for a levy period is worked out in accordance with a method to be prescribed in the regulations. The regulations in turn are expressly permitted to incorporate by reference, determinations made from time to time by ASIC under the ASIC Supervisory Cost Recovery Levy Act 2017. [Section 12 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.21 It is appropriate to empower the Government to make regulations to set the method for calculating the levy amount as the process of determining the amounts of levy payable by each sub-sector will involve mathematical formulas and will involve technical detail that is most appropriately included in delegated legislation. The flexibility to prescribe these formulas in regulations is required as different sub-sectors will require different methods, formulas and/or metrics that are appropriate for each of them. 3.22 The Minister must be satisfied that the proposed regulations would be consistent with the objectives that the total amount of annual levy imposed all persons for a levy period and a sub-sector: • does not exceed the initial claims, fees and costs estimate; • does not cause the sub-sector levy cap to be exceeded; and 90

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • does not cause the scheme levy cap to be exceeded. [Section 12 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.23 These objectives ensure the Commonwealth does not levy more than the amount that is required to meet the total amount of claims, fees and costs for a levy period and a sub-sector. Further, the objectives provide persons liable to pay the annual levy with commercial certainty that the amount of annual levy will not exceed the sub-sector levy cap or scheme levy cap. 3.24 The total amount of annual levy for a sub-sector, for a levy period, cannot exceed the annual sub-sector levy cap of $20 million (or an amount otherwise prescribed for the sub-sector in the regulations). The sub-sector cap levy is intended to provide assurance to relevant industries about the maximum amount expected to be levied against each sub-sector in a levy period. [Section 17 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.25 As the scheme matures, additional data will be collected to inform the estimates of the amount of claims, fees, and costs to be paid for each levy period and a sub-sector. The regulation making power to prescribe the sub-sector levy cap is necessary to have a degree of flexibility in the scheme to adapt to and cater for changing conditions in a timely manner. Initial estimate of claims, fees, and costs 3.26 A central feature of the levy framework is the CSLR operator's role in determining amounts to be levied. 3.27 Under the levy framework, the CSLR operator determines, in a legislative instrument, the initial estimate of the claims, fees and costs for an upcoming levy period and a sub-sector. As explained in Chapter 2 of this Explanatory Memorandum, the Commonwealth will provide funding to the CSLR operator to fund the first year of the scheme's operation (first levy period). The CSLR operator will determine the initial estimate within 12 months before the start of the second levy period (and each levy period thereafter). [Section 9 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.28 The CSLR operator's determination takes the form of a legislative instrument to ensure that the initial estimate of claims, fees and costs is subject to disallowance and appropriate parliamentary scrutiny. 3.29 The initial estimate of claims, fees and costs includes the following: • claims payable - the amount that is expected to be payable as compensation in relation to relevant AFCA determinations for a sub- 91

Financial services compensation scheme of last resort levy sector in the upcoming levy period. To assist in informing this amount, AFCA will provide the CSLR operator with relevant information to inform its estimate (including complaints made to AFCA, AFCA determinations etc.). The CSLR operator uses this information to undertake actuarial analysis to determine the amount of claims expected to be payable as compensation for a sub-sector in the upcoming levy period; • AFCA's unpaid fees - the amount that is expected to be AFCA's unpaid fees for each month for a sub-sector in the upcoming levy period. To assist in informing this amount, AFCA will provide the CSLR operator with relevant information related to its expected unpaid fees for the levy period; • administration costs - the CSLR operator's expected operational costs for the upcoming levy period - for example, staff, purchase of equipment and IT costs; • capital reserve establishment contributions - the amount to establish a capital reserve of $5 million over the first three levy periods. In the first levy period, approximately one third of the capital reserve amount will be paid by the Commonwealth. In the second and third levy periods, the annual levy includes amounts to establish the balance of the capital reserve. Thereafter, the CSLR operator continues to include capital reserve contribution in the annual levy to maintain the capital reserve. Any surplus levy amounts that are collected for pre-CSLR complaints in the first levy period commensurately reduce the capital reserve establishment contributions in the second and third levy periods; • ASIC's administrative costs - the costs ASIC expects to incur for a levy period in performing its responsibilities and functions related to the CSLR and the levy framework. ASIC must notify the CSLR operator of these administrative costs before a levy period; and • reconciliation for earlier levy periods - this allows amounts to be added to or removed from the initial estimate of costs, fees and claims for a levy period where the CSLR operator identifies an excess or shortfall from an earlier period. For the second levy period, this also includes reconciliation of unpaid accumulated claims (and associated AFCA unpaid fees) in the first levy period. [Section 9 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 92

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Revised estimate of the annual levy 3.30 If at any time during a levy period other than the first levy period, the annual levy collected for a sub-sector is insufficient or is likely to be insufficient to meet the actual or estimated claims payable for the sub-sector, the CSLR operator may recalculate the amounts included in the initial estimate of claims, fees and costs and determine a revised estimate of claims, fees and costs for the levy period and a sub-sector. [Section 10 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.31 Where a revised estimate of claims, fees and costs would not exceed the sub- sector cap for a particular sub-sector for the relevant levy period, the CSLR operator may determine a further levy needs to be imposed on the sub-sector with the estimated shortfall. The CSLR operator's determination takes the form of a legislative instrument to ensure that the initial estimate of claims, fees and costs is subject to disallowance and appropriate parliamentary scrutiny. [Section 8 to the Financial Compensation Scheme of Last Resort Levy Bill 2022; and section 10 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.32 The total amount of further levy imposed on the sub-sector must be equal to the difference between the revised and the initial estimate of claims, fees, and costs for that levy period. As with the annual levy imposed by the initial estimate, the amount of further levy payable by each entity in the sub-sector is calculated in accordance with the method prescribed in the regulations. The regulations in turn are expressly permitted to incorporate by reference, determinations made from time to time by ASIC under the ASIC Supervisory Cost Recovery Levy Act 2017. [Section 13 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.33 As with the annual levy, empowering the Government to make regulations to prescribe the method is appropriate as the process to determine the amount of further levy payable will involve the use of mathematical formulas, and will involve technical detail that is most appropriately included in delegated legislation. The formula for each sub-sector will differ depending on the sizing metric and the business activity of the entity in that sub-sector. 3.34 If the revised estimate of claims and costs does not exceed the prescribed annual sub-sector levy cap for that sub-sector for the levy period, the CSLR operator is not required to notify the Minister before making a determination that a further levy needs to be imposed on a sub-sector. 93

Financial services compensation scheme of last resort levy 3.35 The availability of a further levy in a levy period is aimed at ensuring that the funds needed to pay compensation under the CSLR are available within a levy period. The availability of further levy (up to the sub-sector levy cap) reduces the need for a special levy under a Ministerial determination or the need to wait for expected claims and costs to be incorporated in the annual levy process in a later levy period (which will consequentially delay the payment of compensation to claimants). 3.36 The CSLR operator may determine a revised estimate of claims, fees, and costs more than once for a sub-sector in a levy period. Ministerial determination - special levy 3.37 The amount of annual levy payable in an upcoming levy period depends largely on the CSLR operator's estimate of the compensation claims, fees, and costs for the levy period. While the CSLR operator utilises information it receives from AFCA to make this estimation, the forward-looking nature of the levy framework limits the operator's ability to cater for events that cannot be forecasted or accurately estimated ahead of time. For example, the sudden failure of a large financial firm could lead to a significant increase in the number of complaints to AFCA, and consequently an increase in the number relevant AFCA determinations that result in applications for compensation under the CSLR. 3.38 The revised estimate of annual levy deals with revised amounts to be levied up to the relevant sub-sector cap. However, where this revised estimate of claims, fees, and costs exceeds the sub-sector cap for the sub-sector for the levy period, the CSLR operator must notify the Minister in writing as soon as practicable. This notification empowers the Minister to make a determination to impose a special levy (or exercise the option described in Chapter 2 of this Explanatory Memorandum regarding paying compensation payments in instalments). [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 3.39 While empowered to exercise one or a combination of these options (set out below), the Minister is not required to make a determination. Where the Minister does not make a determination the CSLR operator will need to deal with the claims, fees, and costs in excess of levied amounts in another way. For example, the operator could wait for the next opportunity to make an initial estimate of claims, fees and costs for the next levy period and levy the necessary amounts as part of the regular annual levy. Another option would be for the CSLR operator to draw on the capital reserve or access the pool of funds collected through the annual levy, to cover excess amounts. 94

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Special levy for the primary sub-sector 3.40 The Minister may decide to impose a special levy on the relevant sub-sector with the estimated shortfall for the levy period in which the revised estimate of claims, fees, and costs exceeds the sub-sector levy cap (the primary sub- sector). [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022; and section 8 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022]. 3.41 The Minister may determine to impose a special levy for the primary sub- sector for more than once in a levy period. 3.42 As explained in Chapter 2 of this Explanatory Memorandum, given the forward-looking nature of the levy framework, it is appropriate for the Minister to intervene in circumstances where additional funding is required to meet the higher than the initial estimated claims, fees, and costs. 3.43 Additional funding may be needed where, for example, a large financial firm becomes insolvent, or where a "black swan event" occurs in the financial services industry. These circumstances may lead to a significant increase in the number of complaints made to AFCA and, consequently, applications for compensation under the CSLR. 3.44 As these circumstances cannot be predicted, the Ministerial determination is necessary to ensure that the CSLR operator has the funds needed to provide consumers with compensation as quickly as possible. 3.45 The Minister's determination takes the form of a legislative instrument to ensure that the revised estimate of claims, fees and costs can be addressed quickly to support the collection of levies and payment of compensation in a timely manner. As a legislative instrument, the determination is subject to disallowance and appropriate parliamentary scrutiny. 3.46 While the amount of special levy will cause the relevant sub-sector levy cap to be exceeded, features of the special levy ensure that it does not constitute a form of arbitrary taxation. In particular, any special levy imposed must not be an amount that is more than the difference between the amount specified in the revised estimate, and the total levy collected in that levy period. In this way, the imposition of a special levy or multiple such levies, ensures that the revised estimate is not exceeded. Additionally, special levy remains subject to the scheme levy cap of $250 million. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022; and section 17 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 95

Financial services compensation scheme of last resort levy 3.47 As with the regular annual levy, the amount of special levy payable by each firm in the sub-sector will be calculated in accordance with a method prescribed in the regulations. The regulations in turn are expressly permitted to incorporate by reference, determinations made from time to time by ASIC under the ASIC Supervisory Cost Recovery Levy Act 2017. Empowering the Government to make regulations to prescribe the method is appropriate as the process to determine the amount of further levy payable will involve the use of mathematical formulas and will involve technical detail that is most appropriately included in delegated legislation. [Section 14 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] Special levy for another sub-sector not just the primary sub- sector 3.48 In addition to imposing a special levy on the primary sub-sector with the estimated shortfall, the Minister may determine that a special levy be imposed on another sub-sector, including a sub-sector that is not liable to pay the initial annual levy. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022; and section 9 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.49 As with the special levy for the primary sub-sector, the special levy for another sub-sector include features that ensure that it does not constitute a form of arbitrary taxation. Before making a determination to impose a special levy, the Minister must be satisfied that the special levy is: • necessary to meet the number of claimants that will accept compensation payments in that levy period and for the relevant sub- sector with the expected shortfall, and is necessary to meet the size of the sum of those compensation payment amounts; and • the most effective way of enabling payment of those compensation amounts to the claimants in a timely manner. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 3.50 If the Minister is satisfied that the special levy is required (after having regard to the principles above), the Minister must determine the total amount of special levy that needs to be imposed across all members of one or more sub- sectors specified in the determination. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 3.51 As with the annual levy, the sub-sectors that are potentially in scope for the special levy will be derived from the industry sub-sectors specified in the regulations made under the ASIC Supervisory Cost Recovery Levy Act 2017 and will be prescribed in the regulations. The regulations in turn are expressly 96

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 permitted to incorporate by reference, determinations made from time to time by ASIC under the ASIC Supervisory Cost Recovery Levy Act 2017. The Minister's power to specify sub-sectors that are liable to pay a special levy in this way is limited to those industry sub-sectors. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022; and section 9 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.52 Before determining the amount of special levy payable by each of one or more specified sub-sectors, the Minister must have regard to the impact that the special levy might have on the financial sustainability and viability of the specified one sub-sector or more specified sub-sectors, and the impact that the special levy on those sub-sectors may have financial system more broadly. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 3.53 These guiding principles ensure that the Minister's power to impose special levy on one or more specified sub-sectors is only exercised where there is a genuine need for the special levy, and where the decision to impose the special levy takes into account the impact the levy may have on the financial sustainability and viability of the sub-sector subject to the special levy or the adverse impacts the levy may have on the Australian financial system more broadly. 3.54 In this way, the Minister's power to impose a special levy is an appropriate form of intervention when dealing with circumstances where due to an unforeseen event or otherwise, the annual levy collected is insufficient or likely to be insufficient to meet the revised claims, fees, and costs. 3.55 Any special levy imposed must not be an amount that is more than the difference between the amount specified in the revised estimate, and the total levy collected in that levy period. In this way, the imposition of a special levy or multiple such levies, ensures that the revised estimate is not exceeded. [Schedule 3, item 3, section 1069H to the Financial Sector Reform Bill 2022] 3.56 The Minister may determine to impose a special levy on another sub-sector more than once in a levy period. However, the total amounts of special levies imposed through a Ministerial determination must not exceed the scheme levy cap of $250 million. [Section 17 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 97

Financial services compensation scheme of last resort levy Levy for unpaid claims, and AFCA's unpaid fees for complaints made to AFCA before accumulation recovery day 3.57 In addition to the ongoing annual levy, the CSLR levy framework provides for a one-off levy to be imposed to fund: • compensation expected to be payable for pre-CSLR complaints; • AFCA's unpaid fees that relate to pre-CSLR complaints; and • AFCA's accumulated unpaid fees. 3.58 For the one-off levy, a pre-CSLR complaint is one that is: • for AFCA to finalise; • was given to AFCA before the day the Financial Sector Reform Bill 2022 was introduced into the House of Representatives; • made against another person who was an AFCA member at the time the complaint was made; and • about a product or service of a kind that is within the scope of the CSLR (see "Relevant AFCA determination" in Chapter 2 of this Explanatory Memorandum). [Definition of 'pre-CSLR complaint' in sections 7 and 11 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022; and Schedule 3, item 3, section 1065 to the Financial Sector Reform Bill 2022] 3.59 For the one-off levy, AFCA's unpaid fees are the fees that relate to pre-CSLR complaints for which AFCA has completed steps to recover on or after the day the Financial Sector Reform Bill 2022 was introduced into the House of Representatives. [Definition of 'accumulation recovery day' and 'pre-CSLR complaint' in sections 7 and 11 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022; and Schedule 3, item 2, section 1058B to the Financial Sector Reform Bill 2022] 3.60 For the one-off levy, AFCA's accumulated unpaid fees are the fees that relate to finalised complaints for which AFCA has completed steps to recover before the day the Financial Sector Reform Bill 2022 was introduced into the House of Representatives. [Definition of 'accumulation recovery day' and 'pre-CSLR complaint' in sections 7 and 11 to the Financial Compensation Scheme of Last Resort Levy (Collection) Bill 2022; and Schedule 3, item 2, section 1058B to the Financial Sector Reform Bill 2022] 98

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 3.61 The levy for both the accumulated unpaid claims and AFCA accumulated unpaid fees and AFCA's unpaid fees that relate to pre-CSLR complaints is collected as a one-off levy in the first levy period only. 3.62 The levy is imposed on the ten largest financial sector entities. A person is an entity is in the group liable for the one-off levy if each of the following are met: • at any time during the 12 months before the start of the first levy period, the person is a body regulated by APRA; • section 3C of the Taxation Administration Act 1953 applies to the person for the 2019-2020 income year (which requires corporate tax entities with a total income of $100 million or more to report particular information to the Commissioner of Taxation); and • for the 2019-2020 income year, the person's total income exceeds $6 billion according to information reported to the Commissioner in the person's income tax return for that income year. 3.63 However, an entity is not in the group liable for the one-off levy if it is a private health insurer, within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015 or the trustee of a superannuation entity, within the meaning of the Superannuation Industry (Supervision) Act 1993. [Sections 11 and 12 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022; and section 10 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] Initial estimate 3.64 The CSLR operator must, by legislative instrument, determine the initial estimate of the amounts described above. The determination can be made at any time after the commencement of this Act. The CSLR operator's determination takes the form of a legislative instrument to ensure that the initial estimate of claims, fees and costs is subject to disallowance and appropriate parliamentary scrutiny. [Section 11 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022]. 3.65 The amount payable by each entity under the one-off levy will be worked out in accordance with a method to be prescribed in the regulations. The regulation making power to set the method is necessary as the process of determining the amount of one-off levy that is payable by each person will involve mathematical formulas, that is most appropriately dealt with in delegated legislation. 99

Financial services compensation scheme of last resort levy 3.66 Before regulations are made, the Minister must be satisfied that the proposed regulations would be consistent with the objectives that the total amount of one-off levy imposed on all persons for a levy period and a sub sector: • does not exceed the CSLR operator's initial estimate; and • does not cause the scheme levy cap to be exceeded. [Section 16 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] Revised estimate 3.67 The CSLR operator may recalculate the amounts included in the initial estimate for the one-off levy and determine a revised estimate. 3.68 The CSLR operator's revised estimate of unpaid claims and fees must be made by notifiable instrument. The making of this instrument does not have the immediate effect of imposing further levy. Instead, any shortfall identified in the revised estimate can only be recovered as annual levy for a later levy period (which involves the making of a legislative instrument). Therefore, any shortfall identified in the revised estimate is not recovered against the same group of the ten largest financial sector entities (though an entity in that group may also be liable for the annual levy). Similarly, any surplus identified in the revised estimate is not repaid to the ten largest financial sector entities but will reduce the capital amount to be collected in the annual levy in the second and third levy periods, or the annual levy for a later levy period. [Section 12 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] When levy is due for payment and late payment 3.69 After the levy amounts have been determined for the levy period, ASIC must issue notices to persons in a sub-sector setting out the amount of levy that is payable in relation to the levy period. 3.70 The ASIC notice must specify the business day on which the levy becomes due and payable. Firms will be given at least 30 days to pay the levy amounts specified in the notice. [Section 13 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.71 Unless ASIC provides an extension, a failure to pay the levy by the date specified in the ASIC notice will attract a late payment penalty at the rate of 20 per cent per annum calculated monthly. The late payment penalty for a month is due and payable at the end of the levy month. [Section 14 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 100

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Other features of the levy framework 3.72 The levy framework includes a number of administrative features that are closely based on the levy framework established under the ASIC supervisory cost recovery levy framework. Collection of information and substantiation of that information 3.73 Before a levy period, ASIC may require a person subject to the levy to provide information relating in an approved form. The approved form will be prescribed in regulations and may require information relating to the person or information relating to one or more other persons that are subject to the levy. [Section 8 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022]. 3.74 The information collected would be relevant for the purposes of calculating the levy that is payable by the person in accordance with the levy framework. In practice, the information that is required for the purposes of CSLR levy framework significant overlaps with the information that is collected under the ASIC supervisory cost recovery levy framework. As such, ASIC may utilise information that it collects under the ASIC Supervisory Cost Recovery Levy (Collection) Act 2017 for the purposes of CSLR levy framework. [Section 8 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.75 Related to above, the levy framework provides ASIC can, by issuing a written notice, require that person to substantiate the information it has provided to ASIC under the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. The firm must comply with this notice. [Sections 19, 20, 21 and 29 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.76 Where a person has failed to provide information to ASIC, or failed to substantiate this information, they will be subject to a strict liability offence. The maximum penalty for both of these offences is 10 penalty units. [Sections 8 and 21 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.77 The information collected under the levy framework is an integral aspect of calculating the levy that is payable by each person in the sub-sector. As such, the use of strict liability offences are appropriate in the circumstances to strongly deter misconduct that can have a serious detriment for aggrieved parties. The use of strict liability offences reduces non-compliance and bolster the integrity of the levy framework to ensure persons that are subject to pay the levy provide the required information to ASIC. 101

Financial services compensation scheme of last resort levy 3.78 If a person fails to provide this information or substantiate information, or provides false or inaccurate information, this could have implications for all the other persons in that sub-sector as they may be liable to pay a different amount of levy that they otherwise would. The strict liability offences reduce non-compliance, which bolsters the integrity and enforceability of the levy framework. 3.79 The penalty for failing to provide this information if 10 penalty units. This is consistent with the Guide to Framing Commonwealth Offences. For example, the maximum penalty for this offence is 10 penalty units and does not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate as noted in the Guide to Framing Commonwealth Offences. 3.80 Further, the application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences. 3.81 The defence of 'reasonable excuse' is also available for someone who has not complied with a notice to provide information or substantiate information given by ASIC. Under subsection 13.3(3) of the Criminal Code, a defendant bears an evidential burden in relation to providing that they have a reasonable excuse. Whether a person has a reasonable excuse, is a matter that is peculiarly within the knowledge of the defendant, particularly given the broad nature of matters that may be considered to be a 'reasonable excuse'. It would be unreasonably time consuming and costly for the prosecution to disprove in each case any possible reasonable excuse for not complying with a substantiation notice. This stands in contrast to a defendant, who would be able to establish more easily whether there exists such an excuse. [Sections 8 and 21 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022]. 3.82 Further, this defence is justified as the various types of legal entities and the complex business arrangements of financial entities make it difficult to predict what valid reasons may exist for being unable to provide the information. The large diversity of complex business arrangements are also why offence-specific defences that are tailored to the circumstances cannot be designed. By including the defence of reasonable excuse, the court has the flexibility to assess the reason for non-compliance against the circumstances that exist in a particular case and determine whether the failure to comply with the notice to produce information was justified. It is a reasonable excuse for an individual to refuse or fail to answer a question or produce a document on the ground that to do so might tend to incriminate the individual or expose the individual to a penalty. [Section 21 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022]. 102

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 3.83 In addition, for non-compliance with a substantiation notice, a person is not liable if they comply with the notice to the extent that they are able to comply. [Section 21 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Payment to ASIC on behalf of the Commonwealth 3.84 Each of the following are payable to ASIC on behalf of the Commonwealth: • levy; • late payment penalty; and • shortfall penalty. [Section 16 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.85 ASIC is authorised, as an agent of the Commonwealth, to bring proceedings in the name of the Commonwealth to recover the above amounts when they are due and payable by the person as a debt due to the Commonwealth. [Section 18 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.86 ASIC may also, on behalf of the Commonwealth, waive the payment of the whole or a part of any of those amounts, if they are satisfied that there are exceptional circumstances justifying the waiver. They may do this on their own initiative or on written application by a person. [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.87 The written application by a person must be in the approved form. [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Review of Decision 3.88 A person who is affected by a decision of ASIC to waive a levy may, if dissatisfied with the decision, request that ASIC reconsider the decision. [Sections 23 and 24 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.89 A request to review the decision must be made by notice given to ASIC in the approved form within 21 days from the day on which the person first received notice of the decision, or any further period that ASIC allows. The notice given to ASIC must also set out the reasons for making the request. [Section 23 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 103

Financial services compensation scheme of last resort levy 3.90 After receiving the request, ASIC must review the decision or cause the decision to be reviewed by a person: • to whom ASIC's power to review the decision is delegated; and • who was not involved in the making of the original decision. [Section 23 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.91 Within 30 business days after receiving the request, the person reviewing the decision must reconsider the decision and either confirm, revoke or vary the decision, as they think fit. [Section 23 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.92 In the event that a person reviewing the decision has not made a decision after the period of 30 business days, they are taken to have confirmed the earlier decision. [Section 23 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.93 A person reviewing the decision must give a notice in writing to the person that made the request that sets out the result of the reconsideration of the decision and the reasons for their decision. [Section 23 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.94 A decision of ASIC that has been confirmed, varied or revoked, or a decision that has been taken to have been confirmed, may be appealed to the Administrative Appeals Tribunal on application for a review of that decision, or a decision that is taken to have been made. [Section 24 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Late payment penalty 3.95 If any levy payable by a person remains unpaid at the start of a levy month after the levy became due for payment, the person is liable to pay to the Commonwealth, for that levy month, a penalty of 20 per cent simple interest on the outstanding amount, calculated monthly. This is worked out using the following formula: Amount of the levy remaining 0.2  unpaid at the start of the levy month 12 [Section 14 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 104

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 3.96 Late payment penalty for a levy month is due and payable at the end of the levy month. [Section 14 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.97 ASIC may, by written notice given to the person before, on or after the day on which late payment penalty would be due and payable, specify a later day as the day on which the late payment penalty is due and payable. The notice has effect, and is taken always to have had effect, according to its terms. [Section 14 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Shortfall penalty 3.98 Where a person makes a false or misleading statement to ASIC and that statement has resulted in a person having paid a lesser levy than that person would have been liable for if the statement was not false or misleading, then that person is liable to a shortfall penalty. 3.99 A shortfall penalty only applies where the statement maker and the shortfall entity are the same entity. Where an entity provides a false or misleading statement on behalf of another entity, the second entity will not be liable to any shortfall penalty as a result of the statement. [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.100 The amount of penalty that the person is liable to pay is twice the amount of shortfall that results from the statement being false or misleading. [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.101 However, a person is not liable to a shortfall penalty if they took reasonable steps to ensure that the statement, when made, was correct. If a person is unable to point to reasonable steps taken, then a shortfall penalty will continue to apply. [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.102 A shortfall penalty is due and payable on a day specified in a notice given by ASIC to the person. The date specified cannot be less than 30 days after the day on which the notice was given. However, ASIC may, by written notice given to the person before, on or after the day on which the shortfall penalty would be due and payable specify a later day as the day on which the shortfall penalty is due and payable. The notice has effect, and is taken always to have had effect, according to its terms. 105

Financial services compensation scheme of last resort levy [Section 15 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Entity types liable to pay levy 3.103 Because some of the entity types that make up the definition of a regulated entity are not legal persons, section 18 of the Levy Bill extends the meaning of person so that the levy is imposed on those leviable entities as if they were a legal person. The levy is, however, applied with certain modifications so that it applies similarly to how it would if those leviable entities were legal persons. This is achieved by imposing the liability on each member of the various collectives that are treated as a legal person but allowing the obligation to pay the levy to be discharged by any natural person member of the collective on behalf of all of them. 3.104 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 imposes levy on the following persons that are part of a collective: • each partner in a partnership; • each member in an unincorporated association; • each trustee that is part of a group of individual trustees that hold an RSE licence; • multiple natural person trustees of a trust treated as a single 'notional entity' for the purposes of the Financial Services Compensation Scheme of Last Resort Levy Bill 2022. [Definition of 'person' in sections 7 and 18 of the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.105 In the case of a partner, member, or trustee that is part of a group of individual trustees that holds an RSE licence, the levy is imposed on each partner, member, or trustee. However, the obligation may be discharged by any of the partners, members, or trustees on behalf of all of them. [Section 18 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and sections 25 and 28 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.106 The treatment of a 'notional entity' is different to the treatment of the other three cases because the notional entity may only exist for a period of time. Under the Corporations Act and the Credit Act a reference to a person can include a reference to where there are multiple trustees of a trust for a period of time. During the period where there are multiple trustees, the Financial Services Compensation Scheme of Last Resort Levy Bill 2022 treats the multiple trustees as a 'notional entity' for the purpose of imposing the levy and imposes the levy on each of those trustees separately. Any of the trustees may discharge the liability on behalf of the other trustees. However, if during the period, or a part of the period, the trust has only one trustee, an obligation that 106

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 would otherwise be imposed on the notional entity is imposed on that single trustee. This means that where there ceases to be multiple trustees of the trust, the obligation does not remain on the persons that cease to be trustees. [Section 18 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] Approved forms 3.107 The various documents required under the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 will be in the approved form where they are in the form prescribed by the regulations and are provided in the manner prescribed by the regulations. [Sections 8 and 29 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.108 However, if the regulations do not prescribe a form or manner for providing the information, then both the form and manner may be approved by ASIC in writing. This is consistent with the treatment of approved forms in Schedule 3 to the Financial Sector Reform Bill 2022 and provides ASIC with administrative flexibility to specify the form in which it requires information, the information to be provided, and the manner of it being provided. [Sections 8 and 29 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.109 Different approved forms may be prescribed or approved for different classes of persons. [Section 29 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Exempting laws ineffective 3.110 For the purposes of clarity, the levy framework provides that the no law passed prior to the commencement of the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 is intended to exempt a person from being liable to levy under the CSLR levy framework. [Section 22 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.111 In the event a law is passed after the commencement of the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill that purports to exempt a person from the levy, the law must expressly confer an exemption from the levy under both Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. 107

Financial services compensation scheme of last resort levy [Section 22 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.112 However, this does not apply to an exemption of levy that is granted under Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. [Section 22 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] Commencement, application, and machinery provisions 3.113 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 commences on the later of 1 January 2022 and the date after Royal Assent. The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 commences at the same time as the Levy Bill to ensure that all aspects of the levy framework start on the same day. If the Financial Services Compensation Scheme of Last Resort Levy Bill 2022 does not commence, the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 does not commence. [Section 2 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and section 2 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.114 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 bind the Crown in right of each of the States, of the Australian Capital Territory, of the Northern Territory and of Norfolk Island. However, they do not bind the Crown in right of the Commonwealth. [Section 3 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and section 4 of the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.115 This means that entities that are considered to be the Commonwealth, such as a 'Commonwealth entity' (within the meaning of the Public Governance, Performance and Accountability Act 2013) cannot be made liable to levy even where it would otherwise apply to them. Other entities that are not considered to be the Commonwealth may, however, be liable to levy, such as a Commonwealth company (within the meaning of the Public Governance, Performance and Accountability Act 2013). 3.116 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 further provides that it does not make the Crown liable to a pecuniary penalty or to be prosecuted for an offence under this regime. [Section 4 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 108

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 3.117 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 extend to acts, omissions, matters and things outside Australia. They also extend to every external Territory. [Sections 4 and 5 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and sections 5 and 6 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 3.118 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 does not impose a tax on property of any kind belonging to a State within the meaning of section 114 of the Constitution. [Section 6 to the Financial Services Compensation Scheme of Last Resort Levy Bill 2022] 3.119 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 also contains a simplified outline to assist readers in understanding the substantive provisions. However, the outline is not intended to be a comprehensive explanation of the substantive provisions, so readers should instead rely on the substantive provisions. [Section 3 to the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022] 109

Consumer credit reforms Table of Contents: Outline of chapter .............................................................................. 111 Context of amendments ..................................................................... 112 Small amount credit contracts ..................................................... 112 Consumer leases ........................................................................ 113 Anti-avoidance measures ............................................................ 113 Summary of new law.......................................................................... 114 Comparison of key features of new law and current law .................... 116 Detailed explanation of new law ........................................................ 118 Small amount credit contracts ..................................................... 118 Anti-avoidance measures ............................................................ 159 Outline of chapter 4.1 This chapter explains the amendments to the Credit Act made by Schedule 4 to Financial Sector Reform Bill 2022 to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases. In particular, the amendments reduce the risk that consumers of these credit arrangements--many of whom are financially vulnerable--will be unable to meet their basic needs or default on other necessary commitments as a result of entering into the arrangements. 4.2 The amendments address the recommendations of the SACCs Review. The SACCs Review was established to consider and report on the effectiveness of the laws relating to small amount credit contracts, in accordance with a statutory requirement under the Credit Act. The SACCs Review also included recommendations relating to consumer leases 4.3 All legislative references in this Chapter are to the Credit Act unless otherwise specified. General references to the Credit Act include the Code (which is 111

Consumer credit reforms Schedule 1 to the Credit Act). However, specific legislative references to the Code are identified as such. 4.4 All references to licensees in this Chapter are references to persons who hold an Australian Credit licence under Part 2-2 of the Credit Act. Context of amendments Small amount credit contracts 4.5 Small amount credit contracts are loans of up to $2,000, where the term of the contract is between 16 days and 12 months. 4.6 As credit contracts, small amount credit contracts are subject to the general consumer protections that apply under the Credit Act. Providers of small amount credit contracts must comply with the responsible lending obligations that require lenders to determine that the credit is not unsuitable for the consumer before providing the loan. 4.7 However, providers of small amount credit contracts are not subject to the 48 per cent annual percentage rate cap that applies more broadly to credit provided by lenders that are not ADIs. Reflecting the short-term nature of these loans, providers of small amount credit contracts can instead charge a maximum establishment fee of 20 per cent and a maximum monthly fee of 4 per cent of the value of the loan. 4.8 Small amount credit contracts are generally used by consumers with lower incomes or those who are unable to access cheaper mainstream sources of credit. Given the vulnerable consumer base of these credit contracts, there are currently a range of additional consumer protections that apply specifically to small amount credit contracts. In particular: • there is a rebuttable presumption that a small amount credit contract is unsuitable in certain circumstances; and • on default, a consumer cannot be charged more than twice the adjusted credit amount (defined in subsection 204(1) of the Code), including the amount already repaid (excluding any reasonable enforcement expenses). 4.9 The SACCs Review identified that the existing consumer protections for small amount credit contracts are insufficient and that enhancements to the regulatory regime are required to ensure it is fit for purpose 112

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Consumer leases 4.10 In addition to examining the laws about small amount credit contracts, the SACCs Review was also tasked with examining the effectiveness of the laws about consumer leases and considering whether any of the laws which apply to small amount credit contracts should also apply to consumer leases. 4.11 Consumer leases that are regulated by the Credit Act include leases for goods that are hired wholly or predominantly for personal, domestic or household purposes for longer than four months, where: • the lessee does not have the right or obligation to purchase the goods; and • the total amount payable by the lessee exceeds the cash price of the goods. 4.12 As consumer leases are not considered to be credit contracts, the obligations in the Credit Act and the Code that apply to credit contracts do not automatically apply to consumer leases. 4.13 The Consumer Credit Legislation Amendment Enhancements) Act 2012 extended several consumer protections that apply to credit contracts to consumer leases, such as prohibiting lessors from charging specified fees or charges and allowing lessees to terminate a lease before the goods have been provided. 4.14 Building on those reforms, the SACCs Review recommended that a cap on the cost of consumer leases is required to minimise the risk of consumers entering into unaffordable leases. The SACCs Review also considered that the cap on costs should be supported by the introduction of a protected earnings amount for leases for household goods. Anti-avoidance measures 4.15 The SACCs Review noted that under both the Credit Act and its predecessor, the Uniform Consumer Credit Code, the introduction of conduct obligations has resulted in some lenders and lessors seeking to avoid those obligations through a range of avoidance practices. 4.16 The SACCs Review identified multiple benefits from a robust anti avoidance provision, including: • driving competition by ensuring that all providers are meeting the same obligations in relation to the costs they charge and their assessments of suitability of the proposed contract; 113

Consumer credit reforms • avoiding a drift to non-compliance where providers who are complying with the Credit Act are losing business to those who are not complying and are, therefore, under financial pressure to lower their own standards; and • minimising consumer detriment resulting from businesses which are avoiding compliance with cost caps and additional responsible lending and conduct requirements. 4.17 The new anti-avoidance measures in Parts 4 and 5 of Schedule 4 to Financial Sector Reform Bill 2022 seeks to meet these objectives by encouraging compliance with the Credit Act, including the new obligations introduced by that Bill. These measures are designed to minimise financial and other harm to consumers and disincentivise businesses from undertaking avoidance practices. 4.18 These address recommendation 24 of the SACCs Review. Summary of new law 4.19 Key amendments in Parts 1 and 3 of Schedule 4 to the Financial Sector Reform Bill 2022 (relating to small amount credit contracts) include: • updating the mechanism for restricting the repayments that are allowed under a small amount credit contract (also referred to as the protected earnings amount); • repealing the rebuttable presumption that a small amount credit contract is unsuitable if: - the consumer has entered into two or more small amount credit contracts in the past 90 days; or - the consumer is in default under a small amount credit contract; • requiring small amount credit contracts to have equal repayments and equal repayment intervals over the life of the loan; • expressly prohibiting licensees from charging monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early; • prohibiting licensees from making unsolicited communications to consumers to apply for or enter into a small amount credit contract in certain circumstances; • requiring licensees to document in writing their assessment or preliminary assessment that a small amount credit contract is not unsuitable for a consumer; 114

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • requiring licensees to display and give information to consumers about small amount credit contracts in accordance with the requirements determined by ASIC in a legislative instrument; and • prohibiting small amount credit contract providers from making certain referrals. 4.20 The amendments provided by Part 1 take effect on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent. 4.21 The amendment provided by Part 3 take effect on the day after the end of the period of seven days beginning on the day the Financial Sector Reform Bill 2022 receives the Royal Assent. 4.22 Key amendments in Part 2 of Schedule 4 to Financial Sector Reform Bill 2022 (concerning consumer leases) include: • introducing a cap on the amount a lessor can charge in connection with a consumer lease; • introducing a new regulation-making power to set a protected earnings amount for 'consumer leases for household goods'; and • introducing the concept of 'consumer leases for household goods' in the Credit Act and introducing the following obligations in respect of those consumer leases: - requiring lessors to collect and consider a consumer's account information for the 90 days prior to entering into a consumer lease for household goods with the consumer; - requiring lessors to disclose to lessees the base price of the goods hired under the lease and the difference between the total amount payable by the lessee in connection with the lease and the base price; - prohibiting lessors from undertaking unsolicited communications in relation to consumer leases for household goods in certain circumstances; - requiring licensees to document in writing their assessment or preliminary assessment that a consumer lease for household goods is not unsuitable for a consumer; - requiring licensees to display and give information to consumers in accordance with the requirements determined by ASIC in a legislative instrument. 115

Consumer credit reforms 4.23 Many of these changes mirror the consumer protections that apply to small amount credit contracts, with some modifications to reflect the differences between the two products. 4.24 These amendments take effect on the day after the end of the period of six months beginning on the day Financial Sector Reform Bill 2022 receives Royal Assent. 4.25 Part 4 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces prohibitions on avoidance schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts, consumer leases and product intervention orders made under the Credit Act. 4.26 These amendments take effect on the day after the Financial Sector Reform Bill 2022 receives Royal Assent. 4.27 Part 5 of Schedule 4 to the Financial Sector Reform Bill 2022 extends the operation of Credit Act to consumer leases entered into for an indefinite period. The effect of this extension is that all the provisions in the Credit Act that currently apply to consumer leases will also apply to consumer leases for an indefinite period, so far as they can apply. 4.28 These amendments take effect on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent. Comparison of key features of new law and current law Table 4.1 Comparison of new law and current law New law Current law Small amount credit contracts Licensees must not enter into a small Licensees must not enter into a small amount amount credit contract with a consumer if credit contract with a consumer if: the repayments under the contract would not meet the requirements prescribed in the • the consumer is included in a class of regulations. consumers prescribed by the regulations; and • the repayments do not meet the requirements prescribed by the regulations. The rebuttable presumption is repealed. A small amount credit contract is presumed to be unsuitable for a consumer if: 116

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 New law Current law • the consumer has had two or more other small amount credit contracts in the past 90 days; or • is in default under another small amount credit contract. Small amount credit contracts must have No equivalent. equal repayments and equal repayment intervals over the life of the loan, subject to certain limited exceptions. Licensees cannot charge a consumer No equivalent. monthly fees in respect of the residual term of the small amount credit contract where the consumer fully repays the loan early. Licensees are prohibited from making No equivalent. unsolicited communications to a consumer that contain an offer or invitation to enter into or apply for a small amount credit contract in certain circumstances. Licensees must document in writing their No equivalent. assessment that a small amount credit contract is not unsuitable for a consumer. Licensees must display information and Licensees must display information about give information to consumers about small small amount credit contracts in accordance amount credit contracts in accordance with with the requirements prescribed by the requirements determined by ASIC in a regulations. legislative instrument. Small amount credit contract providers are No equivalent. prohibited from making referrals in certain circumstances. Consumer leases There is a cap on the total amount that No equivalent. would be payable by the lessee in connection with the consumer lease. Lessors of household goods must obtain and There is a general obligation on lessors to consider a consumer's account information take reasonable steps to verify a consumer's for the preceding 90 days in the course of financial situation, which in many cases verifying the consumer's financial situation. would already involve obtaining and considering a consumer's account statements. 117

Consumer credit reforms New law Current law There is a regulation-making power to No equivalent. prescribe a protected earnings amount for consumer leases for household goods. Lessors of household goods are generally No equivalent. prohibited from making unsolicited communications in public places in relation to consumer leases for household goods. Lessors of household goods are required to Lessors are required to disclose, among other disclose the base price of the goods being matters, the total amount of rental payments leased and the difference between the base under the lease. price and the total amount payable by the lessee in connection with the lease. Anti-avoidance A person must not enter into, begin to carry No equivalent. out, or carry out a scheme for an avoidance purpose in relation to small amount credit contracts, consumer leases or product intervention orders. Consumer leases for an indefinite period are No equivalent - consumer leases for an regulated under the Credit Act. indefinite period are excluded from regulation under the Credit Act. Detailed explanation of new law Small amount credit contracts Extending the protected earnings amount to all consumers 4.29 Existing section 133CC of the Credit Act allows regulations to be made that prescribe requirements for small amount credit contracts in relation to certain classes of consumers. 4.30 Regulations made under existing section 133CC ensure that for consumers who receive at least 50 per cent of their gross income from social security payments, 80 per cent of the consumer's gross income is protected and cannot be used to repay small amount credit contracts. The protected proportion of the income is referred to as the protected earnings amount. 4.31 Part 1 of Schedule 4 to the Financial Sector Reform Bill 2022 repeals subsection 133CC(1) and replaces it with a general provision that prohibits licensees from entering into small amount credit contracts if the repayments 118

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 under the contract would not meet the requirements prescribed by the regulations. [Schedule 4, item 12, subsection 133CC(1)] 4.32 The main change is that regulations made for the purposes of new subsection 133CC(1) do not need to prescribe a protected earnings amount in respect of a prescribed class of consumers. Rather, the new regulation-making power can be used to ensure all consumers are covered by a protected earnings amount (although different amounts may apply to different consumers). 4.33 This flexibility is needed as repeat borrowing through small amount credit contracts exposes all consumers to a degree of risk, regardless of the consumer's income. 4.34 The regulation-making power in new subsection 133CC(1) is appropriate because the regulations will contain significant technical detail, such as the protected earnings amount and the method for calculating that amount. Any regulations made would be subject to parliamentary scrutiny and disallowance. 4.35 It is expected that the regulations will provide a protected earnings amount of 10 per cent of a person's net (after tax and other deductions) income for all consumers. This will mean that a licensee cannot enter into a small amount credit contract with a person if the total repayments under the small amount credit contract, and any other small amount credit contracts or that the consumer has, would exceed 10 per cent of the consumer's net income. Consequences of failing to comply with the repayment requirements 4.36 Failure to comply with the repayment requirements attracts a civil penalty of up to 5,000 penalty units. It also constitutes the commission of an offence with a financial penalty of up to 50 penalty units. This is consistent with the existing penalties that apply to a contravention of subsection 133CC(1). 4.37 While the specified penalty for the contravention of the civil penalty provision is 5,000 penalty units, the maximum penalty applicable under section 167B of the Credit Act is: • for individuals, the greater of: - 5,000 penalty units; and - if the court can determine--the benefit derived and detriment avoided because of the contravention, multiplied by three; • for bodies corporate, the greater of the following: 119

Consumer credit reforms - 5,000 penalty units multiplied by ten (50,000 penalty units); - if the court can determine--the benefit derived and detriment avoided by the body corporate because of the contravention, multiplied by three; and - 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units. 4.38 This penalty setting is intended to deter contraventions of the repayment requirements and reflects community expectations about an appropriate sanction for misconduct in the corporate and financial sector (including the credit sector). 4.39 The civil penalty framework in the Credit Act allows for a degree of proportionality between the seriousness of the contravention and the quantum of the penalty. That is, if a court declares that a person has contravened a civil penalty provision, the court may exercise its discretion to declare a financial penalty that is appropriate in the circumstances, taking into account all relevant matters, including: • the nature and extent of the contravention; • the nature and extent of any loss or damage suffered because of the contravention; • the circumstances in which the contravention took place; and • whether the person has previously been found by a court to have engaged in similar conduct (see section 167 of the Credit Act). 4.40 Therefore, a court will generally only apply the maximum penalty in the most egregious instances of non-compliance. 4.41 Currently, the value of a penalty unit is $222 (see section 4AA of the Crimes Act 1914 and the notice of indexation issued under that section). 4.42 These changes address recommendation 1 of the SACCs Review. Introducing a loss of charges mechanism 4.43 A licensee who enters into a small amount credit contract in contravention of the repayment requirements will lose their entitlement to any permitted fees that would otherwise be payable under the credit contract. [Schedule 4, item 13, subsection 133CC(3)] 4.44 Consumers who have paid any permitted fees in these circumstances may recover those fees from the licensee, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 4, item 13, subsection 133CC(3)] 120

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.45 This creates a financial incentive for licensees to comply with the repayment requirements by allowing a consumer to recover from the licensee all the fees that would otherwise be payable under the credit contract (not just the amount in breach of the repayment requirements). 4.46 The SACCs Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the repayment requirements as: • these requirements are clear and can be clearly complied with; • it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and • a contravention of these requirements would have significant adverse consequences for consumers. 4.47 Introducing a loss of charges mechanism is also consistent with the existing approach in the Code where a small amount credit contract provider charges more than is permitted under sections 23A and 31B of the Code. 4.48 This change addresses recommendation 23 of the SACCs Review. Removing the unsuitability presumption 4.49 Schedule 4 to the Financial Sector Reform Bill 2022 repeals the provisions in the Credit Act that create a rebuttable presumption that a small amount credit contract is unsuitable for the consumer if the consumer is: • in default under another small amount credit contract; or • the consumer has had two or more other small amount credit contracts in the previous 90-day period. [Schedule 4, items 4, 5, 8 and 9, subsections 118(3A), 123(3A), 131(3A) and 133(3A)] 4.50 The SACCs Review determined that the rebuttable presumption has been ineffective in addressing the harm caused by repeat borrowing and should be replaced by the amendments to the protected earnings requirement outlined above. This approach also simplifies the responsible lending requirements that apply specifically to small amount credit contracts. 4.51 This change addresses recommendation 2 of the SACCs Review. Requirement for equal repayments and intervals 4.52 A licensee must not enter into, or offer to enter into, a small amount credit contract with a consumer unless: 121

Consumer credit reforms • the contract provides for equal repayments; • the due dates for each repayment (the date on or by which a repayment is required to be made) are set at equal intervals over the life of the loan; and • the interval between the date on which the credit would first be provided and the due date of the first repayment is no more than twice the length of the interval between each repayment. [Schedule 4, item 14, subsections 133CD(1) and (3)] 4.53 The treatment of the interval between the date on which the credit is first provided and the due date of the first repayment recognises the utility of having an initial grace period before repayments are due under a small amount credit contract. For example, this would allow a small amount credit contract with terms allowing a consumer to defer the first repayment to a day that is more suitable for the consumer. As the consumer has access to the funds during the grace period, there is no artificial extension of the term of the loan. 4.54 Flexibility is also provided if repayments are required on a fixed day and that day falls on a non-business day (such as a public holiday). If this occurs, the repayment interval will still be considered equal if the affected repayment is required on the immediately preceding or succeeding business day. [Schedule 4, item 14, subsection 133CD(4)] 4.55 Repayments under a small amount credit contract are taken to be equal if: • each repayment is the same amount; • each repayment (other than the final repayment) is the same amount and the final repayment is up to 5 per cent less than the other repayments; or • the repayments satisfy the conditions determined by ASIC by legislative instrument. [Schedule 4, item 14, subsections 133CD(2) and (5)] 4.56 These options are designed to give licensees reasonable flexibility where the total amount to be repaid under a small amount credit contract cannot be divided equally, or where there are other circumstances in which ASIC considers that unequal repayments may be appropriate. The ability for ASIC to determine conditions by legislative instrument helps ensure that the requirement can account for legitimate behaviour which would not result in harm to consumers. Any instrument made by ASIC would be subject to parliamentary scrutiny and disallowance. 4.57 The purpose of new section 133CD is to address the practice of 'front-loading' repayments. This occurs where licensees maximise revenue by entering into small amount credit contracts with consumers that involve 'front-loading' repayments and extending the overall term of the contract with lower repayments required in the later stages of the contract. By artificially extending 122

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 the term of the contract in this way, the provider is able to gain additional revenue when the risk of default is minimal (as the bulk of the loan has been repaid), while also increasing the cost to the consumer. 4.58 These new requirements are not intended to limit the regulations which may be made for the purposes of subsection 133CC(1) (relating to the repayment requirements). [Schedule 4, item 14, subsection 133CD(6)] Example 4.1 : Equal repayments and equal repayment intervals Nelson enters into a small amount credit contract with Carry-on Money to borrow $600 to be repaid over six months. The repayments under the contract are $66.46 per fortnight, including a 20 per cent establishment fee and a 4 per cent monthly fee. Nelson's total repayments under the contract are $863.98. Nelson's contract with Carry-on Money complies with the equal repayments and equal repayment intervals requirements. Example 4.2 : Equal repayments and equal repayment intervals Josie enters into a small amount credit contract with Smith's Finance to borrow $600 to be repaid in 12 months through 26 fortnightly repayments, including a 20 per cent establishment fee and a 4 per cent monthly fee. The contract stipulates that: • the first 13 repayments are $58.15; and • the subsequent 13 repayments are $19.38. The effect of 'front loading' the repayment schedule is that the contract is extended from six months to 12 months, requiring Josie to pay Smith's Finance total repayments of $1,007.89. As the contract does not provide for equal repayments over the life of the contract, Smith's Finance is in breach of subsection 133CD(1). Consequences of failing to comply with the equal repayments and intervals requirements 4.59 Failure to comply with these new requirements attracts a civil penalty of up to 5,000 penalty units. This is consistent with other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new requirements. [Schedule 4, item 14, subsection 133CD(1)] 123

Consumer credit reforms 4.60 Failure to comply with the new requirements also constitutes the commission of: • an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and • a strict liability offence, with a financial penalty of up to 10 penalty units. [Schedule 4, item 14, subsections 133CD(7), (8) and (9)] 4.61 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault therefore strengthens deterrence and reduces the likelihood of contraventions. The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate checks and balances for persons who may be accused of committing the offence. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences. 4.62 These changes address recommendation 5 of the SACCs Review. Prohibition on charging monthly fees after early repayment 4.63 A provider of a small amount credit contract is prohibited from requiring or accepting payment of an unexpired monthly fee by a consumer, where the consumer fully repays the balance of a small amount credit contract before the end of the original term of the loan. [Schedule 4, item 15, subsection 31C(1) of the Code] 4.64 An unexpired monthly fee is each permitted monthly fee in respect of a month covered by the contract that commences after the contract is fully repaid. That is, the provider may charge a permitted monthly fee (up to a maximum of 4 per cent of the adjusted credit amount) up to the month in which the small amount credit contract is repaid. However, in the following months, regardless of the original term of the loan, the provider cannot require or accept payments of those monthly fees (as they will be unexpired monthly fees). [Schedule 4, item 15, subsection 31C(2) of the Code] Example 4.3 : Treatment of monthly fees for the balance of the loan after early repayment of a small amount credit contract Jake borrows $500 for three months under a small amount credit contract entered into with Cut-Price Loans. Under the contract, Cut-Price Loans charges: • a $100 establishment fee; and 124

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • a monthly fee of $20 for each month of the contract. The total amount payable by Jake is $660, comprising equal fortnightly repayments of $110. Jake subsequently decides he wants to pay out the small amount credit contract at the end of the second month of the contract, on the fourth repayment date. As Cut-Price Loans is not able to charge Jake the monthly fee for the third month of the contract, the total balance of the small amount credit contract is now $640, rather than $660. Taking this adjustment into account, Cut-Price Loans requires Jake to pay $310 to pay out the small amount credit contract. 4.65 This addresses concerns about how some credit providers have structured the payment of permitted monthly fees. For example, some licensees have required all the permitted monthly fees to be paid up-front or required permitted monthly fees to be paid in advance of the month in respect of which the monthly fee applies. 4.66 This change also brings the protections for small amount credit contracts in line with the protections that apply to other credit contracts. For example, section 29 of the Code prevents a credit provider from requiring the payment of an interest charge at any time before the end of the day on which the interest charge applies. As providers of small amount credit contracts are not permitted to charge interest, and instead charge permitted monthly fees, section 29 does not apply in respect of small amount credit contracts. Consequences of failing to comply with the prohibition on charging unexpired monthly fees 4.67 A contravention of this new requirement constitutes the commission of: • an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and • a strict liability offence with a financial penalty of up to 10 penalty units. [Schedule 4, item 15, subsections 31C(4), (5) and (6) of the Code] 4.68 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions. The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate 125

Consumer credit reforms checks and balances for persons who may be accused of committing the offence. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences. 4.69 A contravention of this requirement also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 4, items 15 and 15, subsection 31C(1) and paragraph 111(1)(i) of the Code] 4.70 This provides an additional avenue for consumers to seek redress against providers of small amount credit contracts. Applying the key requirements regime is appropriate in this context because the regime contains some unique features that further encourage compliance. For example: • the court is directed to consider the effectiveness of a credit provider's compliance systems in determining the size of any penalty (so the penalty may be higher for a provider with poor compliance systems); and • it is likely that a credit provider will be subject to a lower penalty where it takes proactive action to remedy the contravention, compensate the consumer or prevent further contraventions commences (as opposed to a situation where a consumer commences the action), as this will indicate that the provider has been actively monitoring and responding to its contraventions. 4.71 If a provider requires or accepts payment by a consumer under a small amount credit contract of an unexpired monthly fee, the consumer may recover those fees from the licensee as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 4, item 15, subsection 31C(3) of the Code] 4.72 These changes address recommendation 7 of the SACCs Review. Prohibiting unsolicited communications 4.73 If a consumer: • is, or has at any time been, a debtor under a small amount credit contract with a licensee or another credit provider; or • has at any time applied (whether successfully or unsuccessfully) for a small amount credit contract with the licensee or another credit provider, and the licensee ought to be aware of this; then the licensee must not make, or arrange for the making of, an unsolicited communication to the consumer (whether orally, in writing or by electronic means) that contains: 126

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • an offer to the consumer to enter into a small amount credit contract; or • an invitation to the consumer to apply for a small amount credit contract. [Schedule 4, item 14, subsection 133CF(1)] 4.74 An unsolicited communication to a consumer is a communication to a consumer or their agent that is made by a person dealing directly with the consumer or their agent where: • there has been no prior request made by the consumer to the licensee for that communication; • the consumer has made a prior request to the licensee for that communication and that request was solicited by or on behalf of the licensee; or the circumstances prescribed by the regulations are satisfied. [Schedule 4, item 14, subsection 133CF(2)] 4.75 This is not intended to capture communications that are directed at consumers at large, such as general advertising of the availability of small amount credit contracts. Rather, it ensures that: • licensees cannot make unsolicited communications to vulnerable consumers; and • applications for small amount credit contracts are made actively by consumers and not in response to the consumer being prompted to apply. 4.76 The regulations may prescribe the circumstances where a communication is taken, or is not taken, to be an unsolicited communication. This adds flexibility and ensures the new prohibition on unsolicited communications can remain responsive to evolving industry practices and only captures behaviour which has reasonable potential to cause harm to consumers. The regulation making power is also consistent with the current arrangements in subsection 133BE(6) of the Credit Act, which provides that the regulations may make provisions that apply to determining whether a communication is a credit limit increase invitation. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 4, item 14, subsection 133CF(2)] Example 4.4 : Application of prohibition on unsolicited communication Fast 'n' Quick Cash Limited is a small amount credit contract provider. On 10 June, Fast 'n' Quick Cash Limited runs an advertisement in the local papers regarding an upcoming promotion. 127

Consumer credit reforms As the advertisement is directed to consumers at large, and the lender is not dealing directly with the consumer or the consumer's agent, the advertising campaign is not captured by the prohibition on unsolicited communication in subsection 133CF(1). Example 4.5 : Application of prohibition on unsolicited communication Cash4You is a small amount credit contract provider. On 1 August, Cash4You sends a text message inviting consumers to apply for a small amount credit contract to go into the running to win a holiday in Queensland. Anne previously had a small amount credit contract with Fast 'n' Quick Cash. Cameron had previously unsuccessfully applied for a small amount credit contract with Fast 'n' Quick Cash. The communications to Anne and Cameron are both unsolicited communications and prohibited under subsection 133CF(1) because: • the text message sent by Cash4You includes an invitation to enter into a small amount credit contract; • Anne was previously a debtor under a small amount credit contract; and • Cameron had previously unsuccessfully applied for a small amount credit contract with Fast 'n' Quick Cash. Consequences of failing to comply with the prohibition on certain unsolicited communications 4.77 Failure to comply with the new prohibition attracts a civil penalty of up to 5,000 penalty units. This is consistent with the other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new prohibition. [Schedule 4, item 14, subsection 133CF(1)] 4.78 A contravention of this prohibition also constitutes the commission of an offence, with a financial penalty of up to 100 penalty units. [Schedule 4, item 14, subsections 133CF(3)] Introducing a loss of charges mechanism 4.79 A licensee who enters into a small amount credit contract with a consumer within 30 days of making an unsolicited communication will lose their entitlement to any permitted fees that would otherwise be payable under the credit contract. [Schedule 4, item 14, subsection 133CF(4)] 128

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.80 Consumers who have paid any permitted fees in these circumstances may recover those fees from the licensee, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 4, item 14, subsection 133CF(4)] 4.81 As with other similar provisions introduced by Schedule 4 to the Financial Sector Reform Bill 2022, this provision encourages compliance with the new prohibition and helps ensure that a benefit cannot be obtained from contravening the prohibition. The SACCs Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the new unsolicited communication requirements as: • these requirements are clear and can be easily complied with; • it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and • a contravention of these requirements would have significant adverse consequences for consumers. 4.82 These changes address recommendations 8 and 23 of the SACCs Review. Documenting assessments that a contract is not unsuitable 4.83 As part of the existing responsible lending obligations under the Credit Act, licensees are required to assess whether a small amount credit contract (or increasing the credit limit of a small amount credit contract) will be unsuitable for a consumer before: • entering into the small amount credit contract with the consumer; • increasing the credit limit of the small amount credit contract; or • making an unconditional representation to the consumer that the licensee considers that the consumer is eligible to enter into the small amount credit contract or that the credit limit will be able to be increased. 4.84 Part 1 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces a new requirement for licensees to document in writing and in accordance with any requirements determined by ASIC in a legislative instrument: • any assessment that a small amount credit contract is not unsuitable for a consumer; and • the inquiries and verifications made in relation to that assessment. [Schedule 4, item 14, subsection 133CE(1)] 129

Consumer credit reforms 4.85 This requirement does not impose a record-keeping obligation in circumstances where the provider assesses that a small amount credit contract is unsuitable for a consumer. 4.86 The purpose of this new requirement is to enhance the transparency and accountability of decisions made by licensees that a proposed small amount credit contract is not unsuitable. It should therefore result in improvements to assessment practices. 4.87 The power for ASIC to determine the form in which the matters are to be documented in writing ensures that the documentation of the assessments contains an appropriate level of detail and information. It also allows ASIC to respond promptly to any deficiencies with the way in which licensees are documenting assessments. Any legislative instrument made by ASIC would be subject to parliamentary scrutiny and disallowance. [Schedule 4, item 14, subsection 133CE(2)] 4.88 Before ASIC can make a legislative instrument, it must consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010) and have regard to any submissions made by the Commissioner. This provides the appropriate checks and balances, as any legislative instrument made by ASIC for these purposes may affect the privacy of individuals. For example, the legislative instrument may set out the kinds of personal information that need to be documented. [Schedule 4, item 14, subsection 133CE(3)] 4.89 Failure to comply with the new record-keeping requirements attracts a civil penalty of up to 5,000 penalty units. This is consistent with the other civil penalty provisions in the Credit Act and is intended to deter contraventions of the new requirement. [Schedule 4, item 14, subsection 133CE(1)] 4.90 This requirement also extends to licensees that provide credit assistance in relation to small amount credit contracts. That is, these credit assistance providers are required to document in writing, the preliminary assessment that a small amount credit contract is not unsuitable. [Schedule 4, item 6, section 124C] 4.91 These changes address recommendation 20 of the SACCs Review. Requirement to consider certain information about accounts 4.92 The Credit Act currently requires providers of small amount credit contracts and licensees who provide credit assistance in relation to small amount credit contracts to obtain and consider a consumer's ADI account statements for the preceding 90 days. This forms part of the licensee's obligation to verify a consumer's financial situation, which is relevant to the licensee's preliminary 130

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 assessments or assessments about whether a small amount credit contract is unsuitable for a consumer. 4.93 Part 1 of Schedule 4 to the Financial Sector Reform Bill 2022 amends these requirements to require providers and licensees to obtain and consider information about each transaction on any accounts the consumer holds with an ADI, and the balances of the accounts, that cover at least the immediately preceding 90-day period. The purpose of this amendment is to maintain the current requirement that providers and licensees obtain and consider at least 90 days of bank account statement information but are permitted to do so in a technology neutral manner. This helps ensure that providers and licensees are required to obtain sufficient information relevant to the consumer's financial situation. Information on all such transactions must be obtained. Consideration is limited to that information that is relevant and material to the assessment of whether the provision of credit is unsuitable. [Schedule 4, item 3, subsection 117(1A)] 4.94 For consumers who receive social security payments, it is expected that the regulations will require providers and licensees to obtain and consider relevant information in consumers' income and deduction statements from Services Australia. Protection of information about accounts 4.95 Part 6 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces new restrictions on the use and disclosure of constrained documents and information. Constrained documents and information includes information about accounts obtained by a licensee in connection with a small amount credit contract or a proposed small amount credit contract, as required under subsections 117(1A), 130(1A), 140(1A) or 153(1A) of the Credit Act for the purposes of verifying a consumer's financial situation. [Schedule 4, item 76, subsection 160CA(1)] 4.96 The new restrictions apply to these licensees (including former licensees) and any other persons who have obtained the account information from the licensee, such as a representative of the licensee. However, these restrictions do not apply to a person in relation to a constrained document or constrained information about the financial affairs of the person. In the context of account information, this would include the account holder to which the account information relates. [Schedule 4, item 76, subsections 160CA(1) and (2)] 4.97 A person (such as a licensee or a representative) must not use or disclose account information unless the use or disclosure is: • to the person about whom the information relates; 131

Consumer credit reforms • necessary for the person to comply with the person's obligations under the Credit Act; • required or authorised by or under a law of the Commonwealth, or of a State or Territory, or a court or tribunal order; • for the purposes of considering a hardship notice; • for the purposes of assisting ASIC to perform its functions or exercise its powers; or • for the purposes of allowing AFCA to perform its functions or exercise its powers. [Schedule 4, item 76, subsections 160CB(1) and (5)] 4.98 This ensures that the personal information of a consumer or a prospective consumer is not misused by a licensee or its representatives. For example, it prevents a consumer's account information from being used to market further products and services to the consumer or being sold to third parties. 4.99 The exemptions allow, for example, a licensee to use account information to determine whether a small amount credit contract is unsuitable for a consumer. A licensee may also rely on the exemption to disclose a consumer's account information to a third party if the disclosure is necessary to comply with the licensee's other obligations under the Credit Act. 4.100 The exemptions operate as defences to the prohibition. The defendant therefore bears the evidential burden in relation to matters set out in the defence. This is appropriate as the circumstances which give rise to any of the defences (that is, the purpose of the defendant's use or disclosure of the account information) are peculiarly within the knowledge of the defendant. This is consistent with the principles in the Guide to Framing Commonwealth Offences. Consequences of failing to comply with the restrictions on constrained documents 4.101 Failure to comply with the new restrictions on using or disclosing constrained documents and constrained information, including account information, attracts a civil penalty of up to 5,000 penalty units. This penalty setting is intended to deter contraventions of the new restrictions and is consistent with the existing civil penalty provisions in the Credit Act. [Schedule 4, item 76, subsection 160CB(1)] 4.102 A contravention of the new restrictions also constitutes the commission of: • an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and 132

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • a strict liability offence, with a financial penalty of up to 10 penalty units. [Schedule 4, item 76, subsections 160CB(2), (3) and (4)] 4.103 Applying strict liability for this offence is appropriate because of the potentially serious impact a contravention may have on an affected consumer, in terms of privacy and implications for future transactions. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions occurring. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences. 4.104 A regulation-making power allows these protections for account information to be extended to other constrained documents. This ensures the Government can promptly respond to concerns about the use of information obtained by licensees in connection with small amount credit contracts. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 4, item 76, subsection 160CA(1)] 4.105 These changes address recommendation 19 of the SACCs Review. Enhancing warning statements 4.106 The existing requirement for licensees to display information (also referred to as warning statements) as required by the regulations is repealed. It is replaced with a new requirement for these licensees (who represent they provide or are able to provide small amount credit contracts) to display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 4, item 11, subsection 133CB(1)] 4.107 ASIC may, by legislative instrument, determine the following matters: • the information that the licensees must display and give to consumers; and • how, when and in what form the licensees must display and give the information to consumers. [Schedule 4, item 11, subsection 133CB(2) 4.108 In making a legislative instrument for this purpose, ASIC must take into account the risks associated with small amount credit contracts and the alternatives that may be available to consumers. [Schedule 4, item 11, subsection 133CB(3)] 133

Consumer credit reforms 4.109 The power for ASIC to determine the requirements for displaying and giving information in a legislative instrument (as opposed to the requirements being prescribed by regulations) is necessary to ensure the information provided is effective in highlighting risks with these contracts and assisting customers to make better use of alternatives where available. In particular, it will give ASIC flexibility to mandate requirements that take into account different media for delivery of warnings, and to better account for the behavioural biases of consumers. ASIC will be able to prescribe: • different information to be provided to different classes of consumers (for example, consumers who are repeat users of small amount credit contracts could receive different messages from other consumers); • different information to be provided at different points of time (for example, a consumer could receive a targeted message when they are applying for a small amount credit contract or when they are nearing the end of the contractual term for their current small amount credit contract); and • different modes of delivery (for example, consumers could be sent an SMS message as well as being able to view information on the licensee's website, mobile phone application or at the licensee's place of business). 4.110 The purpose of these changes is to ensure that consumers receive relevant and effective information about the financial implications of entering into or using a small amount credit contract. This will assist consumers to make informed decisions about whether to enter into the credit contract. It can also assist them to understand what alternatives are available and how they can be of assistance to particular consumers. 4.111 The existing civil and criminal penalties continue to apply to a contravention of this requirement. A contravention of this requirement therefore attracts a civil penalty of up to 5,000 penalty units and constitutes the commission of an offence with a financial penalty of up to 50 penalty units. [Schedule 4, item 11, subsections 133CB(1) and (4)] 4.112 This requirement also extends to licensees who represent they can provide or are able to provide credit assistance in relation to, small amount credit contracts. That is, these credit assistance providers must display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 4, item 6, section 124B] 4.113 These changes address recommendation 21 of the SACCs Review. 134

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Family violence as a cause of hardship 4.114 Section 72 of the Code provides for changes to a debtor's obligation under a credit contract on grounds of hardship. Hardship is not defined in the Credit Act and there are no specified circumstances in which hardship must be considered. 4.115 However, the note to subsection 72(3) identifies illness and unemployment as reasonable causes of hardship. Schedule 4 to the Financial Sector Reform Bill 2022 amends this note to make clear that family violence is also a reasonable cause of hardship. [Schedule 4, item 16, subsection 72(3) of the Code] 4.116 This applies in respect of all credit contracts regulated under the Credit Act. 4.117 The equivalent provision in respect of consumer leases is also similarly updated to make clear that family violence is a reasonable cause of hardship. [Schedule 4, item 51, subsection 177B(3) of the Code] Prohibition on making certain referrals 4.118 A licensee that carries on a business of providing credit under small amount credit contracts must not make a 'proscribed referral' referral in certain circumstances. [Schedule 4, item 59, subsection 160G(1) of the Credit Act] 4.119 The circumstances are where: • the licensee is a constitutional corporation; or • the referral is made in the course of carrying on that business; or • the referral is made in the course of carrying on the business of banking, other than State banking (within the meaning of paragraph 51(xiii) of the Constitution) not extending beyond the limits of the State concerned; or • the referral is made using a service to which paragraph 51(v) of the Constitution applies. [Schedule 4, item 59, subsection 160G(1) of the Credit Act] 4.120 The range of circumstances helps ensure that the prohibition has sufficient constitutional support and applies as intended. 4.121 Broadly put, a 'proscribed referral' is a referral of a person (the referred person) to another person (the recipient of the referral) if, at the time when the referral is made, it is reasonable to believe that the referred person would or might, as a direct or indirect result of the referral, enter into a contract or 135

Consumer credit reforms arrangement under which credit is provided and the provision of that credit would not be a provision of credit to which the National Credit Code applies. [Schedule 4, item 59, subsection 160G(2) of the Credit Act] 4.122 Such contracts and arrangements are often carefully crafted to avoid the consumer protections provided by the Code and often cause significant financial and other harm to vulnerable consumers. 4.123 For the prohibition to apply: • the recipient of a proscribed referral need not be a person who would or might be a provider of credit under the contract or arrangement; • a referral of a person to another person includes the provision of information about the first mentioned person to the second mentioned person, whether or not the first mentioned person is aware of the provision of that information • it does not matter whether any person actually has, or had, a belief in relation to whether proscribed referral occurred (the test is objective, any subjective views are irrelevant). [Schedule 4, item 59, subsections 160G(3) to (5) of the Credit Act] 4.124 This helps ensure that the prohibition's application is sufficiently broad to achieve the policy and that schemes or arrangements cannot be easily developed to avoid the application of the prohibition. 4.125 Contravention of the new prohibition results in a civil penalty of up to 5,000 penalty units. This helps ensure that the prohibited behaviour is sufficiently deterred and is consistent with existing civil penalties that apply to licensees throughout Part 3-6A of the Credit Act. [Schedule 4, item 59, subsection 160G(1) of the Credit Act] Statutory review 4.126 Part 6 of Schedule 4 to the Financial Sector Reform Bill 2022 repeals the statutory requirement in section 335A of the Credit Act to conduct an independent review of the operation of the laws relating to small amount credit contracts, as this has been completed by the SACCs Review. [Schedule 4, item 77, section 335A] Consequential amendments - small amount credit contracts 4.127 The definitions in subsection 5(1) of the Credit Act and subsection 204(1) of the Code are updated to signpost the new definitions introduced by these amendments, including the definition of repayment date, unsolicited communication to a consumer and unexpired monthly fee. 136

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 [Schedule 4, items 1 and 19, subsection 5(1) of the Credit Act and subsection 204(1) of the Code] 4.128 Subsection 5(1) of the Credit Act is also updated to refer to the definition of hardship notice currently in subsection 204(1) of the Code and signpost the new definitions of constrained document and constrained information. These definitions are relevant to the new protections regarding account information. The guide to Part 3-6A of the Credit Act is also updated to reflect these new protections. [Schedule 4, item 75, subsection 5(1) and section 160A] 4.129 Subsection 82(2) of the Code, which sets out the amount required to pay out a credit contract, is updated to take into account unexpired monthly fees, which relates to the prohibition on charging or accepting unexpired monthly fees. As a result, the amount required to pay out a small amount credit contract under subsection 82(2) of the Code is: • the sum of the following amounts: - the amount of credit; - all fees and charges payable by the consumer to the licensee up to the date of termination, excluding any unexpired monthly fee; and - reasonable enforcement expenses; • less any payments made under the small amount credit contract. [Schedule 4, item 17, subsection 82(2) of the Code] 4.130 Early termination charges and rebate of premium are not referred to in this list, as subsection 31A(1) of the Code prevents a small amount credit contract from providing for these charges and premiums. For the avoidance of doubt, nothing in the list in subsection 82(2) of the Code is intended to allow a licensee to charge fees that are in addition to those that are expressly permitted under subsection 31A(1) of the Code. 4.131 The guide to Part 3-1 of the Credit Act is updated to reflect the new obligations on licensees that provide credit assistance in relation to small amount credit contracts, such as the requirement to record the preliminary assessment that a small amount credit contract is not unsuitable [Schedule 4, item 2, section 111] 4.132 The guide to Part 3-2C of the Credit Act is also updated to reflect the new obligations on providers of small amount credit contracts, such as the prohibition on entering into, or offering to enter into, small amount credit contracts where it would contravene the repayment requirements or the unsolicited communication prohibition. [Schedule 4, item 10, section 133C] 137

Consumer credit reforms Application provisions - small amount credit contracts 4.133 The amendments to enhance the consumer protection framework for consumers of small amount credit contracts commence on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent. This is referred to as the commencement day. 4.134 The amendments about warning statements and unsolicited communications (sections 124B, 133CB and 133CF of the Credit Act) apply to representations or communications made on or after the commencement day. [Schedule 4, item 78, item 3 of Schedule 19 to the Credit Transitional Act] 4.135 The amendments requiring preliminary assessments and assessments to be documented in writing (sections 124C and 133CE of the Credit Act) apply to preliminary assessment and assessments made on or after the commencement day. [Schedule 4, item 78, item 4 of Schedule 19 to the Credit Transitional Act] 4.136 The amendments relating to inquiries and verifications of a consumer's financial circumstances (sections 117, 130, 140 and 153 of the Credit Act) apply in relation to verifications made on or after the commencement day. [Schedule 4, item 78, item 5 of Schedule 19 to the Credit Transitional Act] 4.137 The amendments regarding the new protected earnings requirement, equal repayments and intervals, and unexpired monthly fees (including related consequential amendments) in sections 133CC and 133CD of the Credit Act, and section 31C of the Code respectively apply to: • small amount credit contracts that are entered into on or after the commencement day; or • offers made to enter into small amount credit contracts on or after the commencement day. [Schedule 4, items 6, 10 and 11 of Schedule 19 to the Credit Transitional Act] 4.138 The prohibition on licensees making certain referrals (section 160G of the Credit Act) applies to a referral by a licensee if the referral is made on or after the commencement of Part 3 of Schedule 4 to the Financial Sector Reform Bill 2022 and the licensee was not, immediately before that commencement, under a contractual obligation to make the referral. [Schedule 4, item 78, item 7 of Schedule 19 to the Credit Transitional Act] 4.139 The new restrictions on the use or disclosure of certain documents and information in section 160CB of the Credit Act apply to uses or disclosures of the documents or information on or after the commencement day. [Schedule 4, item 78, item 9 of Schedule 19 to the Credit Transitional Act] 138

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.140 These commencement and application provisions are intended to provide affected industry participants sufficient time to prepare for the changes introduced by Schedule 4 to the Financial Sector Reform Bill 2022. Consumer leases Cap on costs for consumer leases 4.141 Part 2 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces a cap on costs for all consumer leases regulated under the Credit Act. 4.142 A lessor must not enter into or vary a consumer lease so that the total amount that would be payable by the lessee in connection with the lease (including any applicable taxes and any add-on fees) is more than the permitted cap for the lease. [Schedule 4, item 50, subsection 175AA(1) of the Code] 4.143 The permitted cap for a lease is generally the maximum amount that may be paid by a lessee in connection with the lease. This prevents lessors and other parties from charging lessees excessive fees and charges, and further aligns the consumer protections for consumer leases with those for small amount credit contracts. 4.144 Some specified amounts, such as reasonable enforcement expenses, may be charged in addition to the permitted cap. These amounts are set out in new subsection 175AA(4) of the Code. Permitted cap 4.145 The permitted cap for a consumer lease is the sum of: • the base price of the goods hired under the lease; • the amount worked out by multiplying the base price of the goods hired under the consumer lease by: - in the case of a consumer lease for a fixed term--0.04 multiplied by the number of whole months of the consumer lease, up to a maximum of 48 months; or - in the case of a consumer lease for an indefinite period-- 1.92; • the permitted delivery fee (if any) for the consumer lease; • the permitted installation fees (if any) for the consumer lease; and 139

Consumer credit reforms the permitted add-on fees (if any) for the consumer lease. [Schedule 4, item 50, subsection 175AA(5) of the Code] 4.146 The method for calculating the base price of the goods hired under a lease will be prescribed by the regulations. This is appropriate as the calculation method contains significant technical detail and may need to be updated in response to evolving industry developments. Any regulations made would be subject to disallowance and parliamentary scrutiny. [Schedule 4, item 50, subsection 175AA(6) of the Code] 4.147 A fee or charge is a permitted delivery fee for a consumer lease if the fee or charge: • is for the delivery to the lessee, at the lessee's request, of the goods hired under the consumer lease; and • is limited to the reasonable cost of delivery of the goods to the lessee. [Schedule 4, item 50, subsection 175AA(7) of the Code] 4.148 For example, if a lessor delivers (or can deliver) a number of goods to a capital city or regional area at the same time, it is likely reasonable for the cost of the delivery to be shared between the consumers. If the cost of delivery is not shared in this scenario, it is likely that the delivery fee would exceed the reasonable cost of delivery of the goods to the lessee. In that event, the delivery fee would not be a permitted delivery fee. 4.149 ASIC may declare by legislative instrument that specified fees which relate to the installation of particular kinds of goods hired under a consumer lease are permitted installation fees. No installation fees are permitted unless included in a relevant ASIC instrument. This ensures there is sufficient flexibility to deal with the various kinds of goods that can be hired under a consumer lease. Any instrument made by ASIC would be subject to disallowance and parliamentary scrutiny. [Schedule 4, item 50, subsection 175AA(8) of the Code] 4.150 ASIC may declare by legislative instrument that specified add-on fees for a consumer lease are permitted add-on fees. No add-on fees are permitted unless included in a relevant ASIC instrument. This helps ensures there is sufficient flexibility to allow for such fees to form part of the calculation of the permitted cap where reasonable and appropriate. For example, such fees may be commercially reasonable and pose minimal risk of harm to consumers. Any instrument made by ASIC would be subject to disallowance and parliamentary scrutiny. [Schedule 4, item 50, subsection 175AA(9) of the Code] 4.151 For consumer leases for a fixed term, the final component of the permitted cap practically allows for a 4 per cent monthly fee (based on the sum of the base price of the goods) to be charged to the lessee for each whole month of the consumer lease, up to a maximum of 48 months. This is in addition to the base price of the goods, permitted delivery fees, permitted installation fees, and 140

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 permitted add-on fees. This approach is consistent with the 4 per cent permitted monthly fee that can be charged to consumers of small amount credit contracts. Consumer leases entered into for an indefinite period 4.152 Consumer leases entered into for an indefinite period are treated as having a term of 48 months for the purposes of determining the permitted cap. Accordingly, the final component of the permitted cap for these consumer leases also allows for a 4 per cent monthly fee up to a maximum of 48 months. This is in addition to the base price of the goods, the permitted delivery fees and permitted installation fees. 4.153 In addition to the requirement set out in new subsection 175AA(1) relating to the permitted cap, the amount that a lessor can charge in any month of a consumer lease entered into for an indefinite period is also capped. The permitted monthly cap is the permitted cap divided by 48. [Schedule 4, item 50, subsection 175AA(2) of the Code] 4.154 This additional requirement prevents a lessor from entering into a lease for an indefinite period and 'front-loading' the payments (which could include 48 months' worth of fees) with an understanding that the lease would be terminated before 48 months. Total amount that would be payable by the lessee includes add-on fees 4.155 Add-on fees form part of the total amount that would be payable by the lessee in connection with the lease and therefore must be within the amount of the permitted cap. For example, if a lessor provides an 'add-on' appliance service to a leased good, it must not impose an extra fee or charge above the permitted cap, despite the lessor incurring a cost in providing the service. 4.156 An add-on fee is any fee or charge (whether an interest charge or not) that the lessee is liable to pay to the lessor or to another person under an agreement facilitated by or on behalf of the lessor or the other person where: • the fee or charge relates to a product or service that either: - facilitates or complements the lessee's use of the goods hired under the consumer lease; or - is marketed or offered by the lessor or another person as being complementary the lessee's use of the goods hired under the consumer lease; and 141

Consumer credit reforms • either: - failure by the lessee to pay the fee or charge, or to acquire a service or product to which the fee or charge relates, affects the lessee's rights or obligations under the lease; or - the lessor or another person has represented to the lessee that failure by the lessee to pay the fee or charge, or to acquire a service or product to which the fee or charge relates, will or may affect the lessee's rights or obligations under the lease. [Schedule 4, item 50, subsection 175AA(3) of the Code] 4.157 For example, this could capture fees payable to brokers that facilitate the consumer obtaining the goods. 4.158 A service or product captured by the definition of add-on fee is to be distinguished from, for example: • a bundled package, such as where a customer chooses to enter into a broadband internet service at the same time as they lease a laptop; or • a Blu-ray player leased with a television. 4.159 In most cases where multiple goods are provided these items would be considered separate leases, with each item subject to its own cap on costs. 4.160 The inclusion of add-on fees in the total amount that would be payable by the lessee ensures the cap on costs operates consistently and mitigates the risk of new fees being introduced that are designed to circumvent the cap. Example 4.6 Add-on fees Stephen enters into a consumer lease with Lease on Life to lease a treadmill with a base price of $3,000 for three years. Stephen is charged delivery fees of $100. The maximum amount that Stephen can be charged under the permitted cap over the three-year lease is $7,420, comprising: • the base price ($3,000); • the permitted delivery fee ($100); and • monthly fees of $4,320 ($3,000 x 36 months x 0.04) As a condition of the lease agreement, Stephen must also purchase a set of instructional exercise DVDs at a price of $250. As Stephen must purchase these products as a condition of the lease, these charges are add-on fees and must be within the permitted cap of $7,420 to comply with subsection 175AA(1). 142

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Amounts that may be charged in addition to the permitted cap 4.161 The following amounts are not included in the total amount that would be payable by the lessee in connection with the consumer lease: • default fees--that is, fees or charges that are payable in the event of a default in payment under the lease; and • enforcement expenses that are recoverable in accordance with subsection 179R(1) of the Code. [Schedule 4, item 50, subsection 175AA(4) of the Code] 4.162 The practical effect is that these amounts may be charged in addition to the permitted cap. 4.163 A lessor should be able to charge these amounts irrespective of the permitted cap as each of the amounts are clearly confined and are reasonable in the circumstances. This is consistent with the approach taken with the fees and charges that may be charged under a small amount credit contract in subsection 31A(1) of the Code. 4.164 Establishment fees (fees or charges that relates to the creation of the consumer lease) are counted towards the permitted cap for a consumer lease. 4.165 A limit is placed on the amount that may be recovered if there is a default under a consumer lease. This ensures that lessors cannot charge excessive default fees in addition to the permitted cap. [Schedule 4, item 52, section 179GA of the Code] 4.166 The regulations will prescribe a way of working out a limit on default fees. This is appropriate as the calculation of the limit will contain technical detail and may need to be updated quickly in the future to respond to evolving industry practices. Any regulations made would be subject to disallowance and parliamentary scrutiny. 4.167 A contravention of the new limit on default fees will attract a civil penalty of up to 5,000 penalty units. Further, if a provision of a consumer lease allows a lessor to recover more than the limit on default fees, that provision is void. If an amount is recovered by a lessor in excess of the limitation, it may be recovered back by the lessee. [Schedule 4, item 52, subsections 179GA(1) and (2) of the Code] 4.168 These consequences are intended to deter contraventions of the new limit on default fees and are consistent with the existing consequences that apply in respect of the limit on default fees for small amount credit contracts in section 39B of the Code. 143

Consumer credit reforms 4.169 The limit on default fees does not apply to enforcement expenses, which are set out in section 179R of the Code for consumer leases. [Schedule 4, item 52, subsection 179GA(3) of the Code] Example 4.7 : Application of the permitted cap Anh enters into a consumer lease with Whitegoods for You to lease a refrigerator with a base price of $1,000 for two years. Anh is charged: • permitted delivery fees of $100; and • there are no installation fees. The maximum amount that Anh can be charged over the two-year lease is the permitted cap of $2,060, comprising: • the base price and permitted delivery fees ($1,100); and • monthly fees of $960 ($1,000 x 24 months x 0.04). The lease contract requires Anh to make payments of $5 per month to cover the risk of damage to the goods and $15 per month for a service contract provided to a third-party service provider. These charges must be within the permitted cap of $2,060 to comply with subsection 175AA(1). Example 4.8 : Application of the permitted cap Claire enters into a consumer lease with Summer Breeze Leases to lease a dual washer-dryer with a base price of $2,000 for five years. Claire is charged: • permitted delivery fees of $100; and • permitted installation fees of $100. The maximum amount that Claire can be charged over the five-year lease is $6,040 comprising: • the base price, permitted delivery and installation fees ($2,200); and • monthly fees of $3,840 ($2,000 x 48 months x 0.04). Summer Breeze Leases calculates Claire's required fortnightly repayment of $46.46 by dividing the maximum amount ($6,040) by the number of fortnights in the term of the lease (130 fortnights). As such, Claire pays $6,039.80 under the lease over five years, which is less than the maximum amount of $6,040. 144

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Example 4.9 : Variation of the lease However, before Claire is able to make the first payment on the lease for her dual washer-dryer, the lessor varies the terms of the lease and requires her to pay a quarterly charge of $200 for servicing. Such a charge would cost Claire an additional $4,000 over five years ($200 x 4 x 5). The total cost to Claire is now $10,039.80, which is more than the maximum amount that Claire can be charged ($6,040). As such, the lease now contravenes subsection 175AA(1). Example 4.10 : Application of the permitted monthly cap - leases for an indefinite period Ruth enters into a lease with Super Fast Leasing to lease a wall- mounted television with a base price of $1,200 for an indefinite period. Ruth is charged: • permitted delivery fees of $50; and • permitted installation fees of $100. The maximum amount that Ruth can be charged over the life of the lease is the permitted cap of $3,654, comprising: • the base price, permitted delivery and installation fees ($1,350); and • monthly fees of $2,304 ($1,200 x 1.92). As the lease is for an indefinite period, the maximum amount that Ruth can be charged by Super Fast Leasing in any month of the lease is $76.12 ($3,654 divided by 48). Consequences of entering into or varying a lease that contravenes the permitted cap 4.170 Failure to comply with the permitted cap or the permitted monthly cap constitutes the commission of an offence, with a financial penalty of up to 100 penalty units. [Schedule 4, item 50, section 175AB of the Code] 4.171 Currently, the value of a penalty unit is $222 (see section 4AA of the Crimes Act 1914, and the notice of indexation issued under that section). 4.172 A contravention of these new requirements also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 145

Consumer credit reforms of the Code. [Schedule 4, items 28 and 50, subsections 111(2A), 175AA(1) and 175AA(2) of the Code] 4.173 The maximum penalty that may be imposed under Part 6 of the Code for a contravention of a key requirement in relation to a consumer lease is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. However, if the loss suffered by the lessee is greater than that amount, a greater penalty may be imposed. The tolerances and assumptions in sections 180 and 182 of the Code may apply to the calculation of this amount. [Schedule 4, item 38, section 114A of the Code] 4.174 This provides an additional avenue for consumers to seek redress against lessors. 4.175 If a lessor enters into or varies a consumer lease that contravenes the permitted cap or the permitted monthly cap, the consumer may recover any payments above the base price of the goods from the lessor, as the consumer is not liable and is taken never to have been liable to pay those amounts. [Schedule 4, item 50, section 175AC of the Code] 4.176 This loss of charges mechanism does not rely on a court to determine that there has been a contravention, as in most cases, this will be relatively straightforward to establish. This mirrors the loss of charges mechanism in section 31B of the Code for small amount credit contracts and aims to encourage compliance with the new permitted cap and permitted monthly cap. 4.177 These changes address recommendations 11, 12, 13 and 14 of the SACCs Review. Consumer leases for household goods 4.178 Schedule 4 to the Financial Sector Reform Bill 2022 introduces the concept of a 'consumer lease for household goods' in the Credit Act. 4.179 A consumer lease for household goods is a regulated consumer lease where any of the goods hired under the lease are household goods. However, it does not include a consumer lease where any of the goods hired under the lease include: • a motor vehicle; • a vehicle that is not for use on a road and is of a kind intended primarily for use by persons with restricted mobility; or • goods that are ordinarily used for accommodation (either permanently or temporarily). [Schedule 4, item 54, subsection 204(1) of the Code] 146

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.180 This definition is designed to prevent a lessor from avoiding the new obligations relating to consumer leases for household goods by including a non-household good in the same lease contract as a household good. 4.181 Household goods are in turn defined as goods of a kind ordinarily acquired for domestic or household use. This definition is an objective definition based on the typical use of the goods. It is designed to avoid the need for a lessor to inquire into the purpose for which a particular consumer intends to use a particular hired good. [Schedule 4, item 54, subsection 204(1) of the Code] 4.182 Goods that are ordinarily used for accommodation include, for example, a caravan hired for the lessee to live in. These consumer leases are excluded from being a consumer lease for household goods as it may not be appropriate for some of the requirements relating specifically to consumer leases for household goods (such as the protected earnings requirement) to apply in respect of these leases. For example, it is generally appropriate for a lessee to spend a greater proportion of their income (in excess of the protected earnings requirement) on rental payments for a caravan to live in. The other consumer protections relating to all consumer leases would still apply to these leases, such as the cap on costs. 4.183 This rationale also extends to the exclusion for motor vehicles and vehicles that are intended primarily for use by persons with restricted mobility (such as mobility scooters). However, this exclusion is also intended to put beyond doubt that these vehicles are not considered to be 'household goods'. 4.184 Where leases of motor vehicles, mobility vehicles or accommodation goods are bundled with household goods in the same lease, the entire lease is excluded from being a consumer lease for household goods. For example, this could occur if a caravan furnished with household goods is hired by the licensee to live in for a period of time. Introducing a protected earnings amount 4.185 Schedule 4 to the Financial Sector Reform Bill 2022 prohibits lessors from entering into, or offering to enter into, a consumer lease for household goods if the amount required to be paid under the lease would not meet the requirements (such as the protected earnings amount) prescribed by the regulations. [Schedule 4, item 26, subsection 156B(1)] 4.186 For consumer leases for household goods, this requirement operates in addition to the new cap on costs in section 175AA of the Code. 4.187 The regulation-making power in new subsection 156B(1) is appropriate as the requirements which will be prescribed by the regulations will contain technical 147

Consumer credit reforms detail, including the protected earnings amount and the calculation method. Any regulations made would be subject to disallowance and parliamentary scrutiny. 4.188 It is expected that the regulations will provide a protected earnings amount of 10 per cent of a person's net (after tax and other deductions) income for all consumers. This will mean that a licensee cannot enter into a consumer lease for household goods with a person if the total repayments under the consumer lease for household goods, and any other consumer leases that the consumer has, would exceed 10 per cent of the consumer's net income. Consequences of failing to comply with the repayment requirements 4.189 Failure to comply with the repayment requirements attracts a civil penalty of up to 5,000 penalty units. It also constitutes the commission of an offence with a financial penalty of up to 50 penalty units. [Schedule 4, item 26, subsections 156B(1) and (2)] 4.190 These penalties are consistent with the existing penalties that apply to a contravention of the repayment requirements for small amount credit contracts. 4.191 While the specified penalty for the contravention of the civil penalty provision is 5,000 penalty units, the maximum penalty applicable under section 167B of the Credit Act is: • for individuals, the greater of: - 5,000 penalty units; and - if the court can determine--the benefit derived or detriment avoided because of the contravention, multiplied by three; • for bodies corporate, the greater of the following: - 5,000 penalty units multiplied by ten (50,000 penalty units); - if the court can determine--the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three; and - 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units. 4.192 This penalty is intended to deter contraventions of the repayment requirements and reflects community expectations about an appropriate sanction for misconduct in the corporate and financial sector (including the credit sector). 148

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.193 Additionally, the civil penalty framework in the Credit Act allows for a degree of proportionality between the seriousness of the contravention and the quantum of the penalty. That is, if a court declares that a person has contravened a civil penalty provision, the court may exercise its discretion to declare a financial penalty that is appropriate in the circumstances, taking into account the following matters: • the nature and extent of the contravention; • the nature and extent of any loss or damage suffered because of the contravention; • the circumstances in which the contravention took place; and • whether the person has previously been found by a court to have engaged in similar conduct (see section 167 of the Credit Act). 4.194 Therefore, a court will generally only apply the maximum penalty in the most egregious instances of non-compliance. Introducing a loss of charges mechanism 4.195 A licensee who enters into a consumer lease that contravenes the protected earnings amount will lose their entitlement to any fees or charges above the base price of the goods hired under the lease. [Schedule 4, item 26, subsection 156B(3)] 4.196 Consumers who have paid any fees or charges above the base price of the goods hired under the lease may recover those fees and charges from the lessor, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 4, item 26, subsection 156B(3)] 4.197 This creates a greater financial incentive for lessors to comply with the payment requirements prescribed by the regulations, by allowing a consumer to recover all the fees or charges above the base price that would otherwise be payable under the lease. 4.198 The SACCs Review specifically identified that a loss of charges mechanism is appropriate with respect to contraventions of the protected earnings amount for consumer leases as: • these requirements are clear and can be easily complied with; • it is reasonable to expect that a diligent licensee would be readily able to ensure compliance; and • a contravention of these requirements would have significant adverse consequences for consumers. 149

Consumer credit reforms 4.199 These changes address recommendations 15 and 23 of the SACCs Review. Obtaining and considering account information 4.200 Part of 3 Schedule 4 to the Financial Sector Reform Bill 2022 introduces a new obligation on lessors offering consumer leases for household goods to obtain and consider information about transactions on a consumer's account with an ADI, and the balances of the account, that cover the immediately preceding period of 90 days. This is for the purpose of verifying the consumer's financial situation, which informs a licensee's assessment about whether the consumer lease will be unsuitable for the consumer. Information on all such transactions must be obtained. Consideration is limited to that information that is relevant and material to the assessment of whether the provision of credit is unsuitable. [Schedule 4, item 25, subsection 153(1A)] 4.201 This requirement does not limit or replace the obligation on the lessor to take reasonable steps to verify the consumer's financial situation, which may involve considering other information. For example, for consumers who receive social security payments, it is expected that the regulations will require a lessor to consider information in income and deduction statements from Services Australia. [Schedule 4, item 25, subsection 153(1B)] 4.202 The same requirement is also introduced for licensees that provide credit assistance in relation to consumer leases. [Schedule 4, item 22, subsections 140(1A) and (1B)] 4.203 These provisions address concerns that lessors are not making adequate inquiries about a consumer's expenses and capacity to pay before entering into the lease with the consumer. It also mirrors existing provisions relating to small amount credit contracts. Protection of account information and other documents 4.204 Part 6 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces new restrictions on the use or disclosure of constrained documents and information. Constrained documents and information include account information obtained by a lessor in connection with a consumer lease for household goods or a proposed consumer lease for household goods. [Schedule 4, item 76, subsection 160CA(1)] 4.205 The new restrictions apply to these lessors and any other persons who have obtained account information from the lessor, such as a representative of the lessor. However, these restrictions do not apply to the account holder to which the account information relate. [Schedule 4, item 76, subsections 160CA(1) and (2)] 150

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.206 A person (such as the lessor or a representative of the lessor) must not use or disclose account information unless the use or disclosure is: • to the person about whom the information relates; • necessary for the person to comply with the person's obligations under the Credit Act; • required or authorised by or under a law of the Commonwealth, or of a State or Territory, or a court or tribunal order; • for the purposes of considering a hardship notice; • for the purposes of assisting ASIC to perform its functions or exercise its powers; or • for the purposes of allowing AFCA to perform its functions or exercise its powers. [Schedule 4, item 76, subsections 160CB(1) and (5)] 4.207 This ensures that the personal information of a consumer (or a prospective consumer) is not misused by a lessor or their representatives. For example, it prevents a consumer's account information from being used to market further products and services to the consumer or being sold to third parties. 4.208 These exemptions ensure that, for example, a lessor can use account information to determine whether a consumer lease is not unsuitable for a consumer. A lessor may also disclose a consumer's account information to a third party if it is necessary to comply with the person's obligations under the Credit Act, such as the responsible lending obligations. 4.209 The exemptions operate as defences to the prohibition. For the purposes of the offence and the strict liability offence, a defendant bears an evidential burden in relation to the defence. This is appropriate as the circumstances which give rise to the defences (that is, the purpose of the defendant's use or disclosure of the account information) are peculiarly within the knowledge of the defendant. This is consistent with the principles in the Guide to Framing Commonwealth Offences. Consequences of failing to comply with the restrictions on constrained documents 4.210 Failure to comply with the new restrictions on using or disclosing constrained documents and information attracts a civil penalty of up to 5,000 penalty units. This is intended to deter contraventions of the restrictions and is consistent with existing civil penalty provisions in the Credit Act. [Schedule 4, item 76, subsection 160CB(1)] 151

Consumer credit reforms 4.211 A contravention of these requirements also constitutes the commission of: • an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and • a strict liability offence, with a financial penalty of up to 10 penalty units. [Schedule 4, item 76, subsections 160CB(2), (3) and (4)] 4.212 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer, in terms of privacy and implications for future transactions. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions occurring that could have a significant impact on vulnerable consumers. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences. 4.213 The new provisions contain a regulation-making power to allows these protections to extend to documents or information prescribed by the regulations. This ensures the Government can promptly respond to concerns about the use of information (other than account information) obtained by lessors in connection with consumer leases for household goods. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 4, item 76, subsection 160CA(1)] 4.214 These changes address recommendation 19 of the SACCs Review. Documenting assessments that a contract is not unsuitable 4.215 As part of the existing responsible lending obligations under the Credit Act, lessors are required to assess whether a consumer lease will be unsuitable for the consumer before: • entering into the consumer lease with the consumer; or • making an unconditional representation to the consumer that the lessor considers that the consumer is eligible to enter into a consumer lease. 4.216 Part 2 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces a new requirement for lessors of consumer leases for household goods to document in writing and in accordance with any requirements determined by ASIC: • any assessment that a consumer lease is not unsuitable for a consumer; and • the inquiries and verifications made in relation to that assessment. [Schedule 4, item 26, subsection 156C(1)] 152

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.217 This requirement does not impose a record-keeping obligation in circumstances where the lessor assesses that a consumer lease for household goods is unsuitable for a consumer. 4.218 The purpose of this new requirement is to enhance the transparency and accountability of decisions made by lessors that a proposed contract is not unsuitable. It should therefore result in improvements to assessment practices. 4.219 The power for ASIC to determine the requirements by legislative instrument ensures that the written documentation of the assessments contains an appropriate level of detail and information. It also allows ASIC to respond promptly to any deficiencies with the way in which lessors are documenting assessments. [Schedule 4, item 26, subsection 156C(2)] 4.220 Before ASIC can make such a legislative instrument, it must consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010), and have regard to any submissions made by the Commissioner. This provides the appropriate checks and balances, as any legislative instrument made by ASIC for these purposes may affect the privacy of individuals. For example, the legislative instrument may set out the kinds of personal information that need (or do not need) to be documented. [Schedule 4, item 26, subsection 156C(3)] 4.221 A contravention of this requirement attracts a civil penalty of up to 5,000 penalty units. This is consistent with the existing civil penalties in the Credit Act and is intended to deter contraventions of the new record-keeping requirements. [Schedule 4, item 26, subsection 156C(1)] 4.222 This requirement also extends to licensees that provide credit assistance in relation to consumer leases for household goods. That is, these credit assistance providers are required to document in writing, the preliminary assessment that a consumer lease for household goods is not unsuitable. [Schedule 4, item 23, section 147B] 4.223 These changes address recommendation 20 of the SACCs Review. Prohibition on public canvassing of consumer leases 4.224 Part 2 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces a prohibition on lessors canvassing consumer leases for household goods in public places or certain other places which, broadly put, are not the ordinary business premises of the lessor. [Schedule 4, item 53, subsection 179VA(1) of the Code] 153

Consumer credit reforms 4.225 This new prohibition aims to address the unfair sales practices that are often used by lessors in the course of door-to-door selling and other public selling practices. In particular, it recognises the potential for such sales environments to make it difficult for the consumer to refuse to enter into the lease and to ask the lessor to leave them alone. 4.226 A contravention of the new prohibition constitutes the commission of: • an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence; and • a strict liability offence, with a financial penalty of up to 10 penalty units. [Schedule 4, item 53, section 179VA of the Code] 4.227 Applying strict liability for this offence is appropriate because of the potentially serious financial impact a contravention may have on an affected consumer. The ability to seek a penalty without the need to prove fault as a particular element of the offence strengthens deterrence and reduces the likelihood of contraventions. Further, as the strict liability offence is punishable by a financial penalty of up to 10 penalty units, this approach is consistent with the Guide to Framing Commonwealth Offences. 4.228 A contravention of this prohibition also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 4, items 28 and 53, subsections 111(2A) and 179VA(1) of the Code] 4.229 The maximum penalty that may be imposed under Part 6 of the Code for a contravention of this key requirement is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. However, if the loss suffered by the lessee is greater than that amount, a greater penalty may be imposed. The tolerances and assumptions in sections 180 and 182 of the Code may apply to the calculation of this amount. This provides an additional avenue for lessees to seek redress against lessors. 4.230 A lessor who enters into a consumer lease for household goods with a consumer within 30 days of making an unsolicited communication will lose their entitlement to any permitted fees that would otherwise be payable under the consumer lease for household goods. [Schedule 4, item 53, subsection 179VA(4)] 4.231 Consumers who have paid any permitted fees in these circumstances may recover those fees from the lessor, as the consumer is not liable and is taken never to have been liable to pay those fees. [Schedule 4, item 53, subsection 179VA(4)] 4.232 This provision encourages compliance with the new prohibition and helps ensure that a benefit cannot be obtained from contravening the prohibition. 154

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.233 These changes address recommendation 18 of the SACCs Review. Warning statements 4.234 Licensees who offer consumers leases for household goods will be required to display information and give information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 4, item 26, subsection 156A(1)] 4.235 ASIC may, by legislative instrument, determine the following matters: • the information that the licensees must display and give to consumers; and • how and when the licensees must display and give the information to consumers. [Schedule 4, item 26, subsection 156A(2) 4.236 The power for ASIC to determine the requirements of the warning statements in a legislative instrument ensures the information provided is effective in highlighting risks with these contracts and assisting consumers to make better use of alternatives where available. In particular, it will give ASIC flexibility to mandate requirements which take into account different media for delivery of warnings, and to better account for the behavioural biases of consumers. The power would enable ASIC to prescribe: • different information to be provided to different classes of consumers (for example, consumers who are repeat users of small amount credit contracts or consumer leases could receive different messages from other consumers); • different information to be provided at different points of time (for example, a consumer could receive a targeted message when they are applying for a small amount credit contract or consumer lease); and • different modes of delivery (for example, consumers could be sent an SMS message as well as being able to view information on the licensee's website or at their business premises). 4.237 The purpose of these new obligations is to ensure that consumers receive relevant and effective information about the financial implications of entering into or using a consumer lease for household goods. This will assist consumers to make informed decisions about whether to enter into the lease. It can also assist them to understand what alternatives are available and how they can be of assistance to particular consumers. 4.238 A contravention of these new requirements attracts a civil penalty of up to 5,000 penalty units, and constitutes the commission of an offence with a 155

Consumer credit reforms financial penalty of up to 50 penalty units. This is consistent with the consequences that apply to this contravention in respect of small amount credit contracts. [Schedule 4, item 26, subsections 156A(1) and (3)] 4.239 This requirement also extends to licensees that provide credit assistance in relation to consumer leases for household goods. That is, these credit assistance providers must display information and provide information to consumers in accordance with any requirements determined by ASIC in a legislative instrument. [Schedule 4, item 23, section 147A] 4.240 These changes address recommendation 21 of the SACCs Review. Base price disclosure 4.241 In a consumer lease for household goods lessors must disclose: • the base price of the goods hired under the lease; and • the difference between the base price of the goods hired under the lease and the total amount payable by the consumer in connection with the lease (including any applicable taxes and any add-on fees, but not including an amount described in subsection 175AA(4)). [Schedule 4, item 49, subsection 174(1A) of the Code] 4.242 The regulations may prescribe additional information that lessors are required to disclose in a consumer lease for household goods and the form the disclosure must take. This is appropriate as the matters that should be required to be disclosed under a consumer lease may need to be supplemented to take into account evolving industry practices, including practices that may emerge as a result of the reforms introduced by Schedule 4 to the Financial Sector Reform Bill 2022. Any regulations made would be subject to parliamentary scrutiny and disallowance. [Schedule 4, item 49, subsection 174(1A) of the Code] 4.243 The purpose of the new disclosure requirements is to ensure a lessee is aware of the financial implications of the lease. In particular, the new requirements are intended to clearly show lessees the difference between the cost of the good (the base price of the good) and how much they are paying to lease the good. This will assist lessees to make informed decisions about the lease. 4.244 These new disclosure requirements supplement the existing matters that are required to be disclosed by lessors in a consumer lease, which are set out in section 174 of the Code. Among other things, lessors are currently required to disclose the amount of each rental payment, the total number of rental payments and the total amount of rent payable under the lease. 4.245 A contravention of section 174 (including these new disclosure requirements) currently attracts a civil penalty of up to 5,000 penalty units. It also constitutes 156

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 the commission of a strict liability offence with a financial penalty of up to 100 penalty units. 4.246 A contravention of the new disclosure requirements also constitutes a contravention of a key requirement, for which a penalty may be imposed by a court under Part 6 of the Code. [Schedule 4, items 28 and 49, subsections 111(2A) and 174(1A) of the Code] 4.247 Generally, the maximum penalty that may be imposed under Part 6 of the Code for a contravention of this key requirement is an amount not exceeding the difference between the total amount payable by the lessee in connection with the lease and the base price. 4.248 This change addresses recommendation 22 of the SACCs Review. Consequential amendments - consumer leases 4.249 The definitions in subsection 5(1) of the Credit Act and subsection 204(1) of the Code are updated to signpost the new definitions introduced by Schedule 4 to the Financial Sector Reform Bill 2022, including the definition of add-on fee, base price, consumer lease for household goods, household goods, permitted cap, permitted delivery fee, and permitted installation fees. [Schedule 4, items 20, 54 and 56, subsection 5(1) of the Credit Act and subsection 204(1) of the Code] 4.250 Subsection 5(1) of the Credit Act is also updated to refer to the definition of hardship notice currently in subsection 204(1) of the Code and signpost the new definitions of constrained document and constrained information. These definitions are relevant to the new protections regarding account information. The guide to Part 3-6A of the Credit Act is also updated to reflect these new protections. [Schedule 4, items 74 and 75, subsection 5(1) and section 160A] 4.251 The guide to Part 3-4 of the Credit Act is updated to reflect the new obligations on lessors offering consumer leases for household goods, such as the new protected earnings requirement. [Schedule 4, item 24, section 148] 4.252 The guide to Part 3-3 of the Credit Act is updated to reflect the new obligations on licensees that provide credit assistance in relation to consumer leases for household goods, such as the requirement to record the preliminary assessment that a consumer lease is not unsuitable [Schedule 4, item 21, section 134] 4.253 The existing definition of market value in the Code is also updated to ensure it applies to consumer leases as well as credit contracts. This may be relevant for 157

Consumer credit reforms the purposes of determining the base price of the goods under the lease. [Schedule 4, item 55, subsection 204(1) of the Code] 4.254 As Part 2 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces provisions relating to consumer leases into the key requirements regime for the first time, several consequential amendments to Part 6 of the Code are made to ensure the regime operates as intended. Many of these changes involve inserting references to 'consumer leases', 'lessors' and 'lessees' in Part 6 of the Code where appropriate. For example, the consequential amendments ensure that a party to a consumer lease can apply to the court for an order relating to key requirements. [Schedule 4, items 27 to 48, Part 6 of the Code] Application provisions - consumer leases 4.255 The amendments to enhance the consumer protection framework for consumers of consumer leases commence on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent. This is referred to as the commencement day. 4.256 The amendments about warning statements (see sections 147A and 156A of the Credit Act) apply in relation to representations made on or after the commencement day. [Schedule 4, item 78, item 3 of Schedule 19 to the Credit Transitional Act] 4.257 The amendments requiring preliminary assessments and assessments to be documented in writing (see sections 147B and 156C of the Credit Act) apply to preliminary assessment and assessments made on or after the commencement day. [Schedule 4, item 78, item 4 of Schedule 19 to the Credit Transitional Act] 4.258 The amendments requiring licensees to obtain and consider account information for the purpose of verifying the consumer's financial situation (see sections 140 and 153 of the Credit Act) apply to verifications made on or after the commencement day. [Schedule 4, item 78, item 5 of Schedule 19 to the Credit Transitional Act] 4.259 The amendments regarding the new protected earnings requirement, in section 156B of the Credit Act apply to consumer leases that are entered into, or offers made to enter into, consumer leases on or after the commencement day. [Schedule 4, item 78, item 6 of Schedule 19 to the Credit Transitional Act] 4.260 The new restrictions on the use of account information in section 160CB of the Credit Act, apply to uses or disclosures of account information on or after the commencement day. [Schedule 4, item 78, item 9 of Schedule 19 to the Credit Transitional Act] 4.261 The new restrictions on unsolicited selling of consumer leases in section 179VA of the Code apply to communications made on or after the 158

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 commencement day. [Schedule 4, item 78, item 13 of Schedule 19 to the Credit Transitional Act] 4.262 The remaining amendments about consumer leases apply to consumer leases entered into on or after the commencement day. [Schedule 4, item 78, item 12 of Schedule 19 to the Credit Transitional Act] 4.263 The commencement and application provisions are intended to provide affected industry participants sufficient time to prepare for the changes introduced by Schedule 4 to the Financial Sector Reform Bill 2022. Anti-avoidance measures Prohibition of avoidance schemes 4.264 Part 4 of Schedule 4 to the Financial Sector Reform Bill 2022 introduces new rules that prohibit schemes that are designed to prevent a contract from being a small amount credit contract or a consumer lease. The rules also prohibit schemes that are designed to avoid the application of a product intervention order made under Part 6-7A of the Credit Act. 4.265 The general prohibition provides that a person must not enter into a scheme, begin to carry out a scheme, or carry out a scheme if, having regard to specified matters (referred to in this document as avoidance matters), it would be reasonable to conclude that the purpose, or one of the purposes, of the person engaging in that conduct was an avoidance purpose. [Schedule 4, item 62, subsection 323A(1)] 4.266 Each of the following is an avoidance purpose: • to prevent a contract from being either a small amount credit contract or a consumer lease; • to cause a contract to cease to be a small amount credit contract or a consumer lease; • to avoid the application of a provision of the Credit Act to a small amount credit contract or a consumer lease; • to avoid the application of a provision of the Credit Act to a contract that has ceased to be a small amount credit contract or a consumer lease; • to avoid the application of a product intervention order made under Part 6-7A of the Credit Act. [Schedule 4, item 62, subsection 323A(2)] 159

Consumer credit reforms 4.267 The avoidance purposes may overlap depending on the nature of the scheme. For example, the same scheme may both prevent a contract from being either a small amount credit contract or a consumer lease and may also avoid the application of a product intervention order made under Part 6 7A. 4.268 The definition of avoidance purpose covers two kinds of avoidance: • where a scheme is structured to avoid being regulated by the Credit Act altogether (and so would, for example, prohibit a scheme in which a contract was structured as a small amount credit contract in order to avoid provisions specifically applying to consumer leases, or vice versa); and • where a licensee uses a scheme to avoid the application of particular provisions of the Credit Act (for example, a scheme in which a contract is structured as a credit contract and therefore avoids provisions specifically applying to consumer leases or to small amount credit contracts). 4.269 In addition to the general prohibition on persons, Schedule 4 to the Financial Sector Reform Bill 2022 introduces prohibitions in similar terms that apply to: • any constitutional corporations (either alone or with others) that enter into a scheme, begin to carry out a scheme or carry out a scheme; • any person (either alone or with others) who enters into a scheme, begins to carry out a scheme or carries out a scheme in the course of constitutional trade or commerce; and • any person (either alone or with others) using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution) who enters into a scheme, begins to carry out a scheme, or carries out a scheme. [Schedule 4, item 62, subsections 323A(3), (4) and (5)] 4.270 These prohibitions are independent from and do not limit each other. However, under section 175 of the Credit Act, while the same conduct may engage more than one of these prohibitions, a person can only be ordered to pay a pecuniary penalty under one of the prohibitions. [Schedule 4, item 62, subsection 323A(6)] 4.271 A scheme is defined broadly to capture: • any agreement, arrangement, understanding, promise or undertaking whether express or implied; or • any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral of otherwise. [Schedule 4, item 60, subsection 5(1)] 160

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.272 This would include, for example, an arrangement, plan or scheme that includes a number of elements, any of which could itself be considered a scheme under this definition. 4.273 This definition mirrors the definition of scheme in other anti-avoidance provisions in the A New Tax System (Goods and Services Tax) Act 1999 and the Income Tax Assessment Act 1997. 4.274 The reference to whether it would be 'reasonable' to draw the conclusion that a person has a relevant avoidance purpose ensures that the prohibition applies objectively. Having to prove the subjective intention of the person in question would otherwise not be feasible in many cases or would allow a person to artificially document the purpose of a scheme as being other than for avoidance. Using reasonableness ensures the integrity of the Credit Act and ensures that the effectiveness of the anti-avoidance provisions are not undermined. Avoidance matters 4.275 The avoidance matters that must be considered in determining whether there is an avoidance purpose are: • whether the scheme or the contract was, is or would be: - a means of providing a consumer with credit (or financial accommodation equivalent to providing the consumer with credit) in a manner more complex, or more costly to the consumer, than a small amount credit contract would have been; or - a means of enabling a consumer to have the use of goods in a manner more complex, or more costly to the consumer, than a consumer lease would have been; • whether representations were made (by the person or anyone else) about the scheme or the contract, or about schemes or contracts of that kind, that: - were similar to representations made (by the person or anyone else) about small amount credit contracts or consumer leases; or - were made to persons in a group similar to a group of persons to whom representations about small amount credit contracts or consumer leases were made; and - any matters prescribed by the regulations. [Schedule 4, item 62, subsection 323B(1)] 161

Consumer credit reforms 4.276 These matters are generally considered to be the key indicators of avoidance practices, and have been identified in, or associated with, past avoidance practices (in relation to either the Credit Act or its State and Territory predecessors). 4.277 The complexity of the contract or scheme, and whether it is more complex than a small amount credit contract or a consumer lease, is an indicator of avoidance as in many cases the purpose of that complexity is to avoid the contract from being regulated as a small amount credit contract or a consumer lease. This will generally be the case if the complexity is not needed to meet the objectives or requirements of the consumer. Examples of complexity in this context may include: • having multiple parties involved in an arrangement (for example, by splitting functions between different parties when normally they are undertaken by one party); or • breaking up a contract into a number of different transactions, so financial accommodation is provided to a consumer, even if it is not legally structured as a provision of credit. 4.278 It will also generally be the case that this complexity does not benefit the consumer and may instead operate in a way that is inconsistent with their objectives or requirements. 4.279 A contract or scheme that is more costly to the consumer than a small amount credit contract or a consumer lease is also a key indicator of avoidance because a common driver of avoidance behaviour is to charge the consumer higher amounts to maximise profits. Examples of this behaviour may involve: • the inclusion of unnecessary goods or services in the transaction; or • charging inflated or above market value prices for the goods or services; or • the artificial, contrived, or opportunistic characterisation or labelling of fees or charges (in response to the way the Credit Act imposes obligations in respect of specific types of fees or charges); • artificially providing the consumer with lower-cost options to source the credit or goods but designing the scheme in a way that maximises the use of high-cost products or services by consumers. 4.280 Finally, the representations about the scheme or contract are relevant as many contracts that have an avoidance purpose are represented as though they are small amount credit contracts or consumer leases. For example: • an advertisement about the contract may be similar to existing advertisements for regulated small amount credit contracts; or • an advertisement may make representations targeted at consumers who also use small amount credit contracts (such as consumers who are 162

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 unable to obtain or be eligible for credit from a bank or mainstream lender). 4.281 The regulation-making power recognises that industry participants may develop new avoidance practices which may require the Government to specify additional matters that must be considered in determining whether the relevant avoidance purpose exists. This flexibility is therefore necessary to ensure the prohibitions remain fit for purpose as entities prepared to engage in avoidance purposes will respond to legislative changes by identifying gaps in its scope and changing their practices accordingly. 4.282 The legislation also makes clear that matters other than the avoidance matters may be considered in determining whether the relevant avoidance purpose exists. [Schedule 4, item 62, subsection 323B(2)] 4.283 A specific regulation-making power is also introduced that enables matters to be specified in relation to whether it would be reasonable to conclude that a purpose of a person entering into or carrying out a scheme was to avoid the application of a product intervention order made under Part 6-7A. The conduct engaged in for this avoidance purpose may be different from that engaged in for the other avoidance purposes. This regulation-making power therefore gives additional flexibility to respond to evolving avoidance practices. [Schedule 4, item 62, subsections 323B(3) and (4)] Example 4.11 : Avoidance purpose Following recent 'DIY' renovations to his kitchen, Fitzy needs $600 urgently to repair his fridge, which was damaged during the renovations by his partner. Fitzy sees an advertisement on Facebook that says: Same day loans ... short term loans ... no groans. He clicks on the link and fills in a form with his personal details and how much he wants to borrow. A loan is arranged the same day. The loan has a term of two months, but fees and charges keep being added to Fitzy's loan account, including by third parties. Four months later, Fitzy still owes more than $600. He goes to a financial counsellor for help. He is told his contract has been drafted by the lender in a manner such that the loan is not regulated by the Credit Act. Additionally, the lender is not licensed and so is largely not subject to regulation under the Credit Act. The following factors are relevant to assessing whether the loan has been structured for an avoidance purpose: 163

Consumer credit reforms • that the amount charged to Fitzy, including the third-party fees, is more than the maximum amount that can be charged under a small amount credit contract; • that the arrangements are more complex than a small amount credit contract, as the transaction included two separate contracts in order to enable the third party to charge significant and repeated fees; and • that the advertisements are directed to a similar market as for small amount credit contracts, namely, consumers in urgent need of small amounts of money who cannot access those amounts from their existing financial resources. Consequences of failing to comply with the prohibition 4.284 Failure to comply with any of the new prohibitions attracts a civil penalty of up to 5,000 penalty units [Schedule 4, item 62, subsections 323A(1), (3), (4) and (5)] 4.285 A contravention of any of the prohibitions also constitutes the commission of an offence, with a financial penalty of up to 100 penalty units if fault is proven in respect of the offence. [Schedule 4, item 62, subsection 323A(7)] 4.286 These penalties reflect the serious financial impact that avoidance schemes have on consumers and regulated industry participants, and the need for a strong deterrent. It also supports ASIC's ability to take effective enforcement action in respect of these schemes. Presumption of avoidance for certain schemes 4.287 It is presumed, other than for criminal proceedings, that it is reasonable to conclude that a person entered into or carried out a scheme for an avoidance purpose if the scheme is a scheme prescribed by the regulations or determined by ASIC in a legislative instrument. [Schedule 4, item 62, subsection 323C(1)] 4.288 However, the presumption does not apply if the person proves that it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the avoidance matters in subsection 323B(1). [Schedule 4, item 62, subsection 323C(2)] 4.289 Placing the legal burden of proof on the person is appropriate as it will be peculiarly within the knowledge of the person to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose, compared with requiring ASIC to disprove that matter. For example, if the scheme in question does have a legitimate (non-avoidance) purpose, that matter would be peculiarly within the knowledge of the person. 164

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.290 Further, the presumption applies only in civil cases (not in criminal proceedings), and any regulations or legislative instrument made to prescribe or determine schemes that are presumed to have the relevant avoidance purpose will be subject to parliamentary scrutiny and disallowance. 4.291 Merely reversing the evidential burden of proof is insufficient as doing so will likely still result in ASIC being required to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose. This is inappropriate as it will be considerably easier for the person, opposed to ASIC, to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose. It also jeopardises the ability of the law to achieve its purpose of prohibiting avoidance schemes. 4.292 The conferral of a regulation-making power and a power for ASIC to make a legislative instrument in this context also reflects historical experience that avoidance schemes tend to proliferate quickly if they are seen by other industry participants to be effective. This flexibility therefore ensures that either the Government or ASIC can respond quickly to evolving practices as needed. Exemption by ASIC 4.293 ASIC also has the power to, by legislative instrument, exempt a scheme or class of schemes from all or specified parts of the prohibitions set out in section 323A. ASIC may impose any conditions on such an exemption. [Schedule 4, item 62, section 323D] 4.294 This ensures that ASIC is able to provide appropriately deal with a scheme and provide certainty, where the scheme: • does not cause harm to consumers or regulated industry participants; and • has a legitimate (non-avoidance) purpose. Consumer leases entered into for an indefinite period 4.295 Consumer leases are regulated under the Code. However, currently the Code does not apply to consumer leases that are entered into for an indefinite period. 4.296 Part 5 of Schedule 4 to the Financial Sector Reform Bill 2022 removes the provisions in the Code that exclude consumer leases entered into for an indefinite period from being regulated under the Credit Act. [Schedule 4, items 63 and 64, subsection 171(1) of the Code] 4.297 This change is made to reflect the risk that the introduction of the new obligations in Part 2 of Schedule 4 to the Financial Sector Reform Bill 2022, such as the introduction of a cap on the total amount that can be charged in 165

Consumer credit reforms connection with a consumer lease, will incentivise lessors to offer unregulated products where there is no cap. 4.298 However, the extension only applies to a consumer lease entered into for an indefinite period that • meets the definition of a consumer lease under section 169 of the Code--that is, a contract for the hire of goods by a natural person or strata corporation under which that person or corporation does not have a right or obligation to purchase the goods; • is otherwise a consumer lease to which Part 11 of the Code applies-- that is, each of the following is satisfied when the lease is entered into: - the goods are hired wholly or predominantly for personal, domestic or household purposes; - a charge is or may be made for hiring the goods and the charge together with any other amount payable under the consumer lease exceeds the cash price of the goods; and - the lessor hires the goods in the course of a business of hiring goods carried on in this jurisdiction or as part of or incidentally to any other business of the lessor carried on in this jurisdiction; and • is within the constitutional limitations. 4.299 The extension of the operation of the Credit Act to consumer leases entered into for an indefinite period is confined by constitutional limitations. 4.300 As a result, the extension only applies where: • the lessor under the lease is a constitutional corporation at the time the lease is entered into; • the lease was entered into in the course of constitutional trade and commerce; or • the lease was entered into using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution). [Schedule 4, item 65, subsection 171(1A) of the Code] 4.301 Lessors that are not constitutional corporations are prohibited from: • using postal, telegraphic, telephonic or other like services (within the meaning of paragraph 51(v) of the Constitution) to enter into a consumer lease for an indefinite period; or • entering into a consumer lease for an indefinite period in the course of constitutional trade and commerce. [Schedule 4, item 53, subsections 179VB and 179VC of the Code] 166

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 4.302 This ensures the extension of the operation of the Credit Act to consumer leases entered into for an indefinite period is as broad as possible, while staying within the constitutional limitations. 4.303 A contravention of either of these prohibitions attracts a civil penalty of up to 5,000 penalty units and constitutes the commission of an offence with a financial penalty of up to 100 penalty units. [Schedule 4, item 53, subsections 179VB and 179VC of the Code] 4.304 The effect of extending the operation of the Credit Act to consumer leases entered into for an indefinite period is that all the provisions of the Credit Act that currently apply to consumer leases will also apply to consumer leases entered into for an indefinite period, so far as they are capable of applying. 4.305 For example, as a lessor under a consumer lease entered into for an indefinite period will now be considered to be engaging in a credit activity regulated under the Credit Act, the lessor must obtain an Australian credit licence authorising it to engage in that activity. Other amendments 4.306 Part 5 of Schedule 4 to the Financial Sector Reform Bill 2022 amends section 175H of the Code so that lessors under both fixed-term and indefinite-term consumer leases must give the lessee an end of lease statement. [Schedule 4, item 66, subsection 175H(1) of the Code] 4.307 A lessor under a consumer lease entered into for an indefinite period must provide the statement before the end of seven business days after: • the lessor receives a request for a statement from the lessee; or • the day that the lease ends. [Schedule 4, item 67, subsection 175H(1A) of the Code] 4.308 Part 5 of Schedule 4 to the Financial Sector Reform Bill 2022 also amends section 179 of the Code so that it applies to the termination of both fixed-term and indefinite-term consumer leases. This means that: • a lessee under a consumer lease entered into for an indefinite period can terminate it at any time and in the same way as under a fixed-term consumer lease; • the amount payable by a lessee on the termination of a consumer lease entered into for an indefinite period is calculated on the same basis as for a fixed-term consumer lease; and 167

Consumer credit reforms • principles affecting that calculation can also be prescribed by the National Consumer Credit Protection Regulations 2010. [Schedule 4, items 68 to 72, section 179 of the Code] Consequential amendments - anti-avoidance measures 4.309 The definitions in subsections 5(1) of the Credit Act and subsection 204(1) of the Code are updated to include definitions relating to the new avoidance measures, including the definition of constitutional corporation and constitutional trade and commerce. [Schedule 4, items 60 and 73, subsection 5(1) of the Credit Act and subsection 204(1) of the Code] 4.310 The guide to Part 7-1 of the Credit Act is updated to reflect the new prohibitions on schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases. [Schedule 4, item 61, section 323] Application provisions - anti-avoidance measures 4.311 The amendments in Part 7 of Schedule 4 to the Financial Sector Reform Bill 2022 (prohibiting avoidance schemes) commence on the day after the Financial Sector Reform Bill 2022 receives Royal Assent. These amendments apply to conduct that relates to schemes connected with contracts entered into on or after that day, and that occurs on or after that day. [Schedule 4, item 78, item 10 of Schedule 19 to the Credit Transitional Act] 4.312 The amendments in Schedule 5 (relating to consumer leases entered into for an indefinite period) commence on the day after the end of the period of six months beginning on the day the Financial Sector Reform Bill 2022 receives Royal Assent (referred to as the commencement day). These amendments apply to consumer leases entered into on or after the commencement day. [Schedule 4, item 78, item 12 of Schedule 19 to the Credit Transitional Act] 168

Statement of Compatibility with Human Rights Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Table of Contents: Financial Accountability Regime Bill 2022 ......................................... 170 Overview ..................................................................................... 170 Human rights implications ........................................................... 170 Conclusion .................................................................................. 180 Financial Sector Reform Bill 2022 - Schedules 1 and 2 .................... 181 Overview ..................................................................................... 181 Human rights implications ........................................................... 182 Conclusion .................................................................................. 187 Financial Sector Reform Bill 2022 - Schedule 3 ................................ 188 Overview ..................................................................................... 188 Human rights implications ........................................................... 188 Conclusion .................................................................................. 191 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 ........................................................................................................... 192 Overview ..................................................................................... 192 Conclusion .................................................................................. 192 169

Statement of Compatibility with Human Rights Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 .......................................................................... 192 Overview ..................................................................................... 193 Human rights implications ........................................................... 193 Conclusion .................................................................................. 196 Financial Sector Reform Bill - Schedule 4 ......................................... 196 Overview ..................................................................................... 196 Human rights implications ........................................................... 197 Conclusion .................................................................................. 202 Financial Accountability Regime Bill 2022 Overview 5.1 The Financial Accountability Regime Bill 2022 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 5.2 The Financial Accountability Regime Bill 2022 creates a new accountability regime for the banking, insurance and superannuation industries. It establishes the Financial Accountability Regime, which extends the standards of conduct in the Banking Executive Accountability Regime to all APRA-regulated entities. This gives effect to recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 of the Financial Services Royal Commission. 5.3 The Financial Accountability Regime imposes a strengthened responsibility and accountability framework within financial institutions. It recognises that decisions taken by directors and the most senior and influential executives of financial institutions are significant and have flow on effects for the Australian economy. 5.4 The Financial Accountability Regime Bill 2022 empowers the APRA and the ASIC to jointly administer and enforce the Regime. Human rights implications 5.5 The Financial Accountability Regime Bill 2022 engages the following human rights or freedoms: 170

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • the right to a fair trial under Article 14 of the ICCPR; • the imposition of strict liability for an offence; • the right against self-incrimination under Article 14(3)(g) of the ICCPR; • the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR; and • the right to freedom of expression under Article 19(2) of the ICCPR. Right to a fair trial under Article 14 of the ICCPR 5.6 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals.4 5.7 The Financial Accountability Regime Bill 2022 engages these rights as it contains civil penalties and criminal offences for non-compliance, includes an evidential burden on a defendant, and provides for administrative and judicial review. Assessment of Civil Penalties 5.8 Guidance Note 2: Offence provisions, civil penalties and human rights observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the ICCPR, regardless of the distinction between criminal and civil penalties in domestic law.5 This is because the word 'criminal' has an autonomous meaning in international human rights law. Therefore, when a provision imposes a civil penalty, an assessment is required to ascertain whether it amounts to a 'criminal' penalty for the purposes of complying with the ICCPR. Such assessment requires consideration of the nature and purpose of the penalties, the classification of the penalty provisions under domestic law, and the severity of the penalties. 5.9 Sections 80 and 81 of the Financial Accountability Regime Bill 2022 contain civil penalties. Section 80 imposes a civil penalty where an accountable entity 4 Australian Government Attorney-General's Department, Fair Trial and Fair Hearing Rights, available at: https://www.ag.gov.au/rights-and-protections/human-rights-and-anti- discrimination/human-rights-scrutiny/public-sector-guidance-sheets/fair-trial-and-fair-hearing- rights 5 Parliamentary Joint Committee on Human Rights, Practice Note 2: Offence provisions, civil penalties and human rights, December 2014, available at: http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Human_Rights/Guidance_N otes_and_Resources 171

Statement of Compatibility with Human Rights fails to comply with an obligation under Chapter 2 of the Financial Accountability Regime Bill 2022. Section 81 imposes a civil penalty where a person assists another person to contravene a civil penalty provision under the Financial Accountability Regime. Section 81 is the only civil penalty which applies to a person other than a body corporate. It is intended to deter an accountable person from aiding an accountable entity to contravene its accountability obligations. Providing this penalty for ancillary contraventions of the Financial Accountability Regime continues the approach of the Banking Executive Accountability Regime, providing continuity of expectations on executives. 5.10 The civil penalty provisions are expressly classified as civil penalties. While the domestic classification alone may not be determinative, it is indicative of the nature of the penalty. A criminal penalty is punitive and may include imprisonment in addition to pecuniary sanctions. In contrast, the civil penalties imposed by the Financial Accountability Regime Bill 2022 are regulatory and disciplinary in nature, and solely involve pecuniary penalties in the form of a debt payable to the Commonwealth. None of the civil penalty provisions carry a penalty of imprisonment nor a sanction of imprisonment for non-payment of a penalty, and a finding by a court that these sections have been contravened does not lead to the creation of a criminal record. 5.11 The amount of the civil penalty for a person other than a body corporate is calculated using a formula where the maximum penalty is at least 5,000 penalty units (currently $1,110,000) (see section 83). The maximum penalty may be greater depending on the benefit derived or detriment avoided by the person. This approach is consistent with existing legislative regimes that apply to industries regulated by the Financial Accountability Regime and allows a court to determine a penalty appropriate to the circumstances of the case. 5.12 The nature, classification and amount of the civil penalty provisions in the Financial Accountability Regime Bill 2022 show these provisions do not create criminal offences for the purposes of Articles 14 and 15 of the ICCPR. New Criminal Offences 5.13 The Financial Accountability Regime Bill 2022 provides criminal offences relating to non-compliance with specific provisions. Most offences apply to accountable entities or their significant related entities rather than to natural persons such as accountable persons. Offences which could apply to a natural person involve non-compliance with provisions relating to: • an investigation or examination (sections 46 and 51-53); • a request for information or a direction of the Regulator (sections 63, 66 and 68); and • a requirement relating to legal professional privilege (section 89). 172

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.14 The strong deterrent effect of criminal sanctions is necessary for the Financial Accountability Regime because of the central role that directors and senior executives of entities operating in the Australian financial system play in the Australian economy. 5.15 These offences are designed to deter misconduct and support the integrity of the Regime through efficient oversight and regulation. Most of these offences replicate existing offences in the Banking Act 1959 that apply in relation to the Banking Executive Accountability Regime (sections 46, 51-53, 63, 66 and 68). It is appropriate to maintain the treatment of this conduct as a criminal offence to provide continuity between the regimes, and due to the serious nature of the wrongdoing involved which could compromise oversight and enforcement of the Regime (see Chapter 2 of the Guide to Framing Commonwealth Offences). 5.16 The offences are modelled on the standard for all Australian criminal laws, including default elements from the Criminal Code. 5.17 Consistent with Article 14(1) of the ICCPR, an independent, impartial court will preside over all criminal proceedings brought under the Financial Accountability Regime Bill 2022, which will be subject to established Australian court processes and procedures that protect the right to a fair trial including requirements relating to procedural fairness, evidence and sentencing. 5.18 As these offences are appropriately designed to ensure integrity of the Financial Accountability Regime and its proper regulation, and will be administered in accordance with Australia's standards for criminal law proceedings, the offences created by Schedule 4 to the Financial Sector Reform Bill 2022 are consistent with Article 14 of the ICCPR. Certain offences engage with other human rights; analysis of those interactions is set out in subsequent sections of this Statement. Evidential burden 5.19 The Financial Accountability Regime Bill 2022 imposes an evidential burden on a defendant who wishes to raise a defence to the offence of disclosing information which was subject to a secrecy arrangement (section 68(3)). As the provision imposes an evidentiary burden on the defendant, it engages the right to a fair trial under Article 14 of the ICCPR. 5.20 The Financial Accountability Regime Bill 2022 provides a range of exceptions to the section 68 offence where disclosure is lawfully permitted (sections 69- 75). The offence does not apply where the information was already lawfully in the public domain, or was disclosed to a legal representative in order to seek advice or to another person who is also subject to relevant secrecy arrangements for the purpose of another exception. It is also not an offence 173

Statement of Compatibility with Human Rights where the disclosure was in accordance with the Australian Prudential Regulation Authority Act 1998, the Australian Securities and Investments Commission Act 2001, a determination of the Regulator, or the Minister rules of the Financial Accountability Regime. In addition to these exceptions, which operate as offence-specific defences, disclosure may also take place if it is required by an order or direction by a court or a tribunal. 5.21 Placing an evidential burden in relation to those defences is appropriate, proportionate and reasonable. Principally, this is because in the vast majority of cases it will be peculiarly within the knowledge of the defendant how the information may have been publicly accessed, or the means by which the conduct was authorised by another law of the Commonwealth. This in turn is due to the wide range of publicly available information and circumstances in which other laws could authorise or require disclosure. Evidence establishing that disclosure was to a legal representative for the purpose of seeking legal advice or to another person as permitted by the other exceptions is also peculiarly within the defendant's knowledge and control. 5.22 Placing an evidentiary burden on the defendant is further justified because it would be significantly more difficult for the prosecution to disprove these matters than it would be for the defendant to establish these matters. 5.23 Placing an evidential burden of proof on the defendant is also justified as it aligns with the approach taken in other similar frameworks. For example, it is consistent with the treatment of other protected information collected under prudential frameworks which is held by APRA including information collected under the predecessor regime to the Financial Accountability Regime, the Banking Executive Accountability Regime under Part IIAA of the Banking Act 1959 (see section 56 of the Australian Prudential Regulation Authority Act 1998). Similarly, an evidential burden of proof exists in relation to the other prudential frameworks which interact with the regime including a matter raised under section 11CI of the Banking Act 1959, section 109A of the Insurance Act 1973, section 231A of the Life Insurance Act 1995. Consistency of approach across this complex legal framework is important to support understanding and application of the law. 5.24 In summary, engaging the right to a fair trial in this way is necessary because it achieves the legitimate objective of ensuring that directions given by the Regulator (subject to a secrecy arrangement) is not disclosed in ways that may cause harm, and it ensures consistency of approach across relevant laws. Placing an evidentiary burden on the defendant therefore ensures that a secrecy offence is effectively prosecuted. As such the provision is consistent with the right to a fair trial under Article 14 of the ICCPR. 174

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Merits and judicial review 5.25 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals.6 5.26 The Financial Accountability Regime Bill 2022 engages and supports these rights by providing court and tribunal oversight of administrative decisions. The Financial Accountability Regime Bill 2022 expressly provides for merits review of certain decisions made under the regime by the Administrative Appeals Tribunal (see section 91). 5.27 Certain decisions of the Minister and of the Regulator are not subject to merits review, consistent with the Administrative Review Council's publication "What Decisions Should be Subject to Merits Review?".7 In particular, decisions which are legislation-like in character, and decisions which are procedural or preliminary as they precede a substantive decision, are not suitable for administrative review. Likewise, other decisions are not reviewable where the benefits of not providing administrative review outweigh the objectives of providing it. This applies to decisions of the Regulator and the Minister that are made in favour of the affected person by reducing the scope of their responsibilities or by providing flexibility or an exemption from compliance with the Financial Accountability Regime (see sections 11 and 16 of the Financial Accountability Regime Bill 2022). If requested, the Minister must provide reasons for the decision, as required by section 13 of the Administrative Decisions (Judicial Review) Act 1977 to support procedural fairness. 5.28 Judicial review of an exercise of power or performance of function by the Regulators is also available, unless on the grounds of jurisdictional error solely in relation to one Regulator not having the other's agreement to act, or their arrangement for administration not being in place or available on their website (see section 95). 5.29 As such, the Financial Accountability Regime Bill 2022 upholds and does not unreasonably limit the right to a fair trial or fair hearing with respect to administrative decisions and judicial review. 6 Australian Government Attorney-General's Department, Fair Trial and Fair Hearing Rights, available at: https://www.ag.gov.au/rights-and-protections/human-rights-and-anti- discrimination/human-rights-scrutiny/public-sector-guidance-sheets/fair-trial-and-fair-hearing- rights. 7 Administrative Review Council, What decisions should be subject to merits review?, 1999, available at: https://www.ag.gov.au/legal-system/administrative-law/administrative-review- council-publications/what-decisions-should-be-subject-merit-review-1999. 175

Statement of Compatibility with Human Rights Strict Liability Offence 5.30 The Financial Accountability Regime Bill 2022 imposes a strict liability offence in section 44 where an accountable entity or a significant related entity of an accountable entity appoints a person, disqualified under the FAR, as an 'accountable person'. This includes appointments on a temporary basis. 5.31 This offence does not apply to a natural person, nor could ancillary liability under section 81 apply as such liability relates to contravention of civil penalty provisions, not to offences. 5.32 The prosecution will not need to prove fault as part of a strict liability offence. This approach is appropriate here as there is no ambiguity as to whether a person is disqualified or not. The deterrence provided by a strict liability offence is requested because allowing a disqualified person to act as or be an accountable person would go against the prudential and conduct-related standards the FAR seeks to strengthen. Recognising the importance of such deterrence, section 44 also provides a fault-based offence with a higher penalty than the strict liability offence (250 penalty units compared to 60 penalty units) to cater for more serious situations where the mental element can be proven. 5.33 The penalty for the strict liability offence for entities complies with the requirements of the Guide to Framing Commonwealth Offences as: • the offence is not punishable by imprisonment; • the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals (currently $13,320)); and • the harm to consumers and overall financial stability is so significant that fault should not be an element of the offence. Right against self-incrimination under Article 14(3)(g) of the ICCPR 5.34 The Financial Accountability Regime Bill 2022 empowers the Regulator or an investigator to require a person to cooperate and assist with investigations and examinations (see section 46). This includes answering questions put to the person, signing of a record provision of certain documents, books or accounts. 5.35 The investigation and examination powers engage the right against self- incrimination under Article 14(3)(g) of the ICCPR because they provide that a person cannot refuse to cooperate and/or assist with an investigation or examination on the basis that doing so would incriminate the person. This includes the person refusing to: appear for examinations, answer questions, provide documents, books or accounts, and/or, sign a record. A failure to act in a certain way or provide information required is punishable by a criminal penalty of up to 50 penalty units (currently, $11,100). 176

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.36 However, the Financial Accountability Regime Bill 2022 balances the Regulator's or investigator's need to access information with a natural person's right against self-incrimination by limiting the use of incriminating material supplied by the person. Specifically, incriminating information or documents provided (and identified as such) cannot be used against the individual in criminal proceedings or in proceedings where the person may be liable to a criminal penalty (see section 88). 5.37 The protection does not however apply to proceedings concerning the falsity of the information or documents provided. This is consistent with sections 137.1 and 137.2 of the Criminal Code which creates offences for providing false or misleading information. Incriminating evidence supplied by an individual can also be used to investigate unlawful conduct by that person and a third party, including in subsequent proceedings against a third party. 5.38 These provisions are required in this manner because the material and evidence necessary for the Regulator or investigator to perform its regulatory function is likely to only be available from certain individuals in an entity. Obtaining such information would be critical to give effect to the regulatory functions of the Financial Accountability Regime which in turn ensures the stability of Australia's financial system and prudential standing. 5.39 Engaging the right against self-incrimination in this way is necessary and justified as the public benefit in removing the liberty outweighs the loss to the individual. The regulatory powers in the Financial Accountability Regime Bill 2022 are therefore consistent with the right against self-incrimination under Article 14(3)(g) of the ICCPR. Right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR 5.40 Privacy is a concept that is broad in scope and includes a right to information privacy. Article 17 of the ICCPR prohibits unlawful or arbitrary interferences with a person's privacy, family, home or correspondence. It also provides that everyone has the right to protection from the law against such interference or attacks. 5.41 The Human Rights Committee has interpreted the term 'unlawful' to mean that interferences cannot take place except in cases envisaged by law, which itself must comply with the provisions, aims and objectives of the ICCPR. The Human Rights Committee has also indicated that an interference will not be considered to be 'arbitrary' if it is provided for by law, is in accordance with 177

Statement of Compatibility with Human Rights the provisions, aims and objectives of the ICCPR, and is reasonable in the particular circumstances.8 5.42 The Financial Accountability Regime Bill 2022, through its notification obligations, requires an accountable entity to provide particular information about the entity and its accountable persons. Additionally, the Financial Accountability Regime Bill 2022, through its information gathering powers, also allows the Regulator to request information from accountable entities, its significant related entities or accountable persons. Insofar as the application of these provisions results in the collection, use, sharing or disclosure of information (including personal information), they engage the right to privacy under Article 17 of the ICCPR. 5.43 Mechanisms in the Financial Accountability Regime Bill 2022 which involve collection, use and or disclosure of information include: • accountable entities' notification obligations, to notify the Regulator of the entity's structure and key personnel through accountability statements and accountability maps (Chapter 2 part 6 of the Financial Accountability Regime Bill 2022); • the Regulator's registration function, which includes registering and keeping a register of accountable persons (Chapter 3 part 3 of the Financial Accountability Regime Bill 2022); • information sharing powers, to allow one Regulator to disclose information or documents to the other for the purpose of their functions or powers, such as maintaining the register of accountable persons or conducting an investigation (section 39 of the Financial Accountability Regime Bill 2022); and • the Regulator's power to request information for a purpose under the Regime, such as ensuring or investigating compliance (section 62 of the Financial Accountability Regime Bill 2022). 5.44 These mechanisms are necessary for the Regulator to carry out its functions to administer and enforce the Regime; it would not be possible to achieve the objectives of the Financial Accountability Regime Bill 2022 to ensure accountability of entities and executives in the financial sectors without collecting information about relevant individuals. 5.45 In relation to the register of accountable persons, the Financial Accountability Regime Bill 2022 requires this include details of each accountable person such as their name, date of registration, details of any disqualification as an accountable person, and other relevant information prescribed by the Regulator rules. Section 40(5) allows the Regulator to make any such information available for public inspection, for instance disqualification information. 8 General comment No. 16: Article 17 (Right to privacy), Thirty second session (1988) at [3]- [4]. 178

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Maintaining the register is necessary to ensure that entities do not inadvertently appoint a disqualified individual. Moreover, providing public access to this information allows accountable entities and members of the public to ensure that their financial representatives are correctly registered and qualified to provide services, which justifies the impact upon accountable persons' right to privacy. 5.46 To ensure a balanced approach and avoid arbitrary interferences with privacy, the Regulator's powers to collect and use personal information under the Financial Accountability Regime Bill 2022 are tailored to the purpose of carrying out its functions and powers. This is expressed directly in the powers to share information (section 39) and request information (section 62). It is also evident in the design of section 40 (register) as the types of information collected for the register are designed to only capture information relevant to the person's registration and responsibilities, not other personal information. 5.47 In addition, the Regulator is also subject to information handling obligations which ensure personal information is collected, used and stored securely in accordance with the Privacy Act 1988, which gives effect to the right to privacy in Australia. 5.48 This approach ensures that any limitation on privacy is reasonable, as it is proportionate to the legitimate aim of the Financial Accountability Regime of transparency and accountability. 5.49 The provisions in the Financial Accountability Regime Bill 2022 relating to the collection, use, sharing or disclosure of information are therefore consistent with the right to protection against arbitrary or unlawful interference with privacy under Article 17 of the ICCPR, as they are explicitly specified for in appropriate circumstances. Right to freedom of expression under Article 19(2) of the ICCPR 5.50 The Financial Accountability Regime Bill 2022, through its secrecy provisions, allows the Regulator to indicate in writing that directions it has provided to an accountable entity must not be publicly disclosed (see section 67). Specifically, the Financial Accountability Regime Bill 2022 allows the Regulator to make a secrecy determination if it considers it necessary to protect consumers and/or to promote the stability of the financial system in Australia. Except for limited circumstances, a breach of these secrecy provisions may result in imprisonment of up to two years. 5.51 These provisions engage the right to freedom of opinion and expression under Article 19(2) of the ICCPR because they prevent entities or persons working in 179

Statement of Compatibility with Human Rights the entity from disclosing details of a direction given to them. Consequentially, they also restrict public access to information relating to such directions. 5.52 Article 19(2) of the ICCPR provides that everyone has the right to freedom of expression, including the freedom to impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media. 5.53 Article 19(3) provides that this right may be limited on the grounds including respect for the rights of others, or the protection of national security or public order and that any limitations must be prescribed by legislation and be reasonable, necessary and proportionate to achieve the desired purpose. 5.54 The secrecy provisions in the Financial Accountability Regime Bill 2022 are intended to prevent significant losses to consumers as well as fiscal instability that may arise as a result of unauthorised disclosure of information in the directions. Furthermore, these provisions can also prevent public detriment by averting contagions within the financial system. 5.55 The secrecy provisions have been balanced with a range of exceptions which allow for the disclosure of information in appropriate circumstances. For example, disclosure is allowed where information is subject to a direction that is already public or otherwise authorised by the Regulator. Disclosure to a legal representative is also allowed for the purpose of obtaining legal advice. 5.56 The exceptions identified in the Financial Accountability Regime Bill 2022 ensure that the secrecy provisions are proportionate as they do not unduly or unfairly limit disclosure. As such these provisions are consistent with the right to freedom of expression under Article 19(2) of the ICCPR. Conclusion 5.57 In summary: • the strict liability offences are appropriate and consistent with the requirements of the Guide to Framing Commonwealth Offences; • the investigation and examination powers are consistent with the right against self-incrimination under Article 14(3)(g) of the ICCPR; • the secrecy provisions are consistent with the right to freedom of expression under Article 19(2) of the ICCPR as well as the right to a fair trial under Article 14 of the ICCPR; and • the notification obligations and information gathering and use powers (including keeping a register of accountable persons) are consistent with the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR. 180

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.58 As such, the Financial Accountability Regime Bill 2022 is compatible with human rights because to the extent that it may limit human rights or freedoms, those limitations are reasonable, necessary and proportionate. Financial Sector Reform Bill 2022 - Schedules 1 and 2 Overview 5.59 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 5.60 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 make consequential amendments and transitional arrangements to support establishment of the Financial Accountability Regime by the Financial Accountability Regime Bill 2022. 5.61 The Financial Accountability Regime imposes an accountability framework for certain entities in the banking, insurance and superannuation industries (accountable entities, and their significant related entities), and their directors and most senior and influential executives (accountable persons). 5.62 The Financial Accountability Regime will first apply to the banking industry (ADIs and their authorised non-operating holding companies). Entities in the banking industry are currently subject to the obligations under the Banking Executive Accountability Regime, under the Banking Act 1959. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 make consequential amendments to other legislation and transitional arrangements so that these entities can be transitioned from the Banking Executive Accountability Regime to the Financial Accountability Regime, ensuring continuity of practices and requirements. 5.63 The Financial Accountability Regime will also apply to other APRA-regulated entities in the insurance and superannuation industries. For such entities there is a deferred application so they have sufficient to adjust their systems and processes before they are subject to the obligations under the Regime. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 makes consequential amendments and transitional arrangements to assist this process, such as allowing for early application for registration of accountable persons, to prepare for the start date of the Regime for the relevant industry. 181

Statement of Compatibility with Human Rights Human rights implications 5.64 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 engages the following human rights or freedoms under the ICCPR: • the right to a fair trial and due process under Article 14 of the ICCPR; • the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR; and • the right to freedom of expression under Article 19(2) of the ICCPR. Right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR 5.65 Privacy is a concept that is broad in scope and includes a right to information privacy. Article 17 of the ICCPR prohibits unlawful or arbitrary interferences with a person's privacy, family, home or correspondence. It also provides that everyone has the right to protection from the law against such interference or attacks. 5.66 The Human Rights Committee has interpreted the term 'unlawful' to mean that interferences cannot take place except in cases envisaged by law, which itself must comply with the provisions, aims and objectives of the ICCPR. The Human Rights Committee has also indicated that an interference will not be considered to be 'arbitrary' if it is provided for by law, is in accordance with the provisions, aims and objectives of the ICCPR, and is reasonable in the particular circumstances.9 5.67 The Financial Accountability Regime engages the right to privacy where application of provisions results in the collection, use and disclosure of personal information. 5.68 The right to privacy is most directly engaged by the substantive obligations and powers of the Regime established in the Financial Accountability Regime Bill 2022. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 also engages the right to privacy through provisions that facilitate the transition of the banking, insurance and superannuation sectors into the Regime. 5.69 In particular, Schedules 1 and 2 to the Financial Sector Reform Bill 2022 contains provisions that: • Mean a notification obligation or an application for registration under the Banking Act 1959 (which established the Banking Executive Accountability Regime) is continued under the Financial 9 General comment No. 16: Article 17 (Right to privacy), Thirty second session (1988) at [3]- [4]. 182

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Accountability Regime (Schedule 2 to the Financial Sector Reform Bill 2022, part 2, in particular items 6, 8 and 14); • Allow an early application for registration of an accountable person under the Financial Accountability Regime, so the person may begin their responsibilities on the start date for the relevant industry (Schedule 2, items 8 and 22); and • Enable information collected under the Banking Executive Accountability Regime to be used to investigate breaches under the Financial Accountability Regime (Schedule 2 to the Financial Sector Reform Bill 2022, items 29, 30, 31, and 33). 5.70 These provisions are designed to facilitate a smooth transition into the Financial Accountability Regime, and are important for integrity of the Regime. 5.71 The information required through the registration and notification processes is essential for the Regulator to administer and enforce the Financial Accountability Regime. The substantive provisions are designed to ensure any impact on privacy is reasonable and proportionate to the aim of greater transparency and accountability in the regulated sectors. For instance, only information relevant to a person's role and responsibilities under the Regime is collected, not other personal information (Section 39 of the Financial Accountability Regime Bill 2022). Consistent with this, Schedules 1 and 2 to the Financial Sector Reform Bill 2022 requires the Regulator's annual reports on investigations not include information about a particular person (Schedule 1 to the Financial Sector Reform Bill 2022, items 14 and 19). 5.72 Use of information collected in regulating or investigating compliance with the Banking Executive Accountability Regime is necessary to ensure an effective regulatory transition to the new Regime. In relation to regulatory uses of information collected under the Banking Executive Accountability Regime, this can occur regardless of whether the relevant breach occurred before or after the commencement of the Financial Accountability Regime. However, restrictions on sharing information between the Regulators in relation to such information brought in as part of the Financial Accountability Regime will apply. This means the information must be used for the purpose of fulfilling the Regulator's functions or powers under the Regime, not for other purposes (see section 39 of the Financial Accountability Regime Bill 2022). This approach ensures any impact on privacy is not arbitrary and is proportionate to the broader goals of ensuring accountability and integrity of the Regime. 5.73 The provisions in Schedules 1 and 2 to the Financial Sector Reform Bill 2022 relating to the collection, use, sharing or disclosure of information are therefore consistent with the right to protection against arbitrary or unlawful interference 183

Statement of Compatibility with Human Rights with privacy under Article 17 of the ICCPR, as they are explicitly specified for in appropriate circumstances. Right to freedom of expression under Article 19(2) of the ICCPR 5.74 Article 19(2) of the ICCPR provides that everyone has the right to freedom of expression, including the freedom to impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media. 5.75 Article 19(3) provides that this right may be limited on the grounds including respect for the rights of others, or the protection of national security or public order and that any limitations must be prescribed by legislation and be reasonable, necessary and proportionate to achieve the desired purpose. 5.76 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 engages the right to freedom of opinion and expression under Article 19(2) because it transitions secrecy arrangements under the Banking Executive Accountability Regime in the Banking Act 1959 through to the Financial Accountability Regime (Schedule 2 to the Financial Sector Reform Bill 2022, items 15, 29 and 31). 5.77 The Financial Accountability Regime Bill 2022, through its secrecy provisions, allows the Regulator to indicate in writing that directions it has provided to an accountable entity must not be publicly disclosed (see section 67). Specifically, the Financial Accountability Regime Bill 2022 allows the Regulator to make a secrecy determination if it considers it necessary to protect consumers and/or to promote the stability of the financial system in Australia. Except for limited circumstances, a breach of these secrecy provisions may result in imprisonment of up to two years. 5.78 These provisions engage the right to freedom of opinion and expression under Article 19(2) of the ICCPR because they prevent entities or persons working in the entity from disclosing details of a direction given to them. Consequentially, they also restrict public access to information relating to such directions. 5.79 As such, provisions of Schedules 1 and 2 to the Financial Sector Reform Bill 2022 which support the transition of substantive provisions and active secrecy arrangements under the Banking Act 1959 (which established the Banking Executive Accountability Regime) to the Financial Accountability Regime engage the right to freedom of expression in the same way. 5.80 The secrecy provisions of the Regimes are intended to prevent significant losses to consumers as well as fiscal instability that may arise as a result of unauthorised disclosure of information in the directions. Furthermore, these provisions can also prevent public detriment by averting contagions within the financial system. 184

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.81 The secrecy provisions have been balanced with a range of exceptions which allow for the disclosure of information in appropriate circumstances. For example, disclosure is allowed where information is subject to a direction that is already public or otherwise authorised by the Regulator. Disclosure to a legal representative is also allowed for the purpose of obtaining legal advice. The exceptions ensure that the secrecy provisions are proportionate as they do not unduly or unfairly limit disclosure. 5.82 As such, the provisions of Schedules 1 and 2 to the Financial Sector Reform Bill 2022 which provide transitional arrangements for secrecy arrangements under other legislation are consistent with the right to freedom of expression under Article 19(2) of the ICCPR. Protected information - rights under Articles 14 and 19 of the ICCPR 5.83 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 contain provisions relating to 'protected information' which engage the right to a fair trial in Article 14 of the ICCPR as well as the right to freedom of expression in Article 19 of the ICCPR. 5.84 Article 14 establishes rights to due judicial process and procedural fairness, which Australia applies in both civil and criminal proceedings. This right is engaged by provisions which establish criminal offences and evidential burdens on defendants in relation to offences for disclosure of 'protected information. 5.85 As noted above, Article 19 provides that everyone has the right to freedom of expression, including the freedom to seek, receive and impart information and ideas in any form. Article 19(3) provides that this right may be limited on the grounds including respect for the rights of others, or the protection of national security or public order and that any limitations must be prescribed by legislation and be reasonable, necessary and proportionate to achieve the desired purpose. This right is engaged by provisions which limit disclosure of and access to information which is protected information under the Financial Accountability Regime. 5.86 Most information obtained or disclosed under the Financial Accountability Regime will be 'protected information' within the meaning of each Regulator's enabling legislation. This means that the information will be subject to APRA's and ASIC's standard secrecy and confidentiality obligations. Where the Regulators' legislation is inconsistent, Schedules 1 and 2 to the Financial Sector Reform Bill 2022 makes consequential amendments to align the approach in relation to the Financial Accountability Regime. This approach protects confidential information of financial services businesses, and 185

Statement of Compatibility with Human Rights encourages entities to be open and honest in their dealings with APRA and ASIC. 5.87 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 achieve this by amending relevant definitions of protected information, protected document, and prudential regulation framework law to include information obtained or disclosed under the Financial Accountability Regime (Schedule 1 to the Financial Sector Reform Bill 2022, items 1 and 5 to 8). 5.88 Schedules 1 and 2 to the Financial Sector Reform Bill 2022 also introduce a prohibition into the Regulators' legislation to protect against the disclosure of information that is protected information because of the Financial Accountability Regime (Schedule 1 to the Financial Sector Reform Bill 2022, items 9, 16 and 17). This has the effect of extending the existing offence in section 56 of the Australian Prudential Regulation Authority Act 1998 to cover the Regime, and introducing a new, equivalent offence into section 127 of the Australian Securities and Investments Commission Act 2001 to support a consistent regulatory approach. 5.89 These offences are necessary to protect the personal and sensitive financial information collected under the Regime, and aim to deter inappropriate disclosure. It is appropriate to have a criminal offence given the sensitivity of the information covered by the prohibition on disclosure, which could compromise oversight of the Financial Accountability Regime or result in harm to regulated entities or persons if disclosed or used other than in accordance with the legislation. 5.90 Importantly, consistent with Article 14(1) of the ICCPR, an independent, impartial court will preside over any criminal proceedings, which will be subject to established Australian court processes and procedures that protect the right to a fair trial including requirements relating to procedural fairness, evidence and sentencing. 5.91 Exemptions to the secrecy provisions will allow for the appropriate sharing of information by APRA and ASIC (see Schedule 1 to the Financial Sector Reform Bill 2022, items 10 and 17). A defendant bears an evidential burden in relation to sharing of information on the reliance of these exemptions. Shifting the evidential burden to the person who disclosed the information is justified and not unduly onerous as the information subject to the new provisions would be peculiarly within the knowledge and control of the defendant, and the defendant would have immediate knowledge of the purpose and circumstances of any disclosure. In particular, the defendant could readily establish application of exemptions such as where disclosure was of information contained in the register of accountable persons to an accountable entity or the individual to whom the information relates, or of information about disqualification of an accountable person, or where disclosure was between APRA and ASIC in connection with carrying out their regulatory functions and powers under the Regime. This approach also provides consistency with the existing approach to the evidential burden for similar existing exemptions in 186

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 section 59 of the Australian Prudential Regulation Authority Act 1998 and section 127 of the Australian Securities and Investments Commission Act 2001. 5.92 Information obtained or disclosed under the Financial Accountability Regime that is protected information (as defined by the enabling legislation for APRA and ASIC) will be exempt from the Freedom of Information Act 1982. That Act establishes a scheme of open access to government documents, subject to certain exemptions. Such an exemption already exists for protected information held by APRA. Schedules 1 and 2 to the Financial Sector Reform Bill 2022 extend the exemption to also cover information obtained or disclosed under the Financial Accountability Regime that is held by ASIC (Schedule 1 to the Financial Sector Reform Bill 2022, items 1, 5 to 9, and 17). 5.93 This is necessary to avoid a situation where some but not all information collected under the Regime is exempt from the freedom of information scheme, which could create confusion and inconsistent protection of personal and potentially sensitive financial information from disclosure. It also supports efficient regulation of the as APRA and ASIC are joint regulators of the Regime and will have equivalent powers and procedures. For these reasons, the exemption from the Freedom of Information Act 1892 is a reasonable, necessary and proportionate limitation on the right to freedom of expression under the ICCPR. 5.94 As such, the creation of a new offence and imposition of an evidential burden on a defendant are also consistent with the due process rights in Article 14 of the ICCPR. Any limitations on the right to freedom of expression under Article 19 of the ICCPR are reasonable and proportionate to the aim of the legislation to establish a strong accountability regime and encourage cooperative and accountable behaviour. Conclusion 5.95 In summary: • the notification obligations and regulatory powers to gather and use information are consistent with the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR. • the transitional arrangements relating to secrecy are consistent with the right to freedom of expression under Article 19 of the ICCPR; • the creation of a new offence and imposition of evidential burdens on a defendant are also consistent with the due process rights in Article 14 of the ICCPR. 187

Statement of Compatibility with Human Rights • The 'protected information' provisions are a reasonable and proportionate limitation on the right to freedom of expression, consistent with Article 19(3) of the ICCPR. 5.96 As such, Schedules 1 and 2 to the Financial Sector Reform Bill 2022 are compatible with human rights because to the extent that it may limit human rights or freedoms, those limitations are reasonable, necessary and proportionate. Financial Sector Reform Bill 2022 - Schedule 3 5.97 Schedule 3 to the Financial Sector Reform Bill 2022 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview 5.98 Schedule 3 to the Financial Sector Reform Bill 2022 amends the Corporations Act and other Commonwealth Acts to establish a CSLR. 5.99 The objective of the CSLR is to provide compensation to eligible consumers where they have an AFCA determination in their favour and where the relevant financial firm has not paid the consumer in accordance with the determination. 5.100 The Minister may authorise a person to be the operator of the CSLR once the Minister is satisfied the mandatory requirements can be met. This includes that the operator is a company limited by guarantee and not operated for profit. 5.101 Under the scheme, where AFCA has made a determination under which a complainant is owed an amount from a financial firm and the financial firm has failed to pay the complainant, the complainant may apply to the operator of the CSLR for payment. If the eligibility criteria is met, the operator of the CSLR must compensate the complainant, up to $150,000. Human rights implications 5.102 Schedule 3 to the Financial Sector Reform Bill 2022 engages the following human rights and freedoms: • the right to protection from arbitrary or unlawful interference with privacy; • the right to a fair trial; and • the imposition of strict liability for an offence 188

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Right to protection from arbitrary or unlawful interference with privacy 5.103 A number of provisions in Schedule 3 to the Financial Sector Reform Bill 2022 engage article 17 of the ICCPR, which prohibits the unlawful or arbitrary interferences with a person's privacy. These rights are engaged where: • a person is required to provide information to the CSLR operator to enable the operation of the CSLR; and • the CSLR operator is authorised to share personal and protected information certain other entities. 5.104 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for reason consistent with the ICCPR, and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirements of 'reasonableness' to imply that any interference with privacy must be proportional to end sought and be necessary in the circumstances of any given situation. 5.105 The requirement to provide information involves the collections, storage and use of information for the purpose of enabling the operation of the CSLR. This power to gather information extends to giving information and producing documents including specifying the manner in which information is to be produced, including detail on notice requirements and deadlines. 5.106 The collection and storage of this information is necessary because it is used to ensure that applicants who have received an AFCA determination are able to be compensated for losses they have suffered. Where a party chooses not to comply with such a notice, it can prevent the CSLR from being able to assess claims and provide accurate offers of compensation, this can have serious detriment for aggrieved parties who are seeking compensation. This prevents the entire operation of the scheme. 5.107 While this information is collected by CSLR operator, its use is limited to enabling the operation of the CSLR, or where its disclosure to ASIC, AFCA, the Information Commissioner or the Taxation Commissioner would assist those entities to perform their functions or powers. 5.108 A more general disclosure of personal or protected information to the public is not permitted under the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. 189

Statement of Compatibility with Human Rights 5.109 As such, to the extent the Schedule 3 to the Financial Sector Reform Bill 2022 engages Article 17, it does so in a manner that is appropriate and consistent with the objectives of the Financial Accountability Regime Bill 2022. 5.110 This is because the collection of the information is necessary to enable the carrying out of the functions of the CSLR operator and the maintained of the CSLR, and to the extent that personal information is collected and stored, its disclosure and use is limited to enabling the performance of functions or powers under law. Right to a fair trial and imposition of strict liability. 5.111 Schedule 3 to the Financial Sector Reform Bill 2022 creates a new strict liability criminal offence where a person has failed to provide the CSLR operator with information as detailed in a notice to provide information. 5.112 This offence is subject to a maximum penalty of 30 penalty units. The offence engages, but does limit, the article 14 of the ICCPR. 5.113 Article 14.2 states that a person shall have the right to be presumed innocent until proven guilty according to law. To prove the ordinary offence, the prosecution must prove that the accused engaged in the prohibited conduct (the physical elements) and that the accused did so with a criminal mind (the fault elements). To prove the strict liability offence, the prosecution must only prove that the accused engaged in the prohibited conduct; there is no requirement to prove the accused's criminal intentions. 5.114 Strict liability offences are appropriate in the circumstances to strongly deter misconduct that can have a serious detriment for aggrieved consumers. The information gathered by the CSLR operator using these notices enable CSLR to determine appropriate compensation and assess claims brought as a result of an AFCA determination. If a person fails to provide this information, or provides false or inaccurate information, this could have implications for the ability of the CSLR to provide compensation or to ensure that it is not subject to fraudulent claims. Strict liability offences reduce non-compliance, which bolsters the integrity of the scheme and in particular its last resort nature. 5.115 The strict liability offences in Schedule 3 to the Financial Sector Reform Bill 2022 meet all the conditions listed in the Guide to Framing Commonwealth Offences. For example, the fines for the offences do not exceed 30 penalty units. Furthermore, the application of strict liability as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences. 5.116 For this offence, there also exists the offence-specific defence of a reasonable excuse, so that a person will not be liable where they have such an excuse. In 190

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 addition, for non-compliance with a substantiation notice, a person is not liable if they comply with the notice to the extent that they are able to comply. 5.117 These offence-specific defences also engage article 14(2) of the ICCPR because they displace the assumption that the prosecution must prove every element of the offence. However, whether a person has a reasonable excuse, or has complied with a notice to the extent that they are able to are matters that are peculiarly within the knowledge of the defendant, particularly given the wide nature of the defences. It would be unreasonably time consuming and costly to ask the prosecution to disprove in each case any possible reasonable excuse for complying with a notice to produce information. This stands in contrast to a defendant, who would be able to establish more easily whether there exists such an excuse, or they have complied to the extent that they are able to. 5.118 To establish these defences, a person bears the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant discharges this burden, the prosecution must prove those matters beyond a reasonable doubt. This is easier for a defendant to discharge and does not completely displace the prosecutor's burden; it merely defers that burden until after the evidential burden is discharged. 5.119 To the extent Schedule 3 to the Financial Sector Reform Bill 2022 engages Article 14, it does so appropriately and is consistent with the objectives of the Financial Sector Reform Bill 2022 . 5.120 This is because of the need to protect the operation and ensure the integrity of the CSLR. Accordingly, a strict liability criminal offence is justified for both matters. As there is only a penalty of 30 penalty units, and there exists wide offence-specific defences, the imposition of strict liability is proportional. The offence-specific defences are also appropriate and adapted because the matters that establish those defences are peculiarly within a defendant's knowledge, so can be discharged more easily than by the prosecution disproving the matter. Conclusion 5.121 Schedule 3 to the Financial Sector Reform Bill 2022 is compatible with human rights they engage and do not unnecessarily, unreasonably, or disproportionately limit the rights to unlawful or arbitrary interference with privacy, or the presumption of innocence. 191

Statement of Compatibility with Human Rights Financial Services Compensation Scheme of Last Resort Levy Bill 2022 5.122 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview 5.123 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 implements the levy framework through which levies will be collected to fund the CSLR and associated AFCA fees. 5.124 The levy framework contains a primary funding mechanism ('annual levies'), and if needed, a secondary funding mechanism ('further levies') if the annual levy collected is insufficient or likely to be insufficient to meet the initial estimate of costs and claims. 5.125 The levy framework also provides for a special funding mechanism ('special levy') that involves a Ministerial determination where the revised estimate of costs and claims exceeds the sub-sector levy cap. 5.126 The levies are payable by a person who are members of a sub-sectors within the meaning of the levy framework established by the ASIC Supervisory Cost Recovery Levy Act 2017. 5.127 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 does not engage any of the applicable rights or freedoms. Conclusion 5.128 The Financial Services Compensation Scheme of Last Resort Levy Bill 2022 is compatible with human rights as it does not raise any human rights issues. Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.129 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. 192

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 Overview 5.130 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 implements the levy framework through which levies will be collected to fund the CSLR and associated AFCA fees. 5.131 A person subject to the levy is required to provide ASIC with information relevant for the purposes for calculating the levy. Where a person has failed to provide this information to ASIC, they will be subject to a strict liability criminal offence. 5.132 If ASIC is not satisfied with the information provided, it may issue a written notice requiting the person to substantiate the information. Non-compliance with such a notice will be a strict liability offence. 5.133 After the levy amounts have been determined for the levy period, ASIC will issue notices to persona in a sub-sector setting out the amount of levy that is payable in relation to the levy period. 5.134 Unless ASIC provides an extension, a failure to pay the levy by the date specified in the ASIC notice will attract a late payment penalty. Similarly, a shortfall payment penalty applies where, on the basis of false or misleading information provided to ASIC the amount of levy paid by the person fell short of the levy which it should have been liable for. 5.135 Where a levy, shortfall penalty or late payment penalty remains unpaid for a period of 12 months, ASIC may cancel or suspend the person's licence. Human rights implications 5.136 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 engages the following human rights and freedoms: • the right to protection from arbitrary or unlawful interference with privacy • the right to a fair trial; and • the imposition of strict liability for an offence Right to protection from arbitrary or unlawful interference with privacy 5.137 A number of provisions in the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 engage article 17 of the ICCPR, which 193

Statement of Compatibility with Human Rights prohibits the unlawful or arbitrary interferences with a person's privacy. These rights are engaged where: • a person subject to the levy is required to provide information to ASIC relevant for the purposes of calculating the amount of levy payable by the person; and • a person subject to the levy must comply with ASIC's substantiation notice, requiring information to be provided 5.138 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for reason consistent with the ICCPR, and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirements of 'reasonableness' to imply that any interference with privacy must be proportional to end sought and be necessary in the circumstances of any give. 5.139 The requirement to provide information involves the collections, storage and use of information for the purpose of calculate the levy that will be payable by a person in a sub-sector. The collection and storage of this information is necessary because it is used to apportion 5.140 While this information is collected by ASIC, its use is limited to calculation of levies. 5.141 As such, to the extent the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 engages Article 17, it does so in an appropriate manner and is consistent with the objective of the Financial Sector Reform Bill 2022. Right to a fair trial 5.142 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 creates two new strict liability criminal offences where: • a person has failed to provide ASIC with information for the purposes of calculating the levy; or • a person has failed to comply with a substation notice from ASIC. 5.143 Both of these offences are subject to a maximum penalty of 10 penalty units. The offences engage, but do not limit, the article 14 of the ICCPR. 5.144 Article 14.2 states that a person shall have the right to be presumed innocent until proven guilty according to law. To prove the ordinary offence, the prosecution must prove that the accused engaged in the prohibited conduct (the physical elements) and that the accused did so with a criminal mind (the fault elements). To prove the strict liability offence, the prosecution must only prove 194

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 that the accused engaged in the prohibited conduct; there is no requirement to prove the accused's criminal intentions. 5.145 These offences therefore also engage article 14(2) of the ICCPR as they reverse the principle that the prosecution must prove every element of the offence. 5.146 Strict liability offences are appropriate in the circumstances to strongly deter misconduct that can have a serious detriment for aggrieved parties. The use of strict liability offences reduces non-compliance and bolster the integrity of the levy framework to ensure persons that are subject to pay the levy provide the required information to ASIC, and when required are able to substantiate this information. The information collected are an integral aspect of calculating the levy that is payable by each person in the sub-sector. 5.147 If a person fails to provide this information or substantiate information, or provides false or inaccurate information, this could have implications for all the other persons in that sub-sector as they may be liable to pay a different amount of levy that they otherwise would. The strict liability offences reduce non-compliance, which bolsters the integrity and enforceability of the levy framework 5.148 The strict liability offences in Schedule 4 to the Financial Sector Reform Bill 2022 meet all the conditions listed in the Guide to Framing Commonwealth Offences. For example, as noted above the maximum penalty for both of the offences are 10 penalty units each and do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate as noted in the Guide to Framing Commonwealth Offences. The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences. 5.149 For these offences, there also exists the offence-specific defences of reasonable excuse, so that a person will not be liable where they have such an excuse. In addition, for non-compliance with a substantiation notice, a person is not liable if they comply with the notice to the extent that they are able to comply. 5.150 These offence-specific defences also engage article 14(2) of the ICCPR because they displace the assumption that the prosecution must prove every element of the offence. However, whether a person has a reasonable excuse, or has complied with a notice to the extent that they are able to are matters that are peculiarly within the knowledge of the defendant, particularly given the broad nature of the defences. It would be unreasonably time consuming and costly to ask the prosecution to disprove in each case any possible reasonable excuse for complying with a notice to produce information. This stands in contrast to a defendant, who would be able to establish more easily whether 195

Statement of Compatibility with Human Rights there exists such an excuse, or they have complied to the extent that they are able to. 5.151 To establish these defences, a person bears the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant discharges this burden, the prosecution must prove those matters beyond a reasonable doubt. This is easier for a defendant to discharge and does not completely displace the prosecutor's burden; it merely defers that burden until after the evidential burden is discharged. 5.152 To the extent the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 engages Article 14, it does so appropriately and is consistent with the Bill's objectives. 5.153 This is because of the need to protect the operation and ensure the accuracy of the levy collection framework that exists under The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. Accordingly, a strict liability criminal offence is justified for both matters. As there is only a penalty of 10 penalty units, and there exists wide offence- specific defences, the imposition of strict liability is proportional. The offence- specific defences are also appropriate and adapted because the matters that establish those defences are peculiarly within a defendant's knowledge, so can be discharged more easily than by the prosecution disproving the matter. Conclusion 5.154 The Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 is compatible with the human rights they engage and do not unnecessarily, unreasonably, or disproportionately limit the rights to unlawful or arbitrary interference with privacy, or the presumption of innocence. Financial Sector Reform Bill - Schedule 4 5.155 Schedule 4 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview 5.156 Schedule 4 to the Financial Sector Reform Bill 2022 amends the Credit Act to enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases. Key reforms introduced by Schedule 4 include: 196

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 • imposing a cap on the total payments that can be made by a lessee in connection with a consumer lease; • extending the protected earnings requirement for small amount credit contracts to cover all consumers and introducing a similar protected earnings requirement for consumer leases for household goods; • restricting the use or disclosure of consumers' account information; • enhancing requirements for licensees to disclose information to consumers; and • introducing broad anti-avoidance protections to prohibit schemes that are designed to avoid the application of the Credit Act in relation to small amount credit contracts, consumer leases and product intervention orders made under the Credit Act. 5.157 Schedule 4 implements the recommendations of the SACCs Review. Human rights implications 5.158 Schedule 4 to the Financial Sector Reform Bill 2022 engages the following human rights: • the right to a fair trial and fair hearing rights under Articles 14 and 15 of the ICCPR; and • the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR. Right to a fair trial and fair hearing rights Assessment of civil penalties 5.159 Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the ICCPR regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR. 5.160 While the civil penalty provisions in Schedule 4 to the Financial Sector Reform Bill 2022 are intended to deter people from non-compliance with the obligations, none of the civil penalty provisions carry a penalty of 197

Statement of Compatibility with Human Rights imprisonment, and there is no sanction of imprisonment for non-payment of any penalty. 5.161 Therefore, the civil penalty provisions introduced by Schedule 4 should not be considered 'criminal' for the purposes of Articles 14 and 15 of the ICCPR. Strict liability offences 5.162 Schedule 4 to the Financial Sector Reform Bill 2022 introduces the following strict liability offences: • section 133CD(8) of the Credit Act, which is contravened if a small amount credit contract does not have equal repayments and repayment intervals; • section 160CB(3) of the Credit Act, which is contravened if a person uses or discloses an account information that is obtained in connection with a small amount credit contract or a consumer lease for household goods, other than for a permitted purpose; • section 31C(5) of the Code, which is contravened if a credit provider charges or accepts unexpired monthly fees in respect of small amount credit contracts; and • section 179VA(2) of the Code, which is contravened if a lessor engages in certain unsolicited communication in relation to consumer leases for household goods. 5.163 These offences enhance the consumer protection framework for consumers of small amount credit contracts and consumer leases, many of whom are financially vulnerable. A contravention of any of these offences is likely to result in severe financial consequences for affected consumers. 5.164 For example, the requirement in section 160CB of the Credit Act restricts the use or disclosure of account information. This is necessary to address concerns about a consumer's personal information, including account information, being misused by licensees to market further products or being sold to third parties. Applying strict liability is therefore appropriate because of the serious impact a contravention may have on an affected consumer, both in terms of privacy and future financial position. 5.165 Applying strict liability to these offences is appropriate as requiring proof of fault in respect of these offences would undermine deterrence. 5.166 Further, these strict liability offences are punishable by a fine of up to 10 penalty units for an individual and up to 100 penalty units for a body corporate. None of these offences are punishable by imprisonment. 5.167 The application of strict liability also preserves the defence of honest and reasonable mistake of fact, which maintains adequate checks and balances for persons who may be accused of committing the offence. 198

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.168 Therefore, the application of strict liability to these offences is compatible with human rights because it achieves the legitimate object of protecting the general public from misconduct and is rationally connected to the objective of significantly improving the likelihood of compliance with these new obligations. Extension of existing strict liability offences 5.169 Schedule 4 to the Financial Sector Reform Bill 2022 also extends the application of the existing strict liability offences in: • section 174(4) of the Code, by inserting new section 174(1A); and • section 175H(3) of the Code, by inserting new section 175H(1A). 5.170 New section 174(1A) provides that a consumer lease for household goods must also contain: • the base price of the goods hired under the lease; and • the difference between the base price of the goods hired under the lease and the total amount payable by the lessee in connection with the lease. 5.171 As a result, it will be a strict liability offence under existing section 174(4) of the Code if a lessor enters into a consumer lease for household goods that contravenes new section 174(1A). 5.172 Similarly, new section 175H(1A) provides that lessors must give a lessee an end of lease statement within a specified timeframe before the end of a consumer lease for an indefinite period. An end of lease statement contains information such as: • the total amount that the lessee will pay for the goods under the consumer lease; • the date the goods must be returned to the lessor; and • a statement as to whether the lessor is prepared to negotiate the sale of the goods. 5.173 It will be a strict liability offence under existing section 175H(3) of the Code if a lessor does not give a lessee an end of lease statement within the specified timeframe. 5.174 The maximum penalty that can be imposed under these strict liability offences is 100 penalty units for an individual and 1,000 penalty units for a body corporate (due to section 288D(1) of the Credit Act). 5.175 While this maximum penalty exceeds the maximum penalty referred to in the Guide to Framing Commonwealth Offences, these are existing penalty 199

Statement of Compatibility with Human Rights amounts that are not being changed by the Schedule 4 to the Financial Sector Reform Bill 2022. 5.176 The existing penalty amounts reflect that these documents (the consumer lease and the end of lease statement) are critical features of the consumer lease framework (including the consumer protection framework). In particular, as these documents outline the rights and obligations of lessees and lessors under the lease, contraventions in respect of these documents may adversely affect a consumer's ability to make informed decisions, which may cause significant financial harm to the consumer. Presumption of avoidance for certain schemes in civil cases 5.177 New section 323C(1) of the Credit Act introduces a presumption that a person entered into or carried out a scheme for an avoidance purpose if the scheme is a scheme prescribed by the regulations or determined by ASIC in a legislative instrument. 5.178 However, the presumption does not apply if the person proves that it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the avoidance matters specified in section 323B(1) of the Credit Act. 5.179 Placing the legal burden of proof on the person is appropriate as it will be considerably easier for the person to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose, compared with requiring ASIC to disprove that matter. For example, if the scheme in question does have a legitimate (non-avoidance) purpose, that matter would be peculiarly within the knowledge of the person. 5.180 Further, the presumption applies only in civil cases (not in criminal proceedings), and any regulations or legislative instrument made to prescribe or determine schemes that are presumed to have the relevant avoidance purpose will be subject to parliamentary scrutiny and disallowance. Right to protection from arbitrary or unlawful interference with privacy 5.181 Schedule 4 to the Financial Sector Reform Bill 2022 engages the right to protection from arbitrary or unlawful interference with privacy in Article 17 of the ICCPR, by: • requiring licensees to document in writing preliminary assessments and assessments that a small amount credit contract or consumer lease for household goods is not unsuitable for a consumer (new sections 124C(1), 133CE(1), 147B(1) and 156C(1)); and • requiring lessors to obtain and consider account information (new sections 140(1A) and 153(1A)). 200

Financial Accountability Regime Bill 2022 Financial Sector Reform Bill 2022 Financial Services Compensation Scheme of Last Resort Levy Bill 2022 Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022 5.182 In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case. Documenting assessments that a contract is not unsuitable 5.183 Schedule 4 to the Financial Sector Reform Bill 2022 requires a licensee to document in writing, its assessment (or preliminary assessment) that a small amount credit contract or a consumer lease for household goods is not unsuitable for a consumer. It also provides ASIC with the power to, by legislative instrument, specify the form in which the assessment or preliminary assessment is to be documented in writing. 5.184 The purpose of this new obligation is to enhance transparency around this kind of decision-making and ensure licensees are accountable for their decisions. 5.185 A legislative instrument made by ASIC for these purposes may engage with the right to privacy as it may specify the kinds of personal information that need (or do not need) to be documented in writing. To address these concerns, ASIC must, before making such a legislative instrument, consult with the Australian Information Commissioner in relation to matters that relate to the privacy functions and have regard to any submissions made by the Commissioner. 5.186 In any event, licensees will continue to be subject to all relevant privacy obligations, including obligations under the Privacy Act 1988 relating to the collection, use and integrity of personal information. Lessors obtaining and considering account information 5.187 Schedule 4 to the Financial Sector Reform Bill 2022 also introduces a requirement that lessors under consumer leases for household goods must, in verifying a consumer's financial situation, obtain and consider 90 days of the consumer's account information. A similar requirement is also introduced for licensees who provide credit assistance in relation to consumer leases. 5.188 This replicates existing provisions in the Credit Act relating to small amount credit contracts and is designed to address concerns that lessors of household goods are not making sufficient inquiries about a consumer's capacity to pay before entering into a lease with the consumer. The purpose of the provision is therefore aimed at the legitimate objective of ensuring that lessors do not enter into unaffordable leases with consumers. 201

Statement of Compatibility with Human Rights 5.189 This new requirement formalises a step that, in any event, is likely necessary for a lessor to discharge its existing obligation to verify a consumer's financial situation in the course of assessing whether the lease is unsuitable for the consumer. 5.190 Schedule 4 to the Financial Sector Reform Bill 2022 recognises that account information contains personal information and introduces a restriction on using information obtained from account information or other sensitive documents (constrained documents and information) other than for limited permitted purposes. Among the permitted purposes is where the use or disclosure of the information is necessary to comply with a person's obligations under the Credit Act. This protection also extends to documents that are obtained in respect of small amount credit contracts. 5.191 These changes are therefore reasonable and proportionate to the legitimate objective of protecting consumers of small amount credit contracts and consumer leases. Conclusion 5.192 Schedule 4 to the Financial Sector Reform Bill 2022 is compatible with human rights because to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate. 202

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