FSR GPS: ‘BECOMING AWARE’ OF A SIGNIFICANT DEALING UNDER DDO

This edition of our ‘FSR GPS’ (Guidelines, Principles and Strategies) series provides some insights on the requirement to report significant dealings to ASIC under the upcoming DDO regime, which is due to come into effect on 5 October 2021.

Under the DDO regime, a product issuer has an obligation to report a ‘significant dealing’ to ASIC within 10 business days of ‘becoming aware’ of the significant dealing (section 994G of the Corporations Act).

The ‘significant dealing’ concept is a critical component of the DDO regime. Not only do significant dealings trigger ASIC reporting requirements in their own right, they are effectively a stepping stone to whether a TMD review trigger has occurred. We view this sequencing as follows:

Dealings ⇒ Dealing that are not consistent with the TMD ⇒ Significant dealings ⇒ Significant dealings that would reasonably suggest that the TMD is no longer appropriate ⇒ TMD review trigger

The meaning of when a person ‘becomes aware’ of a significant dealing for the purposes of reporting under the Corporations Act is not a new concept. The threshold for becoming aware mirrors the standard of awareness that arises in the equivalent ASIC significant breach reporting provision in section 912D of the Corporations Act. The statutory language of ‘becoming aware’ in section 994G of the Corporations Act can be understood by reference to the meaning of that identical term in section 912D and accordingly, AFS licensees will be familiar with the concept, which will already likely be built into their significant breach determination and reporting frameworks.

In our view, the following core principles can be established.

Awareness of the prescribed circumstances

To trigger the obligation to report a significant dealing, a person must be aware of each specific circumstance prescribed in section 994G. Awareness of the mere underlying facts which relate to the dealing (for example, that the customer does not fall within the target market) is insufficient to trigger the reporting obligation.

For the purposes of the reporting obligation, the circumstances that the person must have become aware of are that:

1. a TMD has been made for the product: section 994G(a);
2. a dealing in the product has occurred: section 994G(b);
3. the dealing is in relation to a retail client: section 994G(b);
4. the dealing is ‘significant’: section 994G(b); and
5. the dealing is not consistent with the TMD: section 994G(c).

The key circumstances to any determination of a significant dealing will be items 4 and 5 above, as items 1-3 are (generally) readily ascertainable.

The assessment of item 4 is likely a combination of a factual, legal and risk assessment, based on the factors that indicate significance in the relevant circumstances (discussed further below). In contrast, item 5 is likely, in nearly all cases, to be a factual matter that will need to be assessed based on the available data collected by the issuer, including data received from its distributors.

Conscious insight

A person ‘becomes aware’ of these circumstances when they have actual and conscious knowledge of these relevant circumstances. This requires that the person must have consciously determined or discovered that those circumstances exist. This long established principle is articulated in the court’s comment in R v Woods [1968] QB 447 (at [452]) that:

“Knowing” is not the equivalent of “having a pretty good idea”.

To have awareness (and not just ‘a pretty good idea’) as a corporate entity, this generally requires that the product issuer to come to a realisation that each of the prescribed circumstances have occurred. Understood in this way, this will require the following:

• crystallising knowledge of mere underlying facts (e.g. that the customer paid significant fees for a product of which they are not within the target market) into actual awareness of the prescribed circumstance (e.g. that the dealing is ‘significant’); and
• transforming awareness of facts by particular staff in a corporate entity into awareness by the corporate entity itself. In other words, entity’s governance framework might provide that awareness of a particular fact by a staff member will not qualify as acceptance and awareness of those circumstances by the corporate entity, until those facts are approved by a determination by a relevant decision-making person or committee (such as a breach determination committee). The way in which this awareness is reached can be prescribed by the entity, as part of the documentation of its product governance framework for DDO. The process could be designed in a way that is similar to the entity’s process for determining significant breaches under section 912D.

The above is subject to certain parameters, as set out in our discussion on attribution of knowledge below. Internal governance frameworks are likely to be more effective when they limit or prescribe how conclusions/determinations relevant to the existence of a significant dealing will be made. While it might not be possible to limit the deemed knowledge of relevant facts by the corporate entity, it may be possible to limit when those facts will constitute a 'significant dealing'.

Attribution of knowledge to a corporate entity

In this context, it is important to note the implications of section 769B(3) of the Corporations Act, which provides:

If, in a proceeding under this Chapter in respect of conduct engaged in by a body corporate, it is necessary to establish the state of mind of the body, it is sufficient to show that a director, employee or agent of the body, being a director, employee or agent by whom the conduct was engaged in within the scope of the person's actual or apparent authority, had that state of mind. For this purpose, a person acting as mentioned in paragraph (1)(b) is taken to be an agent of the body corporate concerned.

Similar provisions to section 769B(3) appear in other legislation, such as the National Consumer Credit Protection Act, Competition and Consumer Act and the Fair Work Act. There has been considerable judicial consideration of how such attribution provisions operate. In general, such provisions are given wide operation. For example, following the High Court’s decision in the Westpac v ASIC personal advice case, the conclusion from the first instance judgment was left undisturbed; namely that the state of mind of frontline call centre staff was taken to be the state of mind of the relevant Westpac entity. Accordingly, it is important to assess the knowledge of the person who engaged in the relevant conduct, to determine whether this could be attributed to the corporate entity. In the context of significant dealings under DDO, knowledge of employees who are responsible for decisions on DDO implementation and ongoing monitoring of compliance are likely to be attributed to the corporate entity (as such employees are responsible for DDO compliance, including reporting on significant dealings, within their actual/apparent authority).

Constructive awareness vs wilful blindness

Unlike other obligations in the DDO regime which are triggered when a person ‘knows, or ought reasonably to know, of prescribed circumstances’ (see, for example, the obligation in section 994C), the reporting obligation on significant dealings is not triggered by such constructive awareness. Actual knowledge is required to trigger an obligation to report significant dealings to ASIC.

However, it is important to note that there is a difference between constructive awareness (you ought to have known) and wilful blindness. In the context of wilful blindness, the High Court (in R v Crabbe (1985) 156 CLR 464) has said:

When a person deliberately refrains from making inquiries because he prefers not to have the result, when he wilfully shuts his eyes for fear that he may learn the truth, he may for some purposes be treated as having the knowledge which he deliberately abstained from acquiring.

The High Court has further stated that the doctrine of wilful blindness can be used to establish actual knowledge by inference (see Pereira v Director of Public Prosecutions (Cth) (1988) 63 ALJR 1). Accordingly, while actual (rather than constructive) knowledge is required to trigger the ASIC reporting obligation, such knowledge can be established by inference through the concept of wilful blindness. This means that product issuers should establish processes through which to receive reporting and data to enable decisions to be made on significant dealings.

On this point, relatedly, product issuers are required to have systems and processes in place that allow an assessment to be made as to whether a TMD needs to be reviewed within 10 business days of when the issuer knows (in the case of the criminal provision), or ought reasonably to know (in the case of the civil penalty provision), that a review trigger has occurred. Accordingly, the same systems and processes that are in place to enable the issuer to identify whether a review trigger has occurred will necessarily generate data that will provide the issuer with the knowledge to make an assessment of whether the dealings are significant. While we still consider that actual knowledge is required to trigger the ASIC reporting obligation, it is important to note that best practice product governance arrangements will empower relevant decision makers to promptly assess all dealings inconsistent with the TMD, to allow the issuer to determine whether a dealing constitutes a significant dealing that amounts to a review trigger, within 10 business days of when the issuer ‘knows’ or ‘ought reasonably to know’ of the significance of the dealing. After having made that assessment, the issuer is likely to have all the knowledge elements to trigger the significant dealing reporting obligation to ASIC.

Relevant factors

In ASIC RG 274, ASIC has set out a number of factors which it considers ‘will be relevant for issuers’ in determining whether a dealing is ‘significant’. It is important to note that, unlike the prescribed factors for determining significance in section 912D(1)(b), the factors in RG 274 are not prescribed and are therefore, not binding. In developing the governance framework for reporting inconsistent significant dealings, it is open to the corporate entity to independently determine what factors are relevant to identifying whether a dealing will be significant. Taking guidance from RG 274 is of course recommended and will assist the issuer in demonstrating an appropriate framework.

ASIC has also said in RG 274 that it may help issuers to develop objective criteria (i.e. automatic thresholds) for determining whether a dealing is significant, and to make those criteria widely available to distributors. Again, there is no binding requirement on issuers to do this. While objective automatic thresholds may be useful in making determinations and ensuring consistency, they may also narrow a relevant decision-maker’s discretion to examine each dealing on its facts and in the relevant circumstances to determine if any particular dealing is significant. It is important to recognise that even where objective criteria are included in the assessment process, the issuer should have the ability to assess and identify significant dealings beyond the objective criteria, as significance can arise in a range of circumstances.

The reasonable steps obligations under the DDO regime are so broadly defined that each element of an issuer’s product governance arrangements will be important to demonstrating compliance. Accordingly, sufficient guardrails should be included when it comes to identifying and assessment significant dealings.

Parallels with breach reporting

Changes to the breach reporting regime, which come into effect from 1 October 2021, will replace the test of “becoming aware” of a significant breach. Instead, AFS licensees will be required to notify ASIC of a reportable situation within 30 days of when a person:

first knows that, or is reckless with respect to whether, there are reasonable grounds to believe the reportable situation has arisen.

These terms each have a well-established meaning rooted in a criminal law context. However, many of the same principles that apply in the current breach reporting regime will have relevance in the new breach reporting regime. For example, as we’ve highlighted above:

• when a corporate entity “knows” or is “reckless with respect to whether” a reportable situation has arisen can be different to when a person related to that corporate entity (such as an employee) obtains that state of mind outside of their actual or apparent authority (see section 769B of the Corporations Act). Instead, governance documents will often provide a framework for how and when a corporate entity will form a view about particular circumstances; and
• as we’ve highlighted above, the concept of “becoming aware” under the current breach reporting regime is analogous with the concept of knowledge. For example, paragraph 5.3 of the Commonwealth Criminal Code states that:

 A person has knowledge of a circumstance or a result if he or she is aware that it exists or will exist in the ordinary course of events.

What is clear is that existing ASIC reporting and governance frameworks will need to be updated and expanded to enable compliance with the new breach reporting regime, along with the new ASIC reporting obligations under DDO.

If you have any questions, feel free to get in touch with one of our experts below.