The Australian regulators weekly wrap is a weekly alerter which quickly sets out five noteworthy developments from the past week. It is designed to help you in keeping up to speed with what is happening in Australian financial services regulation.
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- Binary options / CFDs: ASIC is having fun wielding its new product intervention power again. This time ASIC is aiming to address significant detriment to retail clients resulting from binary options (one of the more exotic options where the payoff is a liquidated sum or nothing) and contracts for difference (CFDs are a contract between two parties whereby the seller pays to the buyer the difference between the present value of an asset compared to what it will be at a defined point in the future). It has released consultation paper (CP 322) on its proposal to address these products, the main concern of which is the high losses sustained by retail clients trading these instruments and high leverage ratios — many international jurisdictions already have leverage ratios for CFDs, which in some jurisdictions can be up to 500-to-1. ASIC proposes to ban the issue / distribution of binary options to retail clients and impose conditions on the issue / distribution of CFDs. One of the conditions is leverage limits e.g. 5:1 for CFDs over shares. While I see the driver for the use of this power, to my mind this use appears to be bolder than ASIC’s previous use in relation to short term credit (CP 316). Comments close by 1 October 2019.
- ASIC v. NAB: another case stemming from the Royal Commission, ASIC has commenced Federal Court proceedings against NAB for allegedly accepting information in support of consumer loan applications from third party introducers who were not licensed to engage in credit activity e.g. gym owners between 13 September 2016 and 29 July 2016. In short, NAB had a large program running whereby referrers could obtain commission if a referred person- just their name and contact details were to be provided -entered into a loan with NAB. ASIC alleges that the referrers went further in some cases in breach of the National Consumer Credit Protection Act 2009 (Cth) by providing information and documents which NAB accepted, some of which were falsified. A key test for ASIC’s “Why not litigate?” approach, the Concise Statement can be read here.
- Mortgage brokers: Commissioner Hayne recommended that mortgage brokers be subject to a “best interests” duty to their client, and that a breach of this duty should be subject to a civil penalty (Recommendation 1.2). He also recommended that the borrowers instead of lenders should pay broker’s fees and the banning of trail commissions (Recommendation 1.3). The Morrison Government has released exposure draft legislation to give effect to these recommendations. In relation to the new duty, the explanatory memorandum (EM) stresses that it is a principle-based standard of conduct and provides several examples of actions which would fall foul of these duty e.g. providing recommendations where the broker does not have critical information about the customer (1.21). The new law also requires mortgage brokers to resolve conflicts of interest in their client’s favour and not accept conflict remuneration (which is broadly framed for flexibility and deals with Recommendation 1.3) There is a civil penalty of 5,000 penalty units ($1.05M) for engaging in each of these actions, together with closely related others e.g. failure by licensee to take reasonable steps to ensure that the credit representative acts in the best interests of the consumer. (See 1.35 of the EM.) Broad tangential obligations of this nature , which mirror other principles-based legislation recently introduced e.g. BEAR, will no doubt add to the governance / compliance pressures steadily being piled on-top of financial services firms. Consultation closes on 4 October 2019.
- AML / CTF: AUSTRAC has said that it has seen a 70% increase in self reporting since since CBA’s incident involving its smart ATMs (in relation to which CBA agreed to pay a $700M fine for breach of AML/ CTF laws in June 2018 — you can read the background here). AUSTRAC has also stated that it plans to take more enforcement action in the next 6 months including “warnings through to civil penalty” as a result of the increased intelligence it has been receiving. Otherwise, it plans to focus on unregistered money transfer operators in the immediate future who it says are particularly vulnerable to nefarious actors.
- AFCA: The Australian Financial Complaints Authority will henceforth be able to name financial services firms in published determinations — to date these names have not been published (though the decisions have). In a move which ratchets up the risk for firms dealing with a much stronger entity in AFCA than its predecessor the Financial Ombudsman Service, both with regard to jurisdictional limits and new powers e.g. to identify systemic issues and report them to ASIC, ASIC’s approval was given on the basis that “naming firms in determinations can help identify conduct or market problems within firms or affecting specific products or services, as well as highlighting where firms have done the right thing. It will also enhance transparency and accountability of firms’ performance in complaints handling and of AFCA’s own decision-making” (Emphasis added)
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(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)