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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- Privilege (ASIC): in a rather interesting reversal, the hunter became the hunted in ASIC -v- Mitchell  FCA 1484 where the First Defendant (the former VP of Tennis Australia) sought to challenge ASIC’s claim to legal professional privilege in relation to communications it had with potential witnesses prior to proceedings being issued. The First Defendant’s argument had two rungs: 1) that ASIC had failed to establish reasonable anticipation of legal proceedings at the time in question i.e. when the documents were created; 2) that ASIC’s evidence failed to establish the documents were created or made for the dominant purpose of litigation. Beach J, after giving an concise run-down of the applicable principles ( -), found in favour of ASIC. Citing Ensham Resources Pty ltd v AIOI Insurance Company Ltd (2012) 209 FCR 1 at  and  per Lander and Jagot JJ, his Honour stated that “a proceeding is “reasonably anticipated” not only if it is more likely than not, but even if it is only at the level of a real prospect as distinct from a mere possibility. And to determine such a question is fact sensitive.” That test did not turn on external counsel’s views as “what was being sought was external counsels’ view as to whether there were such reasonable grounds. That did not deny that reasonable grounds could be held internally within ASIC at the time of briefing or that such was the objective fact, whether so internally expressed or not.” (Emphasis added) An interesting and timely case — and, at 95 short paragraphs, my top pick for your weekly reading!
- Parliamentary Joint Committee (ASIC): ASIC’s top brass appeared before the Parliamentary Joint Committee on Friday, 13 September. Chair James Shipton outlined ASIC’s strategic priorities as follows: 1) high deterrence enforcement action (there has been a 24% increase in enforcement investigations from Feb 2018 to August 2019 — that percentage keeps rising…); 2) prioritising work on the referrals from the Commissioner Hayne (see entry 3 below in this regard); 3) delivering as the primary conduct regulator for superannuation i.e. enforcement actions to deter misconduct and increased supervision of super trustees; 4) addressing harms in insurance i.e. taking action against mis-selling, unfair contract terms and addressing concerns in claims handling; 5) improving governance and accountability i.e. ASIC’s American-inspired “Close and Continuous Monitoring” program designed to pick up issues before they become breaches; 6) protecting vulnerable customers through its product intervention powers / design & distribution obligations (no surprises that ASIC wants to use this power more — it has just banned a business model where a short term credit provider and its associate charged fees under separate contracts which added up to about 1,000% of the loan amount); and 7) addressing poor financial advice outcomes, in particular given the industry shift to “general advice” models. While there is nothing arguably new, it is (again) worth noting ASIC’s fixation on enforcement- query whether the pendulum is starting to swing too far here…
- Royal Commission update (ASIC): ASIC released its second update on the Royal Commission implementation. Key points include: 1) ASIC is investigating all 13 referrals from Commissioner Hayne; 2) ASIC is also looking into the non-referred matters the subject of case studies before the Commission — there are 29 investigations underway; 3) individuals are also on ASIC’s radar — no surprises here given this is the global shift i.e. achieving regulatory outcomes by looking at individuals (including through new regimes such as BEAR / US “Yates Memo”) — 59 individuals are the subject of investigation; 4) as at 31 July 2019, within the Royal Commission enforcement program there were 88 enforcement investigations and 17 court actions underway. Across the whole of ASIC’s jurisdiction, there were 311 investigations on foot; 4) ASIC is recruiting, as it alluded to in its recent corporate plan. In addition, ASIC is retaining external law firms, legal contract staff and counsel across the majority of the matters to expedite this work. (ASIC hasn’t named the firms, though they are using Johnson Winter & Slattery against GetSwift.); 6) ASIC is seeking to expediate the finalisation of all enforcement matters / accelerating enforcement outcomes. The is largely being done through the Office of Enforcement, Crennan QC’s team in ASIC; finally 7) ASIC is supportive of the breakneck speed of Treasury’s legislative reforms. (The Treasurer recently said that 50 of 54 of the Government’s commitments to implement Commissioner’s Hayne’s legislative recommendations will have been implemented or subject to legislation by mid-2020). Given the scale / complexity of the legislative reforms, my personal view is that implicitly short-circuiting consultation times is an issue. More on that below!
- More enforcement powers (Treasury/ASIC): having (somewhat concerning) previously stated in the context of Treasury’s legislative reform project that, “The Royal Commission’s recommendations and the Government’s response are clear, now is the time for action, not more debate” (Emphasis added), the Treasurer continues to follow-through and has released a raft of draft legislation increasing ASIC’s powers in relation to Search Warrants, Access to Telecommunications Intercept Material, Licensing and Banning Orders. Focusing just on the banning power here, ASIC will be able to make banning orders where a person is not a “fit and proper person” (as opposed to the previous test of “good fame and character”) and forensically in relation to specified “functions” a person performs (as opposed to financial services as a whole or with specification). Basically, it is a shift from ASIC being able to exercise the power based on an individual’s inherent moral quality to the exercise of the power based on the individual’s professional capacity, suitability, or history of compliance with regulatory requirements. It, with other forthcoming powers e.g. BEAR, will better facilitate ASIC to target individuals in charge of businesses which exhibit “systematic non-compliance with financial services laws or other regulatory requirements”. It is an important shift, and one supported by other practical reforms e.g. AFCA’s power to inform ASIC of “systemic issues” it identifies with businesses brought within its jurisdiction. (The wording “fit and proper person” wording is also being carried through to AFSL and ACL applications.) The consultation period ends on 9 October 2019.
- Add-on insurance products (Treasury): Treasury also released a proposal paper with respect to add-in insurance e.g. motor insurance, travel insurance, event insurance, CCI etc. In short, the proposed model introduces an enforced pause in the sales process between the purchase of a primary product and their decision to purchase add-on insurance. (It is a measure already adopted by the UK Financial Conduct Authority for certain types of car dealership insurance — Australia’s proposed model is much broader though.) The reasoning is that it will provide consumers with time to consider the product on its merits, and avoid some of the issues uncovered by the Royal Commission, including pressure-selling, poor value for customers in terms of claims ratios and weak competition / consumer engagement. The proposal will apply industry-wide, across all sales channels for a period of 4 days in most instances (unless shortened by the consumer) and involve a three-tiered approach: Tier 1) ASIC will use its product intervention power for egregious add-on insurance products which have the potential to cause harm; Tier 2) there will be a legislative deferred sales requirement industry-wide which will apply on a default basis to all add-on insurance markets not covered by tier one; 3) ASIC will have an exemptions power to balance the benefits of deferring the sale of add-on insurance with consumer needs and preferences e.g. comprehensive motor insurance. The new regime is proposed to commence by 30 June 2020. Consultation on the proposal will end on 30 September 2019.
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(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)