Keeping on top of the latest financial services regulatory & compliance trends?
Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.
- “Financial sludge” (ASIC): the Dutch Authority for Financial Markets (AFM) and ASIC have released a joint report on mandated disclosure requirements in financial markets. Simply put — disclosure is necessary but not enough on its own to drive good consumer outcomes. The report calls for a rethink on disclosure as the default option to protect consumers, as it does not solve the complexity in financial markets (put another way in the report, “People aren’t dumb, the world is hard”, including because of strategic complexity, sophisticated sales strategies and as financial decisions are inherently difficult e.g. they are made infrequently and there is usually an emotional dimension), disclosure needs to compete for consumer attention (1 in 5 people usually read disclosure statements) and as warnings themselves have limitations (people are susceptible to “warning fatigue”). Global regulators have vaunted disclosure as a critical regulatory tool in recent decades — our Wallis Report in 1997 dedicated a chapter to it — though that philosophy has faltered with recent criticisms (including in the Murray Report in 2014 and Hayne Royal Commission). In a report that ASIC and AFM should be commended for undertaking (and my top read for this week!), it concludes that “While it is clear that disclosure still has a role to play in retail financial services markets … no one regulatory tool can be a cure-all for all regulatory problems. Alternative regulatory tools that may improve consumer outcomes in some contexts include product design, governance and distribution.” Expect ASIC to continue to use its new favorite tool, the product intervention power, in particular for default superannuation entities who are in ASIC’s sights…
- Banking inquiry (ACCC): following a number of the major banks’ decisions not to pass on the recent RBA cut in full, the Treasurer has directed the ACCC to conduct an inquiry into home loan pricing under the Competition and Consumer Act 2001 (Cth). Under the terms of the Treasurer’s direction, the ACCC is to consider since 1 January 2019: 1) the differences between home loan prices advertised vs. actually paid; 2) differences between prices paid by new customers vs. longstanding customers (the alleged “loyalty tax”); 3) pricing decisions following RBA rate changes; and 4) practices and strategies which create impediments to existing customers refinancing (which is something open banking is designed to address). The ACCC has also been directed to focus on the banks with the biggest market shares i.e. the Big Four and to provide an interim report by 30 March 2020. The explanatory statement provides that the aim of the inquiry is to bring “…more transparency to the pricing practices of banks” and — at least publicly — has been welcomed by two of the major banks who have identified it as a good opportunity to put forward facts explaining pricing decisions, which is a perennial friction point in the Australian financial services landscape.
- Disability insurance (ASIC): ASIC has released the findings of a review it has undertaken which identified significant industry-wide problems with the design of total and permanent disability insurance (TPD) after a review of 35,000 claims. (TPD insurance is widely held — over 13.4 million consumers have TPD cover and almost 90% are insured through their superannuation fund.) These include very narrow definitions e.g. payments are only made where individuals cannot undertake several “activities of daily living” e.g. feeding and dressing, the fact that 3 out of 5 claims assessed under this narrow cover are declined and that there is poor claims handling practices which contribute to 1 in 8 claims ultimately being withdrawn. ASIC also found that insurers did not effectively collect key data to help them effectively identify and manage the risk of potential consumer harm. (These findings come off the back of ASIC’s previous report (REP 498) in which it found that only 65% of notified TPD claims were accepted by insurers, with the balance of claims either declined by the insurer or withdrawn by the consumer.) This report identifies four important industry-wide issues that insurers and superannuation trustees must fix; 1) poor consumer outcomes from the “activities of daily living” test; 2) frictions in claims handling leading to withdrawn claims; 3) consumer harm arising from poor data; and 4) insurers with higher than predicted declined claim rates. At this point is is worth remembering that addressing harms in insurance is one of ASIC’s seven strategic regulatory priorities for 2019–2023. Indeed, ASIC has said that it “ will take further action, including enforcement action where appropriate, against insurers and superannuation trustees who fail to properly address our concerns. We will also consider using our product intervention powers to prevent harm to consumers.” (Emphasis added)
- Benchmarks (ASIC): the European Securities and Markets Authority (ESMA) and ASIC have signed a MOU which will allow benchmarks declared significant by ASIC e.g. BBSW (our LIBOR) to be used in the EU by EU-supervised entities. ESMA and ASIC will provide each other with the fullest cooperation permissible under their laws and regulations in relation to all relevant information and supervisory activities regarding the covered benchmarks and maintain confidentiality. The announcement is unsurprising in the wake of recent benchmark scandals e.g. LIBOR / BBSW and FX (which will be familiar to many Australian lawyers who have practiced in the US and UK) and given the increasing trend for cooperation between Australian and overseas regulators. Indeed, ASIC’s Chair James Shipton has stated improving “…regulatory cooperation with our international counterparts is a priority for ASIC”.
- Annual Report (ASIC): ASIC’s annual report for 2018–19, which is a record of its activities and performance over the past year, has been tabled in Parliament. There is not too much new detail: key points reiterated include the increase in enforcement action (20% overall), new office of enforcement and enhanced supervisory approach e.g. the US-style “close and continuous monitoring” program. At 296 pages, I do not think it is a report that busy practitioners necessarily need to read cover-to-cover (unless you really want to!), though there is useful information contained in it, including on ASIC’s current structure and key players (1.2 — 1.5) and what the Hayne Royal Commission looked like for ASIC (1.8). Clearly ASIC felt the “Hayne Pain” as much as the broader industry in that it “responded to 144 requests for information (including 93 notices to produce, 41 requests for information, and 10 witness statements), reviewed over 160,000 documents, and produced more than 97,000 documents. Seven witnesses from ASIC appeared at the hearings”.
Thought for the future: from 2020 onward, large UK companies will need to disclose how their directors have complied with s. 172(1) of the Companies Act 2006 which provides that “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to… [employees, suppliers, customers, community, environment, reputation]”. The late great Milton Friedman would no doubt have something to say here, but my immediate practical thinking whether this is something that will make its way to our shores in the near future?
Do you think I overlooked something or would like more information? If so, please send me a message!
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)