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.
- Market-based causation (Class Actions): oft-times regulatory actions spawn class actions e.g. the BBSW and FX class actions, so it is not too tangential to start this week’s update with the recent Myer class action decision. In short, the department store’s shareholders alleged that it had engaged in misleading conduct by stating in November 2014 that its profit would increase for the next year, after which there was a profit downgrade in March 2015. (Subject to exceptions, listed companies are required to disclose price-sensitive information under the ASX Listing Rules / Corporations Act 2001 (Cth).) Myer lost what is the first formal shareholder class action to proceed to final judgment in Australia — albeit Beach J questioned whether any loss was sustained given hawkish analysts covering Myer. The decision is significant for at least three reasons: 1) “market-based causation”, first raised in 2016 in HIH Insurance Limited (in liquidation) & Ors NSWSC 482, is here to stay. Now plaintiffs do not need to establish they directly relied on any established misrepresentation. It is enough to prove that the broader market relied upon and was misled by a material statement leading to an artificial inflation of the share price (and thus loss). (It is worth noting that Foster J considered the existence of market-based causation in Masters v Lombe (liquidator): In the Matter of Babcock & Brown Limited (In Liq)  FCA 1720 handed down on 18 October 2019.) I should also note that establishing market-based causation will prove a high bar on the reasoning set out in the Myer case; 2) notwithstanding the additional complication, it will lead to increased shareholder class actions fueled by a permissive class actions regime, increase in litigation funders and (in my view) problematic continuous disclosure obligations which are far more onerous that in comparable jurisdictions e.g. there is a lack of a “safe harbour” defence such as in the US for forward-looking statements; and 3) this will mean that directors, officers and insurers’ exposure has significantly increased. In particular, given ASIC’s recent “stepping stones” strategy aimed at directors personally in Australian Securities and Investments Commission v Vocation Limited (in liquidation)  FCA 807 i.e. breach of continuous disclosure / misleading deceptive statements by company (s 674(2) and s1041H Corporations Act 2001 (Cth)) = breach of director’s personal duty of care & diligence (s 180 Corporations Act 2001 (Cth)), of which the business judgment rule defence is not available. Another reason that public disclosure governance structures and policies should be reviewed (and why I feel for Australian company directors in the current climate!).
- Privacy (OAIC): The Australian Information Commissioner and Privacy Commissioner Angelene Falk has released OAIC’s 2018–2019 annual report. Of the 3,306 complaints received, an annual increase of 12%, the top sector for complaints was finance (excluding super) (page 56). The Commissioner has a range of powers and responsibilities outlined in the Australian Information Commissioner Act 2010 (Cth), and also exercises powers under the FOI Act 1982 (Cth), the Privacy Act 1988 (Cth) and other privacy-related legislation. Perhaps surprisingly, there is quite minimal information dedicated to enforcement activity. That may change — the Commissioner has also is seeking feedback on the Draft Privacy Safeguard Guidelines for Consumer Data Right (CDR) by 20 November 2020. With a staged roll-out starting with banking, the CDR aims to provide greater control for Australians over how their data is used and disclosed and will be regulated by the OAIC and ACCC. Of the two, OAIC will be the primary complaints handler and have a wide range of investigative and enforcement powers to handle privacy complaints and carry out other regulatory activities. As part of this function, the OAIC will also work to identify systemic breaches of the framework.
- Governance & IOOF (ASIC): Fresh off the heels of its court victory against APRA, which the prudential regulator has decided not to appeal, ASIC has imposed additional licence conditions on IOOF Investment Services Ltd (IISL) to improve governance and conflicts management after IISL applied to vary its licence as part of a restructure of its corporate group. The restructure will have the effect of transferring its managed investment scheme and advice activities to IISL. The additional conditions include: 1) that there be a majority of independent directors with a breadth of skills and background relevant to the operation of managed investment schemes; 2) the establishment of an “Office of the Responsible Entity” that reports directly to the IISL board, with responsibility for oversight of IISL’s compliance with its AFSL obligations and ensuring IISL’s managed investment schemes are operated in the best interests of its members; and 3) the appointment of an independent expert, approved by ASIC, to report on the implementation of these conditions. APRA’s past court case was issued on the basis of its belief that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. The establishment of a separate structure within IOOF’s governance arrangement i.e. the Office of the Responsible Entity to obliquely mitigate any lingering concerns is very interesting and I wonder whether it foreshadows a trend moving forward. In particular, given poor governance had been identified by ASIC as a key driver of harm and improving governance and accountability is one of its current priorities as set out in its Corporate Plan 2019–23 (page 14).
- Auditors (APRA): the prudential regulator has urged for a parliamentary inquiry to examine whether it would be viable to strip auditors of the right to carry out non-audit consulting work (Australian, 28/10). APRA is also currently considering what should be expected of auditors with respect to the reporting of material misconduct. APRA’s calls follow similar rhetoric in the UK right now following Thomas Cook’s stunning collapse. MP Rachel Reeves, who chairs the UK’s Business, Energy and Industrial Strategy Committee, has stated: “I wonder how many more company failures, how many more egregious cases of accounting do we need? We’ve had BHS, we’ve had Carillion, we’ve had Patisserie Valerie and now we’ve had Thomas Cook. How many more do we need before your industry [auditing] opens its ideas and recognises that you are complicit in all of this and that you need to reform…We can’t rely on you to do the right thing and legislation is needed.”
- ASIC v. Westpac (ASIC): ASIC has won its appeal against Westpac — one of them anyway! (We will need to wait to see the outcome of its appeal of Perram J’s high profile responsible lending decision.) In Australian Securities and Investment Commission v Westpac Securities Administration Limited  FCAFC 187 the Full Federal Court ( Allsop CJ, Jagot J, O’Bryan J) has held that Westpac’s telephone campaigns in 2014–15 to encourage consumers to rollover external superannuation accounts involved its representatives giving “personal advice” and not “general advice” under the Corporations Act 2001 (Cth). The former imposes a greater regulatory obligation, including the need to act in the “best interests” of the client under s 961B(1) of the Corporations Act 2001 (Cth), which section draws on concepts of fiduciary loyalty (see RG 36.99). Finding that Westpac had breached ss 961B(1) and also 912A(1)(a) of the Corporations Act 2001 (Cth) i.e. “efficiently, honestly and fairly” the Full Federal Court found at  that “the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for marketing or general advice. It is a decision that requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer” (Emphasis added). An interesting decision (paragraphs  to  are my top read for the week!), however, given its fact-specific nature I think we should expect more cases turning on the distinction between personal and general advice to come.
Thought for the future: the US Volcker Rule enacted under the Dodd-Frank Act which came into force in 2014 prevents banks from using their balance sheets to undertake proprietary trading or investing in hedge or PE funds. It is slowly being watered down under sustained lobbying e.g. the definition of “trading account” has recently been changed to reduce the scope of financial instruments subject to the rule. The intention behind the (admittedly very convoluted) law was to forestall another GFC. The UK’s response in 2015 was the ring-fencing of some retail banking activities into separate entities within a group. Australia does not have an equivalent response; APRA argued in its 2014 submission to the Financial System Inquiry (page 43) that there was not a strong case for ring-fencing based on the patchwork of regulations and laws that we have in place to promote stability. I wonder, given the new paradigm APRA finds itself in post Hayne Royal Commission / Samuel Report, and the outcomes of its self-assessments of Governance, Accountability & Culture, whether it will revisit that position in the 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)