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.
- RI Advice (ASIC): in August 2019, the AFR reported that ASIC was planning on putting up to 50 cases in court by Christmas — many from the Hayne Royal Commission. By my count, we are not even close, though we have about 2 months to go and the numbers are rising: ASIC has commenced a Federal Court action against RI Advice Group Pty Ltd (RI Advice) and financial adviser John Doyle. ASIC is alleging that RI Advice failed to take reasonable steps required under the law to ensure that Mr. Doyle provided appropriate advice, acted in clients’ best interests and put his clients’ interests ahead of his own. ASIC contends that Mr. Doyle gave “cookie cutter” advice to retail clients to invest in complex structured products without taking into account their goals and objectives and that RI Advice knew or should have known that Mr. Doyle was not complying with his obligations and did not take reasonable steps in response. In particular, ASIC alleges at  to  of its Concise Statement that there were serious issues with Mr. Doyle’s “pre-vetting” process (basically quality control measures) which saw him fail his educational obligations and numerous file audits — despite the fact that he was one of RI Advice’s highest revenue earners. One of the Hayne Royal Commission’s case studies, Mr. Doyle rejected Counsel-assisting’s recommendations that Commissioner Hayne find that he had breached the Corporations Act 2001 (Cth), including the obligations to act in a clients’ best interests in his submissions. If the case proceeds to judgment, what will be interesting is the extent to which the court finds RI Advice should have been held responsible for compliance and actions of its adviser and how fast it should have acted. This may have broader ramifications for other areas where will be a “best interest” duty — most notably the Mortgage broker best interests duty and remuneration reforms which have just finished its rather heated consultation period.
- Superannuation (ASIC): the conduct regulator has written to super trustees seeking asking them to improve the standard of communication around the “Putting Members’ Interests First” reforms. The key features of the reforms are that: a) insurance will be opt-in for members in a regulated superannuation fund with product balances below $6,000; and b) insurance will be opt-in for new members under-25 years old. In essence, the reform is to protect low balance accounts from unnecessary insurance cover, and it takes effect from 1 April 2020. You can read the rather long letter here, which is a great move by ASIC to communicate its expectations to the regulated population. In particular, given we are in an era of increased enforcement activity and where ASIC has publicly stated it is focusing on superannuation entities specifically in this regard.
- Cigno v. ASIC (ASIC): timetabling orders have been made in the matter of Cigno’s appeal to ASIC’s first use of its product intervention power — hearing has been set down until 30 March 2020. The background to the appeal is set out in a previous update and one question I have is whether the 5 month time-frame will temper ASIC’s enthusiasm for its new tool in the intervening period? On balance, my sense is that it will not. One reason is that there are still a number of outstanding areas in which other global regulators have tackled with their product intervention powers and ASIC has not yet grappled with. An example is the UK FCA and hybrid securities which can take the form of capital notes, convertible preference shares, and subordinated debt. Despite calls for hybrid securities to be excluded from the Australian DDO / PIP regime, this did not occur as: “… some consumers acquire structured products that are riskier than they realise and some firms distributing hybrid securities include sales information in addition to, or inconsistent with, the information in the prospectus”. And ASIC has been warning consumers about hybrid securities for some time now, including way back in November 2011 in 11–270MR…
- “Fairness” (Corporations Act 2001 (Cth)): following ASIC’s win against Westpac last week, where the Full Federal Court found the bank breached the obligation to act “efficiently, honestly and fairly” under section 912A of the Corporations Act 2001 (Cth) over the provision of financial advice, a star-studded conference in Sydney was held. As the AFR (1 / 11) reported, much of the focus was on a new standard of “fairness” in the context of financial services regulation. High Court Justice Edleman was in attendance and is quoted by the AFR (my top read for the week — easy!) as follows in this context: “The first aspect is fairness in the context of corporate purpose that we’ve been talking about so much. Fairness in that respect is not a corporate purpose in itself, it’s a matter of achieving corporate purposes …It usually doesn’t mean much more than reasonableness, which lawyers are extremely comfortable with …The second dimension of fairness is in relation to regulatory responses. And, again, it has a very useful role in guiding — as Daniel [Crennan] explained — the manner in which a regulator will decide when to intervene, how to intervene and in which cases to intervene…Fairness in that sense is operating in the same evaluative way, and will guide corporations, by having regard to the cases in which the regulator has decided to get involved…The third dimension of fairness is perhaps the most difficult — and that’s where fairness has been instantiated into legal rules, particularly into legislation or regulations as a specific requirement…It might be that fairness, in those contexts, might mean nothing more than reasonableness, in which case we get back to the areas in which lawyers are comfortable…But in other contexts, fairness doesn’t mean the same thing as reasonableness…The High Court hasn’t yet grappled with any of those specific legislative provisions [i.e. s 912A] although we did grapple with the meaning of the word unconscionable and split 4–3.” I think that where potentially material different interpretations can be taken about what a law means in a given context, especially principles-based laws such as “fairness” (we have so many lately!), it behooves our regulators to give as much actionable information to the financial services industry as possible about their particular interpretations of the law so that industry participants can take advice and proceed on as informed basis as possible.
- Insurance Code of Practice (ICA): the Insurance Council of Australia has issued a news release on the new General Insurance Code of Practice (Code). Key information is a new sanctions power for the Code Governance Committee in the event that there is a breach of the Code and an ability to force insurers who breach the Code to pay up to $100,000 in community benefits. Mandatory standards for claims investigators have also been introduced which will include time-frames for updating a customer on the investigation process, requirements regarding requests for information and requirements as to how the investigation interview should be conducted. It is also worth recalling that insurance claims handling is being brought under s 912A of the Corporations Act 2001 (Cth) definition of “financial services” as well. That consultation closed on 29 March 2019.
Thought for the future: Michael Saadat, who was ASIC’s regional commissioner for NSW and executive director of financial services, has joined buy-now, pay-later giant Afterpay as the director of public policy and regulatory affairs . ASIC Chairman Shipton has stated an inquiry is open (AFR, 25 / 10). The facts of this case to one side — I do not know enough to comment — my perception is that Australia’s regulators generally do not cycle external lawyers in and out of their enforcement divisions to the extent they do in the US e.g the DOJ. Whether or not that is a holistically good thing -one debatable negative is potential regulatory capture-would make for a really great paper!
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)