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.
- Westpac AML action (AUSTRAC): for an arguably dovish regulator since its creation in 1989, Australia’s anti money-laundering and terrorism financing regulator has certainly turned with a vengeance. Following its successful Tabcorp and CBA actions, it has applied to the Federal Court for civil penalty orders against Westpac relating to systemic non-compliance with the AML/CTF Act 2006 (Cth) (Act) on over 23 million occasions. (Each contravention attracts a potential penalty of $17 to $21 million.) Westpac — which self disclosed to AUSTRAC — is alleged to have allowed foreign correspondent banks (some from high risk jurisdictions) to access its banking environment without conducting appropriate DD on those banks or risk assessments on the products and channels offered to them in contravention of s. 98 of the Act; failed under s. 45 of the Act to report over 19.5 million international funds transfer instructions (IFTI) to AUSTRAC from November 2013 to September 2018 (IFTI’s are a key source of intel for AUSTRAC); failed under Part 5 of the Act to pass on information about the source of funds to other banks in the transfer chain (and keep appropriate books & records under s. 115 of the Act); failed under s. 81 of the Act carry out appropriate customer DD on transactions to countries with financial indicators relating to potential child exploitation risks. Further, in what will be a red rag to ASIC and APRA, AUSTRAC’s Concise Statement rather boldly states at : “These contraventions are the result of systemic failures in [Westpac’s] control environment, indifference by senior management and inadequate oversight by the Board. They stemmed from Westpac’s failure to properly resources the AML/CTF function… Westpac adopted an ad hoc approach to ML / TF risk management and compliance”. Westpac denies the statement, though I think it is a fair assumption ASIC will open an investigation — probably based on its new favourite s. 912A of the Corporations Act 2001 (Cth) i.e. general AFSL obligations. (And the inevitable class action(s) based on the share price drop will follow.) APRA is the more interesting one to watch for me (outside a possible capital penalty like for CBA). BEAR commenced for Westpac in July 2018 and specifically applies to “ senior executive responsibility for management of the ADI’s anti‑money laundering function” under s 37BA(3)(j) of the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth). (BEAR does not have a retrospective effect, though some of the alleged conduct occurred after July 2018 — see  of the Concise Statement). That specific accountability statement will be under APRA’s microscope as to whether or not it can support the first BEAR action…
- Dover Financial (ASIC): Dover Financial Planning has been found liable by the Federal Court for conduct that was “misleading or deceptive” or “likely to mislead or deceive” within the meaning of s. 1041H of the Corporations Act 2001 (Cth) and s. 12DA(1) of the ASIC Act 2001 (Cth) and making a “false or misleading representation” within the meaning of s. 12DB(1)(i) of the ASIC Act 2001 (Cth) in a case brought by ASIC stemming from the Hayne Royal Commission. Dover’s sole director, Terry McMaster, was found to be knowingly concerned in Dover’s contraventions under s. 79 of the Corporations Act 2001 (Cth) i.e. aiding and abetting. ASIC’s contention was with Dover’s “Client Protection Policy” which ostensibly set “…out a number of important consumer protections designed to ensure every Dover client gets the best possible advice and the maximum protection available under the law…” (emphasis added) which was far from the truth as the policy contained many exclusions, limitations and restrictions. For example, it contained the term “You agree to not complain or seek any form of compensation for any loss suffered as a result of being under-insured should an insured event occur.” Dover defended the claim on the basis that, inter alia, ASIC had not proved that any individual financial advice clients who had received a statement of advice with the Client Protection Policy were misled or deceived by the inaccuracy or had suffered loss as a consequence. (It also raised other arguments, including that the above statements were of opinion and not fact. See para  of the judgement.) An odd argument, as ASIC did not need to prove that the conduct in question actually deceived or misled anyone under the legislation — the question is whether the conduct had a sufficient tendency to induce error. Paras  —  of the judgement contains a great summary of the law in this regard. O’Brien J found Dover guilty of 19,402 separate contraventions — one for each instance of provision of the policy by Dover’s representatives between September 2015 and about March 2018 (para ). Sentencing is yet to occur in what represents a big win for ASIC in the post Hayne Royal Commission enforcement landscape.
- Comminsure (ASIC): CommInsure (now owned by AIA) has pleaded guilty to 87 counts of selling insurance products in the course of “unlawful, unsolicited telephone calls” i.e. hawking — you can read about the background to this ASIC action in the 7 October 2019 wrap here. In the first criminal matter relating to the Hayne Royal Commission, 30,000 customers will be refunded $12 million and the firm will face a penalty of up to $1.85 million when sentenced on 28 November. The development follows NAB’s admission to 255 of the 297 ASIC-alleged breaches of the National Consumer Credit Protection Act 2009 (Cth) relating to its former Introducer referral program which attracted the ire of Commissioner Hayne in terms of responsible lending laws (see page 83 of the Final Report). And as noted by ASIC Chair James Shipton in his recent address to the Parliamentary Joint Committee (which he used to highlight increased enforcement statistics — a 24% increase since January 2018), MLC Nominees and NULIS, two entities in NAB’s wealth management division, admitted to breaches of the law relating to the fees for no service action. Welcomed by ASIC, enforcement chief Crennan QC stated (AFR 19 / 11) “I’m not saying everyone needs to plead guilty or agree to everything we say, but it’s a better outcome for us, the community and the courts if it’s early [early co-operation]… rather than engage in long, protracted litigation”.
- Board surveillance (APRA): the Treasurer Josh Frydenberg has pushed back against the prudential regulator’s thought bubble set out on page 11 of a recent information paper of sitting in on board meetings of firms it regulates in order to lift governance, culture, risk and accountability (GCRA) measures. (In particular, he noted that the failures identified in the Hayne Royal Commission centred on a failure to act, rather than insufficient information.) That is an sensible response to an idea with innumerable issues to my mind e.g. legal privilege, confidentiality, maintaining open & robust debate, potential for regulatory capture etc. With that said the information paper is a really engaging insight into how APRA plans to approach GCRA (my top read for the week!), including the overseas practices to which it is having reference (page 11) and that it plans to assess outcomes from the implementation of the BEAR through on-site reviews at large ADIs commencing in the second half of 2019 (page 18). APRA is also considering annual GCRA declarations from the boards of regulated entities (much like CPS 220 declarations), periodic GCRA self-assessments to support the annual declarations and engagement with independent experts to assist with APRA’s assessment of entities’ self-assessments. There is also a big focus on co-operation with ASIC.
- Remediation (Parliament): as noted above, ASIC Chair James Shipton was before the Parliamentary Joint Committee on Financial Services on 19 November 2019 addressing ASIC’s recent activity. Aside from fairly standard matters, what I found interesting was an exchange on pages 23 and 24 of the transcript concerning remediation projects undertaken by external consultants. Labour Senator O’Neill asked Mr. Shipton “…could you provide an insight on the service providers in this area. Are they liquidators? Are they auditors? Are the four big audit companies involved in this process? Who’s doing this work for the bank?”. Mr. Shipton took the question on notice, to which Senator O’Neill then said “ I think it would be helpful for people who are waiting for the money to know that ASIC is watching this space. I’d like to get a mud map of who’s got what, when they got it and how much is still lagging…”. Against the backdrop of interest into the major accounting firm’s auditing vs. consulting activities — remediation exercises are commonly undertaken by these firms — it is interesting to know that this aspect of regulatory practice is now on Parliament’s radar. An inherently bespoke and oft-times complicated exercise, legal and compliance functions will no doubt benefit from a greater scrutiny of how tightly constructed a remediation plan proposed by an external services providers is — especially with respect to the timing of any consumer repayments!
Thought for the future: under s37G(1) of the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth), APRA can seek a civil penalty of up to $210 million for a contravention if it “…relates to prudential matters”. (This qualification does not exist for actions against accountable individuals.) After two years (see page 8 of my Treasury submission from 2017) I am still fuzzy on what this exactly means —say a large fine over $700 million is levied on Westpac from AUSTRAC’s AML action as Attorney-General Christian Porter has publicly indicated (AFR 22 / 11) — is that outcome enough to qualify it as a prudential matter given Westpac’s Tier 1 capital was $45B out of $425B of risk weighted assets in September 2018? (A related consideration is that under s 37G(4), the Federal Court of Australia must have regard to the impact that the penalty would have on the viability of the ADI in determining the pecuniary penalty — a consideration I find a bit awkward from a jurisprudential perspective.) It is hard to say with certainty, though one thing I think we can expect is that this qualification will not exist for ASIC once it is empowered under the BEAR regime in 2020…
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)