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.
- Class actions (High Court): in a decision with massive implications for the class actions industry, the High Court rejected 5:2 the joint decisions of the NSW Court of Appeal and Full Federal Court of Appeal that courts have the power to make common fund orders (CFOs). CFOs are essentially an order by the court that all group members in a class action have to pay a percentage of any judgment proceeds to the litigation funder, and they were designed to address disparity between group members who had signed litigation funding agreements and those who had not (the so called “free riders” who did not have to part with any of their proceeds). Since their advent in Moneymax in 2016, CFOs have given a large economic incentive to litigation funders to commence class actions (particularly shareholder class actions), as they no longer need to undertake the arduous “book build” process of signing up group members to agreements, and have grown increasing more complex in structure. In examining the extent of s. 33ZF of the Federal Court of Australia Act 1976 (Cth) (and its NSW mirror provision) , which permits the court to make any order it thinks appropriate to ensure justice is done in the proceeding and forms the juridical power to make CFOs, the plurality held that these sections: “empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all.” (Emphasis added). The decision will be a welcome bright spot in the market landscape for large boards, who have increasingly contended with the unappealing prospect of a class action with each new regulatory investigation or significant share price drop and some of whom may share the views of a now retired Federal Court judge who stated that lawyers who pursue share price drops “look like vultures”…
- Life insurance / CCI (ASIC): ASIC has banned the insurers from cold calling customers to sell life and consumer credit products from 13 January 2020. The move has been anticipated for some time, following ASIC’s earlier Consultation Paper 317 which consulted on the ban (none of the submissions in response opposed the ban). In announcing the ban, ASIC Commissioner Sean Hughes said: “ASIC will intervene to stop practices that lead to poor consumer outcomes and destroy trust in the financial system. This action draws a clear line in the sand. From January firms will no longer be able to call consumers out of the blue and use sophisticated sales tactics to pressure people into buying life insurance and CCI products.”
- Responsible lending (ASIC): the conduct regulator has published the updated RG 209 on the responsible lending obligations that are contained in the National Consumer Credit Protection Act 2019 (Cth)(NCCP). The updated guidance has been released against the backdrop of ASIC’s appeal against Justice Perram’s decision in the ASIC v. Westpac responsible lending case (which you can read a great summary and analysis on here.) At 96 pages, it is not a short read. The main changes focus on reducing the incidence of consumers being encouraged to take on unsuitable levels of credit; ensuring licensees obtain sufficiently reliable and up-to-date information about the consumer’s financial situation i.e. to enable them to assess their suitability for credit; more guidance for licensees on conducting inquiries and verification steps based on different consumers / types of credit; guidance on consideration of spending reductions in assessing applications (presumably fewer dinners consisting of wagyu beef and fine shiraz); guidance on the use of benchmarks e.g. the HEM benchmark and areas that are not subject to responsible lending obligations. One of the broader takeaways to me is that ASIC has largely maintained a principles-based approach to responsible lending rather than opting for more additional prescriptive rules. That will be welcome news to the financial services industry.
- Climate change (Director’s duties): former High Court judge and Royal Commissioner Kenneth Hayne is back in the limelight, this time for warning directors that they have a legal duty to act on climate change risk. He stated that “International opinion is now firmly behind the need for all entities with public debt or equity to respond to climate change issues in their governance, their strategy, their risk management and their metrics and targets and, importantly, to record their responses to the issues in their financial reports” (AFR, 9 / 12). His comments follow an increasing emphasis by ASIC, APRA and the ASX on the need for boards to address climate change risk as part of their governance, risk and reporting frameworks (and a famous public legal opinion by barristers Noel Hutley SC and Sebastian Hartford-Davis published in 2016 (which they restated with greater force in 2019), in which they opined that many climate change risks would be regarded by a court as foreseeable and that directors who fail to consider climate change risks could be found liable for breaching their duty of care and diligence. Strictly speaking as a matter of law, my view is that climate change risks-which may include policy risk, every bit as much as physical risk-do not stand apart from other risks that directors need to deal with if it affects their company’s business e.g. cyber attacks. The scope of a director’s duty of care and diligence is based on the materiality and likelihood of the risk. Once the duty is engaged where the risk is foreseeable, the focus then turns to breach and whether the director is entitled to the protection of the business judgment rule; the issue here is whether proportionate steps were taken to mitigate the risk. The duty is assessed on an objective basis (what a reasonable person would do) with subjective elements (the specific facts).
- Audit Inquiry (Audit): senior executives from Big Four accounting firms were publicly questioned by a parliamentary public hearing in Melbourne on Monday. The hearing focused on accountability, potential conflicts of interest and staff conditions and follows increasing scrutiny from ASIC in 2019. The regulator is considering publicly naming audit firms whose work is substandard, albeit this will be rare in practice (AFR, 5 / 11).
Thought for the future: in August 2019, it was reported that ASIC was planning on putting up to 50 matters into the courts, many arising from the Royal Commission (AFR, 19 / 8). While there have been a good number of ASIC court cases since (the regulator has been working overtime), by my rough estimation and with three weeks until 2020 we are not close to that figure yet…
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)