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.
- BEAR & Westpac (APRA): APRA has confirmed that it is investigating Westpac for breaches of the Banking Act 1959 (Cth)— including the Banking Executive Accountability Regime (BEAR)— or contraventions of APRA’s prudential standards. The investigation centres on AUSTRAC’s allegations that Westpac breached AML / CTF laws 23 million times in its Statement of Claim filed with the Federal Court on 11 November 2019, and also the bank’s actions to rectify and remediate these issues after they were identified. APRA has also imposed an additional $500 million capital requirement on the bank and initiated an extensive review program focused on Westpac’s risk governance framework. APRA plans to co-operate with ASIC’s parallel investigation into the bank (which it is required to do under their new enforcement MOU). Somewhat unusually, but understandably given the febrile surrounding political / public debate, APRA has announced the scope of their investigation. It will cover: the banks’s governance, control and risk framework; accountability and remuneration arrangements for non-financial risk; accountability obligations under the BEAR; failure to comply with the prudential standards e.g. CPS 220 – Risk Management; and failure to notify APRA of significant breaches. This is the first action taken under the BEAR, and so one to watch very closely. In particular, from an individualistic perspective — as I have previously written, despite the public noise, I doubt whether the regime can be effectively wielded against the entire board or more than one or maybe two executives. The whole point of BEAR, from an enforcement lens, is to zero down on specific individuals where there have been failings in their key areas of responsibility.
- BEAR & Regulators (ASIC / APRA): sticking with my favourite regulatory reform, responding to recommendations made by Commissioner Hayne, Australia’s twin peaks have issued their accountability maps and statements as banks are required to do under the BEAR (which is shortly to be extended to the whole of the financial services industry). APRA’s can be accessed here, and ASIC’s can be accessed here. They offer a very interesting insight into these regulators’ structure, key individuals and their responsibilities. My top read of the week is ASIC’s accountability statement. A word of caution though for large firms who know they will have to implement BEAR in the New Year e.g. Insurance and Superannuation – from my experience, I would not take much guidance from the number of shared responsibilities in these statements…
- BEAR & ALRC (Law Reform): on 15 November 2019, the ALRC released a Discussion Paper as part of its Corporate Criminal Responsibility Inquiry (you can about it in this past briefing). The ALRC’s proposals would make an executive officer liable for a civil penalty where “…they were in a position to influence the conduct of a corporation in relation to an offence, and they cannot prove that they took reasonable measures to prevent that offence”. These consultations are ongoing, but this week the ALRC stated that it may be helpful for stakeholders reviewing the Discussion Paper to revisit the alternate BEAR approach to imposing personal liability on individuals given the overlap between the BEAR and the ALRC’s proposals. In essence, should the BEAR personal accountability mechanism i.e. accountability statements / maps be used to extend civil penalty liability offences to individuals rather than the ALRC’s above-mentioned extension mechanism i.e. individual is in a reasonable position to influence conduct and cannot prove they took measures to influence? (The ALRC appears to have been inspired by the Westpac action, and also has stated that this development may provide valuable insight into the potential appropriateness or otherwise of extending the BEAR to non-financial corporations!) While this would arguably bring us closer to the UK position, this is uneasy territory. BEAR is an as-yet untested regime and there are a lot of issues that require answers (see more in my recent article here) and now the question is being posed as to whether we overlay civil penalties on top? One thing is for sure — drafting accountability statements for accountable individuals, who currently face disqualification should there be a breach in their area of responsibility, will certainly become even more challenging for experienced regulatory lawyers…
- NAB court claim (ASIC): the day before its AGM, ASIC issued proceedings in the Federal Court against NAB in connection with alleged “fees for no service” conduct. The conduct regulator alleges that between 17 December 2013 and 4 February 2019, NAB charged customers for financial planning services which were not provided contravening s962P of the Corporations Act 2001 (Cth) (Act); did not issue required fee disclosure statements or issued defective ones contravening 962S and s 1041H of the Act and ss 12DB(1)(a) and (g) and 12DA of the ASIC Act 2001 (Cth); did not have in place systems and controls to prevent these issues contravening ss 912A(1)(a)-(c ), (ca), (e) and (f) of the Act (ASIC’s new favourite power); and engaged in unconscionable conduct in contravention of s 12CB of the ASIC Act 2001 (Cth) given its alleged knowledge of these matters for part of this period. ASIC is seeking declarations, pecuniary penalties and compliance orders in relation to over 10,000 breaches of the law. This will not be the end of the fees for no services saga, which started with the Hayne Royal Commission. Indeed, ASIC’s Enforcement Chief Crennan QC stated: “Fees for No Service misconduct has been widespread and is subject to ongoing ASIC regulatory responses including investigations and enforcement actions…ASIC views these instances of misconduct as systematic failures, unfair to customers including those that are more vulnerable.” (Emphasis added)
- Financial planners (FASEA): the statutory body designed to oversee education, training and ethical standards of licensed financial advisers in Australia, FASEA, has issued guidance on its controversial code of ethics set to take effect on 1 January 2020. The cause of greatest concern in the code is perhaps Standard 3, which states “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” (Emphasis added.) The code goes on to provide examples of conflicted arrangements, notably one where an adviser is in breach of this duty because he receives stamping fees in relation to a share sale i.e. percentage of sale value. Under the current law, advisers need to manage conflicts of interest; the code does away with them altogether. The issue, to my mind, is the tricky guidance language surrounding the standard, which appears to qualify the plain meaning of the standard in terms of whether it is the adviser’s “dominant purpose” to derive personal profits and (from the new guidance) “The Code does not seek to ban particular forms of remuneration, nor does it determine that particular forms of remuneration would always be an actual conflict.” To me, that seems at odds with the literal effect of the standard and all the examples given in the code itself. In addition to stamping fees, which must be rebated, the code also provides an example on referral arrangements: “Referral arrangements that confer a benefit (whether financial or otherwise) on the referring party, create a conflict of interest and duty for the recipient of the benefit and must be avoided.” (Emphasis added) Leaving to one side the argument about whether conflicts of interest should be banned or rigorously managed, the guidance placed around the black & white wording of standard is apt to cause confusion in my view.
Thought for the future: ASIC is increasingly engaging with the media / financial services industry and I think that is great. (Perhaps also strategically picking its timing to issue claims as well e.g. on NAB before its AGM?) More engagement with its regulated population is a good thing in my view, as it helps firms to understand the expectations placed on them in what is a currently a fluid time for financial services regulation. Hopefully the quantity and quality of its releases will continue into 2020, such as ASIC’s reminder to the industry this week to get their whistle-blower policies in place and communicate it to their officers & employees ahead of 1 January 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)