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.
- Consultations (Treasury): The Treasury released late last Friday a large number of consultations in response to recommendations from the Hayne Royal Commission. They include: a) Financial Services Royal Commission — Enhancing consumer protections and strengthening regulators; b) Ongoing fee arrangements and disclosure of lack of independence; c) Trustees of Registrable Superannuation Entities (RSE) should hold no other role or office; d) Restricting use of the term ‘Insurance’ and ‘Insurer’; e) No hawking of financial products; f)Implementation of ASIC Enforcement Review Taskforce — Directions Power; g) Advice fees in superannuation; h) Enforceability of financial services industry codes; i) Duty to take reasonable care not to make a misrepresentation to an insurer; j) Deferred sales model for add-on insurance; k) Superannuation regulator roles; l) Strengthening breach reporting; m) Financial Regulator Assessment Authority; n) Cap on vehicle dealer commissions; o) Limiting avoidance of life insurance contracts. The consultation process is open until 28 February 2020. My preliminary takeaways — I will write more on these very significant laws in the coming weeks — are:
- Timing: these changes will mainly take effect from Royal Assent or 1 July 2020. That leaves a very short time to prepare!
- Breach reporting: firm procedures must change significantly; affected firms need to immediately re-evaluate their policies & procedures. There are more onerous breach reporting requirements for AFSLs and a new regime for ACLs (ASIC will be swamped!). Licence holders will also need to investigate financial advisers’ and mortgage brokers’ misconduct and remediate affected clients (and conduct reference checks on them).
- ASIC will receive its directions power – basically this is a second option to enforcement. It can, if it has reason to suspect a breach of a law, make directions in relation to the contravention. It can direct firms not accept new clients, to conduct reviews or audits and to engage people to carry out specific tasks. No need to go to court first; somewhat unsettling here…
- Anti-hawking: a more holistic regime is proposed for anti-hawking which draws together all the existing patchwork of laws. Retail financial product distribution to comply with extra hawking prohibitions by 30 June 2020
- Enforceable codes: ASIC can pick (largely voluntary) code provisions which if breached may attracted civil penalties. It can will create a new mandatory code of code for those firms that it regulates.
- Superannuation trustees: must not act in another’s interest save for limited circumstances. (This requires an examination of their third-party outsourcing arrangements e.g. commonly, for investments.) Some trustees of corporate superannuation funds need to obtain an AFSL. Trustees of RSEs should not hold any other role. There are new limits on charging advice fees from accounts. There are limits on trustee and directors indemnifying themselves; this overlaps with FAR requirements. ASIC will have a much greater role in regulating superannuation firms; it will have joint responsibility under the Superannuation Industry Supervision Act and the AFSL regime will be extended to superannuation trustee services.
- Insurance: ASIC can cap add-on insurance product commissions (the insurance itself will be subject to a deferred sales model to prevent pressure selling tactics). There will be a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts.
- Financial advisers: have new obligations and disclosure requirements, including to disclose if they are no independant and why. That may be hard to square with FASEA’s new code banning COIs outright.
2. Court cases (ASIC): ASIC Enforcement Head Daniel Crennan QC has stated that ASIC intends to issue a further 20 prosecutions in the first 6 months of this year, which he expects to be busier than the last 6 months (AFR, 3 / 1). He has also rejected criticism that ASIC has been focussed on the little fish i.e. Dover Financial. I agree with that, though I think you can argue that there was a fair amount of low hanging fruit for ASIC in the wake of the Hayne Royal Commission (and with the benefit of his findings)…
- initiatives aimed at driving improvements in GCRA, including finalising a more robust prudential standard on remuneration, and updating prudential standards on governance and risk management.
- working closely with Treasury and the Australian Securities and Investments Commission in expanding the Banking Executive Accountability Regime to the insurance and superannuation sectors.
- strengthening crisis preparedness, including the development of a new prudential standard on resolution and recovery planning;
- completing the current review of the capital framework for authorised deposit-taking institutions to implement “unquestionably strong” capital ratios and the Basel III reforms;
- progressing a range of enhancements recommended by APRA’s post-implementation review of the original superannuation prudential framework introduced in 2013; and
- continuing work on strengthening the capital framework for private health insurers.
In the supervision arena, APRA’s priorities are:
- maintaining financial resilience, including through increased focus on recovery and resolution planning and stress testing;
- conducting a range of GCRA-related supervisory reviews and deep dives, and using entity self-assessments to drive greater accountability;
- encouraging underperforming superannuation funds to urgently improve member outcomes or exit the industry; and
- more closely assessing institutions’ capability to deal with emerging and accelerating risks, such as cyber-security and climate change.
4. Westpac (Class Action): a US investor rights group have filed a US class action against Westpac over its alleged breach of AML / CTF laws 23 million times. It is seeking to recover damages under US federal securities laws; the overlap with the existing class action (in relation to ASX losses) may then not be significant. The US class action also need to overcome the certification hurdle — US lawyers can’t commence class actions without court approval. Indeed, certification is used in every other international jurisdiction that has a contemporary class action regime (except Sweden). It is a measure that Australia has considered, but not adopted; it could be time for a rethink though given the overlapping class actions frenzy last year every time a share price drops. AMP is the classic example, which at one point faced 5 overlapping class actions which is a ridiculous position to be in.
5. Relief (ASIC): ASIC has reported on decisions to cut red tape — April 2019 to September 2019. It can modify or set aside certain provisions of the Corporations Act, including Chapters 2D (officers and employees), 2G (meetings), 2M (financial reporting and audit), 5C (managed investment schemes), 6 (takeovers), 6D (fundraising) and 7 (financial services). During the reported period, ASIC granted relief from provisions of the Corporations Act or the National Credit Act in relation to 420 applications. In my experience, applications for relief are always worth considering as a first option in regulatory change projects!
Thought for the future: Treasury’s tactic of release 15 serious consultation papers late on a Friday, complete with exposure draft legislation and explanatory memorandums, and only a month’s worth of consultation time feels to me like a bad 90’s litigation tactic of drowning the other side in discovery rather that a consultative exercise in improving the regulatory framework. If this is to be the tone for the year ahead — one estimate puts the total financial services legislation to pass through Parliament this year as 25% of total bills —then it will be challenging one.
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)