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.
- ASIC v. King (Corporations Act): the corporate regulator has won its case in Australian Securities and Investments Commission v King  HCA 4, which clarified who is a company ‘officer’ potentially liable for penalties under the Corporations Act 2001 (Cth). ASIC brought a civil penalty case against MFS Investment Management Ltd (MFS) and various directors, officers and employees of the MFS Group of companies, including Mr King. The allegation at the heart of ASIC’s claim was that MFS, which was a responsible entity for a managed investment scheme, had misused $147.5 million to pay the debts of other related companies. ASIC claimed that Mr King had breached his obligations as an officer of MFS in connection with that misuse — Mr King was not a director of that company, although held a lot of practical control over its affairs. An ‘officer’ under the Corporations Act 2001 (Cth) is ‘a person who has the capacity to affect significantly the corporation’s financial standing’. The argument was whether the definition was limited to someone with a specific title, which argument the High Court unanimously rejected (overturning the Qld Court of Appeal’s decision to the contrary), stating it ‘would be an extraordinary state of affairs if those who actually determine the course of a company’s financial affairs could avoid responsibility for their conduct by the simple expedient of deliberately eschewing any formal designation of their responsibilities’. It is a logical decision, and in keeping with the jurisprudence on shadow directors. It is also worth noting the very long reach of the regulator as against individuals now, combined with other tools at its disposal e.g. FAR and expanded banning powers. Including those who may have otherwise considered themselves out of reach e.g. the large shareholder who overly involves themselves in the company’s affairs.
- Fee consultation (ASIC): the Hayne Royal Commission made a number of recommendations to address consumer harm resulting from fees for no service, superannuation balance erosion through inappropriate advice fees and poor advice from financial advisers whose duty to their client conflicted with their own interests. The Morrison Government plans to introduce legislation to implement these recommendations by 1 July 2020. To this end, the conduct regulator has released consultation paper CP 329 Implementing the Royal Commission recommendations: Advice fee consents and independence disclosure. The paper is for persons who provide personal advice to retail clients, superannuation trustees and their professional advisers.The paper seeks public feedback on draft legislative instruments that deal with advice fee consents and independence disclosure and a proposal to issue more guidance in RG 245 Fee Disclosure Statements to help industry meet obligations around ongoing fee arrangements, including renewal notices and fee disclosure statements. The main proposals relates to the form of the written consents required to be given for the deduction of ongoing fees (page 17) and non-ongoing fees (page 22), and the proposals are quite prescriptive from what I can see e.g. the consent must include how long the consent will last and information about the services that the member will be entitled to receive under the arrangement. There will be quite a bit of work for financial advisers to do on their documentation and systems and processes before 1 July 2020.
- Banning (ASIC): ASIC has permanently banned Mark Goldenberg from engaging in any credit activities and from performing any function involved in the engaging in of credit activities. He was the driving force behind Superfunded, which organisation operated to enable people to have early access to their superannuation savings to buy a home. Mr Goldenberg and Superfunded engaged in credit activities but neither held an ACL, or were authorised credit representatives. ASIC found that he contravened credit legislation and had been involved in a contravention of credit legislation. As a corollary, ASIC found that Mr. Goldberg was not a fit and proper person to engage in credit activities. A useful reminder of how seriously ASIC takes engaging in credit or financial services activity without a licence, particular as more structures are coming to market which side-step the National Consumer Credit Code 2009 (Cth) e.g. buy-now, pay-later structures which can tread a delicate path in my view.
- Westpac class action (Courts): a third class action has been filed against Westpac connected with its disclosure around the bank’s monitoring of financial crime. Filed by law firm Johnson Winter & Slattery, and backed by litigation funder Burford, it proceeds a similar class action filed by Phi Finney McDonald in December 2019 (funded by Woodsford) and another by US law firm Rosen in February 2020 connected with losses on the NY stock exchange. The new class action is not particularly surprising given the financial resources of the defendant — it is further evidence that we need class actions reform, regulation of litigation funders and tweaking of continuous disclosure laws though. Take a look at PFM’s website here and Burford’s website here. The class actions cover the exactly same periods for shareholders (16 December 2013 and 19 November 2019); overlapping class action proceedings are hugely unfair to defendants in terms of the time, cost and procedural burden imposed on them. If not a US-style certification system (which requires litigants to seek the court’s approval to proceed with a class action), then some form of take-overs panel for dealing with overlapping class actions may be a sensible way forward (I am also a bit uncomfortable with courts being market-makers in these circumstances). Whatever outcome transpires, it is clear the present system requires improvement.
- COVID-19 (Council of FS Regulators): The Council of Financial Regulators (CFR) is the coordinating body for Australia’s main financial regulatory agencies. There are four members — APRA, ASIC, RBA and The Treasury. The CFR has released a statement in response to the disruption stemming from COVID-19 in which it states that it will be meeting with the major lenders and ‘emphasising the importance of a continuing supply of credit, particularly to small businesses’. Interestingly, the statement also records that ‘Council members are examining how the timing of regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and assist their customers’ and ‘APRA and ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations.’ My top read for the week (it is quite short!), the statement is timely and very sensible in my view.
Thought for the future: there is a very ambitious financial services regulatory change agenda for 2020, much of which is set to come into effect on 1 July 2020 e.g. new onerous breach reporting requirements. Given the effects of COVID-19, policymakers should consider deferring some of the more onerous changes coming through for a time in my view. That will give the industry the time to prepare appropriately for what are some big shifts in the wake of the Hayne Royal Commission e.g. FAR, DDO / PIP, CDR, Modern Slavery, Whistleblowing, SIS Act changes, POS-exemption removal, ‘best interests’ duty for brokers… the list goes on.
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)