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.
- Insolvent trading (Legislation): in response to COVID-19, the Morrison Government has lifted the threshold on statutory demands (which are used to commence winding up actions against companies) from $2,000 to $20,000 and businesses will have 6 months instead of 21 days to respond to them. Massively, company directors will no longer be personally liable for trading while insolvent for a temporary 6 month period. There are two key issues to my mind, one economic and the other legal. First, while the action is sensible in my view, it does create greater credit risk for creditors (including the ATO). That is a future issue to come to grips with. Second, while Parliament is going to temporarily suspend insolvent trading laws (s. 588G of the Corporations Act 2001 (Cth), I did not pick up anything about suspending directors’ duties. Directors have their duties of reasonable care and skill (s.180 ) and to act in good faith (s.181); trading while insolvent, even while s 588G is suspended, creates a natural tension here.
- VOI (ARNECC): All of the states (but not the territories) require mortgagees to undertake reasonable steps to verify the identities of mortgagors, commonly through a framework called the “Verification of Identity Standard” (VOI Standard) undertaken by specialised “Identity Agents” e.g. lawyers or other agents with PI insurance. Where they do not, and the mortgage instrument is challenged, mortgagees risk losing the benefit of their registered mortgage. The VOI Standard essentially requires: a face-to-face interview to be conducted by an Identity Agent with the mortgagor; the Identity Agent to be satisfied that the mortgagor bears a “reasonable likeness” to the person depicted in photographs in the identification documents ; and, the Identity Agent to confirm that the identification documents are current originals produced by the mortgagor. It also applies to Qld witnesses to mortgages, which you can read about here. ARNECC has just released a statement in response to COVID-19 which states that while the VOI Standard ‘requires a face-to-face in person interview, compliance with the [VOI] Standard is not mandatory…A Subscriber can verify the identity of their client or customer in a way that constitutes reasonable steps. It is a matter for the Subscriber to determine what constitutes reasonable steps specific to the circumstances. For example, in the current COVID-19 environment Subscribers might like to consider using video technology as part of the verification of identity process’. The interesting issue here is that ARNECC is currently consulting on version 6 of its Model Participation Rules and the key proposed change to paragraph 6.5.2 of the Model Participation Rules specifies that reasonable steps outside the VOI Standard can only be used if the mortgagee is “reasonably satisfied that the Verification of Identity Standard cannot be applied” i.e. which requires a face-to-face interview. I suspect the outcome for this particular consultation will be delayed for some time…
- Market abuse (ACCC): The Federal Court has dismissed the ACCC’s case against Ramsay Health Care Australia Pty Ltd (Ramsay) for alleged misuse of market power and exclusive dealing. Ramsay operates Baringa Private Hospital, the only private hospital in Coffs Harbour. In 2015, Ramsay also operated Coffs Harbour Day Surgery, the only private day surgery in Coffs Harbour at that time. The ACCC alleged that senior Ramsay executives told a group of surgeons planning to establish a competing private day surgery facility in Coffs Harbour that their access to operating theatre time at Baringa Private Hospital would be substantially reduced or withdrawn if they proceeded with their plans. If established, that may have constituted a private hospital operator with a substantial degree of market power seeking to deter a new entry to the market. Whilst the Court found that Ramsay had a substantial degree of market power in the supply of private in-patient surgery services to surgeons in Coffs Harbour, the Court did not find there was sufficient evidence Ramsay made the alleged threats to surgeons. One interesting aspect of this case was that it was brought under the former misuse of market power provision, which incorporated within the statutory test a ‘take advantage’ element that no longer applies. The new s. 46 of the Competition and Consumer Act 2010 (Cth) applies to conduct from 6 November 2017 and prohibits a firm with a substantial degree of market power from engaging in conduct which has the purpose, effect or likely effect of substantially lessening competition. Given this change in the law, it would be wise not to place too much precedential value on this decision in my view.
- AGMs (ASIC): COVID-19 will affect some companies’ ability to hold an annual general meeting (AGM). This issue is most immediately relevant for listed and unlisted public companies with 31 December balance dates that are required to hold an AGM by 31 May 2020. For these entities, ASIC has proactively (in my view, it is doing a pretty great job handling the market disruptions thusfar — next step is for it to agree to defer major regulatory changes like RG 165) confirmed that it will take no action if the AGMs are postponed for two months and stated that it supports the holding of AGMs using appropriate technology. This may include a ‘hybrid’ AGM (where there is a physical location and online facilities) or a ‘virtual’ AGM that is conducted solely online. (These options are, of course, subject to what the constitution for the relevant company states.) ASIC’s full statement, which provides some more useful detail, is set out here.
- Foreign licensing (ASIC): Foreign financial services providers that wish to provide financial services to wholesale clients or professional investors in Australia, including banks and asset managers and funds, now have some more certainty about the their licensing position. ASIC has released its final policy on foreign AFS licences RG 176 which sets out the application process and other relevant information, extended the ‘passport’ exemption until 31 March 2022 and given set relief for providers of funds management services seeking to work for key types of professional investors. ASIC is encouraging foreign AFS licence applications to be lodged as soon as possible after 1 April 2020. Prudently, the application process for a foreign AFS licence will be streamlined in recognition of the applicant’s existing authorisation to provide the relevant financial services in a sufficiently equivalent overseas regulatory regime e.g. the UK or US.
Thought for the future: Short selling involves investors borrowing shares from fund managers, selling them with a view to pushing the price down, and then buying them back at a cheaper price. The fund manager receives a fee in return. The UK FCA has just issued a temporary prohibition of short selling for a number of key companies. You can see which ones here, and draw the conclusions you will about why they feature on the list. South Korea has also just banned short selling. Former Labor Treasurer Wayne Swan banned short selling during the GFC, largely to protect the Big Four. Current Treasurer Frydenberg has disclosed that he has already asked the ASIC whether there needs to be a ban on short selling. (Relatedly, ASIC has already issued directions under the ASIC Market Integrity Rules to a number of large equity market participants, requiring those participants to limit the number of trades executed each day by up to 25% until further notice.) It has not recommended a ban on short selling yet, however, my sense is that will happen soon. In my view, the sooner the better…
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)