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.
- Regulatory deferrals (Legislation): the Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) has been passed. Relevantly, s. 1362A allows the Minister by legislative instrument to exempt classes of persons from the operation of specified provisions of the Corporations Act 2001 (Cth) or the regulations, or modify the operation of specified provisions of the Corporations Act 2001 (Cth) or the regulations in relation to classes of persons. This gives extra flexibility to the Government to provide relief to financial services businesses from regulatory burdens so that they can focus on their employees, customers and other stakeholders. The sooner it is used, the better so that financial services firms can concentrate their energies. The same applies to The Treasury regarding deferral of major reforms (for more detail, see here) and ASIC as to what further actions it should contemplate to ease the burden. (Incidentally, I am having a lot of these lobbying discussions with clients, etc — please do reach out if you have any ideas on what is or will prove to be an issue!)
- Storm Financial (Director’s Duties): The Full Federal Court (2:1) has found the directors of Storm Financial, Emmanuel and Julie Cassimatis, breached their duties as directors and has dismissed their appeal from Edelman J’s 2016 decision. Since around 1994, Storm Financial operated a system created by the Cassimatises, in which “one-size-fits-all” investment advice was recommended to clients. The advice required clients to invest substantial amounts in index funds, using “double gearing” — taking out both a home loan and a margin loan in order to purchase units in index funds. By the time of Storm’s collapse in early 2009, many of Storm’s clients were in negative equity positions, sustaining significant losses. ASIC alleged that the advice Storm provided to those investors was inappropriate to their personal circumstances. The majority of investors were retired or approaching retirement. ASIC alleged that the Cassimatises were responsible for the day-to-day significant decisions in relation to the provision of financial services to Storm’s clients . Their failure to take reasonable steps to prevent Storm from giving this inappropriate advice meant that they had not exercised their powers as directors with the degree of care and diligence that a reasonable person would have exercised in that situation. The Federal Court agreed, finding that as directors of an AFSL the Cassimatis’ “responsibilities included ensuring that investors obtained from Storm (and particularly retail investors exhibiting the five characteristics of vulnerability […]), consideration and investigation of the subject matter of the advice to be given to them (and given to them), as was reasonable in all of the circumstances and that, having regard to those matters, the advice given to those investors was appropriate to each of the 11 investors in question.” (Note the intersection of director’s duties and expansive AFSL obligations.) The appeal decision fortifies Edelman J’s much-debated earlier judgment, which took an expansive view of the scope of s.180 of the Corporations Act 2001 (Cth) (i.e. the duty of care and diligence), finding that harm is not limited to financial harm, but rather includes all the legitimate interests of the company such as its reputation and leaving open the interests of others aside from the company may be relevant. A judgment Milton Friedman would probably not be happy with, it nevertheless is consistent with judicial trend towards expanding individual responsibility through director’s duties in recent years.
- Sterling Group (AFCA): AFCA is the key external dispute resolution scheme for consumers who are unable to resolve complaints with member financial services organisations. In my personal view, it is also a quasi regulator e.g. it can report ‘systemic issues’ to ASIC and will have a remediation power in due course. But that is a debate for another time. Interestingly, it issued a press release this week stating that it had received a number of complaints about the Sterling Group of companies, which went into insolvency in June 2019 following ASIC’s attention on its defective PDSs. In part, the public statement records: ‘AFCA has had issues with a number of cases, where complainants appear to be operating under advice from an external party or advocate and have received instructions which do not support the resolution of their matter. For instance, rather than providing the information required to allow a proper investigation of facts, some complainants are providing standard pro-forma responses, which hamper our attempts to resolve the issue, and cause delays. Several complainants have in recent times withdrawn their complaint from AFCA. This appears to again be due to advice from an external party. We believe this advice poses a risk to consumers, as it may hamper their access to compensation. In 2019 the Government announced its intention to establish a compensation scheme of last resort (CSLR), for cases where consumers have a claim, but the firm is insolvent…there may be a risk that consumers who withdraw their complaint from AFCA may not be able to access this compensation in the future.’ It all seems somewhat unusual to me i.e. an EDR scheme publicly taking aim against complainants’ external advisers during the course of its adjudication of complaints. Clearly, there is more to the story, but it is interesting to note the willingness with which AFCA is prepared to go public now. (This follows its new power to publicly name financial services members in decisions.)
- Short selling (ASIC): the conducted regulator is focusing on ‘naked’ short selling by traders, responding to investors failing to settle share trades given recent financial market ructions (AFR 23 / 3). Short selling is where an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price. Naked short selling is occurs when a short seller has executed a trade without a securities lending arrangement — they haven’t properly borrowed the stock in other words, inclusive of paying the fee to the party from whom they borrowed the stock. The Australian Stock Report (ASR) has launched a digital signature campaign calling for a 12-month ban on covered short selling of finance sector stocks such as banks to “help quell the coronavirus-inspired market panic”. While, of course, I agree with ASIC’s focus on stopping ‘naked’ short selling by traders it does seem to me it should advocate to ban short selling altogether like Australia did in the GFC to protect bank stocks. Australia would be in good company there, with the UK, South Korea, India, Italy, Belgium, Spain and France having recently limited the practice in order to insulate market drops.
- AGMS (UK): the Financial Reporting Council (UK) has published a guidance note on holding AGMS. The options it has outlined are: a) Adapt the basis on which you hold the AGM; b) Delay convening the AGM, if notice has not yet been issued; c) Postpone the AGM, if permitted under the articles of association (Articles); d) Adjourn the AGM; e) Conduct a hybrid AGM, if permitted under the Articles (of the Company). You can access it here, and compare it to ASIC’s own guidance covered in last week’s briefing here. Both are very sensible.
Thought for the future: there are a lot of unforeseen legal oddities popping up given the disruption caused by COVID-19. Insurance triggers, what a ‘business day’ now means, the inability to witness mortgages / deeds remotely and validity of electronic signatures are only some. In relation to the latter, be on notice — the Electronic Transactions Act 1999 (Cth) does not apply to the Corporations Act 2001 (Cth). S. 127 of the Corporations Act states that ‘A company may execute a document without using a common seal if the document is signed by 2 directors of the company or a director and a company secretary of the company’. However, if you follow this process electronically you cannot necessarily rely on the statutory presumption under s.129 of the Corporations Act 2001 (Cth), which provides that a document which appears to have been signed under s.127 of the Corporations Act 2001 (Cth) has been duly signed and is enforceable. There are methods being built around this legislative draw-back, concerned with ‘authenticating’ the electronic signature. For now, given all the new issues popping up, my thinking is that time dedicated to professional development each day is now more important than ever.
Do you think I overlooked something or would like more information? If so, please send me a message! On a personal note, I hope that you, your families and colleagues are safe and well.
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)