Australian regulators weekly wrap — Monday, 18 May 2020



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.

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  1. Class Action Inquiry (Parliament): following the ALRC and VLRC reports into class actions, on 12 May 2020 the Federal Attorney General referred to the Parliamentary Joint Committee on Corporations and Financial Services for inquiry and report by 7 December 2020 the question as to “Whether the present level of regulation applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs” . There are 14 items to the terms of reference, which you can read on page 80 of the house’s hansard, including: what evidence is available regarding the quantum of fees, costs and commissions earned by litigation funders and the treatment of that income; the impact of litigation funding on the damages and other compensation received by class members in class actions funded by litigation funders; the Australian financial services regulatory regime and its application to litigation funding; and the financial and organisational relationship between litigation funders and lawyers acting for plaintiffs in funded litigation and whether these relationships have the capacity to impact on plaintiff lawyers’ duties to their clients. Such an inquiry is well overdue, given some of the troubling results that have emanated from class actions settlements in recent years i.e. in terms of the minimal return to group members, and other problematic features of an industry that has at times resembled the wild west in terms of regulation and which now lags behind other international jurisdictions in this regard e.g. HK and Singapore, for a start.
  2. SME Guarantee Scheme (AFCA): under the COVID-19 SME Guarantee Scheme, the government is providing a guarantee of 50 per cent to SME lenders to support new short-term unsecured loans to SMEs. The scheme will guarantee up to $40 billion of new lending. AFCA has now put loans made under the government’s COVID-19 SME Guarantee Scheme outside its remit. Loans subject to deferral arrangements have also been removed from its jurisdiction. The scheme includes a temporary exemption from responsible lending obligations for lenders providing credit to existing small business customers. The amended AFCA Complaint Resolution Scheme Rules say: “When considering the complaint, AFCA and the AFCA decision maker must not take into account any decision made by the lender which relates to a decision to provide the SMEG loan to the borrower or the amount of the SMEG loan.” Interesting stuff, and a step in the right direction for a battered financial services sector. To my mind, AFCA needs to go further, however, and provide guidance for to the industry for the vast bulk of the other loans and financial instruments still subject to complaints. For example, practical what are its expectations regarding “fairness” and “reasonableness” in relation to hardship deferrals, etc?
  3. Opening Banking (ACCC): The ACCC and the Office of the Australian Information Commissioner (OAIC) have jointly released the Compliance and Enforcement Policy for the Consumer Data Right. The Policy outlines the approach that the ACCC and the OAIC have adopted to encourage compliance with, and address breaches of, the Consumer Data Right regulatory framework. Key categories are: 1) Principles: a strategic risk-based approach to compliance and enforcement will be adopted which ensures the two agencies act with integrity, professionalism and in the public interest, guided by the principles of accountability, efficiency, fairness, proportionality and transparency; 2) Compliance: the agencies will use a wide range of information sources and monitoring tools to assess compliance and identify potential breaches of the Consumer Data Right legislation (including Privacy Safeguards), Consumer Data Right Rules and Data Standards. These sources and tools will include stakeholder intelligence and complaints, business reporting, audits and assessments, information requests and compulsory notices; and 3) Enforcement: options available to respond to and resolve breaches of the Consumer Data Right legislation (including the Privacy Safeguards), Consumer Data Right Rules and Data Standards will include administrative resolutions, infringement notices and court-enforceable undertakings, suspension or revocation of accreditation by the ACCC (as the accreditor), determination and declarations, using the OAIC’s power to make a determination following an investigation and court proceedings (which may result in penalties, injunctions and other orders). Easily my top read for the week, I think this is a gold standard in communicating regulatory expectations before rolling out a significant new regulatory regime!
  4. Investment warning (ASIC): following its recent (mostly victorious) court battle against Mayfair 101, which you can read about in this April 2020 ARWW, ASIC has issued a warning to consumers about investment advertising that compares fixed-term investment products to bank term deposits. It says that a surge in such marketing of fixed-term investment products in recent months has prompted it to caution consumers to take care making investment decisions based on such advertising. (Expect the ACCC to be watching as well.) ASIC is monitoring such advertising and the entities involved because of reports about fixed-income products being advertised as term deposit ‘alternatives’ or ‘substitutes’, and consumers investing significant sums as a result. ASIC Deputy Chair Karen Chester said, “If an investment product offers higher returns than a term deposit, it is more likely than not to be higher risk. In the current uncertain and volatile markets, higher risk investment products are, more than ever, not for everyone. Especially for smaller investors, be they retail or wholesale, when they are not investing as part of a diversified portfolio.”
  5. Prudential guidance (APRA): has published guidance for authorised deposit-taking institutions on its expectations during the period of disruption driven by COVID-19. The guidance includes the regulatory capital approach for loan repayment deferrals (over the next six months, banks do not need to treat the period of the repayment deferral as a period of arrears for capital purposes) and clarification of APRA’s guidance for serviceability assessments in Prudential Practice Guide APG 223 — Residential Mortgage Lending (APRA accepts that some ADIs may not be able to complete a full serviceability assessment for borrowers seeking a change in their loan conditions).

Thought for the future: regardless of its protestations to the contrary, AFCA is a regulator. For example, it will soon be able to report on ‘systemic issues’ to ASIC and oversee remediation programs — regulator territory. With that in mind, and cognisant that it does not consider itself bound by precedent, it needs to give practical guidance to the financial services industry now on its expectations regarding practical circumstances entities find themselves in. AFCA’s decision making – as it has stated many times — will be guided by ‘fairness’ and ‘reasonableness’ considerations. How does AFCA more specifically view these broad concepts in the current market circumstances? As an example, take the unfortunate circumstance of where a small business is in default of their loans and there is minimal evidence that they will recover in 6 months’ time. The bank, in consideration of the current environment, provides the customer with a 6-month extension instead of opting for enforcement action. Fast forward 6-months, when the customer’s situation has not improved, and the bank is forced to take enforcement action, the customer complains to AFCA that the extension was inappropriate and has worsened their position e.g. loan costs have increased and the value of the security property has decreased. From what lens will AFCA approach such a complaint? The above example underscores the need for practical guidance from AFCA has to how it will approach concepts of ‘fairness’ and ‘reasonableness’ in difficult by highly foreseeable scenarios such as these which are likely to generate future complaints to AFCA. Doing so will ultimately assist customers. Of course, AFCA’s guidance will not be definitive, as each case will turn on its facts. With this said, I do think that additional granularity in how AFCA will approach the above concepts (i.e. beyond an axiomatic statement that these concepts are flexible) allied with practical examples would be very beneficial for financial services entities now.

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

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