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.
- Litigation Funders (Legislation): The Federal Treasurer has announced that litigation funders will within 3 months be required to hold an Australian Financial Services Licence (AFSL), which will dramatically increase the Australian Securities and Investments Commission’s (ASIC) regulatory oversight of them. The announcement follows a referral to the Parliamentary Joint Committee on Corporations and Financial Services, for inquiry and report by 7 December 2020, of ‘…whether the present level of regulation for applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs’ (Inquiry). Subject to minimal regulation, litigation funders’ financial returns have notably increased in recent years, driven by an explosion of class action activity. With that increase has come persistent concerns, including with respect to the rate of return given to plaintiff group members from judgment / settlement outcomes (on average about 50%), and ‘competing class actions’ which are essentially near identical claims against a defendant. There is also the spectre of secondary market activity i.e. funders trading their entitlement to judgment outcomes, which is a growing feature of the US market. AFSL licence holders are subject to obligations set out under the licence instrument itself, and the general obligations under s. 912A of the Corporations Act 2001 (Cth) (Act). For example, 912(1)(a) requires an AFSL holder to ‘do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’. Therefore, foreseeable areas of focus for litigation funders may be the level of disclosure provided to plaintiff group members on the level of financial return that will be taken by the litigation funder. (Funding agreements and common fund orders tend to be quite dense.) 912(1)(g) also requires AFSL holders to be a member of an external dispute resolution body — the Australian Financial Complaints Authority (AFCA). Will plaintiff group members be able to take litigation funders to AFCA in due course to resolve their grievances? In addition, AFSL holders must report ‘significant breaches’ of their obligations under 912A to ASIC pursuant to s. 912D within 10 business days of becoming aware of the breach. What impact might that action, when it occurs, together with complaints being able to be made to AFCA, have on ongoing class actions? There are a lot of other questions, including how this additional regulation will interplay with the oversight exercised by the court in respect of class actions.
- Insurance Code of Practice (ICA): The Insurance Council of Australia has announced changes to the implementation of the new 2020 General Insurance Code of Practice (2020 Code) given the impact of COVID-19. It comprises of two parts. First, insurers will fast-track their support for customers who are experiencing vulnerability, including financial hardship. Insurers will bring forward by six months to 1 July 2020 or earlier where possible, key consumer provisions in Parts 9 (Supporting customers experiencing vulnerability) and 10 (Financial hardship) of the new code. Second, the remaining parts of the 2020 Code will be deferred by six months to 1 July 2021. This includes the revamped parts (i.e. from the 2014 code), on standards for suppliers / distributors, claims handling, claims investigations, complaints and the new enforcement, sanctions and compliance regime to be exercised by the Code Governance Committee (which will essentially act as the regulator for the code). You can access the 2020 Code here. The decision seems a sensible to me, and in line with broader regulatory regime deferrals e.g. by The Treasury and ASIC so that insurance businesses can concentrate their energies in dealing with the COVID-19 pandemic.
- Cigno Appeal (ASIC): Gold coast payday lender Cigno has appealed the Federal Court’s decision to uphold ASIC’s first use of its product intervention power to the Full Federal Court. Cigno’s model was, in short, that entity A (an embedded lender, “Gold Silver”) makes the loan and entity B (Cigno) provides services e.g. speeding up the loan process for which it charges various fees. These collateral fees sidestep protections under the National Consumer Credit Protection Act 2009 (Cth), and could add up to about 1,000% of the original payday loan. ASIC banned the product under its new product intervention powers. You can read more in this ARWW here or here. The Federal Court judgment upholding ASIC’s actions is here (my top read for the week, if you have not read it already). I continue to doubt Cigno will be successful; the design & distribution / product intervention powers legislation was drafted for this precise type of situation, and it appears to me that ASIC did its homework in exercising the power. Were Cigno to be successful, that would be an example of poor legislation drafting; I do not think it will come to this.
- AGM second extension (ASIC): Unlisted entities will now be able to take one additional month to lodge financial reports for year ends from 31 December 2019 to 7 July 2020. Listed entities will be able to take one additional month to report for full year and half-year financial reports for 21 February 2020 to 7 July 2020 balance dates. ASIC will extend the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act 2001 (Cth) by one month for certain balance dates up to and including 7 July 2020 balance dates. This additional relief announced today builds on earlier relief announced for unlisted entities with 31 December 2019 to 31 March 2020 year ends. There are a range of other measures that ASIC has put in place to assist listed companies, including a ‘no action’ position where they do not hold their AGM within 5 months after the end financial years that end from 31 December 2019 to 7 July 2020, but do so up to seven months after year end. they are set out here.
- Loan deferrals (Banks): The Australian Banking Association has put out new figures which showed 429,000 mortgages had been deferred totaling $153.5 billion during the pandemic. The figures take the total number of loans deferred to 703,000, worth a value of $211 billion. That roughly equates to one in fourteen Australian mortgages. That is a great achievement, and the lenders need to be commended for the approach that they have taken to customers during this period of widespread economic destruction. Now what would be helpful is some practical guidance from AFCA as to its expectations regarding ‘fairness’ and ‘reasonableness’, so that lenders can become more targeted in the deferral and hardship approvals without the risk of later falling foul of AFCA when a potentially large amount of complaints are made. See last week’s ARWW’s thought for the future here for further detail.
Thought for the future: with respect to litigation funders holding AFSLs — how will this additional regulation interplay with the oversight exercised by the court in respect of class actions? For example, imagine a judge approves the wording of an ‘opt out’ notice to plaintiff group members regarding a novel funding mechanism to be used by the litigation funder (assuming the common fund orders come back into being, and most likely in Victoria). In the absence of an amicus curiae, the judge does not have the benefit of anyone challenging the funding mechanism (it is inappropriate for the defendant to do so, as they do not act for the plaintiff group members) and has to work with the evidence put before her / him by the parties. ASIC, with its greater regulatory powers permitting it access to information, and focussed on issues of efficiency, honesty and fairness, subsequently considers the notice to be misleading or problematic in some other way. The arguable resulting tension would make for an interesting potential regulatory dilemma. Another consideration, and potentially implicit in the Federal Treasurer’s announcement (see here), is how this development will affect the tenor of class actions litigation. Will litigation funders, who instruct the plaintiff law firm, adopt different tactics? Will their opponents? It is far too soon to say, but not too soon to appreciate the potential changes.
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)