Australian regulators weekly wrap — Monday, 27 July 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. Prudential approach (APRA): Chair Wayne Byres has delivered a speech to the Trans-Tasman Business Circle on APRA’s role and contribution to managing the pandemic. While there is no ‘new’ information, it is a really engaging read (my top read for the week!) into what the prudential regulator has been doing and what it plans to focus on given the disruption caused by COVID-19. It outlines APRA’s initial focus to stabilise markets by easing the operational burden on regulated firms to allow them to focus their attention and resources on supporting their customers; offering temporary regulatory concessions; and, by explicitly communicating its view that the industry’s financial resilience had been built up to be deployed now. The speech also contains APRA’s thinking apropos the financial cliff that will shortly come when many of the temporary stimulus measures disappear e.g. temporary loan deferrals. The key principles APRA plans to be guided by are: first, the financial resilience that has been built up in the system needs to be available, and utilised, to absorb losses; second, the regulatory and supervisory actions it takes should be designed to smooth the economic and financial impacts of the pandemic, but not to avoid or ignore the inevitable i.e. defaults; third, regulated firms should be incentivised to work with and support stressed customers where there is a reasonable prospect of the customer’s recovery, and to recognise and deal responsibly with the issue if there is not; finally, increased transparency is important. All very sensible stuff, and it is useful to see APRA set out all out in the way that it has — basically it is trying to strike a balance between assisting banks and others to support customers where it is clearly appropriate to do so and to decline to take such action e.g. through payment deferrals unless it is clear the customer can recover.
  2. Responding lending (ASIC): ASIC will not seek special leave to appeal to the High Court in the Westpac “responsible lending” matter, following the full Federal Court’s 2–1 decision to reject its earlier appeal. (You can read more on the initial judgment of Perram J, upheld on appeal, here.) What this means, in terms of lenders’ responsible lending obligations, is that “A credit provider may do what it wants in the assessment process… what it cannot do is make unsuitable loans”. While the National Consumer Credit Protection Act 2009 (Cth) requires lenders to ask borrowers about their financial situation, including outgoings, this does not have the the “consequence that the credit provider must use the consumer’s declared living expenses in doing so”. Accordingly, the use of benchmarks and other tools which allow lenders to assess what the borrowers’ living expense are arguably fine on their own (though see my final comments below). ASIC has stated that it will now review its updated regulatory guidance RG 209 (Credit licensing: responsible lending conduct) and will consider what implications the Federal Court decision has for that critical guidance.
  3. “In relation to” (Case law): the Federal Court has considered the meaning of “in relation to”, a ubiquitous phrase that has been the subject of many decisions of the courts in different contexts, in Hutchison and Australian Securities and Investments Commission [2018] AATA 3520. The Court’s consideration relates to conduct said to be “in relation to” a financial product or financial service and arises out of a banning order imposed on Mr Hutchison by a delegate of ASIC under s. 920A of the Corporations Act 2001 (Cth). The delegate found that Mr Hutchison failed to comply with a financial services law in that he engaged in dishonest conduct “in relation to” a financial product or service, and so failed to comply with s 1041G of the Corporations Act. In summary the conduct said to be dishonest included double charging of clients and receiving payments for advice directly into his own bank account when Mr Hutchison knew he was obliged to pay them to the relevant licensee. In essence, Mr Hutchinson’s claim was that his actions were not appropriately connected to the misconduct alleged, and were the result of error rather than dishonestly. The Administrative Appeals Tribunal, in rejecting ASIC’s ban in the first instances, determined that dishonest conduct in relation to a financial product or service in s. 1041G of the Corporations Act must be read as dishonest conduct which relates directly to the nature, qualities or characteristics of the financial service or financial product, and not to the broader context of dishonesty in the carrying on of a financial services business which does not impact the consumer or investor. The Federal Court disagreed, coming to that conclusion the AAT implied additional words of limitation into s. 1041G without an adequate reason for doing so. In essence, the Federal Court found that words “in relation to” require that a relevant connection must be established, but an indirect or less than substantial connection is sufficient. Whether such connection is established will depend on the facts of each case. An interesting case on a confined point (no pun intended), which will not doubt have relevance in the coming years as ASIC increases its enforcement drive.
  4. MIS / Super disclosures (ASIC): the conduct regulator has released minor amendments to the fees and cost disclosure regime for issuers of superannuation and MIS products. A material update to Regulatory Guide 97 Disclosing Fees and Costs in PDSs and Periodic Statements (RG 97) and the associated legislative instrument was released in November 2019. ASIC has slightly amended RG 97 and the instrument to adjust the transitional time-frames in response to COVID-19 and to provide greater clarity on the obligations. ASIC has firstly amended the transitional arrangements — PDSs given on or after 30 September 2022 must comply with the new requirements; issuers can choose to apply the new requirements from 30 September 2020; once an issuer has elected to apply the new requirements, all subsequent PDSs for that financial product must comply with the new requirements. Minor technical refinements have also been made to confirm ASIC’s policy positions in relation to things like the disclosure of buy/sell spreads and the disclosure of performance fees — a big focus recently! The full detail is set out on ASIC’s RG 97 page here.
  5. SMEG loans (Treasury): to support the economy, the Morrison Government is extending the COVID-19 SME Guarantee Scheme which supports small and medium sized businesses to get access to the funding by guaranteeing 50 % of new unsecured loans to SMEs. One of the flaws of the regime though, and why it hasn’t been taken up in a big way from what I have seen, is the repayment terms are quite short i.e. 3 years and there are a number of other constraining restrictions. Under the extended scheme, the Government will: extend the purpose of loans able to be provided beyond working capital, such that a wider range of investment can be funded; permit secured lending (excluding commercial or residential property); increase the maximum loan size to $1 million (from $250,000) per borrower; increase the maximum loan term to five years (from three years); and, allow lenders the discretion to offer a repayment holiday period. A sensible move, the second phase of the SMEG scheme will start on 1 October and will be available until 30 June 2021.

Thought for the future: it makes sense for ASIC to not appeal the responsible lending decision, in terms of time, cost and risk. Still, is there is more than one way to skin a cat. ASIC can seek legislative change, or focus so much attention on this area i.e. appropriately estimating outgoings such that organisations will naturally shy away from over-reliance on benchmarks by attrition.

(These views are my own and do not constitute legal advice. These updates are not designed to be comprehensive. Photo credit Tom Wheatley)

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