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 (ASIC): on 22 May 2020, the Government announced that it would regulate litigation funders under the Corporations Act 2001 (Cth). The regulations to implement this commenced on 24 July 2020. From 22 August 2020, operators of litigation funding schemes will need to hold an AFS licence and each litigation funding scheme will need to be registered. ASIC has arguably been in two minds about it, and you can read more information on ASIC’s litigation funding information page or in this briefing here. A long overdue move in my opinion; despite what the plaintiff law firms and litigation funders say, the court are really not set up to be a regulator. It is not their mandate, they do not have the powers or resources for it.
- CCC (Legislation): on Thursday, Qld AG Yvette D’Ath proposed changes to the Crime and Corruption Commission Act 2001 (Cth) (Act) in state parliament that would carry a six-month jail term for people who published CCC allegations about political candidates during an election period. A wholly inappropriate amendment, the inevitable backlash ensured that the bill was withdrawn on Friday. Qld does have a problem with people using the CCC to score political points — arguably it is being used as a fourth arm of government. The Local Government Association of Queensland has stated that ‘[Complaints are] jumping from an average of 12 per month to 27 per month the 12 months leading up to polling day, with just 6 per cent of those allegations substantiate’. The answer is not to shut down publishers though, and rather take a look at refining the legislation as to what matters should be reported to the CCC (the definition of ‘corrupt conduct’ under the Act needs work), and working to make the CCC a more efficient and effective regulator. It should not go unstated that the driving force behind the amendment to the Act was the CCC itself, which has also in recent months proposed the idea of giving itself a power to strip lawyers of their practicing certificates if they act for people the CCC deems problematic. Both ideas are highly questionable…
- Licences (APRA): the prudential regulator has announced it will recommence public consultations on select policy reforms and begin a phased resumption of the issuing of new licenses. In March, APRA announced the suspension of the majority of its planned policy and supervision initiatives in response to the impact of COVID-19. In April, the issuing of new licences was also suspended due to the significant economic challenges new entrants would have faced. APRA will accept new licence applications from any entity from September 2020. The policy reforms that will be recommenced in 2020 include: the prudential standard for remuneration i.e. CPS 511 — this is the big one!; ADI capital reforms incorporating APRA’s ‘unquestionably strong’ framework, Basel III and measures to improve transparency, comparability and flexibility; insurance capital reforms to incorporate changes in the accounting framework (AASB 17); and the prudential standard for insurance in superannuation, and updated guidance on the sole purpose test.
- MIS (ASIC): given the market volatility, ASIC has stressed that it is more important than ever that valuations of managed fund assets are regular, robust and reasonable. It has reminded responsible entities of their obligation to ensure that valuations of their managed fund assets are regular and reasonably current having regard to the nature of the assets. One of ASIC’s focus areas this year is reviewing valuation practices between all the investment managers (see ASIC Interim Corporate Plan 2020–21, p14). Accurate valuation of fund assets, including illiquid assets, is needed for a responsible entity to determine the value of units, unit price and financial reporting. From a regulatory compliance perspective, regular valuations and robust valuation processes are part of responsible entities’ statutory duties to: exercise a reasonable degree of care of care and diligence; ensure scheme property is valued at regular intervals appropriate to the nature of the property; act in the best interest of members of the fund; and, carry on their financial services business efficiently, honestly and fairly. From my personal experience, there is increasing fund activity now the initial shock of COVID-19 has worn off. Given ASIC’s focus on this area, those in the funds space need to apply extra scrutiny to valuations — particularly for illiquid assets which may be more vulnerable to the effects of a changing market.
- COVID-19 deferrals (ASIC): ASIC’s expectations of retail lenders when loan repayment deferrals end has been set out. In short, they should make efforts around: A) contacting consumers about the expiry of their deferral; B) if a consumer cannot resume repayments on their mortgage, they should make reasonable efforts to interact with the consumer directly and (if appropriate) when offering further assistance to a consumer, lenders’ processes should be flexible and empower staff to offer tailored assistance; and C) lenders should focus on their complaints management processes. ASIC has also highlighted areas for focus among lenders, stating that it thinks more can be done by lenders to provide consumers with personalised information or representative examples about how assistance arrangements may affect their repayments and the cost of their loan over the longer-term. IT has also addressed the hard question, stating that it ‘…recognises that there will likely be some circumstances where offering a consumer further temporary assistance may make their situation worse. Such situations will need to be carefully identified by lenders and involve a high level of engagement with those affected consumers’. That is unsubtle code for the fact that ASIC accepts that increased enforcement activity will occur going forward.
Thought for the future: ASIC’s guidance to lenders on how to approach COVID-19 deferrals ending is regulatory engagement at its best. It is a regulator seeing an issue on the horizon, and actively engaging with it — the first part of Braithwaite’s pyramid. APRA is stepping us as well; now we need more of this type of activity from smaller regulators like AUSTRAC, OAIC and AFCA. It will only assist to help the financial services industry weather the current storm, and assist its customers coping with the effects of COVID-19.
(These views are my own and do not constitute legal advice. These updates are not designed to be comprehensive. Photo credit Tom Wheatley)