Australian regulators weekly wrap — Monday, 28 September 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.

  1. AUSTRAC v Westpac (AML / CTF): in an action-packed week, the first entry is Westpac’s agreement to pay the biggest fine in Australian corporate history, $1.3 billion (Westpac had provisioned $900M), to settle the proceedings brought in November 2019 by the AML / CTF regulator, AUSTRAC. AUSTRAC accused it of breaching anti-money laundering laws 23 million times, including failures to report suspicious matters and threshold transactions. A quirk of Australia’s AML / CTF laws, is that each failure can give rise to a separate cumulative penalty i.e. the breach is not considering on a systemic basis. While the fine is massive to be sure, the drama is not over just yet. ASIC continues to investigate under s.912A, as does APRA under the Financial Accountability Regime (FAR) which focuses on individual accountability — this is the first known investigation of its kind. The FAR regime is modelled on the UK Senior Manager’s & Certification Regime, which is a regulatory construct designed around the concept of personal liability to promote positive corporate culture. Interestingly, APRA said that ASIC will also consider liability under the Banking Executive Accountability Regime (see this article in the AFR from 24 / 9 here). ASIC does not have that jurisdiction yet, but will when BEAR turns into FAR next year; it won’t be retrospective so I am not sure what is behind this thinking. In any event, there is a lot of market commentary around BEAR / FAR so it will be interesting to see where this all goes. Take the CEO of Choice, Alan Kirkland, for example and his statement: ‘If designed correctly, the FAR will be a game-changer for corporate culture in Australia’s financial services sector. Individual executives will not be able to hide behind large corporate pay-outs… This new regime will ensure that executives and senior managers of large financial institutions are subject to large civil penalties, disqualification, or deferred bonuses for breaches of the law.’
  2. Insolvency laws (Treasury): borrowing from the US debtor-led insolvency regime, The Treasury has announced that it will offer a new pathway for companies with liabilities of less than $1 million so they can call in a ‘small business restructuring’ practitioner to deal with creditors. Once this is approved by the board, the business owner would gain protection from unsecured and some secured creditors, who would not be able to enforce personal guarantees against directors or their relatives. The business owner would have 20 days to develop a plan to restructure the debts while keeping control — this is a big shift on existing laws that hand control to outside administrators or receivers. Once the plan is put in place, creditors have 15 days to vote on it and any percentage of disbursements that would be paid to the small business restructuring practitioner, adding to the original flat fee. If the plan gains majority support in a vote of creditors by value, the business continues and the practitioner oversees the distribution of any funds to those who are owed money. If a plan is rejected by creditors, the company would go into administration and insolvency under a modified version of the existing laws. Promising to make the process faster, the government is planning a ‘simplified liquidation pathway’ that reduces the investigative requirements and reporting for liquidators. This is a massive development, and there is considerable debate already about whether directors who have put the company in a parlous state are the best ones to get it out of that state. Still, with most companies who enter into external administration subsequent going into liquidation (a longstanding gripe of the Australian insolvency system), and the economic effects of the pandemic to contend with, it is bold thinking and may assist recovery.
  3. Responsible lending (Treasury): The Treasury has announced that it will, in effect, remove the responsible lending laws that was imposed by the Rudd Government in 2009 as a response to the GFC. It is a big shift from ‘lender beware’ back towards traditional ‘borrower beware’ — ASIC will lose its jurisdiction here, and the expensive ‘Wagyu & Shiraz’ case it fought against Westpac has effectively been for naught. Responsible lending laws do not apply to businesses, and we can expect to see a lot more misleading information being provided by borrowers on their loan applications. The lenders won’t be penalised if they inadvertently rely on this information to approve. From my perspective, the scrapping of the responsible lending laws has thrown a lot of lenders into turmoil (and frustration, in some quarters, given how much resources they have poured into complying with the new RG 209 guidance released earlier this year) and will generate appreciable work unwinding all of the regulatory infrastructure around responsible lending, while not disturbing other regulating regimes which interlink with it and to an extent depend on it e.g. Financial Accountability Regime, Design & Distribution Regime and the regulators’ cultural expectations.
  4. Conflicted remuneration (Treasury): The Treasury has released the long-awaited regulations which will govern mortgage broker remuneration from 1 January 2021, the Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers) (Mortgage Brokers) Regulations 2020(Regulations). It follows the release of the draft regulations and explanatory statement in August 2019. S. 158N of the Bill sets out that ‘conflicted remuneration’ means any benefit, whether monetary or non-monetary, that is given to a licensee, or a representative of a licensee, who provides credit assistance to consumers or acts as an intermediary and because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the credit assistance provided to consumers or whether / how the licensee or representative acts as an intermediary. The Regulations clarify that benefits are not likely to be conflicted remuneration if: the remuneration is given by consumers (r. 28VB(2)); the benefit is: a) not a volume-based; or b) not campaign-based benefit; and c)if a drawdown cap applies, the benefit is not tied to the amount of credit or percentage of the maximum drawdown (r. 28VB(3)); non-monetary benefits which are non-frequent, and less than $300 (r. 28VH(2)); and, non-monetary benefits which have a genuine education or training purpose (r. 28VH(3)) — and the regulations actually specifically that 75% of the course or 6 hours per day must be taken up with the education. One vexed issue addressed by the Regulations is clawback requirements (r. 28VG). Clawback is a concept which requires a mortgage broker to repay all or part of the benefit they receive if the consumer is in default under the credit contract or wholly or partly discharges the credit contract. The regulations provide that the any clawback requirements in relation to the benefit must not apply for more than 2 years after the loan commences. Mortgage brokers and other affected parties need to review their remuneration structures and policies and procedures in order to ensure that a good risk framework is in place.
  5. Fund Managers (ASIC): ASIC has stated that its surveillance has found that fund managers must do more to ensure their products are ‘true to label’ — that the product name aligns with the underlying assets. My top read for the week, the update states that ASIC undertook a targeted surveillance of 37 managed funds operated by 20 responsible entities that collectively hold approximately $21 billion in assets. ASIC’s work found the following categories of issues: a) confusing or inappropriate ‘cash’ product labels e.g. calling something cash, when it was more like a bond product; and b) mismatch between redemption features offered and the liquidity of underlying assets e.g. the liquidity of the underlying assets did not support the short redemption terms offered to consumers. ASIC Deputy Chair Karen Chester stated: ‘Managed investment products are not prudentially regulated or government-guaranteed, so it is paramount that consumers are not misled about the level of risk associated with a particular product…Funds should be “true to label”. This is not a nice-to-have. It’s a must-have for responsible entities in meeting their legal obligations to their investors, especially in times of market volatility. Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is. Put simply, a fund should not use terms such as “cash” or “cash enhanced” unless its assets are predominantly in cash and cash equivalents.’

Thought for the future: in relation to the scrapping of responsible lending, I can very much understand where The Treasury is coming from in freeing up the banks to lend more so as to stimulate the economy. In the wake of the Hayne Royal Commission, however, and given most of our regulation is increasingly paternalistic insofar as consumers are concerned, this decision was somewhat jarring. It will be interesting to see if it is followed in other aspects i.e. drastically relaxing the Basel III capital requirements…

(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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