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.
- ISG Financial Services v AFCA (AFCA): the Australian Financial Complaints Authority or AFCA is an external dispute resolution scheme for consumers who are unable to resolve complaints with member financial services organisations. Membership of AFCA is a requirement under law or license condition of virtually all financial firms and financial service providers. ISG Financial Services is a successful fund, which has unfortunately found itself the beneficiary of an adverse AFCA determination regarding the content of an information memorandum. Quality of the decisions emanating from AFCA aside — full disclosure, my personal view is that many are challenging to comprehend — it is rare for financial firm to appeal AFCA’s determinations. QSuper’s appeal over a superannuation determination and Investors Exchange Limited’s action seeking judicial review of AFCA’s determination are two 2020 examples. Both were essentially resolved in AFCA’s favour. What makes ISG’s newly commenced claim so interesting is that it is proactively suing AFCA for: a) declarations that its adverse determinations are in breach of the contract between AFCA and ISG (which contract is set out in 121(d) of AFCA’s Constitution) and; b) damages pursuant to breach of contract. The breach is, in part, predicated on the allegations that AFCA failed to comply with implied terms of the contract to act reasonably and in good faith. Taking matters to their logical conclusion, the claim also argues that there is no privity of contract as between AFCA and the investors in whose favour it made the determination. ISG’s action raises some very intriguing considerations. AFCA’s powers are based in contract — not by legislation, like say ASIC. It stands to reason then, that usual contract law applies and with it implied terms e.g. good faith which bind AFCA (assuming it is not otherwise expelled. See a great paper by McDougall J here in that regard). While it is intriguing, I do doubt whether this case will make it to trial. There is too much at stake for AFCA….
- Federal budget (AUSTRAC): the budget measures have factored a $104.9 million bonus to AUSTRAC for a “capability uplift” to increase its capacity to combat serious financial crime. It will also help the AML/ CTF regulator with the development of a novel financial data reporting system to assist compliance with reporting obligations under the legislation. That is a staggering amount of resources for what was until 3 years ago a relatively marginalised regulator — recall that the much bigger ASIC was given c. $400M after the Royal Commission. In any case, with its wins against Tabcorp, CBA and Westpac under its belt, that is no longer the case. And it does not appear that AUSTRAC will go back into the shadows any time soon. Chief executive Nicole Rose has unsettlingly told The Australian Financial Review that AUSTRAC is considering enforcement against a major non-banking institution this financial year. “I think it will be big,” she said. “I’ve got 15,000 entities that we regulate and we’re reviewing high-risk sectors. I can’t tell you about specific non-compliance, but I can tell you there will be further enforcement this year.”
- Risk & Intensity Model (APRA): APRA has announced that it is commencing the roll-out of a new model for assessing the risks faced by banks, insurers and superannuation licensees. In a letter to industry, APRA advised that it would begin using its new Supervision Risk and Intensity (SRI) Model from this month, with the new system expected to be fully implemented by June 2021. The SRI Model will replace the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) systems that APRA has used since 2002. APRA will use the SRI Model to assess the systemic significance of APRA-regulated entities, and the level of risk each entity faces. These assessments will then guide the nature and intensity of APRA’s supervisory response. From what I can see, the model is more sophisticated, and tailored to allow APRA to increase its scrutiny of governance, culture, remuneration and accountability, and address new and emerging risks such as cyber-security. The model also includes a degree of tailoring to each individual sector, which is prudent (no pun intended!).
- Open Banking (ACCC): the ACCC has amended the Consumer Data Right Rules to permit accredited intermediaries to collect data on behalf of third party data recipients, with consumer consent. These amended rules mean accredited businesses can now ask other accredited businesses to obtain consumer data on their behalf, and are intended to facilitate greater participation in the Consumer Data Right by fintech firms. The changed rules will, for example, allow an accredited business to use outsourced IT infrastructure and software of an accredited intermediary to connect to data holders’ application programming interfaces, rather than have to build their own. The ACCC has also announced consultation on proposed new consumer data rules. This includes proposals for new levels of accreditation, expanding the Consumer Data Right to business customers and a range of other measures.
- Class orders (ASIC): ASIC has remade ASIC Class Order [CO 10/381] relating to notification requirements for unlicensed carried over instrument (COI) lenders which was due to end on 1 October 2020. The new instrument, ASIC Credit (Notice Requirements for Unlicensed Carried Over Instrument Lenders) Instrument 2020/834, continues to impose an obligation on unlicensed COI lender to notify ASIC when they become an unlicensed COI lender. ASIC has also remade ASIC Class Order [10/1230] relating to credit disclosure obligations which was due to end on 1 April 2021. The new instrument, ASIC Credit (Electronic Precontractual Disclosure) Instrument 2020/835, continues relief allowing credit providers to give pre-contractual disclosure in the same manner as they give other disclosure documents under regulation 28L of the National Consumer Credit Protection Regulations 2010.
Thought for the future: the removal of responsible lending, wholesale changes to the insolvency regime and licensing of litigation funders. All massive shifts in the regulatory landscape, and all appear to have been taken by Frydenberg’s Treasury with little to no consultation with ASIC. Quite aside from the merit of these changes, minimal consultation with the financial regulators (much less the broader community!!!) is a poor recipe for policy design in my view. I hope it does not continue.
(These views are my own and do not constitute legal advice. These updates are not designed to be comprehensive. Photo credit Tom Wheatley)