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.
- Insolvency laws (Treasury): the major insolvency law changes proposed as part of the Federal Budget have passed Parliament. The legislation introduces a new, simplified debt restructuring process that can be accessed by small businesses experiencing distress. This process draws on key features of the Chapter 11 bankruptcy model in the United States and will apply to incorporated businesses with liabilities of less than $1 million — covering around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees. By moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, the aim is for eligible small businesses to restructure their existing debts while remaining in control of their business. A new simplified liquidation pathway will also be introduced to allow faster and lower-cost liquidation, increasing returns for creditors and employees. These new insolvency processes will be available for eligible small businesses from 1 January 2021, and there are a lot of strong views as to whether it will work — does it make sense to have businesses owners whose actions have gotten to company into trouble lead them out of it? Time will tell, though it does shift the balance in favour of debtors.
- FASEA (Treasury): FASEA will be disbanded and have its role divided up between Treasury and ASIC’s Financial Services and Credit Panel (FSCP) — which will become the industry’s long-awaited single disciplinary body — in a raft of changes to the advice industry announced in draft legislation by the Morrison government. Long expected, the FSCP, which currently administers banning orders within ASIC, will have its role expanded dramatically to incorporate advice disciplinary functions as well as take over FASEA’s administration of the adviser exam. Instead of providing clients with an FDS annually and an OSA (or fee renewal notice) every two years, advisers will soon no longer need to provide separate notices. There is also a move from biennial to annual ongoing fee renewals, per Commissioner Hayne’s recommendations. The draft legislation also follows through with Hayne’s recommendation that advisers provide clients with a document outlining their “lack of independence” if they are in receipt of commissions, volume-based payments or “other gifts or benefits” from product issuers. Finally, it also addresses advice fees in superannuation as expected, with trustees to be prohibited from charging members advice fees (other than intra-fund fees) unless they have the member’s consent. If legislated, the new rules will start on 1 July, 2021, with a subsequent 12-month transition period.
- Hayne Recommendations (Parliament): as expected, a raft of legislation from the Hayne Royal Commission has passed Parliament. The legislations which has passed Parliament can be categorised as follows: a) strengthening the unsolicited selling (anti-hawking) provisions, including for superannuation and insurance products, to prevent pressure selling to consumers; introducing a deferred sales model for add-on insurance products, to promote informed purchasing decisions and prevent inappropriate sales of add-on insurance; making the handling and settlement of insurance claims a ‘financial service’, which will require insurers to behave honestly, efficiently and fairly and comply with other licensing obligations, to improve claims handling practices; prohibiting the trustee of a superannuation fund from having a duty to act in the interests of another person, other than those arising from their duties as trustee of a superannuation fund; and, allowing provisions in financial services industry codes to be enforceable, with breaches attracting civil penalties, ensuring better adherence by industry and certainty for consumers. (Watch out for the latter one, AFCA is going to have a field day in 2021!) These changes are complemented by providing further clarity regarding the role of the regulators and enhancing the requirements of financial institutions reporting breaches of the law which will ensure significant misconduct is reported and investigated sooner. The breach reporting laws are really draconian, and the Hansard is here. They will come into effect in October 2021 (pushed back from April 2021). See 217 to 261 of the EM for a good overview. Aside from the content we knew already e.g. expanding the laws to the need to have to report anything which is a civil penalty (which almost everything is under the Corporations Act / NCCP) and to Credit Licence holders, there are a few notable additions I had not picked up earlier — getting ASIC to publish data on breach reports lodged by licensees is one…
- Design & Distribution (ASIC): ASIC has released a new regulatory guide on the product design and distribution obligations (RG 274), following extensive consultation. Under the regime, which starts in 21 October 2021, product issuers must: make a ‘target market determination’ for each product covered by the regime; take reasonable steps that will, or are reasonably likely to, result in ‘retail product distribution conduct’ (other than certain excluded conduct) being consistent with the determination; notify ASIC of ‘significant dealings’ in a product in relation to a retail client that are inconsistent with the determination; and, review the determination regularly and keep records. Distributors must: not engage in ‘retail product distribution conduct’ unless all reasonable enquiries and determination have been made for the product (or that it is not required); take reasonable steps that will, or are reasonably likely to, result in retail product distribution conduct in relation to the product being consistent with the determination; notify the issuer of ‘significant dealings’ that are inconsistent with the determination; and, keep records. Regulatory Guide 274 Product design and distribution obligations sets out: the financial products to which the design and distribution obligations apply; ASIC’s interpretation of the obligations, and, ASIC’s administration of the obligations. I will be covering the guide in more detail in coming weeks — we have been waiting for it for some time(!) — but one thing that is clear is that it is very principles-based, reflecting Parliament’s intent that industry is best placed to implement the obligations in the context of their existing operations and product offerings. It also reflects the fact that the design and distribution obligations cover most financial products across all sectors of the financial services market. If you have not started your DDO implementation programs, start now — they can be more complicated than expected in my experience.
- BEAR / FAR (APRA): The Australian Prudential Regulation Authority released an information paper detailing the findings from its review of the implementation of the Banking Executive Accountability Regime (BEAR) by three of Australia’s largest authorised deposit-taking institutions (ADIs), NAB, CBA and ANZ — Westpac was not included due to an ongoing investigation into potential breaches of the Banking Act 1959 (Cth). APRA’s review found that all three of the large ADIs had designed adequate frameworks to implement the BEAR and that this has helped to deliver: greater clarity and transparency of individual accountabilities at ADIs; sharpened challenge by boards on actions taken by accountable persons to meet their obligations; and, more targeted engagement between APRA and ADIs to deliver prudential outcomes. As at February 2020, APRA considered that CBA had the most developed approach to implement the BEAR, but that all of the ADIs had further work to achieve clearer and more transparent accountability practices. My top read for the week, you can access the paper here. And do not forget — the legislation to introduce BEAR / FAR to general insurers and superannuation firms will come in June 2021…
Thought for the future: both APRA and the UK PRA have lifted the restrictions on banks dividends, which is a good economic sign. Still, with stimulus packages tapering off, and the full economic effect of COVID-19 yet to be felt, not doubt 2021 will be a rocky one.