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 funding (Parliament): the report of the Parliamentary Joint Committee on Corporations and Financial Services into Litigation funding and the regulation of the class action industry has been released. A scathing report, which agreed that the current regulatory overlay of the sector is too light, it contains some major recommendations. These include: a) the Federal Court’s Class Action Practice Notice (PN) be amended to include a requirement that it hold a selection hearing to determine which of the competing or multiple class actions should proceed — this is much the same procedure in the USA, and one I really agree with; b) litigation funders should indemnify a representative plaintiff from adverse costs in every class action; c) legislation should be enacted to clarify the position around ‘common fund’ orders; d) there should be Federal Court approval of litigation funding agreements in order for them to be enforceable, and empower the Federal Court to reject, vary or amend terms of litigation funding agreements in the interest of justice — critically, the committee said that independent financial experts should be appointed to assist the Federal Court’s assessment of litigation funding agreements. I 100% agree!; e) the PN be amended to work in a favorable presumption for the use of contradictors, where there are complex matters at issue in a proposed settlement, or the potential exists for significant conflicts of interest; f) the Australian government to consult on the best way to guarantee a statutory minimum return of the gross proceeds of a class action, including whether a minimum gross return of 70% is best; g) law firms acting on contingency should be subject to similar arrangements as funders e.g. obtaining AFSLs; g) increased disclosures around conflicts of interest e.g. notices to class members need to describe the lawyers and funders duties in this regard — the committee also recommended that the conduct rules for solicitors and barristers be amended to prohibit having a financial or other interest in a third-party litigation funder that is funding the same matter in which the solicitor, law firm or barrister is acting; h) funders should be held to the same standards as parties and lawyers to the litigation i.e. ‘overriding obligation’ to administration of justice ; i) the AFSL and MIS regimes being applied to funders are a step in the right direction, though some tweaking is required. The ASX continuous disclosure laws were amended during COVID-19 by removing the strict liability associated with continuous disclosure such that plaintiffs would be required to prove fault — perhaps most importantly, these changes were recommended to be made permanent by the committee. I think this recommendation, and all the other recommendations, are very sensible. (Shareholder class actions are often economically inefficient, as it is shareholders suing themselves under an unduly onerous disclosure system.) Now to see them put into legislation!
- Pandemic clauses (Federal Court): the Full Federal Court delivered its judgment in Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance  FCAFC 228, rejecting the interpretation of the exclusion clause put forward by the insured, and accepted the insurer’s submission that the exclusion should be given a wide interpretation. It is a win for insurers seeking to rely on their pandemic exclusion clauses, though the decision needs to be treated with caution — each of these cases turns on the specific wording of the clause in question! The insurance clause here was: ‘We will not pay any claim that is directly or indirectly caused by or arises from, or is in consequence of or contributed by: … any biosecurity emergency or human biosecurity emergency declared under the Biosecurity Act 2015 (Cth), its subsequent amendments or successor, irrespective of whether discovered at the premises or the breakout is elsewhere.’
- APRA & ASIC (Co-operation): the twin peaks have published their first annual update on engagement. The update fulfils the agencies’ obligation under their 2019 Memorandum of Understanding to report annually on their engagement activities. The statement is available on the APRA website here, and the most interesting part to me is what they will be working on next together. In 2021, APRA and ASIC’s cooperation will be reinforced by the implementation of Hayne Royal Commission Recommendation 6.9 via a statutory obligation to cooperate, share information and notify each other of suspected entity breaches of laws administered by the other. Further, a key regulatory priority of 2021 includes the implementation of the latest consumer credit and superannuation reforms and preparation for the Financial Accountability Regime (FAR). Both regulators have responsibility under that critical regime.
- Westpac (ASIC): Following the civil proceedings commenced by AUSTRAC in the Federal Court of Australia on 20 November 2019, ASIC commenced an investigation into matters related to the AUSTRAC proceedings. APRA also commenced an investigation into matters related to the AUSTRAC proceedings and potential contraventions of the Banking Act 1959 (Cth) (including the Banking Executive Accountability Regime) and subsequently delegated certain enforcement powers to ASIC in connection with its investigation. ASIC has informed Westpac that it has concluded the investigation and that it does not intend to take any enforcement action against Westpac or any individuals in connection with the investigation. By way of a recap, the bank admitted to more than 23 million breaches of anti-money laundering and counter-terrorism financing laws. Both the company’s CEO and chair left following the investigation, and in September Westpac agreed to pay $1.3 billion settlement. The most interesting investigation will be APRA’s, under BEAR, given that the first investigation of its kind…
- Liquidity (APRA): the prudential regulator has published new frequently asked questions for authorised deposit-taking institutions on minimum liquidity holdings, mortgage warehouse facilities and calculation of collateral outflows. There is some quite good — but very dense technical — information to assist regulated entities in the interpretation of Prudential Standard APS 210 Liquidity, Prudential Practice Guide APG 210 — Liquidity and Reporting Standard ARS 210.0 Liquidity here.
Thought for the future: 2020, from a purely regulatory perspective, is likelier to be easier than 2021 in my view. New breach reporting, Mortgage brokers’ BID regime, FAR, DDO, CDR, RG 165… there are some very large changes in the pipeline.