Australian regulators weekly wrap — Monday, 25 January 2021

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. Secured borrowing (RBA): the RBA has issued an interetsing paper on the role of collateral in credit markets under stress. The paper shows that the presence of collateral affects reactions to stress and the reactions are different depending on the characteristics of the borrower. When the Lehman Brothers collapse in mid September 2008 caused sudden global financial turmoil, collateralised and uncollateralised interbank markets reacted differently. Collateralised borrowing rose, particularly by borrowers that already held large amounts of collateral prior to the stress. Uncollateralised borrowing did not increase overall, and for riskier borrowers (i.e. those with more non-performing loans (NPL) on their balance sheet), it decreased. The combined outcome of these reactions was that riskier borrowers that held sufficient quantities of collateral switched from uncollateralised to collateralised borrowing. A logical finding, you can consider the paper here.
  2. Cyber attacks (BIS): sticking with research papers, the Bank of International Settlements has released a paper on Covid-19 and cyber risk in the financial sector which you can access here. Key takeaways include that the financial sector has been hit by hackers relatively more often than other sectors during the Covid19 pandemic, and while this has not yet led to significant disruptions or a systemic impact, there are substantial risks from cyber attacks for financial institutions, their staff and their customers going forward. Another point that is made is that financial authorities are increasingly working to mitigate cyber risks, including through international cooperation. It is not a particularly surprising report, or one that has not been warned about by international regulators for some time. As but one example, Singapore’s MAS has just enhanced its guidelines to dealing with cyber risk in the face of COVID-19.
  3. Bankruptcy consultation (Treasury): the Attorney-General’s Department is seeking stakeholder submissions on possible changes to the personal insolvency system to inform the Government’s ongoing response to address the impacts of the coronavirus. Questions under consideration include: how might a default period of one year benefit debtors with business related debts such as sole traders; what reforms, if any– either on a temporary basis or more permanently — should be made to the debt agreement system to respond to coronavirus; what new or expanded offence provisions could respond to concerns about the behaviour of untrustworthy advisors, including pre-insolvency advisors? You can see the paper here, and whatever your view is on the bankruptcy law changes — they are generating controversy — my view is that the Morrison Government’s strong commitment to revisiting legal frameworks in order to increase Australia’s economic recovery is a good thing. Personally, I am in favour of reducing the period of bankruptcy (as well as reforms that make corporate insolvency more flexible). Australia is more risk adverse than its UK and US counterparts, and in part that can be laid at the feet of an insolvency systems that is less dynamic than in those jurisdictions and arguably underpinned by a greater focus on punitive measures.
  4. Superannuation (APRA): APRA has commenced a second round of consultation on revisions to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250). The proposed changes are aimed at improving superannuation member outcomes by helping trustees select the most appropriate insurance policies for their members, and monitor their ongoing relationships with insurers. The key changes to the standard address two recommendations from the financial services Royal Commission1, and reflect Government recommendations that trustees make it easier for members to opt-out of insurance, and ensure that premiums don’t inappropriately erode members’ retirement income. APRA has also released for consultation an updated version of Prudential Practice Guide SPG 250 Insurance in Superannuation (SPG 250), which contains further guidance on the new proposed requirements. Submissions on both the SPS 250 and the accompanying prudential practice guide are open until 5 March 2021. APRA intends to finalise both documents by the middle of the year, with the finalised SPS 250 expected to commence from 1 January 2022. The letter on the consultation is here.
  5. General and personal Advice (ASIC): the Australian Institute of Superannuation Trustees has urged ASIC to provide clearer guidance on the line between general and personal advice and implement a private ruling service to give financial advisers greater certainty about new advice offers. In its submission to ASIC’s consultation on promoting access to affordable advice, the Australian Institute of Superannuation Trustees said the value of general advice to consumers as an affordable and accessible form of advice cannot be overstated. Part of AIST’s submission, which I agree with, states as follows: “While consumers do not often understand the difference between general and personal advice — and may care even less — this does not reduce the value of general advice in serving the best interests of consumers on a wide-scale basis”.

Thought for the future: there will be at 7 different mandatory reporting systems for AFSL and ADIs by the end of the year, including those which have been seriously revamped e.g. AFSL breach reporting. Many of them overlap, they are complicated and there is also personal liability under FAR / BEAR for whomever holds the ‘breach reporting’ role… My firm has been developing an APP to draw all these requirements together and meet them in a efficient way — it is in the beta phase, so I would love experienced legal, risk and compliance people to road-test it if you have 15 mins in the coming weeks. If you are interested, please do reach out!

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