Australian regulators weekly wrap — Monday, 14 November 2022

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. FTX (regualtion): the digital assets world has been rocked by the liquidity run on FTX the week, the world’s second largest exchange, and the near buyout by Binance, the world’s largest exchange. While there are various reasons being put forward for the issues facing FTX, in a febrile environment part of the focus is on custody of client assets. As refresher for AFSL businesses, and those wishing to now emulate them: 1) firms must separate client money from their own by keeping it in a different bank account (known as a trust account and most often designated as a s981B or s1017E account). The bank account must be with an Australian bank, an approved foreign bank or a cash management trust; it is impermissible to mix client moneys (s. 1017E of the Act). Only specific types of money can be paid into the client money account, being client money — paid by the client, or on behalf of the client for the benefit of the client; 2) interest on the amount in the account (unless the issuer claims that money, after it is properly disclosed per r. 7.9.08A of the Corporations Regulations 2001 (Cth) — interest made on any investments made in accordance with the Act; 3) firms can invest some client moneys, though there are very specific rules around this which need to be satisfied. Most derivatives providers do this to hedge counterparty risk. Some AFS licensees obtain broad authorisations in their client agreements and product disclosure statements to make withdrawals from client money for any purpose, including as working capital and for proprietary trading; and 4) specific rules apply around when firms can move client money from the trust account and for what purpose (s 1017E(3) of the Act). There are also timeframes. You can read more in our article here, including the practical steps which digital asset firms can take to uplift their custody arrangements.
  2. Crypto scams (ASIC): ASIC has released a guide on how to spot crypto scams. Crypto scams fall into three broad categories, including: scams where you think you’re investing in a genuine asset but it’s a fake crypto exchange, website or app; fake crypto tokens (used to steal your crypto assets), and jobs trading crypto that look legitimate at first glance (but are really money laundering using crypto); or, scams that use crypto-assets to make a payment. It is in response to what ASIC and the ACCC says are a dramatic rise in scams, and advises investors to watch out for things like “The provider withholds investment earnings ‘for tax purposes’” or “The app you’re using or directed to isn’t listed on the Google Play Store or Apple Store”. You can read the helpful guide here.
  3. DDO (ASIC): ASIC deputy Chair Karen Chestor has given a speech amongst heightened DDO enforcement, stating that “Companies need to take a consumer-centric approach across a financial product’s lifecycle. Ultimately, this requires products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers being targeted”. She also advised that ASIC’s regulatory focus has now shifted to compliance, and that it will initially focus on sectors at most risk of consumer harm. In this regarding ASIC has a number of targeted surveillances underway across sectors including BNPL, crypto products, credit cards, superannuation and managed investments. ASIC also expects firms to get their TMDs and product governance settings right and have robust and meaningful data to test and monitor these settings. Ms Chester said that firms must collect and understand data about the outcomes of their product distribution and who their products are getting to, and that ASIC will look closely at the way firms do this. Expect a lot more interim stop orders where TMDs do not align with PDSs, or product T&C’s, etc is my take from the speech.
  4. Mandatory disclosure (Climate change): the Investor Group on Climate Change has urged federal treasurer Jim Chalmers and the RBA to quickly mandate climate disclosures, to help companies and investors mitigate risks. The IGCC is an international set of investor networks that represent over two-thirds of Australia’s investment industry (about $100 Trillion). It wil also worth noting that the recent Australian Federal budget allocated $6.2m for Treasury and the Australian Accounting Standards Board to “develop and introduce climate reporting standards for large businesses and financial institutions”. Like many other developed countries around the world have already done, expect these changes to come into being during the next 2 years.
  5. Insurance (ASIC): ASIC has written to insurers warning they should be prepared, proactive, transparent, consumer-centric and responsive in dealing with claims as they face a summer that’s likely to continue the recent heightened pattern of severe weather events. The letter to directors says this summer is set for a continuation of La Nina conditions, with severe weather increasing in severity and frequency. Expectations include that insurers will have adequately resourced and trained teams of claims handlers, complaints managers, assessors and other service providers. In addition, insurers should inform consumers about their policy coverage, including exclusions or optional benefits, when they lodge a claim or make an inquiry, explain the process, provide realistic expectations about progress, facilitate communication between consumers, experts and tradespeople and provide regular updates. ASIC says that it expects insurers will review and refine response processes, continue to invest in systems to accurately record claims information and continue to invest in increased capacity and resources to deal with severe weather events.

Thought for the future: two regulatory design trends have dominated since the GFC — personal liability, and principles-based regulatory design. Both are well encapsulated in the Financial Accountability Regime, but you can also see the approach more broadly — like this past week when ASIC emphasized the focus on the prosecution of a responsible manager. Despite not having a framework of personal liability, this was a pretty clear message to the industry…

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