Australian regulators weekly wrap — Monday, 20 September 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. Licensing update (ASIC): ASIC has released a report outlining key issues, new and proposed changes to its licensing processes, and other work it has undertaken that affects licensees. Between July 2020 and June 2021, ASIC received 1,883 AFSL and ACL applications (an increase from 1,346 the previous year). The increase was mainly due to the licensing reforms relating to insurance claims handling and debt management services. AFSL applications alone were up 40%. ASIC approved 458 new AFSLs and ACLs (compared to 394 last year). ASIC also approved 537 variation applications by existing licensees (the same as last year). In addition to AFS and credit licence approvals, 391 AFS and ACL applications were withdrawn or rejected for lodgement, one was refused, 563 licences were cancelled and 23 suspended. My top read for the week for practitioners in the licensing space (we have done / are doing about 20 ourselves in 2021), you can read the report here.
  2. BBSW securities (RBA): the Reserve Bank is introducing new eligibility criteria for securities to be accepted as collateral in the Reserve Bank’s market operations. Floating rate notes and marketed asset-backed securities issued on or after 1 December 2022 that reference BBSW must include robust fallback provisions. All self-securitisations, regardless of the date of issue, must include robust fallback provisions. Eligibility criteria for FRNs and marketed asset-backed securities issued before 1 December 2022 are unchanged. However, issuers should consider including robust fallbacks for such securities, depending on their length of time to maturity, as a matter of prudent risk management. More detail is here, and this will come as no surprise — ASIC and APRA have been banging the drum about the change over from BBSW from quite some time now.
  3. Design & distribution (ASIC): ASIC has released additional information for advice licensees and financial advisers who are authorised representatives to help them prepare for the commencement of the design and distribution obligations on 5 October 2021. The fact sheet is here, and contains quite useful summarised information which complements RG 274. For example, it clarifies that advice licensees and financial advisers are exempt from meeting the reasonable steps obligation when providing personal advice but not when providing general advice. The exemption from the reasonable steps obligation applies when personal advice is provided because, in these circumstances, the adviser is providing advice tailored to the consumer’s individual circumstances. Given the amount of TMDS that financial advisers (and credit reps) will be receiving at the moment from issuers, the distilled information is quite timely.
  4. Criminal actions (ASIC): the corporate regulator has brought criminal charges against CBA, for the mis-selling of consumer credit insurance. The charges relate to allegations that between 2011 and 2015, CBA made false or misleading representations to customers that the insurance policies had uses or benefits to those customers when part or all the benefits were not available. It has also brought criminal charges against ME bank, again for misleading & deceptive. The charges relate to letters issued by ME Bank to home loan customers between September 2016 and September 2018, which ASIC alleges made false and misleading representations about: customers’ relevant annual interest rates; and/or, the minimum repayment to be paid after the fixed-rate period expired; and/or the minimum repayment to be paid after the interest-only rate period expired. ASIC also alleges that, between December 2016 and February 2018, ME Bank failed to give written notice to home loan customers that their annual interest rates and minimum repayment amounts were changing after their interest-only rate and/or fixed-rate period expired. The actions are notable for the fact that ASIC considers it can satisfy the higher burden of proof require to maintain criminal charges, and the aggressiveness — such litigation is rare. Somewhat ominous as well given the new breach reporting regime commencing in October specifically makes misleading & deceptive conduct a ‘deemed significant’ breach. For more detail, read here.
  5. Tax treaties (Treasury): the Government will expand Australia’s tax treaty network to enter into 10 new and updated tax treaties by 2023, building on Australia’s existing network of 45 bilateral tax treaties. The aim is to improve tax system integrity through the establishment of a bilateral framework of cooperation on the prevention of tax evasion, the collection of tax debts and rules to address tax avoidance, and is supposed to cover about 80% of foreign investment in Australia. Read this as another of Treasury’s interventions, together with insolvency reform, and attempts to roll back onerous responsible lending regulation on the credit sector to improve Australia’s economic bounce back from COVID-19. Consultation is open until 31 October 2021.

Thought for the future: the US regulatory system is, from one perspective, clever insofar as it uses industry itself to assist regulators. An example is paying whistleblowers for successful outcomes. The Securities and Exchange Commission said the total amount of payouts made to whistleblowers had topped $1 billion after the financial watchdog issued its second-largest ever award to a person for flagging wrongdoing — one person this week was paid a combined $110 million for information and assistance that led to successful enforcement actions by the SEC and other entities. Australia has considered, but rejected this route. It has, however, included a ‘dobbing’ obligation under the new enhanced breach reporting regime commencing in October 2021. That is, AFSL and ACL holders are required to report breaches about other licence holders to ASIC. It will be very new for us, and I suspect quite culturally challenging — especially, for multi AFSL and ACL organisations.Liam Hennessy

Australian regulators weekly wrap — Monday, 13 September 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. Breach reporting (ASIC): the corporate regulator has released the new RG 78 to apply from 1 October 2021 for the new breach reporting regime. The primary shift under this new regime, which applies to both AFSL and ACL holders, is to a more expansive scope of ‘reportable situations’ (i.e. matters that must immediately be reported to ASIC), and the introduction of ‘deemed significant breaches’. Largely gone will be the days of subjective assessments of ‘significance’ of a particular issue, with the decision of whether a matter is reportable to ASIC or not hinging on that assessment. There is far more prescriptive rigour around what is reportable to ASIC now. The new RG 78 explains: what licensee holders must report to ASIC (see Section B); when and how they must report to ASIC, including information about how ASIC deal with the reports we receive and the information we will publish about your reports (see Section C); and, ASIC’s expectations and guidance about compliance systems (see Section D). (The last one is particularly important, as ‘deemed significant breaches’ include a huge raft of civil penalties across legislation — my team has spent the last 6 months alone compiling them all!) It is a large guide, and does nothing to limit what will be an extremely onerous regime change — you can read a summary of the changes in this briefing here (my top read for the week).
  2. ASIC enforcement (ASIC): “We love litigation, say new ASIC chiefs” was the AFR heading on 3 September 2021. In the interview, ASIC Chair Joe Longo and Commissioner Sarah Court made very clear that: 1) they see significant challenges ahead of them in terms of enforcing compliance with the law — one of the more jarring sentences was that the depth of compliance problems in the financial services sector is “breathtaking”; and 2) they will be pushing more litigation from ASIC, albeit in more targeted areas. My read of all this is that we won’t see ASIC stray into policy-type decisions or cases (think responsible lending), which is consistent with the Treasurer’s direction to ASIC covered in the ARWW a fortnight ago, and we will see ASIC using more of the appreciable regime advantages it has been given to conduct more litigation. Think the penalties legislation of 2019 which made 912A an offence, mortgage brokers’ BID regime, new breach reporting regime and FAR in 2023. In effect, a more enforcement happy regulator, though with less of the big cases we saw under Tony D’Aloisio and to a lesser extent Shipton (not Medcraft).
  3. AML/CTF (AUSTRAC): the AML/CTF regulator released four new Australian banking sector money laundering and terrorism financing risk assessments. The four assessments examine the threats criminals pose to Australia’s major banks, other domestic banks, foreign subsidiary banks and foreign bank branches operating in Australia. A sobering read, AUSTRAC assesses the threat of ML/TF facing Australia’s major banks as high, and more importantly that that the major banks are subject to a high level of inherent ML/TF vulnerability. It is a fascinating read, which should prompt banks and non-bank lenders to revisit their AML / CTF policy, program and procedures. AUSTRAC had this to say: “Major banks have a mixed record of applying risk mitigation strategies. On one hand, major banks make significant investments to counter ML/TF risk, engage regularly with AUSTRAC, and some entities have undergone or are undergoing an uplift in their AML/CTF systems, controls and policies. On the other hand, there have been significant and systemic deficiencies detected in the subsector over recent years. Governance and assurance around AML/CTF compliance has been identified as a particular concern, and risk mitigation strategies are not always applied consistently across a reporting entity.”
  4. Safe harbour (Treasury) : In 2017, Parliament enacted the Treasury Laws Amendment (2017 Enterprise Incentives №2) Act 2017. The amendments introduced a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure. As part of the 2021–22 Budget, the Government announced that it would commence an independent review into the insolvent trading safe harbour, to ensure that the safe harbour provisions remain fit for purpose and its benefits can extend to as many businesses as possible — the consultation has just been released, and closes on 1 October 2021. My sense, given how willing the Government is to kickstart the post COVID-19 economy by tinkering with insolvency law, is that the provisions will be expanded. Good news for debtors, and more challenges for creditors essentially!
  5. Climate assessment (APRA): the prudential regulator has published an information paper outlining the purpose, design and scope of the Climate Vulnerability Assessment (CVA) that is underway with Australia’s largest five banks. Along with its draft prudential guidance on climate risk, which closed for consultation on 31 July 2021, the CVA forms the bulk of APRA’s efforts to help its regulated entities understand and manage the financial risks associated with climate change. You can read the paper here, which sets out that the three key objectives of the CVA are to assess potential financial exposure to climate risk; to understand how banks may adjust business models and implement management actions in response to different scenarios; and to foster improvement in climate risk management capabilities. The report sets out the criteria it will be assessing, including the types of climate risks considered, scope (geographic and financial exposures) of the assessment, climate scenarios, and the timeframe.

Thought for the future: once you have your AFSL or ACL permissions, they are yours forever right? Perhaps not, if ASIC follows a UK FCA development. The FCA has new powers to remove a firm’s unused permissions from the Financial Services register more quickly. It says incorrect or outdated permissions on the Financial Services Register can mislead consumers about the level of protection offered by a firm or give credibility to a firm’s unregulated activities. One to watch in case it comes to Australia…

Australian regulators weekly wrap — Monday, 30 August 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. Corporate plan (APRA): APRA has released its new corporate plan until 2025, focusing key action items to: 1) preserve the resilience of banks, insurers and superannuation funds, with a continuing focus on financial strength; cyber risks; governance, risk-culture, remuneration and accountability; and implementing the Government’s Your Future, Your Super reforms; 2) modernise the prudential architecture to ensure it is effective and accessible, less burdensome for entities, and more adaptable to the rapidly evolving financial sector; and, 3) better enable data-driven decision-making. There is some detail in there, for example around adopting the latest regulatory tools, techniques and practices in areas such as specialist regulatory services, enforcement actions, transparency and resolution. APRA’s updates always strike me as abstract and full of trendy compliance lingo to the point of unhelpfulness — they are getting better, though this update probably could have been greatly condensed.
  2. CPS 220 (APRA): APRA has released Prudential Practice Guide APG 220 Credit Risk Management (APG 220), which is new APRA guidance to assist ADIs in making prudent lending decisions and meeting their requirements under the new prudential standard, APS 220 Credit Risk Management. APS 220 requires an ADI to implement a credit risk management framework that is appropriate to its size, business mix and complexity. The framework must include a credit risk appetite statement, credit risk management strategy, credit risk policies and processes, a credit risk management function, a management information system and an independent review process. The key changes are around APRA’s expectations for: the role of the Board in managing credit risk, aligning with the requirements in APS 220; sound credit assessment and approval processes, including providing examples where some additional flexibility could be considered prudent; and, the use of automated valuation methods, including examples for the prudent development of scorecards and use of risk controls.
  3. Corporate Plan (ASIC): ASIC’s Corporate Plan 2021–25 outlines its priorities over the next four years. It is sharper than APRA’s in terms of practical detail, and outlines four strategic priorities: promoting economic recovery — including through better and more efficient regulation, facilitating innovation, and targeting regulatory and enforcement action to areas of greatest harm; reducing risk of harm to consumers exposed to poor product governance and design, and increased investment scam activity in a low-yield environment; supporting enhanced cyber resilience and cyber security among ASIC’s regulated population, in line with the whole-of-government commitment to mitigating cyber security risks; and, driving industry readiness and compliance with standards set by law reform initiatives (including the Financial Accountability Regime, reforms in superannuation and insurance, breach reporting, and the design and distribution obligations). The last one is absolutely critical. DDO and breach reporting come into effect in October 2021, and are going to be a large adaption for everyone in the industry.
  4. Unfair contract terms (Treasury): time to refresh those opinion letters, the Government is strengthening protections for consumers and small businesses against unfair contract terms through newly released draft exposure legislation; the wonderfully name Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract terms reforms. The draft make UCTs unlawful and give courts the power to impose a civil penalty; provide more flexible remedies to a court when it declares a contract term unfair by giving courts the power to determine an appropriate remedy, rather than the term being automatically void; providing that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and, creating a rebuttable presumption provision for UCTs used in similar circumstances; increase the eligibility threshold for the protections from less than 20 employees to less than 100 employees, and introduce an annual turnover threshold of less than $10 million as an alternative threshold for determining eligibility; and, removing the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the UCT protections. This is a big development, and escalates the risk around UCT provisions in financing and other contracts.
  5. Statement of intention (ASIC): the Treasurer has released a Statement of Expectations to ASIC. reading between the lines, stay away from policy making (don’t expect any more responsible-lending interventions) and stick to reform implementation and enforcement. It states that: “…the Government expects ASIC to contribute to the Government’s economic goals, including supporting Australia’s economic recovery from the COVID-19 pandemic and work closely with Government and Treasury on the implementation of policy reforms and in its exercise of policy-related functions.”

Thought for the future: one month to go between DDO, breach reporting and internal complaints handling commence. If you have not got your breach reporting frameworks (including ‘deemed obligations’ lists), TMDs and risk governance frameworks and RG 271, now is the time to start.

Australian regulators weekly wrap — Monday, 23 August 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. AUSTRAC portal (AUSTRAC): the AML / CTF regulator is seeking to update its portal. It has just released market feedback on user-expressed priorities, which include as key issues: the design of the suspicious matter reporting report and process (priority issue of 44% of responders); user Experience and User Interface navigation (priority issue of 32% of responders); guidance and support (priority issue of 28% of responders); and, the need for greater automation and introduction of an application programming interface (priority issue of 24% of responders). A really great initiative by AUSTRAC, I think the last is particularly important, and one that other regulators should revisit. I am specifically thinking of ASIC, given the number of breach reports it will be receiving come October…
  2. APRA statement (APRA): Wayne Byres gave an opening Opening Statement to Joint Standing Committee on Trade and Investment Growth last week. In it he outlined APRA’s role i.e. prudential supervision of specific financial institutions and promoting financial system stability in Australia and current focus on climate risk. Interestingly, however, he delved into detail on its approach, stating: “As we supervise financial institutions, APRA generally seeks to avoid overly prescriptive regulation, instead adopting a principles-based approach wherever possible. Given the diversity of institutions that we oversee, we believe a principles-based approach is more cost-effective, enables the application of regulation to be better tailored to individual circumstances, and reduces barriers to innovation.” That is undoubtedly correct, though work pointing out that as APRA/ASIC and other move more in the direction of principles-based regulation there will be increasing interpretational conflicts with the regulated population. See here for a run through the policy, academic and practical position.
  3. ASIC v BOQ (ASIC): the Federal Court has declared several terms within some Bank of Queensland (BoQ) small business contracts unfair. The Court found that the following terms were unfair: unilateral variation clauses which allowed BoQ to vary the terms and conditions of their contracts without giving borrowers advance notice or an opportunity to exit the contract without penalty; event of default clauses which allowed BoQ to unilaterally determine whether a default has occurred as well as call defaults based on events that do not present any material risk to BoQ and without giving borrowers an opportunity to address the issue; indemnification clauses which allowed BoQ to make a claim against a customer for losses caused by BoQ’s mistake, error or negligence; and conclusive evidence clauses which meant that if BoQ issued a certificate stating an amount owing by a customer, that amount would be assumed to be correct unless the customer could prove otherwise. The Court declared the unfair terms void from the start of the contracts and ordered that the unfair terms be replaced with new, fair terms agreed by the parties. The case follows a similar one against Adelaide & Bendigo Bank last year — there is a helpful table in this article to assist you (with the BoQ case) in navigating your loan document UCT reviews!
  4. Super funds (Treasury): Treasury has released a consultation on the financial and auditing requirements draft Bill for superannuation funds. The draft Bill will requires RSE licensees to: prepare and lodge financial reports for each financial year and half-year with ASIC; publish the financial report, directors’ report and auditor’s report for a financial year on the RSE’s website and provide details of how to access these reports with the notice of the annual members meeting; and, provide a copy of the financial reports for a financial year and half-year to members and beneficiaries on request. The draft Bill also amends the requirements for the auditor of an RSE, who will have obligations under both the Corporations Act 2001 and the Superannuation Industry (Supervision) Act 1993. These changes seek to ensure that the auditor, and in certain circumstances, audit firms and audit companies, are subject to stringent eligibility, reporting and independence requirements.
  5. Insolvency prosecutions (ASIC): between 1 January 2021 to 30 June 2021, ASIC prosecuted 124 people in relation to 224 contraventions of the Corporations Act 2001. Those prosecuted were involved in companies that went into liquidation and had registered liquidators appointed and mainly failed to response to information requests. ASIC took action following reports of misconduct being lodged by registered liquidators of the companies. This one surprised me (and perhaps a number of liquidators); ASIC has historically not focused too much on this area, but that all seems to have changed. A good thing in my view!

Thought for the future: following the UK FCA’s business interruption insurance test case, close to £1bn has been paid out to policyholders in interim and final settlements. The UK FCA has released the latest data, which can be accessed here. Noting the similar position in Australia under QBE’s test case, which the High Court recently rejected special leave appeal on (the lower Court of Appeal held that insurers were not able to rely on a policy exclusion which referred to the Quarantine Act 1908. This Act was repealed with the introduction of the new Biosecurity Act 2015), it is worth paying attention to the UK experience for insurers…

Australian regulators weekly wrap — Monday, 16 August 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.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Breach reporting (Treasury): the Financial Services Sector Reform (Hayne Royal Commission Response — Breach Reporting and Remediation) Regulations 2021 was issued last week. It removes some — unfortunately not many — civil penalty provisions from the new AFSL breach reporting regime commencing in October 2021 (which we have spent the last 8 months compiling in a huge register). I have summarised them for you in the attached factsheet.
  2. ASIC approach (ASIC): Six reforms arising out of recommendations from the Royal Commission and other inquiries will commence in October. The new laws include design and distribution obligations, restrictions on the unsolicited selling of financial products (hawking), a deferred sales model for add-on insurance products, reference checking and information sharing requirements for financial advisers and brokers, and new requirements around how breaches are reported to ASIC and disputes are managed internally in firms. ASICs has now confirmed that it will adopt a transitional approach in terms of policy i.e. it will not immediately come down hard from an enforcement perspective. ASIC Chair Joe Longo has stated: “ASIC’s initial approach extends to technical or inadvertent breaches, where firms have systems changes underway and act quickly to address problems as they arise. However, where firms are not acting in good faith or where we detect conduct causing actual harm, we will not hesitate to enforce the law.”
  3. Electronic execution (Treasury): the Federal Government has just passed the Treasury Laws Amendment (2021 Measures №1) Bill 2021 (“the Bill”) to facilitate the electronic execution of documents under s127 of the Corporations Act 2001 (Cth). It provides that the fixing of a common seal can be witnessed electronically; a document in physical form may be signed using split execution; a director, secretary or witness may electronically sign a document (or a copy or counterpart of the document); and, a copy or counterpart need not include all signatures. I will be updating our master spreadsheet of the electronic executions laws across various jurisdictions, instruments and entities shortly — look out for that one shortly.
  4. Financial advisers disciplinary body (Treasury): the Financial Sector Reform (Hayne Royal Commission Response — Better Advice) Bill 2021 establishes a single disciplinary body for financial advisers and the requirement that all financial advisers who provide personal financial advice to retail clients be registered. It was introduced into Parliament on 24 June 2021. The Government has released a policy paper seeking feedback on two matters which will be included in regulations to support the single disciplinary body, being the circumstances when ASIC must convene the single disciplinary body to determine a disciplinary matter, and the types of administrative sanctions made against a financial adviser that must be included on the Financial Advisers’ Register. The consultation is open until 20 August 2021.
  5. FAR (Treasury): the consultation for the financial accountability regime has finalised. Hopefully, there will be a number of strong submissions pushing back on some of the more contentious aspects, including the breadth of the product accountability role, the double jeopardy elements and more detail around the interpretation to be applied to the obligations. You can read Gadens’ submission here.

Thought for the future: we are delivering a lot of DDO, breach reporting and FAR presentations at the moment, in preparation for October 2021. Do get in touch if you are interested in learning more!

Australian regulators weekly wrap — Monday, 9 August 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.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. AML / CTF Rules (AUSTRAC): AUSTRAC has released draft Anti-Money Laundering and Counter-Terrorism Financing Rules for public consultation. The draft proposes to add Chapters 79 and 80, and amend Chapters 21 and 48 of the AML/CTF Rules. Under the changes, financial institutions will be permitted to carry out applicable customer identification procedures on a customer after opening an account, provided no transaction — other than an initial deposit made at the time of the account opening — is conducted in relation to the account; certain types of products, which are unintentionally captured by the definition of a ‘Stored Value Card’ in the AML/CTF Act will be excluded; the issue of an interest in a litigation funding scheme will be excluded, as will salary packaging administration services. Consultation on the draft Rules is open until 27 August 2021.
  2. ASIC quarterly report (ASIC): ASIC has released its second quarterly update for 1 April to 30 June 2021 which you can access here. There is no new information, but it is a useful run down of the major enforcement action which ASIC has engaged in, and where it is focusing on from a regulatory reforms perspective. No surprises that breach reporting, DDO and UCT are at the top of that list (pp 11–22)…
  3. Add-on insurance (ASIC): ASIC has issued a new regulatory guide to assist with the implementation of the new deferred sales model for add-on insurance (RG 275). The deferred sales model introduces a mandatory four-day pause between the sale of a principal product or service and the sale of add-on insurance. The new RG — ASIC has been doing a great job pumping them out lately, I should say — explains: the scope of the deferred sales model — that is, which products and persons are subject to the deferred sales model; and, the requirements that apply to providers of add-on insurance before, during and after the add-on insurance deferral period (deferral period). This guide also explains ASIC’s powers to grant an individual exemption and how we will approach applications for individual exemptions. You can access the new guide here.
  4. Schemes of arrangement (Treasury): a creditors’ scheme of arrangement is a corporate restructuring process regulated under Part 5.1 of the Corporations Act 2001. It allows individuals to restructure their company’s debt obligations where the company is in financial distress and seeking to reduce and/or renegotiate its debts. At present, it is rather cumbersome, expensive and time consuming process — the Government wants to change that in an effort to assist a post COVID-19 economy rebound. To that end, the Government is seeking stakeholder views on the appropriateness and impact of applying an automatic moratorium on creditor claims during formation of a creditors’ scheme. Currently, no automatic moratorium is applied. The consultation paper, which closes for comments on 10 September 2021, is here. This does not mark the end of the Government’s tinkering with insolvency regime, as it is also consulting on clarifying the treatment of trusts with corporate trustees; increasing the minimum threshold at which creditors can issue a statutory demand on a company from $2,000 to $4,000, commencing 1 July 2021; and, reviewing the insolvent trading safe harbour.
  5. ADIs & COVID-19 (APRA): the prudential regulator has released a consultation letter on regulatory support for authorised deposit-taking institutions offering temporary financial assistance to borrowers impacted by COVID-19. In essence, to assist ADIs in supporting their small business, home loan and other retail customers through this period, APRA is providing a temporary regulatory treatment for loans impacted by COVID-19 — ADIs will not need to treat a repayment deferral as a loan restructuring or the period of deferral as a period of arrears. A sensible proposal in my view to support the economy, the consultation paper is here.

Thought for the future: new complaints handling requirements come into effect on 5 October 2021, and apply to both AFSL and ACL holders. Thinking about ACL holders, October 2021 is going to be quite the month in terms of increased regulation — breach reporting, complaints and DDO being the main three. Two of the three are completely new for them, so one hopes ASIC will take this into account in its regulatory engagement strategy…

Australian regulators weekly wrap — Monday, 26 July 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.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Business interruption (APRA): the prudential regulator will require a number of general insurers to review the soundness of their risk management frameworks in light of recent issues with business interruption insurance by 30 November 2021. APRA has stated that lockdowns and other restrictions associated with COVID-19 have triggered a spate of potential BI claims, with many insurers exposed through policy wordings that had not kept up-to-date with changing legislation. The resultant legal uncertainty, and significant financial exposure for insurers, has raised concerns about the strength of insurers’ risk management frameworks in the prudential regulator’s eyes. APRA has published the letter (my top read for the week) and guidance material that supports the self-assessment exercise, and has urged non-participating insurers to consider whether a similar self-assessment would enhance their own risk management practices. For those insurers undertaking their FAR implementation, there will be considerable overlap here.
  2. External administration (ASIC): ASIC has updated Information Sheet 29 External administration — controller appointments and schemes of arrangements — most commonly lodged forms (INFO 29) to help external administrators, controllers and scheme administrators comply with their lodgement and publication requirements following the introduction of three new types of external administration since 1 January 2021. These are great resources — I really like the ALRC’s flow-charts on the disclosure and licensing regime, and now ASIC’s output here. The following three new flowcharts have been included in INFO 29 for ease of reference: Flowchart 2A — Liquidator in a creditors’ voluntary winding up (simplified liquidation process); Flowchart 14 — Restructuring practitioner of a company; and, Flowchart 15 — Restructuring practitioner of a restructuring plan for a company.
  3. Internal dispute resolution (ASIC): on 30 July 2020 new IDR standards and requirements were published in Regulatory Guide 271 Internal dispute resolution, which commence on 5 October 2021. The new guidance is much more prescriptive than Regulatory Guide 165 Licensing: Internal and external dispute resolution, which continues to apply to all complaints received before 5 October 2021. ASIC has now released internal dispute resolution reporting documents, which will be tested in a pilot involving financial firms from across relevant industry subsectors in late 2021. The reporting documents include a data dictionary and data glossary. The data dictionary sets out the information that financial firms will be required to collect and report to ASIC, while the data glossary provides explanations about the key terms in the data dictionary. ASIC has said that financial services firms should now consider how to map their own complaints systems to the data dictionary. Given the commencement of DDO, breach reporting & anti-hawking also in October 2021, that is good advice…
  4. Reference checking (ASIC): ASIC has made the ASIC reference checking and information sharing protocol that will give effect to the Financial Services Royal Commission’s recommendations to improve reference checking in the financial advice and mortgage broking industries. The ASIC Protocol sets out obligations for licensees to undertake a reference check and share information on an individual seeking to be employed or authorised as a financial adviser or mortgage broker. Helpfully, ASIC has also released Information Sheet 257 ASIC reference checking and information sharing protocol (INFO 257) which is a much quicker read!
  5. Anti-hawking (ASIC): quite a busy week for the corporate regulator — ASIC is also consulting on proposed updates to its guidance on the prohibition on the hawking of financial products. ASIC’s updated regulatory guide reflects the reforms to the anti-hawking regime under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, which is due to commence on 5 October 2021. These reforms consolidate the three existing hawking prohibitions, take a technology neutral approach, and incorporates for the first time a definition of ‘unsolicited contact’ — consumer consent given by a consumer must be ‘positive, voluntary and clear’. Stakeholders have until 17 August to provide feedback on CP 346, which is quite complicated in its application.

Thought for the future: in the UK debt packager firms advise consumers on how to deal with their debts, often referring them to an Insolvency Practitioner or debt management firm, for which they receive referral fees. They have been regulated for some time, and following an FCA review of the practices of debt packager firms, 5 firms have stopped providing regulated debt advice until further notice and the FCA has used formal powers to stop another firm from providing regulated advice. Debt management firms are now, as of 30 June 2021, regulated by ASIC. Expect to see ASIC apply its focus to weeding out those doing the wrong thing in the near future (which will only be a good thing for the industry and consumers alike).

Australian regulators weekly wrap — Monday, 19 July 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.

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  1. Financial accountability regime (Treasury): recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 of the Financial Services Royal Commission recommended the extension of the Banking Executive Accountability Regime to all APRA-regulated entities, with joint administration from APRA and ASIC. The Government has released for consultation the Financial Accountability Regime (FAR) draft Bill. The Government has also released an information paper on joint administration, a policy paper on prescribed responsibilities and positions, and a Questions and Answers document for consultation. You can read more on the original FAR proposal, which places personal liability on executives for failures within their remits, here. I have spent the weekend going through the changes since the consultation paper released in January 2020. I am in the middle of writing a more detailed update, however, some of the key changes to me are: removal of fines for individuals; a detailed framework on how the regulators will co-operate e.g. they can’t disqualify an AP unless both agree; segregated liability for accountable persons for the product role i.e. along specific products lines-it is still joint and several otherwise; detailed procedural safeguards which favour the regulators from an enforcement perspective — there is even a novel section which is targeted at fining lawyers in certain circumstances! We i.e. Gadens will be preparing a response to the consultation by the cut-off date of 13 July 2021. Of course, we would welcome any views you have and we can incorporate the same in our response if you want anonymously.
  2. Compensation scheme of last resort (Treasury): recommendation 7.1 of the Royal Commission recommended that the three principal recommendations to establish a Compensation Scheme of Last Resort made by the Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework should be carried into effect. The Government has released for public consultation exposure draft legislation that would establish the Compensation Scheme of Last Resort. The draft legislation contains the key features of the scheme, which essentially facilitates the payment of limited compensation to eligible consumers who have received a determination for compensation from AFCA which remains unpaid. The key features of the proposed regime include the ability to authorise an operator of the scheme, eligibility requirements, compensation available for each eligible AFCA determination, the levying framework to fund the scheme, and the governance of the scheme. Responses are also due by 13 July 2021.
  3. Grandfathered commission (ASIC): on 21 February 2019, ASIC received a direction under section 14 of the Australian Securities and Investments Commission Act 2001 to investigate industry’s transition away from grandfathered conflicted remuneration arrangements. Conflicted remuneration is a benefit given to an AFS licensee, or a representative of a licensee, who provides financial product advice to clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the choice of financial product recommended to clients by the licensee or its representative, or the financial product advice given to clients by the licensee or its representative. Grandfathered conflicted remuneration (GCR) is any benefit to which the conflicted or other banned remuneration provisions did not apply because of certain transitional provisions in the Corporations Act and Corporations Regulations 2001. ASIC’s report ‘Ending Grandfathered Conflicted Remuneration’ has been released and sets out ASIC’s findings as to the steps taken by industry participants from 1 July 2019 to 31 December 2020 to end the payment of grandfathered conflicted remuneration ahead of the legal requirement to end these arrangements, and refund previously grandfathered benefits on to product holders. ASIC found that nearly all product issuers ended GCR arrangements before 1 January 2021. 8 product issuers plan to rebate product holders an amount equal in value to the amount of GCR the issuer would have otherwise paid.
  4. Zero interest rates (APRA): the Australian Prudential Regulation Authority has released for consultation a letter to authorised deposit-taking institutions on its draft expectations regarding ADIs’ preparedness for the possibility of zero and negative interest rates. APRA considers the risks arising from an ADI’s lack of preparedness for zero and negative interest rates to be material since this could have significant implications for an ADI’s risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems among other areas. APRA has said it expects ADIs to take reasonable steps to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative. APRA expects ADIs to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022. While the RBA has said that zero of negative interest rates are unlikely, possible that other interest rates determined in the financial markets could fall to zero or below zero at any time. APRA clearly wants banks to be prepared…
  5. COVID-19 & bank stability (FSB): The Financial Stability Board (FSB) today published its Interim Report on the Lessons Learnt from the COVID-19 Pandemic from a Financial Stability Perspective. The report identifies preliminary lessons for financial stability and aspects of the functioning of the G20 financial reforms that may warrant attention at the international level. The report stresses the need to strengthen resilience in non-bank financial intermediation. It further records that the pandemic has also highlighted the importance of effective operational risk management arrangements, the need to enhance further crisis management preparedness, and the importance of promoting financial resilience amidst rapid technological change more generally. It is more bullish on capital and liquidity, which it says ‘may’ warrant further consideration.

Thought for the future: less than a month to comment on the FAR regime is longer then we were given for BEAR, and we have had a consultation paper since January 2020. The timing seems about right to me, and I hope the consultations timeframes for major pieces of work like this do not shrink again.

Australian regulators weekly wrap — Monday, 12 July 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. Banking Code of Practice (ABA): the Australian Banking Association has announced it has commissioned an independent review of the Banking Code of Practice. The Code is independently reviewed every three years. The 2021 independent review is being undertaken by Mike Callaghan AM PSM, and is being undertaken in consultation with consumer representatives, small business organisations and other stakeholders. The Terms of Reference outline the scope of the review e.g. it will consider the Banking Code Compliance Committee, and whether there is a need to adjust its duties and powers, including whether sanctions available are appropriate i.e. like exists in the insurance sector. A Consultation Note outlining some of the issues that will be covered in the review has been published, and the review will report by end November 2021.
  2. Complaints statistics (AFCA): Australians lodged more than 70,000 complaints with the AFCA in the past 12 months, leading to more than $240 million in compensation and refunds. Nearly 70 per cent of cases were resolved by agreement after AFCA brought the parties together (mainly, I suspect, because the FS firm wanted to avoid going to hearing), and that nearly 60 per cent of cases were resolved within 60 days. AFCA’s investigations into a range of systemic issues resulted in remediation payments to consumers totalling nearly $32 million in the past financial year. (The total serious contraventions and other breaches referred to regulators such as ASIC since 1 July 2020 were 36.) The consumer-centric language still (annoyingly to me for a body which is supposed to be impartial) exists in the update, but these statistics are well-worth consideration. My top read for the week, you can access them here.
  3. Litigation funding (ASIC): ASIC has released Consultation Paper 345 Litigation funding schemes: Guidance and relief (CP 345) to seek feedback on proposed guidance and relief for litigation funding schemes. It follows changes made in 22 August 2020, which required operators of litigation funding schemes to hold an AFS licence, and litigation funding schemes to be generally be subject to the managed investment scheme regime under the Corporations Act 2001 (Cth).The main ideas which I picked up from the consultation paper were that ASIC is proposing to grant relief from the equal treatment duty in relation to distributions of a settlement or judgment sum obtained in connection with a litigation funding scheme, and extend relief from the dollar disclosure provisions in relation to certain commercially sensitive information. Both are sensible changes.
  4. Alex (APRA): APRA has granted Alex Bank Pty Ltd a licence to operate as a restricted authorised deposit-taking institution and Alex Corporation Limited as a non-operating holding company, under the Banking Act 1959 (Cth). It is a rare and happy development for the banking sector, concentrated as it is — you can see just how concentrated by clicking here.
  5. ‘Greenwashing’ (ASIC): ASIC Commissioner Cathie Armour has warned of increasing ‘greenwashing’, which is where investment opportunities are presented as more socially friendly than they actually are. She stated that: ‘There is growing global unease about the risks of greenwashing of financial products — partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area. This issue has been recognised by international regulators as well as the International Organization of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns. ASIC is participating in this task force.’ Ms Armour warned of the potential for misleading and deceptive conduct, clearly signaling ASIC’s focus on this area, and noted that the potential to mislead can arise as a result of the product issuer being unclear on what standards they use to assess the product as environmentally or socially responsible; or, overstating green credentials that are not sufficiently reflected in their operations.

Thought for the future: 4 months until October 2021, when both the DDO and new breach reporting frameworks will commence. If you are an AFSL holder and haven’t commenced your preparations in earnest, now is the time!

Australian regulators weekly wrap — Monday, 5 July 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. Securitisation trusts (Accounting): securitisation trusts that undertake to prepare financial reports in accordance with AASBs will have to prepare general purpose financial statements from 1 July. AASB 2020–1 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities removed the ability for many entities to prepare special purpose finance statements — they must now prepare the more onerous general purpose financial statements.
  2. Opening banking (Treasury): Treasury has released exposure draft amendments to the Consumer Data Right rules and explanatory materials for consultation (version 3 of the rules). Designed to increase the take-up, they: introduce a sponsored tier of accreditation and a CDR representative model; allow consumers to share their data with trusted professional advisers; allow participants to share CDR insights with consumer consent for specific purposes; and create a single consent data sharing model for joint accounts. The consultation ends on 30 July 2021.
  3. Money laundering risk (AUSTRAC): a money laundering and terrorism financing) risk assessment released by AUSTRAC shows a medium level of risk to Australia’s non-bank lending and financing sector. AUSTRAC analysed transactional and suspicious matter reporting by the sector between 1 February 2018 and 31 January 2019. The main threat facing the sector is fraud, particularly loan application fraud, identity fraud and welfare fraud. Non-bank lenders and financiers are also a target for money laundering, relating predominantly to unexpected early loan payouts. My top read for the week, you can access the report here.
  4. Market integrity rules (ASIC): the corporate regulator has released the Proposed amendments to the ASIC market integrity rules and other ASIC-made rules (CP 342). ASIC’s proposals include amendments to the Securities Market Integrity Rules covering accredited derivatives advisers, trades with price improvement, trade confirmations for non-retail clients and regulatory data reporting; amendments to the Futures Market Integrity Rules covering prohibited employment, suspicious activity reporting and client authorisations; amendments to ASIC-made rules generally, covering merits review, waivers and penalty amounts for breaches of the rules. A dense consultation, but with some good ideas that will hopefully reduce the regulatory burden on market participants.
  5. Source of funds (AUSTRAC): KYC procedures, including where appropriate, taking reasonable measures to identify the source of a customer’s wealth and the source of a customer’s funds are an important part of AML/CTF programs. AUSTRAC has released source of wealth and source of funds considerations, including: what is a customer’s source of wealth and source of funds?; why is it important to know a customer’s source of funds and source of wealth?; when would source of funds and source of wealth enquiries be appropriate?; what are reasonable measures?; I have undertaken source of funds and source of wealth enquires, now what? You can read the guidance here.

Thought for the future: I have been catching up on my case rereading (it often takes more than one attempt for me), and this weekend it is Westpac Securities Administration Ltd & Anor v Australian Securities and Investments Commission [2021] HCA 3. It massively broadened the scope of ‘personal advice’ under Chapter 7, including by stating that where there is a pre-existing relationship, a reasonable person may expect the licensee would have taken into account the the consumer’s objectives, financial situation and needs when communicating with the client i.e. providing ‘personal advice’. Many distributors have longstanding relationships with clients, so if they are operating under ‘general advice’ models (as many white labelling firms do) then they are going to need to put measures in place to protect themselves. If they do not, they run the risk of increased liability as provide personal advice comes with far more stringent regulatory requirements. This is especially so when design & distribution comes into play in October 2021, as it requires suitable products only to be given to clients…