Australian regulators weekly wrap — Monday, 16 March 2020



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. ASIC v. King (Corporations Act): the corporate regulator has won its case in Australian Securities and Investments Commission v King [2020] HCA 4, which clarified who is a company ‘officer’ potentially liable for penalties under the Corporations Act 2001 (Cth). ASIC brought a civil penalty case against MFS Investment Management Ltd (MFS) and various directors, officers and employees of the MFS Group of companies, including Mr King. The allegation at the heart of ASIC’s claim was that MFS, which was a responsible entity for a managed investment scheme, had misused $147.5 million to pay the debts of other related companies. ASIC claimed that Mr King had breached his obligations as an officer of MFS in connection with that misuse — Mr King was not a director of that company, although held a lot of practical control over its affairs. An ‘officer’ under the Corporations Act 2001 (Cth) is ‘a person who has the capacity to affect significantly the corporation’s financial standing’. The argument was whether the definition was limited to someone with a specific title, which argument the High Court unanimously rejected (overturning the Qld Court of Appeal’s decision to the contrary), stating it ‘would be an extraordinary state of affairs if those who actually determine the course of a company’s financial affairs could avoid responsibility for their conduct by the simple expedient of deliberately eschewing any formal designation of their responsibilities’. It is a logical decision, and in keeping with the jurisprudence on shadow directors. It is also worth noting the very long reach of the regulator as against individuals now, combined with other tools at its disposal e.g. FAR and expanded banning powers. Including those who may have otherwise considered themselves out of reach e.g. the large shareholder who overly involves themselves in the company’s affairs.
  2. Fee consultation (ASIC): the Hayne Royal Commission made a number of recommendations to address consumer harm resulting from fees for no service, superannuation balance erosion through inappropriate advice fees and poor advice from financial advisers whose duty to their client conflicted with their own interests. The Morrison Government plans to introduce legislation to implement these recommendations by 1 July 2020. To this end, the conduct regulator has released consultation paper CP 329 Implementing the Royal Commission recommendations: Advice fee consents and independence disclosure. The paper is for persons who provide personal advice to retail clients, superannuation trustees and their professional advisers.The paper seeks public feedback on draft legislative instruments that deal with advice fee consents and independence disclosure and a proposal to issue more guidance in RG 245 Fee Disclosure Statements to help industry meet obligations around ongoing fee arrangements, including renewal notices and fee disclosure statements. The main proposals relates to the form of the written consents required to be given for the deduction of ongoing fees (page 17) and non-ongoing fees (page 22), and the proposals are quite prescriptive from what I can see e.g. the consent must include how long the consent will last and information about the services that the member will be entitled to receive under the arrangement. There will be quite a bit of work for financial advisers to do on their documentation and systems and processes before 1 July 2020.
  3. Banning (ASIC): ASIC has permanently banned Mark Goldenberg from engaging in any credit activities and from performing any function involved in the engaging in of credit activities. He was the driving force behind Superfunded, which organisation operated to enable people to have early access to their superannuation savings to buy a home. Mr Goldenberg and Superfunded engaged in credit activities but neither held an ACL, or were authorised credit representatives. ASIC found that he contravened credit legislation and had been involved in a contravention of credit legislation. As a corollary, ASIC found that Mr. Goldberg was not a fit and proper person to engage in credit activities. A useful reminder of how seriously ASIC takes engaging in credit or financial services activity without a licence, particular as more structures are coming to market which side-step the National Consumer Credit Code 2009 (Cth) e.g. buy-now, pay-later structures which can tread a delicate path in my view.
  4. Westpac class action (Courts): a third class action has been filed against Westpac connected with its disclosure around the bank’s monitoring of financial crime. Filed by law firm Johnson Winter & Slattery, and backed by litigation funder Burford, it proceeds a similar class action filed by Phi Finney McDonald in December 2019 (funded by Woodsford) and another by US law firm Rosen in February 2020 connected with losses on the NY stock exchange. The new class action is not particularly surprising given the financial resources of the defendant — it is further evidence that we need class actions reform, regulation of litigation funders and tweaking of continuous disclosure laws though. Take a look at PFM’s website here and Burford’s website here. The class actions cover the exactly same periods for shareholders (16 December 2013 and 19 November 2019); overlapping class action proceedings are hugely unfair to defendants in terms of the time, cost and procedural burden imposed on them. If not a US-style certification system (which requires litigants to seek the court’s approval to proceed with a class action), then some form of take-overs panel for dealing with overlapping class actions may be a sensible way forward (I am also a bit uncomfortable with courts being market-makers in these circumstances). Whatever outcome transpires, it is clear the present system requires improvement.
  5. COVID-19 (Council of FS Regulators): The Council of Financial Regulators (CFR) is the coordinating body for Australia’s main financial regulatory agencies. There are four members — APRA, ASIC, RBA and The Treasury. The CFR has released a statement in response to the disruption stemming from COVID-19 in which it states that it will be meeting with the major lenders and ‘emphasising the importance of a continuing supply of credit, particularly to small businesses’. Interestingly, the statement also records that ‘Council members are examining how the timing of regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and assist their customers’ and ‘APRA and ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations.’ My top read for the week (it is quite short!), the statement is timely and very sensible in my view.

Thought for the future: there is a very ambitious financial services regulatory change agenda for 2020, much of which is set to come into effect on 1 July 2020 e.g. new onerous breach reporting requirements. Given the effects of COVID-19, policymakers should consider deferring some of the more onerous changes coming through for a time in my view. That will give the industry the time to prepare appropriately for what are some big shifts in the wake of the Hayne Royal Commission e.g. FAR, DDO / PIP, CDR, Modern Slavery, Whistleblowing, SIS Act changes, POS-exemption removal, ‘best interests’ duty for brokers… the list goes on.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 9 March 2020



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. Corporate criminal reform (ALRC): the big news this week, the ALRC has discarded its thought bubble of making an executive officer criminally liable where “…they were in a position to influence the conduct of a corporation in relation to an offence, and they cannot prove that they took reasonable measures to prevent that offence”. Or, worse yet, seeking to make the executive criminally liable through the nascent FAR / BEAR structure. Imagine the arguable structural arbitrariness that that action would introduce for criminal liability? Not to mention that one of the main problems with the idea is that it equates to a reversal of the criminal onus of proof! Instead the ALRC has said that we should wait and see what BEAR / FAR does for individual accountability and reassess the situation in 2025. It has stated ‘Given the potential for significant legislative development and judicial clarification in this area in the near future, the ALRC does not intend to recommend any specific law reform at the present moment. However, addressing individual liability for corporate conduct is an area in which there does appear to be a gap in accountability, and the effectiveness of new mechanisms such as the proposed FAR should be kept under review. If the new and existing mechanisms do not operate to ensure senior managers may be held liable where appropriate for corporate misconduct further law reform may be required.’ The update is here (my top read for the week), and I have to say that given the worrisome potential of the idea and amidst all the industry lobbying that was undertaken this sensible result made my week.
  2. Code of Banking Practice (ABA): the ABA has announced the implementation of changes to the Banking Code of Practice. The updated code came into effect on 1 March 2020. The changes are handily set out in this guide, and include: banks will take extra care when providing banking services to customers who are experiencing vulnerability e.g family violence; better protections for guarantors to ensure they understand their obligations, including a cooling-off period; guarantors will be notified of changes to the borrower’s circumstances, including if they are experiencing financial difficulty; the independent Banking Code Compliance Committee (BCCC) will investigate alleged breaches of the Code; the BCCC can formally warn a bank, require them to rectify or take corrective action for serious breaches, require a bank to train staff, and report serious, systemic and ongoing issues to ASIC; ceasing default interest and fees on agricultural loans while farms are affected by drought or natural disaster; ceasing default interest and fees on agricultural loans while farms are affected by drought or natural disaster; removing overdraft and dishonour fees on basic, low fee or no fee accounts for concession card holders and simplified loan contracts with fewer conditions for total loans under $3 million. If they have not already, banks need to review their documentation to incorporate the new code and their procedures e.g for identifying vulnerable customers etc. There are also new information disclosure obligations to implement e.g. for guarantors. Member-owned banks need to take note as well. My information is that their 4th edition of the COBCOP, which takes a good amount of inspiration from the new CBP, is likely to commence in the second half of this year.
  3. Currency bill (Legislation): the Economics Legislation Committee recommended that the Currency (Restrictions on the Use of Cash) Bill 2019 (Cth) be passed on in its report dated 28 February 2020. This means that it is very likely, in the near future, that it will be a criminal offence to make or accept a payment from businesses that includes $10,000 or more of cash. It will also be an offence to make or accept a cash donation equal to or in excess of $10,000. The maximum penalty was to be set at two years imprisonment and/or 120 penalty units (currently $25,200) — one of the recommendations was to review these penalty provisions to make sure they are not overly harsh. The endorsement of the draft legislation came despite widespread business concern (and more than a little misinformation) and strong opposition from the Greens, who rather dramatically stated: ‘This bill is a classic case of the cure being worse than the disease. By criminalising the use of legal tender, and by taking a rose-coloured view of a world without cash, this government is blithe to the fundamental freedoms provided by hard currency, and is instead laying down a path towards surveillance capitalism and negative interest rates.’
  4. Document production (ASIC): for someone who has spent many countless hours complying with ASIC’s requests under s. 33 of the ASIC Act 2001 (Cth) documents, the conduct regulator’s release of INFO 242 on document production guidelines has been an interesting read this week. The guide sets out the preferred methods for producing books to ASIC in electronic and hard copy form; the benefits of producing books in accordance with the guidelines; the consequences of not following the guidelines; and how ASIC requests books to be produced when using a litigation support system. There is not too much new information in here, but it is helpful in noting ASIC’s response to productions which do not comply with the guide i.e. more notices and greater costs, as the guide emphasises ASIC’s focus on metadata (which they never used to demand, but certainly do now!) and as it explicitly advises the industry to work with ASIC on document productions. Something I always try to do at the start in order to reduce time, cost and frustration (for both sides), I think this is a great move by ASIC which has said: ‘Discussing the scope of a notice, including the meaning of certain terms, can often result in significant time and cost savings.’ Of course, this should only be one plank of your firm’s strategy in responding to an information request, the use of review technology and novel fee structures (where you are using an eternal service provider) being others. You can read more about that here.
  5. Security for costs (District Court): while most of the interesting stuff to my mind tends to happen in the superior courts, Gibson DCJ had a novel situation permitting a cryptocurrency exchange account to be used as security for legal costs in Hague v Cordiner (№2) [2020] NSWDC 23. Her Honour stated at [31] and [32] ‘I am unaware of any other orders for security being made in relation to cryptocurrency, but I am prepared to assume that these are volatile sources of investment, even when the proceeds are recorded in Australian dollars. However, this is a recognised form of investment… he issue of cryptocurrency volatility can best be addressed by requiring the plaintiff to provide copies of his monthly bank statements to the solicitor for the defendant and by requiring him to notify drops below the secured amount.’ Just another indicia that cryto-currencies are here to stay as an increasingly mainstream asset class.

Thought for the future: lobbying governmental or semi-governmental bodies for changes to proposed laws and regulations can leave lawyers and other stakeholders a bit flat at times. At other times, however, there is a result which makes a lot of it worthwhile; the ALRC’s decision at item 1 this week is one. With really short consultation times for major proposed legislation this year, most only 3 to 4 weeks, I suspect this year will see more losses than wins on that front. Still, given the magnitude of the changes proposed which will be with us for many years to come, it is imperative to try. The next one on my radar is the draconian breach reporting laws proposed by The Treasury which will no doubt drown the industry and ASIC in paperwork. Hopefully that will change into a more sensible form before the implementation date of 1 July 2020…

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 2 March 2020



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. ‘Best interests (ASIC): ASIC has released a consultation paper CP 327 on the new ‘best interests duty’ for mortgage brokers which is open until 20 March 2020. You can read more on the ‘best interests’ duty, and ancillary changes e.g. prohibition on giving / receiving ‘conflicted remuneration’, in this past ARWW briefing or here. The draft guidance is structured around the key steps common to the credit assistance process of brokers, such as gathering information, considering the product options available and presenting options and a recommendation to the consumer. At a broad category level, ASIC is setting out its expectations for what mortgage brokers may need to do to meet the ‘best interests’ duty when: (a) gathering information about the consumer; (b) making an individual assessment of what is in the consumer’s best interests; and (c) presenting information and recommendations. The initial thoughts that I have is that the definition of ‘mortgage brokers’ in paragraph 13 of the CP 327 does not appear to match the definition s15B and s15C of the legislation, which defines ‘mortgage broker’ and ‘mortgage intermediary’ more broadly; the draft guidance is principles-based and does not contain a ‘safe harbour’ within which a broker is deemed to have complied with the obligations; information gathering may involve an iterative process of receiving instructions and making inquiries (usually, it is not an iterative process); mortgage brokers should consider products ‘holistically’ to assess whether they are in the consumer’s best interests (including for packaged products); brokers should ‘use their judgment to weigh up factors according to the consumer’s individual circumstances’ (which is quite subjectively broad); the duty operates in conjunction with other laws that affect how credit assistance is provided to consumers, including the responsible lending obligations; and, the duty will apply at the time of the assessment and whenever a mortgage broker provides credit assistance. ASIC also proposes to provide guidance on the operation the conflict priority rule, which requires mortgage brokers to prioritise the consumer’s interests in the event of a conflict of interest, and the obligations for credit licensees to ensure that their representatives who are mortgage brokers comply with the best interests obligations. In relation to the latter, which may present an appreciable compliance burdens on licensees, ASIC has stated that what constitutes ‘reasonable steps’ by the licensee may vary depending on the nature and scale of the mortgage broker’s operations and their relationship with the credit licensee. Irrespective of the final form of the guidance, the legislation is now in place and affected entities need to start implementing compliance frameworks now — the broad nature of the obligations (and lack of safe harbour) mean implementation may take time and the changes come into effect on 1 July 2020. Also, we need to look out for ASIC’s guidance on ‘conflicted remuneration’ before that time!
  2. IPOs (ASIC): ASIC has released a consultation paper CP 328 concerned with making things easier for IPOs, which closes for consultation on 6 April 2020. There are two key changes proposed. First, ASIC’s modification power will be used to to grant conditional relief to public companies, professional underwriters and lead managers for voluntary escrow arrangements in connection with an IPO. The relief would enable these entities to require certain security holders to enter into voluntary escrow arrangements without acquiring a relevant interest for the purposes of the takeover provisions. Second, ASIC is proposing to grant conditional relief to allow companies to communicate specified factual information to employees and security holders about an IPO, before the company lodges the disclosure document. These are sensible proposals, in my view, and I doubt they will receive any material opposition.
  3. Accountability (APRA): Deputy Chair Helen Rowell gave a speech to the AICD on accountability, which is perhaps the most candid and useful of APRA’s speeches I have seen recently. Definitely my top read for the week! Ms. Rowell started with the new proposed CPS 511, which proposes far more prescriptive requirements for regulated entities to ensure their remuneration frameworks align with the long-term interests of entities and their stakeholders, including customers, beneficiaries and shareholders, stating that: ‘It’s no secret that much of the feedback was critical of what APRA was proposing, including the 50 per cent cap on the use of financial metrics in determining variable remuneration, longer vesting periods and clawback provisions. Disappointingly from APRA’s perspective, we received much less in the way of realistic alternative suggestions as to how we could design the standard differently to satisfy disgruntled stakeholders while still achieving our regulatory objectives.’ Ms. Rowell also dedicated a lot of her speech to FAR / BEAR, urging entities to start their preparations now (which, having led BEAR / UK SMCR implementations, I strongly endorse). She stated: “An essential first step is for organisations to clarify internal lines of accountability…this is a more helpful first step than focusing on the content and format of the accountability statements and maps. Another area where some entities stumbled in implementing the BEAR regime was to concentrate too intently on the number of accountable persons rather than appropriateness of who is included as an accountable person…a very small number of accountable persons may be an indication that accountability is overly concentrated, while a very large number of accountable persons may be an indication that accountability is inappropriately diluted.” Ms. Rowell also noted that firms which had struggled with their BEAR implementation-which regime sets the framework for potential future enforcement action, and so really needs to be done well-were those that engaged consultants to just implement BEAR for them instead of those consultants working to deeply understand, advise, work with and challenge the firm where necessary. I have seen a number of consultancy firms roll out arguably ‘prepackaged’ BEAR implementation projects which involve minimal nuance. It is not a one size-fits-all regime. The BEAR / FAR laws themselves are untested principles-based ones with little heritage in Australia, there is personal liability attached to failures (and hawkish ASIC / APRA in the background) and many ancillary considerations. To put it inelegantly, it very much pays for financial services firms to ‘kick the tyres’ on their consultants. How has the regime played out overseas in UK or HK? What are some of the key UK cases under the UK SMCR? Which subsidiaries are and are not caught? What amendments to employment agreements / REM policies do we need to consider? How do we deal with information access rights once an executive leaves / then faces an investigation? What happens with the legal function under FAR / BEAR? How do we give our executives / directors meaningful comfort they can demonstrate ‘reasonable steps’ to APRA / ASIC? How do we avoid paper attestation ‘waterfalls’? Do the executives have the right ‘information and control’ over their function areas to justify their role as an accountable person? How do we handle the division of responsibility over the ubiquitous tech function? How do we mesh the product responsibility role with DDO / PIP? Do we mesh FAR / BEAR breach reporting with AFSL breach reporting? Is there any sensitive material we need to consider only behind the protection of legal privilege? If you are a superannuation or general insurance firm faced with implementing FAR now, I do encourage you to take the time to ask probing questions (I have a high level two-page document with initial considerations I would be happy to send you as well, if it will assist.)
  4. Small business (ACCC): the competition regulator has released its report on small business, franchising & agriculture news for July — December 2019. The great thing about this particular report is that it breaks down the reports being received by the ACCC by key issues. For small business, by far the biggest issue was misleading conduct and false representations — 910 were reported for the H2 2019 period (up from 846 in H1 2019). The second biggest issue was consumer guarantees — 489 reports for the H2 2019 period (up from 405 in H1 2019). With increasing reports in these areas, expect a greater focus from the ACCC in 2020. The report also deals with other areas that the ACCC has been focusing on the H2 2019 period, including the CDR, scams, franchising code and electricity retail code.
  5. Climate reporting (APRA): the prudential regulator has published a letter to all APRA-regulated institutions outlining plans to develop a prudential practice guide focused on climate-related financial risks, as well as a climate change vulnerability assessment. The assessment, which will be coordinated with ASIC, will begin with Australia’s largest banks . APRA has stated that beginning with the banking industry will provide helpful insights on the impact of a changing climate on the broader economy, which will be analysed in conjunction with the RBA. The vulnerability assessment will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy. The bank vulnerability assessment will be designed in 2020 and executed in 2021, with other industries to follow. Finally, the letter also outlines APRA’s intention to update superannuation Prudential Practice Guide SPG 530 Investment Governance, which includes paragraphs related to environmental, social and governance investments. The assessment will be quite interesting reading, to be sure. For now, my sense is that organisations should continue to focus on their climate risk reporting (and how this risk interacts with their existing directors’ duties for their business — see Hutley, Noel and Hartford Davis, Sebastian “Climate Change and Directors’ Duties Supplementary Memorandum of Opinion” (26 March 2019), published by The Centre for Policy Development here.) as that will receive a good deal of scrutiny this year and beyond. ASIC and APRA have repeatedly called for companies to address climate change risk as part of their governance and risk management frameworks and to make public disclosures where appropriate. ASIC expects companies to include in their annual directors’ reports a discussion of climate risk when it could affect the company’s achievement of its financial performance or disclosed outcomes. In addition, for listed companies, Recommendation 7.4 of the ASX Recommendations provides: “A listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks.”

Thought for the future: the AFR (3 / 2) reported that CBA’s spending on risk and compliance was 64 per cent of its total $1.4 billion in investment spending in FY19. That trend will increase for the foreseeable future, driven by the need for financial services firms to fix past mistakes,to respond to increased consumer expectations and implement new principles-based laws. Such laws require a fair bit of thought and transferable experience in implementing though, given their interpretational nature and newness. (Also, frankly some are poorly drafted, for example the new FASEA code which I have commented on in the AFR this past week here.) The point is that cookie-cutter or near cookie-cutter approaches to regulatory reforms across financial services firms are much less likely to pass muster now than they were for past regulatory reforms, which were more prescriptive. Especially given the global zeitgeist Australia is following of attaching personal liability to their laws. (Just wait for the ALRC’s corporate criminal reform report to come out in April 2020!) For what it is worth, my view is that increasing cost, consumer / regulator expectations and risk should correlate to increased stress-testing of legal advisers, accountants and other consultants.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 17 February 2020



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. Industry data (APRA): the prudential regulator has sent a consultation letter to the insurance sector proposing to publish a greater breadth of industry-aggregate data for the general insurance and life insurance sectors. Part of a broader trend towards greater availability of data e.g. open banking and mandatory credit reporting (see item 5 below), APRA is hoping that this action will increase competition, foster innovation and increase public understanding of insurance issues. The consultation closes 20 March 2020.
  2. Verification of Identity’ (Banks): the Australian Registrars National Electronic Conveyancing Council’s consultation on version 6 of its Model Participation Rules will finish on 19 February 2020. It pertains to Mortgagees’ “Verification of Identity” (VOI Draft) requirements when registering mortgage securities, which are separate to AML / CTF KYC requirements. All of the states (but not the territories) require mortgagees to take positive steps to verify the identities of mortgagors, commonly through a framework called the “Verification of Identity Standard” (VOI Standard) undertaken by specialised “Identity Agents” such as a lawyer. The VOI Standard essentially requires: a face-to-face interview to be conducted by an Identity Agent with the mortgagor; the Identity Agent to be satisfied that the mortgagor bears a “reasonable likeness” to the person depicted in photographs in the identification documents; and the Identity Agent to confirm that the identification documents are current originals produced by the mortgagor. In addition to identity verification obligations, the VOI Standard requires the mortgagee to verify the mortgagor’s entitlement to sign the mortgage e.g. through a land title search and to maintain key records. Where it does not, the mortgagee could lose the benefit of its registered mortgage security. (The same requirements are imposed on Qld witnesses to mortgage instruments.) The VOI Draft contains an important proposed change. At present, the VOI Standard is not mandatory. All that is required is that mortgagees take “reasonable steps” to verify mortgagors’ identities. The rules provide that the VOI Standard will satisfy this requirement, however, mortgagees can take a different approach if they consider it justified in all the circumstances. Many do as a matter of course. With the new draft, the VOI Standard will become mandatory save for in limited circumstances. As such, mortgagees will need to update their systems and processes or risk their mortgages…
  3. Auditors (ASIC): the conduct regulator has told a Parliamentary Inquiry that it intends to focus on auditors in an enforcement context, and that it already has 5 cases sitting with its enforcement teams relating to auditor independence and quality. Greg Yanco, executive director of markets at ASIC, has also stated that ASIC’s enforcement team are getting involved a lot earlier: “Previously … we’d come to a point where we would refer something to enforcement… Now enforcement are looking over our shoulder a lot earlier and picking up on items that they may want to take. This can get things moving a lot quicker.” In the context of this increased focus on auditors, it is worth recalling that the Morrison Government introduced fault-based criminal offence for breaches of audit standards in early 2019, adding to the existing strict liability offence, under which auditors may be penalised up to $50,400 or face up to two years in goal. Those breaching the strict liability equivalent can be fined as much as $10,500.
  4. Blockchain compliance (AUSTRAC): The Department of Home Affairs and AUSTRAC have highlighted blockchain as a means to help reporting entities comply with their compliance and regulation requirements in a joint submission to the Select Committee on Financial Technology and Regulatory Technology. The submission — while light on examples — is a really interesting insight (my top read for the week!) into the work AUSTRAC is doing in this space and its support for innovative solutions to increasingly onerous AML / CTF KYC requirements. Especially given the increasing cross-border interactions. The submission states: “RegTechs appear to be alive to the opportunities for growth in the Australian market (such as the recently introduced Consumer Data Right), and are increasingly adopting blockchain technologies in their solutions (for example, Identitii). There is also an active awareness of privacy obligations and emerging consumer concerns.” The service mentioned in the submission, Identitii, is a clever Regtech company which helps reporting entities to know which transactions need to be reported and have the right data available in the right format to comply with AUSTRAC rules. There are a number of such entities operating (and growing) in the Australian market, which is great to see from my perspective.
  5. Mandatory Credit Reporting (Treasury): The Government is seeking stakeholder views on the exposure draft of the National Consumer Credit Protection Amendment (Mandatory Credit Reporting) Regulations 2020. These Regulations provide detail on the Government’s mandatory comprehensive credit reporting regime (CCR). The mandatory reporting regime is expected to give lenders access to a deeper, richer set of data so they can better assess a borrower’s true credit position and the borrower’s ability to repay a loan. The mandatory CCR regime is also expected to increase competition between lenders in the credit market and benefit consumers who will be able to better demonstrate their reliability to get better deals on financial products. The mandatory CCR regime requires a large banks institution to supply 50 per cent of its consumer credit information within 90 days of 1 April 2020 to all credit reporting bodies it had an existing agreement with on 2 November 2017. Within 90 days of 1 April 2021, the same banks will need to supply credit information on their remaining accounts to the same credit reporting bodies. From 1 April 2021, the CCR regime will also require the same banks to supply any financial hardship information about an individual if the bank is disclosing repayment history information about the individual to a credit reporting body as part of its credit reporting obligations. The consultation closes on 28 February 2020 and, at two weeks, is the the fastest consultation time yet I think!. Affected lenders will need to mesh this development with any updates to their responsible lending obligations under the new RG 209 (which specifically mentioned CCR).

Thought for the future: the Bank for International Settlements has released a paper on operational and cyber risks in the financial sector. It is an interesting — if very dense — report. It found that cyber losses are a small fraction of total operational losses , but can account for a significant share of total operational value-at-risk for banks. Given the increasing trend towards data sharing as evidenced in this briefing, my sense is that cyber risk is set to rise as a risk to manage for banks and other financial services institutions affected by reforms such as open banking and CCR.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 10 February 2020



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. Compensation scheme of last resort (AFCA): AFCA has reiterated its strong support for creating a compensation scheme of last resort (e.g. where compensation cannot be paid by a firm because of insolvency) in a submission to The Treasury in response to its Discussion Paper released on 20 December 2019 – Implementing Royal Commission Recommendation 7.1 — Establishing a Compensation Scheme of Last Resort. (Consultation closed on 7 February 2020.) Framed in the language you may expect from AFCA, key points are that AFCA wants the scheme to cover financial firms engaged in all forms of regulated financial services, financial advice or financial products; it also wants the scheme to cover managed investment schemes (which is too far in my view; there are plenty of unlicensed MISs); the scheme should cover unpaid determinations made by AFCA from 1 November 2018 onwards; debt management and buy-now pay-later firms should come under AFCA’s jurisdiction (many don’t as they do not hold an AFSL or ACL); the scheme should cover court and tribunal decisions, in addition to AFCA decisions. AFCA considers the scheme should be funded by all financial firms, calibrated to reflect risk and ability to pay. The Government has committed to establishing the scheme by 31 December 2020, with the scheme to then commence accepting claims from 1 July 2021. My personal sense is that AFCA’s wish list goes too far — why should one market segment bear the significant costs of shielding consumers from their competitors’ misconduct/insolvency in such a broad fashion? It is otherwise a timely reminder of how important AFCA is becoming though; don’t forget it has the power to report ‘systemic’ issues to ASIC and will have a remediation power in due course. (Which makes it a quasi-regulator in my view, whatever AFCA may say to the contrary.)
  2. ASIC v. AMP (Court): Lee J has delivered his decision in Australian Securities & Investments Commission v AMP Financial Planning Pty Ltd (No 2) [2020] FCA 69, finding that AMP failed to take ‘reasonable steps’ to ensure its financial planners complied with their ‘best interests’ duty and related obligations under the Corporations Act 2001 (Cth). ASIC had alleged AMP’s financial planners engaged in ‘churning’ — cancelling existing policies and taking out similar ones, which had the effect of the planners receiving increased commissions than they would have if they had simply transferred the policies. On AMP becoming aware of one adviser taking this course of conduct, Lee J determined it was necessary for AMP to investigate the issue and he found that ‘the lack of a prompt response to the…conduct was the result of passivity and inaction following identified misconduct in contravention of the relevant best interests obligations.’ His Honour found there was a total of six contraventions of section 961L of the Corporations Act 2001 (Cth) — which require licensees to take reasonable steps to ensure that their representatives of the licensee comply with their duties — and imposed a penalty of $5.175M while stating ‘this penalty proceeding reflects a lamentable failure of corporate will to take the necessary steps to prevent greedy and unlawful conduct taking place, and a further failure to adopt a swift and proper remedial response’. I think there are two important things to note; first, the existing and new laws (e.g. the new mortgage brokers legislation — see 5 below) requiring licensees to take ‘reasonable steps’ to supervise their representatives are going to be a focus area in the years to come. Second, AMP admitted liability. This case is important, but I do not think seminal. Time will tell.
  3. Financial reports (ASIC): ASIC has announced the results from its review of the 30 June 2019 full-year financial reports of 200 entities. It has made inquiries of 47 entities on 80 matters. The largest number of inquiries continue to relate to impairment of non-financial assets and inappropriate accounting treatments. ASIC has said that its work highlights the need to focus on the newer accounting standards that can materially affect reported assets, liabilities and profits (see here: Financial reporting focuses for 31 December 2019 (19–341MR)). ASIC publicly announces when a company makes material changes to information previously provided to the market following its inquiries. I think that is a good thing, as it puts directors and auditors of other companies on notice of ASIC’s concerns so they can avoid similar issues.
  4. Open Banking (ACCC): one of the big matters on banks’ minds this year, the ACCC has just released the Competition and Consumer (Consumer Data Right) Rules. They came into effect on 6 February 2020. The Rules require the four major banks to share product reference data, such as interest rates, fees and charges, and eligibility criteria, with accredited data recipients. The consumer data sharing obligations become mandatory from 1 July 2020 for credit and debit cards, deposit accounts and transaction accounts. They become mandatory from 1 November 2020 for mortgage and personal loan data. My top read of the week is Division 1.2 of the Rules, which provides a simplified outline of how the CDR works and is a welcome addition to what has the potential to be a complicated regime. In particular, given the matching with other regimes that needs to occur e.g. FAR.
  5. Mortgage brokers (Legislation): on 6 February 2020, the Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers (2019 Measures) Bill 2019 (Bill) passed in Parliament. The Bill imposes an obligation on mortgage broker licence holders and their credit representatives to act in the ‘best interests’ of consumers when giving credit assistance in relation to credit contracts; ss. 158LA and 158LE of the Bill. If the mortgage broker licensee knows, or reasonably ought to know, that there is a conflict between the interests of the consumer and the interests of the mortgage broker licensee, their associate or a representative or an associate of a representative of the licensee, then the licensee must give priority to the consumer’s interests when giving the credit assistance; s. 158LB of the Bill. A similar broad conflicts of interest provision is placed on the credit representatives; s.158LF of the Bill. In addition, as is the case for financial adviser licencees, mortgage broker licensees must take ‘reasonable steps’ to ensure that their credit representatives comply with their obligations; s. 158LE(2) of the Bill. The other major limb of the BIll is that it prohibits mortgage broker licensees, credit intermediaries, and credit representatives of those entities from accepting ‘conflicted remuneration’; ss. 158NB and 158NC of the Bill. There is a definition of conflicted remuneration under S. 158N of the Bill, which the Senate’s Scrutiny of Bill Committee asked for more guidance on in December 2019; that was rejected by The Treasury, which wants to leave the detail to regulations. Each of these new laws come with penalties of up to $1.05M for breaches and will come into effect by 1 July 2020. Mortgage broker licensees have a lot of work to do before then in setting up appropriate risk frameworks / auditing their incentives structures.

Thought for the future: I wrote last week about The Treasury’s release 15 serious consultation papers late on a Friday. Revisiting the one on breach reporting, which creates a new breach reporting regime for ASFLs and ACL, matters that may need to be reported to ASIC are now to be referred to as ‘reportable situations’ and split between ‘core’ and ‘non-core’ reportable situations. A core reportable situation will arise where the licensee or its representative has breached or is likely to breach a ‘core obligation’ or the licensee has commenced an investigation into whether the licensee or its representative has breached a core obligation and, in either case, the breach or likely breach is ‘significant’.

My sense is that the proposed exposure draft legislation is much more prescriptive than the existing breach reporting regime and arguably goes too far. For example, it states that a breach or likely breach of a ‘core obligation’ needs to be taken as ‘significant’ where the breach constitutes a contravention of civil penalty provision. There are a vast number of civil penalty provisions in the NCCP and CA, for example failure by a mortgage broker licensee to provide a compliant credit proposal disclosure document under s. 121 of the NCCP. This will mean a lot more breach reports will be received by ASIC if the exposure draft stays in its current form. Another example is with respect to when the reporting actually needs to occur; as set out under 2.133 of the Explanatory Memorandum, there will be an obligation to lodge a report with ASIC upon the commencement of an investigation and at the end of an investigation. A report must be lodged within 30 calendar days after the credit licensee first reasonably knows there are reasonable grounds to believe the reportable situation has arisen. My take-away is that, if the legislation stays in its current form, it will create a lot more work for compliance / legal departments and ASIC will get swamped with much more information and probably a lot of low-level stuff. I am not sure that is in anyone’s interest…

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 3 February 2020



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. Consultations (Treasury): The Treasury released late last Friday a large number of consultations in response to recommendations from the Hayne Royal Commission. They include: a) Financial Services Royal Commission — Enhancing consumer protections and strengthening regulators; b) Ongoing fee arrangements and disclosure of lack of independence; c) Trustees of Registrable Superannuation Entities (RSE) should hold no other role or office; d) Restricting use of the term ‘Insurance’ and ‘Insurer’; e) No hawking of financial products; f)Implementation of ASIC Enforcement Review Taskforce — Directions Power; g) Advice fees in superannuation; h) Enforceability of financial services industry codes; i) Duty to take reasonable care not to make a misrepresentation to an insurer; j) Deferred sales model for add-on insurance; k) Superannuation regulator roles; l) Strengthening breach reporting; m) Financial Regulator Assessment Authority; n) Cap on vehicle dealer commissions; o) Limiting avoidance of life insurance contracts. The consultation process is open until 28 February 2020. My preliminary takeaways — I will write more on these very significant laws in the coming weeks — are:
  • Timing: these changes will mainly take effect from Royal Assent or 1 July 2020. That leaves a very short time to prepare!
  • Breach reporting: firm procedures must change significantly; affected firms need to immediately re-evaluate their policies & procedures. There are more onerous breach reporting requirements for AFSLs and a new regime for ACLs (ASIC will be swamped!). Licence holders will also need to investigate financial advisers’ and mortgage brokers’ misconduct and remediate affected clients (and conduct reference checks on them).
  • ASIC will receive its directions power – basically this is a second option to enforcement. It can, if it has reason to suspect a breach of a law, make directions in relation to the contravention. It can direct firms not accept new clients, to conduct reviews or audits and to engage people to carry out specific tasks. No need to go to court first; somewhat unsettling here…
  • Anti-hawking: a more holistic regime is proposed for anti-hawking which draws together all the existing patchwork of laws. Retail financial product distribution to comply with extra hawking prohibitions by 30 June 2020
  • Enforceable codes: ASIC can pick (largely voluntary) code provisions which if breached may attracted civil penalties. It can will create a new mandatory code of code for those firms that it regulates.
  • Superannuation trustees: must not act in another’s interest save for limited circumstances. (This requires an examination of their third-party outsourcing arrangements e.g. commonly, for investments.) Some trustees of corporate superannuation funds need to obtain an AFSL. Trustees of RSEs should not hold any other role. There are new limits on charging advice fees from accounts. There are limits on trustee and directors indemnifying themselves; this overlaps with FAR requirements. ASIC will have a much greater role in regulating superannuation firms; it will have joint responsibility under the Superannuation Industry Supervision Act and the AFSL regime will be extended to superannuation trustee services.
  • Insurance: ASIC can cap add-on insurance product commissions (the insurance itself will be subject to a deferred sales model to prevent pressure selling tactics). There will be a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts.
  • Financial advisers: have new obligations and disclosure requirements, including to disclose if they are no independant and why. That may be hard to square with FASEA’s new code banning COIs outright.

2. Court cases (ASIC): ASIC Enforcement Head Daniel Crennan QC has stated that ASIC intends to issue a further 20 prosecutions in the first 6 months of this year, which he expects to be busier than the last 6 months (AFR, 3 / 1). He has also rejected criticism that ASIC has been focussed on the little fish i.e. Dover Financial. I agree with that, though I think you can argue that there was a fair amount of low hanging fruit for ASIC in the wake of the Hayne Royal Commission (and with the benefit of his findings)…

3. Priorities (APRA): the prudential regulator has set out its policy and supervision priorities for the next 12 to 18 months. Policy priorities are:

  • initiatives aimed at driving improvements in GCRA, including finalising a more robust prudential standard on remuneration, and updating prudential standards on governance and risk management.
  • working closely with Treasury and the Australian Securities and Investments Commission in expanding the Banking Executive Accountability Regime to the insurance and superannuation sectors.
  • strengthening crisis preparedness, including the development of a new prudential standard on resolution and recovery planning;
  • completing the current review of the capital framework for authorised deposit-taking institutions to implement “unquestionably strong” capital ratios and the Basel III reforms;
  • progressing a range of enhancements recommended by APRA’s post-implementation review of the original superannuation prudential framework introduced in 2013; and
  • continuing work on strengthening the capital framework for private health insurers.

In the supervision arena, APRA’s priorities are:

  • maintaining financial resilience, including through increased focus on recovery and resolution planning and stress testing;
  • conducting a range of GCRA-related supervisory reviews and deep dives, and using entity self-assessments to drive greater accountability;
  • encouraging underperforming superannuation funds to urgently improve member outcomes or exit the industry; and
  • more closely assessing institutions’ capability to deal with emerging and accelerating risks, such as cyber-security and climate change.

4. Westpac (Class Action): a US investor rights group have filed a US class action against Westpac over its alleged breach of AML / CTF laws 23 million times. It is seeking to recover damages under US federal securities laws; the overlap with the existing class action (in relation to ASX losses) may then not be significant. The US class action also need to overcome the certification hurdle — US lawyers can’t commence class actions without court approval. Indeed, certification is used in every other international jurisdiction that has a contemporary class action regime (except Sweden). It is a measure that Australia has considered, but not adopted; it could be time for a rethink though given the overlapping class actions frenzy last year every time a share price drops. AMP is the classic example, which at one point faced 5 overlapping class actions which is a ridiculous position to be in.

5. Relief (ASIC): ASIC has reported on decisions to cut red tape — April 2019 to September 2019. It can modify or set aside certain provisions of the Corporations Act, including Chapters 2D (officers and employees), 2G (meetings), 2M (financial reporting and audit), 5C (managed investment schemes), 6 (takeovers), 6D (fundraising) and 7 (financial services). During the reported period, ASIC granted relief from provisions of the Corporations Act or the National Credit Act in relation to 420 applications. In my experience, applications for relief are always worth considering as a first option in regulatory change projects!

Thought for the future: Treasury’s tactic of release 15 serious consultation papers late on a Friday, complete with exposure draft legislation and explanatory memorandums, and only a month’s worth of consultation time feels to me like a bad 90’s litigation tactic of drowning the other side in discovery rather that a consultative exercise in improving the regulatory framework. If this is to be the tone for the year ahead — one estimate puts the total financial services legislation to pass through Parliament this year as 25% of total bills —then it will be challenging one.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 27 January 2020



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. BEAR — now FAR (Legislation): a huge development— on 22 January 2020, The Treasury released the Government’s proposed model for the expansion of the BEAR regime to all APRA-regulated entities e.g. banks, superannuation and insurance firms. The consultation time for the extended BEAR — now to be called the “Financial Accountability Regime” (FAR) (not the “Financial Executive Accountability Regime” or FEAR as some had hypothesized)- is very short; 14 February 2020. While expected, I do find this less than ideal given the magnitude of the changes proposed. The changes proposed by the Government with the proposed FAR regime include: 1) APRA will be able to veto director and senior executive appointments; 2) 40% of all variable remuneration is to be deferred for a minimum of 4 years, unless it is under $50,000 p.a. (no claw-back though, like in the UK); 3) additional prescribed responsibilities, including senior executive responsibility for breach reporting, dispute resolution and “setting of incentives” (banks will need to revisit their past work under BEAR); 4) an additional personal conduct obligation, being the need to take “reasonable steps” to ensure that the entity complies with its “licensing obligations” (so this will bring in ASIC’s favourite, s.912A of the Corporations Act 2001 (Cth); 5) individuals face disqualification and civil penalties ($1.05M) if they breach their obligations (I think D&O premium splitting will come back, therefore); and 6) APRA and ASIC will administer the new regime. I have summarised the key points of the Government’s proposal, provided some initial analysis and practical guidance to assist affected entities in this briefing here (my top read for the week — a bit cheeky, I know!). Affected entities need to consider whether they wish to make a submission now.
  2. Retail bitcoin investing (ASIC): Raiz users will now also be able to invest in Bitcoin, as ASIC has given Raiz’s retail bitcoin fund approval. It is the first such approval granted by ASIC. For those who have not come across the service, Raiz is a micro-investing platform aimed at millennials. It allows people to invest small amounts in the stock market by using an app to connect them with an Exchange Traded Fund (ETF). (ETFs are an investment fund traded on stock exchanges, and invest in a range of shares and other assets e.g. commodities.) Raiz does not require knowledge of investing, overcomes some transaction barriers by pooling customers’ funds and has a number of clever ways that allow users to make micro-donations e.g. rounding up transactions from your bank account and investing the balance via Raiz. For example, my $3.80 coffee will come up as $4 on my bank account — the $0.2 balance has been invested in Raiz. ASIC’s approval is interesting, as it has hitherto been suspicious of crypto assets, though was perhaps inevitable as this asset class steadily increases.
  3. 2019 in review (APRA): the prudential regulator has released an inaugural annual publication designed to highlight the actions and decisions APRA has taken over the past year to fulfill its mandate. The report outlines APRA’s perspective on the financial environment and the key issues that have faced the banking, insurance and superannuation sectors last year. It is divided into three parts. Chapter 1 relates to financial sector resilience, and covers things like APRA’s focus on GCRU (i.e. Governance, Culture, Remuneration and Accountability), its “constructively tough” enforcement approach, the new CPS 511 and capability review. It is a useful summary of the key action items of the past year, but there is no material new information here from what I can see. Chapter 2 relates to specific industry sections, and contains some more useful information and metrics in my view for specific industry segments e.g. natural disasters and the impact on general insurers. Chapter 3 relates to life at APRA e.g. organisational structure and diversity etc. I think it is a moderately useful report, and there is value in continuing going forward. It does little to change my private perception, however, that APRA generally releases less actionable information than ASIC.
  4. Regtech (APRA): APRA has made a submission to the Senate Select Committee on Financial Technology and Regulatory Technology in which it outlined how it is evolving its regulatory framework and approach to support the developing FinTech and RegTech sector, while ensuring risks are appropriate managed. These measures include introducing the restricted ADI licensing framework in 2018 that provides an alternative pathway to a full licence for new banking entrants (which I think is a great initiative given how cumbersome it can be to obtain an ADI!), setting up a dedicated team to engage with applicants on the licensing process and regulatory expectations (another useful initiative) and by participating in the Council of Financial Regulators (CFR) (members include the RBA, APRA, ASIC and the Treasury) which is reviewing the regulatory framework to reduce complexity, increase competition and foster innovation. It is an interesting read, though the main action for the FinTech and RegTech community is understandably centered around ASIC with its Innovation Hub and sandbox regime. Many FinTech / RegTech entities do not require the blessing or assistance of the prudential regulator, though that is much less the case for the conduct regulator…
  5. Illegal money transfers (AUSTRAC): CEO Nicole Rose has previously stated that small home-based money transfer operators can be exposed to human trafficking, child exploitation, illegal firearms sales and drug networks. As such, the AML / CTF regulator has been undertaking a community campaign targeting illegal money transfer dealers. Between August and November, more than 130 AUSTRAC staff visited over 400 registered money transfer businesses and over 240 people attended town hall meetings. The campaign is now finished, and AUSTRAC plans to consolidate its findings to determine the appropriate next steps and continue to assess reports of suspected unregistered remittance dealers and take any action required. As it has been doing for the past two years, expect the newly-aggressive AUSTRAC to use the additional information it has gathered to initiate formal enforcement action where possible.

Thought for the future: the volume and complexity of regulation is increasing, in particular in financial services with its focus on principles-based laws / personal liability. As are the penalties for getting it wrong. Companies, especially smaller ones, are struggling to keep up and spending increasing amounts of money on legal and compliance. Technological solutions not only offer a way to comply with the increasing demands, but also to enhance businesses. The regulators are also adopting technology at pace (see an AFR article on 22 / 1 that I commented on here in this regard). Traditional RegTech using Robotic Process Automation, Big Data Analysis, AI, and Machine Learning has focused on 5 categories; 1) compliance e.g. AI searching for new regulations; 2) identity management e.g. AI-assisted KYC; 3) risk management e.g. fraud detection; 4) regulatory reporting; and 5) transaction monitoring. My sense is that more bespoke applications will start to arise, based on major new laws. Take FAR (formerly BEAR) for example. Given that APRA will be able to veto directors / executives where it holds information which conflicts with that person’s obligation to demonstrate “integrity” etc, RegTech applications which can crawl public and semi-public domains to obtain information that will assist in the due-diligence vetting process is not so far-fetched a possibility. Arguably a touch “black mirror” though…

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 20 January 2020



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. Superannuation (ASIC): the corporate regulator has forewarned that auditors and superannuation fund trustees will face increased enforcement scrutiny year (AFR, 14 / 1). That is not really a surprise, as ASIC outlined in its Corporate Plan for 2019- 23 that it was focusing on “delivering as a conduct regulator for superannuation”. ASIC Chair James Shipton has said that “The key focus for us is around trustees’ duties. We are beefing up by way of staff and capability, we’ve got a number of high profile cases we’ve embarked on in superannuation and we are just covering the field more.” My broad sense is that superannuation firms are between a rock (APRA) and a hard place (ASIC) as both are focusing on superannuation firms and some regulatory overlap between the two remains. In its draft report on efficiency and competitiveness in the superannuation system released in April 2018, The Productivity Commission’s draft finding 10.2 was that “Conduct regulation arrangements for the superannuation system are confusing and opaque, with significant overlap between the roles of APRA and ASIC. These arrangements have the potential to lead to poor accountability and contribute to the lack of strategic conduct regulation, with poor outcomes for members.” While following the Hayne Royal Commission there are plans to improve this overlap, from my impression the current situation makes for a challenging degree of oversight…
  2. Consultations (Legislation): just a reminder of the key consultations mentioned in past ARWW briefings which close soon should you consider it in your interests to make a submission (there are a few to choose from!): a) ALRC’s review into Australia’s corporate criminal responsibility regime — submissions close 31 January 2020; b) Attorney General’s draft guidance on adequate procedures to prevent the commission of foreign bribery – submissions close on 28 February 2020; c) Version 6 of the VOI Model Participation Rules — submissions close on 19 February 2020; d) ASIC CP 325 Product design and distribution obligations — comments close on 11 March 2020; e) APRA’s Consultation on revisions to the capital framework for authorised deposit-taking institutions — submissions close on 21 February 2020; f) Financial Regulator Coordination and Information Sharing — submissions on the bill close on 24 January 2020; g) Enhancements to Unfair Contract Term Protections — submissions close on 16 March 2020; h) Compensation Scheme of Last Resort — submissions close on 7 February 2020; and i) ACCC consultation on facilitating participation of intermediaries in the CDR regime — submissions close on 3 February 2020.
  3. DOCAs (ASIC): one more to add to the above list — ASIC has released consultation paper 326 seeking feedback about the circumstances in which it will grant relief for share transfers under. 444GA of the Corporations Act 2001 (Cth). s. 444GA permits a court to grant leave to allow an Administrator to transfer shares as a part of a Deed of Company Arrangement (DOCA), where it will not “unfairly prejudice” the interests of shareholders. (A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration.) The Courts will generally allow the transfer if the evidence shows that the shares have no value. Where a transfer under a DOCA results in a shareholder’s voting power in the company increasing above 20%, ASIC relief from s. 606 of the Corporations Act 2001 (Cth) is required. S. 606 prohibits the acquisition of a relevant interest in voting shares if, because of that transaction, a person’s voting power in the company increases from under 20% to over 20% or increases from a starting point that is above 20% and below 90%. (There are various underlying rationales for this rule, and a large number of exceptions to it, which are well summarised on the takeovers panel website here.) ASIC is seeking views on whether it should grant relief where shareholders are provided with explanatory materials prior to the s444GA hearing, including an Independent Expert Report (IER) prepared under RG 111: Content of Expert Reports, the IER is prepared by an independent expert i.e. not the administrator and the IER is prepared on a liquidation basis. from my perspective, the proposal appears sensible and proportionate to me.
  4. Scammers & insurance (ASIC): ASIC has warned consumers and small business owners to watch out for dodgy tradespeople, repairers or firms offering to assist them with their insurance claim. It has also updated its guidance on its Money Smart website to educate consumers on what to what to do after a natural disaster. (I think ASIC should be commended here.) Commissioner Sean Hughes said: “These unscrupulous operators typically target homeowners, farmers and small businesses in the aftermath of natural disasters. They may claim to be able to identify damage to your property, sometimes by way of a free inspection. Be wary of anyone who asks for payment up front and who asks you to sign a contract immediately. Don’t agree to sign anything which prevents you from dealing directly with your insurer, broker, financial adviser or lawyer.” Meanwhile, ASIC enforcement chief Daniel Crennan QC sent this message to insurers: “ASIC is working with insurers and other key stakeholders to ensure that claims are handled efficiently and fairly. We expect those involved in handling these insurance claims to act with the utmost good faith”. He chose his words carefully, picking up the requirement of s. 13 of the Insurance Contracts Act 1984 (Cth) which requires insurers to act with “utmost good faith” under the insurance contract. Courtesy of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019, from March 2019 a breach of this section now comes with potentially steep civil penalties. And soon ASIC will be able to use s912A of the Corporations Act 2001 (Cth) i.e. “efficiently , honestly fairly” in addition to s. 13 of the Insurance Contracts Act 1984 (Cth)(which ASIC relied upon in its court action against TAL Life Insurance issued in December 2019, which stems from a case study heard by the Hayne Royal Commission) for insurance claims handling failures, as claims handling will be considered a “financial service” under the Corporations Act 2001 (Cth). That consultation i.e. making insurance claims handling a financial service recently ended on 10 January 2020.
  5. Derivatives (ISDA): the International Swaps and Derivatives Association (ISDA), which is a trade organisation of participants in the market for over-the-counter derivatives, has released a paper (my top read for the week!) considering the private international law aspects of derivatives contracts governed by the laws of Singapore and England / Wales involving blockchain technology. While it does not consider Australia’s laws, the overarching issues with blockchain derivations apply equally to us. One of the main problems is the situs (i.e. where property is treated as being located for legal purposes) of any assets that are native to a blockchain platform. Private international law rules relating to property typically dictate that questions over rights and entitlements to property are governed by the law of the place in which the property or claim to property is situated. Good luck getting to the bottom of that issue with blockchain assets! The paper proposes that the best solution is a structured choice of law arrangement i.e. all parties to agree that their transactions should be subject to a common “law of the platform”, “law of the system”, or elective situs. However, the paper proposes to restrict the choice to the laws of countries where parties such as the issuer of assets, the system administrator and market participants are subject to sufficient legal and regulatory oversight. It is a sensible solution in my view, though I suspect a long way from becoming a reality given the complexity and amount of co-ordinated international policy-making required.

Thought for the future: ASIC has said it wants a “revolution” in approaches to non-financial risk, which includes operational risk, conduct risk and compliance risk (AFR, 14 / 1). It plans to report early this year on the governance of executive remuneration in this regard. Under sustained pressure, my sense is that those financial firms who take the time to see opportunity in this environment are likely to reap rewards. Actively embracing climate change reporting in annual reports or extending modern slavery requirements to bank customers (instead of just supply chains) — that type of proactive media / regulator friendly approach which has been done in the UK may work in some firms’ favour in this hawkish new environment.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 13 January 2020



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. Disqualifications (ASIC): ASIC has disqualified three Queensland directors from managing corporations based on insolvency-related offences. It found that they failed to exercise their directors’ duties with due care and diligence, failed to ensure their companies had paid taxes and failed to prevent the companies from trading while insolvent and (for two of the directors) improperly used their position to gain an advantage for a related entity. S. 206F of the Corporations Act 2001 (Cth) allows ASIC to disqualify a person from managing corporations for up to five years if, within a seven-year period, the person was an officer of two or more companies that were wound up and the liquidator lodge reports with ASIC about each company’s inability to pay its debts or alleges misconduct. This action strikes as consistent with ASIC’s greater focus on phoenix and other insolvency-related offences as set out in its Corporate Plan 2019 -23.
  2. Kleenmaid (ASIC): the former director of Kleenmaid (a white goods importer and retailer) has been found guilty of fraud by dishonestly gaining loan facilities from Westpac and criminally trading while insolvent in the District Court of Queensland. The verdict follows other indictments of two other directors, who each received lengthy prison sentences. When it went into administration on 9 April 200, the consolidated debts of the Kleenmaid group amounted to approximately $96 million, which included $26 million in customer deposits for outstanding orders. ASIC Commissioner John Price said of verdict “The action ASIC has taken against the former directors of Kleenmaid should send a clear message that where a director fails in their duty to prevent a company from incurring debts while it is insolvent, ASIC will take action, particularly where the director’s conduct has been dishonest and to the detriment of creditors and consumers”.
  3. Financial advisers (ASIC): the Australian Financial Review (2 — 6 / 1) has reported on ASIC’s and Treasury’s extraordinary private communications released on FOI concerning the FoFA reforms conflict of interest carve out given to financial advisers which enabled them to recommend special ASX-listed LIT and LIC investment funds to retail customers while taking commissions from fund managers. This carve out led to substantial revenues for financial advisers in the past few years, although research indicates that these funds appear to have performed poorly overall for retail investors. The AFR is now reporting (9 / 1) the Treasurer is pressing ASIC to investigate if stamping fees — which are the commissions paid by fund managers to brokers or financial advisers — are compromising the best interests of financial customers. Whether or not they are is up for debate, though arguably this is a moot point now for financial advisers as those fees are banned under the new FASEA Code of Ethics, Standard 3. In my view, the code will cause considerable confusion amongst advisers as it bans all conflicts of interest outright and blurs the line been the different advice obligations financial advisers owe to retail and sophisticated investors. In that regard it represents a significant extension to the existing law, contains muddled surrounding guidance in how to apply the code i.e. taking into account what the adviser’s “dominant” purpose was in a conflicts scenario (which flies in the face of the literal wording of the standard) and may have a substantial impact on financial advice businesses’ profitability — the conflicts ban will affect up to 57% of financial advice income on one estimate. You can read more about it here and here in the AFR articles in which I gave my views.
  4. New memorandum of understanding (AUSTRAC): our regulators are getting friendlier! With each other anyway. AUSTRAC and the Great Britain Gambling Commission have signed a regulatory memorandum of understanding (MOU) in London. It will enable both agencies to share regulatory and compliance information to combat money laundering and terrorism financing. The move follows a spate of important MOUs in 2019, including between ASIC / APRA and ACCC / US FBI. You can read more about it in a previous briefing I did (from a Government perspective) here. AUSTRAC intends to sign MOUs with other regulators in the UK in early 2020, including the UK Financial Conduct Authority and Her Majesty’s Revenue and Customs. The information sharing trend is only going to increase and needs to be front and centre in regulatory enforcement scenarios i.e. “I am content provide these documents to ASIC, but do I really want APRA to have them? I better assume they will get passed on…”
  5. Cold calling ban (ASIC): on 13 January 2020, the corporate regulator’s ban on unsolicited “cold call” telephone sales of consumer credit insurance and direct life insurance took effect under the ASIC Corporations (Hawking–Life Risk Insurance and Consumer Credit Insurance) Instrument 2019/839. The ban prohibits the offering of life insurance products and consumer credit products in the course of, or because of, an unsolicited telephone call, unless the person has been provided with personal advice. Speaking in relation to the long-anticipated ban, ASIC commissioner Sean Hughes previously stated: “ASIC will intervene to stop practices that lead to poor consumer outcomes and destroy trust in the financial system…This action draws a clear line in the sand. From January, firms will no longer be able to call consumers out of the blue and use sophisticated sales tactics to pressure people into buying life insurance and CCI products.”

Thoughts for the future: the ABA and FinTech Australia have submitted to the Senate that Australia’s regulation of the data economy is too fragmented, with ASIC, ACCC, APRA and AUSTRAC all having a role in some capacity. I agree with that. Marrying the consumer data right i.e. “open banking’ with the Australian Privacy Principles and AML / CTF — which can be tricky navigating in and of themselves — is going to make for an interesting 2020!

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)

Australian regulators weekly wrap — Monday, 6 January 2020



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. Currency bill (Parliament): the Currency (Restrictions on the use of Cash) Bill 2019 (Cth) will force Australians to use electronic transactions or cheques over cash for payments above $10,000 and impose two-year jail sentences and fines of up to $25,200 if they don’t. You can read more about it in this previous ARWW here. The controversial law has been passed in the House of Parliament and was due to commence on 1 January 2020; it has stalled in the Senate, which is conducting an inquiry through the Senate Economics Legislation Committee which is due to report in early February 2020. My sense is that affected businesses, for e.g. car retailers and travel businesses, need to continue their planning — given all the AML / CTF focus at the moment, I think it very likely the law will pass.
  2. FASEA Code (Financial Advisers): the controversial FASEA code for financial advisers commenced operation on 1 January 2020. You can read more about it in this previous ARWW briefing. In my view, there will be confusion. Standard 1 of the Code provides “You must act in accordance with all applicable laws, including this Code, and not try to avoid or circumvent their intent.” This is fine in principle, but potentially problematic in practice as it requires financial advisers to form a view on the “intent” of the applicable financial services laws. That is difficult enough for trained lawyers. The problem can readily be observed in the guidance to the Code itself, which provides as example 2 a scenario where the financial adviser who has dealt with a confirmed wholesale client as a wholesale client is in breach of Standard 1 because he “…ignores her lack of competence in financial matters.” That is not a consideration under the Corporations Act 2001 (Cth), which is clear-cut in its distinction between retail and wholesale investors; in practical effect this blurs the lines for financial advisers. The big one is Standard 3 of the Code though, which provides “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” This is a very broad requirement, which goes beyond the requirements of the Corporations Act 2001 (Cth) and ASIC’s guidance which only require conflicts of interest to be properly managed, and is based on Commissioner Hayne’s direction to eliminate conflicts of interest “where possible”. Whatever side of the financial adviser conflicts debate you sit on, the the FASEA code and surrounding guidance could be improved on in my view. See this article in the AFR (4 / 1) where my views are set out in more detail.
  3. Modern Slavery (Legislation): the Modern Slavery Act 2018 (Cth) (Act) came into effect on 1 January 2019 and requires firms with an annual revenue of over $100 million which is based or conducts business in Australia to report annually on the risks of modern slavery in its operations and supply chains. And what the firm is doing to address those risks. For companies who report on a calendar year, the first reporting period will be 1 January 2020 to 31 December 2020 with the first report due by 30 June 2021. More detail on the Modern Slavery regime, and current consultation exercise, is in this previous ARWW briefing.
  4. Legislative pipeline (Parliament): a hopefully timely run through of key legislation covered in past ARWW briefings that is currently winding its way through Parliament: 1) Business Names Registration (Fees) Amendment (Registries Modernisation) Bill 2019 (creates director identification numbers); 2) Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 (creates a new offence of failure of a body corporate to prevent foreign bribery by an associate and creates a Commonwealth Deferred Prosecution Agreement scheme which will enable the CDPP to invite a person that has engaged in serious corporate crime to negotiate an agreement to comply with a range of specified conditions); 3)National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (№2 (creates new conditions for small account contracts, including mandating equal repayments and payment intervals); 4) Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers (2019 Measures)) Bill 2019 (requires mortgage brokers to act in the best interests of consumers when providing consumer credit assistance, reforms mortgage broker remuneration, ensures that the consumer protection provisions of the financial services law apply to funeral expenses policies and bans unfair contract terms in standard insurance contracts — this will apply from 5 April 2021); 5) Financial Sector Reform (Hayne Royal Commission Response — Stronger Regulators (2019 Measures)) Bill 2019 (upgrades ASIC’s current range of search warrant powers, improves ASIC’s ability to access telecommunications intercept material, strengthens ASIC’s licencing powers e.g. ensuring that controllers such as significant shareholders are fit and proper in deciding whether a AFS licence should be granted or retained and extends ASIC’s banning powers to ban individuals from managing financial services businesses where they are not a fit and proper person i.e. more grounds to do so); 6) Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019 (expands the circumstances in which reporting entities may rely on customer identification and verification procedures undertaken by a third party and many other reporting requirement tweaks); and 7) Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (introduces new criminal offences and civil penalty provisions for company officers that fail to prevent the company from making creditor-defeating dispositions and other persons that facilitate these actions).
  5. Whistle-blowing (Legislation): Public companies, large proprietary companies, and corporate trustees of APRA-regulated superannuation entities must have a revised whistle-blower policy from 1 January 2020 under the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019. Among other things, the whistle-blower policy must include information about the legal protections available to whistle-blowers, and how a company will investigate whistle-blower disclosures and protect whistle-blowers from detriment. You can read more about this development in this previous ARWW briefing and this one. There are penalties for non-compliance, and setting up an effective whistle-blowing regime can take time — anonymous disclosures is a particular tricky aspect, so do get started if you have not already!

Thoughts for the future: there is an eye-watering amount of legislation planned for 2020 — see pages 8 and 9 of Treasury’s Financial Services Royal Commission Implementation Roadmap. (My top re-read for the week!) That is to say nothing of ASIC, APRA and AUSTRAC’s planned activities. Before February 2020, at which time the courts will reopen and most of corporate Australia will be back at work, setting aside a few hours (or a full day) to map what regulatory reforms are likely to impact your business lines in 2020 and proactively take steps to meet those challenges is effort that will certainly not be wasted.

Do you think I overlooked something or would like more information? If so, please send me a message!

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)