Australian regulators weekly wrap — Monday, 30 December 2019



Thank you to everyone who has supported the ARWW in 2019. I hope that it has been useful — have a wonderful New Year and see you in 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. PIP / DDO (ASIC): ASIC has issued a consultation paper CP 325 on the forthcoming guidance for the new financial product design and distribution obligations which come into effect on April 2021. It is a very useful paper summarising to whom the regime applies (page 13) and their obligations (pages 14–16) — my top read for the week! In terms of the guidance, key points are a strong emphasis on documenting the product governance framework to help firms demonstrate whether or not they are complying with their design and distribution obligations; an expectation that behavioral biases or “other factors that impede consumer outcomes” will not be exploited; a note that disclosure is not enough to protect consumers (which is a global theme); a principles-based approach to designing the content and form of a “target market determination” for a financial product subject to the regime; and some more detail on what broad considerations will form part of the “reasonable steps” to be taken in assuring that a financial product is being distributed in accordance with the target market determination e.g. risk, harm and mitigation (page 28). An issuer must notify ASIC of a significant dealing (except excluded dealings) in a financial product that is not consistent with the product’s target market determination — ASIC plans to provide guidance to issuers on the factors to consider in relation to this breach reporting aspect. To my mind the paper is a detailed and helpful resource to assist affected product issuers and distributors to get started on what may prove to be a lengthy regulatory reform project which will need to interlink with other projects e.g. BEAR. And against the backdrop of Cigno’s challenge to ASIC’s corresponding enforcement tool, the product intervention power.
  2. Regulator co-operation (Treasury): the Morrison Government has released exposure draft legislation for public comment which implements recommendations 6.9 and 6.11 of the Hayne Royal Commission to place a statutory obligation on ASIC and APRA to cooperate, share information with each other and notify each other if they have a reasonable belief that there has been a breach of the other’s legislation and also to formalise and align their meeting procedures. ASIC and APRA have already released an MOU which outlines how they are going to work together (which you can read more about in a recent article I published here). The draft legislation is straight-forward enough and contains mechanisms for mandatory information disclosure (upon request) and proactive notifications e.g. the new s 55D of the Australian Prudential Regulation Authority Act 1998 (Cth) which provides that “(1) Subsection (2) applies if APRA has a reasonable belief that a material breach of a legislative provision of which ASIC has the general administration may have occurred, or may be occurring. (2) APRA must notify ASIC of that reasonable belief as soon as practicable.” (Emphasis added). Regulatory investigations by one regulator can trigger a snowball effect i.e. other regulators issuing their inquiries, market disclosure obligations and class actions. Firms need to appreciate this now more than ever in the context of the incoming legislation and existing MOUs.
  3. Crypto exchanges (AUSTRAC): AUSTRAC has withdrawn the licences of three crypto-currency exchanges based on concerns about their connections to organised crime. These actions were commenced in September 2019, but recently announced as AUSTRAC increases its focus on this area. Australian cryptocurrency exchange operators have been required to register with AUSTRAC since the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017 (Cth) was passed. Under that law AUSTRAC can suspend and/or cancel a registration if it is believed that a business or organisation poses an unacceptable risk of money laundering, terrorism financing, or other serious crime.
  4. ASIC v. Volkswagon (ASIC): ASIC has commenced civil penalty proceedings in the Federal Court of Australia against Volkswagen Financial Services Australia Pty Limited (Volkswagen), claiming that between 20 December 2013 and 15 December 2016, Volkswagen contravened the responsible lending provisions of the National Consumer Credit Protection Act 2009 (Cth) (Act) in relation to 49,380 car finance loans by not making reasonable inquiries about and / or verifying borrowers’ living expenses and not making an assessment about whether the loans were unsuitable in contravention of ss 128(d), 129 and 130(1)(b) and ( c) of the Act. ASIC also alleges that Volkswagen contravened its obligations under s47 of the Act (the Act’s version of s 912A of the Corporations Act 2001 (Cth)) requiring it to engage in credit activities “efficiently, honestly and fairly” — unlike in the Corporations Act 2001 (Cth), there is no penalty for breaching this section. This action comes on the back of ASIC’s appeal to the Full Federal Court from the decision in ASIC v Westpac Banking Corporation, which Justice Perram decided a lender “may do what it wants to in the assessment process” and so does not have to use a borrower’s stated expenses in undertaking their obligations, and ASIC’s release of an updated RG 209 on responsible lending. Initial setback notwithstanding, ASIC is clearly not backing down in the area of responsible lending…
  5. Directors (Market-commentary): it has been reported that top company directors have warned that too few boards have directors able to make “experience-based judgments”, partly due to the public “sin-binning” of those tarnished by controversies in recent times (The Australian, 27 / 12). It is an important discussion to have. The pressure from the regulatory e.g. BEAR & ASIC’s stepping stones strategy, media e.g. recent AGM coverage and political spheres e.g. Frydenberg’s public commentary on directors of financial services firms is enormous. What long term effect it will have on the Australian director talent pool remains to be seen. For now, my sense is that directors need to be given as much assistance as possible — and the benefit of some more nuanced perspective — in discharging their duties to shareholders and other stakeholders while also successfully navigating increasingly choppy regulatory waves. Senior executives too!

Thought for the future: the UK Financial Conduct Authority is introducing a new regime next year which will force credit card providers to take a series of escalating steps to help people who are making low repayments on credit cards for a long period of time. Banks will have to explain to customers the benefits of increasing customer’s payments, and tell them about where to get debt help and advice after 18 months of persistent low level repayments. They will need to send them a reminder at 27 months and then offer them a way to repay their balance over a reasonable period after 36 months. Customers who fail to respond or cannot afford the increased repayment risk having their credit cards suspended. With ASIC’s increasing focus on responsible lending, perhaps this a measure we can expect to be raised in Australia soon?

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, 23 December 2019



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 & Westpac (APRA): APRA has confirmed that it is investigating Westpac for breaches of the Banking Act 1959 (Cth)— including the Banking Executive Accountability Regime (BEAR)— or contraventions of APRA’s prudential standards. The investigation centres on AUSTRAC’s allegations that Westpac breached AML / CTF laws 23 million times in its Statement of Claim filed with the Federal Court on 11 November 2019, and also the bank’s actions to rectify and remediate these issues after they were identified. APRA has also imposed an additional $500 million capital requirement on the bank and initiated an extensive review program focused on Westpac’s risk governance framework. APRA plans to co-operate with ASIC’s parallel investigation into the bank (which it is required to do under their new enforcement MOU). Somewhat unusually, but understandably given the febrile surrounding political / public debate, APRA has announced the scope of their investigation. It will cover: the banks’s governance, control and risk framework; accountability and remuneration arrangements for non-financial risk; accountability obligations under the BEAR; failure to comply with the prudential standards e.g. CPS 220 – Risk Management; and failure to notify APRA of significant breaches. This is the first action taken under the BEAR, and so one to watch very closely. In particular, from an individualistic perspective — as I have previously written, despite the public noise, I doubt whether the regime can be effectively wielded against the entire board or more than one or maybe two executives. The whole point of BEAR, from an enforcement lens, is to zero down on specific individuals where there have been failings in their key areas of responsibility.
  2. BEAR & Regulators (ASIC / APRA): sticking with my favourite regulatory reform, responding to recommendations made by Commissioner Hayne, Australia’s twin peaks have issued their accountability maps and statements as banks are required to do under the BEAR (which is shortly to be extended to the whole of the financial services industry). APRA’s can be accessed here, and ASIC’s can be accessed here. They offer a very interesting insight into these regulators’ structure, key individuals and their responsibilities. My top read of the week is ASIC’s accountability statement. A word of caution though for large firms who know they will have to implement BEAR in the New Year e.g. Insurance and Superannuation – from my experience, I would not take much guidance from the number of shared responsibilities in these statements…
  3. BEAR & ALRC (Law Reform): on 15 November 2019, the ALRC released a Discussion Paper as part of its Corporate Criminal Responsibility Inquiry (you can about it in this past briefing). The ALRC’s proposals would make an executive officer liable for a civil penalty 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”. These consultations are ongoing, but this week the ALRC stated that it may be helpful for stakeholders reviewing the Discussion Paper to revisit the alternate BEAR approach to imposing personal liability on individuals given the overlap between the BEAR and the ALRC’s proposals. In essence, should the BEAR personal accountability mechanism i.e. accountability statements / maps be used to extend civil penalty liability offences to individuals rather than the ALRC’s above-mentioned extension mechanism i.e. individual is in a reasonable position to influence conduct and cannot prove they took measures to influence? (The ALRC appears to have been inspired by the Westpac action, and also has stated that this development may provide valuable insight into the potential appropriateness or otherwise of extending the BEAR to non-financial corporations!) While this would arguably bring us closer to the UK position, this is uneasy territory. BEAR is an as-yet untested regime and there are a lot of issues that require answers (see more in my recent article here) and now the question is being posed as to whether we overlay civil penalties on top? One thing is for sure — drafting accountability statements for accountable individuals, who currently face disqualification should there be a breach in their area of responsibility, will certainly become even more challenging for experienced regulatory lawyers…
  4. NAB court claim (ASIC): the day before its AGM, ASIC issued proceedings in the Federal Court against NAB in connection with alleged “fees for no service” conduct. The conduct regulator alleges that between 17 December 2013 and 4 February 2019, NAB charged customers for financial planning services which were not provided contravening s962P of the Corporations Act 2001 (Cth) (Act); did not issue required fee disclosure statements or issued defective ones contravening 962S and s 1041H of the Act and ss 12DB(1)(a) and (g) and 12DA of the ASIC Act 2001 (Cth); did not have in place systems and controls to prevent these issues contravening ss 912A(1)(a)-(c ), (ca), (e) and (f) of the Act (ASIC’s new favourite power); and engaged in unconscionable conduct in contravention of s 12CB of the ASIC Act 2001 (Cth) given its alleged knowledge of these matters for part of this period. ASIC is seeking declarations, pecuniary penalties and compliance orders in relation to over 10,000 breaches of the law. This will not be the end of the fees for no services saga, which started with the Hayne Royal Commission. Indeed, ASIC’s Enforcement Chief Crennan QC stated: “Fees for No Service misconduct has been widespread and is subject to ongoing ASIC regulatory responses including investigations and enforcement actions…ASIC views these instances of misconduct as systematic failures, unfair to customers including those that are more vulnerable.” (Emphasis added)
  5. Financial planners (FASEA): the statutory body designed to oversee education, training and ethical standards of licensed financial advisers in Australia, FASEA, has issued guidance on its controversial code of ethics set to take effect on 1 January 2020. The cause of greatest concern in the code is perhaps Standard 3, which states “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” (Emphasis added.) The code goes on to provide examples of conflicted arrangements, notably one where an adviser is in breach of this duty because he receives stamping fees in relation to a share sale i.e. percentage of sale value. Under the current law, advisers need to manage conflicts of interest; the code does away with them altogether. The issue, to my mind, is the tricky guidance language surrounding the standard, which appears to qualify the plain meaning of the standard in terms of whether it is the adviser’s “dominant purpose” to derive personal profits and (from the new guidance) “The Code does not seek to ban particular forms of remuneration, nor does it determine that particular forms of remuneration would always be an actual conflict.” To me, that seems at odds with the literal effect of the standard and all the examples given in the code itself. In addition to stamping fees, which must be rebated, the code also provides an example on referral arrangements: “Referral arrangements that confer a benefit (whether financial or otherwise) on the referring party, create a conflict of interest and duty for the recipient of the benefit and must be avoided.” (Emphasis added) Leaving to one side the argument about whether conflicts of interest should be banned or rigorously managed, the guidance placed around the black & white wording of standard is apt to cause confusion in my view.

Thought for the future: ASIC is increasingly engaging with the media / financial services industry and I think that is great. (Perhaps also strategically picking its timing to issue claims as well e.g. on NAB before its AGM?) More engagement with its regulated population is a good thing in my view, as it helps firms to understand the expectations placed on them in what is a currently a fluid time for financial services regulation. Hopefully the quantity and quality of its releases will continue into 2020, such as ASIC’s reminder to the industry this week to get their whistle-blower policies in place and communicate it to their officers & employees ahead of 1 January 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, 16 December 2019



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. Modern slavery (legislation): the Morrison Government will establish a “Modern Slavery Expert Advisory Group” comprised of representatives from business, academia and elsewhere to provide advice on key issues and strengthen business engagement to effectively implement the new laws. Introduced on 1 January 2019, the Modern Slavery Act 2018 (Cth) requires affected large companies to report steps taken to respond to the risk of modern slavery – which is broadly defined, and includes the inability to leave work because of threats or abuse of power – in the operations and supply chains of it and its controlled entities. For Australian corporations, the first reporting year will be 1 July 2019–30 June 2020. (And it takes time to conduct the required investigations, so my advice is to start now if you haven’t already.) The Government also announced increased funding for the Fair Work Ombudsman to conduct investigations, improve migrant workers’ understanding of their workplace rights and introduce criminal sanctions for serious workplace exploitation and released a very short consultation paper to inform development of Australia’s National Action Plan to Combat Modern Slavery 2020–24, which sets out Australia’s strategic framework to combat modern slavery. The closing date for submissions is 31 January 2020.
  2. “Business ethics” (ASIC): ASIC Commissioner John Price has given the keynote address at the Australasian Business Ethics Network Conference. He reemphasised the importance that ASIC places on corporate culture, a global regulatory trend following the GFC, and stated that ASIC has an important role in promoting ethical culture in a business: “In short, culture is ‘the way we do things around here’. And we can see the influence of culture in the entities we regulate. A company’s culture often shapes its approach to corporate governance, its response to its regulatory obligations, and drives conduct within the firm. And that can be either good or bad conduct.” Interestingly, after touching on ASIC’s Corporate Governance Taskforce and its aim to “…build understanding and improve current corporate governance practices that can support changes towards a more ethical culture”, the Commissioner dedicated much of his speech to whistle-blowing. Summarising the broad whistle-blower reforms which commenced in July 2019 (take a look at ASIC’s great new RG 270 for more detail — the requirement to have a compliant policy starts from 1 January 2020), the Commissioner stated that these reforms will help ASIC perform its mandate by encouraging more whistle-blowers to come forward. He also stated that ASIC plans to survey the whistleblower policies from a sample of companies next year to review compliance with the legal requirements and the extent to which companies are implementing good practices. Expect to hear a lot more about whistle-blowing in 2020!
  3. Director identification (legislation): the Morrison Government has introduced the Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2019 (Cth) to integrate the 32 existing business registers onto one platform to be administered by the Australian Business Registrar. The different registers are set out on page 8 of the Explanatory Memorandum, the main ones being those maintained by ASIC e.g. ACN register. The interesting bit is on page 39 though (my top read for the week); the Government is going to introduce a unique director identification number that will stay with individuals all their life in an effort to combat pheonixing activity i.e. transferring all the assets out of one company to another and then liquidating the first company. The EM states: “The new requirement assists regulators to better detect, deter and disrupt phoenixing and improves the integrity of corporate data maintained by the registrar.” A development for which the insolvency industry has lobbied long and hard (it is quite easy common for variations of names to be registered), I suspect a collateral consequence will be APRA and ASIC’s ability to better monitor “rolling bad apples” as the UK FCA does i.e. senior individuals with a black mark against their name moving from one financial services firm to another. Under BEAR, APRA can query or challenge an “accountable person” appointment e.g. to a C-suite role, but cannot formally object to their appointment; it is different in the UK, where the FCA must approve the person for that role. Whether or not that law changes (practically-speaking would you move ahead with an appointment if APRA raised concerns?), this new law will give our regulators an easier time of monitoring Australian directors.
  4. Auditors (ASIC): ASIC has released its results from its audit firm inspections for the 12 months to 30 June 2019, and a supplementary report of audit quality measures, indicators and other information. The report found that the auditors did not, in ASIC’s view, obtain reasonable assurance that the financial report was free from material misstatement in 26 per cent of the key audit areas (which does not mean the financial reports audited were materially misstated, rather that the auditor may not have had a sufficient basis to support their opinions). ASIC stated that sustainable improvements in audit quality require a focus on governance, accountability, culture and talent by audit firms and that it would continue to pay attention to this area. ASIC Commissioner John Price said: “While firm action plans to improve audit quality remain important, the continuing overall level of adverse findings from our audit files reviews needs to be addressed. ASIC will adopt a more intensive supervisory and regulatory approach in this regard.” (Emphasis added.)
  5. Mortgage brokers (ACCC): the ACCC is proposing to grant re-authorisation to the Mortgage and Finance Association of Australia (MFAA) to allow it to continue enforcing disciplinary rules among its members. The MFAA is the national body for mortgage and finance brokers, mortgage managers and aggregators. Its disciplinary rules enforce the MFAA’s Code of Practice, which establishes standards of conduct and behaviour for MFAA members, as well as mechanisms for suspending or expelling members. Interestingly, the MFAA is only seeking authorisation for 2 years instead of the usual 5 years, citing expected reforms to the mortgage and finance industry following the Hayne Royal Commission. That seems sensible to me, given Treasury’s ambitious legislative agenda for 2020. ACCC Commissioner Stephen Ridgeway said: “Following the Royal Commission, there is potential for significant legislative and regulatory change, which may affect the MFAA’s governance regime.”

Thought for the future: the consultation paper for the expansion of the BEAR regime across most financial services entities — which will be a huge shift in the Australian financial services regulatory landscape — is supposed to be released before the end of the year (AFR, 29 / 10). With two weeks until Christmas and a period thereafter when many lawyers, governance, regulatory / compliance professionals will be enjoying well-deserved breaks (2019 has been a busy year!), my hope is that the consultation period is sufficiently generous. It was not in 2017 when BEAR was first introduced…

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 December 2019



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. Class actions (High Court): in a decision with massive implications for the class actions industry, the High Court rejected 5:2 the joint decisions of the NSW Court of Appeal and Full Federal Court of Appeal that courts have the power to make common fund orders (CFOs). CFOs are essentially an order by the court that all group members in a class action have to pay a percentage of any judgment proceeds to the litigation funder, and they were designed to address disparity between group members who had signed litigation funding agreements and those who had not (the so called “free riders” who did not have to part with any of their proceeds). Since their advent in Moneymax in 2016, CFOs have given a large economic incentive to litigation funders to commence class actions (particularly shareholder class actions), as they no longer need to undertake the arduous “book build” process of signing up group members to agreements, and have grown increasing more complex in structure. In examining the extent of s. 33ZF of the Federal Court of Australia Act 1976 (Cth) (and its NSW mirror provision) , which permits the court to make any order it thinks appropriate to ensure justice is done in the proceeding and forms the juridical power to make CFOs, the plurality held that these sections: “empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all.” (Emphasis added). The decision will be a welcome bright spot in the market landscape for large boards, who have increasingly contended with the unappealing prospect of a class action with each new regulatory investigation or significant share price drop and some of whom may share the views of a now retired Federal Court judge who stated that lawyers who pursue share price drops “look like vultures”
  2. Life insurance / CCI (ASIC): ASIC has banned the insurers from cold calling customers to sell life and consumer credit products from 13 January 2020. The move has been anticipated for some time, following ASIC’s earlier Consultation Paper 317 which consulted on the ban (none of the submissions in response opposed the ban). In announcing the ban, ASIC Commissioner Sean Hughes said: “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.”
  3. Responsible lending (ASIC): the conduct regulator has published the updated RG 209 on the responsible lending obligations that are contained in the National Consumer Credit Protection Act 2019 (Cth)(NCCP). The updated guidance has been released against the backdrop of ASIC’s appeal against Justice Perram’s decision in the ASIC v. Westpac responsible lending case (which you can read a great summary and analysis on here.) At 96 pages, it is not a short read. The main changes focus on reducing the incidence of consumers being encouraged to take on unsuitable levels of credit; ensuring licensees obtain sufficiently reliable and up-to-date information about the consumer’s financial situation i.e. to enable them to assess their suitability for credit; more guidance for licensees on conducting inquiries and verification steps based on different consumers / types of credit; guidance on consideration of spending reductions in assessing applications (presumably fewer dinners consisting of wagyu beef and fine shiraz); guidance on the use of benchmarks e.g. the HEM benchmark and areas that are not subject to responsible lending obligations. One of the broader takeaways to me is that ASIC has largely maintained a principles-based approach to responsible lending rather than opting for more additional prescriptive rules. That will be welcome news to the financial services industry.
  4. Climate change (Director’s duties): former High Court judge and Royal Commissioner Kenneth Hayne is back in the limelight, this time for warning directors that they have a legal duty to act on climate change risk. He stated that “International opinion is now firmly behind the need for all entities with public debt or equity to respond to climate change issues in their governance, their strategy, their risk management and their metrics and targets and, importantly, to record their responses to the issues in their financial reports” (AFR, 9 / 12). His comments follow an increasing emphasis by ASIC, APRA and the ASX on the need for boards to address climate change risk as part of their governance, risk and reporting frameworks (and a famous public legal opinion by barristers Noel Hutley SC and Sebastian Hartford-Davis published in 2016 (which they restated with greater force in 2019), in which they opined that many climate change risks would be regarded by a court as foreseeable and that directors who fail to consider climate change risks could be found liable for breaching their duty of care and diligence. Strictly speaking as a matter of law, my view is that climate change risks-which may include policy risk, every bit as much as physical risk-do not stand apart from other risks that directors need to deal with if it affects their company’s business e.g. cyber attacks. The scope of a director’s duty of care and diligence is based on the materiality and likelihood of the risk. Once the duty is engaged where the risk is foreseeable, the focus then turns to breach and whether the director is entitled to the protection of the business judgment rule; the issue here is whether proportionate steps were taken to mitigate the risk. The duty is assessed on an objective basis (what a reasonable person would do) with subjective elements (the specific facts).
  5. Audit Inquiry (Audit): senior executives from Big Four accounting firms were publicly questioned by a parliamentary public hearing in Melbourne on Monday. The hearing focused on accountability, potential conflicts of interest and staff conditions and follows increasing scrutiny from ASIC in 2019. The regulator is considering publicly naming audit firms whose work is substandard, albeit this will be rare in practice (AFR, 5 / 11).

Thought for the future: in August 2019, it was reported that ASIC was planning on putting up to 50 matters into the courts, many arising from the Royal Commission (AFR, 19 / 8). While there have been a good number of ASIC court cases since (the regulator has been working overtime), by my rough estimation and with three weeks until 2020 we are not close to that figure yet…

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, 1 December 2019



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. Westpac AML action (ASIC): following AUSTRAC’s application to the Federal Court for civil penalty orders against Westpac relating to systemic non-compliance with the AML/CTF Act 2006 (Cth) (Act) on over 23 million occasions, and as anticipated (see last week’s wrap here), ASIC and APRA have separately announced investigations into the matter . (And plaintiff firm Phi Finney McDonald have predictably announced they are investigating a class action.) Expect ASIC action to focus on s912A(1) of the Corporations Act 2001 (Cth) i.e. “ efficiently, honestly and fairly”; APRA is focusing on whether it can use its new tool BEAR. Indeed, on 1 December 2019 Chair Wayne Byres told a Parliamentary hearing that the regulator would confirm by the end of the month whether it was launching proceedings under BEAR and stated: “There are various people designated by Westpac as accountable persons — that broadly includes individual directors, the chief executive and by and large the next layer of group executives…each of those accountable persons has their own obligations under the BEAR regime — to act honestly, conduct their affairs with due skill and diligence and to make sure they don’t do anything that might unduly jeopardise the current standing of the bank…if there is a sense that it is not done efficiently or effectively, then there is an opportunity for APRA, if the circumstance is warranted or the behaviour is sufficiently serious, to seek disqualification of certain individuals.” It is worth noting, in this context, that BEAR is not retrospective and most of the conduct appears to have occurred before its introduction in July 2018. And that, like the UK SMCR upon which it is based, BEAR is designed on the “no-gaps” principle i.e. more than two people should not have responsibility for the same matters. There may be some grey areas of overlap (commonly with the tech function), but for all the sweeping public statements being made it is very doubtful to me that the BEAR would apply broadly across the executive suite. (P.s. look out for a forthcoming article this week on the UK experience so far under the UK SMCR which may give us a clue where BEAR is going!)
  2. Insurance prudential standard (APRA): APRA released for consultation its proposed revisions to prudential standard SPS 250, which are aimed at improving superannuation member outcomes by helping trustees select the most appropriate policies for their members, and monitor their ongoing relationships with insurers. The revisions also incorporate recommendations from the Hayne Royal Commission, and include the ability of members to easily opt out of insurance cover (new 12(f)) and requirement for super licencees to obtain independent certification that insurance arrangements entered into are (among other things) in the best interests of members (new 25). Submissions on the draft revised prudential standard will be received until 3 February 2020.
  3. Fees disclosure (ASIC): sticking with superannuation, ASIC has released updated guidance on fees and cost disclosure for issuers of superannuation and managed investment products. Designed to make the regime more practical for industry, the the main changes in the updated RG 97, are a categorisation of on-going fees and costs into three groups (Administrative, Investment and Transaction), a single “cost of product” figure in PDSs and simplifying how fees and costs are presented in periodic statements. The new guidance will apply to PDSs issued on or after 30 September 2020, and periodic statements (ongoing or on exit) for a reporting period that commences on or after 1 July 2021.
  4. Memorandum of understanding (ASIC / APRA): as can be seen in the current Westpac case, when you are dealing with one regulator there is always the potential for another (local or foreign) to be in the wings. Especially where there is an MOU between those regulators on information sharing and enforcement action! The ACCC and US FBI signed an MOU earlier in the year to will strengthen the agencies’ joint efforts in combating cartels and other anti-competitive behaviour. And now ASIC and APRA have refreshed their MOU, following the Hayne Royal Commission’s recommendation 6.9 that the law should be amended to oblige ASIC and APRA to cooperate, share information to the maximum extent practicable and notify the other whenever it forms the belief that a breach for which the other agency has enforcement responsibility may have occurred. The updated MOU (my top read for the week!) is geared to information sharing and investigatory co-operation, for example [22] provides “Each agency agrees to inform the other agency of breaches, and suspected or potential breaches of regulatory requirements that are relevant to the other’s responsibilities.” From my viewpoint, APRA and ASIC are already information sharing to quite an extent in the wake of the Hayne Royal Commission- no doubt that trend will continue and probably increase given the new MOU…
  5. Financial advisors / FASEA(ASIC): in news welcomed by financial planning industry, ASIC announced that it will not be monitoring or enforcing individual advisers’ compliance with the Financial Planners and Advisers Code of Ethics 2019 on the grounds that it is not a code-monitoring body. The code was set by the Financial Adviser Standards and Ethics Authority (FASEA) in February 2019. Financial advisers will still be required to comply with the code from 1 January 2020 and AFS licensees will still be required to take reasonable steps to ensure that their financial advisers comply with the code. However, ASIC will take a facilitative approach to compliance with Standards 3 and 7 of the Code (see below) until the new single disciplinary body for financial advisors currently under development — which will displace the role of compliance schemes in monitoring and enforcing the code — is up and running. 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” and Standard 3 of the Code provides “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”

Thought for the future: the global Financial Action Taskforce (FATF), is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In its reviews on Australia over the years, it has sometimes been less than glowing in its reports. (One longstanding gripe is the fact that AML / CTF laws do not cover real estate agents, lawyers and accountants — there is good reason for it not covering lawyers, including given their fiduciary obligations but that is a topic for a separate time.) Indeed, in its last report in 2018 FATF stated “Overall, Australia has made some progress in addressing the technical compliance deficiencies identified in its MER and has been re-rated on seven Recommendations. However, 14 Recommendations remain non-compliant or partially compliant” My broad sense is that with recent developments, FATF will obtain more satisfaction from Australia going forward.

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, 25 November 2019



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. Westpac AML action (AUSTRAC): for an arguably dovish regulator since its creation in 1989, Australia’s anti money-laundering and terrorism financing regulator has certainly turned with a vengeance. Following its successful Tabcorp and CBA actions, it has applied to the Federal Court for civil penalty orders against Westpac relating to systemic non-compliance with the AML/CTF Act 2006 (Cth) (Act) on over 23 million occasions. (Each contravention attracts a potential penalty of $17 to $21 million.) Westpac — which self disclosed to AUSTRAC — is alleged to have allowed foreign correspondent banks (some from high risk jurisdictions) to access its banking environment without conducting appropriate DD on those banks or risk assessments on the products and channels offered to them in contravention of s. 98 of the Act; failed under s. 45 of the Act to report over 19.5 million international funds transfer instructions (IFTI) to AUSTRAC from November 2013 to September 2018 (IFTI’s are a key source of intel for AUSTRAC); failed under Part 5 of the Act to pass on information about the source of funds to other banks in the transfer chain (and keep appropriate books & records under s. 115 of the Act); failed under s. 81 of the Act carry out appropriate customer DD on transactions to countries with financial indicators relating to potential child exploitation risks. Further, in what will be a red rag to ASIC and APRA, AUSTRAC’s Concise Statement rather boldly states at [3]: “These contraventions are the result of systemic failures in [Westpac’s] control environment, indifference by senior management and inadequate oversight by the Board. They stemmed from Westpac’s failure to properly resources the AML/CTF function… Westpac adopted an ad hoc approach to ML / TF risk management and compliance”. Westpac denies the statement, though I think it is a fair assumption ASIC will open an investigation — probably based on its new favourite s. 912A of the Corporations Act 2001 (Cth) i.e. general AFSL obligations. (And the inevitable class action(s) based on the share price drop will follow.) APRA is the more interesting one to watch for me (outside a possible capital penalty like for CBA). BEAR commenced for Westpac in July 2018 and specifically applies to “ senior executive responsibility for management of the ADI’s anti‑money laundering function” under s 37BA(3)(j) of the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth). (BEAR does not have a retrospective effect, though some of the alleged conduct occurred after July 2018 — see [13] of the Concise Statement). That specific accountability statement will be under APRA’s microscope as to whether or not it can support the first BEAR action…
  2. Dover Financial (ASIC): Dover Financial Planning has been found liable by the Federal Court for conduct that was “misleading or deceptive” or “likely to mislead or deceive” within the meaning of s. 1041H of the Corporations Act 2001 (Cth) and s. 12DA(1) of the ASIC Act 2001 (Cth) and making a “false or misleading representation” within the meaning of s. 12DB(1)(i) of the ASIC Act 2001 (Cth) in a case brought by ASIC stemming from the Hayne Royal Commission. Dover’s sole director, Terry McMaster, was found to be knowingly concerned in Dover’s contraventions under s. 79 of the Corporations Act 2001 (Cth) i.e. aiding and abetting. ASIC’s contention was with Dover’s “Client Protection Policy” which ostensibly set “…out a number of important consumer protections designed to ensure every Dover client gets the best possible advice and the maximum protection available under the law…” (emphasis added) which was far from the truth as the policy contained many exclusions, limitations and restrictions. For example, it contained the term “You agree to not complain or seek any form of compensation for any loss suffered as a result of being under-insured should an insured event occur.” Dover defended the claim on the basis that, inter alia, ASIC had not proved that any individual financial advice clients who had received a statement of advice with the Client Protection Policy were misled or deceived by the inaccuracy or had suffered loss as a consequence. (It also raised other arguments, including that the above statements were of opinion and not fact. See para [8] of the judgement.) An odd argument, as ASIC did not need to prove that the conduct in question actually deceived or misled anyone under the legislation — the question is whether the conduct had a sufficient tendency to induce error. Paras [98] — [100] of the judgement contains a great summary of the law in this regard. O’Brien J found Dover guilty of 19,402 separate contraventions — one for each instance of provision of the policy by Dover’s representatives between September 2015 and about March 2018 (para [116]). Sentencing is yet to occur in what represents a big win for ASIC in the post Hayne Royal Commission enforcement landscape.
  3. Comminsure (ASIC): CommInsure (now owned by AIA) has pleaded guilty to 87 counts of selling insurance products in the course of “unlawful, unsolicited telephone calls” i.e. hawking — you can read about the background to this ASIC action in the 7 October 2019 wrap here. In the first criminal matter relating to the Hayne Royal Commission, 30,000 customers will be refunded $12 million and the firm will face a penalty of up to $1.85 million when sentenced on 28 November. The development follows NAB’s admission to 255 of the 297 ASIC-alleged breaches of the National Consumer Credit Protection Act 2009 (Cth) relating to its former Introducer referral program which attracted the ire of Commissioner Hayne in terms of responsible lending laws (see page 83 of the Final Report). And as noted by ASIC Chair James Shipton in his recent address to the Parliamentary Joint Committee (which he used to highlight increased enforcement statistics — a 24% increase since January 2018), MLC Nominees and NULIS, two entities in NAB’s wealth management division, admitted to breaches of the law relating to the fees for no service action. Welcomed by ASIC, enforcement chief Crennan QC stated (AFR 19 / 11) “I’m not saying everyone needs to plead guilty or agree to everything we say, but it’s a better outcome for us, the community and the courts if it’s early [early co-operation]… rather than engage in long, protracted litigation”.
  4. Board surveillance (APRA): the Treasurer Josh Frydenberg has pushed back against the prudential regulator’s thought bubble set out on page 11 of a recent information paper of sitting in on board meetings of firms it regulates in order to lift governance, culture, risk and accountability (GCRA) measures. (In particular, he noted that the failures identified in the Hayne Royal Commission centred on a failure to act, rather than insufficient information.) That is an sensible response to an idea with innumerable issues to my mind e.g. legal privilege, confidentiality, maintaining open & robust debate, potential for regulatory capture etc. With that said the information paper is a really engaging insight into how APRA plans to approach GCRA (my top read for the week!), including the overseas practices to which it is having reference (page 11) and that it plans to assess outcomes from the implementation of the BEAR through on-site reviews at large ADIs commencing in the second half of 2019 (page 18). APRA is also considering annual GCRA declarations from the boards of regulated entities (much like CPS 220 declarations), periodic GCRA self-assessments to support the annual declarations and engagement with independent experts to assist with APRA’s assessment of entities’ self-assessments. There is also a big focus on co-operation with ASIC.
  5. Remediation (Parliament): as noted above, ASIC Chair James Shipton was before the Parliamentary Joint Committee on Financial Services on 19 November 2019 addressing ASIC’s recent activity. Aside from fairly standard matters, what I found interesting was an exchange on pages 23 and 24 of the transcript concerning remediation projects undertaken by external consultants. Labour Senator O’Neill asked Mr. Shipton “…could you provide an insight on the service providers in this area. Are they liquidators? Are they auditors? Are the four big audit companies involved in this process? Who’s doing this work for the bank?”. Mr. Shipton took the question on notice, to which Senator O’Neill then said “ I think it would be helpful for people who are waiting for the money to know that ASIC is watching this space. I’d like to get a mud map of who’s got what, when they got it and how much is still lagging…”. Against the backdrop of interest into the major accounting firm’s auditing vs. consulting activities — remediation exercises are commonly undertaken by these firms — it is interesting to know that this aspect of regulatory practice is now on Parliament’s radar. An inherently bespoke and oft-times complicated exercise, legal and compliance functions will no doubt benefit from a greater scrutiny of how tightly constructed a remediation plan proposed by an external services providers is — especially with respect to the timing of any consumer repayments!

Thought for the future: under s37G(1) of the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (Cth), APRA can seek a civil penalty of up to $210 million for a contravention if it “…relates to prudential matters”. (This qualification does not exist for actions against accountable individuals.) After two years (see page 8 of my Treasury submission from 2017) I am still fuzzy on what this exactly means —say a large fine over $700 million is levied on Westpac from AUSTRAC’s AML action as Attorney-General Christian Porter has publicly indicated (AFR 22 / 11) — is that outcome enough to qualify it as a prudential matter given Westpac’s Tier 1 capital was $45B out of $425B of risk weighted assets in September 2018? (A related consideration is that under s 37G(4), the Federal Court of Australia must have regard to the impact that the penalty would have on the viability of the ADI in determining the pecuniary penalty — a consideration I find a bit awkward from a jurisprudential perspective.) It is hard to say with certainty, though one thing I think we can expect is that this qualification will not exist for ASIC once it is empowered under the BEAR regime in 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, 18 November 2019


Australian regulators weekly wrap – Monday, 18 November 2019

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 Liability (ALRC): The ALRC has been undertaking a detailed review of Australia’s corporate criminal liability regime pursuant to a direction from the Attorney General. The terms of reference require the ALRC to consider potential law reform to simplify the application of criminal liability to companies (under Part 2.5 of the Criminal Code (Cth) the “physical” element of the crime can be undertaken by an agent, employee or officer of the corporation and the “mental” element is proven where the company expressly, tacitly or impliedly authorised or permitted the offence eg the board approved the criminal action) and to facilitate company officers being held criminally liable for company misconduct. The latter subject area continues an initial US / UK push following the GFC to achieve regulatory outcomes by targeting individuals eg the famous US DOJ’s “Yates Memo”. The ALRC has just released its discussion paper – and there are some big proposals which easily make this my top read for the week. For eg, proposal 9 (page 10) is that any officer who was in a position to influence the conduct of a company should be subject to a civil penalty if the company has committed an offence, unless they can prove they took reasonable measures to prevent the same. That is a big increase in personal liability! (And the discussion paper moots the introduction of Australian deferred prosecution agreements – yes, please just introduce them finally. But we should follow the more regimented UK and not US model.) Consultation will continue to 31 January 2020.

2. Enforceable undertakings (ASIC): ASIC Chair Karen Chester told a Sydney forum that enforceable undertakings will not be preferenced over litigation as “s912A is now front and centre on ASIC’s ‘why not litigate’ radar, as distinct to the enforceable undertaking territory of the past… And why? Before 13 March 2019 a breach of this provision would attract a penalty of zero. Today it attracts maximum civil penalties of up to $1.05 million for an individual, or up to $525 million for a corporation.” She also stated that ASIC was focusing on conflicted financial advice models. We have already seen a number of s912A actions launched by ASIC – we should then expect more to come! (Also, there are some nuances around that 13 March 2019 deadline given the technical “continuing breach” provisions in the legislation, so please do get in touch if you have any limitations concerns.)

3. Whistleblowing (ASIC): public companies, large proprietary companies, and proprietary companies that are trustees of registrable superannuation entities must have a whistleblower policy available to their officers and employees by 1 January 2020. ASIC has just released RG 270, which sets out the components that a whistleblower policy must include to comply with the law eg types of matters covered by a policy, who can make and receive a disclosure and legal and practical protections for disclosers. It also provides guidance to assist companies develop and implement policies that are tailored to their operations. It is a really useful guide – of course, in practice whistleblower implementation is usually a rather involved process – with some great practical examples. Including as to how an entity’s policy can provide examples of how the entity will, in practice, protect the confidentiality of a discloser’s identity (page 31). (Protecting anonymity is quite a tricky aspect, with penalties for getting it wrong, so good to see ASIC’s detail here!) And it is worth noting that having an effective whistleblowing policy is one consideration for showing reasonable steps have been taken to mitigate offences under the ALRCs discussion paper (page 10).

4. Liquidator inquiry (ASIC): ASIC has filed an application with the Federal Court seeking an inquiry into the conduct of Jason Bettles – the liquidator of the Members Alliance Group of companies from 22 July 2016 until 13 July 2017. ASIC alleges he failed to maintain independence, did not exercise the degree of care and diligence required of a liquidator and failed to discharge his obligations as a liquidator. No factual details have yet emerged. The action is part of the ATO-led Serious Financial Crime Taskforce (of which ASIC is a member), and it’s worth noticing the steady increase in scrutiny being applied to the insolvency industry (phoenixing is also on the top of its radar). Despite the industry itself being somewhat in a lulled state itself.

5. Cryptocurrency (AUSTRAC): A Victorian man has been charged under the Anti-Money Laundering and Counter-Terrorism Financing Act of 2006 for alleged providing a crypto platform service which is unregistered (he has also been arrested under the Criminal Code Act 1995 for dealing with property suspected of being related to criminal activities). It marks one of the first joint actions by AUSTRAC and the police under the new E Crimes Squad related to cryptocurrencies.

Thought for the week: between the ALRC’s above-mentioned proposal for personal criminal liability (if it comes to fruition), BEAR and ASIC’s “stepping stones” strategy deployed in ASIC v Vocation the corporate veil as it applies to directors is feeling a little thin lately. Perhaps too thin? It could be useful to revisit, perhaps, why it has existed since the 1,600’s for policymakers going forward e.g. principled risk taking.

Australian regulators weekly wrap – Monday, 11 November 2019


Australian regulators weekly wrap – Monday, 11 November 2019

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. Freezing orders (ASIC): the corporate regulator has obtained freezing orders against a financial advisor Ross Andrew Hopkins, QWL and QWL Asset Management from dissipating their assets and an undertaking that they will not provide financial services to clients without seeking prior approval from ASIC. The action relates to an ongoing investigation that ASIC is conducting into these parties around their alleged failure to assist the Australian Financial Complaints Authority to resolve client complaints. The move strikes me as interesting from the point of highlighting ASIC’s hawkishness – obtaining freezing orders during an investigation is rare – and growing role AFCA is playing in the financial services framework.
  2. Superannuation (ASIC): ASIC has commenced action in the Federal Court in South Australia against Tidswell Financial Services Ltd (Tidswell), an AFSL holder and superannuation trustee, and various related promoter entities (and its director), in relation to the promotion of the MobiSuper Fund. In short, ASIC is alleging Tidswell (and the AFSL holder for one of the promoter entities) failed to do all things necessary to ensure the financial services covered by its AFSL were provided efficiently, honestly and fairly. (More s. 912A action!) ASIC also alleges that both Tidswell failed to adequately monitor the promotion of the Fund through a purported ‘general advice model’ that had insufficient regard for consumers’ best interests. It claims the promoter made misleading claims about fee savings and equivalent insurance cover if consumers joined the Fund and provided personal advice that was not in consumers’ best interests. Two things are interesting to me: first, the clear continuation of a focus on superannuation firms in line with ASICs strategic goals. Second, the cooperation with APRA – the prudential regulator has supported ASIC with its investigation and has provided it with a delegation of certain functions and powers under the Superannuation Industry Supervision Act 1993 (Cth). On the heels of the APRA’s unsuccessful IOOF action, this one will be really interesting to watch – you can read the concise statement here.
  3. Responsible lending (ASIC): At the FBAA Challenge the Future conference in the Gold Coast on 8 November, Richard McMahon, a senior manager in the credit, retail banking and payments division at ASIC has said that the hotly anticipated updated RG 209 should be released by the end of the year. He is also quoted (Advisor, 12 / 11) as saying: “what we’re thinking about now is continuing to provide principles-based guidance with content and structure changes, to give more clarity about what ASIC considers important, and to give you some examples…This could include a more expressed description of the principles [that] licensees should consider when developing their compliance processes, a stronger focus on the purpose of the obligations and what licensees should seek to achieve, and a shifting of the focus away from the term scalability to more direct guidance about what circumstances licensees should consider when deciding what information gathering steps are reasonable.”
  4. Superannuation data (APRA): APRA has launched a multi-year project to upgrade the breadth, depth and quality of its superannuation data collection. The project will make it easier to scrutinise and reliably compare fund and product performance. Deputy Chair Helen Rowell said APRA will use the insights gained from a more complete and granular data collection to sharpen its supervision priorities and drive better industry industry practices. The Phase 1 Discussion Paper and the first topic paper on RSE Structure and Profile can be read here.
  5. Modern slavery (Legislation): the Australian Council of Superannuation Investors (ACSI) and the Responsible Investment Association Australasia (RIAA) have developed a best-practice guide to reporting under Australia’s Modern Slavery Act. The new Act has requirements for organisations in reporting the risks of modern slavery in their operations and supply chains. The ACSI/RIAA guide provides information for investors on how to incorporate investments into their modern slavery reporting and meaningfully address modern slavery risks. My top read for the week, it is an excellent work product and can be accessed here. Under the new legislation, for Australian corporations, the first reporting year will be 1 July 2019–30 June 2020 with the reports due by 31 December 2020. In my experience. implementing modern slavery frameworks can take more time than expected, so businesses who have not started to meaningfully grapple with the incoming regime should start now.

Thought for the future: in London this week and speaking to former colleagues about current trends and past matters, it strikes me that ASIC’s enforcement cooperation with APRA is overdue. The UK PRA and FCA – whom our regulators are quite close with – regularly cooperate on large enforcement investigations, so my sense is that we will see more of this in Australia in the coming years and it will throw up new challenges for dual regulated entities.

Australian regulators weekly wrap — Monday, 4 November 2019



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. RI Advice (ASIC): in August 2019, the AFR reported that ASIC was planning on putting up to 50 cases in court by Christmas — many from the Hayne Royal Commission. By my count, we are not even close, though we have about 2 months to go and the numbers are rising: ASIC has commenced a Federal Court action against RI Advice Group Pty Ltd (RI Advice) and financial adviser John Doyle. ASIC is alleging that RI Advice failed to take reasonable steps required under the law to ensure that Mr. Doyle provided appropriate advice, acted in clients’ best interests and put his clients’ interests ahead of his own. ASIC contends that Mr. Doyle gave “cookie cutter” advice to retail clients to invest in complex structured products without taking into account their goals and objectives and that RI Advice knew or should have known that Mr. Doyle was not complying with his obligations and did not take reasonable steps in response. In particular, ASIC alleges at [3] to [11] of its Concise Statement that there were serious issues with Mr. Doyle’s “pre-vetting” process (basically quality control measures) which saw him fail his educational obligations and numerous file audits — despite the fact that he was one of RI Advice’s highest revenue earners. One of the Hayne Royal Commission’s case studies, Mr. Doyle rejected Counsel-assisting’s recommendations that Commissioner Hayne find that he had breached the Corporations Act 2001 (Cth), including the obligations to act in a clients’ best interests in his submissions. If the case proceeds to judgment, what will be interesting is the extent to which the court finds RI Advice should have been held responsible for compliance and actions of its adviser and how fast it should have acted. This may have broader ramifications for other areas where will be a “best interest” duty — most notably the Mortgage broker best interests duty and remuneration reforms which have just finished its rather heated consultation period.
  2. Superannuation (ASIC): the conduct regulator has written to super trustees seeking asking them to improve the standard of communication around the “Putting Members’ Interests First” reforms. The key features of the reforms are that: a) insurance will be opt-in for members in a regulated superannuation fund with product balances below $6,000; and b) insurance will be opt-in for new members under-25 years old. In essence, the reform is to protect low balance accounts from unnecessary insurance cover, and it takes effect from 1 April 2020. You can read the rather long letter here, which is a great move by ASIC to communicate its expectations to the regulated population. In particular, given we are in an era of increased enforcement activity and where ASIC has publicly stated it is focusing on superannuation entities specifically in this regard.
  3. Cigno v. ASIC (ASIC): timetabling orders have been made in the matter of Cigno’s appeal to ASIC’s first use of its product intervention power — hearing has been set down until 30 March 2020. The background to the appeal is set out in a previous update and one question I have is whether the 5 month time-frame will temper ASIC’s enthusiasm for its new tool in the intervening period? On balance, my sense is that it will not. One reason is that there are still a number of outstanding areas in which other global regulators have tackled with their product intervention powers and ASIC has not yet grappled with. An example is the UK FCA and hybrid securities which can take the form of capital notes, convertible preference shares, and subordinated debt. Despite calls for hybrid securities to be excluded from the Australian DDO / PIP regime, this did not occur as: “… some consumers acquire structured products that are riskier than they realise and some firms distributing hybrid securities include sales information in addition to, or inconsistent with, the information in the prospectus”. And ASIC has been warning consumers about hybrid securities for some time now, including way back in November 2011 in 11–270MR
  4. “Fairness” (Corporations Act 2001 (Cth)): following ASIC’s win against Westpac last week, where the Full Federal Court found the bank breached the obligation to act “efficiently, honestly and fairly” under section 912A of the Corporations Act 2001 (Cth) over the provision of financial advice, a star-studded conference in Sydney was held. As the AFR (1 / 11) reported, much of the focus was on a new standard of “fairness” in the context of financial services regulation. High Court Justice Edleman was in attendance and is quoted by the AFR (my top read for the week — easy!) as follows in this context: “The first aspect is fairness in the context of corporate purpose that we’ve been talking about so much. Fairness in that respect is not a corporate purpose in itself, it’s a matter of achieving corporate purposes …It usually doesn’t mean much more than reasonableness, which lawyers are extremely comfortable with …The second dimension of fairness is in relation to regulatory responses. And, again, it has a very useful role in guiding — as Daniel [Crennan] explained — the manner in which a regulator will decide when to intervene, how to intervene and in which cases to intervene…Fairness in that sense is operating in the same evaluative way, and will guide corporations, by having regard to the cases in which the regulator has decided to get involved…The third dimension of fairness is perhaps the most difficult — and that’s where fairness has been instantiated into legal rules, particularly into legislation or regulations as a specific requirement…It might be that fairness, in those contexts, might mean nothing more than reasonableness, in which case we get back to the areas in which lawyers are comfortable…But in other contexts, fairness doesn’t mean the same thing as reasonableness…The High Court hasn’t yet grappled with any of those specific legislative provisions [i.e. s 912A] although we did grapple with the meaning of the word unconscionable and split 4–3.” I think that where potentially material different interpretations can be taken about what a law means in a given context, especially principles-based laws such as “fairness” (we have so many lately!), it behooves our regulators to give as much actionable information to the financial services industry as possible about their particular interpretations of the law so that industry participants can take advice and proceed on as informed basis as possible.
  5. Insurance Code of Practice (ICA): the Insurance Council of Australia has issued a news release on the new General Insurance Code of Practice (Code). Key information is a new sanctions power for the Code Governance Committee in the event that there is a breach of the Code and an ability to force insurers who breach the Code to pay up to $100,000 in community benefits. Mandatory standards for claims investigators have also been introduced which will include time-frames for updating a customer on the investigation process, requirements regarding requests for information and requirements as to how the investigation interview should be conducted. It is also worth recalling that insurance claims handling is being brought under s 912A of the Corporations Act 2001 (Cth) definition of “financial services” as well. That consultation closed on 29 March 2019.

Thought for the future: Michael Saadat, who was ASIC’s regional commissioner for NSW and executive director of financial services, has joined buy-now, pay-later giant Afterpay as the director of public policy and regulatory affairs . ASIC Chairman Shipton has stated an inquiry is open (AFR, 25 / 10). The facts of this case to one side — I do not know enough to comment — my perception is that Australia’s regulators generally do not cycle external lawyers in and out of their enforcement divisions to the extent they do in the US e.g the DOJ. Whether or not that is a holistically good thing -one debatable negative is potential regulatory capture-would make for a really great paper!

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, 28 October 2019



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. Market-based causation (Class Actions): oft-times regulatory actions spawn class actions e.g. the BBSW and FX class actions, so it is not too tangential to start this week’s update with the recent Myer class action decision. In short, the department store’s shareholders alleged that it had engaged in misleading conduct by stating in November 2014 that its profit would increase for the next year, after which there was a profit downgrade in March 2015. (Subject to exceptions, listed companies are required to disclose price-sensitive information under the ASX Listing Rules / Corporations Act 2001 (Cth).) Myer lost what is the first formal shareholder class action to proceed to final judgment in Australia — albeit Beach J questioned whether any loss was sustained given hawkish analysts covering Myer. The decision is significant for at least three reasons: 1) “market-based causation”, first raised in 2016 in HIH Insurance Limited (in liquidation) & Ors[2016] NSWSC 482, is here to stay. Now plaintiffs do not need to establish they directly relied on any established misrepresentation. It is enough to prove that the broader market relied upon and was misled by a material statement leading to an artificial inflation of the share price (and thus loss). (It is worth noting that Foster J considered the existence of market-based causation in Masters v Lombe (liquidator): In the Matter of Babcock & Brown Limited (In Liq) [2019] FCA 1720 handed down on 18 October 2019.) I should also note that establishing market-based causation will prove a high bar on the reasoning set out in the Myer case; 2) notwithstanding the additional complication, it will lead to increased shareholder class actions fueled by a permissive class actions regime, increase in litigation funders and (in my view) problematic continuous disclosure obligations which are far more onerous that in comparable jurisdictions e.g. there is a lack of a “safe harbour” defence such as in the US for forward-looking statements; and 3) this will mean that directors, officers and insurers’ exposure has significantly increased. In particular, given ASIC’s recent “stepping stones” strategy aimed at directors personally in Australian Securities and Investments Commission v Vocation Limited (in liquidation) [2019] FCA 807 i.e. breach of continuous disclosure / misleading deceptive statements by company (s 674(2) and s1041H Corporations Act 2001 (Cth)) = breach of director’s personal duty of care & diligence (s 180 Corporations Act 2001 (Cth)), of which the business judgment rule defence is not available. Another reason that public disclosure governance structures and policies should be reviewed (and why I feel for Australian company directors in the current climate!).
  2. Privacy (OAIC): The Australian Information Commissioner and Privacy Commissioner Angelene Falk has released OAIC’s 2018–2019 annual report. Of the 3,306 complaints received, an annual increase of 12%, the top sector for complaints was finance (excluding super) (page 56). The Commissioner has a range of powers and responsibilities outlined in the Australian Information Commissioner Act 2010 (Cth), and also exercises powers under the FOI Act 1982 (Cth), the Privacy Act 1988 (Cth) and other privacy-related legislation. Perhaps surprisingly, there is quite minimal information dedicated to enforcement activity. That may change — the Commissioner has also is seeking feedback on the Draft Privacy Safeguard Guidelines for Consumer Data Right (CDR) by 20 November 2020. With a staged roll-out starting with banking, the CDR aims to provide greater control for Australians over how their data is used and disclosed and will be regulated by the OAIC and ACCC. Of the two, OAIC will be the primary complaints handler and have a wide range of investigative and enforcement powers to handle privacy complaints and carry out other regulatory activities. As part of this function, the OAIC will also work to identify systemic breaches of the framework.
  3. Governance & IOOF (ASIC): Fresh off the heels of its court victory against APRA, which the prudential regulator has decided not to appeal, ASIC has imposed additional licence conditions on IOOF Investment Services Ltd (IISL) to improve governance and conflicts management after IISL applied to vary its licence as part of a restructure of its corporate group. The restructure will have the effect of transferring its managed investment scheme and advice activities to IISL. The additional conditions include: 1) that there be a majority of independent directors with a breadth of skills and background relevant to the operation of managed investment schemes; 2) the establishment of an “Office of the Responsible Entity” that reports directly to the IISL board, with responsibility for oversight of IISL’s compliance with its AFSL obligations and ensuring IISL’s managed investment schemes are operated in the best interests of its members; and 3) the appointment of an independent expert, approved by ASIC, to report on the implementation of these conditions. APRA’s past court case was issued on the basis of its belief that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. The establishment of a separate structure within IOOF’s governance arrangement i.e. the Office of the Responsible Entity to obliquely mitigate any lingering concerns is very interesting and I wonder whether it foreshadows a trend moving forward. In particular, given poor governance had been identified by ASIC as a key driver of harm and improving governance and accountability is one of its current priorities as set out in its Corporate Plan 2019–23 (page 14).
  4. Auditors (APRA): the prudential regulator has urged for a parliamentary inquiry to examine whether it would be viable to strip auditors of the right to carry out non-audit consulting work (Australian, 28/10). APRA is also currently considering what should be expected of auditors with respect to the reporting of material misconduct. APRA’s calls follow similar rhetoric in the UK right now following Thomas Cook’s stunning collapse. MP Rachel Reeves, who chairs the UK’s Business, Energy and Industrial Strategy Committee, has stated: “I wonder how many more company failures, how many more egregious cases of accounting do we need? We’ve had BHS, we’ve had Carillion, we’ve had Patisserie Valerie and now we’ve had Thomas Cook. How many more do we need before your industry [auditing] opens its ideas and recognises that you are complicit in all of this and that you need to reform…We can’t rely on you to do the right thing and legislation is needed.”
  5. ASIC v. Westpac (ASIC): ASIC has won its appeal against Westpac — one of them anyway! (We will need to wait to see the outcome of its appeal of Perram J’s high profile responsible lending decision.) In Australian Securities and Investment Commission v Westpac Securities Administration Limited [2019] FCAFC 187 the Full Federal Court ( Allsop CJ, Jagot J, O’Bryan J) has held that Westpac’s telephone campaigns in 2014–15 to encourage consumers to rollover external superannuation accounts involved its representatives giving “personal advice” and not “general advice” under the Corporations Act 2001 (Cth). The former imposes a greater regulatory obligation, including the need to act in the “best interests” of the client under s 961B(1) of the Corporations Act 2001 (Cth), which section draws on concepts of fiduciary loyalty (see RG 36.99). Finding that Westpac had breached ss 961B(1) and also 912A(1)(a) of the Corporations Act 2001 (Cth) i.e. “efficiently, honestly and fairly” the Full Federal Court found at [5] that “the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for marketing or general advice. It is a decision that requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer” (Emphasis added). An interesting decision (paragraphs [404] to [427] are my top read for the week!), however, given its fact-specific nature I think we should expect more cases turning on the distinction between personal and general advice to come.

Thought for the future: the US Volcker Rule enacted under the Dodd-Frank Act which came into force in 2014 prevents banks from using their balance sheets to undertake proprietary trading or investing in hedge or PE funds. It is slowly being watered down under sustained lobbying e.g. the definition of “trading account” has recently been changed to reduce the scope of financial instruments subject to the rule. The intention behind the (admittedly very convoluted) law was to forestall another GFC. The UK’s response in 2015 was the ring-fencing of some retail banking activities into separate entities within a group. Australia does not have an equivalent response; APRA argued in its 2014 submission to the Financial System Inquiry (page 43) that there was not a strong case for ring-fencing based on the patchwork of regulations and laws that we have in place to promote stability. I wonder, given the new paradigm APRA finds itself in post Hayne Royal Commission / Samuel Report, and the outcomes of its self-assessments of Governance, Accountability & Culture, whether it will revisit that position in the future…

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)