Australian regulators weekly wrap — Monday, 11 April 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Capital adequacy (APRA): the prudential regulator has released for consultation the interim reporting standards that will accompany the updated capital adequacy and credit risk capital requirements for authorised deposit-taking institutions. It follows the release in November 2021 of APRA’s new bank capital framework, which was meant to align Australian standards with Basel III requirements. The letter is here, and ADIs can comment up until 7 June 2022.
  2. ‘Technology development (APRA): APRA Chair Wayne Byres gave a speech to the American Chamber of Commerce in Australia, on regulating the technological revolution in finance which was fascinating. He essentially accepted the rise and permanence of crypto currency, noting “Even central banks are conducting pilot exercises to test the use case for central bank digital currencies (CBDCs). Some countries — ranging from the Bahamas to China to Nigeria — have moved beyond pilots to general use…Evolution in the nature of money — from shells, to beads, to gold coins, to privately-issued bank notes, to central bank-issued bank notes, to the electronic bank deposits most of us use today — has in turn shaped how the entire financial system has evolved…CBDCs, digital currencies/stablecoins and crypto-assets have the potential to significantly reshape the financial system. However, there remains significant uncertainty over what a more digital and decentralised financial system will ultimately look like, which new types of money will gain prominence, which products and services will take off, and which will fade away as newer, better alternatives emerge.” I think it is the clearest statement that APRA has made on the subject yet, and was accompanied by the Chair’s views on regulatory design for the future, which he summarised as follows: 1) not charging ahead pretending we have the answers; 2) ensuring that the regulatory agenda is focused on consumer benefits as much as it is on harm prevention; and 3) by trying to work with some key principles for good regulatory design e.g. technology-neutral, utilising principles-based regulation wherever possible, and by working with a whole-of-system perspective. I can cavil with the zeitgeist of principles-based regulation, though I don’t want to take away from what is a insightful, heartening and wholly timely speech. Bravo!
  3. Modern slavery (ABA): the Australian Banking Association has released its first edition working paper on Modern Slavery, bringing together member banks’ knowledge of modern slavery practices in Australia. The first edition working paper focuses on the construction and agriculture sectors and seeks to provide a point of reference for banks to operationalise modern slavery risk identification and management. There are some very helpful case studies in here which assist in highlighting the issues which can arise e.g. a ‘workers as consumers’ business model is where an intermediary creates revenue by charging workers excessive fees for ancillary products and services, such as accommodation, transportation, and equipment. You can read the report here.
  4. Takeovers panel (Treasury): this time last year, the Government announced that it would consult on expanding the role of the Takeovers Panel in control transactions, including potentially giving advance rulings and expanding the Panel’s remit to include members’ schemes of arrangement, with an aim of reducing the time and costs of mergers and acquisitions. In Australia, one of two control transaction processes is typically used to effect a change in corporate control. The first is a takeover bid, governed by the Takeover Rules in Chapter 6 of the Corporations Act 2001 (CA)(this is driven by the bidder, and used in hostile takeovers). The second is the implementation of a scheme of arrangement, a court-approved regime governed by Chapter 5 of the CA (this is drive by the target). As takeover bids can be hostile, with the target company subject to multiple competing takeover bids, disputes often arise. Disputes which arise during the takeover period are heard by the Takeovers Panel, which is a peer review dispute resolution body composed of members with expertise in mergers and acquisitions. Its primary power is to make a declaration of ‘unacceptable circumstances’ to protect the rights of persons or groups (especially shareholders of the target company). Treasury has just released a consultation paper seeking feedback on: the operation of takeovers and schemes generally, and whether they are meeting the broader policy objectives in respect of control transactions in Australian law; the role of the Takeovers Panel and ASIC in regulating takeovers generally; and, the role of the Court, the Takeovers Panel, and ASIC in regulating schemes general. The CP is here, and is open for consultation until June 2022 — giving more powers to the Takeovers Panel is certainly a sensible move in my book, given the speed and efficacy with which it can operate.
  5. SLACIP Act (Parliament): the Security Legislation Amendment (Critical Infrastructure Protection) Act 2022 (SLACIP Act) has been passed, and . implements key elements of the Australia’s revised critical infrastructure framework, by seeking to: introduce an obligation for entities responsible for critical infrastructure assets to implement a critical infrastructure risk management program; and, impose enhanced cyber security obligations on entities responsible for critical infrastructure assets which are declared by the Minister of Home Affairs to be ‘systems of national significance’ . It is the second half of the Security Legislation Amendment (Critical Infrastructure) Bill 2020 (SOCI Bill), which was ultimately split into the SLACIP Act and first piece of legislation — the Security Legislation Amendment (Critical Infrastructure) Act 2021 (SLACI Act). A massive uplift to Australia’s cyber security laws, you can read more about these items of legislation in this update here.

Thought for the future: ASIC has multiple tough jobs, and one of them is licensing market participants with AFSLs and ACLs. When it allegedly gets that wrong, for example by not establishing someone is of ‘good fame and character’ it can expose the regulator to criticism and financial claims as this article in the Guardian shows. That is why it is critical, when dealing with licensing with the regulator, to get it right the first time. Delays, increased requisitions and potentially refusal can follow if not….

Australian regulators weekly wrap — Monday, 28 March 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

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. Crypto regulation (Treasury): the Treasury has released its consultation paper on Crypto asset secondary service providers: Licensing and custody requirements (Consultation Paper) raising 32 consultation questions in relation to crypto licensing and custody requirements. The Consultation Paper fulfils the government’s December 2021 commitment in its ‘Transforming Australia’s Payment System’ report, to develop a licensing and custody regime for digital assets, with advice to be provided to Government on policy by mid-2022. The Consultation Paper looks at proposals for a licensing regime for crypto asset secondary service providers (CASSPrs), custody obligations to safeguard private keys and seeks early views on the classification of crypto assets. CASSPrs will be: entirely separate to the AFSL regime; overlap with the key AFSL licensing obligations under s. 912A of the Corporations Act e..g ‘efficiently, honestly and fairly’; include a various recent Corporation Act obligations which sit outside the general licensing regime e.g. anti-hawking; and, adds some weird other thought bubbles, which seem like they have come from the ACCC’s battles with social media platforms e.g. obligation to respond to scams in a timely matter. In my view straight crypto shouldn’t be regulated as a financial product — at least on to this degree since is it broadly analogous to currency (FX providers trading spot do not need an AFSL)— expect me to say more on this in Gadens’ response to the consultation paper. There is so much to cover in this consequential paper, that I can only recommend you read it in full or our detailed article over on it here.
  2. Managed funds (ASIC): ASIC has commenced a surveillance into the marketing of managed funds, to identify the use of misleading performance and risk representations in promotional material. ASIC is scrutinising traditional and digital media marketing of funds, including search engine advertising, targeting retail investors and potentially unsophisticated wholesale investors, such as some retirees. ASIC has stated that it is concerned that, in the current highly volatile and low-yield environment, consumers seeking reliable or high returns are being misled about the performance and risks of the funds they are investing in.
  3. Safe harbour (Treasury): Treasury has released the final report of the Review of the insolvent trading safe harbour. The report concludes that the safe harbour protections offer considerable assistance in encouraging an active turnaround market, particularly for larger companies. However, the the report highlighted concerns as to the relevance and applicability of the safe harbour (and, indeed, the underlying prohibition on insolvent trading) to the SME market. It also recommends a holistic review of the insolvency regime, which I am all for — we are far less agile than our American cousins in this space.
  4. Finfluencers (ASIC): ASIC has published an information sheet about discussing financial products and services online. It outlines how the law applies to social media influencers, and the licensees who use them. In 2021, the ASIC young people and money survey found that 33% of 18–21 year olds follow at least one financial influencer on social media. The survey found a further 64% of young people reported changing at least one of their financial behaviours as a result of following a financial influencer. A timely and prudent update then, ASIC’s information sheet highlights activities where influencers may contravene the law if they are unaware of the legal requirements e.g. general advice; explains issues for influencers to consider e.g. whether an AFS licence is needed; and, reminds AFS licensees who use influencers to undertake the same governance and oversight they would for any other AR. e.g. DDO.
  5. Disinformation laws (Parliament): the Government will introduce legislation this year in an effort to combat harmful disinformation and misinformation online. The legislation will provide the Australian Communications and Media Authority (ACMA) with new regulatory powers to hold tech companies to account for harmful content on their platforms. ACMA will be given new information-gathering powers to incentivise greater platform transparency and improve access to Australia-specific data on the effectiveness of measures to address disinformation and misinformation. In addition, ACMA will be given reserve powers to register and enforce industry codes or make industry standards. A Misinformation and Disinformation Action Group will be established, bringing together key stakeholders across government and the private sector to collaborate and share information on emerging issues and best practice responses. All very interesting, though slightly Orwellian sounding stuff. As always, the devil will be in the detail here…

Thought for the future: for crypto and CASSPRs, how does the creation of an entirely new complicated licence regime to be housed within the Corporations Act 2001 (Cth) fit in with the ALRC’s simplification mandate!

Australian regulators weekly wrap — Monday, 21 March 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. CDR extension (Treasury): in January 2022, the Government announced that the Consumer Data Right (CDR) would expand to ‘Open Finance’ as the next sector to be assessed. A massive step for the financial services industry, phase 1 of Open Finance will include the assessment and designation of the non-bank lending sector, merchant acquiring services, and key datasets in the general insurance and superannuation sectors. Treasury has just released a consultation paper which invites feedback on the proposal to expand CDR to non-bank lending for the purpose of informing Treasury’s sectoral assessment report. A broad consultation paper, which does not have too much specifics beyond outlining the benefits of ‘open finance’, it is open for consultation under 12 April 2022.
  2. Financial advice review (Treasury): the Government is undertaking a review into the quality of financial advice. The review is designed to presents an opportunity to assess how the regulatory framework could deliver better outcomes for consumers. Amongst other things, the review will investigate: whether there are opportunities to streamline and simplify regulatory compliance to reduce costs and duplication; how to improve the clarity and availability of documents provided to consumers; and, whether parts of the regulatory framework have created unintended consequences. A report will be provided to the Government by 16 December 2022, and here’s hoping that it will contain some recommendations which help to rehabilitate a severely battered industry!
  3. CCIV (ASIC): ASIC has released a consultation paper seeking industry feedback on its proposed licensing requirements for corporate collective investment vehicles. The licensing requirements will come into effect on 1 July 2022 when the CCIV regime commences — you can learn more about CCIVs, the new challenger to MIS regime, in this article here. CP 360 contains proposals on a range of licensing-related matters, including how ASIC will: assess AFSL applications from corporate directors seeking to operate a CCIV; assess AFS licence applications from persons seeking to provide financial product advice on and/or deal in CCIV securities, and, administer the licensee obligations that will apply to CCIV corporate directors. Overall, the positions taken by ASICare sensible and seek to reduce the licensing burden. For example, AFS licensees will not have to apply to ASIC for a licence variation to provide financial product advice on and/or deal in CCIV securities if: they are licensed to provide financial product advice on and/or deal in securities, since their AFS licence already covers ‘securities’; and, they are licensed to provide financial product advice on and/or deal in ‘interests in managed investment schemes’, and consent to an ASIC initiated licence variation to include ‘securities in a CCIV’. Easily my top read for the week, submissions on CP 360 from close on 14 April 2022.!
  4. Reinsurance (APRA): APRA has released an updated prudential standard to manage risks associated with the growing use of offshore reinsurers by Australian life insurers due to commence from 1 July 2023. APRA now intends to amend LPS 117 to include limits on the recognition of eligible collateral, guarantees and letters of credit as risk mitigants in respect of APRA-approved affiliated offshore reinsurers. The revised LPS 117 includes a reduction in the minimum term for letters of credit to three years from five years. This minimum term must be met in order to be recognised as a risk mitigant for capital purposes.
  5. Market integrity rules (ASIC): ASIC has introduced new market integrity rules aimed at promoting the technological and operational resilience of securities and futures market operators and participants. The new technological and operational resilience rules that apply from 10 March 2023 relate to: change management; outsourcing; information security; business continuity planning; governance and resourcing, and trading controls (market operators only).

Thought for the future: the proposed review of trailing commissions for mortgage brokers that came after the Hayne Royal Commission will not go ahead, as the government said there was no systemic evidence of broker misconduct or consumer detriment stemming from the current remuneration structure. A good move in my view — Commissioner Hayne had some good, some neutral and some bad ideas and the sooner policymakers accept that the better…

Australian regulators weekly wrap — Monday, 14 March 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Youpla Group (ASIC): very unusual. Following the liquidation of one funeral fund, ASIC has written to the directors of Youpla Group to ask them to take immediate and public action to address concerns about the financial viability of ACBF 1, ACBF Plan and ACBF Community. Youpla manages four entities that provide funeral insurance products nationwide and ASIC said it had concerns about the other three funds. In particular, ASIC was concerned about members of ACBF 1, ACBF Plan and ACBF Community continuing to pay premiums when they may get little benefit from these products in the future. Administrators were appointed yesterday, however, the public intervention by ASIC into the financial position of a business is strange (and quite sharp).
  2. Corporate governance priorities (ASIC): ASIC Chair Joe Longo gave a speech at the AICD Australian Governance Summit on ASIC’s corporate governance priorities. He singled out: 1) governance failures relating to non-financial risk that result in significant harm to consumers and investors e.g. directors failing to identify and manage the risk attaching to a company’s business activities; failing to ensure that appropriate resources are allocated to deal with risks; or failing to respond to indicators that risks are not being properly managed; 2) cyber governance and resilience failures. Mr Longo referred to the proceedings brought by ASIC against RI Advice Group, where wherin ASIC allegs that it failed to have adequate policies, systems and resources to appropriately manage risk in respect of cyber security and cyber resilience; and, 3) egregious governance failures or misconduct resulting in corporate collapse. This includes instances where company money, or money belonging to company creditors, is misapplied or misappropriated. He also singled out other issues relating to non-financial risk that ASIC is considering, being include cyber resilience and climate-related disclosure, including misleading marketing or ‘greenwashing’ by listed entities.
  3. Liquidity (APRA): APRA has released a discussion paper to ADIs and other interested stakeholders advising of APRA’s post-implementation review of the Basel III liquidity reforms. The Basel III liquidity reforms were introduced eight years ago in Australia, with the commencement of the revised Prudential Standard APS 210 Liquidity in 2014. The two core measures of the reforms, the Liquidity Coverage Ratio and the Net Stable Funding Ratio, became effective from 2015 and from 2018 respectively. The LCR requires banks to hold high quality liquid assets at least equal to an estimate of short-term net cash outflows under a stress scenario, to build resilience to liquidity shocks. The NSFR requires banks to maintain an amount of available stable funding at least equal to their required stable funding, to promote sustainable funding structures. The consultation paper seeks to determine how efficiently and effectively the Liquidity Coverage Ratio and Net Stable Funding Ratio are achieving their objectives. The discussion paper requests responses by 14 April 2022.
  4. ePayments (ASIC): ASIC has published a report, Report 718: Response to submissions on CP 341 Review of the ePayments Code: Further consultation (REP 718), on updates to the ePayments Code. REP 718 follows the release in May 2021 of Consultation Paper 341 Review of the ePayments Code: Further consultation (CP 341), which sought feedback on proposed updates to the Code. The ePayments Code provides important consumer protections in relation to electronic payments, including ATM, EFTPOS, credit and debit card transactions, online payments, and internet and mobile banking. For example, there is a general principle in the Code that banking customers will not be liable for unauthorised transactions on their accounts if they have taken reasonable steps to protect their accounts. ASIC’s report also relates primarily to updates in the following areas of the Code: compliance monitoring and data collection; mistaken internet payments; unauthorised transactions; complaints handling; and, facility expiry dates. ASIC’s present aim is to publish an updated Code in April 2022. A transition period of 12 months will apply.
  5. CDR (Treasury): Treasury and the Data Standards Body are seeking input on the development of rules and standards to implement the CDR in the telecommunications sector. While CDR is supposed to be sector agnostic, and the general rules for CDR will be adhered as set out in the paper e.g. rules relating to eligible data recipients or dispute resolution or privacy standards, the paper seeks to identify areas where sector-specific rules and standards are needed to effectively apply the regime to telecommunications entities, and to design these in a way that is aligned with existing sectoral arrangements, seeking to minimise costs for participants. The consultation paper, which is open for feedback until 29 March 2022, is available here.

Thoughts for the future: 21 May 2022 is the latest the Federal election can be held. The following bills are awaiting passage before the election: Financial Accountability Regime Bill 2021; Corporations Amendment (Meetings and Documents) Bill 2022; National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020; Financial Services Compensation Scheme of Last Resort Levy Bill 2021. Expect to see many get through at the end of March, when both houses sit again — a number of these bills have partisan support e.g. FAR and CSLR.

Australian regulators weekly wrap — Monday, 7 February 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Advice update (ASIC): ASIC has released a consultation paper setting out its proposals to update Regulatory Guide 263 Financial Services and Credit Panel (RG 263) to reflect legislative changes in the Financial Sector Reform (Hayne Royal Commission Response — Better Advice) Act 2021. In December 2020, the Government announced that it would expand the operation of the FSCP to give effect to Recommendation 2.10, which called for a single, central disciplinary body to be established for financial advisers. The Better Advice Act gives effect to this recommendation by giving the FSCP its own legislative functions and powers. These functions and powers enable the FSCP to address a range of circumstances and misconduct, including less serious misconduct, by financial advisers. The CP set out the types of matters to be referred to a sitting panel, appeals to decisions and process questions. A sensible move in my opinion-ASIC needs to rely more on industry experience where appropriate / feasible-it is open for submissions until 28 March 2022.
  2. Digital platforms (ACCC): the ACCC will consider whether there is a need for a new regulatory framework to address the competition and consumer concerns identified in digital platform services markets to date. The ACCC released a discussion paper to seek stakeholder views on: whether there is a need for new regulatory tools to address competition and consumer issues in relation to the supply of digital platform services; and, if reform is needed, options for regulatory reform. The discussion paper includes a list of specific questions for stakeholders about these options which are due 1 April 2022. For example, “Do you consider that the CCA and ACL are sufficient to address competition and consumer harms arising from digital platform services in Australia, or do you consider regulatory reform is required?” With such a broad scope, this is one of the bigger consultations happening at the moment!
  3. Climate risk survey (APRA): the prudential regulator has released a cross-industry letter to advise on the purpose and timing of a voluntary climate risk self-assessment survey with medium-to-large APRA-regulated entities. The survey is intended to improve both APRA’s and industry’s understanding of the approaches being taken by APRA-regulated entities to identify, assess and manage climate-related financial risks. In particular, the survey is designed to gather insights on how entities are managing these risks, using APRA’s Prudential Practice Guide CPG 229 Climate Change Financial Risks which it released late last year.
  4. Cyber risk (ACSC): Australian Cyber Security Centre has released an unusual warning, encouraging Australian firms to urgently adopt an enhanced cyber security position. It states that: ‘Organisations should act now and follow ACSC’s advice to improve their cyber security resilience in light of the heightened threat environment… Following the attack of Ukraine, there is heightened cyber risk globally, and the threat of cyber attacks on Australian networks, either directly or inadvertently, has increased. While the ACSC has no specific intelligence relating to a cyber attack on Australia, this could change quickly.’ You can read more on the website here — my top read of the week — which is very prudent in my view. In my practice, I am seeing more cyber attacks on financial institutions and OAIC are watching…
  5. Short term credit (ASIC): ASIC has extended Class Order [CO 14/41] for a further two-year period to 1 April 2024. The class order relieves credit providers and lessors from the obligation to provide written notice to consumers about hardship contract variations of 90 days or less. The relief was due to expire on 1 March 2022 and has been extended by ASIC Credit (Amendment) Instrument 2022/81.

Thought for the future: enhanced breach reporting. It is just not achieving the objectives it was created for in my view, and instead increasing the burden on financial services institutions unnecessarily. We have (with Lawcadia), for that reason, commissioned independent research from CoreData to examine the framework and the impact on the industry — it may help in rolling back some of the more onerous provisions. Please get in touch if you wish to participate — naturally all answers are confidential, and it will take 5 mins.

Australian regulators weekly wrap — Monday, 28 February 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

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. Ransomware (Parliament): on 17 February 2022, the Crimes Legislation Amendment (Ransomware Action Plan) Bill 2022 was introduced into the House. The bill amends the Criminal Code Act 1995, the Crimes Act 1914 and the Proceeds of Crime Act 2002 to updated criminal offences and procedures to respond to the threat of ransomware. It introduces a standalone cyber extortion offence, which will criminalise the extortive conduct associated with ransomware; an aggravated offence relating to cyber attacks on critical infrastructure assets as defined under the Security of Critical Infrastructure Act 2018; a standalone offence of dealing with data obtained by unauthorised access or modification; and, an aggravated offence criminalising producing, supplying or obtaining data under arrangement for payment. In relation to crypto currency, it extends the powers of existing law enforcement agencies to ensure they have the appropriate capabilities to investigate the use of, and ability to seize, these digital assets. This includes ensuring that existing information gathering powers and freezing orders available in relation to financial institutions are applicable to digital currency exchanges. Interestingly, the Bill does not make the payment of a ransom as such illegal.
  2. Electronic signing (Parliament): the Corporations Amendment (Meetings and Documents) Bill 2021 (Cth) is now in effect. Companies can execute documents in electronic form and using electronic means, and importantly this extends to deed. An individual agent can execute documents (including deeds) on behalf of companies under s. 126. Witnessing and delivery is not required. The agent can also sign documents in electronic form and using electronic means. If a company executes a document through an agent under s. 126, a person will be able to rely on the assumptions in s. 129(3) for dealings and transactions in relation to the company. Sole director companies can use the statutory document execution means — a long overdue, and very welcome change!
  3. CDR (Treasury): on 14 February 2022, Minister Hume announced the commencement of a statutory review on the operation of the Consumer Data Right. The review is initiated under section s. 56GH of the Competition and Consumer Act 2010 and will explore the extent to which implementation of the CDR statutory framework supports the core policy objectives of driving value for consumers, increasing competition within designated sectors, and driving innovation across the data services sector. The terms of reference for the review are here.
  4. General insurance quotes (ASIC): ASIC has remade Class Order [CO 11/842] PDS requirements where a quote for a general insurance product is given, for a further five years. ASIC Corporations (PDS Requirements for General Insurance Quotes) Instrument 2022/66, continues to provide relief to address the practical difficulties for general insurers in giving a PDS to a consumer during a phone call. It facilitates insurance quotes being given to consumers over the phone, enabling consumers to easily compare.
  5. Crypto (UK): the FCA is planning to bring ‘qualifying crypto assets’ into its financial promotions regime. It will adopt the UK government’s definition of ‘qualifying crypto assets’ (as confirmed in its consultation response of 18 January 2022). It should release its rules in mid 2022. The regime will capture local and international promoters, and subject them to the standard requirements which deal with who can issue a promotion, the format and substantive content of materials, and how risk is expressed. Unregulated firms will need to prepare for a higher level of regulation, and operational changes. Interestingly, like in Australia, this will create a somewhat fragmented regulatory structure for crypto firms operating in the UK as this level of regulation does not cover the entire product itself — only a narrow subset such as investments and speculative trade as ‘qualifying crypto assets’.

Thought for the future: the regulation of crypto is increasing globally, so much is clear. The US, UK and Australia are all very much feeling their way through the landscape at the moment, and adding pieces of regulation on — there is no wholesale licensing requirements as yet. That is a good thing in my view — overregulation is easy in terms of policy, but not in anyone’s overarching interest.

Australian regulators weekly wrap — Monday, 21 February 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. FAR (Senate Report): the Senate Economics Legislation Committee has completed its report into the Financial Accountability Regime Bill 2021. The Committee has recommended that the bills be passed, complete with civil penalties introduced in the FAR regime (despite appreciable lobbying to the contrary). Both houses sit again in late March 2022, so expect the legislation to go through then. For a practical overview of FAR, and some of the implementation issues affected entities will need to contend with, please do sign up to this webinar on 2 March 2022 here.
  2. Compliance risk (APRA): the prudential regulator has released an information sheet called ‘How to manage compliance risk and stay out of the headlines’ noting that ‘[c]ompliance risk has traditionally been the poor cousin of longer-established risks to financial services organisations, such as credit and market risk. But that’s no longer true.’ Key messages were that well-documented approach to compliance risk management supports an APRA-regulated entity’s operations, and that APRA’s recent work indicates that entities need to: 1) have a clearly defined approach to managing compliance risk; 2) have established processes to support compliance risk management practices; and, 3) specify clear accountability for managing compliance risk. This information sheet is quite timely, as these issues can and should be baked into FAR implementation for organisations.
  3. Opening statement (ASIC): there were a few interesting points in the ASIC Chair’s opening statement to the Senate Economics Legislation Committee Additional Estimates Committee. Leaving aside the expected talk on increased enforcement, Mr. Longo mentioned the establishment of a Regulatory Efficiency Unit (REU) to promote better regulation by removing unnecessary frictions and making it easier for business to get things done. The REU — which is a great idea to me — will identify a set of initiatives this year that aim to improve the efficiency of ASIC’s interactions with its regulated population. He also stated that ESG and crypto and cyber-resilience have been three areas of focus that will ‘no doubt remain of the highest order this year.’ Finally, in what is a nod to the changing face of enforcement, he said that ASIC will be seeking remedies that deliver quicker outcomes, in cases that are chosen more carefully, following investigations that are more timely. Expect that to mean more reliance on ASIC’s new tools e.g. PIP power (and FAR in due course).
  4. Legislative instruments (ASIC): ASIC is seeking industry feedback on proposals to remake relief contained in seven legislative instruments relating to specific financial services disclosure requirements through a consultation paper released today. They relate to PDS in-use notices for employer-sponsored superannuation, product dashboard disclosure, shorter PDSs and PDS obligations for superannuation trustees, IDPS operators and responsible entities of IDPS-like schemes. They also relate to the issuance of Financial Services Guides in time critical situations. Some necessary house cleaning to my mind, on instruments regularly you can read more about these instruments here.
  5. Financial reports (ASIC): between 1 July 2021 and 31 December 2021, ASIC prosecuted seven companies for failing to comply with their obligations to lodge financial reports and hold annual general meetings (AGMs) in the required timeframes. My top read for the week, most of the failures related to periods where financial reports were failed to be reported over the course of years. ASIC has stated that it will continue to prosecute companies that systemically fail to comply with their financial reporting obligations.

Thought for the future: the UK FCA announced a plan in 2021 to be a more ‘innovative, adaptive and assertive, data led regulator’. Since whatever the FCA does, ASIC follows closely, it is worth a look at how the FCA performed in this infographic. One of the interesting points I picked out was the money spent on advising customers on high risk investments, which ASIC itself has done in recent months. I am not entirely comfortable with this — regulators are not commercial or financial advisers, and this feels like quite a subjective foray…

Australian regulators weekly wrap — Monday, 14 February 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. CCIV (Parliament): the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 finally passed Parliament on 10 February. The CCIV regulatory framework utilises a company structure limited by shares so that it is recognisable to offshore investors and fund managers. As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified. Features of the MIS regime have also been incorporated into the design of CCIVs . For example, a CCIV must have share capital but the CCIV can issue some or all of its shares as being redeemable at the member’s option. This feature is similar to a member’s right to withdraw from a registered scheme. Further, while other types of companies are required to appoint natural person directors, a CCIV must have a single corporate director. The CCIV tax framework provides flow-through tax treatment for investors. It achieves this by leveraging the existing trust taxation framework and the existing attribution flow-through regime (i.e., the new tax system for MITs, or the AMIT regime), rather than by creating a new bespoke tax regime. The general intent is that the tax outcomes for an investor in a sub-fund of a CCIV be the same as an investor in an AMIT. This is an incredibly important development in the funds management landscape, and one we will be writing more about in the weeks to come!
  2. Litigation funding (Senate): the Senate Economics Legislation Committee has released its report into Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021. The legislation implements the government’s response to the report of the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into litigation funding and the regulation of the class action industry by amending the Corporations Act 2001 to establish a new kind of managed investment scheme called a class action litigation funding scheme, and introduce additional requirements for the constitutions of managed investment schemes that are class action litigation funding schemes. An interesting read on a highly divisive topic (proponents say that it reigns in litigation funders taking disproportionate profits from litigation, detractors say that it reduces access to justice), the committee ultimately recommended the passing of the legislation with minor amendments and a review in three years time. The Labor members of the Committee dissented, citing the constitutionality of the legislation. Expect legal challenges next if this gets passed prior to the election.
  3. FAR (Parliament): Parliament has resumed, and the calendar is here. The house sitting sitting next week, and the Senate is only sitting again in late March 2022. With a Federal election around the corner, expect things to be busy and the Financial Accountability Regime legislation (summary here) to be through by the end of March 2022.
  4. Reinsurance pool (Parliament): the Government has finished the design of the reinsurance pool for cyclone and related flood damage, following consultation on the draft legislation. It will be backed by a $10 billion annually reinstated Commonwealth guarantee and be administered by the Australian Reinsurance Pool Corporation from 1 July 2022. Over 880,000 residential, strata and small business property insurance policies in northern Australia are expected to be eligible to be covered by the reinsurance pool for the risk of cyclone and related flood damage. The pool is expected to reduce insurance premiums by up to $2.9 billion for eligible household, strata and small business insurance policies over 10 years. A sensible move in my view, given the (understandable) inflation in insurance premiums in the climate-change impacted area. Now for D&O and PI premiums, in a market that has become inaccessible for many!
  5. Banning order (AAT): ASIC’s banning and disqualification from 2015 of former Provident Capital director, Michael Roger O’Sullivan, has been upheld by the AAT — though reduced. ASIC tends to struggle in the AAT, and this decision will do little to dislodge that perception. ASIC sought to ban him from providing financial services for seven years and disqualified from managing corporations. However, the AAT reduced the period of O’Sullivan’s disqualification from managing corporations from five years to two years and nine months. The Tribunal found that Mr. O’Sullivan failed to exercise due care and diligence in relation to the management of the largest loan (the Burleigh Views Loan) made by Provident Capital Limited (PCL), by deciding to accrue interest on that loan as earned and recoverable income rather than characterising that loan as being in arrears; made inadequate disclosures or misleading statements in a prospectus and information booklets regarding debentures issued by PCL; made inadequate disclosures or misleading statements regarding the Burleigh Views Loan in reports to the debenture trustee, Australian Executor Trustees Limited (AETL); was involved in PCL making inadequate disclosures or misleading statements to AETL about the status of the Burleigh View Loan, the status of the development approval, the valuation information about the property, and the risk of a debt shortfall on any realisation of the property; and, failed to exercise due care and diligence and used his position improperly to gain advantages for himself in securing the release of a personal guarantee he had provided for a loan from PCL to a related company, Cashflow Finance Solution, of which he was a director.

Thought for the future: we have a very sophisticated, and capable funds management industry in Australia — it is domestically focused though. The CCIV regime is going to be excellent to attract international capital inflows, and I think it is an excellent move by the Government.

Australian regulators weekly wrap — Monday, 7 February 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. APRA priorities (APRA): the prudential regulator has released its policy and supervision priorities for the next 12 to 18 months. Policy priorities for 2022 include: a major multi-year initiative to modernise its prudential architecture; improving crisis preparedness, including finalising two new prudential standards on contingency and resolution planning; implementing the bank capital reforms that were largely finalised in 2021, to embed “unquestionably strong” capital ratios and the Basel III reforms; strengthening core requirements for strategic planning and member outcomes in superannuation, to align with and reinforce the Government’s Your Future, Your Super reforms; and, completing comprehensive reforms to the insurance capital standards, primarily to ensure they align with the new accounting standard AASB17. You can read the paper here.
  2. Senate economics committee — FAR (Parliament): on 27 January 2022, the Senate Economics Committee met to discuss the FAR bill. There was less coverage on the FAR proposals than Compensation Scheme of Last Resort (see below); however, CHOICE, who had the largest submission, made some recommendations regarding FAR. CHOICE had recommended reintroducing civil penalties into the FAR bill, as was initially proposed by the Ramsay Report in 2015. The Committee had concerns; one concern was authorised persons indemnifying themselves from the company or insurance to cover the cost of the civil penalty. This means the cost is borne by the shareholders (not executives). CHOICE argued that it would still be a significant individual deterrent as the industry would consider a civil penalty a black mark against that executive’s name. Further, indemnification could be legislated against, as notably the Corporations Act already has carveouts for what behaviour indemnities can cover. Some submissions addressed amendments to the proposal of deferred remuneration, hoping for increased punitive measures for variable remuneration. Senator Scarr raised the issue that Executives will simply increase their base pay, which then has the effect of less incentive to adhere to the guidelines (because there are fewer financial consequences for malfeasance). It was submitted that short and long term incentives are there to drive the correct behaviour (align senior executive’s performance with the company overall). In response, CHOICE went back to the issues that have caused the creation of the legislation: those short-term incentives encourage behaviour to fulfil short-term performance metrics. Deferred Remuneration in FAR would not seek to ban, just be clawed back when breached, similar to the approach taken in the UK. ASFA also had submissions relating to deferred remuneration under FAR, arguing that the current regulations under CPS 511 do not align with the proposal in the bill. Noting that, CPS 511 is being reviewed this year but pointing out that one takes a backward-looking approach and the other forward-looking approach. ASFA recommended that the legislation comes into line with CPS 511. APRA’s submission was published and is here, which stated: ‘The BEAR has been a key regulatory lever for APRA to drive action by ADIs through the identified accountable persons and to transform governance, risk culture, remuneration and accountability outcomes across the banking industry. APRA uses the BEAR in its day-to-day supervision to influence preventative or remedial action to be taken by ADIs and accountable persons well before there is a threat to the ADIs’ financial viability. APRA has seen positive outcomes from the BEAR and supports the broadening of the regime to all APRA-regulated entities. This will extend the coverage of an accountability regime aimed at improving risk and governance cultures from 143 ADIs under the BEAR to approximately 435 entities under the FAR.’
  3. Senate economics committee — FAR (Parliament): the Committee also considered the CSLR, which took up more time. The submissions repeatedly addressed the narrow scope of the CSLR, namely the exclusion of Managed Investment Schemes. This was raised in almost all submissions for that sub-sector’s responsibility in creating ‘Black Swan’ events which have financially impacted some Australians. The scheme, at present, is limited mainly to financial advice. In response, the Committee raised the question that the scope of the current scheme was broader than that proposed in the Ramsay Review & Financial Services Royal Commission. CHOICE CEO Alan Kirkland, a member of the 2015 Ramsay Review, raised the point that the bill is narrower in several key areas such as compensation caps and the lack of consideration of Court and Tribunal decisions for consumer compensation. Yet Mr Kirkland agreed that a greater cross-section of sectors are subject to the proposed bill, and this is because there have been several issues coming to light in those sectors since then. The number of Australians who would be left vulnerable without the coverage of Managed Investment Schemes is challenging to quantify as it was the second-most under covered sector in Ombudsman’s reports, and CPA Australia’s data had the sector as the second biggest contributor to claims. Given the broad customer base of many of these schemes, Senator Chisolm questioned the possibility of a moral hazard, but this was rejected out-of-hand on the basis that in all case studies, consumers do not have a grasp on the complex legislation and investing in a Managed Investment Scheme is a ‘big leap of faith’. It was put to the Financial Planning Association by Senator Scarr that the procurement of financial advice could be mandated for Managed Investment Schemes because of his involvement in reviewing the Sterling First Collapse. While the body welcomed the procurement of financial advice, it admitted mandating it is a significant step to take. However, it did say increased financial education for the community would aid this because consumers would learn the risks of the scheme and, more importantly, the complexity that encourages them to seek financial advice. Questions were also raised about the exclusion of Debt Management Firms. The Committee wanted to know the reasons behind the submissions to include Debt Management Firms. In response, CHOICE noted that despite the relatively small claim size (e.g. $10,000-$15,000 per person), the class of persons subject to the scheme means a cost of this amount has a devastating financial impact. As the scheme is for last resort instances only, the Committee first attempted to clear up the other ways in which victims can recover before accessing the CSLR. Senator Bragg raised a hypothetical that pointed to how the CSLR functions. Is the first port of call insurance, the licensee or regulators? The answer is that the firm must pay the order of compensation. The firm is legally required to store enough cash. So, the first port of call is the owner. Then this can be indemnified by insurers, and additional regulatory action may be taken. The structure of the compensation pool is such that sectors with higher levels of claims have a greater proportion of the contribution. Notably, different interest groups took a different attitude towards the structure of the pools. CPA Australia, for example, held the belief that the broader the pool, the greater the impetus for the financial services industry to take a shared responsibility. Senator Scarr asked the question that he said many stakeholders were interested in: how do we protect sectors or sub-sectors doing the right thing? How do we ensure that fly-by-night operators do not enter the sector and leave everyone else to pay? It was responded that the scheme is subject to caps for individual instances, several claims will be significantly below the caps, and the bill proposes a $250 million annual cap on payouts as a whole which the Minster has the power to change. Furthermore, it is critical to legislate the floor of the behaviour correctly; then, the scheme would only kick in if the firm was unable to pay (i.e. disappears or insolvent). ASFA’s Black Swan event levy proposal could also ease the burden in periods where there are no claims. Senator McDonald raised the issue of regulatory creep to superfunds who currently are outside the scheme. Stakeholders responded by saying that levies are payable by each subsector and superfunds are not presently defined as a subsector however, there is the risk of increased cost to financial advice sectors that could be passed on to superfunds when seeking advice. Market-driven factors which prevent the payout of insurance claims, such as excesses exceeding claims payouts, meaning the victim does not receive compensation — present a risk to the effectiveness and feasibility of the scheme. John Maroney of the SMSF Association believes this is a regulatory question to ensure licensees have adequate cover, even proposing an annual insurance declaration. The Government’s current review into professional indemnity insurance was supported, advocating for fit-for-purpose professional indemnity policies and insurance pools based on jurisdiction to ease cost in areas that are not claiming. CHOICE recommended a broad definition of when a firm cannot pay the scheme should be allowed to step in where AFCA orders compensation. The scheme should step in, for example, when the consumer paid out under insolvency did not get paid out because of an excess in a firm’s professional indemnity insurance policy. For the scheme to be feasible, insurers need to play a role in subsiding the scheme by providing proper coverage and claims payouts; if insurers fall back on the CSLR, it will become too costly. In response, the SMSF Association submitted that this would require greater regulatory coverage.
  4. Information matters (OAIC): the privacy regulator has released a paper outlining its regulatory priorities for the year ahead. It has stated that its collaboration and joint regulatory actions with international regulators will remain central to ensure Australians’ data is protected wherever it flows, and that it will be active in forums such as the Global Privacy Assembly, Asia Pacific Privacy Authorities Forum and International Conference of Information Commissioners. It also plans to focus on collaboration with domestic regulators will as it co-regulates the Consumer Data Right with the ACCC, and prepare for an Online Privacy Code following the government’s release of the Privacy Legislation Amendment (Enhancing Online Privacy and Other Measures) Bill 2021. Finally, OAIC stated that it will continue to support government agencies to reduce freedom of information (FOI) applications through proactive publication and through its resources to support good decision making. OAIC’s priorities have been set out to: ‘advance online privacy protections, influence and uphold privacy and information access rights frameworks, encourage and support proactive release of government information, and operate as a contemporary regulator’
  5. Responsible entity governance review (ASIC): ASIC has released findings from a high-level review of the governance practices of 10 large responsible entities of managed investment schemes. ASIC undertook the review to explore specific aspects of responsible entity governance and gain some early insights. Some of the key findings were: 1. Five of the 10 responsible entity boards had a majority of executive directors and one board had an equal number of executive and non-executive directors. Six boards had a majority of non-independent directors. 2. The average length of tenure for a director across the 10 responsible entities was approximately 4.5 years. 3. A director held on average 6.7 additional roles that were external to the responsible entity, including directorships and committee positions at other entities (including entities in the same corporate group as the responsible entity). The average estimated time commitment for a director’s external roles was 10.1 days per quarter. 4. Eight of the responsible entities obtained all of their staff resources from other entities in the same corporate group. These eight responsible entities did not employ their own staff. 5. The responsible entities had documented delegation and reporting frameworks. 6. The number of outsourced service providers the responsible entities engaged during the relevant period ranged from five to over 150. The responsible entities had arrangements to monitor outsourced service providers. 7. The responsible entities demonstrated an awareness of managing conflicts of interest.

Thought for the week: some dense wording on the Senate Economics Committee deliberations regarding FAR and CSLR this week! Important though, to my mind — there was a sense in some quarters that the ancillary civil penalties would be rolled back. That is clearly not going to happen, and I think that the FAR in its present form is likely to be passed imminently. Now banks, insurers and super funds need to turn to implementation, which is much more practically difficult than might be thought. We are running a practical session on FAR implementation on 2 March- for those interested, sign up here!

Australian regulators weekly wrap — Monday, 31 January 2022

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Electronic surveillance laws (Home Affairs): the Government has released the Reform of Australia’s electronic surveillance framework discussion paper. The discussion paper seeks early views to inform the development of a new framework, and provides an overview of how the Government proposes to reform Australia’s electronic surveillance legislative framework. The protection of, and access to, private information and data by law enforcement is governed by a range of legislation. The reform project aims to repeal the TIA Act, SD Act and relevant parts of the ASIO Act, and replace the current patchwork of laws with a single, streamlined and technology neutral Act. The discussion paper is broken up into four areas of focus for the Government. Part 1: Who can access information under the new framework?; Part 2: What information can be accessed?; Part 3: How can information be accessed? Part 4: When will information be accessed? Submissions close on 11 February for what in my view is a very sensible project. The current has really struggled to keep pace, and it shows in the number of amendments made and the hodgepodge of application legislation….
  2. Corporate criminal liability (ALRC): The ALRC’s eighth recommendation in its Corporate Criminal Responsibility Report was that ‘the Australian Government should introduce offences that criminalise contraventions of prescribed civil penalty provisions that constitute a system of conduct or pattern of behaviour by a corporation’. The ALRC recommended the enactment of this system of conduct offence in specific regulatory contexts as an adjunct to ordinary criminal offences (such offences being applied to corporations through methods of attribution). Now we are starting to see some excellent papers from Walpole and Corrigan, both at the ALRC, on how this could occur. The article is here — my top read for the week — wherein the authors argue that: “…the enactment of a novel type of offence tailored to corporations, and targeting corporate systems of conduct and patterns of behaviour, would enhance the law’s ability to respond to contemporary corporate misconduct”. Provided it is properly calibrated, and the ALRC stays away from using the BEAR/FAR framework to attribute criminality (its original thought bubble), I agree.
  3. Scammers (ACCC): the ACCC has released an updated ‘The Little Black Book of Scams’ for consumers and small businesses to learn about scams including: the most common scams to watch out for; the different ways scammers can contact you; the tools scammers use to trick you; the warning signs; how to protect yourself, and where you can find help. An excellent resource by the ACCC, I think the general admonitions at the back on the ‘anatomy of a scam’ are particularly well done.
  4. Business introduction (ASIC): ASIC is seeking feedback on proposed changes to the relief for business introduction services. [CO 02/273] Business introduction and matching services, gave conditional relief from the fundraising, financial product disclosure, hawking and advertising requirements in the Corporations Act 2001 that would apply to a person making or calling attention to offers of securities or interests in a registered managed investment scheme through a business introduction service. That relief is due to expire on 1 April 2022. Consultation Paper 357 Remaking relief for business introduction services: ASIC Instrument 2017/186 (CP 357) includes proposals to: extend the relief for interests in managed investment schemes to 1 April 2025; amend the relief to update and clarify that the design and distribution obligations apply to business introduction services; allow the relief for Ch 6D securities to expire, and require persons who rely or cease to rely on the relief from 1 April 2022 to provide notice to ASIC.
  5. US digital currency (US): the US Federal Reserve Board has released a discussion paper titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation examining the pros and cons of a potential U.S. central bank digital currency. The Federal Reserve has stated that the Discussion Paper does not favour a particular policy outcome. Rather, the Federal Reserve hopes to begin a dialogue about whether and how to implement a CBDC. We are ahead of our US cousins, thanks for Senator Bragg’s excellent report (see recommendations here). Now to see them put into action though!

Thought for the future: there is a lot happening this in terms of regulatory developments, as January 2022 has demonstrated. This resource here — updated twice a week — is a good update / calendar service for busy risk, compliance and legal professionals to make sure their planning is complete.