Australian regulators weekly wrap — Monday, 19 September 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 (Parliament): the FAR bill is in Parliament, and will pass in the Spring sitting (which ends in December 2022). See here for details. The Government is now seeking stakeholder views on the Minister Rules. The Minister Rules prescribe: particular responsibilities and positions which cause a person to be subject to the FAR in the banking, insurance and superannuation sectors; the enhanced notification threshold, which is the total asset size above which an entity is required to comply with additional notification obligations; and, the way that a written record can be authenticated in a proceeding as prima facie evidence of the statement it records. Some big changes in here on my first review — we are summarizing now, and will issue a more detailed briefing shortly — including the fact that the problematic product role isn’t in here. That in itself is a reason for celebration, and a lowkey rolling back of the Hayne Royal Commission recommendations (which, while picked up by APRA, were deeply fraught).
  2. CASSPr (Crypto): Senator Andrew Bragg announced at the Australian Crypto Convention today that he will be releasing a draft bill for a 6 week consultation to legislate components of CASSPrs, digital assets and stablecoins (including CBDCs). You can read more about CASSPrs — essentially mutated AFSLs — here. Senator Bragg noted that part of the push was to shame the Government into doing something. Fair play. The token mapping exercise is great, but as I have been saying it does not mitigate the fact that we need clear rules to support our crypto businesses as the UK and US is furnishing.
  3. James Mawhinney (ASIC): the Full Federal Court has allowed an appeal by James Mawhinney to overturn a 20-year ban restraining him from advertising investments and raising funds from the public through financial products. In essence, Mr Mawhinney was denied procedural fairness because ASIC had not sought certain findings of contraventions, but the primary judge made and relied on those findings in making the restraining order. The original injunctions against capital raising remain. The backstory to this saga is that, in March 2021, the Court found Mayfair Wealth Partners Pty Ltd and related entities engaged in misleading or deceptive conduct and made false or misleading representations when promoting the M+ and M Core Fixed Income Notes. Mayfair 101 Group products were advertised in newspapers, on websites and via Google search advertising, when potential investors searched for terms such as ‘bank term deposits’ and ‘best term deposit’. One of the most high profile battles ASIC has had in recent times, this one does not feel over just yet…
  4. Prudential architecture (APRA): APRA has outlined plans for its multi-year program to modernise the architecture of prudential standards and guidance for banks, insurers and superannuation funds. The program is intended to ensure the framework continues to underpin financial safety and stability in a rapidly changing economic and technological environment. APRA will achieve this through a series of initiatives focused on: better regulation — ensuring prudential standards and guidance are easier to navigate, understand and implement; digital first — exploring how to use technology to support better regulation; and, new risks, new rules — developing new approaches to tackle emerging risks and new business models on the regulatory perimeter. With over 140 prudential instruments, some of which are tricky to understand in practice (I am looking at you, CPS 511), I think this is a great initiative from the prudential regulator.
  5. OTC derivatives (ASIC): ASIC has remade class order [CO 12/752] Financial requirements for retail OTC derivative issuers which was due to sunset on 1 October 2022. Under the instrument, retail OTC derivative issuers must: meet a net tangible asset requirement where the licensee must hold the greater of $1M or 10% of average revenue; prepare, each quarter, projections of cash flows over a 12-month period based on their reasonable estimate of revenues and expenses over that term; meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets, comply with financial trigger point reporting obligations if licensees fail to hold the required NTA. You can read the instrument here, which is a sensible move by the corporate regulator for a system which is working.

Thought for the future: Senator Bragg’s legislation is likely to be dead on arrival, given the Labor Government. Still, as he acknowledged, it will be a form of pressure. I agree with the move, and hope he succeeds in taking the regulatory discussion forward in this area.

Australian regulators weekly wrap — Monday, 12 September 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 (Parliament): IT. IS. FINALLY. HERE. AND. I. AM. EXCITED! This week, the Federal Government introduced the Financial Accountability Regime Bill 2022 (Cth). The bill reintroduces the Financial Accountability Regime Bill 2021 (Cth), which was introduced by the previous Government but lapsed with the calling of the federal election in April. The new bill is identical to the previous iteration (with the exception of new commencement dates) and implements a number of recommendations from the Financial Services Royal Commission. You can read more in our update here, which also contains a number of our past updates. In summary, the bill introduces a new accountability regime for the banking, insurance and superannuation industries. The regime is designed to improve the risk and governance cultures of financial institutions by imposing a strengthened responsibility and accountability framework for those institutions and the directors and the most senior and influential executives (accountable persons) of those institutions. They are personally responsible for conduct failures in their divisions e.g. “honesty, integrity, due skill, care and diligence”, unless they take reasonable steps. There are ancillary financial liability provisions for those who aid and abet breaches. If passed, the regime will apply to the banking industry six months after commencement (March 2023), and to insurance and superannuation industries 18 months after commencement (March 2024). Make no mistake, FAR is absolutely THE most consequential change to the Australian financial services regulatory regime in a generation and takes a good amount of time to implement (we are assisting a number of insurers and super funds now). Do begin your preparations early, and if you want to arrange a free training session to get the benefit of our insights since 2015 (counting FAR’s UK forerunners), please reach out directly to me!
  2. CSLR (Parliament): Legislation to establish the financial services Compensation Scheme of Last Resort, was also introduced into Parliament on 8 September 2022. The CSLR is a proposed scheme that will provide compensation to eligible victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent. Again, the legislation hasn’t materially changed. What is interesting, is that the Government has released a draft consultation paper on the proposed regulations for comments. The draft regulations specify matters relating to the CSLR operator’s reporting requirements and identify persons upon whom a levy will be imposed. The draft regulations also outline the methods that underpin the calculation for the amount of levy payable and how they differ based on the type of levy being imposed. Technical stuff, but what is worth noting is that those payments to AFCA will increase.
  3. Crypto taxation (Parliament): in June, the Government announced it would introduce legislation to exclude crypto assets such as Bitcoin from being treated as a foreign currency for Australian income tax purposes. The proposed legislation maintains the current tax treatment of crypto assets. The Government has just released exposure draft legislation, Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation treatment of digital currency, and associated draft explanatory material. A great step forward, but the biggest one remains — is crypto property or data in a legal sense? Do we just legislate it is a the former, ala NZ, or consider creating some new distinct form of property, ala UK? Either is fine to my mind — though the UK’s approach is more jurisprudentially pure — but we do need to get onto this one sooner rather than later so we can have rules certainty.
  4. Token mapping (Treasury): something important I learned this week at Intersekt. The token mapping exercise does not mean that the Government focus on licensing crypto is on hold. I had thought that it would, and while I am unsure as to what specifically is being done — not the short-lived CASSPr from the sounds of things, this does give me confidence. The burgeoning crypto industry deserves clear rules.
  5. Binary options (ASIC): ASIC has extended its product intervention order banning the issue and distribution of binary options to retail clients until 1 October 2031. In the 13 months to 3 May 2021, before the ban took effect, ASIC found that retail clients incurred significant aggregate net losses trading binary options. For example: 74–77% of active retail clients lost money trading binary options; retail client accounts made net losses of $14 million in aggregate; and, loss-making retail client accounts made net losses totaling $15.7 million, while profit-making retail client accounts only made net profits of $1.7 million. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of the following product characteristics: an ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client loses their entire investment; short contract duration (e.g. the average contract duration of binary options traded with one provider was less than six minutes); and, negative expected returns (i.e. the present value of the expected payoff for a binary option contract is lower than the initial investment). I know that binary options have a lot of harm associated with them, and that many other jurisdictions overseas have taken this step, still outright banning products based on this risk profile does sit uneasily with me.

Thought for the future: since the GFC, advanced financial services economies around the world have had two major macro changes. Principles-based regulation e.g. increases in the legislation of rule requirements like ‘integrity’ and ‘fairness’, and personal accountability for individuals. FAR embodies both, and will now be operated by ASIC and APRA; it marks a larger shift for Australia than say the position in the UK, which was already more used to this style of regulation when the UK SMCR (their version of FAR) came into effect and will take time to work through.

Australian regulators weekly wrap — Monday, 5 September 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 (ASIC): Information from an ASIC session with the Chair and Commissioners this week in which I took the following notes. FAR will be passed in Spring sitting. It will come into effect for ADIs in March 2023. It will come into effect for Super / Insurers in March 2024. Finally, there is lots of work going on in the background with APRA to administer this one.
  2. Advice (Treasury): Treasury conducted a review is to consider whether changes should be made to the regulatory framework applying to financial advice to improve the accessibility and affordability of financial advice. Led by the very capable Michelle Levy, she has now put forward a number of big proposals. In the interests of brevity, the three main ones are: 1) The financial services regime should regulate the provision of ‘personal advice’. The definition of ‘personal advice’ should be somewhat broader so it is clear that it applies whenever a recommendation or opinion is provided to a client about a financial product (or class of financial product) and, at the time the advice is provided, the provider has or holds information about the client’s objectives, needs or any aspect of their financial situation. 2) The regime should no longer regulate ‘general advice’ as a financial service and the definition should be removed together with the obligation to give a general advice warning. 3) The financial services regime should require a person who provides personal advice to provide ‘good advice’. ‘Good advice’ is advice that would be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided. I think the suggestions are good ones, though will be hard fought. They shouldn’t be. The advice industry has been decimated, but Australians need access to advice now more than ever as the financial services landscape becomes ever more diversified and complicated and a recession looms.
  3. Litigation funding (Treasury): Easy come, easy go. Treasury has released draft Regulations is to amend the Corporations Regulations 2001 to provide litigation funding schemes with an explicit exemption from the managed investment scheme, AFSL, product disclosure and anti‑hawking provisions of the Corporations Act 2001 for consultation. A flashpoint between the blue and the red teams, which I don’t need to delve into the history of again, for would-be legal lobbyists our there I think there are better things to consult on than this one given the likelihood of the Government changing its mind…
  4. Breach reporting (ASIC): Information from an ASIC session with the Chair and Commissioners this week in which I took the following notes. AISC knows there are issues to be ironed out. Quite an inconsistent approach taken across the industry. No legislative changes, or ASIC relief in the pipeline though. More guidance coming — no ETA though. ASIC is more focused consultation with key industry groups. There is about 2–3 cycles before they start name dropping licensees in connection with breaches. ASIC plans to deploy technology and AI to help them review the breaches — too much for human review. They see industry as needing to adopt technology as well.
  5. High-risk retail offers (ASIC): ASIC is warning brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending. It has called out design features that may not be fair or appropriate, including: bundling of securities lending with other services or automatic opt-in of clients to securities lending (i.e. clients are required to take active steps to opt-out); no pre-qualification or vetting of investors (e.g. based on experience, assets or income); or, a fee split that is heavily skewed in favour of the provider. ASIC has also called out brokers offering crypto products alongside shares and other regulated financial products through their trading apps. ASIC has said that it is “concerned this may give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or they may underestimate the risks.” All the more reason we need to get some appropriately calibrated rules rules in place, like the UK and US, to separate the good crypto market participants from the bad!

Thoughts for the future: regulation moves in waves. Right now, 4 years post the Royal Commission, we are near the zenith. Consumer protection is front of mind. While important, undoubtedly, is consumer protection really the first priority when determining the regulation of blockchain (which is much broader than its utility for financial services)? How much weight should be given to it?

Australian regulators weekly wrap — Monday, 29 August 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. Token mapping (Treasury): the Government has announced that Treasury will prioritise ‘token mapping’ work in 2022, which will help identify how crypto assets and related services should be regulated. The aim will be to identify notable gaps in the regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards. A great step, to be sure, but frankly — how long do we need to wait until we get a set of rules for crypto? The UK and US are powering ahead. Why can’t we do the crypto token mapping exercise at the same time we incrementally develop our regulation. Unfortunately, in this increasingly important space in the financial services ecosystem, we are looking like followers rather than leaders. More thoughts on my Ausbiz interview this week here.
  2. Corporations Act (Treasury): the Government has released two suites of exposure draft legislation to reduce the complexity of Australia’s corporations and financial services law and improve its navigability. The amendments implement recommendations from the Australian Law Reform Commission’s Interim Report A of its Review of the Legislative Framework for Corporations and Financial Services Regulation. Amendments to move matters in current legislative instruments made by the ASIC into the primary law and regulations are also being consulted on. These amendments make the following changes: removing erroneous references; removing redundant definitions; making broad improvements in relation to the use of definitions, including: — clarifying the meaning of defined terms; and — using consistent headings for definition sections; and — removing substantive obligations from definitions; repealing redundant regulations; making other minor and technical amendments to simplify and improve the readability and navigability of the ASIC Act and Corporations Act. Important, to be sure, but tinkering nonetheless. What will be more interesting is to see if the Government takes up some of the bigger things the ALRC is working on e.g. principles-based obligations.
  3. Open banking (Treasury): Consultation is open on a draft designation instrument that would extend the Consumer Data Right to non-bank lenders. The CDR gives consumers the right to use data that businesses hold about them and also allows consumers to consent for data to be shared with other service providers. An expected move, the submissions are open for consultation until 16 September 2022.
  4. Corporate Plan (ASIC): ASIC has outlined its strategic plans for the next 4 years, being: 1) Product design and distribution: Reduce the risk of harm to consumers of financial and credit products, caused by poor product design, distribution and marketing, especially by driving compliance with new requirements; 2) Sustainable finance: Support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards in relation to sustainable finance; 3) Retirement decision making: Protect consumers, especially as they plan and make decisions for retirement, with a focus on superannuation products, managed investments and financial advice; and, 4) Technology risks: Focus on the impacts of technology in financial markets and services, drive good cyber-risk and operational resilience practices, and act to address digitally enabled misconduct, including scams. No major surprises here, and these priorities build on recent enforcement action e.g. ASIC’s TMD action and win in the RI Advice case.
  5. Competition penalties (Treasury): the Albanese Government is moving to increase penalties for corporations engaging in anti‑competitive behavior from $10 million to $50 million, ensuring the price for misconduct is high enough to deter unfair activity. The current turnover‑based penalty will also be increased from 10 per cent of annual turnover to 30 per cent of turnover for the period the breach took place, and penalties for individuals will increase from $500,000 to $2.5 million. This ensures those who perpetuated the wrongdoing, either individually or on behalf of the company, are held accountable. The draft legislation is here.

Thought for the future: the US SEC is tweaking its rules around paying whistleblowers for tips. We considered, but didn’t go with this approach in Australia. I think that will be revisited in the future though…

Edit: an earlier version of this article referred to BOQ in connection with TMD action. That was incorrect, and I offer my apologies!

Australian regulators weekly wrap — Monday, 22 August 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. AG Priorities (Government): the meeting of the Fed and State AGs has occurred with them setting out their common reform priorities. Not much from a financial services regulatory perspective. They continue to focus on defamation, access to digital records upon death / incapacitation and national register for enduring POAs.
  2. Unfair contracts (ACCC): The Federal Court has declared that 38 contract terms used in contracts entered into by Fujifilm Business Innovation Australia or Fujifilm Leasing Australia with many thousands of small businesses are unfair, following court action by the ACCC. The types of terms which have been declared unfair and void include the following: 1) Automatic renewal terms: permit Fujifilm to renew the contract for a further period unless customers cancel the contract a certain number of days before the end of the contract term; 2) Disproportionate termination terms: allows Fujifilm to terminate the contract in a significantly wider range of circumstances than those which allow the customer to terminate the contract, if any; 3) Liability limitation terms: limit Fujifilm’s liability or require the customer to indemnify Fujifilm without corresponding rights for the customer; 4) Termination payment terms: require customers to pay extensive exit fees to Fujifilm in the event the contract is terminated, including certain charges which Fujifilm can set unilaterally; 5) Unfair payment terms: require customers to pay Fujifilm for software licensed pursuant to the agreement irrespective of whether Fujifilm has delivered the software and, when goods are purchased, to pay the purchase price prior to delivery; and, 6) Unilateral variation terms: permit Fujifilm to unilaterally vary some terms of the contract including the charges and terms contained in documents other than the signed contract. You can read the case here.
  3. Old COld (AFSL): ASIC has cancelled the Australian financial services licence of Old Cold Gold Pty Ltd (which is a great company name!). The licence was cancelled on the basis that Old Cold Gold failed to maintain external dispute resolution membership with the AFCA and failed to lodge the profit and loss statement and balance sheet for the financial year ended 30 June 2021. Sharp stuff, and getting sharper from ASIC in the licensing space…
  4. Statistics reporting (APRA): APRA has released updated FAQs on the Economic and Financial Statistics. APRA has released two updated frequently asked questions on the Reporting Form ARF 730.1 ABS/RBA Fees Charged of the Economic and Financial Statistics collection. The updated FAQs provide guidance to ADIs on the data reported on ARF 730.1 regarding interchange payments and housing loan cashback offers. Quite helpful, and concise answers, for what is quite a complicated area! You can read about the FAQs here.
  5. BNPL (FCA): The UK FCA has warned firms that offer Buy Now Pay Later products that although some agreements are unregulated the financial promotions of all BNPL products must comply with the financial promotion rules. Authorised firms selling unregulated or exempt BNPL products must comply with the relevant rules unless an exemption applies. This includes that their BNPL financial promotions must be clear, fair and not misleading. For example, adverts emphasising the benefits of BNPL products without fair and prominent warnings of any risks to customers, such as: the risk of taking on debt that customers cannot afford to repay; the consequences of missed payments; any other adverse consequences such as the impact on the customer’s credit file; and, information about when charges become payable. I have always had a lot of respect for the FCA, and the fact that it does blanketly advocate licensing as the means for regulation of all products (like BNPL), but equally doesn’t shy away from regulating them with the proportionate attentuated regimes it does apply i.e. the financial promotion rules (a bit like DDO here) is to its credit. Worth noting from a comparative perspective for BNPL firms here now.

Thought for the future: do we need a CASSPr license for crypto? Can we modify the DDO / PIP regime, and add some rules around custody?

Australian regulators weekly wrap — Monday, 15 August 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. Corporate plan (APRA): APRA’s new Corporate Plan for 2022–2023 are based around the twin themes of “protecting the community today”, as well as ensuring the Australian financial system is “prepared for tomorrow”. The plan is designed to respond to rapid changes in APRA’s operating environment, including geopolitical tensions, inflationary pressures and rising interest rates, and the impact of new technologies. By way of particularity, APRA plans to increasing its focus on the evolving financial landscape in Australia including responding to the impact of new financial activities and participants; helping to find solutions to important challenges such as superannuation retirement income products, retirement income longevity solutions, insurance accessibility and affordability for Australians, and the financial risks associated with climate change; and, adopting the latest regulatory tools, techniques, and practices. APRA updates are never as good as ASIC ones, in terms of their generality, but there are a few gold nuggets in there. For example, this action item in relation to the forthcoming FAR regime “Update Prudential Standards CPS 220 Risk Management; CPS 510 Governance; and CPS 520 Fit and Proper and related guidance, to ensure they are, amongst other things, reflective of current practices and aligned with the proposed new Financial Accountability Regime (FAR).” (See page 11)
  2. Investment behavior (ASIC): ASIC has released Report 735 Retail investor research (REP 735) capturing retail investor motivations, attitudes and behaviours in the period following the onset of the COVID-19 pandemic. The research surveyed 1,053 Australian retail investors aged 18 and over who had directly traded in securities, derivatives or cryptocurrencies at least once since March 2020. 44% reported holding cryptocurrency, making it the second most common product type held after Australian shares at 73%. After bank trading platforms (used by 31% of surveyed investors), the three most commonly used platforms all specialised in cryptocurrency. Mr Longo said: “We are concerned about the number of people surveyed who reported investing in unregulated, volatile crypto-asset products. …ASIC is also concerned that there are limited protections for crypto-asset investments given they have become increasingly mainstream and are heavily advertised and promoted. There is a strong case for regulation of crypto-assets to better protect investors”. No major crypto platform would push back vehemently apropos regulation —so we need to get on with it. We need to pick up Senator Bragg’s report, and better calibrate it (there are a number of major wrinkles — see here) so we can catch up to the UK and US (see here) and others in supporting an industry which is here to stay and patently appealing to many investors. The ball is in the policymakers’ court here, and they need to stop dedicating so much energy to pet Labor issues e.g. litigating funding, and move to more difficult issues such as crypto, FAR and CSLR which have a bigger impact.
  3. Greenwashing (ASIC): ASIC’s Karen Chester continues to bang the greenwashing drum, following the release of INFO 274, stating that ASIC expects issuers to ensure investors have adequate information to make informed investment decisions by reference to the following questions: Have you used vague terminology?; Are your headline claims potentially misleading?; Is there a reasonable basis for a stated sustainability target?; and, Is it easy for investors to locate and access relevant information. Ms Chester stated that sustainability targets — such as net-zero commitments — require clear, time-based action plans to avoid breaching the misleading statement prohibitions. Some good guidance for those in the green investments space — there are an increasing number!
  4. Privilege (ACCC): the ATO (famously) and ASIC have long had issues with claims of privilege to resist production, and now the ACCC appears to be getting in on the action. It has set out a helpful guide on when privilege can be claimed, the format that it wants to see where privilege is claimed — complete with excel spreadsheet, and alternative approaches to claiming privilege. For example, legal professional privilege claims being particularised by reference to categories of documents, rather than by individual documents. The ACCC has state that failure to voluntarily provide the legal professional privilege information may: lead to further inquiries; result in the ACCC issuing a further notice; and, lead to action being taken for failure to comply with a notice if material has been withheld without a valid legal professional privilege claim. Overall, a balanced approach from the ACCC here in my view.
  5. Climate change guidance (FSC): the FSC has released guidance to assist investment managers in meeting their disclosure obligations. IT is a very helpful guidance note, which develops a set of common considerations for the investment management industry on the following topics: approach to assessment of emissions in portfolios, setting net-zero targets and aligning portfolios to net zero targets; appropriate product labelling and avoidance of greenwashing; and, application of Taskforce on Climate Related Financial Disclosures reporting to asset manager. For example, disclosing the fund’s objectives. The general, financial, and specific carbon or environmental objectives sought should be clearly described in the documents given to investors. If a new fund is being designed with the intention of investing in companies that will support the transition to the low carbon economy the fund should disclose this objective. A representation that a fund has specific climate risk objectives should also demonstrate that the climate related factors are substantial or significant. Together with ASIC’s guidance, this is a great piece of work to my mind!

Thought for the future: a minor rant on policymaking priorities above, is perhaps a little unfair this soon after the election. It won’t be unfair at the six month mark though, especially with our woefully short 3 year election cycles in Australia, so lets get on with the hard stuff!

Australian regulators weekly wrap — Monday, 8 August 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. CSLR (ASIC): such an interesting time for updates from the corporate regulator, who has advised that Former clients of Dixon Advisory and Superannuation Services Pty Limited (in administration, ‘Dixon Advisory’) may be eligible for compensation under a potential future Compensation Scheme of Last Resort but they will need to take action as soon as possible.’ ASIC suspended the AFSL of Dixon Advisory & Superannuation Services Pty Limited after the appointment of administrators to Dixon Advisory on 19 January 2022. The CSLR is a proposed scheme that will provide compensation to eligible victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent .What is interesting is the extent to which ASIC is encouraging consumers to access the CSLR , which is yet to be legislated! That bill lapsed when the Albanese Government came into power in May 2022. A calculated gamble by ASIC then…
  2. Liquidators (ASIC): ASIC has prosecuted 73 people in the period from 1 January 2022 to 30 June 2022 for failing to assist registered liquidators in their investigations. With $340K in fines obtained, that is a staggering amount of litigation for the corporate regulator. And some own goals for those on the other side, as before ASIC commences prosecution action, individuals are given an opportunity to provide registered liquidators access to company books and a records to avoid prosecution action. historically, ASIC didn’t much focus on this area — clearly, that it is in the past and I don’t think that will change moving forward into a recession.
  3. Foreign financial services providers (AFSL): ASIC is extending for a further 12 months the transitional relief for foreign financial services providers from the requirement to hold an AFSL when providing financial services to Australian wholesale clients. The new relief instrument also delays the commencement of the ASIC Corporations (Foreign Financial Services Providers — Funds Management Financial Services) Instrument 2020/199 until 1 April 2024Under that instrument ASIC gives licensing relief to some FFSPs that provide funds management financial services to certain categories of Australian professional investors. For all the fanfare in 2020 with FFSPs losing their “sufficient equivalence” and “limited connection” relief, which allowed them operate in Australia if they were appropriately regulated in certain jurisdictions or if they engaged in limited activities, that change appears to have taken a long time to materialise. No clues on why either, just speculation…
  4. Climate change (APRA): APRA has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance and superannuation industries. The responses to the survey from 64 medium to large institutions, and identified that: four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions (63 per cent) have incorporated climate risk into their strategic planning process; almost 40 per cent of institutions said climate-related events could have a material or moderate impact on their direct operations; nearly three-quarters of institutions (73 per cent) said they had one or more climate-related targets in place, however 23 per cent of institutions do not have any metrics to measure and monitor climate risks; and, over two-thirds of institutions (68 per cent) said they have publicly disclosed their approach to measuring and managing climate risks.
  5. Capital adequacy (APRA): APRA has released the finalised prudential practice guides that accompany the final capital adequacy and credit risk capital requirements for authorised deposit-taking institutions. APRA is also publishing an updated version of Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113), and a response paper on the technical issues raised in the submissions received during the November 2021 consultation on the bank capital reforms.

Thought for the future: Prudential Standard APS 110 Capital Adequacy (APS 110), Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) and Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113) will commence on 1 January 2023. If you haven’t started your preparations now, as a bank, then it is time to start soon!

Australian regulators weekly wrap — Monday, 1 August 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. DDO (ASIC): MASSIVE news this week on the AISC enforcement front. It has placed interim stop orders on three financial firms in response to deficiencies in the target market determination for their products. These actions are ASIC’s first use of the stop order powers under the design and distribution obligations, which took effect on 5 October 2021, and it is fair to say that this one came as a bit of a shock. A TMD is a mandatory public document that sets out the class of consumers a financial product is likely appropriate for (the target market). It also sets out matters relevant to the product’s distribution and review. In ASIC’s view, the three financial firms did not appropriately identify the consumers they intended to target i.e. for a fund, customers who intended to use an investment in the fund as a core component of their investment portfolio and investors with an objective of high capital growth or a mixture of capital growth and income (so ASIC compared the PDSs with the TMDs) or did not have a TMD at all i.e. a firm which had issues a prospectus, but not a TMD. In ASIC’s view, this meant that the products may have otherwise been marketed and sold to retail investors for whom they were not appropriate or too risky.
  2. CDR Sandbox (ACCC): the ACCC has launched the Consumer Data Right sandbox, a free tool that enables existing and potential CDR participants to better test and improve their CDR solutions. It is a hosted environment that behaves and functions like the actual CDR ecosystem. The Sandbox will allow participants to set up their own software solutions and communicate with the existing mock solutions and other participants within a secure testing environment. I think this is an absolutely wonderful offering from the ACCC, and will particularly helpful to insurance firms who are early on in their CDR journey (for more information see here).
  3. Complaints statistics (AFCA): Australians lodged 72,358 complaints with the AFCA in the past 12 months, a rise of 3 per cent on the previous financial year. Among the largest financial firms, the top 4 banks together accounted for nearly 20,000 complaints, a rise of nearly 10 per cent, while the top 4 insurers together accounted for about 9,400 complaints, up 19 per cent. Overall, the number of licensed financial firms with a complaint lodged against them was 5% lower than in the previous 12 months. One of the biggest increases was generated by natural disasters like floods, with 1,586 complaints being made, more than double the 653 complaints from such disasters the previous year. Altogether, 67 per cent of complaints were resolved by agreement between the parties. Finally, in statements that continue to gall me for the fact they come from an independent decision maker, AFCA ended with: “AFCA has now helped to secure more than $820 million in compensation and refunds since starting operation on 1 November 2018. It has registered more than 270,000 complaints in that time.”
  4. FIRB (Government): from Friday 29 July, foreign investment application fees will double. This will generate $455 million in revenue over the forward estimates, though query if it will also dampen foreign investment at a time when we need it most / is inconsistent with the development of structures designed to attract foreign investors e.g. CCIVs….
  5. Enforcement outcomes (ASIC): ASIC has released its enforcement statistics, providing an overview on ASIC’s enforcement actions in a particular six-monthly period. Highlights for me are the: 148 ongoing investigations, 57 individuals banned / restricted and 40 civil penalty cases before the court. Quite a lot then, and In addition, ASIC successfully took action in the Federal Court against an entity for failing to adequately manage cyber risk i.e. the RI Advice case. The current actions against Lanterne and Macquarie bank for failures in risk & compliance controls are equally major developments for ASIC, showing the new and more granular ways in which it is exercising its powers.

Thought for the future: ASIC is hawkish on the enforcement front. So much as been clear for years, and is increasing. ASIC has, however, recently become more creative. The DDO stop orders, RI advice case (Cyber failures) and actions against Lanterne / Macquarie (controls failure) show a regulator which is trying new things. More to come, in my estimation, when ASIC gets its hands on FAR (which is very likely to be passed soon — see here).

Australian regulators weekly wrap — Monday, 25 July 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. FATCA / CRS (ATO): the ATO has issued a self-review guide and toolkit on the internal processes and systems that reporting financial institutions should maintain to comply with the Foreign Account Tax Compliance Act and the Common Reporting Standard, which has been something of a focus for it in preceding years. The ATO has stated that organisations’ frameworks should be based around three fundamental areas of compliance: 1) governance; 2) due diligence obligations; and 3) reporting systems. The ATO has stated that a well-designed framework: has a clear ‘line of sight’ for maintenance, reporting and compliance; sets out the operating model and controls (including the due diligence compliance program); identifies gaps and deficiencies, so that reporting errors can be corrected in advance; assists senior management with clarifying accountabilities for managing FATCA / CRS obligations, and key risks; and, provides accurate reporting of customer information. Guidance aside — which is great in my view — the FATCA / CRS rules are complex. (Do reach out if you want a flow chart we have developed if it will help!)
  2. Open banking infringement (ACCC): Bank of Queensland has paid a penalty of $133,200 after the ACCC issued it with an infringement notice for allegedly breaching the Consumer Data Right i.e. Open Banking Rules by failing to provide a service enabling consumers’ data to be shared. BOQ was required to be in a position to share data for financial products, including savings accounts, term deposits and credit cards, by 1 July 2021 – it did not meet this requirement until 13 December 2021. Two things are interesting to me here, with what is the first such infringement notice issued. First, I know a good number of banks were delayed with CDR compliance, due largely to core banking system provider issues. The ACCC appears to have recognised this, though also took into account a number of factors, including the period of alleged non-compliance, the number of customers potentially impacted, the resourcing constraints Bank of Queensland faced in developing its CDR infrastructure and the steps it took to limit the duration of its non-compliance. It must have judged Bank of Queensland to be comparatively worse than other banks. Second, this is worth noting for the general insurers and others who are or will be implementing CDR shortly. The ACCC is taking a hardline approach!
  3. Cyber risk (ASIC): ASIC is understandably pressing the fact that directors duties include cyber risks in the wake of its notable win in RI Advice. It has stated that it expects directors to ensure their organisation’s risk management framework adequately addresses cyber security risk, and that controls are implemented to protect key assets and enhance cyber resilience and that “Failing to do so could cause you to fall foul of your regulatory obligations”. These include obligations under the recent SOCI Act (see here) and Privacy Act. ASIC has asked directors to: consider their risk management framework and risk appetite to ensure it adequately deals with cybersecurity risk; enquire about incident response and business continuity plans to determine the organisation’s preparedness to respond to cybersecurity incidents; and, ensure access to appropriate resources to effectively manage cybersecurity risk, whether it be in-house or through commercial arrangements. It has also stressed the need for broad and effective disclosure in the wake of a cyber attacks e.g. ASX, annual reports, relevant regulators, etc.
  4. Investment governance (APRA):APRA has released a response to consultation and final Prudential Standard SPS 530 Investment Governance (SPS 530). The letter addresses key concerns raised by industry (e.g. clarification that the valuation governance framework requirements do not require the establishment of a stand-alone Board valuation sub-committee), and additionally outlines the updates implemented to SPS 530 to ensure better member outcomes by enhancing stress testing, valuation and liquidity management practices. SPS 530 will commence on 1 January 2023, and you can read the letter here.
  5. UK regulation (FCA): I have a lot of respect for the UK FCA as a regulator, from the guidance it issues, to its willingness to speak to market participants, to regulatory evolution it develops to carefully calibrated enforcement action. That is also evident in a speech its CEO gave recently, in which I picked up that it: 1) has invested heavily in data and technology and scan 100,000 websites for fraud every day; and 2) the US and UK will deepen ties on crypto-asset regulation and market developments — including in relation to stablecoins and the exploration of central bank digital currencies. Both areas which will no doubt be an increasing focus for our domestic regulators. I know ASIC scans websites already for misleading & deceptive conduct. That will only increase I think, as will its focus on cryptocurrency regulation (once Treasury finalises the CASSPr regime).

Thought for the future: ASIC has made an interim stop order preventing advertisements containing certain misleading or deceptive statements about PPM Units, a class of interests in RES Investment Fund (Fund). The order stops RES from advertising or publishing any statement regarding PPM Units that suggests an investor will acquire equity in Pleasure Point Mine Pty Ltd (PPMPL), a related entity of RES. ASIC considers that statements that investors will acquire equity are misleading or deceptive because they may lead investors in PPM Units to believe that they will receive shares and/or a direct ownership interest in PPMPL. The sole underlying asset of the PPM Unit class in the Fund is a loan to PPMPL. It is an interesting, and targeted use of ASIC’s powers — one to watch out for as to whether it will increase.

Australian regulators weekly wrap — Monday, 18 July 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.

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  1. Conflicted remuneration (ASIC): In Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786 the Federal Court of Australia held that conflicted remunerations contraventions took place for the Respondent, Select AFSL. Select AFSL was part of a corporate group structure which retailed life insurance products where the remuneration of sales agents was linked to the number of sales they made; although they were paid a base salary, they earned commission on products sold and could obtain benefits as a result of sales plus other incentives such as a cruise to the Gold Coast, trips to Las Vegas and Hawaii, and a Vespa scooter. Abraham J concluded that AFSL Select had contravened its AFSL general obligations under s. 912A(1)© of the Corporations Act. Importantly, by encouraging the boiler room culture, His Honour also found that the director Mr Howden had breached his directors’ duties owed to AFSL Select under s 180(1). My top read for the week, this decision is an important one in the evolving conception of the “efficiently, honestly and fairly” duty and directors duties.
  2. SMSF auditors (ASIC): ASIC has acted against eight self-managed superannuation fund auditors over the period 1 March 2022 to 30 June 2022. It deregistered five SMSF auditors and imposed additional conditions on the registration of three others. These actions resulted from breaches of obligations including auditing and assurance standards, independence requirements, and registration conditions, or because ASIC was satisfied the individual was not a fit and proper person to remain registered. Here is the thing — this appears to be ASIC’s MO at the moment. Lots of litigation and enforcement action, but not ones with a systemic or policy element e.g. Shipton’s responsible lending cases.
  3. Short term credit (ASIC): ASIC has made product intervention orders for short term credit and continuing credit contracts. ASIC’s orders prohibit the provision of short term credit and continuing credit contracts which involve unreasonably high fees charged to retail clients, in excess of the cost caps in the relevant exemptions in subsections 6(1) and 6(5) of the National Credit Code. The EM for the decision is here. An interesting thought — why ban something already subject to civil penalties under the NCC? Seems like ASIC is compensating for regulatory design here…
  4. Credit reporting (ASIC): banks need to need to supply financial information to credit reporting bodies under the mandatory comprehensive credit reporting regime. From 1 July 2022, comprehensive credit information also includes information about financial hardship arrangements. ASIC has adopted a temporary no-action position to enable large banks to withhold the reporting of certain credit information on consumer credit reports where reporting the information could lead to consumer harm, including where a consumer may be the victim of family violence. For example, a joint loan where the DV victim has agreed a hardship plan with the bank (unbeknownst to the abuser). Here is hoping it becomes a permanent relief position shortly!
  5. ‘Crypto winter’ (Bank of England): an interesting speech by Sir Jon Cunliffe from the BOE, where he succinctly pulled together some recent lessons from the drop in the crypto market. “1) Technology does not change the underlying risks in economics and finance; 2) Regulators should continue and accelerate their work to put in place effective regulation of the use of crypto technologies in finance; 3) This regulation should be constructed on the iron principle of ‘same risk, same regulatory outcome’ [the same regulation to the risks inherent in the provision of a financial service no matter how it is provided]; and, 4) Crypto — technologies offer the prospect of substantive innovation and improvement in finance. But to be successful and sustainable innovation has to happen within a framework in which risks are managed: people don’t fly for long in unsafe aeroplanes.” Sensible comments to be sure, though in my view the greater burden of work sits with policymakers and regulators. We need effective regulation to be put into play to support the industry and protect consumers, so lets get on with consultation on CASSPrs (warts and all) in Australia under the Albanese Government.

Thought for the future: next sitting dates are 26 July to 4 August 2022. Expect to see many prorogued non contentious legislation revived and passed….