Australian regulators weekly wrap — Monday, 12 April 2021

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

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

  1. Claims handling as a service (ASIC)ASIC has called on insurers (life / general), insurance claims managers, and claimant intermediaries to lodge licence applications (new and varied) as soon as possible, and by no later than 7 May 2021. If they do not, they may have to stop providing claims handling and settling services after 30 June 2021. (We are doing one at the moment, and it is slower than usual going!) Deputy Chair, Karen Chester said ‘Time is running out for firms to lodge their applications with ASIC. To date [this week] we’ve received fewer than 15 applications for the new claims handling and settling service. Some applications received have also needed to be re-submitted because of their poor quality. We are concerned that firms are running the risk of not submitting a complete application in time to get the benefit of the legislated transition period.’ To put Ms. Chester’s comments in context, there are about 109 general insurers and 30 life insurers in Australia, so less than 10% have applied as of last week…
  2. Financial reporting (ASIC): ASIC prosecuted three companies between 1 July 2020 to 31 December 2020 for failing to comply with their financial reporting obligations. Section 292 of the Corporations Act 2001 (Cth) requires all disclosing entities, public companies, large proprietary companies and registered schemes to prepare financial reports each financial year. Section 319 of the Act require a disclosing entity and registered scheme to lodge the complete financial reports within three months after the end of the financial year. All other entities are required to lodge their financial reports within four months after the end of the financial year. The failures of the three companies were egregious, spanning 5 years each and the fines relatively minimal at $5K each. Still, the willingness of ASIC to focus on this area when previously it has not is notable. It follows a consistent pattern of regulatory focus on reporting; mainly AFSL breach reporting in 2020 and 2021.
  3. Judicial impartiality (ALRC): Australian Law Reform Commission has released two new background papers into the review into judicial impartiality. The first paper focuses on the practical matter of how courts manage claims (and the potential for claims) by litigants that the judicial officer deciding their matter is, or might appear to be, biased. The key issue is that the primary judge, the one in relation to whom the allegation of bias is raised, determines whether the relevant test for bias has been satisfied. This is traditionally justified on the basis that the challenged judge is ‘best apprised of the facts, and is in the best position to determine any such application’ and it avoids tactical manoeuvring. The second background paper provides an overview of the composition of the federal judiciary, the jurisdiction of the Commonwealth courts, the workload of those courts, and the frequency of complaints against judicial officers (noting that such complaints may not necessarily be in relation to an allegation of impartiality or bias). Both papers are worth the time spent to read in the context of the broader inquiry, which has asked the ALRC to consider ‘whether, and if so what, reforms to the laws relating to impartiality and bias as they apply to the federal judiciary, are necessary, or desirable.’
  4. Superannuation IDR (ASIC): RG 271 — Internal Dispute Handling does not take effect until 5 October 2021, though ASIC’s broad expectations of super firms to assist in the transition to meet the new requirements have been released. RG 271 includes reduced timeframes for responding to complaints, including a reduction to a new maximum of 45 days for superannuation complaints; further guidance on the information that funds must include in written IDR responses to allow consumers to understand complaint outcomes and decide whether to escalate their complaint; and, a greater focus on identifying, investigating and, where relevant, resolving possible systemic issues raised by complaints. RG 271 also introduces enforceable standards, which reinforces that trustees need to have oversight of, and be accountable for, their IDR procedures. The updated obligations are more comprehensive than existing requirements and focus with more granularity on the internal operations of the financial service provider. In setting out its expectations, ASIC has stated that super firms need to: 1) consider the intent behind them — this is directed specifically towards legal advisers; 2) thoroughly review existing processes, systems and resources, and trustees should turn their attention to this work now as it may require some time. (For example, ASIC states that there is likely to be changes needed to IT and administration systems for complaints management, including capturing data, processes and procedures, and staff training); 3) super firms need to review their insourced and outsourced arrangements, which may require contractual and/or operational changes; 4) keep the member journey front of mind when reviewing and implementing their IDR processes; 5) consider increasing their investment in skilled staff and systems; 6) focus on having the right governance arrangements and operational transparency in place, underpinned by a member-centric approach; and, 7) use the IDR processes to assist in identifying and managing systemic issues related to complaints. In what is the best and most granular ‘informal’ guidance given I have seen in awhile (my top read for the week), ASIC has stated: ‘… trustees [should] to take an expansive approach to identifying, recording and responding to complaints, and to ensure fund staff are empowered and encouraged to do the same. IDR-related processes should be run efficiently, honestly and fairly — from the handling of complaints to managing identified systemic issues to internal reporting. Trustees should engage with RG 271 early to ensure that they are fully compliant with the new standards by 5 October 2021′.
  5. FATF consultation (AUSTRAC): the international Financial Action Task Force (FATF) is inviting feedback on draft guidance about proliferation financing risk, and on digital currencies and digital currency exchange providers, known internationally as virtual assets and virtual asset service providers. FATF is proposing a risk-based approach to digital currency and digital currency exchange providers. The guidance is not binding in Australia, but will not doubt heavily influence the development of our policy in this space.

Thought for the future: 2021 was always going to be a massive year for regulatory reform, as the major Hayne Royal Commission recommendations come into play. With so many balls in the air, those entities that are coping best from my perspective are the ones giving themselves long lead times to implement regulatory change projects and who are seeking to cross-stitch multiple reforms together rather than leave this after the fact.

Australian regulators weekly wrap — Monday, 5 April 2021

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

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

  1. CFDs (ASIC): ASIC’s product intervention order which reduces CFD leverage available to retail clients and targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade, has now taken effect. CFDs are a leveraged derivative that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates. It is worth noting that the ASIC’s proposal to ban the issue and distribution of binary options remain outstanding. For other products which may be on ASIC’s radar, given its product intervention powers have been around in some form in other comparable jurisdictions for some time, see here.
  2. AFCA review (AFCA): AFCA’s submission to the Government on its performance over the last two years is an interesting read. It received more than 153,000 complaints, and finalised over 146,000 complaints in this period. The overall average time it took to finalise all complaints in the first two years was 74 days. AFCA has also established and administered a legacy jurisdiction covering historical complaints going back to 1 January 2008. Three parts that leapt out at me were, firstly, where it notes it had ‘…delivered access to justice to many thousands of Australians, achieving $477 million in compensation or refunds in its first two years’. Second, that AFCA’s systemic issues and serious contravention work led to a range of enforcement actions by regulators, resulting in more than $202 million in financial remediation for consumers and small businesses over the two-year period. The information that AFCA is passing to ASIC, in other words, is getting acted upon in quite a large way! Finally, boldly, AFCA has taken the opportunity to ask for a broader remit, stating: ‘It is important that AFCA’s compensation cap for non-financial loss enables AFCA to compensate a complainant for more significant and extreme stress and inconvenience caused by the conduct of a financial firm…AFCA proposes an increase to the compensation cap for nonfinancial loss’.
  3. KYC (AUSTRAC): the anti-money laundering regulatory has updated the applicable customer identification procedures (ACIP) and ongoing customer due diligence resources, to assist regulated entities in strengthening these parts of their AML/CTF program. The updates include new guidance and example scenarios that will help regulated entities to identify gaps in their customer identification, verification and ongoing customer due diligence processes. I think it is great from AUSTRAC — AML / CTF can be labyrinthine to navigate at times — you can access the new resources here.
  4. Responsible lending (Treasury): The Assistant Treasurer, Michael Sukkar, has given an interesting speech justifying the removal of the responsible lending laws. He called them a ‘… a rigid and inflexible system that has frustrated many consumers and lenders alike impeding prospective and good borrowers from much-needed credit because of their granular spending habits rather than their ability to service a loan’. Once scrapped, the responsible lending laws will only remain for small amount credit contracts and consumer leases. For all other credit, lenders will still have to undertake credit assessments based on a borrower’s capacity to repay without substantial hardship but have greater flexibility to do so. Mr. Sukkar mentioned APRA’s lending standards, the Code of Banking Practice and AFCA in the context of maintaining lending standards. In Parliament, the progression of the bill repealing responsible lending laws has been delayed, after Senate adjourned the debate of its second reading until 11 May 2021.
  5. Elder abuse (ABA): the Australian banking association has called on governments across Australia to establish: Power of Attorney (POA) laws which are the same across the country and protect people from elder abuse; a POA register to check if POA documents are legitimate and current; and, somewhere to report abuse in each state that can investigate and act. The goal is to prevent elder financial abuse and, in my view, is a great use of the ABA’s insights and clout.

Thoughts for the future: anyone who has spoken to me about AFCA knows my view that it is a quasi-regulator, and I think the tonality of the above statement that it has delivered access to justice in the form of half a billion in compensation / refunds supports that view. I appreciate that mine is a one sided view though, so do get in touch if you think differently, I’d love to chat with you about it.

Australian regulators weekly wrap — Monday, 29 March 2021

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

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

  1. Statutory unconscionable conduct (ACCC): in Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40 the Full Federal Court upheld an appeal by the ACCC and declared that Quantum had engaged in an unconscionable system of conduct in its dealings with investors regarding the National Rental Affordability Scheme, in breach of the Australian Consumer Law. The case is significant because the Full Court found that it is not necessary to establish that the business engaging in the conduct has exploited some disadvantage or vulnerability on the part of the consumers or small businesses affected. All that need occur is for the Court to identify that there is a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience. In effect, the intention element of unconscionable conduct need not be proved.
  2. New ADIs (APRA): APRA has released the discussion paper setting out APRA’s approach to new entrant authorised deposit-taking institutions and an information paper ADIs: New entrants — a pathway to sustainability. These papers outline revisions to APRA’s approach to licensing and supervising new entrant ADIs. Written submissions on the information paper are due by 30 April 2021. There are several key themes here, in the wake of Xinja handing back its licence and 86400 getting purchased by NAB. They include focusing applicants and new entrants on longer term sustainability rather than the short-term ambition of receiving a licence and becoming an ADI; benefiting all stakeholders by providing clear and consistent expectations for appropriate levels of capital and effective capital planning to support and grow a new entrant’s business; and, focusing applicants on adequate downside scenario planning including exit planning. I think these are very useful resources, in particular the capital outlays set out in the information paper e.g. $3M plus 3 months of operational expenses for a new Restricted ADI.
  3. Financial advice (ASIC): the Financial Sector Reform (Hayne Royal Commission Response №2) Act 2021passed earlier this monthIt devolves certain legislation powers to ASIC, which it has now exercised setting the requirements for: 1) the written consent that a fee recipient must obtain from a client before deducting, or arranging to deduct, advice fees from a client account as part of an ongoing fee arrangement; 2) the disclosure of lack of independence that an AFSL or authorised representative must give clients where they would breach s923A of the Corporations Act 2001 (Cth) (restriction on use of certain words or expressions) if they used words such as “independence”, “impartial”, or “unbiased”; and 3) the written consent that a superannuation trustee must obtain from a member before deducting advice fees from a superannuation account under a non-ongoing fee arrangement.
  4. AGMs (ASIC): Corporations (Coronavirus Economic Response) Determination (№3) 2020 operated to facilitate the holding of meetings (including AGMs) by temporarily removing legal uncertainty around the validity of virtual meetings. It expired on 21 March 2021, together with a determination which facilitated the electronic executions under the Corporations Act 2001 (Cth). Given the lapsing, ASIC will shortly (and sensibly) adopt a temporary “no action” position in relation to the convening and holding of virtual meetings. The position will not apply to electronic executions.
  5. ASIC v Mayfair 101 (ASIC): in Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd (No 2) [2021] FCA 247, the corporate regulator has succeeded in its action for misleading and deceptive conduct against the embattled fund manager. Mayfair 101 used sponsored link internet advertising through Google AdWords and Bing Ads, so that the websites for Mayfair’s debenture products appeared as sponsored links when consumers searched for “bank term deposit” or “term deposit” online. Mayfair’s promotional material also used words such as: “term deposit alternative”; “term investment” and “fixed term”; “certainty” and “confidence”; and, “first-ranking”, “unencumbered” and “dollar-for-dollar” security in relation to the secured promissory notes. Unsurprisingly, Justice Anderson stated: “I am satisfied that the Mayfair Products have been, in fact, designed by the Defendants to produce a result which is uncertain for investors and could not on any reasonable view be described as an investment with no risk of default.”

Thought for the future: China has just released its “Outline of the 14th Five-Year Plan (2021–25) for National Economic and Social Development and Long-term Objectives Through 2035”. From the perspective of financial services, China will be developing its own digital currency, encouraging lenders to focus on financing R&D companies, “greatly develop” its green finance capabilities, further open up its banking, securities, insurance, funds, futures and other financial sectors and enhance its financial regulatory and supervisory framework e.g. increasing the transparency around related-party transactions. Given the behemoth that China is, and how quickly it can get things done when it puts its mind to it, it is going to be interesting to see the evolution of the Chinese financial services market in the next decade.

Australian regulators weekly wrap — Monday, 22 March 2021

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

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

  1. BEAR / Westpac (APRA): the prudential regulator has closed its investigation into possible breaches of the Banking Act 1959 (Cth), including the Banking Executive Accountability Regime, by Westpac. APRA commenced the investigation in December 2019 to examine prudential concerns arising from allegations by AUSTRAC that Westpac had breached anti-money laundering and counter-terrorism laws. APRA’s investigation also examined the bank’s actions to rectify and remediate the issues after they were identified. Westpac remains subject to a court enforceable undertaking to put in place an integrated risk governance remediation plan to uplift risk governance and a 1 billion operational risk capital add-on by APRA. For a regime characterised by its broad principles-based requirements e.g. the requirement to act with ‘integrity’ and ‘co-operate with APRA’, I think APRA’s media release is lackluster, and it has missed an opportunity to pass much needed information along to its regulated population.
  2. Business registers (ASIC): the ‘Modernising Business Registers’ Program which aims to unify the Australian Business Register and 31 business registers administered by ASIC onto a single platform is now subject to a consultation paper. The MBR Program will include the introduction of a director identification number which is a unique identifier that a director will keep forever, and designed to prevent ‘rolling bad apples’. The amount of different entries for the same person in the ASIC portal is quite amazing, based on things like misspelling, missing middle names and the like. I think it is a good idea, and am hoping we get something like NZ’s great free resource offered by its companies house. Our Antipodean cousins have a great system, which you can judge for yourself here.
  3. Add-on insurance (ASIC): ASIC is seeking stakeholder feedback on proposals for a Regulatory Guide and prescribed customer information for the forthcoming deferred sales model for add-on insurance. Comments close 23 April 2021. The Hayne Royal Commission recommended that a deferred sales model should be introduced for all add-on insurance products other than comprehensive motor vehicle insurance: Recommendation 4.3. Under the deferred sales model, providers of add-on insurance must wait for four clear days after a customer has committed to acquire a principal product or service before selling them an add-on insurance product: s12DP(1) of the ASIC Act. ASIC has since undertaken substantial work and issued multiple reports which found systemic problems with the sale of add-on insurance through car yards and lenders. Draft Regulatory Guide 000 — The deferred sales model for add-on insurance (draft RG 000), which ASIC is seeking feedback on, cover the the scope of the deferred sales model, ASIC’s our expectations of providers of add-on insurance products in complying with the deferred sales model, and ASIC’s our interpretation of the factors ASIC must consider when deciding whether to grant an exemption from the new rule. Having read through the proposed guide, my initial view is that it is a quality product, and tackles some knotty issues, for e.g. the casual nexus. For example, a lender may provide a home loan product to a customer and, under an arrangement, give the customer’s contact details to an issuer of home building insurance. If the issuer of the insurance contacts the customer three weeks later, the offer will still be ‘in connection with’ the customer acquiring the principal product. That is quite broad!
  4. Continuous disclosure (Treasury): The Treasury Laws Amendment (2021 Measures №1) Bill 2021 has this week been referred to the Senate Economics References Committee, with the Report due 30/06/2021. The legislation seeks to amend the Continuous Disclosure Laws to introduce a higher threshold for liability e.g. recklessness or negligence. The report of the Senate Standing Committee on Economics into the provisions of the bill was tabled on Friday 12 March 2021.
  5. Electronic signatures (Treasury): the COVID legislation permitting electronic signatures were temporary measures put in place during the pandemic. As these come to expiration on 21 March 2021, the current legislative requirements around electronic signing under the Corporations Act 2001 (Cth) will revert back to the pre-COVID requirements. While there has been talk of extension, and a bill has been introduced into Parliament, it has not passed. On 16 March, the Senate agreed to refer the Bill to the Economics References Committee for inquiry and report by 30 June 2021, with no debate on the Bill in the Senate until August 2021. It is therefore likely the COVID-19 measures will lapse, and pre-COVID-19 measures need to be readopted. My firm has worked on large table covering the legislative position across each of the Federal and State jurisdictions, for all different types of instrument e.g. deeds, agreements, etc. Happy to provide a copy to those who reach out!

Thought for the week: there is a fascinating article in the AFR this week on why corporate criminals act, that is the rationalizations they use to justify their crimes. Some include ‘temporary use’, ‘victimless crime’, ‘ubiquity’ and ‘economic necessity’. With all the regulatory change projects underway at the moment e.g. FAR, it is a timely reminder that good risk frameworks comply with the letter of the law. Great risk frameworks respond to these deeper personal and potentially cultural drivers.

Australian regulators weekly wrap — Monday, 15 March 2021

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

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

  1. Competing class actions (High Court): competing class actions are one of the notable issues which accompany the rise in litigation funding and correlated increase in class actions i.e. the asset class. Morabito 
    identified that, of the 122 shareholder class actions filed in Australia since 1992, 59 were competing or related class actions based on the same or similar facts. This week in Wigmans v AMP Limited & Ors [2021] HCA 7, the High Court of Australia (by a 3:2 majority) dismissed an appeal against the decision of the New South Wales Court of Appeal. It upheld the ‘multi-factorial approach’ used by the Courts to determine which competing class actions need to be stayed, gave guidance to the lower courts as to how to choose which class action should go ahead and dismissed the argument that there is a presumption that the filing of a second, overlapping class action is an abuse of process. The multifactorial approach first developed by Beach J in McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd [2017] FCA 947 (and later adopted by Ward CJ in Eq in NSW) is used to determine which class action is to proceed based on a number of criteria, including: the experience and resources of the lawyers running each class action; the fees to be levied by each plaintiff law firm; the litigation funding agreements in each class action; the order in which the actions were commenced; the volume of group members signed up, as opposed to being caught as ‘open’ class action members; and, the possibility of a common fund order being made. While the High Court’s decision assists in this vexed area, there are, perhaps, some outstanding jurisprudential questions for those so inclined to consider them (in particular, the moral hazard of making precedential law based on the experience and resources of the advocates, which remains personally uncomfortable for me…).
  2. Breach reporting (Treasury): the Government has released a consultation paper on the proposed regulations for the new onerous AFSL breach reporting regime coming into play in October 2021. In short, they are lessening the threshold for reports to be made for some of the very common civil breaches e.g. failure to provide a credit guide. These regulations amend the Corporations Regulations 2001, the National Consumer Credit Protection Regulations 2010, the Corporations (Fees) Regulations 2001 and the National Consumer Credit Protection (Fees) Regulations 2010 to prescribe civil penalty provisions that are not taken to be significant (and therefore may not be reportable) under the relevant breach reporting regime if those provisions are contravened. The consultation paper also seeks to ensure certain breach reporting offences and civil penalty provisions are subject to an infringement notice. It is consistent with Karen Chester’s comments to the recent AFR Summit, where she detailed a shift in operating philosophy, which she dubbed “express investigations”. “We want to reward good performers with nudges, not grudges. We want to train ASIC’s radar on harmful misconduct, not on harm-free process breaches. Over time, this will deliver better outcomes for the economy, markets, business, shareholders and, ultimately, consumers and investors,” Chester told the Summit. Sensible as they are, the proposals do not go nearly far enough, however, and the system will remain draconian and give rise to a huge uptick in breach reporting. It is one of the reasons a good number of Regtech solutions are being created to respond to the increased demands (including by us, so get in touch if you want a demo!), and why I will be making a submission to the Government on this reform. Please do get in touch if you want to anonymously add to that submission.
  3. LIBOR (FCA): Goodbye LIBOR! The FCA has announced the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. For those not familiar, the London Inter-bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. It forms a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. Unfortunately, LIBOR has been subject to manipulation, scandal, and methodological critique, making it less credible today as a benchmark rate. (Major banks allegedly colluded to manipulate the LIBOR rates. They took traders’ requests into account and submitted artificially low LIBOR rates to keep them at their preferred levels. The intention behind the alleged malpractice was to bump up traders’ profits who were holding positions in LIBOR-based financial securities.) The Bank of England and the FCA have made it clear over a number of years that the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it. 31 December 2021 is the end date, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings. 30 June 2023 is the date for all other US dollar settings.
  4. Climate guidance (APRA): APRA has indicated it will develop its first cross-industry prudential practice guide (PPG) on the management of climate-related financial risks. A PPG is not a legally binding regulation, but rather, is designed to be helpful guidance as to how regulated entities can fulfil their prudential obligations in relation to risk management when it comes to climate-related risks. (APRA’s other major initiative in addressing climate risk this year is the commencement of a series of Climate Vulnerability Assessments of major Australian banks.) The PPG is expected to be released for consultation in the first half of this year, and finalised before the end of 2021.
  5. ASIC’s crosshairs (ASIC): Deputy Chair Karen Chester gave a speech to the AFR Business Summit 2021 on Wednesday, 10 March 2021. Interestingly, she answered the question “What harms are in ASIC’s crosshairs today?”. The first: harm to consumers seeking fairly priced credit. The second is cyber risk. In this regard, Ms. Chester gave a very good summary of why the risk is a priority. First, systems under investment have increased exposures “ ‘System deficiency’ was the second most common root cause of breaches recently reported to us by the major banks” (28.9%!). Second, the risk landscape has become tougher. There are increasing bad actors seeking to take advantage. The third reason “much of this increase in vulnerabilities is occurring in systems that are ubiquitous; indeed, many are household names”. ASIC’s response to deal with cyber is as follows: “From these consultations we advanced our current cyber supervisory endeavours: raising awareness of cyber resilience for our entities; helping our regulated entities get prepared with their self‑assessment; and, taking decisive, deterrence-based enforcement action.” My top read for the week, the speech also covers ASIC recent enforcement action against super firms (20 investigations, and 8 court actions) and its plans for DDO (with particular reference to BNPL firms) later in the year.

Thought for the future: I really like APRA’s plan to issue a PPG for climate risk. We need more non binding forms of guidance from ASIC and APRA and AUSTRAC, to assist the regulated population in meeting increasing expectations placed on them. If you have the power to enforce expectations, then you have the duty to first adequately inform about them.

Australian regulators weekly wrap — Monday, 8 March 2021

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

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

  1. BNPL CODE (AFIA): the Code of Practice for the Buy Now Pay Later (BNPL) sector has come into effect. The Code contains 9 key commitments to customers, including that BNPL providers will be ‘fair, honest and ethical’ in dealings. Combined with their voluntary sign up to AFCA, it is a significant commitment to self regulation. What is interesting to me is the extent to which the new Code mirrors the provisions of the Design & Distribution Regime coming in for BNPL providers later this year. For example, one of the commitments is that ‘We will make sure our BNPL product or service is suitable for you’. The consistency is clever, and will assist them in not being overly weighted by two new regulatory regimes.
  2. ARS 115 (APRA): APRA is consulting on revisions to the capital framework for authorised deposit-taking institutions (ADIs) to implement ‘unquestionably strong’ capital ratios and the Basel III reforms. APRA has just released a response to submissions on proposed changes to Reporting Standard ARS 115.0 Capital Adequacy: Standardised Measurement Approach to Operational Risk. The response includes final operational risk reporting requirements, and a change in date for when the changes will commence. APRA has moved the implementation date of APS 115 for all ADIs to 1 January 2023 to align with the Basel Committee on Banking Supervision’s decision to delay the international start date of the Basel III standards. Interestingly, a lot of submissions appeared to be around confidentiality. APRA will determine data submitted for ARS 115.0 to be non-confidential 35 days after it is given to APRA…
  3. Council of Financial Regulators (Regulators): the Council of Financial Regulators is the coordinating body for Australia’s main financial regulatory agencies. There are four members — the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Reserve Bank of Australia and The Treasury. The Reserve Bank Governor chairs the CFR and the RBA provides secretariat support. It has just released its Quarterly Statement — March 2021. There is no new news here, simply a recitation that they are collectively focusing on credit conditions, changes to insolvency laws, the general insurance business interruption cases winding their ways through the High Court, the volume complaints lodged with AFCA and cyber attacks. Still, a good summary of topical issues in financial services regulation nonetheless.
  4. Costs Recovery (ASIC): ASIC has published the final 2019–20 Cost Recovery Implementation Statement (CRIS). The CRIS sets out details of ASIC’s forecast regulatory costs — which it levies from the industry, in part — and activities by industry and subsector. These are long documents, and the headline for me is that surveillance ($53.885m) and enforcement costs $54.129m) are together up on last year. In 2018–2019 surveillance was $39.216m and enforcement $54.460m. While enforcement costs continue to run high, ASIC is also putting more resources into its surveillance activities. See page 15 / 208 of the report (my top read for the week!), for what those activities consist of e.g. breach reporting.
  5. REST (ASIC): ASIC has commenced civil penalty proceedings in the Federal Court against Retail Employees Superannuation Pty Ltd , a superannuation trustee, for false or misleading representations made about the ability of its members to transfer their superannuation. ASIC alleges that, from at least 2 March 2015 to 2 May 2018, REST made representations that discouraged, and in many cases delayed or prevented, members from transferring some or all of their funds to another superannuation fund. This is against the trustees duties to act in the best interests of its members. You can read the originating process here, and form your own judgements on REST’s media response: “We are disappointed with ASIC’s decision to launch proceedings about a matter that REST reported to the regulator, and for which REST is remediating affected members.”

Thought for the future: the pipeline of regulatory change projects in the works this year is significant; the lead ups to June and October 2021 are going to be intense. For those charged with leading these projects, I suggest booking your holidays around these periods!

Australian regulators weekly wrap — Monday, 1 March 2021

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

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

  1. Immunity policy (ASIC): power and information. ASIC has received plenty of the former in the past 2 years, and now it is focusing on the latter. It has released a policy which sets out information on applications for immunity from civil penalty or criminal proceedings for a contravention of a provision in Part 7.10 of the Corporations Act 2001 (Cth). The main offences within this Part are market manipulation and insider trading. In essence, the policy is for individuals who: a) think they may have contravened, with at least one other person, a provision in Part 7.10 of the Corporations Act 2001 (Cth); b) wish to apply for immunity from civil penalty or criminal proceedings; and c) intend to cooperate with ASIC in relation to its investigation and any court proceedings regarding the contravention. The policy comes with an FAQs section here, complete with the exhortation that it will only be first in, best dressed that gets the immunity. You can read more on the policy in my colleagues’ excellent summary here. While I understand the intent of the policy, and suspect that ASIC has been spending more time with our American cousins, the area does have the potential to raise a host of legal and ethical issues.
  2. Crown Casino (Victoria): the Victorians have announced a Royal Commission into Crown Melbourne Ltd’s suitability to hold its Victorian casino licence, as well as the suitability of its associates, including Crown Resorts Ltd. It comes on the heels of the findings of the New South Wales Independent Liquor and Gaming Authority (ILGA) inquiry, which held that casino was not a suitable licensee holder and its NSW state gaming clearance should be revoked. Commissioner Patricia Bergin said in her findings there was “significant deficiency” in Crown’s corporate character and a lack of understanding and compliance of the country’s anti-money laundering and counter-terrorism financing laws. She stated that “any applicant for a casino licence with the attributes of Crown’s stark realities of facilitating money laundering, exposing staff to the risk of detention in a foreign jurisdiction and pursuing commercial relationships with individuals with connections to triads and organised crime groups would not be confident of a positive outcome”. Raymond Finkelstein QC will serve as Commissioner and Chairperson of the Royal Commission and will hand down his recommendations by 1 August 2021; to me, it will be quite interesting if he focuses on the corporate culture aspects of Crown (the global regulatory focus du jour) quite as much as Commissioner Bergin did.
  3. Financial advisers (Parliament): the Financial Sector Reform (Hayne Royal Commission Response №2) Bill 2020 has passed both houses and is awaiting assent. It amends the Corporations Act 2001 to require financial services providers that receive fees under an ongoing fee arrangement to: provide clients with a document each year which outlines the fees they will be charged and the services they will be entitled to in the following 12 months and which seeks annual renewal commitment; and, require a financial services licensee or authorised representative to give a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client. It also amends the Superannuation Industry (Supervision) Act 1993 to provide that a superannuation trustee can only charge advice fees to a member where certain conditions are satisfied, and remove a superannuation trustee’s ability to charge fees under an ongoing fee arrangement for financial product advice from MySuper products.
  4. ASIC v. NAB (Court): ASIC has commenced proceedings against NAB for unconscionable conduct and misrepresentation of account fees in charging customers a total of $365,454 to which it wasn’t entitled between 25 February 2015 and 22 February 2019. The regulator alleges misleading or deceptive conduct and that NAB failed to “provide financial services efficiently, honestly and fairly” (no surprises that s. 912A of the Corporations Act 2001 (Cth) is being used. Now that it is a civil penalty, it features in most of ASIC’s actions). ASIC also stated that NAB had identified that it was charging periodic payment fees in error to both personal and business banking customers by the end of October 2016, however, it took NAB until July 2018 to lodge a breach report with ASIC. NAB has acknowledged these issue publicly; it is bit strange therefore that ASIC felt the need to file proceedings, but does fit in with the whole “why not litigate” mantra. In any event, it does highlight a point that is a growing issue that ASIC is focusing on — breach reporting. Please do get in touch in you want to see an early iteration of am inexpensive Regtech solution we have created to handle breach reporting!
  5. Enforcement priorities (ACCC): Australia’s competition regulator has announced a raft of strategic priorities for 2021. Of most interest to me, was the fact that the ACCC will be focusing on investigations into anti-competitive conduct in the finance sector, including following through on recommendations made in the Home Loan Inquiry final report (which focused on impediments to borrowers switching to alternative lenders, and identifying cost effective recommendations to address specific impediments), and digital platforms with the ACCC working closely with overseas counterparts and considering possible enforcement issues. These priority areas supplement the ACCC’s “enduring priorities”, which include cartel conduct, anti-competitive conduct, product safety, consumer experiencing vulnerability and conduct impacting ATSI individuals.

Thought for the future: Australians have a particular cultural aversion to dobbing, though that seems to be the basis of a good number of regulatory reforms in our pipeline… Aside from whistleblowing, take the mortgage brokers information sharing reforms coming into play in October 2021 which requires licensees to conform to a referencing checking and information-sharing protocols — which are designed to weed out the bad apples — or suffer the imposition of a civil penalty for non-compliance. You can read more in this article. It would be a fascinating piece of research to see how Australia, as opposed to say the US or UK, compares globally in respect of these areas…

Australian regulators weekly wrap — Monday, 22 February 2021

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

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

  1. Continuous disclosure (Treasury): the Morrison Government has introduced the Treasury Laws Amendment (2021 Measures №1) Bill 2021. It amends the Corporations Act 2001 to embed the temporary COVID-19 changes made to Australia’s continuous disclosure laws, and extend the changes made to allow for virtual Annual General Meetings and to permit for the electronic signing and sending of documents. There is a lot of debate on the continuous disclosure changes: critics argue that it will water down disclosure obligations, while proponents argue that the current system is unworkable as it is overly punitive. In essence, the previous regime enabled claims to be brought without any need to establish, or even claim, any intention, fault, negligence or indifference on the part of the listed company. Suffice it to say that this fueled a great number of shareholder class actions and heated debate along partisan lines… Now, under the changes, there is still a basis to bring civil actions for breach of the continuous disclosure laws, but there has to be fault — it has to be reckless, it has to be negligent or fraudulent. The change brings Australia closer in line with the UK and US position, and regular readers will know my position on these changes!
  2. Statutory demands (Treasury): the Morrison Government is consulting on whether to permanently raise the minimum threshold at which creditors can issue a statutory demand on a company. It is currently $2,000 and companies have to respond in 21 days, though on 25 March 2020 the Government temporarily raised the threshold at which a statutory demand could be issued to $20,000 and allowed 6 months to respond to the notice (which did not affect the timeframe to set them aside in court, but that is an another point). The consultation paper seeks a response by 5 March 2021 on the threshold at which a statutory demand should be set, among other related questions. I am not in favour of raising it too high; statutory demands — while noting they should not be used as debt collection tool — serve a useful function in avoiding litigation. Raise the bar too high, and that may create more low-value litigation.
  3. Debt management firms (ABA): the Australian Banking Association has come out in support of the Morrison Government’s proposed licencing regime for debt management firms i.e. that they hold a Credit Licence. It goes further, indeed, and recommends that the proposed licensing regime be strengthened to allow ASIC to supervise the debt management industry for fee structures that place Australians in financial vulnerability such as “…charging large upfront fees or placing caveats on people’s property for minor services rendered.” The ABA has also called for more enforcement action from regulators to prevent misleading advertising and unfair contract terms used by debt management firms. I am all in favour! In the absence of being able to provide legal advice, or indeed do much more than have communications with creditors and if all else fails direct the debtor to AFCA (a free service), I do not see much value add in these firms and indeed quite often a lot of predatory activity…
  4. FX markets (RBA): the Reserve Bank uses foreign exchange swaps to manage domestic liquidity. These are short-term transactions (of 2 — 3 months or less) that alter the extent of Australian dollar liquidity in the banking system. They add to the Bank’s stock of foreign exchange assets, but are not considered to be part of the Bank’s foreign exchange reserves available for policy purposes. This week, the Reserve Bank decided to start acquiring foreign currency via swaps over longer terms e.g. 2 years. It aims to minimise any rollover risks, which allows it to treat foreign exchange acquired in this way as part of its foreign currency liquidity. Something other global reserve banks do, it is probably no surprise that this economic efficiency measure is occurring against the backdrop of COVID-19.
  5. AFCA review (Treasury): the Government has announced a review of the Australian Financial Complaints Authority (AFCA).The review is independent of AFCA and being conducted by Treasury, with a report to be finalised by 30 June 2021. The terms of reference are quite broad, and seek feedback on whether: AFCA’s dispute resolution approach and capability producing consistent, predictable and quality outcomes; AFCA’s processes for the identification and appropriate response to systemic issues arising from complaints effective; and, whether there is a need for AFCA to have an internal mechanism where the substance of its decision can be reviewed. Submissions close on 26 March 2021. Speaking personally, I know that many of my clients find the decisions emanating from AFCA to be baffling at times — here is an opportunity to convey that to Treasury!

Thought for the future: Braithwaite’s pyramid of responsive regulation, stresses persuasion and feedback as the first and largest step in steering a regulated population to desired outcomes. Part of that is obtaining feedback through consultative processes, for example before new major legislation is released or on how a new scheme is operating. Sometimes, however, it is best to provide that feedback anonymously e.g. through a third party. We will making a submission on the AFCA consultation paper — we welcome any feedback you may wish us to include for Treasury’s consideration.

Australian regulators weekly wrap — Monday, 15 February 2021

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

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

  1. Remediation (ASIC): ASIC has released the latest statistics on repayments for customers who have suffered loss or detriment because of fees for no service issues or non-compliant advice. AMP, ANZ, CBA, Macquarie, NAB and Westpac have paid / offered a total of $1.24B in compensation, as at 31 December 2020. The remediation stems back to reviews ASIC started in 2015, before the Hayne Royal Commission, as to the extent of failure by the institutions to deliver ongoing advice services to financial advice customers who were paying fees to receive those services, and how effectively the institutions supervised their financial advisers to identify and deal with ‘non-compliant advice.
  2. Judicial review body (Treasury): together with the plans for a Federal anti-corruption body, the Morrison Government is considering the design of a judicial complaints agency. The agency could investigate allegations of corruption and other misconduct — including sexual harassment and bullying. The Rudd Government considered something of this nature, though went with having a Chief Judge to investigate complaints given the knotty constitutional issues involved. Personally, I think this is really sensitive ground. The intent is great, of course, but the practical application is tricky. Uncomfortable ground as it is to discuss, the existing State public-sector corruption agencies are often sought to be misused to settle scores — the fact of an investigation alone is often damaging – in my experience. Given the separation of powers, and the need to uphold the administration of justice, I think that any judicial complaints agency should have a very tightly constructed terms of reference…
  3. AFSA Speech (APRA): APRA Deputy Chair Helen Rowell gave a speech to the ASFA Conference. The key points I picked up built on APRA’s priorities released last week. That is, the key areas of focus for the review of the prudential framework include insurance and investment governance in the first half of 2021, followed by the outsourcing, risk management, governance, conflicts and fit and proper standards in late 2021 and 2022. APRA will also take account of findings from the thematic reviews such as APRA’s reviews of unlisted asset valuation practices, implementation of APRA’s strategic planning and member outcomes standard, expenditure practices and trustee capability/governance practices.
  4. Monetary threshold (AFCA): the Australian Financial Complaints Authority has adjusted its monetary limits for complaints, which now include: the maximum value of a claim for compensation AFCA can consider ($2M); the maximum size of a credit facility AFCA can consider a complaint about ($5M); and, the maximum amount AFCA can award a consumer or small business for complaints about banking and finance, general insurance, life insurance and investments and advice. The claim limits are set out in a helpful document, which is my top read for the week.
  5. Year in review (APRA): the prudential regulator has released a document on its year in review. It provides APRA’s view on the financial environment and details its key activities for the year across the banking, insurance and superannuation industries. The 2020 Year in Review also contains metrics for APRA-regulated industries, including analysis of industry composition, profitability and financial strength. The report itself is an interesting, if unsurprising, trip down memory lane for 2020. What I thought were particularly interesting were the anonymised supervision vignettes that APRA provided for such a provide regular, for example: “Following a whistleblower notification to the Board of an entity and subsequently to APRA, APRA engaged with the entity over its response to the significant issues raised. APRA was not satisfied with the timeliness or urgency of the response and acted to ensure the issues would be appropriately considered. The resultant investigation identified deficiencies and led to control improvements in the finance function and expense management, and the commissioning of an independent review into the risk management practices of the entity. APRA is monitoring progress against the findings of the review, which will enhance Board oversight and management control of the entity”.

Thought for the future: this year is packed in terms of the regulatory timeframe, with most people having moved on from Mortgage Broker’s BID to DDO and breach reporting now starting in October 2021. Feel free to keep up with the updates as they come, by signing up to this calendar!

Australian regulators weekly wrap — Monday, 8 February 2021

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

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

  1. General v. personal advice (Court): the High Court handed down its decision in Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3, dismissing Westpac’s appeal against the Federal Court‘s decision that the marketing campaign by Westpac to encourage customers to roll over superannuation accounts into their account held with Westpac involved the provision of “financial product advice” that was “personal advice” within the meaning of section 766B(3) of the Corporations Act 2001 (Cth) (Act) i.e. instead of “general advice”. As a result of the advice being “personal advice”, there was found to be a contravention of the duty in section 961B of the Act to act in the best interests of the customers in making the relevant recommendations to accept the rollover service as well as a breach of the obligation to act fairly under section 912A(1)(a) of the Act i.e. “efficiently, honestly, and fairly”. Section 766B(3)(b) of the Act defines “personal advice” so as to include “financial product advice” given or directed to a person in circumstances where a reasonable person might expect the provider to have considered one or more of the person’s objectives, financial situation and needs (or, of course, where they have in actuality). “General advice” is essentially anything that is not “personal advice” under section 766B(4) of the Act. I feel rather sorry for Westpac; the difference between general and personal advice can be fiendishly difficult to determine depending on the fact pattern of a particular case, reliant as it is on what a “reasonable person” would identify. A senior colleague put me onto A.P. Herbert’s excellent book Uncommon Law recently, which had this to say about the legal construct of the reasonable person: “Devoid, in short, of any human weakness, with not one single saving vice, sans prejudice, procrastination, ill-nature, avarice, and absence of mind, as careful for his own safety as he is for that of others, this excellent but odious character stands like a monument in our Courts of Justice, vainly appealing to his fellow-citizens to order their lives after his own example.”
  2. Prudential priorities (APRA): APRA has issued its policy and supervision priorities for 2021. In terms of policy areas, key areas it is going to focus on include the long awaited new prudential standard on remuneration (CPS 511), updating prudential standards on operational risk, governance and risk management, and consulting with industry on guidance for climate change financial risk. For supervision activities, APRA plans to focus on increased scrutiny of entities’ cyber security capabilities, embedding the new remuneration standard, conducting a risk culture survey, undertaking a range of GCRA-related supervisory reviews and deep dives, and working to close risk governance issues currently requiring capital overlays. No particular surprises here, and to me the greatest amount of work will rest with the remuneration update and cross-linking it with other regulatory developments for 2021 e.g. the Financial Accountability Regime.
  3. Licence cancellations (ASIC): ASIC has been busy cancelling licences this past week. It has cancelled the Australian financial services licence (AFSL) and Australian credit licence (ACL) of based Mortgage and General Financial Services. The firm failed to demonstrate that it had the competence and resources to provide financial services and credit activities as required under its licences, as it failed to replace its ‘ key person’ (a species of responsible manager) after the previous one passed aware and failed to lodge its accounts under its AFSL for the financial years ending in 2017, 2018 and 2019. ASIC has also cancelled the ACL of Golden Securities Pty Ltd on the basis Australian Golden Securities did not engage in the credit activities authorised by the licence. Under the National Consumer Credit Protection Act 2009 and National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009, if a licensee held an Australian Credit Licence before 18 February 2020, ASIC may cancel the licence if the licensee has not engaged in the credit activities authorised by the licence before the end of the 6 month period commencing from 18 February 2020. A timely, if not at all surprising decision; the key message here is to replace your responsible managers and key persons within the designed timeframes, lest your licenses come under regulatory security and use it i.e. your licence or lose it.
  4. False statements (ASIC): Mr Ding Yang, director of Advanced Choice Finance Pty Ltd (ACF), a former Melbourne-based mortgage brokerage company, has pleaded guilty to aiding and abetting ACF in knowingly making a false statement in a credit licence annual compliance certificate lodged with ASIC. In short, he lodged a credit licence annual compliance certificate with ASIC in which he falsely certified that none of ACF’s fit and proper people i.e. himself had their accreditation cancelled by a lender or their membership with an aggregator terminated. In fact, he had had his accreditation cancelled with one lender (Bank of Melbourne) and one aggregator (Connective). A timely reminder that, while ACL compliance statements lodged with ASIC are often completed in a rush, there are very real consequences for the information that is provided to ASIC on them.
  5. Climate risk (ASIC): ASIC Commissioner Cathie Armour has given a paper in in which she says disclosing and managing climate-related risk is a key director responsibility. Nothing new in there, and it follows on the back of ASIC surveillance began in the first half of 2019–20 of several large listed companies spanning a range of industries to see how they were tackling climate risk disclosure. What is helpful in the paper — and my top read for the week — is the the succinct guidance given to directors: 1) Consider climate risk — directors and officers of listed companies need to understand and continually reassess existing and emerging risks that may be applicable to the company’s business, including climate risk; 2) Develop and maintain strong and effective corporate governance — strong governance facilitates better information flows within a company and facilitates active and informed engagement and oversight by the board in identifying and managing risk; 3) Comply with the law — directors of listed companies should carefully consider the requirements relating to operating and financial review (OFR) disclosures in annual reports under s299(1)(a)© of the Corporations Act 2001; and 4) Disclose useful information to investors — ASIC recommends listed companies with material exposure to climate risk consider reporting under the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures framework. To me, as matter of pure corporate law, and completely agnostic to the question of whether climate change is man-made or otherwise, there is absolutely nothing special about climate change risk. It is like any other risk that needs to be recognised and mitigated by company directors, for example liquidity risk. Still, with all this focus on it by ASIC and APRA, it is worth board dedicating their time to this area…

Thought for the future: the UK FCA has announced that buy-now-pay-later products are to be regulated be regulated. The announcement comes as a review of the unsecured credit market recommends bringing interest-free buy-now-pay-later into FCA supervision. UK legislation will be forthcoming soon. It will be interesting to see what happen in other jurisdictions, in particular (with thanks to a friend who gave me the heads up) in NZ where a BNPL Code of Practice is well progressed and in the US given the new Biden administration and related CFPB shake-up.