Financial Services in Focus – Issue 8

Funds and financial products

ASIC identifies areas of improvement for exchange traded products

On 2 August, ASIC released a completed review of the exchange traded products (ETP) market in Australia, including exchange traded funds, aimed at ensuring the market is delivering on promises to investors.

The report in relation to the review, Report 583 Review of exchange traded products, found that the market is generally performing well, and ETPs are meeting the relatively low cost and liquidity expectations of investors. However, the review identified a range of risks that require monitoring by issuers and oversight by market operators.

ASIC updates guidance for funds management industry

On 31 July, ASIC released a suite of seven new and updated regulatory guides to provide comprehensive guidance to the funds management industry. The guidance has been updated for changes arising from the Asia Region Funds Passport and brings all of ASIC's funds management policies up to date to help promote industry-wide consistency.

ASIC states that the updates are designed to help the funds management industry to access the Asia Region Funds Passport. The updates do not include changes arising from corporate collective investment vehicles (CCIVs), as the legislation has not yet passed through Parliament, and ASIC states that it will review and re-release these seven regulatory guides to include material for the new CCIV regime after this regime is implemented into Australian law.

The new and updated regulatory guides are:

• Regulatory Guide 131 Funds management: Establishing and registering a fund
• Regulatory Guide 132 Funds management: Compliance and oversight
• Regulatory Guide 133 Funds management and custodial services: Holding assets
• Regulatory Guide 134 Funds management: Constitutions
• Regulatory Guide 136 Funds management: Discretionary powers
• Regulatory Guide 137 Constitution requirements for schemes registered before 1 October 2013
• Regulatory Guide 138 Foreign passport funds

Government consults on amendment to gift cards legislation

On 26 July, the Government released for public consultation an exposure draft of the Competition and Consumer Amendment (Gift Cards) Bill 2018 (Bill) and Exposure Draft Explanatory Materials. A consultation paper was also released clarifying the definition of gift cards and explaining the exemptions.

The Bill would mandate minimum three year expiry dates for gift cards, require gift cards to display expiry dates, and ban post-purchase fees on gift cards. It would also specify penalties for non‑compliance and create a regulation-making power.

Submissions are due by 9 August.

ASIC announces next steps for industry funding

On 26 July, ASIC announced organisations that are regulated by ASIC need to complete their business activity statements before Thursday, 27 September 2018 under the Federal Government’s industry funding arrangements.

ASIC states that, to enable ASIC to calculate invoices, organisations must submit or confirm pre-populated business activity metric data on the operation of their business from the previous financial year. This will be done via the new online ASIC Regulatory Portal.

ASIC releases external report on fees and costs disclosure

On 24 July, ASIC released a report into Regulatory Guide 97 Fees and costs disclosure (RG 97) commissioned in November 2017.

The report, prepared by expert Darren McShane, concludes changes to the disclosure regime would be advantageous, and includes discussion of the way fee and cost information is presented, and some of the information to be included in the disclosure.

See our analysis of the report of the RG 97 fees and costs regime here.

Government releases exposure draft legislation on design and distribution obligations and product intervention powers

On 20 July, the Government released for public consultation a revised exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Bill).

The revised exposure draft of the Bill has been developed in response to the feedback received during the Government’s previous round of consultation. These measures implement the Government’s response to the Financial System Inquiry (FSI), improving Australia’s Financial System 2015, whereby the Government accepted the FSI’s recommendations to introduce design and distribution obligations for financial products to ensure that products are targeted at the right people; and a product intervention power for ASIC when there is a risk of significant consumer detriment.

According to the Exposure Draft Explanatory Memorandum, the Bill aims to impose design and distribution obligations for financial products to ensure that products are targeted to the right people, and to give ASIC a product intervention power for both financial products and credit products when there is a risk of significant consumer detriment.

Submissions are due by 15 August.

Financial product advice

ASIC announces professional standards reforms for financial advisers

On 1 August, ASIC announced changes to reporting dates for a number of required notifications in the transition to the new financial adviser professional standards reforms.

The revised schedule is intended to simplify licensees' disclosure obligations. ASIC is also clarifying the process for recognising advisers as 'existing providers'.

Financial advisers who are listed on the Financial Advisers Register between 1 January 2016 and 1 January 2019 will be recognised as an 'existing provider' under the new professional standards.

Further information about the changes to notification dates can be found on ASIC’s Professional standards for financial advisers – reforms website.

Anti-money laundering

AUSTRAC publishes an assessment of money laundering/terrorism financing risks for traveller’s cheques

On 16 July, AUSTRAC published an assessment of money laundering and terrorism financing risks with traveller’s cheques.

According to the report, AUSTRAC assesses the overall money laundering/terrorism financing (ML/TF) risk posed by traveller’s cheques to be low.

There is no recent criminal intelligence relating to traveller’s cheques recorded by AUSTRAC’s partner agencies. Only 27 suspicious matter reports (SMRs) were submitted to AUSTRAC in relation to traveller’s cheques over a two-year period. These SMRs all related to the process of cashing traveller’s cheques. The reasons for suspicion in this small SMR dataset were suspected low-level money laundering and traveller’s cheque fraud. There were no SMRs in the dataset relating to terrorism financing.

The purchase of traveller’s cheques is likely to be vulnerable to money laundering ‘placement’ risk, as customers can buy traveller’s cheques using cash. The very significant reduction in recent years in the number of outlets in Australia where traveller’s cheques can be purchased has limited this risk. There are now only two financial institutions that sell traveller’s cheques in Australia.

Banking

ASIC approves Banking Code of Practice

On 31 July, ASIC approved the Australian Banking Association’s (ABA’s) new Banking Code of Practice (Code).

ASIC’s approval of the Code follows extensive engagement with the ABA, following a comprehensive independent review and extensive stakeholder consultation. According to ASIC, the ABA made additional significant changes to the Code in order to satisfy ASIC that it met our criteria for approval.

The new Code provides for improved protections for small business borrowers and expands the reach and impact of legal protections against unfair contract terms. For small businesses who borrow up to $3 million, the Code provides that lending contracts should not contain a range of potentially unfair and one-sided terms. Unfair contract terms protections in the law apply to businesses who borrow up to $1 million.

ASIC has provided guidance on its approach to approving codes, including how to obtain and retain approval in Regulatory Guide 183 Approval of financial services sector codes of conduct.

Other financial services regulation

Government improves access to ASIC searches

On 30 July, Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer, announced that the Government will reduce and remove fees for accessing certain information from the online business registries maintained by ASIC.

The Government will also extend the fee exemption that is currently available to some journalists for certain registry searches, as specified in the Corporations (Fees) Regulations 2001 (Cth) to all journalists, for all registry searches. The Minister states that an exemption from these fees will facilitate free access to important information about companies and financial services providers. Associated changes to the various ASIC registries will not affect ASIC's resourcing from the Budget.

The Minister states that both measures will reduce the impost on those seeking information on companies, organisations or corporations and that expanding the group of journalists that will benefit from the exemption from fees will aid public discussion.

APRA releases response to proposed replacement of Direct to APRA with a new data collection solution

On 30 July, APRA released its response to industry feedback on the proposed replacement of Direct to APRA (D2A) with a new Data Collection Solution.

In a letter to APRA reporting entities, APRA Executive General Manager, Risk and Data Analytics, Sean Carmody, said a second phase of industry engagement is now underway to help finalise the choice of the system and the transition and roll-out plan. To this end, APRA has created the following 3 new cross-industry forums: (i) Strategic Industry Reference Group; (ii) Technical Working Group; and (iii) Software Vendors Working Group. More details about the purpose and composition of these groups, including meeting minutes, are available on APRA's Data Collection Solution page.

The letter states that the new system will align with APRA’s commitment to use the Government's Standard Business Reporting (SBR) reporting taxonomies. Replacing D2A will not remove the obligation for regulated entities to report data to APRA or change the frequency and content of submissions. Entities will also continue to report data to multiple government agencies.

Tax

Government releases exposure draft legislation on improving the integrity of stapled structures

On 26 July, the Government released for public consultation the second stage of exposure draft legislation and Exposure Draft Explanatory Materials on improving the integrity of stapled structures. The revised exposure draft reflects feedback from public consultation on the first tranche of draft legislation which was released on 17 May 2018 and also includes draft legislation to prevent foreign investors from accessing concessional Managed Investment Trust (MIT) tax rates on agricultural land.

In addition, this exposure draft legislation includes changes to the treatment of residential housing held in a MIT announced as part of the affordable housing measures.

The Treasurer, the Hon Scott Morrison, stated the exposure draft also promotes more investment in affordable housing, especially for low to moderate income earners. The new legislation will allow foreign investors access to the concessional Managed Investment Trust (MIT) rate if they invest in affordable housing. The Treasurer stated that MITs will also be able to be used to invest in residential housing provided they do so primarily for rental purposes, however, access to conventional tax rates will only be extended to the income from such investment derived from affordable housing.

Submissions are due by 10 August.

Government cracks down on the black economy

On 23 July, the Government released for public consultation exposure draft legislation and Exposure Draft Explanatory Materials to further expand the taxable payment reporting system (TPRS) to three new industries: ‘road freight’, ‘information technology’, or ‘security, investigation or surveillance’, to ensure payments made to contractors in these industries are reported to the Australian Taxation Office (ATO).

On 23 July, The Government has released for public consultation exposure draft legislation and explanatory memorandum to remove tax deductibility of certain payments – including payment of wages and payments to contractors – if the entity making the payment fails to comply with its obligations to withhold and report information to the Commissioner of Taxation.

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer, stated that honest businesses meeting their tax and other obligations lose out to competitors doing the wrong thing and this encourages others to begin operating in the black economy in order to remain competitive.

Submissions are due by 17 August.

Treasury consults on best way to strengthen and modernise the ABN system

On 20 July, the Government released a consultation paper on the best way to strengthen and modernise the Australian Business Number (ABN) system.

The Treasury states Action to reform the ABN system responds to Black Economy Taskforce findings that participants in the black economy are using the ABN system to facilitate their fraudulent activity. This will also provide an opportunity to consider improvements to the ABN system which will better support ABN data for end users and underpin the growing use of ABNs across a wide range of purposes.

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer, stated that the ABN system is the backbone of business registration with around 7.7 million ABN registrations, and around 860,000 new ABNs issued in 2017-18. The ABN is increasingly acting as a business enabler, underpinning laws targeted at business, and signalling a business’s credentials. The Minister stated that it is therefore timely to consider whether the ABN system remains fit to support the expanded range of purposes an ABN serves today

Submissions are due by 31 August.