Financial Services in Focus – Issue 52

In this edition, we report on ASIC’s CFD and binary option product intervention orders, ASIC’s requirements for advice fee consents and independence disclosures, ASIC’s ‘no action’ position on virtual meetings and much more.

Funds and financial products

On 1 April, ASIC announced that it has made a product intervention order banning the issue and distribution of binary options to retail clients.

According to ASIC, the ban under ASIC Corporations (Product Intervention Order-Binary Options) Instrument 2021/240 will take effect from 3 May.

The order follows ASIC’s public consultation in ASIC Consultation Paper 322 Product intervention: OTC binary options and CFDs.

As required under the Corporations Act, ASIC also published a product intervention order notice describing the significant detriment to retail clients it has identified as resulting (or likely to result) from binary options (among other matters).

On 29 March, ASIC announced that its product intervention order in relation to the issue and distribution of contracts for difference (CFD) for retail clients takes effect that day.

ASIC states that the order requires a reduction to the 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.

The order is made under the ASIC Corporations (Product Intervention Order-Contracts for Difference) Instrument 2020/986.

For more information on the order, see our earlier Issue 46.

On 26 March, the ASIC Corporations (Margin Lending Relief for Exchange-Traded Instalment Warrants) Instrument 2021/194 (Instrument) was registered.

According to the Explanatory Statement, the purpose of the Instrument is to remake the relief under ASIC Class Order [CO 10/1034], which expired on 1 April.  [CO 10/1034] exempted certain types of instalment warrants from the additional obligations imposed on margin lenders.

The Instrument will be repealed on 1 April 2026.

On 25 March, the Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry into mobile payment and digital wallet financial services.

According to the Terms of Reference, the inquiry will have particular reference to commercial relationships and business models, competition and consumer protection implications and comparisons between Australia and other jurisdictions.

Consultation closes on 21 May.

On 23 March, Anderson J of the Federal Court of Australia handed down a judgment finding that companies in the Mayfair 101 Group engaged in misleading or deceptive conduct and made false or misleading representations to investors in relation to promissory notes issued by a Mayfair 101 company.

In Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd (No 2) [2021] FCA 247, Anderson J held that the defendants contravened the prohibitions against misleading or deceptive conduct in the Corporations Act and the ASIC Act, and made false or misleading representations in contravention of the ASIC Act, in relation to the following four types of representations:

1. that the notes were comparative to, and of a similar risk profile to, bank term deposits, in circumstances where the notes exposed investors to significantly higher risk as they were not prudentially regulated and the issuer was insolvent since inception (among other matters);
2. that investors would be repaid their principal in full regardless of investment performance, in circumstances where the issuer had a right to extend the repayment date indefinitely where there were insufficient funds;
3. that the notes carried no risk of default, in circumstances where the issuer’s financial position was uncertain and the notes were designed in a manner to produce a result that was uncertain for investors; and
4. that the notes were a fully secured financial product, in circumstances where the notes were generally not supported by any first-ranking, unencumbered asset security.

The representations were conveyed in promotional and marketing material, application forms as well as internet key term searches.  Commenting on the judgment, ASIC states that, as part of its ‘True to Label’ project, it will take action not only when investments are marketed as safer, lower risk or more liquid when they are not, but also when search engines are used in a misleading or deceptive way to entice investors to products.

Financial product advice

On 25 March, ASIC announced that it has made three legislative instruments that deal with advice fee consents, and independence disclosure, in support of amendments made under the Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021 (Cth).

On 24 March, the following legislative instruments were registered:

1. ASIC Corporations (Consent to Deductions – Ongoing Fee Arrangements) Instrument 2021/124 (Instrument 2021/124), which prescribes the requirements for the giving of client consent to deductions or arranging for deductions of fees under an ongoing fee arrangement;
2. ASIC Corporations (Disclosure of Lack of Independence) Instrument 2021/125, which prescribes the requirements for a disclosure of a lack of independence in a Financial Services Guide; and
3. ASIC Superannuation (Consent to Pass on Costs of Providing Advice) Instrument 2021/126 (Instrument 2021/126), which prescribes the requirements for the written consent that superannuation trustees must obtain from a member before they pass on the cost of providing financial product advice in relation to a member to the member under a non-ongoing fee arrangement (other than fees for intra-fund advice).

In addition to the three legislative instruments, ASIC also published:

1. ASIC Report 687 Response to submissions on CP 329 on advice fee consents and independence disclosure, which sets out ASIC’s response to its March 2020 consultation (see our earlier Issue 37);
2. example written consent form for ongoing fees to be deducted as prescribed under Instrument 2021/124;
3. example written consent form for non-ongoing fees to be deducted as prescribed under Instrument 2021/126; and
4. frequently asked questions in relation to advice fee consent and independence disclosure.

Financial markets

On 31 March, the ASX issued Compliance Update No. 02/21.  In this update, the ASX announced that:

1. it has finalised ASX Listing Rule amendments in relation to online forms, security issues and corporate action timetables and published a response to the consultation conducted in late 2020 (see below);
2. on 12 March, it released an updated version of ASX Guidance Note 19 Performance Securities;
3. it has deferred the approved ASX Listing Rule compliance course for persons responsible for communicating with the ASX to 1 July 2022; and
4. it has made available additional online forms in the new ASX Online training environment.

On 25 March, the ASIC Corporations (Short Term Trading Market) Instrument 2021/218 (Instrument) was registered.

According to the Explanatory Statement, the purpose of the Instrument is to exempt the Australian Energy Market Operator and trading participants on their Short Term Trading Market (STTM) for gas from the requirement to hold an AFSL covering the provision of specified financial services related to the operation of the STTM.

The Instrument preserves the effect of ASIC Class Order [CO 10/407] for five years until 1 April 2026.

On 24 March, the ASX published a response paper to submissions received in a consultation conducted by the ASX from November to December 2020 on proposed amendments to the ASX Listing Rules.

The ASX also published its finalised changes to the ASX Listing Rules, stating that the amendments will come into effect on 5 June (or such later date as the ASX may notify).

The amendments relate to online forms, notification of security issues and corporate action timetables.

For more information on the consultation, see our earlier Issue 48.

Anti-money laundering

On 29 March, AUSTRAC announced that it has updated its resources on applicable customer identification procedures and ongoing customer due diligence resources.

AUSTRAC states that the updates include new guidance and example scenarios to assist reporting entities in identifying gaps in their customer identification, verification and ongoing customer due diligence processes.

On that day, AUSTRAC also:

1. announced that it has made available a set of new guidance resources on how to submit more effective suspicious matter reports;
2. published five new regulatory guides to assist reporting entities to review and strengthen their AML/CTF programs in relation to governance, risk assessments, ongoing customer due diligence, international funds transfer instruction reporting and correspondent banking relationships; and
3. published a financial crime guide to assist reporting entities in understanding, identifying and reporting suspicious financial activity to prevent fraud against the National Disability Insurance Scheme.

On 19 March, the Financial Action Task Force (FATF) published a draft updated Guidance on the risk-based approach to virtual assets and VASPs for consultation with private sector stakeholders.  The guidance describes the application of the FATF Recommendations to countries and competent authorities in relation to virtual assets and virtual asset service providers (VASP).

The FATF states that the changes aim to maintain a level playing field for VASPs, based on the financial services they provide, and to minimise the opportunity for regulatory arbitrage between sectors and countries.

AUSTRAC has a webpage on this consultation.

FATF’s consultation closes on 20 April.

We explore some of the key changes set out in the draft guidance.

Consumer credit

On 1 April, the National Consumer Credit Protection Amendment (Small Business Exemption) Regulations 2021 (Regulations) were registered.

Last year, regulations were registered to temporarily exempt certain credit providers from responsible lending obligations to enable the flow of credit to small business.

According to the Explanatory Memorandum, the purpose of the Regulations is to amend the National Consumer Credit Protection Regulations 2010 to align the end of the small business exemption to the responsible lending obligations with the removal of the responsible lending obligations (subject to certain exceptions) under the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020.

The bill was introduced to Parliament on 9 December 2020.

On 22 March, the National Consumer Credit Protection (Transitional and Consequential Provisions) Regulations 2021 (Cth) (Regulations) were registered.

The Regulations are made in support of amendments made under Financial Sector Reform (Hayne Royal Commission Response- Protecting Consumers (2019 Measures)) Act 2020 (Cth) (Amending Act).

The Amending Act amended the National Consumer Credit Protection Act 2009 (Cth) to impose a ban on giving or receiving conflicted remuneration for certain persons including mortgage brokers, mortgage intermediaries and credit representatives (who are mortgage brokers and mortgage intermediaries) under arrangements entered into on or after 1 July 2020.

According to the Explanatory Statement, the purpose of the Regulations is to apply the ban on conflicted remuneration to any benefit given or received after the Regulations commence, even if the benefits are given under an arrangement made prior to 1 July 2020.

The Regulations commenced on 23 March.

Banking

On 18 March, APRA announced that it will consult on an updated approach to ADI licensing and supervision.  In support of the consultation, APRA published:

1. APRA Information Paper ADIS: New entrants – a pathway to sustainability, which sets out APRA’s revised approach to new entrants to the ADI industry; and
2. APRA Discussion Paper APRA’s approach to new entrant authorised deposit-taking institutions, which summarises the main revisions to APRA’s approach and sets out the rationale for the revisions.

APRA states that the updated approach includes the following changes:

1. restricted ADIs must achieve a limited launch of both an income-generating asset product and a deposit product before being granted an ADI licence;
2. increased clarity around capital requirements at different stages for new entrants, aimed at reducing volatility in capital levels and facilitating a transition to the methodology for established ADIs over time; and
3. new entrants are expected to have more advanced planning for a potential exit, including a focus on return of deposits as an option.

Consultation closes on 30 April.

Other financial services regulation

On 1 April, the Treasury Laws Amendment (Reuniting More Superannuation) Regulations 2021 were registered.

According to the Explanatory Statement, the regulations support amendments made under the Treasury Laws Amendment (Reuniting More Superannuation) Act 2021 (Cth). The amendments under the Act facilitate the closure of eligible rollover funds (ERF) by 31 January 2022, the creation of a new category of payments from superannuation providers to the Commissioner of Taxation and the reunification of these amounts with a member’s active account or to the member themselves.

The Explanatory Statement further states that the regulations no longer require or permit superannuation providers to transfer certain amounts to ERFs and enable the Commissioner of Taxation to pay interest on amounts received from ERFs or other voluntary payments from superannuation providers.

The regulations commenced on 2 April.

On 29 March, ASIC announced that it has adopted a temporary ‘no action’ position in relation to the convening and holding of virtual meetings of companies or managed investment schemes.  According to ASIC, the no action position:

1. supports the holding of meetings using appropriate technology;
2. facilitates electronic notice of meetings including supplementary notices; and
3. allows more public companies an additional 2 months to hold their annual general meetings,

and applies in relation to meetings held between 21 March and the earlier of either 31 October or the date that Parliament passes any measures relating to the use of virtual technology in meetings of companies or managed investment schemes.  The Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 is awaiting debate in the Senate.

ASIC states that its position follows the expiry of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination No. 3) on 21 March.

On 23 March, ASIC announced that it will not be providing a ‘no action’ position in relation to electronic signatures (which was also part of the temporary relief under Determination No. 3).

On 25 March, APRA published a response paper and ten finalised new reporting standards as part of Phase 1 of its multi-year Superannuation Data Transformation (SDT).

According to APRA, the SDT is intended to support improved member outcomes by increasing the breadth, depth and quality of APRA’s superannuation data collection.

APRA states that the new reporting standards cover registrable superannuation entity structure and profile, performance, member demographics, expense management, asset allocation, insurance arrangements, and fees and costs, and that the reporting framework has also been updated to facilitate proposed legislative amendments to be introduced under the Treasury Laws Amendment (Your Future Your Super) Bill 2021.

Subsequently, on 26 March, APRA published draft technical information and supporting material to help superannuation entities prepare data for submission.

APRA states that it will commence consultation on Phase 2 in late 2021.

On 22 March, ASIC announced that it has released ASIC Information Sheet 250 Giving AFS and credit licensees information about their representatives (INFO 250).

INFO 250 outlines ASIC’s approach to giving Australian financial services licensees and Australian credit licensees information about a representative.  According to INFO 250, such information may include breach notifications and reports of misconduct, whistleblower information, material produced in response to a notice, information from ASIC’s own surveillance activities and intelligence provided by other regulators.

ASIC states that it will notify the representative of ASIC’s decision to give information to a licensee, and that it will give the information to the licensee no earlier than two business days after ASIC has notified the representative and any affected third party.

On 22 March, ASIC published a review of how superannuation trustees supported their members during 2020, including how trustees communicated to members about COVID-19 issues and the provision of intra-fund advice.

ASIC also reminded superannuation trustees of its expectations as set out in a joint ASIC-APRA letter published on 1 April 2020 and ASIC’s frequently asked questions about infra-fund advice.

On 22 March, APRA released a letter to ADIs providing guidance on managing the risks associated with indemnities in divestment transactions. APRA states the guidance is intended to ensure a consistent and prudent approach is taken across the industry, as these indemnities can expose ADIs to potentially significant liabilities.

On 15 March, APRA published its response to submissions on a proposal to collect cyber insurance and management liability data in the National Claims and Policies Database (NCPD).  APRA states that it will implement the data collection with minor modifications.

APRA has released the revised reporting standards (including marked-up amendments) on its website.

For more information about the consultation, see our earlier Issue 47.

In March, Deloitte Access Economics (Deloitte) published an interim report Competition in Funds Management, which assesses competition in the Australian managed funds industry, for public consultation.

Deloitte was engaged by ASIC to produce the report (also known as ASIC Report 686), and to undertake public consultation. Deloitte states that the interim report does not identify significant evidence to suggest that competition is not effective in the managed funds industry, however, it identifies some areas where concerns have been raised or where outcomes might be improved.

Consultation closes on 9 April.

Tax

On 12 March, the Treasurer, Josh Frydenberg, announced that the Government will introduce legislation to reform Australia’s offshore banking unit (OBU) regime to avoid Australia being designated as a harmful tax regime by the OECD and the European Union.  According to the Treasurer, the OBU regime provides a more attractive tax rate for offshore banking activity conducted by Australian registered banks, and the changes are aimed to ensure that Australia remains globally competitive and an attractive market for financial services.