Financial Services in Focus – Issue 54

By Harry New, Adrian Verdnik and Vince Battaglia

In this edition, we consider the Budget’s commitments to funds management and foreign financial services providers, a case on defective PDS disclosure, the exposure draft Your Future, Your Super regulations and much more.

Click on each heading below to read more about each of these areas: funds and financial products, financial product advice, financial markets, anti-money laundering, consumer credit, banking and other financial services regulation.

Funds and financial products

Collective investment vehicles and foreign financial services licensing reforms announced in Budget

On 11 May, the Treasurer delivered the Federal Budget for 2021-22.

According to the budget papers, the Government states that it intends to:

1. finalise the corporate collective investment vehicles component of the measure previously announced in the 2016-17 Budget, with a revised commencement date of 1 July 2022; and
2. consult on options to restore previously well-established regulatory relief for foreign financial service providers.

For more information on the implications of the Federal Budget on funds management regulation, see our update. We have also written about the impact of the Federal Budget across a range of industries here.

Court hands down reasons for defective PDS and compliance plan breach penalties

On 11 May, the reasons for the decision in Australian Securities and Investments Commission v Theta Asset Management Limited [2020] FCA 1894 (ASIC v Theta) were published.

The Federal Court of Australia held that:

1. the first defendant, the responsible entity of a registered scheme, contravened the Corporations Act by issuing a number of defective PDSs and failing to comply with the compliance plan of the scheme; and
2. the second defendant, the managing director of the responsible entity, contravened the Corporations Act by authorising the issue of the defective PDSs and failing to take reasonable steps to ensure that the responsible entity complied with its statutory obligations.

In assessing the pecuniary penalty, the Court adopted the principle that one factor to consider is whether the company has a corporate culture conducive to compliance with the Corporations Act, as evidenced by compliance programs and corrective measures in response to an acknowledged contravention.

In this case, the Court held, in relation to complying with the compliance plan, that although the responsible entity had put in place a compliance plan to seek to ensure that it complied with its obligations under the Corporations Act, the responsible entity failed to comply with its compliance plan and therefore did not have in place during the relevant period an adequate culture of compliance with its obligations under the Corporations Act. 

ASIC grants temporary dollar disclosure relief in respect of litigation funding schemes

On 10 May, ASIC announced that it has granted responsible entities of registered litigation funding schemes temporary relief from the requirement to disclose certain sensitive information in dollar terms in the scheme’s PDS. The relief was granted under ASIC Corporations (Amendment) Instrument 2021/292, which was registered earlier on 27 April.

According to ASIC, the temporary relief exempts dollar disclosures of:

1. the funding budget;
2. legal costs budget;
3. adverse costs insurance premiums;
4. estimated funding;
5. estimated legal costs; and
6. estimated claim proceeds,

and is only available in circumstances where this financial information has been separately disclosed in writing or electronically to all known members of the litigation funding scheme.

The temporary relief commenced on 28 April. According to the Explanatory Statement, ASIC has provided relief for a 12-month period, pending expected forthcoming public consultation as to the continuation of the exemption provided under the instrument.

ASIC publishes findings from retail fund liquidity review

On 30 April, ASIC published its summary of findings from its review of retail managed funds identify any potential liquidity issues faced by managed funds during the height of COVID-19 market disruption.

In summary, ASIC found that the funds did not face serious investor liquidity challenges during the height of COVID-19 market disruption, and that their liquidity frameworks were generally adequate.

Instruments registered to allow right-of-use lease assets to be used in AFSL financial requirements

On 28 April, the ASIC Corporations (Licence Conditions-Treatment of Lease Assets) Instrument 2021/229 and ASIC Corporations (Amendment) Instrument 2021/230 were registered.

According to the Explanatory Statement, the impetus for the instruments is the introduction of Australian Accounting Standard AASB 16 Leases (AASB 16). AASB 16 gave rise to an anomaly that, when calculating adjusted assets for the purpose of AFS licensee financial resource requirements, an AFS licensee will generally be required to exclude the right-of-use asset under AASB 16 as an intangible asset, but the licensee will generally have to include the corresponding lease liability in the calculation of adjusted liabilities. This may result in an AFS licensee being unable to satisfy their financial resource requirements following AASB 16.

The purpose of the instruments is to allow an AFS licensee to include a right-of-use asset under AASB 16 in their calculation of ‘adjusted assets’ and, consequently, the AFS licensee’s calculation of net tangible assets, surplus liquid funds and adjusted surplus liquid funds.

For more information on ASIC’s consultation on these changes, see our earlier Issue 48.

Financial product advice

Regulations supporting ongoing fee arrangements registered

On 14 May, the Financial Sector Reform (Hayne Royal Commission Response-Advice Fees) Regulations 2021 (Advice Regulations) were registered.

According to the Explanatory Statement, the Advice Regulations support amendments made under the Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021 (Cth) by:

1. specifying the records that fee recipients must keep to evidence compliance with the obligations for ongoing arrangements; and
2. enabling written consents in relation to financial product advice fees paid out of a superannuation interest to be provided electronically (and making other consequential amendments).

For more information on the Act, see our earlier Issue 51.

ASIC announces consumer research findings on ‘general advice’ label

On 5 May, ASIC announced that it will not be making recommendations to the Government in relation to changing the label of general advice, in light of research findings that changing the label alone is unlikely to prevent consumer confusion about general advice.

According to ASIC, the independent consumer research found that:

1. there was no evidence that a change in the ‘general advice’ label will change consumers’ understanding of general advice;
2. alternative labels to ‘general advice’ were not found to be a significantly better fit with the description of general advice;
3. the circumstances in which general advice is received could significantly increase the risk of consumer misunderstanding of the nature of the advice given;
4. consumers felt it was important to seek further information regardless of what label was used to convey general advice; and
5. there are other ways advice providers can clarify what is meant by ‘general advice’.

ASIC states that AFS licensees should review the research findings and the recent decision of Westpac Securities Administration Ltd & Anor v ASIC [2021] HCA 3 (Westpac v ASIC), and apply them in practice to ensure compliance with the relevant laws.

In Westpac v ASIC, the High Court of Australia clarified the meaning of personal financial product advice (compared to general advice). For more information on the case, see our article.

Treasury consults on regulation of proxy advisers and superannuation funds

On 30 April, the Treasury published a consultation paper relating to the adequacy of the current regulatory regime for proxy advice and developing reform options that would strengthen the transparency and accountability of proxy advice.

According to the consultation paper, proxy advisers typically undertake research and provide voting recommendations on resolutions put at a company’s meeting, and that many institutional shareholders, such as superannuation funds, use the services of proxy advisers to assist in arriving at voting decisions.

The Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced that the consultation will consider:

1. requirements on proxy advisers, including to obtain an AFSL for the provision of proxy advice or to be independent from their client (where the client is a superannuation fund); and
2. requirements on superannuation funds to make publicly available more detailed information on their voting record and outline how they exercise independent judgment in the determination of their voting decisions.

Consultation closes on 1 June.

Financial markets

ASIC announces intention to change capital requirements for market participants

In May 2021, ASIC published Issue 126 of its Market Integrity Update. In the update, ASIC announced that it intends to make changes to the capital requirements for market participants, following feedback received in response to ASIC’s proposals outlined in ASIC Consultation Paper 302 Proposed changes to ASIC’s capital requirements for market participants (CP 302).

CP 302 was published on 4 July 2018 and consultation closed on 15 August 2018. For more information in relation to the consultation, see our earlier Issue 6.

ASIC states that it anticipates that the new capital requirements for market participants (excluding clearing participants, authorised deposit taking institutions and principal traders), in the form of new market integrity rules, will be made by 30 June.

ASX publishes final changes to rules and guidance on trust and client segregated accounts

On 5 May, the ASX published a response paper in relation to its consultation on proposed amendments to rules and guidance in relation to trust and client segregated accounts. For more information on the consultation see our earlier Issue 48.

The amendments were to the ASX Clear Operating Rules and Procedures and ASX Clear Operating Rules Guidance Note 12 Trust and Client Segregated Accounts.

In the response paper, the ASX published the final rule and guidance note changes. The ASX states that the changes will come into effect on 2 August, and that ASX Clear participants will have a 12-month transition period that will end on 2 August 2022.

ASX publishes CHESS replacement information paper and consultation on changes to oil and gas reporting

On 30 April, the ASX issued Compliance Update No. 03/21. In the update, the ASX announced that it has:

1. published an information paper for listed entities and issuers of exchange-traded securities about the CHESS replacement go-live;
2. published a consultation paper in relation to proposed changes to reporting requirements for oil and gas production and exploration activities; and
3. published additional online forms for preview in the training environment for the new ASX Online, and announced new listing fee changes for FY22.

Anti-money laundering

AUSTRAC publishes new SMR resources

On 29 April, AUSTRAC published new resources in relation to suspicious matter reports (SMR), comprising a reference guide and a checklist setting out the main points outlined in the reference guide.

Consumer credit

ASIC publishes guidance for debt management services providers

On 5 May, ASIC published an information sheet for providers of debt management services that explains their new regulatory obligations, including the requirement to be licensed.

According to ASIC Information Sheet 254 Debt management services: Applying for a credit licence or variation, from 1 July 2021, providers of debt management services must hold a credit licence with an authorisation that covers debt management services. A provider may, however, continue to provide debt management services where they have, by 30 June 2021:

1. applied for, and have ASIC accept for lodgement, a credit licence application or variation that covers this activity (or have arrangements to act as a representative of a provider that has applied for a licence to cover this activity); and
2. become a member of the Australian Financial Complaints Authority (AFCA).

New credit licensing requirement for debt management services

On 30 April, the National Consumer Credit Protection Amendment (Debt Management Services) Regulations 2021 (Amendment Regulations) were registered.

According to the Explanatory Statement, the purpose of the Amendment Regulations is to introduce credit licensing obligations for persons providing debt management services to debtors and guarantors by prescribing debt management services as a new type of credit activity under the National Consumer Credit Protection Act 2009 (Cth).

The Explanatory Statement states that person who provides debt management services will need to hold an ACL covering the provision of those services by 1 July 2021, unless the limited transitional relief set out in the Amendment Regulations applies.

For more information on Treasury’s consultation process with respect to the regulations in draft exposure form, see our earlier Issue 49.

Banking

ASIC consults on proposed changes to ePayments Code

On 21 May, ASIC published a consultation paper in relation to proposed updates to the ePayments Code (Code).

According to ASIC Consultation Paper 341 Review of the ePayments Code: Further consultation, proposals focus on:

1. compliance monitoring and data collection;
2. mistaken internet payments, including retrieval of partial funds and the responsibilities of the sending and receiving ADIs;
3. extending the Code protections to small business customers;
4. unauthorised transactions and the pass code security requirements;
5. modernising the Code;
6. complaints handling;
7. facility expiry dates; and
8. transition and commencement of the updated Code.

According to ASIC, its review of the Code in its voluntary form is an interim measure ahead of the Code eventually becoming mandatory through legislation. ASIC states that the positions set out in CP 341, and in the updated voluntary Code, may be revisited when the Code is mandated at a future date.

Consultation closes on 2 July.

APRA publishes further revised draft standard on ADI capital adequacy

On 10 May, APRA published a response paper and a further revised draft standard in response to its consultation on proposed measures to enhance the capital adequacy of authorised deposit-taking institutions.

APRA commenced consultation on proposed revisions to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) in October 2019. According to APRA, the key proposals focused on:

1. reinforcing financial system resilience, through changes to the capital treatment of a parent ADI’s equity investments in their banking and insurance subsidiaries;
2. promoting simple and transparent capital issuance, through the removal of the allowance for the use of special purpose vehicles in regulatory capital issuance; and
3. clarifying various parts of APS 111, including through providing additional technical information to assist ADIs in issuing capital instruments.

APRA states that it intends to finalise APS 111 in July 2021, and that the final revised standard is intended to come into force from 1 January 2022.

Other financial services regulation

APRA publishes additional FAQs and worked examples on Superannuation Data Transformation

On 7 and 21 May, APRA published publishes additional FAQs and worked examples on the Superannuation Data Transformation Phase 1 reporting standards. The FAQs are available on the APRA website.

Treasury consults on measures to streamline the calculation of exempt current pension income for superannuation trustees

On 21 May, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the Government has published exposure draft legislation in relation to reducing ‘red tape’ for superannuation funds by streamlining some administrative requirements for the calculation of exempt current pension income.

According to the Treasury, the exposure draft legislation and supporting explanatory materials give effect to the Government’s commitment by amending the Income Tax Assessment Act 1997 (Cth).

The exposure drafts are available on the Treasury’s website.

Consultation closes on 18 June.

APRA postpones commencement of policy contract term measures for IDII products

On 12 May, APRA announced that it has issued a letter to life insurers and friendly societies on extending the timeframe for the implementation of the policy contract term measure for individual disability income insurance (IDII).

According to the letter, the policy contract term measure was introduced to create a mechanism for life insurers and friendly societies (life companies) to update their IDII products, taking into account changes in the operating environment.

APRA states that it has decided to postpone implementation of the policy contract term measure from 1 October 2021 to 1 October 2022 (however that APRA’s other IDII product measures will still take effect on 1 October 2021).

ACCC publishes compliance guidance for CDR data holders

On 3 May, the ACCC published compliance guidance for data holders in the banking sector under the Consumer Data Right regime.

The focus of the Compliance Guidance for Data Holders Banking sector is on obligations arising under the Consumer Data Right Rules and the Consumer Data Standards. According to the ACCC, the guide does not cover a data holder’s obligations under the Privacy Safeguards.

Treasury consults on ‘opt-out’ model for joint account data sharing in CDR regime

On 30 April, the Treasury published a paper setting out proposed Consumer Data Right (CDR) rules and standards about an ‘opt-out’ model for joint account data sharing in the banking sector for consultation.

According to the design paper, the current ‘opt-in’ requirement means that while one joint account holder may initiate a consent process with an accredited data recipient to share joint account data, the process will stall if any other joint account holders have not previously indicated that they wish to share data from the account.

The consultation also relates to the energy sector.

Consultation closed on 26 May.

APRA consults on draft guide on remuneration for APRA-regulated entities

On 30 April, APRA published a draft Prudential Practice Guide CPG 511 Remuneration (CPG 511) for public consultation.

APRA states that the draft CPG 511 sets out principles and examples of better practice to assist banks, insurers and superannuation licensees comply with proposed Prudential Standard CPS 511 Remuneration (CPS 511), which will be finalised later this year.

For more information on the draft CPS 511, see our earlier Issue 47.

Consultation on the draft CPG 511 closes on 23 July.

Senate Select Committee on FinTech publishes further report and issues paper

On 28 April, the Select Committee on Australia as a Technology and Financial Centre published its second interim report.

The interim report recommendations related to matters including the Consumer Data Right, blockchain, corporate taxation, capital raising and skilled visas. We have written about the report here.

Subsequently on 19 May, the Select Committee published a third issues paper setting out matters for stakeholder consultation. The matters related to cyptocurrency and digital assets, the ‘debanking’ of Australian financial technology providers, neobanking, instances of corporate law holding back investment and options to replace the Offshore Banking Unit.

Consultation closes on 30 June.

Treasury consults on draft Your Future, Your Super regulations

On 28 April, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced the publication of exposure draft regulations and Explanatory Statements in relation to the Government’s Your Future, Your Super package.

According to the Treasury, the draft exposure regulations will:

1. outline the methodology for the annual performance test and re-opening test, as well as requirements for notifications to members;
2. prescribe the definition of a ‘stapled fund’, including tie-breaker rules for determining which fund is to be an employee’s stapled fund where they have multiple existing funds;
3. specify the formulas as a basis for ranking products on the YourSuper comparison tool;
4. set out the manner in which the portfolio holdings disclosures are organised;
5. prescribe the information that must be included with the notice of an Annual Members’ Meeting; and
6. further strengthen the prohibition on funds offering inducements to employers.

Consultation closed on 25 May.