Financial Services in Focus – Issue 76

By Vince Battaglia, Philip Hopley and Georgia Francis

In this edition, we outline ASIC’s findings on TMDs in the small account credit industry, our view on the importance of a consumer credit case, regulatory reforms relating to Australia’s financial system, and much more.

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

Financial products

ASIC publishes report of review into small amount credit lenders’ target market determinations

On 13 December 2022, ASIC published Report 754 Small amount credit target market determinations (Report 754) which ASIC states highlight improvements that credit licensees who offer small amount credit contracts (SACC) have made to their target market determinations (TMDs) following ASIC’s review into their compliance with the design and distribution obligations (DDO).

In releasing the report, ASIC stated the review is part of a series of initiatives ASIC is undertaking to address compliance with the DDO regime.

Report 754 sets out the following areas of concern that ASIC has as a result of ASIC’s review of the TMDs issued by SACC lenders:

• specifying key attributes: SACC lenders must specify in their TMDs the details of the small amount credit contracts they provide (eg minimum and maximum amounts lent, and fees charged), and the repayment periods actually offered and any other features that would impact the product’s suitability for a class of consumers.
• defining the target market: a target market based on broad descriptions (eg ‘Consumers who need a loan for any legal purpose’) is unlikely to meet the requirements to define a target market.
• identifying consumers in the target market: the use of objective and tangible parameters, such as minimum income levels or a limit on the number of other recent or concurrent small amount credit contracts by the consumer, is more likely to demonstrate that a SACC lender has appropriately defined their target market.
• excluding consumers from the target market: ASIC expects SACC lenders will consider identifying groups of consumers who should be excluded from the target market of their small amount credit contract.
• setting review triggers: review triggers should test for patterns or clusters of harm, and be specific and appropriate, with explicit review triggers that address high-risk consumer groups.
• notifying ASIC of significant dealings: SACC lenders should include a review trigger relating to the occurrence of a significant dealing.
• setting review periods: review periods must be reasonable and based on the length of the small amount credit contract offered.

Funds

Government and ASIC announce reforms for litigation funding arrangements

On 16 December 2022, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, announced new regulations, the Corporations Amendment (Litigation Funding) Regulations 2022, which he states is designed to improve access to justice for class action plaintiffs.

On 19 February, ASIC announced that, following the commencement of these new regulations, litigation funding arrangements are generally exempt from the managed investment scheme, Australian financial services licensing, product disclosure and anti-hawking regimes in the Corporations Act, but that ASIC has determined to extend the relief for certain litigation funding arrangements set out in ASIC Credit (Litigation Funding-Exclusion) Instrument 2020/37 and ASIC Corporations (Conditional Costs Schemes) Instrument 2020/38 until 31 January 2026 because there are not covered by the new regulations.

ASIC also revoked redundant relief for registered litigation funding schemes in ASIC Corporations (Disclosure in Dollars) Instrument 2016/767 and ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787.

The above changes have been made by ASIC Corporations and Credit (Amendment and Repeal) Instrument 2022/1032.

Superannuation

FSC releases enforceable claims handling standard for superannuation funds

On 15 December 2022, the FSC released FSC Standard 28 Claims Handling Standard for Superannuation Funds (Standard). The Standard replaces existing voluntary guidance and outlines the minimum level of service consumers should expect to receive from their superannuation fund when making a life insurance claim.

The Standard commenced on 1 January 2023 on a voluntary compliance basis, with full mandatory compliance to commence from 1 July 2023 to complement the protections in the new Life Insurance Code of Practice.

APRA releases 2022 MySuper Heatmap

On 15 December 2022, APRA released its updated MySuper Heatmap which compares all MySuper superannuation products’ performance in the areas of investment returns, fees and costs, and long-term sustainability of member outcomes.

To further enhance industry transparency and ensure trustees are held accountable for outcomes being delivered to members, the heatmap also includes each product’s result under the Annual Performance Test.

APRA also published updates to its FAQs on the superannuation heatmaps.

Consumer credit

High Court refuses special leave application in case involving the meaning of the provision of credit

On 15 December 2022, the High Court of Australia refused special leave applications by Cigno Pty Ltd (Cigno) and BHF Solutions Pty Ltd (BHF), which sought to appeal the decision of the Full Federal Court which unanimously found that a ‘financial supply fee’ charged by Cigno was a charge ‘made for providing credit’.

According to ASIC’s media release in response to the High Court’s refusal of the special leave application, Cigno and BHF operated a lending model purporting to rely on an exemption in the National Credit Code and claimed they did not require an Australian credit licence. The lender, BHF, provided the credit and charged consumers a fixed fee per loan (of $15 regardless of amount – these were small loans, mostly under $2,000). Cigno, under a services agreement, separately charged very high fees (including a ‘financial supply fee’) for arranging and managing the credit. Cigno’s fees, combined with the lender’s fees, exceeded the prescribed maximum charge allowed in order to be exempt from holding a credit licence.

Cigno’s fees varied according to the amount of credit provided by BHF, so the question the Full Court of the Federal Court of Australia decided was whether Cigno’s fees were made ‘for [BHF] providing the credit’ (under section 6(5) of the National Credit Code).

The trial judge found that the only charge made ‘for the provision of credit’ was the $15 fee payable under the loan agreement that the borrower entered into with BHF and that, in contrast, the fees paid by the borrower to Cigno were paid for the provision by Cigno of application, management and collection services.

The Full Court of the Federal Court of Australia held that the ‘facts provide a sufficient basis on which to conclude that [a particular Cigno] Fee was a charge that was made for providing the [BHF] credit. Having regard to the commercial substance of the arrangements, the [particular] Fee was imposed on account of or by reason of the provision of [BHF] credit and, in a practical commercial sense, was imposed in exchange for that credit’.

More broadly, ASIC also argued that Cigno engaged in a ‘credit activity’ (as defined in the National Consumer Credit Protection Act 2009 (Cth)) by:

• assessing applications for loans and managing and collecting payments from the borrower and thereby exercised the rights of BHF in relation to a credit contract within the meaning of item 1(c) of section 6(1) of the National Consumer Credit Protection Act;
• suggesting that consumers apply for a credit contract with BHF and assisting them to apply for a credit contract with BHF and thereby provided a credit service within the meaning of item 2 of sections 6(1) and 7(a) of the National Consumer Credit Protection Act; and
• in the course of Cigno’s business, acting as an intermediary between BHF and borrowers for the purpose of securing the provision of credit for the borrower under a credit contract with BHF and thereby provided a credit service within the meaning of item 2 of sections 6(1) and 7(b) of the National Consumer Credit Protection Act.

These broader aspects were not decided by the Full Court, but were remitted to (and remain before) the trial judge for determination. The Full Federal Court’s judgment can be found on ASIC’s website.

With the refusal of the special leave applications by the High Court of Australia, we consider that there is now an important legal clarification of the circumstances in which the National Consumer Credit Protection Act and the National Credit Code apply to the provision of credit.

Financial markets

ASIC and RBA take further regulatory response to the ASX CHESS Replacement Program

On 15 December 2022, ASIC and RBA took further action to prompt ASX to maintain the current CHESS model until its replacement is issued.

On the same day, the ASX announced that it will act in accordance with ASIC’s requirements and RBA’s expectations for the current CHESS and CHESS replacement. The ASX said it will maintain the current CHESS sufficiently and ensure that it will continue to service Australia’s cash equities market’s reliability until the CHESS replacement goes live.

Anti-money laundering

AUSTRAC announces Australia’s first proliferation financing risk assessment

On 14 December 2022, AUSTRAC released Australia’s first proliferation financing national risk assessment  targeted at boosting domestic and international efforts to combat significant criminal activity.

The risk assessment tool compiles information from government agencies and private sector stakeholders to provide a current picture of proliferation financing risk, how it is addressed and where efforts can be improved.

AUSTRAC releases guidance to enhance accessibility to financial services

On 9 December 2022, AUSTRAC released guidance titled, Assisting customers who don’t have standard forms of identification, which seeks to help financial institutions adopt flexible approaches to customer identity processes while still maintaining due diligence processes.

Banking

APRA announces consultation on centralised publication for ADIs

On 13 December 2022, APRA released a consultation letter on the frequency of its new centralised statistical publication for locally incorporated authorised deposit-taking institutions.

APRA states that the proposed new publication seeks to increase the transparency of the ADI industry through providing key market players access to data points in a way that is easier to analyse, compared to individual disclosures.

Consultation closes 31 January.

Other financial services regulation

ASIC relief to facilitate employee share schemes

On 20 December 2022, ASIC announced that it has made a legislative instrument that facilitates employee share schemes (ESS), ASIC Corporations (Employee Share Schemes) Instrument 2022/1021, in response to ESS provisions in Part 7.12 of the Corporations Act that commenced on 1 October 2022.

ASIC states the legislative instrument provides:

• a broader exemption for secondary sales of financial products that are quoted on a financial market;
• more options for the financial information that foreign companies can provide ESS participants;
• the ability to provide an expert valuation of ESS interests that are not ordinary shares (in addition to the other valuation methods set out in s1100X(3));
• technical relief so that salary sacrificing arrangements can comply with the requirements for contribution plans; and
• clarification that financial products offered outside this jurisdiction do not need to be included when calculating the issue cap in s1100V.

Council of Financial Regulators releases its quarterly statement

On 15 December 2022, the Council of Financial Regulators issued its quarterly statement (Quarterly Statement) following its quarterly meeting on 12 December 2022.

The statement covered issues such as included the evolving risks to household and business balance sheets, non-bank financial intermediation, cyber risks and regulatory developments in the payments system, including crypto, stablecoins and financial market infrastructure.

Treasury announces consultation on Strategic Plan for the Payments System

On 14 December 2022, the Treasury released for consultation a strategic plan for the Payments System.

In releasing A Strategic Plan for the Payments System: Consultation paper, Treasury states that the Strategic Plan is an important initiative for the Government to provide industry and regulators with clarity about its policy priorities, with a view to supporting the resilience of the payments system, strengthening the powers of regulators to adapt to new payment methods and promoting the transition to more modern payments infrastructure.

See our article on this topic.

Consultation closes 6 February.

Government announces reforms to modernise Australia’s Financial System

On 14 December 2022, the Treasurer, Dr Jim Chalmers, and the Assistant Treasurer and Minister for Financial Services, Stephen Jones, jointly announced the Federal Government is implementing reforms in 2023 to modernise the financial system.

According to the media release, the Government intends to:

• update Australia’s payment system – the Government will release a Strategic Plan for the future of Australia’s payments system in the first quarter of 2023;
• strengthen financial market infrastructure – the Government will act on recommendations by the Council of Financial Regulators (CFR), where the CFR had undertaken a series of reviews and has identified deficiencies in the current regulatory framework;
• set up a regulatory framework for Buy Now Pay Later arrangements; and
• set up a licensing and regulatory framework for crypto service providers – the Government will release a consultation paper in early 2023 to provide information on what digital assets should be regulated by financial services laws, and the development of appropriate custody and licensing settings to safeguard consumers.

Treasury releases consultation paper on digital platforms

On 20 December 2022, the Treasury released for consultation a paper on the ACCC’s inquiry into digital platform services in Australia.

In releasing Government consultation on ACCC’s regulatory reform recommendations: Consultation paper, Treasury states that while the ACCC is considering issues from a competition and consumer perspective, Treasury is consulting from the perspective of associated regulatory reform in Australia. The subject matter affects financial services and products, according to the consultation paper.

Consultation closes 15 February.

Treasury releases consultation paper on a climate-related financial disclosure regime

On 12 December 2022, the Treasury released for consultation a paper on a proposed mandatory climate-related financial disclosure regime.

In releasing Climate-related financial disclosure: Consultation paper, Treasury seeks initial views on key considerations for the design and implementation of the Government’s commitment to standardised, internationally‑aligned requirements for the disclosure of climate‑related financial risks and opportunities in Australia.

See our article on this topic.

Consultation closes 17 February.

Treasury publishes its first quarterly report on foreign investment

On 9 December 2022, Treasury published the first quarterly report on the regulation of foreign investment in Australia. The Quarterly Report on Foreign Investment 1 July – 30 September 2022 contains key data regarding the performance of Australia’s foreign investment regulatory framework.

The next quarterly report will be published by Treasury in February 2023.

This article was written with the assistance of Georgia Koutzoumis and Rachel Bonic, Graduate Lawyers.