Financial Services in Focus – Issue 80

By Philip Hopley and Georgia Francis

In this edition, we outline ASIC’s review of how investment product issuers are meeting the DDO, the Attorney-General’s proposed reforms to Australia’s AML/CTF regime, ASIC’s updated guidance for licensees on reportable situations, and much more.

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

Funds

ASIC releases report on DDO market surveillance

On 3 May, ASIC released Report 762 Design and distribution obligations: Investment products, which outlines ASIC’s findings and action taken following ASIC’s initial, risk-based review of how investment product issuers are meeting their design and distribution obligations (DDO) (Report 762). Report 762 sets out a number of areas for improvement with particular aspects of the DDO regime which ASIC considers issuers should take into account.

According to ASIC’s media release, the key target market deficiencies ASIC identified across investment product issuers include:

• target markets defined too broadly – a factor in 15 stop orders;
• unsuitable investor risk profiles used – a factor in 21 stop orders;
• inappropriate levels of portfolio allocation used – a factor in 10 stop orders;
• unsuitable investment timeframes and/or withdrawal features, not reflecting the product’s risks and liquidity profile – a factor in 18 stop orders; and
• inappropriate or no distribution conditions – a factor in 13 stop orders.

ASIC noted that many of these deficiencies appeared when issuers relied on target market determination templates without customising them appropriately.

Superannuation

APRA releases findings of the review of amendments to the Superannuation Guarantee (Administration) Act 1992

On 10 May, APRA released the findings from its review of the impacts on defined benefit schemes from amendments to the Superannuation Guarantee (Administration) Act 1992 (SGAA) (Report).

APRA conducted the review in accordance with the requirements of the Treasury Laws Amendment (Your Superannuation, Your Choice) Act 2020 (YSYC Act) and did not identify any unintended consequences on the operation or ongoing viability and profitability of defined benefit schemes that can be attributed to the amendments to the SGAA. It is APRA’s view is that no further amendment to the SGAA or any other Act is required as a consequence of the YSYC Act amendments.

The Report was tabled in both houses of the Parliament on 9 May as per the requirements of the YSYC Act.

APRA publishes additional FAQs on the Superannuation Data Transformation project

On 9 May, APRA published a new set of frequently asked questions (FAQs) on the Superannuation Data Transformation project in relation to recent minor amendments.

The FAQs are available on the APRA website.

Government introduces payday superannuation

On 2 May, the Treasurer, Jim Chalmers, and Assistant Treasurer, Stephen Jones, jointly announced that from 1 July 2026, employers will be required to pay their employees’ super at the same time as their salary and wages.

According to the media release, Treasury and the ATO will consult closely with industry and stakeholders on these changes in the second half of this year.

APRA publishes latest Choice Heatmap

On 26 April, APRA published its latest Choice Heatmap which provides comparable information (with respect to investment returns, fees and costs and sustainability) on the performance of MySuper and Choice products.

APRA also released an Insights Paper, which provides key findings from the Choice Heatmap, along with the Methodology Paper, which outlines the procedure that APRA has used to produce the Choice Heatmap.

APRA issues releases on combining product performance histories for the Superannuation Performance Test

On 20 April, APRA announced that it has issued for consultation, two releases on combining performance histories for the Superannuation Performance Test.

The first release is a draft for consultation of a technical determination that would remove the need for APRA to make individual determinations for lifecycle MySuper products for which performance histories are required to be combined.

The second release is an information paper which outlines APRA’s methodology for combined performance histories of trustee-directed products for this year’s performance test.

Consultation closes 11 May.

APRA consults on proposed class exemption to own or control a registrable superannuation entity licensee

On 19 April, APRA released for consultation draft instrument, Superannuation Industry (Supervision) Act exemption No 1 of 2023, to exempt a certain class of registrable superannuation entity (RSE) licensee directors from the change of control and ownership provisions of the Superannuation Industry (Supervision) Act 1993.

The proposed exemption intends to remove the requirement to obtain approval to own or control a RSE licensee for certain RSE licensee directors holding shares in the RSE licensee, where they are not entitled to a personal financial benefit from the shareholding.

APRA also published a letter to all RSE licensees which explains the proposed exemption.

Submissions close 17 May.

Insurance

APRA releases a report on claims trends and affordability of liability insurance in Australia

On 10 May, APRA released the findings from its review of claims trends and affordability of public liability and professional indemnity insurance in Australia report (Report).

The Report draws insights on the affordability of public and product liability, professional indemnity and directors and officers insurance.

APRA releases for consultation minor amendments to the insurance reporting framework

On 4 May, APRA released for consultation minor amendments to the final reporting standards impacted by the introduction of the Australian Accounting Standards Board 17 Insurance Contracts (AASB 17), LAGIC updates, and revisions to the capital framework for private health insurers.

According to APRA, the proposed changes can be categorised as:

• correcting errors that could lead to incorrect reporting; 
• removing ambiguity of instructions; and
• improving usability.

Consultation closes 19 May.

Financial markets

ASX consults on the future of the ASX Managed Fund Settlement Service

On 12 April, ASX Limited and ASX Settlement Pty Limited (together, ASX) announced that it is aiming to release a consultation paper in June 2023 to seek feedback regarding a proposed wind down and closure of the ASX Managed Fund Settlement Service (mFund).

According to the ASX’s media release, it will seek feedback on matters including industry preferences for transacting in managed funds via ASX and key considerations (such as timing and process) relevant to a wind down should ASX decide to close mFund.

ASX has stated that a final decision regarding mFund has not yet been made and that the mFund service will continue to operate as normal throughout the consultation process.

ASX expects the consultation period to remain open for six weeks.

Banking

ACCC seeks views on competition and consumer issues affecting Australian savers

On 21 April, the ACCC published the ACCC Retail Deposits Inquiry: Issues Paper (Issues Paper) which seeks views on the key issues it will consider in its inquiry into the market for retail deposit products supplied by authorised deposit-taking institutions.

According to the media release, the key issues the ACCC is seeking feedback on include:

• how banks and other authorised deposit-taking institutions set their rates on retail deposit products;
• how their approaches differ from rate setting for credit products (eg home loans);
• the role of deposits in their overall funding mix; and
• consumer information switching.

ACCC intends to consult closely with the RBA, APRA and ASIC.

Consultation closes 19 May. ACCC must provide the Treasurer with a report on the inquiry by 1 December.

ASIC releases report on handling scams for bank customers

On 20 April, ASIC released  Report 761 Scam prevention, detection and response by the four major banks (Report 761), which examined the approaches taken by the major banks to prevent, detect and respond to scams.

According to ASIC’s media release, Report 761 found that:

• the overall approach to scams strategy and governance of Australia’s major banks was variable and overall less mature than expected;
• the banks had inconsistent and narrow approaches to determining liability;
• scam victims were not always well supported by their bank;
• there were gaps and inconsistencies in how the banks detect and stop scam payments; and
• while there were examples of emerging good practice, steps taken to help prevent customers fall victim to scams varied across banks.

In response to the findings of Report 761, ASIC is calling for all financial institutions to improve their approaches to handling scams.

Government releases review of the Reserve Bank of Australia

On 20 April, the Government released its report which set out its review of the RBA titled, ‘An RBA fit for the future’ (Review).

According to the Treasurer, Jim Chalmers, the Review makes 51 specific recommendations under 14 broader headings, grouped into the following five key themes:

• a clearer monetary policy framework, with clear objectives and tools, and a well‑defined financial stability role;
• stronger monetary policy decision making and accountability, including a more expert Monetary Policy Board supported by better processes and greater transparency and accountability around decisions;
• an open and dynamic RBA, with a more agile and empowering culture and more open and constructive debate;
• more robust corporate governance, including the establishment of a new Governance Board to support and oversee management; and
• steps to ensure RBA leaders drive institutional and cultural change.

Anti-money laundering

Attorney-General consults on AML/CTF reforms

On 20 April, the Attorney-General announced consultation on proposed reforms to Australia’s AML/CTF regime.

The proposed reforms, as set out in the consultation paper, seek to extend the existing AML/CTF legislation to capture additional ‘tranche-two’ high risk entities. These entities include lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones.

Consultation closes on 16 June.

Read more about these AML/CTF regime reforms in our earlier article.

AUSTRAC launches new AML/CTF e-learning modules

On 20 April, AUSTRAC released two new AML/CTF e-learning modules aimed at reporting entities that conduct applicable customer identification procedures for non-individual customers, such as companies and trusts.

The new modules are:

• Applicable Customer Identification Procedures; and
• Beneficial owners and Politically Exposed Persons.

The new modules join the existing AUSTRAC e-learning suite, which is available to reporting entities to increase their understanding of AML/CTF regulation and their compliance obligations.

Access to the new modules is available via AUSTRAC’s e-learning resource page.

Other financial services regulation

ASIC releases report on recent enforcement and regulatory work

On 11 May, ASIC released Report 764 ASIC enforcement and regulatory update: January to March 2023 (Report 764).

Report 764 sets out the key enforcement and regulatory actions ASIC have taken between January and March 2023. These include both court-based and other enforcement actions, and our work to strengthen market integrity, foster industry compliance and deliver against our strategic priorities.

As a result of the findings of Report 764, ASIC also issued a media release which warned credit providers and debt management firms to expect strong, targeted action against predatory lending, high-cost credit and misconduct impacting consumers experiencing financial difficulty, in the coming months.

ASIC releases update on its recent greenwashing actions

On 10 May, ASIC released Report 763 ASIC’s recent greenwashing interventions, which details the 35 interventions it has made in response to its greenwashing surveillance activities from 1 July 2022 to 31 March 2023 (Report 763).

Report 763 also identifies what ASIC considers to be the increasing levels of representations on environmental, social and governance credentials by listed companies, managed funds and superannuation funds.

According to the media release, from 1 July 2022 to 31 March 2023, ASIC intervention resulted in:

• 23 corrective disclosure outcomes
• 11 infringement notices issued, and
• in one case, the commencement of civil penalty proceedings.

ASIC updates the implementation timeframe for the internal dispute resolution data reporting framework

On 5 May, ASIC updated the implementation timeframe of the internal dispute resolution (IDR) data reporting framework to enable firms to report their IDR data as efficiently as possible given that it will be the first time since the reform was introduced.

ASIC has also updated the IDR data reporting handbook providing guidance on how financial firms can consistently report their IDR data.

ASIC will not publish IDR data until all financial firms have commenced reporting after 29 February 2024.

APRA and AFCA sign Memorandum of Understanding

On 28 April, APRA announced that it had signed a memorandum of understanding (MoU) with the Australian Financial Complaints Authority (AFCA) setting out how they will continue to work together to support a fair and efficient financial system.

The MoU sets out the basis for the agreement between APRA and AFCA, including information sharing and other forms of cooperation and coordination.

ASIC releases updated guidance for licensees on reportable situations

On 27 April, ASIC published updated Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees (RG 78) for the purposes of clarifying aspects of the existing guidance and providing new guidance in response to operational issues that have arisen since the implementation of the regime on 1 October 2021.

ASIC also released a document titled, Reportable situations: Overview of changes to RG 78 announced in April 2023, which outlines a summary of all the changes it made to RG 78, including the provision of new guidance on:

• the circumstances in which licensees may group multiple reportable situations into one report to ASIC;
• how to complete the free-text field ‘Describe the reportable situation’;
• the listed investigation trigger and root cause options;
• what constitutes a ‘similar’ reportable situation;
• calculating the number of clients affected; and
• the process for withdrawing a submitted report to ASIC.

In addition, there were several changes made to the content and embedded guidance of the prescribed form. These changes will be implemented on 5 May on the ASIC Regulatory Portal.

ASIC also set out other issues raised during industry consultation, which it noted would require further consideration before being acted upon.

Financial Stability Board releases report on climate-related financial risk factors in compensation frameworks

On 20 April, the Financial Stability Board issued a report, which is titled Climate-related Financial Risk Factors in Compensation Frameworks, which it states reviews compensation practices around climate-related objectives and how the stated goal of financial institutions is incorporated into their compensation frameworks.

IOSCO publishes report on emerging retail market conduct issues

On 30 March, the Board of the International Organization of Securities Commissions (IOSCO) published its Report on Retail Market Conduct, in response to the evolving retail trading landscape, influenced by changing macro conditions, demographic trends, and technological developments.

According to IOSCO’s media release, the report outlines a toolkit of adaptable measures for regulators to consider when dealing with retail market conduct issues, and includes various innovative approaches under five overarching categories:

• Heightening regulators’ digital presence and online strategy to proactively address retail investor harm;
• Honing approaches to better identify and mitigate misconduct;
• Enhancing cross-border and domestic supervisory and enforcement cooperation frameworks, both bilaterally and multilaterally;
• Addressing retail investor harm that stems from crypto-assets; and
• Implementing new regulatory approaches against retail misconduct.

In response to IOSCO’s report, ASIC stated that IOSCO’s report will inform ASIC’s strategic priorities on retail investor harms concerning crypto-assets, sustainable finance, scams and Australia’s DDO laws.

This article was written with the assistance of Laurice Aziz and Sogand Shamsaria, Law Graduates.