Financial Services in Focus – Issue 82

By Philip Hopley and Georgia Francis

In this edition, we outline the Government’s response to the Quality of Advice review, updates to the Compensation Scheme of Last Resort, and Treasury’s strategic plan for Australia’s payments system and much more.

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

Funds

ASIC consults on remaking ‘sunsetting’ class orders on unit pricing discretions for managed investment schemes

On 8 June, ASIC released for consultation draft legislative instrument, ‘ASIC Corporations (Discretions for Setting the Issue Price and Withdrawal Price for Interests in Managed Investment Schemes) Instrument 2023/XX’, which seeks to remake the following managed investment scheme unit pricing class orders sunsetting on 1 October:

• ASIC Class Order [CO 13/655] Provisions about the amount of consideration to acquire interests and withdrawal amounts not covered by ASIC Corporations (Managed investment product consideration) Instrument 2015/84; and
• ASIC Class Order [CO 13/657] Discretions affecting the amount of consideration to acquire interests and withdrawal amounts.

ASIC proposes to remake the above class orders in a combined legislative instrument in substantially the same form for 5 years, as it considers they are operating effectively and efficiently and continue to form a necessary and useful part of the legislative framework.

In particular, ASIC is seeking feedback on:

• its proposal to simplify the drafting of the duty to maintain written policies and records in relation to the exercise of pricing discretions in [CO 13/657];
• whether the broad existing requirement that pricing discretions be consistent with commercial practice and result in a current value/price requirement in [CO 13/657] (see new s601FC(1A)), remains appropriate; and
• whether ASIC should continue to maintain a separate unit pricing regime for the relevant schemes that were registered before 1 October 2013.

Consultation closes 29 June.

Superannuation

ASIC calls on superannuation trustees to appropriately deal with application monies

On 26 June, ASIC issued a media release in which it called on superannuation trustees to ensure they are meeting their legal obligations for dealing with incoming money from consumers if a new or increased interest in a superannuation product cannot be issued by the next business day.

ASIC states that the call follows ASIC’s review of a sample of twelve superannuation trustees to understand how they met requirements for dealing with money received for a financial product set out in the Corporations Act.

In its media release, ASIC states it found four main issues among the trustees reviewed.

• Using a non-compliant account to hold money: some trustees used an account that did not meet the requirements for some or all of their superannuation products. For example, the account used was not a designated trust account.
• Not holding money for the required time: Several trustees did not retain a member’s money on trust in a compliant bank account until the time an interest in a product was issued or increased. For example, before a new or increased interest for a member was issued, incoming money was being moved or ‘swept out’ of the prescribed account daily and invested as part of a general fund strategy. ASIC states that some trustees may need to revise their incoming cashflow management practices to ensure they comply.
• Failure to identify money subject to the requirement: Some trustees reported that they could not or did not identify money subject to the requirements of section 1017E. For example, some trustees had no daily monitoring arrangements in place while others did not check how their service providers handled money for a member when it was first received.
• Inadequate disclosures to consumers: In ASIC’s view, most of the disclosure material reviewed required improvement. For example, it often did not clearly explain who would receive the benefit of interest earned on incoming money before a product is issued (or increased) or explain when no interest would be payable.

APRA publishes updates to FAQs on the Your Future, Your Super package

On 22 June, APRA issued a set of new and updated frequently asked questions (FAQs) to provide further guidance on the administration of the Government’s Your Future, Your Super Performance Test.

The new and updated FAQs provide clarification on the following topics regarding the implementation of the 2023 Performance Test:

• determination of Trustee Directed Product status; 
• resubmission of SRS 550.0 reporting;
• determination of Strategic Asset Allocations;
• reporting forms used; and
• use of data collected as part of the Superannuation Data Transformation project.

APRA updates its FAQs on the Superannuation Data Transformation project

On 21 June, APRA published an update to its frequently asked questions (FAQs) for the Superannuation Data Transformation project. The updated FAQs refer to APRA’s approach to the revocation of superannuation reporting standards.

Treasury consults on draft legislation for non-arm’s length expense rules for superannuation funds

On 19 June, Treasury released for consultation the Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds and explanatory materials to enact amendments to the non‑arm’s length income (NALI) provisions announced in the 2023‑24 Budget.

The NALI provision amendments will apply to expenditure incurred by superannuation funds, referred to as the non‑arm’s length expense (NALE) rules.

Consistent with the Budget, the bill contains amendments to the Income Tax Assessment Act 1997, which:

• limit application of the NALE rules to self‑managed superannuation funds (SMSFs) and small APRA regulated funds (SAFs);
• distinguish between specific and general expenses for the purposes of NALE rules for both general and specific expenses of the fund;
• set the amount of income taxable as NALI from a general expense breach by an SMSF or SAF as twice the difference between the amount that would have been charged as an arm’s length expense and the amount that was actually charged to the fund;
• limit potential income of the fund taxable as NALI to the fund’s taxable income less contributions and related deductions; and
• exempt expenses that were incurred or might have been expected to be incurred before the 2018‑19 income year.

Consultation closes 7 July.

Government updates benchmarks used for superannuation performance test

On 16 June, the Assistant Treasurer Stephen Jones, announced that – following consultation on draft regulations and the Your Future, Your Super review – the Government will update the regulations for the August 2023 performance test.

According to Mr Jones’ media release, the updated test will address unintended consequences identified in the Your Future, Your Super review, while ensuring it is more fit‑for‑purpose for Choice products. The changes include:

• an increase to the minimum testing period, in line with the increase of the longer-term investment testing ‘lookback’ period.
• key benchmarks will be calibrated to ensure that funds are not unintentionally discouraged from investing in certain assets.
• in assessing the representative administration fee for trustee-directed products, platform and non-platform products will be benchmarked against a median fee relevant to this category.

According to this media release, the Government will continue to explore and consult on further changes that improve the sophistication of the test to scrutinise underperformance across superannuation products.

APRA and ASIC release notes on the Superannuation CEO Roundtable

On 9 June, APRA and ASIC released the notes from the Superannuation CEO Roundtable which was held on 29 May. The discussion focused on the effectiveness and adequacy of trustees’ cyber risk-management practices.

According to the notes, insights from lessons learnt from recent cyber attacks in Australia, both within and outside of the superannuation industry, were shared by the regulators and included the following:

• to reduce the risk of significant compromise, trustees should have strong data and IT systems governance measures that include the decommissioning of legacy systems and adequate service provider oversight.
• preparedness for an incident occurring is also critical. Response plans should be tested and address, at a minimum, governance and decision-making, business continuity and contingency planning, and communication strategies.
• simulations of cyber threats and trustee responses can be very effective in ensuring that trustees are well-prepared and response plans are fit for purpose. Clear delineation between board and management responsibilities is important to establish in advance of any real threat scenario.
• cyber incidents can have direct negative consequences for members. Trustees must make decisions which are in the best interests of their members, and this includes providing members with timely and accurate communications and ensuring adequate resourcing for appropriate member support.

APRA publishes notes from the Superannuation Data Transformation Strategic Forum

On 5 June, APRA published the notes from the Superannuation Data Transformation Strategic Forum, held on 16 May.

Insurance

ASX releases listing fee changes for FY24

On 1 July, changes to ASX annual and subsequent listing fees for FY24 (‘Listing Rule Guidance Note 15A – Schedule 1, Tables 1B and 1C’) will come into effect.

FY24 annual listing fees will be calculated on the total value of the entity’s quoted securities, based on the closing price of its quoted securities multiplied by the number of securities quoted on ASX at 31 May 2023.

The new fee schedules will be made available on the listing fees page of the ASX website from 1 July.

Initial listing fees (‘Schedule 1, Table 1A – Listing Rule Guidance Note 15A’) will change from 1 January 2024.

ASIC grants relief to insurers from certain transaction confirmation requirements

On 9 June, ASIC announced it had granted relief to life and general insurers to provide modifications and exemptions from the confirmation of transaction requirements contained in section 1017F of the Corporations Act in certain circumstances.

The relief is set out in two separate legislative instruments:

• ASIC Corporations (Confirming Transactions-Deceased Life Insurance Policyholder) Instrument 2023/437, which provides legal certainty that confirmation of transactions is not required to be given to a life insurance policyholder if the initial owner of the policy has deceased, and instead confirmation can be provided to third-party beneficiaries.
• ASIC Corporations (Confirming Transactions-Recurring Insurance Benefit Payments) Instrument 2023/438, which provides an exemption from giving confirmation of the transaction after a recurring benefit claim payment has occurred, where:
  • confirmation has already been given in the form of a statement that covers future payments under the recurring benefit claim for a period of no more than six months; and
  • the statement complies with subsections 1017F(6)-(8) of the Corporations Act in relation to the payment and each other payment covered by the statement.

The instruments are set to expire on 1 July 2028.

Financial product advice

Government announces response to Quality of Advice review recommendations

On 13 June, Assistant Treasurer Stephen Jones announced that the Government will adopt the bulk of Quality of Advice review recommendations and develop legislation over the coming year to deliver this reform.

The package of reforms will be progressed in three streams:

• stream one: removing onerous red tape that adds to the cost of advice with no benefit to consumers;
• stream two: expanding access to retirement income advice; and
• stream three: exploring new channels for advice.

Financial markets

ASX releases consultation paper on amendments to the ASX Operating Rules and ASX Settlement Operating Rules relating to ETP naming expectations

On 7 June, ASX released a consultation paper on amendments to the ASX Operating Rules and ASX Settlement Operating Rules to facilitate the implementation of ASIC’s updated exchange traded product (ETP) naming expectations set out in the revised version of INFO 230 released by ASIC in November 2022.

This includes amendments to align categories of AQUA products that may be admitted to trading status with ASIC’s updated ETP naming conventions – which no longer contemplate a Managed Fund as an ETP product label (with the only primary labels contemplated for ETPs being Exchange Traded Fund (or ETF) or Structured Product (or Structured)), as well as a number of other structural drafting improvements to the AQUA Rules which it is opportune to make at this time.

Written submissions are requested by 19 July.

ASX releases the CHESS Special Report and Audit Report

On 5 June, ASX released public versions the Special Report and the Audit Report on the current CHESS clearing and settlement system.

Banking

Regarding Australia’s debit card market

On 16 June, the RBA released an Issues Paper outlining options for further enhancing the competitiveness, efficiency and safety of Australia’s debit card market.

According to RBA’s media release, the key concerns outlined in the Issues Paper are:

• the practice of a default routing network being set at issuance on dual-network debit cards. The RBA states that this practice can reduce competition between card schemes and puts upward pressure on merchants’ debit card payment costs, which in turn feeds through into higher prices for consumers. The RBA seeks stakeholder views on the benefits and costs of actions to prohibit this practice, with merchants instead choosing the routing network.
• the tokenisation of debit cards for the purpose of conducting online transactions. Tokenisation of card details in the online environment plays an important role in improving security. However, merchants and payment service providers continue to retain sensitive card details, which undermines the security benefits of tokenisation. There are also some areas where standardisation may be necessary to ensure that the full benefits of tokenisation are realised without impeding competition. The RBA seeks stakeholder views on expectations that the RBA could set for the industry to address these issues and to substantially reduce the amount of sensitive card details being held across the industry by the end of 2024.

Stakeholders are invited to provide written submissions in response to these issues. The closing date for submissions is 12 July.

APRA publishes letter to banks on exceptions to home lending standards

On 9 June, APRA published a letter to all banks to reiterate its expectations around managing exceptions to housing lending policy.

The letter follows recent changes by some banks to their processes for granting exceptions to borrowers who do not meet minimum home loan serviceability criteria, such as the 3% serviceability buffer.

The intention of the letter is to reinforce to banks the importance of ensuring exceptions to policy are prudent, limited, and clearly justified so as not to undermine the core intent of APRA’s guidance on credit risk management.

The housing lending standards letter is available on APRA’s website.

Anti-money laundering

AUSTRAC announces updated website

On 20 June, AUSTRAC announced it would be launching an updated AUSTRAC website, which it expects to go live from 27 June.

According to AUSTRAC, some improvements include:

• industry specific landing pages to make it easier for businesses to find information relevant to their industry;
• simplified navigation and improved search filters for guidance and resources by industry or financial crime type;
• new layouts that make it easier to read and understand long or complex information;
• a new ‘Partners’ section about AUSTRAC’s partnerships with other agencies and how they work together; and
• easy access to log into AUSTRAC Online from the header of all pages.

Attorney-General makes AUSTRAC industry contribution determination

On 8 June, the Australian Transaction Reports and Analysis Centre Industry Contribution Determination 2023 (No. 1) was made by the Attorney-General under the Australian Transaction Reports and Analysis Centre Industry Contribution Act 2011 No. 54 (Cth) and was registered on the Federal Register of Legislation on 16 June.

According to the explanatory statement, the legislative instrument determines the amount of the instalment of levy for 2022-23 that will recover the costs of the performance of AUSTRAC regulatory and intelligence functions.

Other financial services regulation

Treasury releases final report of its review of the ASIC Industry Funding Model

On 26 June, the Government released the Final Report on the Review of the ASIC Industry Funding Model (IFM).

The Review was led by Treasury in consultation with ASIC, the Department of Finance and the Department of the Prime Minister and Cabinet to ensure the ASIC IFM settings remain appropriate in the longer term.

According to the Assistant Treasurer, Stephen Jones’ media release, the Review found that the settings of the ASIC IFM remain broadly appropriate but that refinements can be made within the existing framework to improve the way regulatory costs are recovered and to communicate IFM settings to industry more effectively.

The Review makes 10 recommendations, of which four are directed to ASIC.

Key recommendations include:

• spreading the costs of certain regulatory activities (taking action against unlicenced operators, regulating emerging sectors, and capital expenditure) either across a wider population or over time to recognise the wider benefits of those activities;
• undertaking further consultation to ensure sub‑sector definitions, metrics and formulas used to calculated levies remain fit‑for‑purpose;
• delegating the fee‑setting power to ASIC to ensure fee amounts continue to reflect full cost recovery; and
• ASIC to enhance its reporting, transparency, and consultation arrangements on the IFM.

Mr Jones’ media release also notes that the Government supports ASIC taking action to implement the recommendations directed to it, to improve its engagement with industry and to streamline its reporting arrangements, particularly through its Cost Recovery Implementation Statement.

APRA releases latest stakeholder survey results

On 23 June, APRA released the results of the 2023 Stakeholder Survey.

APRA considers that the results demonstrated a strong backing for APRA’s focus on enhancing risk management across the banking, insurance and superannuation industries.

The survey recorded:

• strong support for APRA’s ongoing prudential supervisory role, with 98% of respondents saying it benefitted their industry, 94% agreeing that it helped protect the community, and 90% believing it enhanced the strength of their entity.
• lower levels of support for the cost and burden of complying with APRA’s regulatory requirements. APRA also noted less positive responses from superannuation entities following several years of heightened scrutiny and tougher requirements aimed at boosting member outcomes.

According to the media release, for the first time, the 2023 survey included a range of questions on current issues as well as several questions on behalf of the Financial Regulator Assessment Authority, which is conducting its first review of APRA.

Among the new insights produced:

• 92% of respondents believed APRA had a positive impact on their entity’s risk management practices, while almost the same number (88%) said it had a positive impact on their risk culture;
• 70% said APRA’s focus on climate-related risks was a positive for their organisation; and
• more than two-thirds (68%) of respondents said APRA’s supervision and regulatory relief during the pandemic had a positive impact on their entity.

Senate passes legislation to establish the Compensation Scheme of Last Resort

On 22 June, the Senate passed the ‘Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023’ [and associated Bills] to establish the Compensation Scheme of Last Resort (CSLR).

According to the media release issued by Assistant Treasurer Stephen Jones, the CSLR implements one of the last outstanding recommendations from the Hayne Royal Commission. Consumers will be able to lodge claims for compensation from April 2024, with the first compensation payments to follow shortly thereafter.

The Bill and the explanatory memorandum to the Bill are available on Parliament’s website.

APRA consults on minor amendments to the prudential framework for ADIs and insurers

On 19 June, APRA released for consultation minor updates to the prudential framework applicable to authorised deposit-taking institutions and general, life and private health insurers.

According to APRA, this consultation:

• is a new process, intended to ensure minor updates to the framework can be made in a timely manner;
• is part of APRA’s strategic initiative to modernise the prudential architecture; and
• does not substantially amend policy settings.

The standards and guidance affected include:

• Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180);
• Prudential Practice Guide APG 210 Liquidity (APG 210);
• Prudential Standard APS 120 Securitisation (APS 120);
• Prudential Practice Guide CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review (CPG 110); and
• Prudential Standard CPS 320 Actuarial and Related Matters (CPS 320).

Submissions are due by 19 July.

Treasury consults on draft APRA and ASIC assessment framework 

On 15 June, Treasury announced that the Financial Regulator Assessment Authority (FRAA) has developed and released for consultation, the Draft Financial System and Regulator Metrics Framework to improve its ability to assess the effectiveness and capability of APRA and ASIC.

The framework contains a system of measurement to enable future assessment of the effectiveness and capability of the framework, as well as to help the FRAA in developing reviews with more context and insights.

Consultation closes 27 July.

ASIC invites Australian entities to assess their cyber resilience

On 13 June, ASIC invited all ASIC regulated entities to take part in, ASIC’s cyber pulse survey, one of the largest conducted surveys to evaluate their cyber resilience in Australia’s corporate and financial markets.

The survey is voluntary, anonymously answered, and reviews an entity’s ability to:

• govern and manage organisational-wide cyber risks;
• identify and protect information assets that support critical business services; and
• detect, respond to, and recover from cyber security incidents.

ASIC will publish a report with key findings from the survey later this year.

Insights gained from the report will support the Department of Home Affairs to further target advice and assistance to the financial sector, support enhanced partnerships to continue the sector’s uplift in cyber security and resilience, and ensure compliance with regulatory requirements.

Participants who elected to receive an individual report will receive insights into how they have assessed their current cyber resilience capability compared to those of industry peers.

This survey is available through the ASIC Regulatory Portal.

Treasury releases strategic plan for Australia’s payments system

On 7 June, Treasury released its Strategic Plan for the future of Australia’s payments system which sets out its policy objectives and priorities for the payments system. The Strategic Plan was developed through a consultation process in collaboration with regulators, industry, consumer, and business representatives.

According to the media released issued by Treasurer Jim Chalmers, the Strategic Plan has five key components:

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      1. promoting a safe and resilient payments systemby reducing scams, strengthening cyber‑security, and updating the RBA’s supervision frameworks.
      2. updating the payments regulatory frameworkincluding a new licensing framework, more competition and transparency across systems, more collaboration amongst regulators, and steps to reduce small business transaction costs.
      3. modernising payments infrastructureby phasing out cheques and supporting the industry’s transition to the New Payments Platform.
      4. uplifting competition, innovation and productivityby aligning the payments system with other reforms including the Consumer Data Right framework, Digital ID, and the skills agenda.
      5. making Australia a leader in global payments, including through work in the G20 and the Pacific to improve the availability of fast, low‑cost international transfers, and piloting a central bank digital currency.

As part of the Strategic Plan, the Government has also released two consultation papers:

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      • Reforms to the Payment Systems (Regulation) Act 1998′ (PSRA), which proposes changes to:
        • ensure the Reserve Bank of Australia can regulate new and emerging payments systems, such as digital wallet providers, and
        • introduce a new Ministerial designation power that would allow particular payments services or platforms that present risks of national significance to be subject to additional oversight by regulators.

Consultation closes 5 July.

It is expected that legislative amendments to the PSRA will be introduced to Parliament before the end of 2023.

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      • Payments System Modernisation (Licensing: Defining Payment Functions), which proposes a list of payments functions that would be regulated under the new licensing framework.

Consultation closes 19 July.

Further consultation on the regulatory obligations under the new licensing framework will take place later in 2023 to facilitate the introduction of legislation for the new payments licensing regime in 2024.

You can read more about the Government’s Strategic Plan in our earlier article.

APRA publishes Statement of Intent

On 7 June, APRA published its Statement of Intent in response to the Government’s Statement of Expectations.

The Statement of Intent details APRA’s response to the Government’s expectations of APRA role, Government policy priorities, relationships with external stakeholders and organisational matters.

Government statement in response to the Statutory Review of the Consumer Data Right

On 7 June, the Government released its statement in response to the findings and recommendations of the independent Statutory Review of the Consumer Data Right (CDR).

According to the statement, the Government is:

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      • committed to ensuring Australia’s CDR framework continues to develop as safe and secure infrastructure for the data economy so that consumers have trusted ways to use their transaction data to better manage their money and save time; and
      • progressing many of the Review’s recommendations (having agreed to the Review’s recommendations) and has continued its commitment to the CDR in the 2023-24 Budget.

ASIC highlights focus areas for 30 June 2023 reporting

On 6 June, ASIC published a media release “urging” directors, auditors and persons preparing financial reports for the full and half-years ending 30 June 2023 to consider the effect uncertain market and economic conditions have had on their asset values and provisions.

ASIC also set out (as an attachment to the media release), ASIC’s specific focus areas for 30 June 2023 reporting.

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