Financial Services in Focus – Issue 85

By Philip Hopley and Georgia Francis

In this edition, we outline ASIC’s new legislative instruments for constitutions of registered schemes and retail CCIVs and financial resources requirements, draft legislation on the objective of superannuation, and Parliament’s passing of the Financial Accountability Regime, and much more.

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

Funds

ASIC remakes three ‘sunsetting’ class orders for managed funds

On 15 September, ASIC stated it remade three class orders that were due to expire (‘sunset’) on 1 October 2023 under the Legislation Act 2003. The class orders are:

• [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 2015/847;
• [CO 13/656] Equality of treatment impacting on the acquisition of interests; and
• [CO 13/657] Discretions affecting the amount of consideration to acquire interests and withdrawal amounts.

[CO 13/655] has been remade on substantially the same terms in ASIC Corporations (Discretions for Setting the Issue Price and Withdrawal Price for Interests in Managed Investment Schemes) Instrument 2023/693  and [CO 13/656] and [13/657] have been substantially remade in ASIC Corporations (Equality of Treatment Impacting on the Acquisition of Scheme Interests and CCIV Shares) Instrument 2023/697.

The new legislative instruments that replace these class orders will sunset on 1 October 2028.

ASIC states that it will also update Regulatory Guide 134 Funds Management: Constitutions shortly to reflect the release of the new instruments, and that the new instrument for [CO 13/519] will be remade in substantially the same form in September 2023.

ASIC issues new legislative instruments for financial resources requirements

On 7 September, ASIC released four new legislative instruments and updated its guidance regarding the financial resource requirements that apply to some categories of Australian financial services licensees and platforms.

The new legislative instruments relating to financial requirements are:

• ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647. This applies to responsible entities of registered schemes, investor-directed portfolio service (IDPS) operators and corporate directors of retail corporate collective investment vehicles (CCIVs); and
• ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648. This applies to licensed custodians.

The following two legislative instruments were made in relation to Investor Directed Portfolio Services (IDPSs) and IDPS-like schemes, which are commonly referred to as ‘platforms’:

• ASIC Corporations (Investor Directed Portfolio Services Provided Through a Registered Managed Investment Scheme) Instrument 2023/668; and
• ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669.

The new legislative instruments were made after industry consultation and are set to expire on 1 October 2028.

To reflect the terms of the new legislative instruments and address key issues covered in Report 769 Response to submissions on CP 367 Remaking ASIC class orders on financial requirements, ASIC has also updated Regulatory Guide 166 AFS licensing: Financial requirements.

Superannuation

APRA releases findings on review of superannuation trustees’ treatment of private equity asset

On 4 September, APRA released findings of a review into the governance practices followed by registrable superannuation entity (RSE) licensees that were invested in the private equity technology company, Canva Pty Ltd (Canva) in late 2022.

In light of the deterioration in the investment market conditions over the course of 2022, APRA selected Canva as the focus of a targeted review of unlisted asset valuation governance due to its public profile as an asset in a higher-risk asset class.

APRA found the majority of RSE licensees’ governance practices related to their valuation of Canva appropriate, although it also highlighted some areas of improvement that APRA continues to address with RSE licensees through its supervision activities.

Treasury consults on draft legislation regarding objective of superannuation

On 1 September, Treasury released for consultation the Superannuation (Objective) Bill 2023, Superannuation (Objective) (Consequential and Transitional Provisions) Bill 2023 and explanatory materials.

The proposed objective of superannuation, as set out in the Superannuation (Objective) Bill 2023 is ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way’. This objective is the same as in Treasury’s February 2023 consultation paper.

According to the explanatory materials, the key concepts within the objective of superannuation are: ‘preserve savings’, ‘deliver income’, ‘dignified’, ‘government support’, ‘equitable’; and ‘sustainable’.

According to Treasury:

• the draft legislation and explanatory materials reflect the feedback received from stakeholders on the need to legislate the objective of superannuation to provide a shared direction for government, the superannuation industry and Australians; and
• the objective does not alter superannuation trustees’ existing obligations or how members’ money can be invested or accessed.

Consultation closes 29 September.

APRA releases 2023 superannuation performance test results

On 31 August, APRA released the results of the 2023 superannuation performance test.

This year’s test was expanded to evaluate the performance of 805 ‘trustee directed products’, a subset of the choice sector. MySuper products were tested for the third year in a row, with 64 MySuper products assessed.

APRA states the 2023 performance test results showed:

• 96 trustee-directed products failed to meet the test benchmarks. This included 20 of 500 non-platform products and 76 of 305 platform products;
• 75% of failed trustee-directed products are concentrated in products offered by just four trustees;
• one MySuper product failed to meet the test benchmarks, compared with five failed products in 2022 and 13 in 2021; and
• the median administration fees and costs for platform trustee-directed products were the highest at 0.54% of assets, compared to 0.27% for non-platform trustee-directed products and 0.26% for MySuper products.

APRA states that trustees of products that failed to pass the benchmarks must notify their members of the test outcomes by 28 September 2023. Trustees cannot accept new members into products that have failed for two consecutive years.

Financial product advice

Experienced pathway for financial advisors legislation passes Parliament

On 6 September, the Treasury Laws Amendment (2023 Measures No. 3) Bill 2023 (Bill) passed both Houses of Parliament.

The Bill, among other things, exempts advisors who practiced in the industry for 10 years, who have a clean record and who have passed the Financial Adviser Exam, from requiring further qualifications. The Bill is awaiting Royal Assent.

According to Assistant Treasurer, Stephen Jones, by better recognising the experience of long‑serving financial advisors, the Government is providing a pathway for experienced advisors to remain in the industry. He also said this means new entrants will have the benefit of their experience through mentoring and supervision and more Australians will have access to financial advice.

Financial markets

Legislation to improve competition in the trading of shares and other securities passes Parliament

On 6 September, Treasury Laws Amendment (2023 Measures No. 3) Bill 2023 (Bill) passed both Houses of Parliament.

According to the Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones, the Bill will, among other things, support competition in clearing and settlement services, which are critical to the functioning and stability of financial markets.

The Ministers state in their media release that, from Royal Assent, the Reserve Bank and ASIC will have powers to set rules for the conduct of clearing and settlement service facilities. In addition, the ACCC will have the power to arbitrate disputes between parties around the price and access to clearing and settlement services.

ASIC and RBA issue joint letter of expectations to ASX

On 30 August, ASIC and the RBA issued a joint letter outlining regulatory expectations of ASX Clear Pty Limited (ASX Clear) and ASX Settlement Pty Limited (ASX Settlement) when engaging with the newly established ASX Cash Equities Clearing and Settlement Advisory Group (Advisory Group).

The letter requires ASX Clear and ASX Settlement to resource, consult and engage with the Advisory Group in good faith and in the public interest.

According to media releases, ASIC and RBA will actively monitor ASX Clear and ASX Settlement’s engagement with the Advisory Group.

Consumer credit

ASIC proposes to extend electronic precontractual disclosure legislative instrument

On 5 September, ASIC proposed to extend the operation of ASIC Credit (Electronic Precontractual Disclosure) Instrument 2020/835 for a temporary period of 12 months, pending law reform.

In June 2023, the Government introduced Treasury Laws Amendment (2023 Law Improvement Package No. 1) Bill 2023 (Bill) to move exemptions or modifications of the law currently in ASIC Credit (Electronic Precontractual Disclosure) Instrument 2020/835 directly into the primary Acts and regulations. The Bill has not yet passed Parliament.

ASIC invites feedback on their proposal. Comments should be sent to ASIC by 13 September.

Banking

APRA consults on amendments to capital adequacy reporting standard

On 11 September, APRA released for consultation its proposed amendments to the Reporting Standard ARS 180 Capital Adequacy: Counterparty Credit Risk.

APRA proposes to align the regulatory burden on non-significant financial institutions with APRA’s previous prudential guidance, as part of the new capital framework’s reduction of reporting burden on smaller ADIs and to improve entities’ understanding of regulatory obligations.

The consultation letter and amended reporting standard are available on the APRA website.

Consultation closes 22 September.

ASIC releases letter calling on lenders to support customers in financial hardship

On 30 August, ASIC released an open letter to lenders calling on them to make sure they appropriately support customers experiencing financial hardship.

In the letter, ASIC sets out expectations of lenders to meet their obligations. These include:

• proactively communicating how and when customers can seek assistance;
• genuinely considering customer circumstances to develop sustainable solutions where possible; and
• communicating regularly with customers throughout and at the end of the assistance period.

According to ASIC’s media release, financial hardship will be an area of increased focus for ASIC over the next 12 months.

Reserve Bank and Digital Finance CRC complete CBDC Research Project

On 23 August, the RBA and the Digital Finance Cooperative Research Centre released a report on the findings from a joint research project involving industry that explored potential use cases for a central bank digital currency (CBDC) in Australia.

The project involved the RBA issuing a limited-scale ‘pilot’ CBDC that was a real legal claim on the RBA. The pilot CBDC was used by selected industry participants to demonstrate how a CBDC could be used to provide innovative payment and settlement services to Australian households and businesses. The various use cases explored in the project highlighted a range of areas where a CBDC could enhance the functioning of the payments system. At the same time, the project raised a number of legal, regulatory, technical and operational issues associated with a CBDC that warrant further consideration in future research.

Other financial services regulation

APRA finalises updated Financial Claims Scheme standard

On 12 September, APRA finalised minor administrative updates to Prudential Standard APS 910 Financial Claims Scheme (APS 910), following a short consultation.

APS 910 forms a key component of APRA’s crisis management framework and the remade standard will come into effect on 1 October 2023.

The response letter, updated prudential standard and non-confidential submissions are available on the APRA website.

ASIC report on distribution of OTC derivatives under DDO regime

On 6 September, ASIC published the findings of its review of the compliance with the design and distribution obligations (DDO) by issuers of retail over-the-counter (OTC) derivatives.

The findings in Report 770 Design and distribution obligations: Retail OTC derivatives (Report 770), outline how issuers of retail OTC derivatives are meeting DDO and highlights areas for improvement. Report 770 calls for issuers to:

• address their over-reliance on client questionnaires as a primary distribution filter; 
• review their mass marketing of OTC derivatives; and
• make greater use of available data to assist the design of derivative products, target market determinations and distribution arrangements. 

According to ASIC Deputy Chair Karen Chester, ASIC is disappointed that some high-risk retail product issuers have changed little in response to their DDO. Ms Chester also noted that ASIC will not hesitate to take further action from stop orders through to court proceedings, especially where ASIC sees egregious failures.

APRA releases findings on implementation of cross-industry standard on remuneration

On 6 September, APRA released findings from a review on how entities are approaching the implementation of Prudential Standard CPS 511 Remuneration (CPS 511).

APRA states the findings of the review demonstrate entities’ efforts to strengthen the alignment of remuneration and risk management in their remuneration frameworks, and also focus on common gaps observed during the review process that need to be considered by entities to ensure a sustainable change.

Financial Accountability Regime (FAR) passes Parliament

On 5 September, Financial Accountability Regime Bill 2023 and the Financial Accountability Regime (Consequential Amendments) Bill 2023 (FAR) passed both Houses of Parliament.

According to Assistant Treasurer, Stephen Jones, the FAR replaces and extends the Banking Executive Accountability Regime by imposing tough new accountability obligations on banks, insurers, and superannuation funds. The Assistance Treasurer said the FAR ensures these institutions clearly identify individuals who will be held accountable for the actions of the organisation.

The Assistant Treasurer states, in his media release, that an executive who breaches these obligations can be penalised with a loss of income, disqualification from working in the sector, and individual civil penalties for assisting in the organisation’s contravention of its obligations.

The Assistant Treasurer also states that the FAR will apply to the banking industry six months after Royal Assent and to the insurance and superannuation industries 18 months after Royal Assent.

ASIC proposes to remake financial reporting legislative instrument for stapled entities

On 5 September, ASIC proposed to remake ASIC Class Order [CO 13/1050] Financial reporting by stapled entities (Class Order). The Class Order provides relief to enable the combination or consolidation of stapled entities and relief for presentation of reports of stapled entities.

ASIC invites feedback on their proposal. Comments should be sent to ASIC by 13 September.

Government releases report of the review of the Payment Times Reporting Act 2020

On 31 August, the Minister for Small Business, Julie Collins, released the written report of the independent review of the Payment Times Reporting Act 2020, conducted by Dr Craig Emerson.

According to Treasury, the review found that the Payment Times Reporting Scheme has merit, however, certain requirements in the Act impose unnecessary regulatory burdens on reporting entities, compromise the effectiveness of the Regulator, and limit the accuracy and accessibility of the data.

The Minister states that the Government will carefully consider the findings and recommendations from the review, and has asked Treasury to immediately proceed with actions that require only changes to existing guidance materials and operational processes.

Treasury releases consultation regulation impact statement on unfair trading practices

On 31 August, Treasury released for public consultation a paper called Protecting consumers from unfair trading practices: Consultation Regulation Impact Statement, regarding unfair trading practices across the jurisdictions of the Commonwealth, and the states and territories.

Consultation closes 29 November.

Treasury releases discussion paper on screen scraping

On 30 August, Treasury released a discussion paper, Screen scraping – policy and regulatory implications, in which Treasury seeks views on the nature of the screen scraping market, risks to consumers, the broader regulatory context and the comparability of data accessed through screen scraping with the Consumer Data Right (CDR).

Treasury states that ‘screen scraping’ is a technology that collects displayed data to support a range of activities, and that the discussion paper focuses on screen scraping practices that involve consumers providing their login details to third parties to collect data to provide a product or service, such as loans or financial management products.

Consultation closes 25 October.

APRA responds to emerging risks in 2023-24 Corporate Plan

On 28 August, APRA released its 2023-24 Corporate Plan.

The 2023-24 Corporate Plan outlines APRA’s priorities for the coming four years in response to new and developing risks impacting the global financial system.

APRA’s key priority areas are:

• addressing system-wide risks by enhancing cross-industry stress-testing, and ensuring macroprudential policy settings remain appropriate for the operating environment;
• a heightened focus on operational resilience, including cyber resilience, crisis management and operational risk management, to maintain the continuity of critical financial services;
• climate-related financial risks, including a Climate Vulnerability Assessment for general insurers and embedding climate risk in APRA’s approach to supervision; and
• improving superannuation transparency to provide members with enhanced insights about investment performance and increasing APRA’s focus on retirement outcomes.

Additionally, APRA says that it will progress plans to modernise the prudential architecture, transform its use of technology and data to sharpen industry supervision and increase transparency, and further cultivate an agile, engaged workforce that is equipped to respond to new and emerging issues.

ASIC releases 2023-24 Corporate Plan

In ASIC’s 2023-24 Corporate Plan, its strategic priorities include product design and distribution, sustainable finance, retirement outcomes and technology risks.

According to ASIC, it will take further enforcement action to protect Australian consumers and small businesses in an environment where scams, digitally-enabled misconduct and predatory lending practices are increasingly prevalent.

Treasury consults on Consumer Data Right (CDR) rules – expansion to the non-bank lending sector

On 25 August, Treasury released for consultation:

• exposure draft amending instrument to the Competition and Consumer (Consumer Data Right) Rules 2020 (the CDR Rules);
• exposure draft rules;
• explanatory materials; and
• a draft Privacy Impact Assessment.

The exposure draft rules expand the CDR to the non‑bank lenders sector.

According to the explanatory materials, extending the CDR to non-bank lenders sector is expected to facilitate more informed consumer engagement with both banks and non-bank lenders, leading to improved financial outcomes for individuals and businesses.

Consultation closes 6 October.

Treasury consults on Consumer Data Right rules – consent review and operational enhancements design papers

On 25 August, Treasury released for consultation CDR Consent Review design paper and operational enhancements design paper, in order to seek input on the development of changes to consent procedures and further operational enhancements to the Competition and Consumer (Consumer Data Right) Rules 2020 (CDR Rules).

According to Treasury:

• the consent review design paper seeks stakeholder feedback on a number of change proposals relating to rules and standards for CDR consents. Topics for feedback include:
  • bundling of consents;
  • selection of key consent terms;
  • withdrawal of consent information;
  • notifications;
  • consents for de‑identification; and
  • dark patterns.
• The operational enhancements design paper seeks stakeholder feedback to support the development of rules and standards to make changes to the CDR Rules so they are fit‑for‑purpose and support the policy aims of the CDR.

Consultation closes 6 October.

This article was written with the assistance of Aash Velhal, Isabella Emanuel and Francesca Di Mase, Law Graduates.