Financial Services in Focus – Issue 88

By Philip Hopley and Georgia Francis

In this edition, we outline the first tranche of draft legislation, which responds to several recommendations of the Quality of Advice review, along with the Government’s package for financial advice reforms, a Treasury consultation on the retirement phase of superannuation, ASIC’s 2024 enforcement priorities 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, payments system and other financial services regulation.

Funds

ASIC consults on remaking class order on exchange traded funds

On 24 November, ASIC announced that it was seeking feedback from the investment management industry on its proposal to remake the ASIC Class Order [CO 13/721] Relief to facilitate quotation of exchange traded funds on the AQUA (ASX Quoted Assets) Market.

Consultation Paper 374 Remaking ASIC Class Order on Exchange Traded Funds: [CO 13/721] sets out ASIC’s proposed amendments to [CO 13/721].

ASIC states that [CO 13/721] affords equal treatment relief for responsible entities and corporate directors (issuers), ongoing disclosure relief, relevant interest relief as well as substantial holding and beneficial trading relief for issuers, and that the class order is due to expire on 1 April 2024.

ASIC states it proposes to continue the relief currently provided in [CO 13/721] with an amendment to provide an extension of the current relief to a broader class of ETFs. This includes all types of quoted managed investment schemes and sub-funds of a corporate collective investment vehicle, not limited to those funds that are passively managed and track an index, but does not propose to extend the legislative instrument to funds that employ internal market making.

Superannuation

Treasury consults on the retirement phase of superannuation

On 4 December, Treasury released for public consultation a discussion paper, Retirement phase of superannuation, which seeks views on how the superannuation system can best provide the security and income Australians need as they live longer and healthier lives in retirement.

In commenting on the discussion paper, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, said there’s a clear need for better information, support and well-rounded income products to help retirees make the most of their superannuation.

Consultation closes on 9 February 2024.

APRA seeks greater industry transparency in latest phase of the Superannuation Data Transformation

On 30 November, APRA released a discussion paper outlining proposed enhancements for data collection as part of its efforts to strengthen transparency under the ‘Superannuation Data Transformation’ initiative.

This discussion paper increases the focus on the retirement phase by examining three key areas:

• supporting members to navigate the retirement income system,
• supporting funds to deliver better retirement income products and services, and
• making lifetime income products more accessible.

According to the discussion paper, APRA proposes to strengthen its data collection in areas including trustee board governance and investment liquidity and valuations.

Submissions are due by 31 March 2024.

APRA releases new data on superannuation product performance

On 29 November, APRA published new data on superannuation product performance, which it says sheds further light on the industry’s fees and performance metrics.

According to APRA, the findings show:

• there is significant variance in the administration fees paid by fund members within each of the product segments. This indicates considerable scope for fee reductions across the industry, particularly for trustee-directed products;
• trustee-directed products offered through platforms generally have the highest fees. Trustees should review whether the additional services provided to justify the higher fees are delivering value for money to members;
• larger funds tend to charge lower administration fees, which reinforces the efficiency and cost-savings benefits of scale that exist in superannuation; and
• while most MySuper products and non-platform trustee-directed products are outperforming the investment component of the performance test, more than half of all platform trustee-directed products are failing to meet the benchmark.

In commenting on the results, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, said it confirms the importance of the Government’s decision this year to extend the coverage of the performance test to trustee-directed products in the choice sector.

APRA publishes updates to FAQs on Superannuation Data Transformation

On 24 November, APRA published two new frequently asked questions (FAQs) and two updated worked examples for the Superannuation Data Transformation project.

The new FAQs and updated worked examples relate to reporting expenses under SRS 332.0 Expenses and SRS 550.0 Asset Allocation. They are available on the APRA website at: Frequently Asked Questions – Superannuation Data Transformation.

Draft legislation on the objective of superannuation

On 16 November, the Superannuation (Objective) Bill 2023 was introduced to Parliament, and defines the objective of super as: ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way’.

A joint media release by Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones announced the objective will not alter superannuation trustees’ existing obligations or provisions around the early access to superannuation on compassionate grounds.

ASIC releases report on its enforcement and regulatory activities

On 15 November, ASIC released Report 777 ASIC enforcement and regulatory update: July to September 2023, which provides an overview of ASIC’s work and key matters between 1 July and 30 September 2023.

In releasing the Report, ASIC announced that it will look to take strong, targeted enforcement action in the coming months and into 2024, as part of its focus on member outcomes in the superannuation sector.

Insurance

ASIC releases findings of survey on life insurance in superannuation

On 7 December, APRA published findings of a survey on the sustainability of group life insurance in superannuation, undertaken by a sample of registrable superannuation entity (RSE) licensees, life insurers and reinsurers.

The letter released that day follows the survey conducted by APRA at the end of 2022 to assess how the industries are responding to the issue of sustainability of the provision of group life insurance offerings and benefits in superannuation. APRA says the survey particularly focused on the actions taken in response to three key areas of concern: premium volatility, availability and provision of data, and tender practices.

Treasury consults on the use of genetic testing results in life insurance underwriting

On 27 November, Treasury released for public consultation a consultation paper, Use of genetic testing results in life insurance underwriting, which seeks feedback on both the impacts of life insurers utilising genetic test results in underwriting on genetic testing and research, as well as a range of potential policy responses.

In commenting on the consultation paper, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, said the Government is aware of community concerns that people are being dissuaded from taking genetic tests for fear of discrimination in accessing life insurance, and is releasing the consultation paper to regulate the use of genetic testing results in life insurance underwriting so that consumers can continue to access affordable life insurance while maximising the significant health benefits provided by genetic testing.

Consultation closes on 31 January 2024.

ASIC article on impact of disruption by natural disasters

On 22 November at the ASIC Annual Forum, insurers, experts and consumer advocates discussed the growing insurance ‘protection gap’ for Australians amid increasing fires, floods and other natural disasters. 

At a time when extreme weather events are becoming more frequent, ASIC states that insurers need to adapt to ensure they can balance the need for affordable, quality products with sustainable business models.

Financial product advice

Government announces comprehensive financial advice reform package

On 7 December, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, announced the Government will have a comprehensive package of reforms to ensure that Australians have access to quality and affordable financial advice.

In making the announcement, the minister said:

• There will be a new class of financial advisers (called ‘qualified advisers’), who will generally be employees of licensed financial institutions. This class will be required to meet education standards, be focused on providing advice on simple matters, and be prevented from charging a fee or a commission.
• These changes will apply across all financial institutions, including superannuation funds, life and general insurers, and banks.
• The best interests will be modernised to ensure customers receive helpful advice, including on single issue or limited scope issues, at a high standard.
• Statements of advice will be replaced with a record that is in plain English and which provides helpful information to make an informed decision.
• There will be clarity about the topics that superannuation funds can charge for advice on and the circumstances they can consider.
• Superannuation funds will be allowed to provide helpful ‘nudges’ to members to drive greater engagement with superannuation at key life stages.

The minister said that legislation will be developed to implement this model in 2024 and that this package will finalise the Government’s response to the Quality of Advice Review.

Treasury consults on the first tranche of the Delivering Better Financial Outcomes package of reforms

On 14 November, Treasury released for consultation the first tranche of draft legislation, which responds to several recommendations of the Quality of Advice review. 

These recommendations include:

• Recommendation 7: clarifying the legal basis for superannuation trustees reimbursing a member’s financial advice fees from their superannuation account, and associated tax consequences;
• Recommendation 8: streamlining ongoing fee renewal and consent requirements and removing the requirement to provide a fee disclosure statement;
• Recommendation 10: providing more flexibility on how FSG requirements can be met;
• Simplifying and clarifying the provisions governing conflicted remuneration, including:
  • Recommendations 13.1 and 13.3: clarifying that monetary or non-monetary benefits given by a client are not conflicted remuneration, along with the removal of consequential exceptions;
  • Recommendation 13.4: removing the exception to conflicted remuneration rules for the issue of financial products where advice has not been provided in the previous 12 months; and
  • Recommendation 13.5: removing the exception to conflicted remuneration rules for agents or employees of ADIs.
• Recommendation 13.2: introducing a specific exception to the conflicted remuneration provisions that permits a superannuation fund trustee to pay a fee for personal advice where the client requests the trustee to pay the fee from their superannuation account.
• Recommendations 13.7 to 13.9: introducing new standardised consent requirements for life risk insurance, general insurance and consumer credit insurance commissions.

In commenting on the draft legislation, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, said this package will cut onerous red tape that adds to the cost of advice with no benefit to consumers.

Submissions closed on 6 December.

Financial markets

ASIC releases report on online traders

On 6 December, ASIC released a report summarising its key observations on the practices ASIC observed in a 2022-2023 review of online trading providers. The report also sets out ASIC’s results of its actions.

In releasing Report 778 Review of online trading providers, ASIC states that it has made a number of regulatory interventions in relation to:

• high-risk offers;
• inadequate supervision of representatives;
• misleading or deceptive statements;
• use of digital engagement practices, such as gamification and influencer marketing; and
• holding client assets and money.

ASX expands roadmap to include new recommendations from review

On 27 November, the ASX announced that it has expanded the actions it will undertake to further improve delivery capability across the organisation following a review of its delivery frameworks. The review was conducted to inform a special report published on that day which assesses ASX’s Portfolio, Program and Project Management frameworks. The ASX said the special report was delivered to ASIC on 29 September 2023 and was audited by EY.

ASX announces product-based solution for CHESS replacement

On 20 November, the ASX announced that it has completed its reassessment of the solution design to replace CHESS and will proceed with a product-based solution to be delivered by global technology provider TATA Consultancy Services. 

On that day, ASIC and the RBA acknowledged ASX’s announcement and stated it is a foundational step in getting the CHESS replacement program back on track.

Banking

APRA maintains current macroprudential policy settings

On 4 December, APRA published its annual update on macroprudential policy outlining the reasons why existing policy settings remain appropriate.

In determining to keep its current capital- and credit-based macroprudential settings in place, APRA took account of ongoing cost-of-living pressures, the domestic and global economic outlook, particularly the expected easing in labour market conditions, and the potential for higher borrowing costs. APRA also considered the level of capital on bank balance sheets and the expected performance of their lending assets.

ASIC consults on ABA’s proposed changes to the banking code

On 17 November, ASIC announced it will consult on the Australian Banking Association’s (ABA) proposed changes to its Banking Code of Practice (the Code). The Code contains a set of contractually enforceable standards that customers and small business can expect subscribing banks to uphold. The ABA plans to apply for ASIC approval of the revised Code.

ASIC states this is the first time that ASIC has undertaken a public consultation before making a decision on approving the Code. ASIC is seeking to ensure the Code continues to provide real benefits to consumers, small businesses, and subscribing banks before deciding whether to grant final approval.

The consultation closes on 15 January 2024.

APRA proposes targeted changes on liquidity and capital

On 15 November, APRA released for consultation its proposed changes to liquidity and capital requirements aimed at strengthening the banking sector’s resilience to future stress.

The proposed changes seek to ensure that ADIs have strong crisis preparedness, prudently value their liquid assets and minimise potential contagion risks.

The changes will be reflected in the following standards and guidance:

• Prudential Standard APS 210 Liquidity;
• Prudential Practice Guide APG 210 Liquidity; and
• Prudential Standard APS 111 Capital Adequacy: Measurement of Capital.

Anti-money laundering

AUSTRAC releases draft Rules regarding financial markets

On 16 November, AUSTRAC released draft Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules) and Explanatory Statement amending Chapter 21 of the AML/CTF Rules.

The draft AML/CTF Rules would clarify that the domestic financial market operator Australian Securities Exchange Limited (ASEL) is not a ‘prescribed financial market’ under the Corporations Act, but has been specified as an exempt financial market by the AUSTRAC CEO. The draft AML/CTF Rules also amend paragraph 21.4(8) to extend the exemption to apply to market participants of FEX Global Pty Ltd in the same way as ASEL.

Consultation is open to 11 December.

Payments system

RBA paper on the results of the 2022 consumer payments survey

On 27 November, the RBA released a research discussion paper, The Evolution of Consumer Payments in Australia: Results from the 2022 Consumer Payments Survey.

The research paper outlines the way Australians are making payments, and observed (among other things) that new payment methods are emerging – which are often enabled by mobile technology – and that the traditional use of cash is declining.

Other financial services regulation

APRA comments on data risk management

On 27 November, APRA released its insights on how banks, insurers and superannuation trustees can improve their data management practices, after a multi-year pilot study on the management of data risk among the companies APRA regulates.

APRA states that the results from its engagements with industry on the topic of data management highlights six factors for businesses to consider when improving data management.

• Establish data governance with a unified data strategy.
• Provide clarity on roles and responsibilities for ownership of critical data elements and processes across the data lifecycle.
• Simplify the technology and data architecture environment through improved platform solutions and by decommissioning legacy assets.
• Identify critical data elements and create a consistent set of data controls.
• Establish mechanisms to monitor data quality and timely remediation of errors based on business requirements.
• Integrate data management risk into risk management frameworks.

APRA consults on new cross-industry standard to centralise existing standards on definitions for ADIs and insurers

On 27 November, APRA released for consultation a new cross-industry standard to centralise APRA’s existing standards on definitions for authorised deposit-taking institutions and general, life and private health insurers.

The proposed new prudential standard CPS 001 Defined terms aims to remove terms that are no longer in use, address duplication and consolidate existing definitions across different standards into one place.

Consultation closes 13 March 2024.

Treasury aims to streamline financial reporting architecture

On 21 November, Treasurer, Jim Chalmers, and Assistant Treasurer, Stephen Jones, reported the Government plan to restructure Australia’s financial reporting bodies to make them more ‘efficient, effective and fit for purpose’, including to assist Australia in implementing new climate and sustainability standards.

The three bodies that currently oversee financial reporting and set reporting standards – the Australian Accounting Standards Board, the Auditing and Assurance Standards Board and the Financial Reporting Council – will be combined into a single entity.

It is intended that the body will be operational on or after 1 July 2026, subject to the passage of legislation.

ASIC announces 2024 enforcement priorities

On 21 November, ASIC announced its enforcement priorities for 2024.

Its enforcement priorities comprise:

• enforcement action targeting poor distribution of financial products;
• misleading conduct in relation to sustainable finance, including greenwashing;
• high-cost credit and predatory lending practices to consumers and small business;
• member services failures in the superannuation sector;
• misconduct resulting in the systematic erosion of superannuation balances;
• compliance with the reportable situation regime;
• insurance claims handling;
• conduct impacting small business, including small business creditors;
• enforcement action targeting gatekeepers facilitating misconduct;
• misconduct relating to used car financing to vulnerable consumers including brokers, car dealers and finance companies;
• compliance with financial hardship obligations; and
• technology and operational resilience for market operators and market participants.

See our earlier article on this development.

ASIC proposes to extend parent entity financial reporting and auditor independence legislative instruments

On 17 November, ASIC announced that it is proposing to extend the operation of two legislative instruments, ASIC Corporations (Auditor Independence) Instrument 2021/75 and ASIC Corporations (Parent Entity Financial Statements) Instrument 2021/195, which are due to expire in April 2024, for a further five years.

ASIC considers that these instruments are operating effectively and efficiently, and continue to form a necessary and useful part of the legislative framework.

Consultation closes 8 December.

APRA releases response to consultation on minor amendments to prudential framework for ADIs and insurers

On 16 November, APRA released a response to consultations on proposed minor amendments to the prudential framework for ADIs and general, life and private health insurers.

The response letter issued on that day follows the consultation released in June 2023 on APRA’s proposed updates to ensure that the framework for ADIs and insurers is refreshed in a timely manner between more comprehensive reviews of prudential standards. APRA states the amendments are primarily technical clarifications and do not present any material change in policy settings.

ASIC and Australian Financial Security Authority sign refreshed memorandum of understanding

On 16 November, ASIC Chair Joe Longo and the Australian Financial Security Authority (AFSA) Chief Executive Tim Beresford signed a refreshed Memorandum of Understanding (MoU), following the last update in 2014.

The agencies will continue to work together to pursue common interests and demonstrate their commitment to a whole-of-Australian Government approach to protecting and promoting confidence in the financial system.

ASIC stated the updated MoU between ASIC and AFSA sets out a framework for continued cooperation to facilitate liaison, assistance and the exchange of information between the agencies for the effective and efficient performance of their respective regulatory functions.

ASIC releases report on its cyber pulse survey

On 13 November, ASIC released a report outlining its key findings from the ASIC cyber pulse survey 2023, which ASIC states summarises important trends, identifies areas for improvement and highlights better practices with practical examples.

In releasing Report 776 Spotlight on cyber: Findings and insights from the cyber pulse survey 2023, ASIC states that the results of the voluntary self-assessment survey have exposed deficiencies in cyber security risk management of critical cyber capabilities, indicating that organisations are reactive rather than proactive when it comes to managing their cyber security.

This article was written with the assistance of Julia Rowland and Richard Goodlad.