Financial Services in Focus – Issue 91

ASIC issues new legislative instrument for exchange traded funds

On 18 March, ASIC released a new legislative instrument ASIC Corporations (Relief to Facilitate Admission of Exchange Traded Funds) Instrument 2024/147. It replaces [CO 13/721] ASIC Corporations (Relief to facilitate quotation of exchange traded funds on the AQUA Market) 13/721 ([CO 13/721]), which was due to sunset on 1 April 2024.

The new legislative instrument extends the relief in [CO 13/721] to a broader class of quoted funds, not limited to those which track an index.

ASIC made the new legislative instrument after considering the submissions received, in response to Consultation Paper 374 Remaking ASIC class order on exchange traded funds: [CO 13/721] (CP 374). Respondents to CP 374 generally supported ASIC’s proposals.

Treasury consults on draft legislation regarding superannuation concessions

On 15 March, Treasury released draft legislation designed to support implementation of changes to superannuation tax concessions announced in the 2023‑24 Budget.

Treasury states the draft regulations contain provisions that enable the calculation Division 296 of tax for defined benefit interests to deliver commensurate treatment under the measure. This includes:

• outlining methods to value defined benefit interests; and

• making modifications to the Division 296 earnings formula to appropriately capture notional contributions to defined benefit interests.

According to Treasury, the draft regulations also update existing methods to calculate notional contributions for defined benefit interests to reflect up‑to‑date economic parameters. These methods have not been updated for many years and do not reflect the current social and economic climate.

Consultation closes on 26 April.

ASIC report on Choice super performance

On 21 February, ASIC released a report on the performance of Choice superannuation investment options.

Report 779 Superannuation and choice products: What focus is there on performance? examines the role of superannuation trustees, financial advisers and AFS licensees in influencing the investment options that make up member superannuation portfolios as part of a choice superannuation product.

In releasing the report, ASIC said its review found there was often insufficient emphasis on, and a lack of transparency about, Choice investment options that failed to meet performance expectations. Additionally, there was little evidence of trustees communicating to members about investment option performance in a targeted manner and financial advisers were not always addressing underperformance where relevant.

Treasury consults on annual superannuation performance test

On 8 March, Treasury released a consultation paper on the Annual Superannuation Performance Test (test), which was introduced as one of four Your Future, Your Super measures.

The purpose of the consultation paper, Annual Superannuation Performance Test - design options, is to canvass a range of options for reforming the test, should the government decide to do so in the future. In considering improvements to the performance test, the government is focused on ensuring the test holds trustees to account for delivering the best financial outcomes for members.

In commenting on the consultation paper’s release, Treasurer Jim Chalmers said the government isn’t directing super investment, but rather seeks to make sure superannuation funds are able to invest in ways that deliver the best possible returns for Australians.

Consultation closes on 19 April.

Treasury consults on standard definitions and standard cover for insurance

On 7 March, Treasury announced it is consulting on standardising natural hazards terms for insurance contracts and reviewing the standard cover regime.

In the 2022–23 October Budget, the Australian Government announced its intention to improve consumer understanding of insurance products as part of a package of reforms designed to:

• reduce the cost of insurance in communities at risk of natural disasters;

• enhance mitigation measures; and

• promote better outcomes for consumers.

In commenting on the release of the consultation paper, Assistant Treasurer and Minister for Financial Services, Stephen Jones, said this initiative forms part of a broader package of reforms to improve insurance affordability and resilience to natural hazards.

Consultation closes on 4 April.

ASIC calls on insurers to improve claims handling practices

On 6 March, ASIC issued a letter to Chairs and CEOs of general insurance companies reminding general insurers of their obligations as AFS licensees when handling insurance claims, especially in response to severe weather events. General insurers have a responsibility to act efficiently, honestly, fairly, and resolve claims in a timely manner.

In addition, ASIC says insurers are required to:

• communicate transparently, clearly and in a timely way with consumers regarding their claims;

• effectively project manage third parties, including assessors and tradespeople;

• identify complaints and expressions of dissatisfaction at the earliest opportunity;

• recognise consumers experiencing vulnerability and tailor their claims handling service accordingly; and

• sufficiently resource claims handling and dispute resolution functions, and ensure staff are adequately trained.

ASIC says this is an area of continued focus for ASIC, and addressing misconduct in insurance claims handling is a key enforcement priority for ASIC this year.

ASIC approves prescribed form for life insurance memorandums of transfer

On 1 March, ASIC announced it has been given the power to approve in writing the form that life insurance memorandums of transfer should take.

Accordingly, ASIC has approved the current version of ‘Form 2 – Memorandum of transfer for assigning rights under a life policy’ (Form) in Schedule 4 of the Life Insurance Regulations 1995 (Cth) as the prescribed form that memorandums of transfer should take for the purposes of incoming subsection 200(2B) of the Life Insurance Act 1995 (Cth).

The Form is approved for continued use from 1 March.

AUSTRAC consults on draft outsourcing guidance

On 26 February, AUSTRAC released draft guidance on outsourcing AML/CTF obligations.

The draft guidance is 11-pages long and includes ‘examples of good and bad practices’.

Consultation closed on 18 March.

ASX commences industry consultation on its proposed approach to deliver CHESS replacement

On 14 March, ASX released a public consultation paper calling for feedback on the two-stage approach it has proposed for the delivery of the Clearing House Electronic Subregister System (CHESS) replacement, as well as the proposed implementation plan for the clearing service, which is to be delivered in the first release.  

CHESS is the clearing and settlement system for Australia’s securities market, and this consultation paper follows an extensive reassessment by ASX of the solution design for a replacement of CHESS that would serve the whole market. In November 2023, ASX announced it would proceed with a product-based solution design for CHESS replacement that would be delivered by global technology provider TATA Consultancy Services.

Consultation closes on 24 April.

Treasury releases draft legislation on Buy Now Pay Later arrangements

On 12 March, Treasury announced that following previous consultation on the proposed regulation of Buy Now, Pay Later (BNPL) arrangements, it has released an exposure draft legislative package for public comment.

The package comprises a draft bill accompanied by an explanatory memorandum and draft regulations accompanied by an explanatory statement.

The draft legislation amends the National Consumer Credit Protection Act 2009 and the National Consumer Credit Protection Regulations 2010 to bring BNPL into the existing regulatory framework for other credit products.

Certain technical and operational provisions (including those dealing with the application, commencement and technological neutrality of the reforms) have been omitted for consultation.

In commenting on the release of the draft legislation, Assistant Treasurer and Minister for Financial Services, Stephen Jones, said that, left unregulated like credit products, BNPL can lead to poor product disclosure, inadequate dispute resolution processes, excessive default fees and unaffordable lending practices that lead to hardship and financial stress.

Consultation closes on 9 April.

Government announces an independent review of Australia’s credit reporting framework

On 27 February, the government announced an independent review of Australia’s credit reporting framework. The review will examine the effectiveness and efficiency of the credit reporting provisions in the Privacy Act 1988 and the National Consumer Credit Protection Act 2009.

The terms of reference for, and other information about, the review can be found here.

APRA releases information paper on credit risk capital requirements for housing loans

On 15 March, APRA released an information paper explaining how the capital adequacy rules for housing lending work and explores two key questions:

• how does APRA ensure capital requirements for housing lending are sufficient to withstand losses through the cycle?; and

• how does APRA ensure the differences between internal ratings-based and standardised capital requirements are appropriate, and limit impacts on competition in the Australian banking system?

Parliamentary inquiry into the wholesale investor and wholesale client tests

On 20 March, the Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry into the wholesale investor test for offers of securities (section 708 of Chapter 6D of the Corporations Act) and the wholesale client test for financial products and services (sections 761G and 761GA of Chapter 7 of the Corporations Act).

The committee seeks public submissions and intends to report to Parliament by the end of 2024.

For more information, see our earlier article.

Federal Court finds crypto-asset product was not a financial product

On 14 March, the Federal Court of Australia in ASIC v Finder Wallet Pty Ltd [2024] FCA 228 found Finder Wallet Pty Ltd did not provide unlicensed financial services in relation to crypto-asset related product, ‘Finder Earn’.

ASIC alleged the Finder Earn product was a debenture. This is because customers deposited money with Finder Wallet on the understanding their money would be repaid, together with a return for allowing Finder Wallet to use their capital. The court rejected this contention and found the product was not a debenture.

ASIC Executive Director Enforcement and Compliance Tim Mullaly said, ‘ASIC pursued this matter because we considered that this product was being offered without the appropriate licence or authorisation and therefore without the benefit of important consumer protections.’

For our analysis of this case, see our earlier article.

ASIC and APRA release a cross-industry information package on the Financial Accountability Regime

On 14 March, ASIC and APRA published new information to help banks, insurers and superannuation trustees prepare for the commencement of the Financial Accountability Regime (FAR).

The FAR, which takes effect for banks from 15 March 2024 and one year later for the insurance and superannuation industries, imposes a strengthened responsibility and accountability framework to improve the risk governance cultures of APRA-regulated entities, their directors and most senior executives. The information package includes the following guidance materials relevant to all industries:

• an information paper to assist entities and their accountable persons in understanding and complying with their obligations under the FAR;

• an updated accountability statement guide and template to help entities subject to the FAR enhanced notification obligations to prepare accountability statements; and

• reporting form instructions to assist entities in reporting FAR breaches to APRA and ASIC.

The documents for consultation are available on APRA's website: Financial Accountability Regime – Regulator rules. The information package’s guidance materials are available on ASIC's website: Financial Accountability Regime.

Government announces a financial sector regulatory initiatives grid

On 11 March, Treasurer Jim Chalmers announced  the government will introduce a financial sector regulatory initiatives grid to make sure the standard business of regulation is carried out in a more coordinated way.

According to the media release, the regulatory grid, modelled on the grid in place in the United Kingdom, will help financial services businesses engage with the government and regulators more effectively. It will also allow regulators to avoid duplication, build shared strategic priorities and focus on how to best implement reforms.

The grid will be a rolling, 24‑month forward program of regulatory initiatives that will materially affect the financial sector, including banking, credit, insurance, superannuation, investment, payments and capital market entities, updated twice a year.

It will be established and administered by Treasury and include proposed legislation, rule and regulation and standard making, consultation processes and data collection processes.

The grid will include initiatives of agencies including ASIC, APRA, ACCC, RBA and ATO.

Treasury will continue to engage with financial sector stakeholders in the development of the grid.

APRA and ASIC issue final rules and further guidance for the Financial Accountability Regime

On 8 March, APRA and ASIC released final rules and further guidance to support the financial services industry in implementing the Financial Accountability Regime (FAR). 

The FAR imposes a stronger responsibility and accountability framework for APRA-regulated entities in the banking, insurance and superannuation industries and their directors as well as their most senior executives. In doing so, the FAR aims to improve the risk and governance cultures of those financial institutions.

The package includes: 

• the Regulator rules, which prescribe information for inclusion in the FAR register of accountable persons;

• the Transitional rules, which prescribe information to be provided by authorised deposit-taking institutions (ADIs) in relation to their existing accountable persons under the BEAR at the transition point to the FAR; 

• descriptions of ADI key functions to assist banking entities in the allocation of key functions; and

• reporting form instructions to assist banking entities in providing the required information to APRA and ASIC.

The release of these materials follows a joint public consultation on the draft Regulator rules, Transitional rules and ADI key functions descriptions. 

Material changes to AFCA scheme approved by ASIC

On March 5, AFCA announced ASIC has formally approved material changes to the AFCA scheme following the consultation on changes to AFCA’s Rules and Operational Guidelines in 2023. AFCA has now published its Consultation Response outlining how it responded to formal submissions and stakeholder feedback.

The proposed changes to the Rules and Operational Guidelines were designed to implement the review’s recommendations and ensure AFCA continues to provide efficient, timely operations so we can deliver fair, independent and effective solutions for financial disputes. 

New versions of AFCA’s Rules and Operational Guidelines will be published on 1 July 2024, and will apply to complaints lodged on or after this date. These incoming changes will:

• increase AFCA’s ability to manage unreasonable or inappropriate conduct within the scheme from Complainants and Paid Representatives;

• deal with complaints where an appropriate offer of settlement has been made or where issues in dispute have been previously settled;

• provide further guidance and clarity on the exclusion of complaints lodged by professional or sophisticated investors unless exceptions apply;

• enhance the visibility, accessibility and performance of the Forward-Looking Review Mechanism;

• ensure greater transparency and understanding of AFCA’s decision making including how the slip rule works and clarification of effects of AFCA determination;

• make minor changes to definitions and language to update certain areas of the Rules arising from legislative change, which will give greater clarity and transparency of the scheme’s operation overall; and

• make minor changes to clarify AFCA’s reporting and transparency obligations.