Financial Services in Focus – Issue 98

APRA review highlights the need for improved valuation and liquidity risk governance in superannuation 

On 17 December 2024, APRA released findings from a review into superannuation trustees’ progress in implementing enhanced valuation governance and liquidity risk management requirements. The findings will help trustees in aligning their practices with Prudential Standard SPS 530 Investment Governance (SPS 530), including in relation to the use of independent external asset valuations and the effective management of potential conflicts of interest in valuation processes.

APRA reports it found that a significant proportion of trustees displayed material gaps in key areas. Specifically:

• 12 of the 23 in-scope Registerable Superannuation Entity licensees required material improvements in either or both of their valuation governance and liquidity risk management frameworks, in order to meet the requirements of the SPS 530;
• in relation to unlisted asset valuation governance, weaknesses were observed in the areas of board oversight and conflict of interest management, revaluation frequency and triggers, valuation control, and fair value reporting; and
• in relation to liquidity risk management, weaknesses were observed in the areas of liquidity stress trigger frameworks, unlisted asset liquidity risks and liquidity action plans.

Government announces pathway out of legacy retirement products

On 14 December 2024, the Assistant Treasurer, Stephen Jones, announced the Government is implementing improvements to the superannuation system whereby individuals will now be able to exit certain legacy retirement products that are no longer fit‑for‑purpose and transition to more modern options which better meet their needs.

Following consultation with stakeholders, the regulations that have commenced will:

• remove barriers, to allow individuals to exit these products at any stage over the next five years; and
• help retirees access capital more easily than would otherwise be locked in the system.

These changes are in effect, with the five‑year commutation window closing on 7 December 2029. 

APRA finalises enhancements to superannuation data collections

On 6 December 2024, APRA announced its response to the recent consultation on enhancing superannuation data collections covering investments, trustee licensee profile and trustee profile. The enhancements aim to:

• improve member outcomes through the collection of accurate and comparable superannuation data to enable appropriate regulatory oversight; 
• increase transparency across the industry; and 
• strengthen APRA’s ability to assess the financial resilience of funds and the robustness of governance.

This final response, outlined in the response paper, enhances APRA’s data collections by:

• addressing a gap in current investment data on liquidity and valuation risk;
• enhancing the reporting on trustee boards for a comprehensive understanding of governance practices and effectiveness of superannuation trustees; and
• completing the picture of trustee’s business operations by including product distribution arrangements.

Government’s response to improving superannuation retirement phase

On 20 November 2024, Treasury announced a package of reforms in response to the issues set out in the retirement phase of superannuation discussion paper. The reforms will build on the obligations introduced by the Retirement Income Covenant and work in tandem with the Government’s Delivering Better Financial Outcomes package fact sheet. 

The reforms will encompass:

• enhanced independent guidance, 
• innovations in quality retirement products, 
• a new set of voluntary best practice principles; and
• increased transparency.

APRA amends operational risk financial requirements for superannuation trustees

On 24 October 2024, following industry consultation, APRA announced that it has amended the requirements for superannuation trustees relating to operational risk financial requirements (ORFR) as set out in Prudential Standard SPS 114 Operational Risk Financial Requirement (SPS 114) and related guidance. 

The key changes are to:

• clarify the purpose of the ORFR; 
• widen the allowable range of uses for the ORFR;
• introduce a clear and direct relationship with Prudential Standard CPS 230 Operational Risk Management (CPS 230); and 
• amend the APRA notification requirements to facilitate further use of the ORFR.

The amended SPS 114 will take effect from 1 July 2025. 

APRA releases letter to RSE licensees on intensified supervision approach

On 22 October 2024, APRA published a letter to all registrable superannuation entity (RSE) licensees outlining its approach for intensifying supervision of fund-level expenditure. RSE licensees should be aware that APRA will initially focus its supervisory efforts on the following:  

• discretionary expenditure categories such as travel, entertainment and conferences;
• relative and absolute size outliers, including consideration of impact to members; and
• particular types of payees and payments where benefit to members is not immediately apparent.

Government announces updates to better ensure access to quality and affordable financial advice

On 4 December 2024, Treasury released a fact sheet highlighting the second tranche of updates to the Delivering Better Financial Outcomes reforms after consulting widely. These changes aim to:

• expand advice services;
• reduce unnecessary compliance;
• help advisers focus on high‑quality advice; and
• maintain strong consumer protections.

Notably, the Government will introduce a new class of financial adviser to deliver simple advice, who will be restricted to advising only on products issued by prudentially regulated entities and will be prevented from providing advice on more complex and high-risk areas.

ASIC makes changes to OTC derivative transaction reporting

On 21 October 2024, following extensive industry engagement, the ASIC Derivative Transaction Rules (Reporting) 2024 (2024 Reporting Rules) took effect, replacing the ASIC Derivative Transaction Rules (Reporting) 2022.

The 2024 Reporting Rules make changes to more closely align with international reporting standards, consolidate transitional provisions and exemptions, and ensure reporting requirements are fit for purpose. Notably, the changes will greatly enhance the conformity and consistency of OTC derivative transaction data and ultimately improve its quality and useability for a range of regulatory purposes.

ASIC had previously published guidance materials for the 2024 Reporting Rules and said that it will take a measured approach to compliance until March 2025 for reporting entities that make reasonable efforts to comply with the 2024 Reporting Rules.

For a more in-depth look at the 2024 Reporting Rules, see our article in the latest edition of Fundamental.

AUSTRAC announces cryptocurrency ATMs taskforce

On 6 December 2024, AUSTRAC announced that an internal AUSTRAC cryptocurrency taskforce has been established to ensure digital currency exchanges that provide crypto ATM services meet minimum standards and have robust practices in place to identify and minimise the risk that their machines will be used to move money associated with scams, fraud or other proceeds of crime.

Legislation to strengthen Australia’s AML/CTF regime has passed Parliament 

On 29 November 2024, the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Amendment Bill 2024 (Cth) (Bill) was passed by Parliament. 

The Bill:

• expands the AML/CTF regime to certain high-risk services provided by lawyers, accountants, trust and company service providers, real estate professionals, and dealers in precious metals and stones – also known as ‘tranche 2’ entities;
• improves the effectiveness of the AML/CTF regime by making it simpler and clearer for businesses to comply with their obligations; and
• modernises the regime to reflect changing business structures, technologies and illicit financing methodologies.

The changes introduced by this Bill will not take effect until March 2026.

AUSTRAC provides FATF updates on global ML/TF risk 

On 6 November 2024, the Financial Action Task Force (FATF), the global group that sets international AML/CTF standards, published the following two new reports: 

• High-Risk Jurisdictions Subject to a Call for Action Report: which notes that the 21 February 2020 call for action in relation to the Democratic People’s Republic of Korea, Iran and Myanmar remains in effect; and 
• Jurisdictions under Increased Monitoring Report: which lists jurisdictions that have strategic deficiencies in their AML/CTF regimes and are actively working with the FATF to address them.

Reporting entities should note these reports and use this information on countries that pose a higher risk of money laundering or terrorism financing and to help guide ML/TF risk assessments, compliance programs and decisions about submitting suspicious matter reports to AUSTRAC.

ASIC puts insurers on notice for blind spots in complaints handling

On 5 December 2024, ASIC published its findings from its review of the Internal Dispute Resolution (IDR) practices of 11 general insurers, which highlighted:

• insurers are failing to identify one in six customer complaints, effectively denying those Australians critical protections available through the IDR regime;
• shortcomings in the failure to identify complaints and systemic issues, as well as inadequate communications to customers;
• insurers failed to adequately identify systemic issues, finding only 85 systemic issues from over 1.4 million complaints, compared to AFCA identifying 11 systemic issues from only 16,000 complaints;
• immature IDR systems and processes contributed to poor complaints handling and reporting; and
• significant variability in insurers’ communication practices.

APRA to phase out AT1 as eligible bank capital

On 9 December 2024, APRA announced it will phase out the use of Additional Tier 1 (AT1) capital instruments to simplify and improve the effectiveness of bank capital in a crisis.

Following an extensive consultation process beginning in 2023 and careful consideration of the potential options, APRA launched a consultation in September 2024 on a proposal to require banks to replace AT1 – also known as hybrid bonds – predominantly with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress.

Under APRA’s proposed approach:

• large, internationally active banks will be able to replace 1.5 per cent AT1 with 1.25 per cent Tier 2 and 0.25 per cent Common Equity Tier 1 capital; 
• smaller banks will be able to fully replace AT1 with Tier 2, with a reduction in Tier 1 requirements; and
• APRA’s requirements applicable to internationally active banks will remain in line with international minimum standards.

Buy now pay later legislation passes both Houses of Parliament

On 29 November 2024, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 (Bill), which seeks to regulate Buy Now Pay Later (BNPL) products under the National Consumer Credit Protection Act 2009 (Cth), finally passed both Houses of Parliament. 

The Bill introduces a regime that regulates BNPL arrangements as a type of ‘low-cost credit contract’ (LCCC), imposing fee restrictions and licensing requirements on BNPL providers.

The Bill's substantive provisions, meaning those which apply the credit regulatory framework to LCCCs, come into effect either on proclamation or six months after the Bill receives Royal Assent.

The Bill is still awaiting Royal Assent. 

APRA and ASIC release observations from the banking industry's implementation of the Financial Accountability Regime

On 27 November 2024, APRA and ASIC published a letter containing observations on registration and notification lodgements made since the Financial Accountability Regime (FAR) commenced for the banking industry. 

The letter identifies areas that require further consideration by banking entities and reiterates specific aspects, consistent with previously released FAR guidance, to entities across the banking, insurance and superannuation industries. 

Entities who are subject to FAR, should take note of these observations, especially insurance and superannuation entities for which FAR takes effect on 15 March 2025.

Treasury invites feedback on the scope of the Consumer Data Right Rules

On 26 November 2024, Treasury released for consultation a tranche of key documents related to the draft amendments to the Competition and Consumer (Consumer Data Right) Rules 2020 (Rules) to:

• expand the Consumer Data Right (CDR) to the non‑bank lending sector; and 
• narrow the scope of CDR data for the banking sector. 

This comes after Treasury released draft amendments to the Rules in 2023 to expand the CDR to Australia’s non-bank lending sector for public consultation. The Government has considered stakeholder feedback received in response to that consultation and Treasury has released updated draft amendments for further consultation.

Key documents released by Treasury include an information sheet on non-bank lending and banking data scope, exposure draft, explanatory materials, information sheet on privacy updates and a privacy impact statement.

Comments can be made until 24 December 2024. 

Government releases Regulatory Initiatives Grid – December 2024

On 19 December 2024, Treasury released the Regulatory Initiatives Grid – Edition 1 lists and announced and publicised regulatory reform priorities and initiatives that will materially affect the financial sector over the next two years.

Of relevance, the financial advice sector was impacted by 19 initiatives, the banking, credit and lending sector was impacted by 35 initiatives, the collective management and investment management was impacted by 17 initiatives and the superannuation and retirement income sector was impacted by 30 initiatives. 

For a detailed summary of the initiatives relevant to your business and sector, we recommend reviewing the report in full.

ASIC highlights focus areas for 31 December 2024 financial reports

On 13 December 2024, ASIC reminded directors, preparers of financial reports and auditors to be aware of the enduring and ongoing focus areas in its proactive surveillance of financial reports for the year ending 31 December 2024.

Areas of focus for the reporting season included:

• impairment and asset values;
• provisions;
• events after year end and before completing the financial report; and
• disclosures in the financial report and Operating and Financial Review.

AFCA completes three-year program responding to Independent Review

On 5 December 2024, AFCA published its Independent Review Response Program Outcomes Report, announcing the completion of a three-year program responding to the 2021 Independent Review of its operations.

The Independent Review’s recommendations were aimed at enhancing AFCA’s operations and complaint handling process. Over the past three years, AFCA has delivered a wide-ranging and impactful set of outcomes in response to the report, including but not limited to: 

• developing additional guidance on how AFCA approaches further issues in complaints or excluding wholesale client complaints;
• strengthening consultation on the development of AFCA Approach documents and a forward-looking review mechanism to keep Approaches current; and
• completely transforming AFCA’s systemic issues and funding models.

ASIC invites feedback on proposed updates to digital asset guidance

On 4 December 2024, ASIC announced that it has released Consultation Paper 381 Updates to INFO 225: Digital Assets: Financial Products and Services (CP 381) outlining proposals to update Information Sheet 225 Crypto Assets (INFO 225).

ASIC’s range of updates to INFO 225 includes adding 13 practical examples of how the current financial product definitions apply to digital assets and related products.

CP 381 seeks feedback on:

• ASIC’s updated guidance in INFO 225, including the worked examples;
• the application of the existing AFS licence processes, ASIC guidance and standard conditions to digital asset businesses;
• practical licensing issues for wrapped tokens and ‘stablecoins’, issues arising from the potential transition to the Government’s proposed digital asset platform and payment stablecoins regimes, and consideration of potential regulatory relief; and
• a potential class ‘no action’ position for digital asset businesses that are in the process of applying for or varying an AFS licence, Australian Markets Licence or Clearing and Settlement Facility licence.

Feedback can be provided until 5.00 pm on 28 February.

ASIC flags key observations from inaugural IDR data publication

On 3 December 2024, ASIC announced that it has published Report 801: Insights from Internal Dispute Resolution Data Reporting: July 2023 to June 2024) (REP 801), which is ASIC’s first publication of industry-wide data that was reported under the internal dispute resolution (IDR) data reporting framework. Under the framework most licenced financial firms are required to report IDR to ASIC on a six-monthly basis. 

Key observations from the over 4.7 million complaints reported by financial firms of all types for the period 1 July 2023 to 30 June 2024 include:

• general insurance products were subject to the most complaints (33% of all complaints), followed by credit products (22%) and deposit-taking products (15%);
• most complaints were about service (45%), followed by charges (22%) and transactions (11%);
• most outcomes involved an explanation or apology only, or no remedy (43%), followed by a service-based remedy (39%) and a monetary remedy (13%);
• over three-quarters of all complaints were resolved within one day; and
• 623,555 complaints resulted in a monetary remedy, collectively totalling over $375 million.

ASIC update on maintenance of regulatory guides

On 25 November 2024, ASIC announced it will be consulting with stakeholders to update the following key regulatory guides in 2025 to ensure they remain simple to follow, effective, current, and appropriate:

• Regulatory Guide 53: The use of past performance in promotional material;
• Regulatory Guide 168: Disclosure: Product Disclosure Statements (and other disclosure obligations);
• Regulatory Guide 181: Licensing: Managing conflicts of interest;
• Regulatory Guide 183: Approval of financial services codes of conduct; and
• Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guidance.

Investor roundtable to help unlock investment in national priorities

On 22 November 2024, the Treasurer, Jim Chalmers, announced, at the fourth Treasurer’s Investor Roundtable in Canberra, that ‘leading investors’ have committed to work closely with the government to unlock more private sector capital in key areas such as housing and cleaner and cheaper energy. 

Relevantly, key outcomes from the roundtable include:

• housing: banks, superannuation funds and other institutional investors will work together with industry to address barriers to financing modern methods of construction, in particular, pre‑fabricated housing, at scale;
• front door: the government will establish an Investor Council to support better coordination of investment in national priorities under the ‘front door’ for investment, which will be up and running by September 2025; and
• cleaner and cheaper energy: institutional investors will continue to look for opportunities to deliver the necessary capital to transform Australia’s energy system by 2050.

ASIC releases new and updated guidance in response to the DBFO Act

On 21 November 2024, ASIC announced that it has issued new regulatory guidance and has also updated some existing regulatory guidance in response to reforms under the Treasury Law Amendments (Delivering Better Financial Outcomes and Other Measures) Act 2024 (DBFO Act). 

In addition to updates to Regulatory Guide 246 Conflicted and other banned remuneration (RG 246) and Regulatory Guide 175 AFS Licensing: Financial product advisers – Conduct and disclosure (RG 175), ASIC’s new regulatory guidance also includes the following new information sheets:

• Information Sheet 286 FAQs: Ongoing fee arrangements and consents (INFO 286), which answers frequently asked questions (FAQs) for financial advisers who must get a client’s written consent to enter into or renew an ongoing fee arrangement;
• Information Sheet 287 FAQs: Non-ongoing fee requests or consents (INFO 287), which answers FAQs for financial advisers who must get a client’s written request or consent to charge non-ongoing fees to client superannuation accounts;
• INFO 291 FAQs: FSGs and website disclosure information (INFO 291), which answers FAQs about obligations relating to Financial Services Guides (FSGs) and website disclosure information; and
• INFO 292 FAQs: Informed consents for insurance commissions (INFO 292), which answers FAQs about the obligation to obtain informed consent before receiving certain insurance commissions to avoid them being conflicted remuneration.

ASIC will consult with industry and issue further guidance once the second tranche of the Government’s Delivering Better Financial Outcomes package is legislated.

ASIC announces new enforcement priorities for 2025

On 14 November 2024, ASIC announced its enforcement priorities for 2025 and the areas where it will direct its resources and expertise in the coming year. 

In 2025, ASIC’s enforcement priorities will focus on:

• Misconduct exploiting superannuation savings
• Unscrupulous property investment schemes
• Failures by insurers to deal fairly and in good faith with customers
• Strengthening investigation and prosecution of insider trading
• Business models designed to avoid consumer credit protections
• Misconduct impacting small businesses and their creditors
• Debt management and collection misconduct
• Licensee failures to have adequate cyber-security protections
• Greenwashing and misleading conduct involving ESG claims
• Member services failures in the superannuation sector
• Auditor misconduct
• Used car finance sold to vulnerable consumers by finance providers

ASIC sustainability reporting regime 

On 7 November 2024, ASIC released a draft regulatory guide on the sustainability reporting regime for consultation with stakeholders, in anticipation for the sustainability reporting regime to commence from 1 January 2025, for many large Australian businesses and financial institutions. 

ASIC’s Consultation Paper 380 Sustainability reporting (CP 380) seeks stakeholder feedback on the draft guide, whether any ASIC legislative instruments that grant relief in relation to financial reporting or audit requirements should be extended to sustainability reporting, and any other areas where ASIC should support the introduction of the sustainability reporting regime.

Feedback was due by 19 December 2024.

AFCA publishes latest edition of its Systemic Issues Insights Report 

On 6 November 2024, AFCA published its latest Systemic Issues Insights Report (Report) 

The Report shares data and findings from a range of recent systemic issue cases across the industry, helping financial firms improve industry practice.

Relevantly, we note that common systemic issues included:

• in banking and finance sector:
  • Compliance with responsible lending obligations 
  • Compliance with AFCA Rules 
  • Privacy & credit reporting 
  • Financial Difficulty
• In the general insurance sector:
  • Dealing with third party representatives
  • Dispute resolution
  • Policy cancellation 
  • Add-on insurance
• In the life insurance sector:
  • Policy cancellation
• In the investments and advice sector: 
  • Inconsistency with AFCA approach to terms of settlement
• In the superannuation sector: 
  • System errors 
  • Non-compliance with PYS legislation

ASIC releases third publication on insights from the reportable situations regime

On 31 October 2024, ASIC released Report 800 Insights from the reportable situation regime: July 2023 to June 2024,its third publication on information lodged under the reportable situations regime. 

The publication provides high-level insights into reporting trends from 1 July 2023 to 30 June 2024 and covers licensee population reporting, breach identification and investigation, root causes, consumer impact and remediation efforts. 

Licensees lodged a total of 12,298 reports during the reporting period. The overall volume of reports decreased by 27% from the previous reporting period due to a greater uptake for some licensees (particularly larger licensees) in grouping similar, related or identical reportable situations into a single report and a decrease in reportable situations relating to misleading or deceptive conduct provisions and the false or misleading statements provision, following the release of ASIC Instrument 2023/589 in October 2023 which exempted certain reports about breaches of false and misleading conduct prohibitions from being reportable to ASIC.

The most common root cause of breaches was staff negligence and/or error. ASIC has noted that there remained a significant proportion of reports where licensees selected ‘staff negligence and/or error’ as the sole root cause despite previous reporting of similar breaches and/or grouping of multiple breaches into the relevant report. This appears to indicate to ASIC that licensees are not assessing the root causes effectively.

ASIC proposes updates to RG 51 and RG 108

On 21 October 2024, ASIC announced it is proposing to update Regulatory Guide 51 Applications for relief (RG 51) and Regulatory Guide 108 No-action letters (RG 108) to reflect current regulatory approaches to both applications for relief and no-action letters, to incorporate relevant additional guidance and amend outdated references.

ASIC says that it is not proposing to make any significant changes to the factors that it considers when assessing applications. 

Proposed updates to RG 51 are:

• consolidate ASIC’s separate guidance on how it charges fees for applications;
• combine relevant guidance on procedural fairness and rights of review;
• revise content on what to include when making an application; and
• amend the description of our approach to applications, considering the decision in Lantern Hotel Group and Australian Securities and Investments Commission [2015] AATA 428.

Proposed updates to RG 108 are:

• simplify the existing guidance on ‘what is a no-action letter’ and ‘why ASIC gives no-action letters’;
• make minor changes to the factors that make it more likely ASIC will give a no-action letter;
• consolidate guidance on no-action requests and class no-action requests to avoid repetition, and
• introduce content to highlight the absence of review rights and need to lodge an application through the ASIC Regulatory Portal and pay an application fee.