Financial Services in Focus – Issue 35

Funds and financial products

Treasury consults on a number of proposals to implement Financial Services Royal Commission recommendations

On 31 January, the Treasury released draft legislation in relation to a number of recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Specifically, according to the Treasurer, Josh Frydenberg, the draft legislation released implements 22 recommendations, as follows:

• Recommendation 1.15 to strengthen the existing code of conduct framework in the financial services sector to enable certain provisions of financial services industry codes to be made ‘enforceable code provisions’ which, if breached, may attract civil penalties, and to create a new mandatory code of conduct framework.
• Recommendation 2.1 to enhance the existing ongoing fee arrangement provisions.
• Recommendation 2.2 to require entities who are authorised to provide personal advice to a retail client to disclose in writing to the client where they are not independent and why that is so.
• Recommendation 3.1 to prohibit superannuation trustees from having duties other than those arising from or in the course of the performance of their duties as a trustee of a superannuation fund.
• Recommendation 3.2 to remove a superannuation trustee’s capacity to charge advice fees from MySuper products.
• Recommendation 3.3 to remove the capacity of a superannuation trustee to charge advice fees to a member unless certain conditions are satisfied, including the new requirements outlined in relation to Recommendation 2.1 for ongoing fee arrangements.
• Recommendation 3.4 to prohibit the hawking of superannuation products.
• Recommendation 4.1 to prohibit the hawking of insurance products.
• Recommendation 4.3 to establish an industry-wide deferred sales model for the sale of add-on insurance products.
• Recommendations 4.4 to provide ASIC with the power to impose a cap on commissions for add-on insurance products and insurance-like products.
• Recommendation 4.5 to implement a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts.
• Recommendation 4.6 to add an extra condition for life insurers to show they would not have entered into a contract on any terms if they had known about the unintentional misrepresentation or non-disclosure.
• Recommendation 2.7 to establish a compulsory scheme for checking references for prospective financial advisers.
• Recommendations 2.8 and 7.2 to strengthen breach reporting requirements for Australian financial services licensees.
• Recommendation 2.9 to require Australian financial services licensees to investigate misconduct by financial advisers and appropriately remediate clients affected by the misconduct.
• Recommendation 1.6 will apply the new obligations under recommendations 2.7, 2.8, 2.9 and 7.2 to Australian credit licensees in relation to conduct by mortgage brokers. This will also introduce breach reporting requirements for Australian credit licensees more generally.
• Recommendation 3.8 and 6.3 to adjust APRA and ASIC’s roles in relation to superannuation to accord with the principles that APRA is the prudential regulator and ASIC the conduct and disclosure regulator.
• Recommendation 6.4 to give ASIC joint responsibility for enforceable provisions in the Superannuation Industry (Supervision) Act 1993 which have consumer protection as their touchstone.
• Recommendation 6.5 to ensure that APRA’s role is unchanged. APRA remains responsible for prudential and member outcomes regulation in superannuation.
• Recommendation 6.14 to establish the Financial Regulator Assessment Authority to independently review the effectiveness of APRA and ASIC, and report on its findings to the Minister.

The Treasurer states the draft legislation seeks to consult on two additional recommendations, as follows:

• Additional commitment in response to recommendation 4.2 to restrict use of the term ‘Insurer’ and ‘Insurance’ if the product or service is not insurance, in circumstances where it is likely that the product or service could mistakenly be believed to be insurance.
• Additional commitment in response to recommendation 7.2 to provide ASIC with powers to give directions to financial services and credit licensees consistent with the recommendations of the ASIC Enforcement Review Taskforce.

Consultation closes on 28 February.

Treasury consults on compensation scheme of last resort

On 20 December 2019, the Treasury released a discussion paper on a proposal to implement the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that a compensation scheme of last resort be established (recommendation 7.1).

Consultation closes on 7 February.

Department of Home Affairs issues consultation paper on significant investor regime

On 19 December 2019, the Department of Home Affairs announced it is conducting a public consultation to seek views on whether:

• there are opportunities to streamline the Business Innovation and Investment program to maximise the value the program generates
• increased investment thresholds and different investment types could provide better economic benefits to Australia compared to the current settings used for the Investor visa and Significant Investor visa.

The Department releases a consultation paper, Business Innovation and Investment Program: Getting a better deal for Australia.

Consultation closes on 14 February 2020.

ASIC releases report on its regtech initiatives

On 20 December 2019, ASIC released a report covering its observations and findings from four initiatives coordinated by ASIC in 2019.

Report 653 ASIC's Regtech Initiatives 2018–19 summarises ASIC’s regtech initiatives and events conducted during FY2018–19.

In releasing the report, ASIC stated that the initiatives showed Australian regtech solutions can:

• detect potential breaches of mandatory disclosure requirements in financial promotions, with high rates of accuracy, at near real-time;
• detect potential conduct breaches in financial advice files such as Statements of Advice;
• identify cases of poor sales practices/tactics in phone calls (stored, non-compressed recordings using voice analytics and voice-to-text technology); and
• help ASIC provide guidance on licensing using a chatbot.

ASIC releases consultation paper on design and distribution obligations

On 19 December 2019, ASIC released draft guidance on the new financial product design and distribution obligations for public consultation.

Consultation Paper 325 Product design and distribution obligations, to which is attached a draft regulatory guide, sets out:

• ASIC’s proposals for guidance on the design and distribution obligations in Part 7.8A of the Corporations Act; and
• additional proposals relating to ASIC’s administration of the design and distribution regime.

In releasing the consultation paper, ASIC stated that firms that already have good product governance regimes in place will readily adapt to the new obligations which commence in April next year.

Consultation closes on 11 March.

Financial product advice

FASEA releases 2020 Legislative Instrument for Relevant Providers Degrees, Qualifications and Courses Standard

On 4 February, the Corporations (Relevant Providers Degrees, Qualifications and Courses Standard) Determination 2020 was registered.

FASEA states the instrument expands the list of approved education programs and courses available to existing advisers and new entrants seeking to meet FASEA’s education standard.

FASEA releases preliminary response to submissions on the code of ethics guidance

On 20 December 2019, FASEA released Preliminary Response to Submissions: FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance.

FASEA states the response provides clarification on the interpretation and application of the Code relating to a number of matters raised by stakeholders during the consultation.

Financial markets

Treasury consults on stamping fee exemption LITs, LICs and REITs

On 29 January, the Treasury stated it is undertaking a four week targeted public consultation on the merits of the current stamping fee exemption in relation to listed investment entities (which comprise listed investment companies and trusts, including real estate investment trusts).

In particular, the Treasury states that it is seeking information on current industry practices and trends, and evidence on how the current listed investment entities exemption operates within the context of:

• the quality of advice received by retail investors from stockbrokers and financial advisers, and, any subsequent impacts on investor outcomes;
• capital markets and industry participants, including their efficiency and competitive dynamics both locally and overseas; and
• the broader economy.

The Treasury is also seeking information on the consequences of modifying or removing the stamping fee exemption if the Government chose to do so.

Here is the media release of the Treasurer, Josh Frydenberg.

Consultation closes on 20 February.

Anti-money laundering

Financial Action Task Force publishes updated on global AML/CTF compliance

On 12 December 2019, the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and combating the counter terrorism-financing (AML/CTF), published two updates on international AML/CTF compliance.

FATF published a statement about ongoing concerns about the Democratic People’s Republic of Korea and Iran and an update on jurisdictions that pose a risk to the international financial system.

Other financial services regulation

APRA sets out policy and supervision priorities for 2020

On 30 January, APRA released its policy and supervision priorities for the next 12 to 18 months with an emphasis on fulfilling the four strategic goals of its Corporate Plan: maintaining financial system resilience; improving outcomes for superannuation members; improving cyber-resilience in the financial sector; and transforming governance, culture, remuneration and accountability across all APRA-regulated institutions.

The priorities are set out in the Information Paper APRA’s Policy Priorities and the Information Paper APRA’s Supervision Priorities.

Treasurer announces inquiry into the Consumer Data Right

On 23 January, the Treasurer, Josh Frydenberg, announced an inquiry to examine further ways in which the Consumer Data Right can further support innovation and competition.

The terms of reference are available here.

The review will report by September 2020.

Treasury consults on Financial Accountability Regime

On 22 January, the Treasury issued for public consultation a proposals paper outlining the Government’s proposed model to implement recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to extend the Banking Executive Accountability Regime (BEAR) to all APRA regulated entities and provide joint administration to ASIC as the conduct regulator.

Consultation closes on 14 February.

ASIC makes legislative instruments on litigation funding arrangements

On 21 January, two legislative instruments were registered.  ASIC Corporations (Conditional Costs Schemes) Instrument 2020/38 provides temporary financial services and managed investment scheme relief to enable the operation of certain ‘conditional costs schemes’ without having to comply with certain requirements of the Act until 31 January 2023.

ASIC Credit (Litigation Funding—Exclusion) Instrument 2020/37 excludes, until 31 January 2023, ‘litigation funding arrangements’ and a ‘proof of debt funding arrangements’ from the application of the National Credit Code founds in Schedule 1 to the National Consumer Credit Protection Act 2009.

APRA and RBA each publish submission on fintech and regtech

On 21 January, APRA published its submission to the Senate Select Committee on Financial Technology and Regulatory Technology.

APRA states the submission outlines how APRA is evolving its regulatory framework and approach to support the developing fintech and regtech sector, while ensuring risks are appropriate managed in line with APRA’s mandate of financial soundness and stability.

The RBA also released its submission.  In releasing the submission, the RBA states that the submission discusses:

• various changes that are occurring in the payments system, some of which have been influenced by fintech activity; and
• discusses the RBA's regulatory role in the payment system and a number of aspects of the RBA's recent policy work that relate to fintech and regtech activities, and where the RBA has engaged with fintech entities.