Financial Services in Focus – Issue 40

By Harry New, Adrian Verdnik and Vince Battaglia 

Funds and financial products

Federal Court considers operation of ASIC Act regarding prohibition of accepting payment without intending or being able to provide financial services

On 5 June, the Federal Court of Australia handed down its decision in relation to ASIC’s proceedings against the Commonwealth Bank of Australia (CBA) for alleged breaches of the ASIC Act and Corporations Act in respect of CBA’s AgriAdvantage Plus Package.

In Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790, the Court noted that there is limited authority dealing with section 12DI(3) of the ASIC Act.

According to section 12DI(3), a person contravenes that section if the person, in trade or commerce, accepts payment or other consideration for financial services and, at the time of acceptance, there are reasonable grounds for believing that the person will not be able to supply the financial services within the period specified or, if no period is specified, within a reasonable time.

The Court held, among other things, that section 12DI(3) does not require proof that the financial services provider ‘is aware or ought reasonably to be aware’ of the reasonable grounds.  It is only necessary to prove that ‘objectively as at the time of acceptance […] there were facts and circumstances which constituted reasonable grounds for believing that [the provider] would not be able to supply the relevant financial services’.

Treasury releases draft exposure legislation to abolish stamping fee exemption

On 4 June, the Treasury released exposure draft regulations extending the ban on conflicted remuneration to stamping fees paid in respect of listed investment companies (LICs) and listed investment trusts (LITs).

The exposure draft Corporations Amendment (Stamping Fee Exemption) Regulations 2020 and Explanatory Statement remove the exemption for stamping fees paid in respect of LICs and LITs, but retain the exemption for trading companies, real estate investment trusts and listed infrastructure entities.

According to the draft Explanatory Statement, the amendments seek to:

• remove the incentive for AFS licensees to mis-sell products to retail clients to increase their remuneration; and
• ensure that AFS licensees using fees-for-services models are not at a competitive disadvantage vis-à-vis licensees that receive stamping fees.

On 21 May, the Treasurer, Josh Frydenberg, announced that the stamping fee exemption will be abolished with effect from 1 July.

Public consultation closed on 10 June.

Previously, Treasury undertook a four week consultation on the merits of the stamping fee exemption in relation to listed investment entities that ended on 20 February.  For more information, see Issue 35.

APRA issues new FAQ on margining and risk mitigation for OTC derivatives

On 1 June, APRA published a new frequently asked question (FAQ) in relation to Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared Derivatives.

The question relates to the application of the minimum transfer amount limit where the collateral agreement base currency is denominated in a foreign currency.

Government enhances fintech regulatory sandbox

On 28 May, the Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, announced the introduction of new regulations that will establish an enhanced fintech regulatory sandbox.

On that day, the Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020 (Regulations) was registered.

According to the Explanatory Statement, the Regulations provide for a conditional exemption from the AFSL requirements to allow the testing of financial services relating to certain financial products.  These Regulations are complemented by similar regulations enacted under the National Consumer Credit Protection Act 2009 (Cth) that address ACL requirements.  We report on this further below.

The Assistant Minister stated that innovative firms will now have 24 months to test their products with customers in the sandbox before obtaining an AFSL or ACL from ASIC.

For more information about the sandbox, see our article here.

ASIC defers commencement of design and distribution obligations (DDO)

On 27 May, the ASIC Corporations (Deferral of Design and Distribution Obligations) Instrument 2020/486 (Instrument) was registered.

The Instrument is made under section 994L(2) of the Corporations Act, which confers power on ASIC to exempt specified persons or specified financial products from provisions implementing the DDO.  The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) (which implements the DDO regime) and the Instrument will both commence on 5 April 2021.

According to the Explanatory Statement, the purpose of the Instrument is to ensure that product issuers and manufacturers do not need to comply with the design and distribution obligations until an additional six months from the original commencement date of the DDO regime on 5 April 2021.  The new commencement date is 5 October 2021.

We reported on ASIC’s announcement of the deferral in Issue 39.

ASIC announces amendments to RG 97 transitional arrangements

On 26 May, ASIC published a new frequently asked question (FAQ) for managed investment schemes to explain that ASIC will be making changes to the transitional arrangements for PDSs under the new fees and costs disclosure regime in ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070 (Instrument 2019/1070) and ASIC Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97).

ASIC states that it will amend the transitional arrangements for PDSs to allow entities to come into the new disclosure regime from 30 September 2020, and to require any PDS given on or after 30 September 2022 to comply with the new disclosure regime.

Under the current transitional arrangements in Instrument 2019/1070, PDSs issued on or after 30 September 2020 must comply with the new disclosure regime, and there is no ability to opt in beforehand.  This FAQ states that ASIC will amend Instrument 2019/1070 to change the transitional arrangements as part of ASIC’s response to the COVID-19 pandemic.

Treasurer announces litigation funders to obtain an AFSL

On 22 May, the Treasurer, Josh Frydenberg, announced that the Government will abolish the exemption from holding an AFSL for litigation funders.  According to the Treasurer, the amendments to the Corporations Regulations will take effect three months from the date of this announcement.

Litigation funding are currently not considered managed investment schemes regulated under the Corporations Act, and accordingly litigation funders are not required to hold an AFSL in respect of those funding arrangements.

The Treasurer states that these changes complement the inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding and the regulation of the class action industry, which is due to publish its report by 7 December.

ASIC updates FAQ for superannuation trustees

On 19 May, ASIC updated its frequently asked questions (FAQ) for superannuation trustees in relation to COVID-19 to include responses about:

• issuing exit statements to members who have a zero balance due to accessing the COVID-19 early access to superannuation scheme;
• providing appropriate and timely communications to members who have a zero or low balance due to accessing the COVID-19 early access to superannuation scheme; and
• ASIC’s expectations towards trustees communicating to their members about the how members’ insurance may be affected by COVID-19.

Financial markets

ASIC Market Integrity Rules instruments registered

On 5 June, the ASIC Market Integrity Rules (Securities Markets) Determination 2020/561 (Determination) and ASIC Market Integrity Rules (Securities Markets) Repeal Instrument 2020/562 (Repeal Instrument) were registered.

According to the Explanatory Statement, the purpose of the Determination and the Repeal Instrument is to supersede and repeal the ASIC Market Integrity Rules (Securities Markets) Determination 2020/195.  The Determination and Repeal Instrument maintain existing policy settings under the superseded instrument in relation to ASIC’s policy of determining allocation of equity market products to tiers based on a periodic calculation of average daily value.

The Determination and Repeal Instrument commence 20 business days following the date they are registered on the Federal Register of Legislation.

Treasurer makes temporary changes to continuous disclosure provisions due to COVID-19

On 25 May, the Treasurer, Josh Frydenberg, announced that the Government will temporarily amend the continuous disclosure provisions in the Corporation Act, so that companies and officers will only be liable if there has been ’knowledge, recklessness or negligence’ with respect to updates on price sensitive information to the market.

On that day, the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Determination) was registered.

According to the Explanatory Statement, the purpose of the Determination is to temporarily modify the continuous disclosure provisions in the Corporations Act to facilitate the continuation of business in circumstances relating to COVID-19.  The modifications take effect for six months from 26 May.

The Determination was made under the Treasurer’s new power to temporarily exempt or modify the operation of specified provisions of the Corporations Act or Corporations Regulations due to COVID-19.  For more information about this power, see our earlier Issue 37.

For more information about the Determination, see our article here.

Anti-money laundering

Alternative AML/CTF processes for customers experiencing domestic violence

On 22 May, the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2020 (No. 3) (Amendment Instrument) was registered.

The Amendment Instrument amends the headnote to Part 4.15 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) to make it plain that a reporting entity can use the alternative identity proofing processes described in Part 4.15 when their customer does not possess, and is unable to obtain, the necessary information or evidence of identity due to family and domestic violence.

On 28 May, AUSTRAC announced the change and referred reporting entities to relevant AUSTRAC guidance on how reporting entities may identify customers who do not have conventional forms of identification.

Consumer credit

Government enhances fintech regulatory sandbox

On 2 June, the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2020 (Regulations) were registered.

These Regulations, along with the Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020, establish an enhanced fintech regulatory sandbox.

According to the Explanatory Statement, the Regulations provide for a conditional exemption from ACL requirements to allow the testing of credit activities relating to certain credit products.

For more information about the sandbox, see our article here.

Instrument deferring mortgage broker reforms registered

On 27 May, the ASIC Credit (Deferral of Mortgage Broker Obligations) Instrument 2020/487 (Instrument) was registered.

According to the Explanatory Statement, the purpose of the Instrument is to ensure that persons do not need to comply with the mortgage broker reforms for an additional six months from the original commencement date of the reforms, until 1 January 2021.

We reported on ASIC’s announcement of the deferral in Issue 39.

Other financial services regulation

Major reforms proposed for Australia’s foreign investment review framework

On 5 June, the Treasury released a paper outlining comprehensive reforms to Australia’s foreign investment review framework, and stated that the Government will shortly release exposure draft legislation for public consultation.

The Treasurer, Josh Frydenberg, explained that the proposed changes deal with national security risks, strengthening compliance measures, streamlining approval processes, and administrative enhancements.

The reforms are proposed to take effect from 1 January 2021.  For more information on the reforms, see our article here.

New regulations to improve superannuation flexibility

On 29 May, the Superannuation Legislation Amendment (2020 Measures No. 1) Regulations 2020 (Amendment Regulations) were registered.

According to the Explanatory Statement, the Amendment Regulations amend the Retirement Savings Accounts Regulations 1997 and Superannuation Industry (Supervision) Regulations 1994 to:

• allow people aged 65 and 66 to make voluntary contributions to superannuation without having to meet the work test; and
• increase the cut-off age for spouse contributions from 70 years to 75 years.

The Treasury consulted on draft exposure forms of these Amendment Regulations from 5 March to 3 April.  We reported on this in Issue 36.

ACCC grants exemptions to Consumer Data Right (CDR) commencement obligations

On 4 June, the ACCC granted exemptions under section 56GD of the Competition and Consumer Act 2010 (Cth) to:

• exempt non-major ADIs and non-primary brand products of major ADIs from their consumer data sharing obligations until 1 July 2021 (in respect of phase 1 products) and 1 November 2021 (in respect of phase 2 products);
• exempt major and non-major ADIs from their direct-to-consumer data sharing obligations until 1 November 2021; and
• defer reciprocal data holder obligations until 1 March 2021 (in respect of phase 1 products) and 1 July 2021 (in respect of phase 2 products).

The exemptions that have been issued can be found on the ACCC’s consumer data right exemptions register here.

ACCC launches Consumer Data Right participant portal and publishes CDR accreditation guidelines and FAQ

On 26 May, the Treasurer, Josh Frydenberg, and the Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, jointly announced that the ACCC will launch the Consumer Data Right Register and Accreditation Application Platform (RAAP) to allow businesses to apply to become accredited data recipients.

The ACCC stated that the RAAP has two main functions:

• to create a trusted data environment where encrypted data is only shared between approved participants; and
• to provide a portal where businesses can apply to be accredited.

Entities can apply for accreditation through the Consumer Data Right Participant Portal, which is available here.

On 25 May, the ACCC released finalised guidelines on the CDR accreditation process.  The ACCC also published a series of frequently asked questions (FAQ) about becoming accredited to participate in the CDR.

Government announces deferral of retirement income covenant for superannuation trustees

On 22 May, the Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, announced that the Government will defer the introduction of the retirement income covenant that was previously scheduled to commence on 1 July.

The purpose of the retirement income covenant is to establish an additional obligation for superannuation trustees to formulate a retirement income strategy for their members.

The Assistant Minister stated that the revised date will be determined following further consultation on the retirement income covenant.