Financial Services in Focus – Issue 45

By Harry New and Adrian Verdnik

A reminder to ensure your managed funds are ‘true to label’ and an inquiry into the complexity of financial services regulation are among the latest legal and regulatory developments in the Australian financial services sector. We report on these and much more.

Funds and financial products

Debit cards relief instrument extended

On 28 September, the ASIC Corporations (Amendment) Instrument 2020/885 (Amendment Instrument) was registered.

According to the Explanatory Statement, the Amendment Instrument extends the relief provided under the ASIC Corporations (COVID-19 – Distribution of Debit Cards) Instrument 2020/401 (Instrument 2020/401) until 31 December.

Instrument 2020/401 provides exemptions and modifications in relation to the hawking and product disclosure requirements in the Corporations Act in relation to issuing basic deposit products, linked non-cash payment facilities and debit cards due to adverse implications on consumers without debit cards – including vulnerable and elderly consumers – due to COVID-19.  For more information on the relief, see our earlier Issue 39.

ASIC imposes restrictions on certain retail offers of ‘stub equity’

On 24 September, ASIC announced that it has modified the Corporations Act in relation to ‘stub equity’ offers of scrip in a proprietary company.

According to ASIC, ‘stub equity’ refers to unlisted securities or interests offered in connection with a control transaction that enables offerees to have continued economic exposure to the performance of the underlying business of a body or another entity in which they are invested, and are offered as an alternative to another form of consideration (such as cash) that does not provide the same exposure.

Last year on 4 June, ASIC commenced consultation on a proposal to modify the operation of takeover and fundraising provisions to address ASIC’s concerns about control transactions where the consideration offered included stub equity in proprietary companies or in other issuers where certain investors were required to hold the scrip through custody arrangements.

On 23 September, the ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 (Instrument 2020/734) was registered. According to the Explanatory Statement, the purpose of Instrument 2020/734 is to create a regulatory environment where retail investors in what are, in substance, widely-held companies, benefit from the higher levels of regulation available in public companies.

ASIC also released ASIC Report 669 Response to submissions on CP 312 Stub equity in control transactions on 24 September.

ASIC extends COVID-19 capital raising relief

On 23 September, ASIC announced that it is extending temporary relief for capital raisings due to the continuing impact of the COVID-19 pandemic.

On that day, ASIC Corporations (Amendment) Instrument 2020/862 (Amendment Instrument) was registered.

The Amendment Instrument commences on 24 September and extends the relief available ASIC Corporations (Trading Suspensions Relief) Instrument 2020/289 and ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547, which provides relief to allow ‘low doc’ placements, rights issues and share purchase plans where a listed company has been suspended for up to ten days in total during the previous 12 month period (rather than the ordinary five days), from 2 October 2020 to 1 January 2021.

Minor amendment made to new RG 97 regime for superannuation

On 23 September, the ASIC Corporations (Amendment) Instrument 2020/853 (Amendment Instrument) was registered.

According to the Explanatory Statement, the Amendment Instrument makes a minor amendment to the ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070 (Instrument 2019/1070) in relation to the fees and costs disclosure requirements for superannuation products.

In September, ASIC also issued an updated ASIC Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements to reflect the amendment.

ASIC reminds fund managers to ensure their products are ‘true to label’

On 22 September, ASIC announced that fund managers ‘must do more to ensure their products are ‘true to label’‘.

After examining the appropriateness of product labels used by 37 managed funds operated by 20 responsible entities holding in excess of $21 billion in assets, ASIC states that it has identified two significant concerns, namely:

1. confusing and inappropriate product labels across ‘cash’ funds; and
2. redemption features not matching the liquidity of underlying assets.

Among other matters, ASIC states that ‘a fund should not use terms such as “cash” or “cash enhanced” unless its assets are predominantly in cash and cash equivalents‘, and that responsible entities should ensure that redemption terms offered to investors are supported by and consistent with the underlying liquidity of the fund’s assets.

The targeted surveillance followed ASIC’s warning to consumers on 7 May that investment advertising may not always be ‘true to label’. For more information on this warning, see our earlier Issue 39.

ASIC warns issuers about including forecasts in prospectuses

On 17 September, ASIC published an article in relation to fundraising activity and ASIC intervention during COVID-19. 

ASIC reminded issuers that any forecasts or forward-looking statements must have a reasonable basis, and referred issuers to regulatory guidance in relation to the use of forecasts in fundraising documents.

ASIC sandbox instruments repealed

On 14 September, the ASIC Corporations and Credit (Repeal) Instrument 2020/839 (Repeal Instrument) was registered.

According to the Explanatory Statement, the Repeal Instrument repeals two ASIC instruments that established the ASIC ‘sandbox’, as this has been superseded by the ‘enhanced regulatory sandbox’ (ERS) as explained in Issue 44.  For more information on the ERS, see our earlier article here.

The Repeal Instrument commenced on 15 September, and the ERS commenced on 1 September.

Financial product advice

FASEA releases draft Code of Ethics 2019 Guide

On 5 October, FASEA released the draft Financial Planners & Advisers Code of Ethics 2019 Guide for consultation.

According to FASEA, the draft guide provides an explanation of the intent and application of the Code’s values and standards and builds on the Preliminary Response to Submissions released in December 2019 and the case study examples contained in FG002 Financial Planners & Advisers Code of Ethics 2019 Guidance.

Consultation closes on 2 November.

ASIC issues no-action position for Victorian financial advice businesses

On 24 September, ASIC announced that it has issued a no-action position in relation to ongoing fee arrangement obligations for Victorian financial advice businesses.

Under the no-action position, ASIC states that it does not intend to take regulatory action against an AFS licensee or their representative for a breach of obligations in relation to fee disclosure statements and renewal notices in specified circumstances. 

ASIC extends COVID-19 intra-fund advice relief and other advice-related relief

On 23 September, ASIC announced that it is extending temporary relief for financial advice due to the continuing impact of the COVID-19 pandemic. ASIC also announced that it is extending a no-action position for intra-fund advice by superannuation trustees in light of the Government’s extension of the early release of superannuation scheme.

On that day, ASIC Corporations (Amendment) Instrument 2020/862 (Amendment Instrument) was registered. The Amendment Instrument commenced on 24 September, and extends the relief available under ASIC Corporations (COVID-19-Advice-related Relief) Instrument 2020/355, which provides relief to financial advisers and registered tax agents from various obligations under Chapter 7 of the Corporations Act to facilitate the provision of advice during COVID-19, from 15 October to 15 April 2021.

ASIC also extended the no-action position for superannuation trustees from 24 September to 31 December. The no-action position has the effect of expanding the scope of personal advice that may be provided by, or on behalf of, superannuation trustees as ‘intra-fund advice’ to include personal advice about the COVID-19 early release of superannuation scheme.

Financial markets

ASIC and RBA set out expectations on ASX in relation to CHESS replacement

On 1 October, ASIC and the RBA outlined their expectations of the ASX with respect to its replacement of the Clearing House Electronic Sub-register System (CHESS).

The regulators also noted that they, along with the broader Council of Financial Regulators and the ACCC, are closely supervising the ASX’s conduct in the CHESS replacement program of change in accordance with the Council of Financial Regulator’s Policy Statement Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia.

RBA publishes annual assessment of ASX CS facilities

On 1 October, the RBA released the RBA Report Assessment of the ASX Clearing and Settlement Facilities (Assessment). The RBA conducts annual assessments of the ASX Group’s clearing and settlement facilities. The ASX operates four clearing and settlement facilities: two central counterparties (ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited) and two securities settlement facilities (ASX Settlement Pty Limited and Austraclear Limited).

According to the RBA, its Assessment concludes that the ASX’s clearing and settlement facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the RBA’s Financial Stability Standards as at 30 June, except for:

1. the standard relating to margin, which was rated as ‘partly observed’ in ASX Clear (Futures); and
2. the standard relating to operational risk, which was rated as ‘partly observed’ in ASX Clear and ASX Settlement.

The RBA states that the ASX will need to place a high priority on addressing recommendations related to margin at ASX Clear (Futures) and operational risk at ASX Clear and ASX Settlement, including via the replacement of the Clearing House Electronic Sub-register System (CHESS).

ASIC derivative transaction reporting and central clearing rules amended

On 30 September, the following instruments were registered:

1. ASIC Corporations (Amendment) Instrument 2020/827 (Instrument 2020/827); and
2. ASIC Regulated Foreign Markets Determination (Amendment) Instrument 2020/828 (Instrument 2020/828).

The ASIC Corporations (Derivative Transaction Reporting Exemption) Instrument 2015/844 provides transitional relief from certain reporting requirements under the ASIC Derivative Transaction Rules (Reporting) 2013 (Reporting Rules). According to the accompanying Explanatory Statement, the purpose of Instrument 2020/827 is to amend the relief instrument to remove some elements of expired relief and to extend and update some elements of the existing relief.

The purpose of Instrument 2020/828, according to the accompanying Explanatory Statement, is to amend ASIC Regulated Foreign Markets Determination [OTC DET 13/1145] (Determination) to update what is a classified as a Regulated Foreign Market for the purposes of Rule 1.2.4(3) of the Reporting Rules. The Determination provides that derivatives that are entered into, and able to be traded, on Regulated Foreign Markets are carved out of the reporting requirements in the Reporting Rules and clearing requirements in the ASIC Derivative Transaction Rules (Clearing) 2015.

Both Instrument 2020/827 and Instrument 2020/828 commenced on 1 October.

Government extends continuous disclosure relief

On 23 September, the Treasurer, Josh Frydenberg, announced that the Government will extend temporary continuous disclosure provisions that apply to companies and their officers for a further six months until 23 March 2021.

On that day, the Corporations (Coronavirus Economic Response) Determination (No. 4) 2020 (Determination) was registered. The Explanatory Statement states the purpose of the Determination is to ensure that the temporary modifications to the continuous disclosure provisions will continue in force for a further period.

The Treasurer explains that the existing relief temporary amends the Corporations Act so that companies and officers remain liable where there has been ‘knowledge, recklessness or negligence‘ with respect to updates on price sensitive information to the market.

The Determination will be automatically repealed at the end of six months.

For more information about the existing relief, see our earlier Issue 40.

ASIC publishes report about AFS licensees in debt capital markets

On 22 September, ASIC released a report outlining findings from ASIC’s surveillance of market practices in debt capital market (DCM) transactions and setting out better practice guidelines, including ASIC’s expectations in relation to AFS licensees in DCMs.

According to ASIC, ASIC Report 668 Allocations in debt capital market transactions (REP 668) follows the release of IOSCO’s Final report on Conflicts of interest and associated conduct risks during the debt capital raising process and builds on ASIC’s previous work on improving conduct in capital raising transactions.

ASIC’s better practice recommendations in REP 668 cover matters including AFS licensees’ engagement with issuers, engagement with and messaging to investors, and management or avoidance of conflicts of interests arising in licensees.

ASX issues updates in relation to class waivers and ASX Listing Rules

On 15 September, the ASX issued Compliance Update No. 09/20. In this update, the ASX:

1. announced changes to the temporary emergency capital raising relief introduced by the ASX that impose further requirements on an entity wishing to rely on the class waivers;
2. clarified that the additional 10% temporary extra placement capacity provided for in the ASX’s temporary emergency capital raising relief may not be ratified under ASX Listing Rules 7.1 or 7.4;
3. announced the release of updates to Guidance Notes 3, 4, 12, and 19 to the ASX Listing Rules;
4. reminded listed entities that draft notices of meetings provided to the ASX must incorporate amendments made to the ASX Listing Rules that were made on 1 December 2019; and
5. noted that ASX Market Announcements will close one hour later during daylight saving.

Anti-money laundering

COVID-19 AML/CTF Rule amendments extended

On 10 September, the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2020 (No. 4) (Amendment Rules) was registered.

Earlier this year on 16 April, the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules) were temporarily amended. AUSTRAC states that the amendments are intended to help streamline the customer verification process for superannuation funds to make payments to their members made under the COVID-19 early release of superannuation initiative.

According to AUSTRAC, the Amendment Rules extend the amendments for streamlined customer verification to 31 December, in support of the Government’s decision to allow the COVID-19 early release of superannuation initiative to continue until 31 December.

Consumer credit

Temporary modifications to responsible lending obligations in relation to small businesses

On 1 October, the National Consumer Credit Protection Amendment (Responsible Lending Obligations) Regulations 2020 (Regulations) were registered. 

According to the Explanatory Statement, the Regulations make a further targeted adjustment to the regulatory settings pertaining to the responsible lending obligations for the purpose of enabling the timely flow of credit to small businesses. These Regulations follow the National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020, which expired on 2 October, and make modifications to the exemption provided under those regulations.

The Regulations will expire after six months.

ASIC remakes relief in relation to COI lenders and credit disclosure

On 30 September, the following instruments were registered:

1. ASIC Credit (Notice Requirements for Unlicensed Carried Over Instrument Lenders) Instrument 2020/834, which ensures that carried over instrument lenders continue to notify ASIC if they become unlicensed, according to the Explanatory Memorandum;
2. ASIC Credit (Electronic Precontractual Disclosure) Instrument 2020/835, which allows Australian credit licensees and representatives to give pre-contractual disclosure to consumers in the same electronic manner that applies to other credit disclosure documents, according to the Explanatory Memorandum; and
3. ASIC Credit (Repeal) Instrument 2020/836, which repeals the class orders that implemented the policy underlying the aforementioned two instruments, according to the Explanatory Memorandum.

ASIC states that the reliefs were remade following public consultation through ASIC Consultation Paper 331 Remaking ASIC class orders on unlicensed COI lenders and credit disclosure obligations, in response to which ASIC received no submissions.

Government announces reform to credit framework

On 25 September, Treasurer, Josh Frydenberg, and Assistant Treasurer, Michael Sukkar, jointly announced reforms to Australia’s credit framework and released a fact sheet setting out the proposed reforms.

According to the joint media release, key elements of the reforms include:

1. removing responsible lending obligations from the National Consumer Credit Protection Act 2009 (Cth), with the exception of small amount credit contracts and consumer leases where heightened obligations will be introduced;
2. ensuring that ADIs will continue to comply with APRA’s lending standards requiring sound credit assessment and approval criteria;
3. adopting key elements of APRA’s ADI lending standards and applying them to non-ADIs;
4. protecting consumers from the predatory practices of debt management firms by requiring them to hold an ACL when they are paid to represent consumers in disputes with financial institutions;
5. allowing lenders to rely on the information provided by borrowers, replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle; and
6. removing the ambiguity regarding the application of consumer lending laws to small business lending.

Mortgage broker remuneration regulations registered

On 21 September, the Financial Sector Reform (Hayne Royal Commission Response-Protecting Consumers) (Mortgage Brokers) Regulations 2020 (Regulations) were registered.

According to the Replacement Explanatory Statement, these Regulations, together with Schedule 3 to the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth), implement the Government’s response to Recommendation 1.3 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to address conflicted remuneration for mortgage brokers.

The Replacement Explanatory Statement states that the Regulations prescribe five different kinds of benefits that are not conflicted remuneration, namely:

1. certain monetary and non-monetary benefits given by the consumer;
2. monetary benefits that meet a number of specific requirements directed at ensuring the benefits are transparent and do not negatively impact consumers;
3. infrequent, low-value non-monetary benefits;
4. non-monetary benefits related to education and training; and
5. non-monetary benefits related to IT support.

Among other matters, the Regulations also prescribe circumstances in which conflicted remuneration must not be accepted and must not be given.

The Replacement Explanatory Statement states that the Regulations follow the Government’s consultation on draft exposure regulations from 26 August 2019 to 4 October 2019.

Federal Court of Australia hands down decision in relation to contraventions of credit legislation

On 11 September, the Federal Court of Australia handed down a decision holding that the defendant contravened the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and its directors knowingly concerned a number of those contraventions.

According to ASIC, the defendant provided credit for the purchase of used cars to customers, and engaged in misconduct by charging excessive interest and misleading customers about the true cost of the credit contract.

In Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd [2020] FCA 1312 (ASIC v R2O), the matters in dispute included the proper interpretation of sections 9(1) and (4) of the National Credit Code, which was relevant to whether the NCCP Act applied to the contracts in question, as well as in relation to accessorial liability in relation to contraventions of the NCCP Act and injunctive relief.

Section 9(1) provides that:

‘For the purposes of this Code, a contract for the hire of goods under which the hirer has a right or obligation to purchase the goods, is to be regarded as a sale of the goods by instalments if the charge that is or may be made for hiring the goods, together with any other amount payable under the contract (including an amount to purchase the goods or to exercise an option to do so) exceeds the cash price of the goods’.

Section 9(4) then provides that: ‘the amount payable under the contract includes any agreed or residual value of the goods at the end of the hire period or on termination of the contract, but does not include‘, under section 9(4)(b), ‘any amount that ceases to be payable on the termination of the contract following the exercise of a right of cancellation by the hirer at the earliest opportunity‘.

The defendant argued that, since the customers could terminate the contract at any time, all amounts payable under the contract fell under section 9(4)(b), with the effect that the ‘amount payable under the contract‘ under section 9(1) may never exceed the cash price of the goods for those contracts.

Greenwood J held that section 9(1) drew a distinction between ‘charges‘ and ‘amount payable under the contract‘, and that section 9(4)(b) must be construed in that context. His Honour held that section 9(4)(b) does not address ‘charges‘, and is confined in its operation to not including amounts within the ‘amount payable under the contract‘ in section 9(1). The effect of this is that payments representing weekly charges in the contracts remained relevant for section 9(1) as ‘charges‘, and are not excluded by section 9(4)(b). Greenwood J held that this is also consistent with the protective purpose of the provision.

The defendant also argued that the principles in relation to being ‘knowingly concerned‘ in another person’s contravening conduct were subject to debate. Greenwood J held that the applicable principle is set out in Yorke v Lucas (1985) 158 CLR 661, namely that the ‘accessory knew the “essential facts” or “essential circumstances” constituting the contravention‘ and in a case based on representations, the ‘accessory must be shown to know that the content of the representation was incorrect. […] It is not necessary to show that the contended accessory knew that the making of the representation was, in fact, “misleading”.’

Greenwood J made declarations of contravention and issued injunctions against the defendant and its directors.

Other financial services regulation

Treasury releases exposure draft legislation amending Consumer Data Right regime

On 1 October, the Treasury released exposure draft legislation amending Part IVD of the Competition and Consumer Act 2010 (Cth) (CC Act) in relation to the operation of the Consumer Data Right (CDR) regime.

According to the draft Explanatory Memorandum, the purpose of the Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2020: amendments 5 of the consumer data right is to amend the CC Act by reallocating the responsibility for conducting sectoral assessments and making CDR rules, and to make miscellaneous amendments.

The Treasury also states that the Government is seeking views in relation to particular amendments relating to an outsourced service provider.

Consultation closes on 16 October.

ACCC amends Consumer Data Right Rules in relation to CDR outsourcing arrangements

On 1 October, the Competition and Consumer (Consumer Data Right) Amendment Rules (No. 2) 2020 (Amendment Rules) were registered.

According to the ACCC, the Amendment Rules expand the Consumer Data Right (CDR) system by allowing for accredited businesses to rely on other accredited businesses to collect CDR data on their behalf, so they can provide goods and services to consumers.

The registration of the Amendment Rules follows consultation conducted by the ACCC from 22 June to 20 July in relation to draft exposure amendments. For more information, see our earlier Issue 41.

ACCC consults on proposed Consumer Data Right Rules amendments

On 30 September, the ACCC commenced consultation on proposed changes to the Competition and Consumer (Consumer Data Right) Rules 2020 (CDR Rules).

In support of the consultation, the ACCC published:

1. the Consultation Paper CDR rules expansion amendments;
2. a marked-up copy of the CDR Rules incorporating the proposed amendments;
3. the CDR Roadmap – Proposed compliance dates for Consumer Data Right;
4. the Consumer Data Right Regime Update 2 to Privacy Impact Assessment.

According to the ACCC, the changes are intended to expand the CDR Rules and allow for the entry of a greater number and type of business in the Consumer Data Right (CDR) regime.

Consultation ends on 29 October.

Virtual meeting and electronic signing instruments extended

On 23 September, the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination) was registered.

According to the Explanatory Statement, the Determination remakes the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 in order to extend the relief provided in relation to annual general meetings and other meetings, and electronic signatures for a further six months.

For more information in relation to the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020, see our earlier articles in relation to virtual meetings here and electronic signing here.

Exposure draft regulations for foreign investment framework reforms released

On 18 September, the Treasury released exposure drafts and draft Explanatory Statements for the:

1. Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020; and
2. Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020,

which give further effect to major reforms of the Foreign Acquisitions and Takeovers Ac1975 (Cth) that were announced by the Government earlier this year on 5 June.

According to FIRB, this tranche of exposure draft regulations follows the first tranche of exposure draft legislation, which were released on 31 July. For more information, see our earlier Issue 43.

Consultation on the second tranche closed on 2 October.

APRA and ACCC sign updated MOU

On 15 September, APRA announced that APRA and the ACCC have signed an updated Memorandum of Understanding (MOU).

APRA states that the new MOU commits both agencies to a broader model of engagement, with a greater emphasis on proactive information sharing and collaboration, and is written in simpler, less prescriptive language.

ALRC announces inquiry into simplification of financial services regulation

On 11 September, the Australian Law Reform Commission (ALRC) announced that it has been asked to inquire into the potential simplification of laws that regulate financial services in Australia (Inquiry).

The Terms of Reference for the Inquiry outline three specific sub-topics, namely:

1. the use of definitions in corporations and financial services legislation;
2. the coherence of the regulatory design and hierarchy of primary law provisions, regulations, class orders, and standards; and
3. potential reframing or restructuring of Chapter 7 of the Corporations Act.

According to the Timetable, it is intended that three interim reports will be published with the final report being published on 30 November 2023.