Thinking | 28 October 2020

Financial Services in Focus – Issue 46

By Harry New, Adrian Verdnik and Vince Battaglia

In this edition, we report on ASIC's contracts for difference product intervention order and the proposed virtual meetings and electronic signing amendments to the Corporations Act. We also explain why an over-the-counter derivatives business was ordered to pay a $75 million pecuniary penalty. That's just a glimpse of our legal and regulatory round-up of the Australian financial services sector this fortnight.

ASIC makes CFD product intervention order

On 22 October, the ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986 (CFD Product Intervention Order) was registered.

According to the Explanatory Statement, the purpose of the CFD Product Intervention Order is to reduce the risk of significant detriment to retail clients resulting from contracts for difference (CFD).

According to ASIC, the CFD Product Intervention Order will, from and including 29 March 2021:

    1. impose maximum leverage ratios on CFDs that are offered to retail clients;
    2. standardise CFD issuers’ margin close-out arrangements that act as a circuit breaker to close-out one or more of a retail client’s CFD positions before all or most of the client’s investment is lost;
    3. protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account, and
    4. prohibit giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads).

The CFD Product Intervention Order follows ASIC’s public consultation on a proposed product intervention order in ASIC Consultation Paper 322 Product intervention: OTC binary options and CFDs. ASIC states that it is still considering stakeholder feedback on its other proposal to ban binary options for retail clients.

ASIC also published a Product Intervention Order Notice in relation to the order as required under section 1023L(3) of the Corporations Act.

For more information on ASIC’s product intervention power, see our earlier article here.

OTC derivatives businesses ordered to pay $75 million pecuniary penalty

On 16 October, Beach J of the Federal Court of Australia made orders requiring an ‘over-the-counter’ (OTC) derivatives issuer and its former authorised representatives to pay pecuniary penalties worth $75 million and to refund retail investors, in the case of Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 4) [2020] FCA 1499.

This case relates to the operation of OTC derivatives businesses by the defendants that offered contracts for difference (CFD) and margin foreign exchange contracts to retail investors in Australia.

The liability judgement was handed down earlier this year on 26 February. In that decision, Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) (No 3) [2020] FCA 208, Beach J found, among other matters, that:

    1. the authorised representatives provided unlicensed personal advice, breached best interests provisions, engaged in unconscionable conduct, and made false, misleading or deceptive representations about contracts for difference and margin foreign exchange contracts;
    2. the authorised representatives had acted as agents of the OTC derivatives issuer (ie the AFS licensee) for the purposes of civil and criminal liability provisions in the Corporations Act and ASIC Act (however, His Honour did not find that the OTC derivatives issuer had knowledge such that it was knowingly involved in the contraventions); and
    3. the OTC derivatives issuer had breached its obligations as an AFS licensee to adequately supervise the provision of financial services by its authorised representatives.

The liability judgment also usefully sets out observations about the steps to take by AFS licensees to supervise its authorised representatives, as well as commentary on the meaning of ‘efficiently, honestly and fairly’ under section 912A(1)(a) of the Corporations Act.

ASIC states that the retail OTC derivatives sector remains a focus for ASIC and that it will continue to take strong enforcement action where misconduct is detected.

NSW Supreme Court orders pooling of client money accounts for failed FX and CFD business

On 1 October, Black J of the Supreme Court of New South Wales handed down a decision determining that liquidators of a financial services business are justified in pooling client monies held in separate accounts for the purpose of distributing the funds rateably among clients.

The case, In the matter of Direct FX Trading Pty Ltd [2020] NSWSC 1338, arose out of the appointment of liquidators over a financial services business that primarily focussed on facilitating retail clients’ entry into foreign exchange contracts and other contracts for difference. Black J agreed that funds held in various accounts constituted client money under section 981A of the Corporations Act that were held on trust for clients.

Black J referred to case law in relation to the pooling of client segregated accounts in a liquidation context, noting that:

    1. amounts should only be pooled if mixing or another proper basis for pooling is established, and where there are relatively clear property interests in particular property, this cannot be altered by reference to some notion of common misfortune; and
    2. the Court may order pooling on pragmatic grounds, and that this is not based on the absolute impossibility of tracing entitlements but rather on whether tracing is reasonably and economically practical.

Black J accepted that there was mixing between the various client segregated accounts and that it is not possible, and that it would not be reasonable, practicable or economical, to trace individual clients into the client monies or to apply the lowest intermediate balance rule. Accordingly, His Honour held that the liquidators would be justified in pooling the accounts to distribute the funds rateably among clients. 

Regulators urge Australian institutions to follow ISDA protocol and supplement

On 9 October, the International Swaps and Derivatives Association (ISDA) announced that it will publish the ISDA 2020 IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement to the 2006 ISDA Definitions. These are intended to take effect on 25 January 2021.

On 13 October, ASIC, the RBA, and APRA jointly announced that Australian institutions should adhere to the ISDA protocol and supplement, and that these are needed to implement robust fall-back provisions for derivative contracts referencing key interbank offered rates, including the London Interbank Offered Rate (LIBOR).

It is intended that LIBOR will be discontinued after the end of 2021. The regulators state that adherence is an important step towards the orderly transition of LIBOR-referenced derivatives contracts.

Mortgage broker reforms deferral instrument amended

On 23 October, the ASIC Credit (Amendment) Instrument 2020/963 (Amendment Instrument) was registered.

Earlier this year in May, the ASIC Credit (Deferral of Mortgage Broker Obligations) Instrument 2020/487 (Deferral Instrument) was registered. The purpose of the Deferral Instrument is to provide a temporary exemption until 1 January 2021 from (among other matters) the ban on giving or accepting conflicted remuneration under the National Consumer Credit Protection Act 2009 (Cth).

According to the Explanatory Statement to the Amendment Instrument, the application of the exemption under the Deferral Instrument depended on when the benefit was given rather than on when the credit service was provided. The Amendment Instrument amends the Deferral Instrument so that it also extends to a credit service provided before 1 January 2021 (irrespective of when the benefit is given).

The Amendment Instrument commenced on 24 October.

Government announces review into payments system

On 21 October, the Treasurer, Josh Frydenberg, announced that the Government will undertake a review into the regulatory architecture of the Australian payments system.

According to the Terms of Reference, the purpose of the review is to ensure that the payments system is fit-for-purpose and responsive to advances in payments technology.

It is intended that the review will provide a report to the Treasurer by April 2021.

Treasury consults package of ‘technical’ amendments to laws

On 21 October, the Treasury released a package of draft exposure legislation and regulations for public consultation. According to the Treasury, these draft exposures cover proposed ‘minor and technical’ amendments to Treasury portfolio laws.

The draft exposures propose to make amendments to the ASIC Act, Corporations Act, National Consumer Credit Protection Act 2009 (Cth), and the Superannuation Industry (Supervision) Act 1993 (Cth), as well as other Acts and regulations.

Consultation closes on 17 November. 

ASIC updates regulatory guidance on unfair contract terms and insurance contracts

On 20 October, ASIC announced that it has updated:

to include information about how the unfair contract terms protections will apply to insurance contracts that are entered into or renewed on or after 5 April 2021, and to terms in an insurance contract that is varied on or after 5 April 2021.

The application of the unfair contract terms regime to insurance contracts is implemented under the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Cth)

Treasury consults on proposed legislative amendments to enable virtual meetings and electronic signing

On 19 October, the Treasury released exposure draft legislation proposing to amend the Corporations Act in relation to virtual meetings and electronic document execution for public consultation.

According to the exposure draft Explanatory Memorandum, the proposed bill makes permanent, and expands upon, the temporary changes in the Corporations (Coronavirus Economic Response) Determination (No.3) 2020. For more information about this determination, see our earlier Issue 45.

In brief, the exposure draft legislation proposes to allow:

    1. company documents to be executed using electronic means;
    2. directors’ meetings, shareholders’ meetings, and meetings of members of a registered scheme to be held using electronic means;
    3. meeting documents to be given electronically, and to be signed electronically;
    4. minutes for meetings to be taken electronically.

Consultation closes on 30 October. 

ASIC writes to insurance industry participants about business interruption insurance claims

On 15 October, APRA published a letter to RSE licensees in relation to the ‘controlling stake requirements’ in Part 2A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).

In the letter, APRA:

    1. reminded RSE licensees that failure to obtain APRA’s approval prior to owning a controlling stake in an RSE licensee is a strict liability offence under section 29JCB of the SIS Act which may attract severe penalties;
    2. set out the form the approval request must take; and
    3. set out actions that RSE licensees must take as a matter of priority to determine if the letter applies to them.

Government announces ‘Your Future, Your Super’ reforms

On 6 October, the Treasurer, Josh Frydenberg, and the Assistant Minister for Superannuation, Financial Services, and Technology, Jane Hume, jointly announced the ‘Your Future, Your Super’ package of superannuation reforms. The ‘Your Future, Your Super’ reforms are part of the 2020-21 Federal Budget.

On that day, the Treasury released a paper and fact sheet about the proposed reforms.

According to the Treasury, the reforms are intended to commence on 1 July 2021. In brief, the Government proposes to:

    • ‘staple’ a superannuation account to an employee, so the account follows the employee between jobs and overrides the employer’s chosen default fund;
    • introduce a new online YourSuper comparison tool;
    • impose an annual performance test to expose underperforming superannuation funds; and
    • increase accountability and transparency by imposing a new best financial interests duty.

For more information, see our earlier article here.

This article was written with the assistance of Nina Mao, Law Graduate.


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