Thinking | 16 November 2020

Financial Services in Focus – Issue 47

By Harry New, Adrian Verdnik and Vince Battaglia

In this edition, we provide an overview of the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which is now before Parliament. We also summarise an important case in which the Federal Court held that a loan arrangement constituted a financial product under the Corporations Act. We bring you these reports and plenty more need-to-know legal and regulatory developments in the Australian financial services sector this fortnight.

Financial Services Royal Commission bill introduced to Parliament

On 12 November, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was introduced to the House of Representatives.

This follows the Government’s announcement earlier this year in May that it would defer for six months the implementation of commitments associated with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) due to the impact of COVID-19.

According to the draft Explanatory Memorandum, the Bill implements the following recommendations of the Financial Services Royal Commission:

  • recommendation 1.15 to allow ASIC to designate enforceable code provisions and a mandatory code of conduct framework;
  • recommendations 4.5 and 4.6 to replace the duty of disclosure for consumer insurance contracts with a duty to take reasonable care not to make a misrepresentation, and to limit the circumstances in which an insurer can avoid a life insurance contract;
  • recommendation 4.3 to implement an industry-wide deferred sales model for the sale of add-on insurance products;
  • recommendation 4.4 to cap the amount of commission that may be paid in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle;
  • recommendations 3.4 and 4.1 to strengthen the prohibition on hawking of financial products;
  • recommendation 4.2 to restrict the ability of persons to use the terms ‘insurance’ and ‘insurer’;
  • recommendation 4.8 to make insurance claims handling and settling a financial service;
  • recommendation 3.1 to impose a new condition on RSE licensees prohibiting trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to carry out their ordinary functions as a trustee of a registrable superannuation entity;
  • recommendations 3.8, 6.3, 6.4, and 6.5 to adjust APRA’s and ASIC’s roles in superannuation;
  • recommendations 1.6 and 2.7 to implement a reference checking and information sharing protocol in relation to financial advisers and mortgage brokers;
  • recommendations 1.6, 2.8, and 7.2 to implement ASIC Enforcement Review Taskforce recommendations to clarify and strengthen AFSL breach reporting and introduce a comparable breach reporting regime for ACL holders;
  • recommendations 1.6 and 2.9 to require AFSL and ACL holders to investigate, inform, and remediate misconduct by financial advisers and mortgage brokers;
  • recommendation 6.9 to impose a statutory obligation to co-operate on APRA and ASIC; and
  • recommendation 6.11 to formalise ASIC meeting procedures.

On 12 November, the Treasurer, Josh Frydenberg, announced that the Government is focused on completing the implementation of the Financial Services Royal Commission recommendations.

ASIC publishes AFSL and ACL report including key issues for FY20

On 11 November, ASIC published ASIC Report 671 Licensing and professional registration activities: 2020 update (REP 671). The report provides an update on ASIC’s licensing and professional registration activities in relation to financial services and credit activities, as well as an update of regulatory developments affecting AFS licensing and the AFS licensing application process.

In addition to providing information on FY20 licensing and professional registration applications, ASIC also noted:

  • the new changes to the licensing process, including the fit and proper person test, the foreign financial services provider regulatory framework, and changes in relation to funeral expenses and litigation funding; and
  • other ASIC work affecting AFSL and ACL holders, including the product intervention power, upcoming design and distribution obligations, and ASIC’s updated guidance on fees and costs disclosure.

ASIC notifies consumers about new CFD conditions

On 11 November, ASIC published an article for consumers announcing that new conditions will apply to the issue and distribution of contracts-for-difference (CFD) from 29 March 2021.

The conditions are imposed under ASIC’s new CFD product intervention order. For more information about the order, see our earlier Issue 46.

ASIC publishes regulatory update

On 26 October, ASIC published a speech by ASIC Commissioner Sean Hughes at the 30th Annual Credit Law Conference.

The Commissioner noted, among other matters, that ASIC:

  • intends to release its final guidance on design and distribution obligations (which commence on 5 October 2021) soon;
  • intends to consult on an updated ASIC Regulatory Guide 78 Breach reporting by AFS licensees in early 2021;
  • intends to finalise the reference checking and information sharing protocol for ACL and AFSL holders in the first half of 2021, ahead of the planned October 2021 commencement; and
  • is working with the Treasury and APRA to progress the responsible lending reforms announced by the Government on 25 September.

FCA holds a purported ‘loan agreement’ to be a financial product

On 14 October, Derrington J of the Federal Court of Australia handed down his judgment making orders and declarations with respect to the winding up of a company that carried on a financial services business without an AFSL.

In Australian Securities and Investments Commission v Secure Investments Pty Ltd (No 2) [2020] FCA 1463, Derrington J noted that the company purported to carry on an investment business involved in property development. ASIC submitted, and Derrington J agreed, that the ‘loan agreements’ offered by the company constituted financial products under sections 763A and 763B of the Corporations Act, as facilities through which a person makes a financial investment.

Credit facilities are excluded from the definition of financial product by section 765A(1)(h)(i) of the Corporations Act. However, a financial product that falls under section 763A(1)(a) (and section 763B) is not a credit facility, under Corporations Regulation 7.1.06.

Sections 763A(1)(a) and 763B provide that a financial product is a facility through which, or through the acquisition of which, a person makes a financial investment. In relation to the criteria in section 763B(a)(ii), Derrington J held that:

A mere loan agreement between a borrower and lender by which money is lent in return for its repayment together with interest is unlikely to satisfy the requirement that it was intended that the contribution would be used by the [borrower] to generate a financial return for the lender. In the ordinary course, a borrower uses borrowed funds for their own purposes to generate a benefit for themselves and the interest rate is the price paid for the use of the funds.

However, in light of the circumstances surrounding the loan agreement (such as the company’s public statements, the agreement terms, and representations made by the company’s representative), Derrington J held that the borrowers (ie the investors) did intend for the company to generate a financial return in respect of the loan agreements. Accordingly, the loan agreements were held to be financial products. 

AFCA submits to ASIC proposed Rule change to transfer SCT complaints

On 4 November, AFCA announced that it will submit to ASIC proposed amendments to the AFCA Rules to facilitate the transition of any unresolved complaints from the Superannuation Complaints Tribunal (SCT).

The SCT will cease operations on 31 December.

Earlier this year, AFCA consulted on the proposed amendments from 21 September to 16 October.

Class waiver for NSXA and SSX market participants extended

On 2 November, the ASIC Market Integrity Rules (Securities Markets) Class Waiver Amendment Instrument 2020/877 was registered.

According to the Explanatory Statement, the instrument extends the term of ASIC Market Integrity Rules (Securities Markets) Class Waiver 2018/258 (Instrument 2018/258) to 16 November 2022.

Instrument 2018/258 exempts market participants of the National Stock Exchange of Australia Limited (NSXA) and the Sydney Stock Exchange Limited (SSX) markets from obligations to comply with various rules under the ASIC Market Integrity Rules (Securities Market) 2017

ASIC conditionally waives accreditation renewal requirements

On 29 October, the ASIC Market Integrity Rules (Securities Markets) Class Waiver Instrument 2020/870 (Instrument 2020/870) was registered.

According to the Explanatory Statement, the purpose of Instrument 2020/870 is to relieve market participants from the need to renew the accreditation of each of their accredited advisers by submitting a written application to ASIC during the current renewal period for those accreditations.

The conditional waivers cease to apply at the end of 30 November 2021.

ASX announces the go-live for CHESS replacement system is April 2023

On 28 October, the ASX announced that the new go-live date for the CHESS replacement system will be April 2023, with increased project scope.

On that day, the ASX also released the CHESS Replacement: Confirmed Implementation Timetable Response to consultation feedback. The paper sets out the ASX’s response to feedback received by the ASX in relation to the proposed CHESS replacement implementation schedule. 

Class waiver for NSXA and SSX market participants extended

On 2 November, the ASIC Market Integrity Rules (Securities Markets) Class Waiver Amendment Instrument 2020/877 was registered.

According to the Explanatory Statement, the instrument extends the term of ASIC Market Integrity Rules (Securities Markets) Class Waiver 2018/258 (Instrument 2018/258) to 16 November 2022.

Instrument 2018/258 exempts market participants of the National Stock Exchange of Australia Limited (NSXA) and the Sydney Stock Exchange Limited (SSX) markets from obligations to comply with various rules under the ASIC Market Integrity Rules (Securities Market) 2017

ASIC conditionally waives accreditation renewal requirements

On 29 October, the ASIC Market Integrity Rules (Securities Markets) Class Waiver Instrument 2020/870 (Instrument 2020/870) was registered.

According to the Explanatory Statement, the purpose of Instrument 2020/870 is to relieve market participants from the need to renew the accreditation of each of their accredited advisers by submitting a written application to ASIC during the current renewal period for those accreditations.

The conditional waivers cease to apply at the end of 30 November 2021. 

ASX announces the go-live for CHESS replacement system is April 2023

On 28 October, the ASX announced that the new go-live date for the CHESS replacement system will be April 2023, with increased project scope.

On that day, the ASX also released the CHESS Replacement: Confirmed Implementation Timetable Response to consultation feedback. The paper sets out the ASX’s response to feedback received by the ASX in relation to the proposed CHESS replacement implementation schedule. 

AML/CTF reform bill introduced to Senate

On 12 November, the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019 was introduced to the Senate after passing the House of Representatives.

According to the Explanatory Memorandum, the bill contains a range of measures to strengthen Australia’s anti-money laundering and counter-terrorism financing regime including amendments to:

  • expand the circumstances in which reporting entities may rely on customer identification and verification procedures undertaken by a third party;
  • explicitly prohibit reporting entities from providing a designated service if customer identification procedures cannot be performed;
  • strengthen protections on correspondent banking by:
    • prohibiting financial institutions from entering into a correspondent banking relationship with another financial institution that permits its accounts to be used by a shell bank, and
    • requiring banks to conduct due diligence assessments before entering, and during, all correspondent banking relationships; 
  • expand exceptions to the prohibition on tipping off to permit reporting entities to share suspicious matter reports and related information with external auditors, and foreign members of corporate and designated business groups;
  • provide a simplified and flexible framework for the use and disclosure of financial intelligence to better support combatting money laundering, terrorism financing and other serious crimes;
  • create a single reporting requirement for the cross-border movement of monetary instruments;
  • address barriers to the successful prosecution of money laundering offences by:
    • clarifying that the existence of one Commonwealth constitutional connector is sufficient to establish an instrument of crime offence, and
    • deeming money or property provided by undercover law enforcement as part of a controlled operation to be the proceeds of crime for the purposes of prosecution.

The Explanatory Memorandum states that the bill implements a second phase of reforms arising from the recommendations of the 2016 Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations.

ASIC consults on revised product intervention order for continuing credit contracts

On 10 November, ASIC published an addendum to ASIC Consultation Paper 330 Using the product intervention power: Continuing credit contracts (CP 330), and a further draft product intervention order in relation to continuing credit contracts.

The addendum and further draft product intervention order respond to submissions received by ASIC on CP 330, which was published on 9 July. For more information on CP 330, see our earlier Issue 42.

Consultation on the revised order closes on 24 November.

Treasury consults on consumer credit reforms

On 4 November, the Treasury released exposure draft legislation, regulations, and a legislative instrument to amend Australia’s consumer credit framework, for public consultation.

The credit reforms were announced by the Government on 25 September. For more information, see our earlier Issue 45.

According to the exposure draft Explanatory Memorandum, the exposure draft legislation amends the National Consumer Credit Protection Act 2009 (Cth) so that:

  • responsible lending obligations only apply to small amount credit contracts (SACC), SACC-equivalent loans provided by ADIs, and consumer leases (among other matters);
  • the best interests duty and obligation to resolve conflicts of interest in the consumer’s favour is extended to apply to all credit assistance providers; and
  • the Minister may make non-ADI credit standards by way of legislative instrument.

Consultation closes on 20 November.

APRA consults on revised remuneration requirements for APRA-regulated entities

On 12 November, APRA published a revised draft Prudential Standard CPS 511 Remuneration for consultation. APRA states that the revised prudential standard responds to industry feedback from the initial consultation, sets robust minimum standards for APRA-regulated entities, and addresses recommendations 5.1, 5.2 and 5.3 from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

APRA also published its response paper to industry feedback on the initial consultation proposals (released in July 2019) and non-confidential submissions to the initial consultation proposals.

Consultation closes on 12 February 2021. 

ASIC further extends financial reporting deadlines and AGM ‘no action’ position

On 11 November, ASIC announced that it will extend the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 January 2021 balance dates, where the reporting deadline has not already passed.

ASIC explains that this builds on earlier relief announced for unlisted entities with 31 December 2019 to 7 July 2020 year ends (for more information, see our earlier Issue 39).

ASIC states it has also adopted a ‘no action’ position where public companies do not hold annual general meetings within five months after the end financial years that end from 31 December 2019 to 7 January 2021, but do so up to seven months after year end.

ASIC previously adopted a ‘no action’ position where public companies hold their AGMs for 31 December 2019 year ends by the end of July 2020 (see also our earlier Issue 39). 

ACCC publishes guidance about CDR accreditation

On 11 November, the ACCC compiled and published three documents about becoming accredited to participate in the Consumer Data Right (CDR) ecosystem.

The documents comprise:

According to the FAQs, entities must be accredited to receive consumer data to provide products or services to consumers under the CDR regime. 

APRA publishes FAQs in relation to outcomes assessments by RSE licensees

On 11 November, APRA published new frequently asked questions (FAQs) in relation to the completion of outcomes assessments by RSE licensees by the end of February 2021.

APRA states that the new FAQs address common areas of weakness identified from APRA’s targeted review of trial outcomes assessments. 

ASIC announces its focus in superannuation for 2020-21

On 10 November, ASIC published an article about ASIC’s focus in superannuation for 2020-21. Among other matters, ASIC states that, as the superannuation conduct regulator:

  • ASIC is focusing on the behaviour of trustees to improve consumer outcomes in superannuation; and
  • ASIC will continue to work with APRA, the prudential and member-outcomes regulator.

In relation to the upcoming design and distribution obligations (DDO), ASIC states that while the DDO do not apply to MySuper products, there is still significant work to be undertaken by trustees. ASIC encouraged trustees to consider how trustees can implement both the DDO and APRA’s Member Outcomes regimes simultaneously to make the most of the synergies between them.

ASIC also referred to the upcoming new internal dispute resolution framework and foreshadowed changes to retirement income calculators and projections relief. 

Senate Committee on Fintech and Regtech publishes second issues paper

On 9 November, the Senate Select Committee on Financial Technology and Regulatory Technology (Committee) published a second issues paper outlining the Committee’s intended direction for the remainder of its inquiry and some specific areas of interest.

Earlier in September, the Committee published an interim report in relation to its inquiry. For a summary of the recommendations, see our earlier article here.

The Committee’s final report is due in April 2021.

Consultation on the second issues paper closes on 11 December. 

UCT protections in ASIC Act and ACL to be enhanced

On 9 November, the Treasury published a Regulation Impact Statement for Decision (Decision RIS) setting out the Treasury’s consideration of proposed enhancements to unfair contract terms (UCT) regime in the ASIC Act and the Australian Consumer Law (ACL).

The Decision RIS concluded that the preferred options for enhancing the UCT regime include making UCTs unlawful and giving courts the power to impose a civil penalty, amending the definition of a small business contract, and providing an exemption for certain terms that meet minimum standards.

It is intended that amendments will be made to UCT protections in the ACL and the ASIC Act.

On 10 November, the Assistant Treasurer, Michael Sukkar, announced that the Commonwealth and State and Territory Consumer Affairs Ministers have agreed to strengthen the UCT protections. 

New regulatory framework to be introduced for stored-value facilities

On 6 November, the Council of Financial Regulators (CFR) published the Regulation of Stored-value Facilities in Australia: Conclusions of a Review by the Council of Financial Regulators (Report). The Report sets out the CFR’s recommendations following its review of stored-value facilities in Australia.

Stored-value facilities are payment services that enable customers to store funds in a facility for the purpose of making future payments, including international money transfers, gift cards, pre‑paid cards and digital wallets.

On that day, the Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume, announced that the release of the Report follows the Government’s announcement in the 2020-21 Budget that it will introduce a new regulatory framework for stored-value facilities in line with the Report’s recommendations. 

APRA consults on cyber insurance and management liability data collection

On 5 November, APRA published a letter to general insurers and other interested parties consulting on a proposal to separately collect cyber insurance and management liability data within the National Claims and Policies Database.

Consultation closes on 17 December. 

APRA resumes consultation on general and life insurer data confidentiality

On 5 November, APRA announced that it is resuming consultation on a proposal to determine all classes of business data for general insurance and all product group data for life insurance as non-confidential.

Consultation closes on 3 December.

Senate Committee recommends bill increasing SMSF membership be passed

On 4 November, the Senate Economics Legislation Committee published its report and recommendation that the Treasury Laws Amendment (Self Managed Superannuation Fund) Bill 2020 be passed.

According to the report, the purpose of the bill is to increase the maximum number of allowable members in SMSFs from four to six.

ACCC publishes FAQs on next phase of Open Banking

On 2 November, the ACCC published new frequently asked questions (FAQs) for consumers about new datasets available for sharing under the Consumer Data Right (CDR) regime from 1 November.

According to the ACCC, customers of the four major banks may now share their data on joint accounts and home loans, offset and personal loan accounts with accredited data recipients. 

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

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