Financial Services in Focus – Issue 49

By Harry New, Adrian Verdnik and Vince Battaglia

In this edition, we consider an interesting case on the 'application moneys provisions' for the issue of financial products, we outline proposed exclusions from the new claims handling licensing obligations and report on reforms to AML/CTF legislation.

Click on each heading below to read more about each of these areas: funds and financial products, financial markets, anti-money laundering, consumer credit, banking and other financial services regulation. 

FCA considers client money and application money provisions in relation to foreign exchange contract payments

On 28 January, Colvin J of the Federal Court of Australia handed down a judgment holding that certain funds held by a foreign exchange services provider (FX Provider) in liquidation were held on trust as they were client money under Subdivision A of Division 2 of Part 7.8 of the Corporations Act.

The judgment in Nikitins (Liquidator) v EncoreFX (Australia) Pty Ltd (in liq), in the matter of EncoreFX (Australia) Pty Ltd (in liq) (No 2) [2021] FCA 27 (Liquidator v EncoreFX) provides guidance on how the client money and application provisions under the Corporations Act apply in respect of money paid to a foreign exchange provider under foreign exchange contracts.

In Liquidator v EncoreFX, clients transferred Australian dollars to an FX Provider to be exchanged for foreign currency. After the funds were transferred but before the foreign currency was made available, the FX Provider was placed in liquidation. Among other matters, it was submitted that the Australian dollars were held on trust by the FX Provider as they constituted application money under section 1017E of the Corporations Act or alternatively client money under section 981A.

Colvin J rejected the argument that the Australian dollars were application money paid under section 1017E to acquire foreign exchange contracts. Rather than being money paid to acquire a foreign exchange contract, Colvin J held that the money was paid in performance of the foreign exchange contract, which was already in existence at that point (ie the client had already acquired the foreign exchange contract by agreeing to the FX Provider’s terms). His Honour reasoned as follows:

Both the terms of s 1017E and the protection that it affords are dealing with payments made upon the issue of or to acquire a financial product. Where, as here, the financial product is not an ownership interest but takes the form only of creating by agreement an arrangement pursuant to which there are ongoing obligations, payments made in performance of those obligations are not governed by the statutory protection. The legislation is concerned with the issuing or acquisition process. It ensures that the party knows what it is getting (by regulating the advice given concerning the financial product and requiring that there be a PDS) and also ensures that any money it pays to get the product by a process of issue or transfer is properly set aside and then only applied to the benefit of the party issuing the product once the issue or transfer is complete. In the case of a foreign exchange contract there is no payment made for a step or dealing of that kind.

It was submitted in the alternative that the Australian dollars were client money under section 981H. Colvin J agreed that the money was paid ‘in connection with’ a financial product (being the foreign exchange contract) under section 981A(1)(a)(ii). He rejected submissions that it was excluded as remuneration paid to the FX Provider under section 981A(2)(a), or excluded as money paid to acquire a financial product under section 981A(2)(c). Colvin J accordingly held that the money was held on statutory trust for the clients, and not available to creditors.

ASIC issues no-action position on document-giving timeframes for ICA members

On 14 January, ASIC announced that it has issued a no-action position in relation to breaches of certain provisions of the Corporations Act and Corporations Regulations, in response to an application for relief made by the Insurance Council of Australia (ICA).

According to ASIC, the application for relief arises out of regulatory relief given to Australia Post that temporarily adjusts Australia Post’s performance standards by relaxing some delivery timeframes until 30 June (Postal Standards Relief).

The relief is provided to regulated persons (such as ICA members) and relates to technical provisions regarding the delivery of FSGs and PDSs, and dollar disclosure requirements, where there may be a breach of such requirements by such persons as a result of the effect of the Postal Standards Relief.

ASIC states that its no-action position will cease when the Postal Standards Relief expires.

Treasury consults on product exemptions regarding deferred sales model for add-on insurance

On 13 January, the Treasury announced that it is seeking feedback from stakeholders on what classes of add-on insurance products may satisfy requirements to be exempted from the new deferred sales model for add-on insurance.

Under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), an industry-wide deferred sales model for add-on insurance (Deferred Sales Model) will come into effect on 5 October. The Deferred Sales Model applies a deferral period between the purchase of the primary product and the purchase of add-on insurance.

According to the Treasury, the Government intends to exempt add-on travel insurance products and CTP insurance for motor vehicles from the Deferred Sales Model. The Treasury states it is also seeking stakeholder feedback on how these proposed exemptions may be captured in the regulations.

Consultation closes on 15 February.

APRA and ASIC write to RSE licensees on member outcomes and DDO

On 15 December 2020, APRA and ASIC jointly issued a letter to RSE licensees in relation to the interaction between member outcomes obligations and the design and distribution obligations (DDO).

According to the letter:

      • the member outcomes obligations are administered by APRA and commenced on 1 January, while the DDO are administered by ASIC and commence on 5 October;
      • the member outcomes obligations focus on RSE licensees’ broader business operations, enhancing strategic planning and ensuring licensees are continually reviewing their products and operations, to deliver quality outcomes for members holding MySuper products or choice products;
      • the DDO, which apply to RSE licensees in respect of their choice product offerings, require choice products to be designed for an identified target market of consumers, and require RSE licensees to take reasonable steps in distribution that will, or are reasonably likely to, result in distribution to that target market; and
      • there are three key areas in which the member outcomes obligations and the DDO interact closely, namely: planning, reviews and adjustments; data; and insurance in superannuation.


IOSCO report on COVID-19 retail market conduct issues published

On 23 December 2020, ASIC announced the publication of a report on retail market conduct issues arising from COVID-19 by the Retail Market Conduct Task Force of the International Organization of Securities Commissions (IOSCO).

According to ASIC, the Retail Market Conduct Task Force Report: Initial Findings and Observations About the Impact of COVID-19 on Retail Market Conduct:

      1. outlines key observations of the retail market conduct risks caused or exacerbated by COVID-19;
      2. identifies a number of common themes experienced during COVID-19 that highlight the vulnerabilities and risks for retail investors, market participants and regulators; and
      3. highlights case studies specific to member organisations (including ASIC) and suggests practical regulatory tools member organisations can utilise.

ASX announces updated Listing Rules guidance and other reminders

On 16 December 2020, the ASX issued Compliance Update No. 12/20. In this update, the ASX:

      1. announced updates to ASX Listing Rules Guidance Note 5 Chess Depositary Interests and ASX Listing Rules Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B that were released on 9 December 2020;
      2. announced that a new ASX Online training environment that allows listed entities to simulate new and updated online forms was available for use;
      3. announced that ASX Information Paper ASX Data Governance under CHESS and CHESS Replacement, which explains ASX’s data governance arrangements under CHESS and the CHESS replacement system, was released on 4 December 2020; and
      4. reminded listed entities of ASX annual listing fees for FY21.


AUSTRAC consults on amendments to AML/CTF Rules

On 27 January, AUSTRAC released exposure draft amendments to the Anti-Money Laundering and Counter-Terrorism Financing Rules 2007 (No. 1) (AML/CTF Rules), including an explanatory note, for public consultation.

The exposure draft amendments to the AML/CTF Rules support amendments made under the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth), which received Royal Assent on 17 December 2020.

According to AUSTRAC, the exposure draft amendments:

      1. make changes to customer due diligence rules;
      2. expand tipping off exceptions;
      3. make changes to correspondent banking rules; and
      4. support cooperation and collaboration to detect, deter and disrupt money laundering, terrorism financing and other serious crimes.

Consultation closes on 11 March. 

AUSTRAC releases update on trade-based money laundering measures

On 6 January, AUSTRAC announced that it has been taking a collaborative approach to addressing trade-based money laundering (TMBL), which is a form of money laundering whereby criminals take advantage of the size and complexity of international trade to transfer money between parties and evade authorities.

AUSTRAC also noted the publication of a report by the Financial Action Task Force and the Egmont Group on the risks and challenges posed by TMBL. 

AML/CTF reform bill passes and receives Royal Assent

On 17 December 2020, the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth) received Royal Assent.

According to the Explanatory Memorandum, the Act contains a range of measures to strengthen Australia’s capabilities to address money laundering and terrorism financing risks, and generate regulatory efficiencies.

For more information, see our earlier Issue 47 in relation to the bill, which was passed without amendment.

Treasury consults on debt management firm licensing regulations

On 15 January, the Treasury released draft exposure regulations and an Explanatory Statement requiring debt management firms to hold an ACL for public consultation.

According to the draft exposure Explanatory Statement, the proposed regulations prescribe a new type of ‘credit activity’ for the purposes of section 6 of the National Consumer Credit Protection Act 2009 (Cth), which will require providers of ‘debt management services’ to hold an ACL and meet the ongoing obligations imposed on credit licensees.

Consultation closes on 12 February.

ASIC approves variations to Banking Code of Practice

On 8 January, ASIC announced that it has approved of variations to the Banking Code of Practice. ASIC’s approval is given under ASIC Corporations (Approval of Variation of March 2020 Banking Code of Practice) Instrument 2021/11, which was registered on 11 January.

According to ASIC, pursuant to amendments to the Corporations Act made under Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), ASIC may approve of variations to an approved code of conduct by legislative instrument and may identify an eligible provision as an ‘enforceable code provision’ (a breach of which may attract civil penalties and/or other administrative enforcement action). 

ASIC states that its approval does not identify any enforceable code provisions.

APRA updates capital management guidance for banks and insurers

On 15 December 2020, APRA published updated capital management guidance for ADIs and insurers that is intended to apply from the start of 2021. APRA states that this is an update to guidance previously provided in July 2020. 

APRA publishes results of COVID-19 bank stress testing

On 15 December 2020, APRA published the results of its internal stress testing models on the banking industry since the onset of the COVID-19 pandemic in APRA Information Paper Stress testing banks during COVID-19.

According to APRA, the banking system is well positioned to withstand a very severe economic downturn, while retaining the capacity to support the broader economy.

APRA releases policy and supervision priorities for 2021

On 1 February, APRA released its policy and supervision priorities for the coming 12 to 18 months. The priorities are set out in:

        1. Information Paper APRA’s Supervision Priorities; and
        2. Information Paper APRA’s Policy Priorities.

According to APRA, its primary focus in policy development in the period ahead is heavily weighted towards financial system resilience, and completing key reforms, and its supervisory program is risk-based, forward-looking and outcomes-focused. 

APRA consults further on prudential standard governing insurance in superannuation

On 20 January, APRA released for consultation a revised draft Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) for public consultation. ASIC also released an updated draft Prudential Practice Guide SPG 250 Insurance in Superannuation.

The current round of consultation on amendments to SPS 250 follows the first round of consultation in November 2019 (for more information, see our earlier Issue 33).

APRA states that the current round of consultation follows queries raised and guidance sought in response to the November 2019 consultation.

Consultation closes on 5 March.

AFCA rules to be amended to cover authorised representatives acting outside authority

On 5 January, the ASIC Corporations (AFCA Scheme Regulatory Requirement) Instrument 2021/0002 (Instrument 2021/0002) was registered.

According to the Explanatory Statement, the purpose of Instrument 2021/0002 is to require the operator of the AFCA scheme to amend the AFCA scheme rules to remedy a jurisdictional gap in the rules which causes a lack of access to remedies for consumers who have a complaint about the conduct of a representative of an AFCA member, where the conduct of the representative was without or outside authority.

Under Instrument 2021/0002, the operator of the AFCA scheme will be required to amend the scheme rules on or before 15 January. 

Report into future directions for the Consumer Data Right published

On 23 December 2020, the Treasury released the Final Report of the Inquiry into Future Directions for the Consumer Data Right (Final Report).

On that day, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, explained that the Final Report makes recommendations on ways to expand and enhance the Consumer Data Right to boost innovation and competition, and further empower consumers.

Amendments made to Consumer Data Right rules

On 22 December 2020, the Competition and Consumer (Consumer Data Right) Amendment Rules (No. 3) 2020 (Amending Rules) were registered. The Amending Rules amend the Competition and Consumer (Consumer Data Right) Rules 2020 (CDR Rules).

On 23 December 2020, in announcing the amendments, the ACCC explained that the new rules expand the types of consumers who can use the Consumer Data Right (CDR) to include more business customers, include provisions to improve the consumer experience and provide greater flexibility for participants’ business models.

The Amending Rules commenced on 23 December 2020.

FIRB updates Guidance Notes for foreign investment reforms

On 21 December 2020, the Foreign Investment Review Board (FIRB) announced that it has consolidated and updated Guidance Notes as part of implementing the foreign investment framework reforms.

The foreign investment framework reforms commenced on 1 January 2021. For more information, see our earlier Issue 48 and Issue 43.

The new Guidance Notes are available here. Archived guidance notes in relation to applications made before 1 January 2021 are available.

Treasury consults on modernising business communication laws

On 18 December 2020, the Treasury released a consultation paper on improving the technology neutrality of Treasury portfolio laws.

According to the Treasurer, Josh Frydenberg, the consultation seeks stakeholder feedback on regulatory impediments to modernising business communications.

Relevant business communications include written communications or transfers of information among stakeholders (including investors), lodging documents with regulators like ASIC, written signature requirements, record-keeping requirements, and payments.

Consultation closes on 28 February. 

APRA publishes 2020 MySuper Product Heatmap

On 18 December 2020, APRA published the 2020 MySuper Product Heatmap and additional material including:

      1. an Insights Paper illustrating key insights from the 2020 Heatmap and a paper explaining the changes in methodology behind the Heatmap;
      2. frequently asked questions in relation to the 2020 Heatmap, including questions about the new RG 97 fees and costs disclosure regime and ‘Your Future, Your Super’ measures; and
      3. an additional online, interactive, web-based tool to help users explore the Heatmap (in addition to Excel and CSV data).

ASIC provides guidance about financial reporting focus areas

On 15 December 2020, ASIC announced its key focus areas for financial reporting by companies for years ending 31 December 2020.

ASIC states that the areas remain similar to those previously identified at 30 June 2020. For more information on the previous guidance, see our earlier article.

ASIC also reminded entities that it has extended 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. For more information, see our earlier Issue 48.

Subsequently, on 17 December 2020, ASIC released results from its review of financial reports of listed entities and other public interest entities as part of its ongoing risk-based reviews of financial reports. 

ASIC consults on financial firm data reporting about internal dispute resolution

On 16 December 2020, ASIC released for public consultation:

New IDR standards and requirements will apply to financial firms that deal with retail clients from 5 October. ASIC states that, while mandatory IDR data reporting will not commence on that date, its intention is to give firms some certainty about what information it will be collecting as they make changes to their systems now.

Consultation closes on 12 February. 

ASIC publishes review of school banking programs

On 15 December 2020, ASIC published a review of school banking programs in ASIC Report 676 Review of school banking programs. The report sets out key findings and includes a set of questions that school communities may consider to assist them in assessing and implementing school banking programs. 

Treasury consults on exclusions from new claims handling licensing obligations

On 14 December 2020, the Treasury released exposure draft regulations for public consultation. The regulations arise out of amendments made under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), which received Royal Assent on 17 December 2020.

Under that Act, insurance claims handling will be considered a financial service and claimant intermediaries will be required to hold an AFSL covering claims handling.

According to the exposure draft Explanatory Statement, the exposure draft regulations exclude certain people from regulation for claims handling as a claimant intermediary. The persons excluded are mortgage brokers and mortgage intermediaries, insurance brokers, qualified accountants, veterinarians, travel agents, financial advisers, property managers, estate managers and public trustees.

Consultation closed on 25 January.

ASIC publishes report on default insurance in superannuation

On 14 December 2020, ASIC published a report on measuring the value for money that members receive from default insurance provided by their superannuation funds.

ASIC Report 675 Default insurance in superannuation: Member value for money compares some measures of value for money, with a focus on outcomes for members, across superannuation trustees and for distinct member cohorts.

ASIC also reminded trustees that from October 2021, the design and distribution obligations will apply to Choice products in superannuation, including any attached insurance. 

Repeal of AFSL exemption for trustees of non-public offer superannuation funds

On 11 December 2020, the Financial Sector Reform (Hayne Royal Commission Response) (Regulation of Superannuation) Regulations 2020 (Regulations) was registered.

According to the Explanatory Statement, the purpose of the Regulations is to remove certain exemptions from the requirement to hold an AFSL to provide financial services, and to make other minor amendments, in support of broader reforms to the roles and responsibilities of superannuation industry regulators made under Schedule 9 to the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (Amending Act).

Among other matters, the Amending Act extends the AFS licensing regime to cover a broader range of activities undertaken by superannuation trustees by introducing a new financial service known as a ‘superannuation trustee service’. For more information, see our earlier article.

According to the Explanatory Statement, the Regulations repeal the exemption for trustees of non-public offer superannuation funds from the requirement to hold an AFSL to deal in financial products. From the commencement day of Part 2 to the Regulations, being 1 July, trustees of non-public offer superannuation funds who hold an RSE licence must also hold an AFSL.


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