Financial Services in Focus – Issue 55

By Harry New and Adrian Verdnik

In this bumper edition, we report on the extension of transitional licensing relief for foreign financial services providers, new AUSTRAC guidance, new ASIC guidance on ongoing fee arrangements, and much more.

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

Funds and financial products

ASIC consults on remaking class order about describing debentures

On 1 July, ASIC published ASIC Consultation Paper 344 Remaking ASIC class order on when debentures can be called secured notes seeking feedback on a proposal to remake ASIC Class Order [CO 12/1482], which relates to how debentures may be described.

ASIC states it proposes to remake the class order.

Consultation closes on 29 July.

ASIC consults on good practice proposals for crypto-asset investment products

On 30 June, ASIC published ASIC Consultation Paper 343 Crypto-assets as underlying assets for ETPs and other investment products (CP 343) seeking feedback on proposals about exchange-traded products (ETPs) and other investment products that provide retail investors with exposure to crypto-assets.

According to ASIC, CP 343 consults on ASIC’s proposed good practices for ETPs, listed investment companies, listed investment trusts and unlisted registered managed investment schemes that provide exposure to crypto-assets.

Consultation closes on 27 July.

Parliament clarifies ASIC’s product intervention power

On 30 June, the Treasury Laws Amendment (2021 Measures No. 4) Bill 2021 received Royal Assent. According to the Explanatory Memorandum, the bill (among other matters) amends Commonwealth legislation to address unintended outcomes under the product intervention power (PIP) regime and clarifies that ASIC is permitted to exercise its PIP to intervene in relation to the costs of a financial or credit product.

These amendments to the PIP regime came into effect on 1 July.

Full Federal Court upholds ASIC’s short-term credit product intervention order

On 29 June, ASIC announced the dismissal of an application to quash ASIC’s short-term credit product intervention by the Full Court of the Federal Court of Australia.

The decision of the Full Court in Cigno Pty Ltd v Australian Securities and Investments Commission [2020] FCA 479 (Cigno v ASIC) arises out of an appeal brought by the applicant against the primary judge’s decision affirming the product intervention order in 2020. For more information on the initial decision, see our earlier Issue 38.

Relevantly, the Full Court held that:

1. ‘significant detriment to retail clients ought to be construed broadly, and detriment may take into account the surrounding circumstances in which a financial product is made available (rather than being limited to detriment caused by the features of the financial product itself, without taking into account the surrounding context); and
2. there are different ways a ‘class’ of financial product may be identified for the purpose of assessing significant detriment caused by a ‘class’ of products. Such a ‘class’ may include potential members or changing membership over time.

In doing so, the Full Federal Court generally upheld the primary judge’s decision.

Interim conditional relief for 31-day notice term deposits registered

On 28 June, the ASIC Corporations (Amendment) Instrument 2021/500 was registered. According to the Explanatory Statement, the instrument provides interim conditional relief to allow 31-day notice term deposits of up to five years to continue to be treated as ‘basic deposit products’.

It is intended that this will provide the Government with an opportunity to consider whether the definition of ‘basic deposit product’ under the Corporations Act ought to be amended.

AFS extends AFS licensing relief to non-public offer trustees

On 18 June, ASIC announced that it has extended existing AFS licensing relief for public offer trustees to include all registrable superannuation entities, including non-public offer trustees. On that day, the ASIC Corporations (Amendment) Instrument 2021/550 (Cth) was registered for this purpose.

In making the announcement, ASIC stated that, from 1 July 2021, all registrable superannuation trustees will be required to hold an AFS licence with authorisations to deal in superannuation interests and to provide a superannuation trustee service.

For more information, see our article on the relief extension.

ASIC extends transitional relief for foreign financial services providers

On 11 June, ASIC announced that it has extended the transitional relief for foreign financial services providers (FFSPs) from the requirement to hold an AFSL, pending the Government’s proposed consultation on options to regulate FFSPs in Australia. This initiative was announced as part of the Federal Budget (see our article for more information).

On that day, the ASIC Corporations (Amendment) Instrument 2021/510 was registered for this purpose. According to the Explanatory Statement, the instrument extends the transitional period for the sufficient equivalence relief and limited connection relief until 1 April 2023 in anticipation of the Government’s consultation.

The instrument also delays the commencement of the ASIC Corporations (Foreign Financial Services Providers-Funds Management Financial Services) Instrument 2020/199 until 1 April 2023

ASIC also states that it has paused its assessment of AFSL applications lodged by FFSPs pending the outcome of the Government’s proposed reforms.

Government announces further consultation on litigation funding

On 28 May, the Treasurer, Josh Frydenberg, announced that the Government will consult on recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services in the report Litigation funding and the regulation of the class action industry (December 2020).

The Joint Committee considered the extension of the AFS licensing regime to litigation funders (among other matters) in its report and its recommendations.

Financial product advice

ASIC and APRA write to superannuation trustees on charging advice fees from member accounts

On 30 June, ASIC and APRA jointly published a letter to superannuation trustees setting out their expectations with respect to superannuation trustees’ oversight of financial advice fees charged to members’ accounts.

The letter arises out of reforms to ongoing fee arrangements, including obtaining consent to pass on costs of providing advice, under the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021 (Cth).

Government announces introduction of ‘Better Advice Bill’ into Parliament

On 24 June, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced the introduction of the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Bill 2021 into Parliament.

According to the Ministers, the bill makes the following changes (among other matters):

1. expands the role of the Financial Services and Credit Panel within ASIC to operate as the single disciplinary body for financial advisers;
2. creates additional penalties and sanctions for financial advisers who have breached their obligations under the Corporations Act;
3. introduces a new registration system for financial advisers; and
4. winds up the Financial Adviser Standards and Ethics Authority and transfers its functions to the Minister responsible for administering the Corporations Act and to ASIC.

The bill arises out of the Treasury’s consultation on exposure draft legislation earlier in April and May. For more information on the consultation, see our earlier Issue 53.

ASIC publishes guidance on advice fee consents and independence disclosure

On 15 June, ASIC published ASIC Information Sheet 256 FAQs: Ongoing fee arrangements (INFO 256). INFO 256 answers frequently asked questions about recent changes to ongoing fee arrangements in relation to advice fee consents and independence disclosure.

On that day, ASIC also released an updated ASIC Regulatory Guide 175 Licensing: Financial product advisers-Conduct and disclosure, which reflects new advice obligations introduced into the Corporations Act following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and which includes an example of the lack of independence disclosure statement to help advisers understand the requirements in ASIC Corporations (Disclosure of Lack of Independence) Instrument 2021/125.

For more information on the recent changes, see our earlier Issue 52.

Temporary relief provided to financial advisers in anticipation of ongoing fee arrangements reforms

On 11 June, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the Government intends to provide relief to assist financial advisers during the transition period leading up to the commencement of new disclosure requirements for ongoing fee arrangements made under Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021 (Cth).

Subsequently on 25 June, the Treasury Laws Amendment (Miscellaneous and Technical Amendments) Regulations 2021 (Cth) were registered for this purpose, among other matters.

Financial markets

ASX publishes response to consultation on netting and settlement workflow changes

On 30 June, the ASX published its response to feedback arising out of its February consultation on changes to netting and settlement workflows. This is part of the CHESS replacement project. For more information on the consultation, see our earlier Issue 51.

In the response paper, ASX Chess Replacement: Confirmed changes to netting and settlement workflow Response to consultation feedback, ASX states that it has made modifications following consultation and outlines its confirmed solution design.

ASIC consults on amendments to market integrity rules

On 30 June, ASIC published ASIC Consultation Paper 342 Proposed amendments to the ASIC market integrity rules and other ASIC-made rules (CP 342) setting out proposed amendments to the ASIC market integrity rules and other ASIC-made rules.

ASIC states that CP 342 sets out proposals to amend the ASIC Market Integrity Rules (Securities Markets) 2017 and the ASIC Market Integrity Rules (Futures Markets) 2017, and make other machinery amendments to other ASIC market integrity rules.

Consultation closes on 6 August.

ASIC removes requirement for market makers under ETF relief to be local authorised participants

On 22 June, ASIC announced that it has updated ASIC Class Order [CO 13/721], which provides regulatory relief from specified provisions of the Corporations Act in relation to exchange traded funds (ETFs), to allow ETF issuers to use overseas market makers.

Earlier on 21 June, the ASIC Corporations (Amendment) Instrument 2021/299 was registered for this purpose. According to the Explanatory Statement, the instrument removes a regulatory barrier to entry for offshore market-making entities seeking to participate in the Australian ETF market by removing the requirement in [CO 13/721] that an authorised participant must be an Australian resident for tax purposes.

The amendment came into effect on 22 June.

New market integrity rules for capital requirements registered

On 16 June, ASIC announced that it has made new market integrity rules for capital that will replace the existing separate capital rules for securities market participants and futures market participants. On that day, the ASIC Market Integrity Rules (Capital) 2021 (Capital Rules) were registered.

The Capital Rules arise out of ASIC’s review of the existing market participant capital rules in ASIC Consultation Paper 302 Proposed changes to ASIC’s capital requirements for market participants (for more information on this consultation, see our earlier Issue 54).

Along with the new rules, ASIC also released ASIC Report 692 Response to submissions on CP 302 Proposed changes to ASIC’s capital requirements for market participants.

ASIC states that following a 12-month transition period, market participants will be required to comply with the Capital Rules from 17 June 2022 (but may opt-in earlier).

Government announces reforms to financial market infrastructure regulation

On 8 June, the Treasurer, Josh Frydenberg, announced the release of the Council of Financial Regulators’ (CFR) review into financial market infrastructure regulatory reforms. On that day, the CFR published its response and its advice to Government.

In connection with the review, the Treasurer states that the Government will introduce a reform package that:

1. introduces a crisis management regime that will allow the RBA to manage a failure at a domestic clearing and settlement facility;
2. enhances the supervisory and licensing powers of ASIC and the RBA in respect of financial market infrastructure; and
3. streamlines and clarifies certain regulatory powers.

ASX publishes response to consultation on trust and client segregated account rule amendments

On 5 June, the ASX published its response to feedback arising out of its consultation during November 2020 on proposed amendments to the ASX Clear Operating Rules and Procedures and ASX Clear Operating Rules Guidance Note 12 Trust and Client Segregated Accounts.

For more information on the initial consultation, see our earlier Issue 48.

ASX amendments to ASX Listing Rules and forms, and Guidance Notes

On 27 May and 2 June, the ASX issued Compliance Update No. 4/21 and No. 5/21 respectively. In the updates, the ASX:

1. announced that it had made further amendments to the proposed ASX Listing Rule amendments that are intended to come into effect on 5 June, and published marked-up versions of Guidance Notes in support of the amendments. For more information on the amendments, see our earlier Issue 52;
2. announced to listed entities that it has made available training material regarding the ASX Listing Rule and online form changes;
3. reminded listed entities that transition arrangements will be in place for the implementation of the new and changed forms, and provided additional guidance on transition arrangements for buy-back notifications; and
4. announced that it has issued a further class waiver to give effect under the ASX Listing Rules to ASIC’s extension of reporting deadlines for listed entities in ASIC Corporations (Amendment) Instrument 2021/315, noting that the class waiver relief is subject to specified conditions.

Amendments to Guidance Notes 8, 14, 20 and 30 came into effect on 5 June. For an analysis of the amendments, see our earlier article.

ASIC publishes guidance on activist short selling

On 1 June, ASIC published ASIC Information Sheet 255 Activist short selling campaigns in Australia (INFO 255) on activist short selling, which refers to a person taking a short position in a financial product and then publicly disseminating information directly or through an agent that might negatively impact the price of the product.

INFO 255 provides an overview of the Australian regulatory framework relevant to activist short selling, recommends better practices and lists actions that ASIC may take in response.

Anti-money laundering

AUSTRAC publishes ML/TF risk assessment of the non-bank lending and financing sector

On 25 June, AUSTRAC published its assessment of the money laundering and terrorism financing (ML/TF) risk of the non-bank lending and financing sector. The ML/TF risk associated with the sector was assessed as ‘medium’.

In the risk assessment, AUSTRAC states that it does not intend for the risk assessment to act as targeted guidance or recommendations as to how reporting entities should comply with their AML/CTF obligations. AUSTRAC expects, however, the sector to review the assessment to inform their own ML/TF risk assessments, strengthen their controls and enhance their understanding of risk.

AUSTRAC publishes new guidance in line with AML/CTF reforms

On 17 June, AUSTRAC announced the publication of new guidance to assist entities to implement changes to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) made under the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth). These changes came into effect on 17 June.

The new guidance relates to:

1. reliance on customer identification and verification;
2. the offence of tipping off;
3. customer due diligence before providing a designated service; and
4. correspondent banking relationships (financial institutions only).

Amendments to AML/CTF Rules registered

On 16 June, the Anti-Money Laundering and Counter‑Terrorism Financing Rules Amendment Instrument 2021 (No. 1) (Amending Rules) were registered.

According to the Explanatory Statement, the Amending Rules make amendments to the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules) in support of reforms made under the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth).

The Amending Rules arise out of the Treasury’s consultation on exposure draft amendments during January to March. For more information on the consultation, see our earlier Issue 49.

AUSTRAC publishes regulatory guidance on ‘cuckoo smurfing’

On 3 June, AUSTRAC published a new financial crime guide to assist the finance sector in detecting the money laundering method known as ‘cuckoo smurfing’. AUSTRAC states that ‘cuckoo smurfing’ refers to a method whereby criminals move illegal funds into Australia by exploiting legitimate bank accounts.

Consumer credit

Accounts excluded from mandatory credit reporting regime

On 15 June, the ASIC Credit (Mandatory Credit Reporting) Instrument 2021/541 was registered.

According to the Explanatory Statement, the instrument determines certain kinds of accounts as not being eligible credit accounts under the new mandatory credit reporting regime under the National Consumer Credit Protection Act 2009 (Cth). This means eligible licensees will not be required to supply mandatory credit information for these accounts to credit reporting bodies.

For more information about the mandatory credit reporting regime, see our earlier Issue 50.

Regulations supporting mandatory credit reporting regime registered

On 27 May, the National Consumer Credit Protection Amendment (Mandatory Credit Reporting) Regulations 2021 were registered.

According to the Explanatory Statement, the purpose of the regulations is to support amendments made under the National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Act 2021 (Cth), which established a mandatory credit reporting regime in Australia.

The mandatory credit reporting regime applies to credit providers that are large ADIs and commences on 1 July 2022.

Banking

APRA publishes timeline for ADI capital framework reforms

On 2 June, APRA published a letter to ADIs setting out a roadmap of next steps until the capital framework reforms come into effect from 1 January 2023.

In the letter, APRA explains that the timeline covers key policy releases, reporting requirements, industry workshops and the process for capital model approvals.

Other financial services regulation

Treasury releases draft amendments to Consumer Data Right rules

On 1 July, Treasury released exposure draft amendments to the Consumer Data Right (CDR) rules and explanatory materials for consultation (version 3 of the rules).

According to the Treasury, the rules will support growth of the CDR ecosystem and increase participation in the CDR by data recipients and consumers by:

1. introducing a sponsored tier of accreditation and a CDR representative model;
2. allowing consumers to share their data with trusted professional advisers;
3. allowing participants to share CDR insights with consumer consent for specific purposes; and
4. creating a single consent data sharing model for joint accounts.

Consultation closes on 30 July.

Treasury consults on electronic execution and meeting legislation

On 25 June, the Treasury published exposure draft legislation for consultation setting out reforms to facilitate the use of technology in meetings of companies and registered schemes, and provisions for the electronic execution of company documents.

According to the Treasury, the reforms make permanent the temporary measures put in place during the COVID-19 pandemic relating to electronic execution of company documents and meeting notifications.

Consultation closes on 16 July.

Bills establishing Financial Regulator Assessment Authority pass Parliament

On 23 June, the Treasurer, Josh Frydenberg, announced the passage of the Financial Regulator Assessment Authority Bill 2021 through Parliament. A supporting bill, the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021, was also passed.

According to the Treasurer, the legislation establishes a new independent body known as the Financial Regulator Assessment Authority to regularly review and report on the effectiveness and capability of ASIC and APRA.

The legislation implements recommendations 6.13 and 6.14 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Your Future, Your Super package passed by Parliament

On 17 June, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced the passage of the Treasury Laws Amendment (Your Future, Your Super) Act 2021 (Cth) (Your Future, Your Super Act) and the Treasury Laws Amendment (Self Managed Superannuation Funds) Act 2021 (Cth)(SMSF Act) through Parliament. Both Acts received Royal Assent on 22 June.

According to the Explanatory Memorandum to the bill, the SMSF Act increases the maximum number of allowable members in SMSFs from four to six and makes other consequential amendments. Subsequently on 25 June, the Treasury Laws Amendment (Self Managed Superannuation Funds) Regulations 2021, which support the SMSF Act, were registered.

In relation to the Your Future, Your Super Act, the Explanatory Memorandum to the bill states that the Act, among other matters:

1. introduces an annual performance test for MySuper products and other products;
2. introduces a new duty on super trustees to act in the best financial interests of members; and
3. provides for the new online YourSuper comparison tool.

We have previously written about the Your Future, Your Super budget initiative.

Regulators remind Australian entities to cease the use of LIBOR

On 4 June, ASIC, APRA and the RBA jointly announced that Australian institutions must cease the use of LIBOR in new contracts before the end of 2021. The regulators referred to the Financial Stability Board’s (FSB) announcement and publication of an updated global transition roadmap and related statements.

The regulators also state that they expect all market participants to accelerate the active conversion of legacy LIBOR contracts.

Extension of temporary reduction in superannuation minimum drawdown rates

On 29 May, the Prime Minister, Scott Morrison, Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the temporary reduction in superannuation minimum drawdown rates will be extended to 30 June 2022.

Subsequently on 24 June, the Superannuation Legislation Amendment (Superannuation Drawdown) Regulations 2021 were registered for this purpose.

RBA publishes retail payments review consultation paper

On 28 May, the RBA published a consultation paper as part of the RBA’s Review of Retail Payments Regulation. The consultation paper sets out the preliminary conclusions of the Payments Systems Board following consultation in November 2019 from the Issues Paper (for more information see our earlier Issue 44).

According to the RBA, the key policy changes proposed relate mostly to dual-network debit cards and least-cost routing, interchange fees and the transparency of scheme fees. Extensive consideration has also been given to the no-surcharge rules imposed by some ‘buy now, pay later’ providers.

Consultation closes on 8 July.