Financial Services in Focus – Issue 57

By Harry New and Adrian Verdnik 

In this edition, we consider proposed DDO reforms, temporary relief to permit electronic disclosures and virtual meetings, updates to superannuation portfolio holdings disclosure, and much more.

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

Funds and financial products

Proposed temporary relief to give effect to DDO regime policy intention

On 9 August, Treasury announced the Federal Government’s intention to make a number of amendments to the design and distribution obligations (DDO) regulatory regime to achieve the intended operation of the DDO reforms.

In the interim period before the legislative changes are made, Treasury states that ASIC will undertake targeted consultation and consider providing temporary relief that gives effect to the Government’s policy intention.

The proposed changes are set out in a paper published by Treasury here.

Temporary amendments to allow electronic execution and virtual meetings passed

On 10 August, the Treasurer, Josh Frydenberg, announced the passing of legislation through Parliament that:

1. extends relief for virtual meetings and electronic communications; and
2. introduces a fault element to civil penalty proceedings in respect of continuous disclosure obligations.

Subsequently, on 13 August, the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth) (Amendment Act) received Royal Assent. According to the Explanatory Memorandum, the Amendment Act makes temporary amendments to:

1. allow meetings of directors, shareholders of companies, and members of registered schemes to be held virtually, provided that members as a whole have a reasonable opportunity to participate;
2. allow documents relating to such meetings to be provided and signed electronically and minutes to be kept electronically;
3. allow the electronic execution of company documents; and
4. require all civil penalty proceedings commenced under the continuous disclosure and misleading and deceptive conduct provisions to prove that an entity or officer acted with ‘knowledge, recklessness or negligence’ in respect of an alleged contravention.

We have written about the effect of the Amendment Act.

ASIC provides breach reporting relief to licensees for IDR standards

On 17 August, the ASIC Corporations and Credit (Breach Reporting – Reportable Situations) Instrument 2021/716 (Instrument 2021/716) was registered.

According to the Explanatory Statement, Instrument 2021/716 is intended to notionally notify the law to exclude non-compliance with internal dispute resolution (IDR) standards from the categories of situations that are automatically deemed to be ‘significant’ breaches (and therefore reportable to ASIC under the new breach reporting regime on and from 1 October) by virtue of being civil penalty provisions.

The Explanatory Statement states that it was not anticipated that the attachment of pecuniary penalties to IDR standards would automatically result in the breach being deemed ‘significant’ and therefore reportable.

The instrument comes into effect on 5 October (also the day that the new IDR regime comes into effect) and will be repealed on 5 October 2024.

ASIC states it will take a reasonable approach to firm implementation of a number of reforms

On 12 August, ASIC announced its approach to financial services regulatory reforms arising out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in relation to:

1. design and distribution obligations;
2. restrictions on the unsolicited selling of financial products (hawking);
3. a deferred sales model for add-on insurance products;
4. reference checking and information sharing requirements for financial advisers and brokers; and
5. new breach reporting regime and internal dispute resolution standards.

ASIC states that it recognises that the reforms require significant changes to businesses’ systems and processes and take effect at the same time industry is facing other challenges, including from COVID-19.

On that basis, ASIC states that it recognises there will be a period of transition as industry finalises implementation of additional compliance measures, and that ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply.

ASIC states that its initial approach extends to technical or inadvertent breaches. However, ASIC will not hesitate to enforce the law where firms are not acting in good faith or where ASIC detects conduct causing actual harm.

ASIC finds good practices from COVID-19 review of managed funds’ valuation of illiquid assets

On 10 August, ASIC announced the findings from its review of managed funds’ illiquid-asset valuation practices during the early stages of the COVID-19.

ASIC’s review considered how the ten responsible entities valued different types of illiquid assets as well as the governance frameworks, policies and procedures they used to undertake the valuations. ASIC said it found that the responsible entities:

1. were responsive to the increased valuation risks during the review period;
2. continued to provide timely valuations of their illiquid assets, including by increasing the frequency of valuations, expanding the sources of information to benchmark valuations and assumptions;
3. continued to be able to obtain and rely on external valuations; and
4. had adequate arrangements to manage conflicts of interest associated with valuations, and appropriately revalued illiquid assets downwards and upwards as appropriate.

ASIC stated that the review identified some better valuation practices by the responsible entities.

Exceptions to hawking prohibitions registered

On 6 August, the Financial Sector Reform (Hayne Royal Commission Response) (Hawking of Financial Products) Regulations 2021 were registered.

According to the Explanatory Statement, the purpose of the regulations is to implement recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in relation to financial product hawking.

Among other matters, the regulations insert exceptions to the hawking prohibition where a consumer is expected to have enough knowledge to adequately assess the suitability of the product or where the law already provides a consumer with adequate protection.

The regulations commence on 5 October.

Financial product advice

Government consults on implementation of ‘Better Advice’ bill

On 4 August, the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Bill 2021 was passed by Parliament. The bill, among other matters, expands the role of the Financial Services and Credit Panel within ASIC to operate as the single disciplinary body for financial advisers.

For more information on the bill, see our earlier Issue 55.

On 6 August, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the Government will consult on proposals to implement regulations under the bill. A policy paper and disciplinary process diagram are available on the Treasury’s website.

Consultation closes on 20 August.

Financial markets

ASX updates listed entities in relation to employee incentive schemes and other reminders

On 18 August, the ASX issued Compliance Update no. 07/21. In this update, the ASX:

1. reminded listed entities to lodge their draft notices of annual general meeting and of annual listing fees for FY22, and
2. in relation to notifications to the ASX of the issue of equity securities under an employee incentive scheme, stated that the ASX will, upon request, update its records to reclassify options or conditional rights issued under the same employee incentive scheme as a single class of option or right (as applicable).

Anti-money laundering

AUSTRAC consults on proposed amendments to AML/CTF Rules

On 30 July, AUSTRAC published proposed amendments to the Anti‑Money Laundering and Counter‑Terrorism Financing Rules Instrument 2007 (No. 1) (Cth) for public consultation (AML/CTF Rules).

According to AUSTRAC, the proposed amendments:

1. insert new Chapter 79, which permits a reporting entity to carry out applicable customer identification procedures after opening an account, provided no transaction (other than an initial deposit) is conducted in relation to the account;
2. insert new Chanter 80, which proposes to exempt certain types of products from the definition of a ‘stored value card’;
3. amend Chapter 21 to exempt the issuing of an interest in a litigation funding scheme from the operation of the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 (Cth); and
4. amend Chapter 48 to expand the exemption for providing salary packaging services to include payroll and superannuation clearance services.

Consultation closes on 27 August.

Banking

APRA releases final APG 220 Credit Risk Management

On 19 August, APRA released a final revised Prudential Practice Guide APG 220 Credit Risk Management (APG 220), and a letter to ADIs in relation to APG 220.

APRA finalises new approach to licensing and supervising new banks

On 11 August, APRA released its revised approach to licensing and supervising new ADIs. In releasing the package, APRA stated that APRA’s final position remains largely consistent with its original proposals, with the most significant clarifications relating to milestones in the progression of a licence application.

The package includes a response paper, information paper and guidelines for licensing locally-incorporated ADIs and guidelines for overseas banks operating in Australia.

APRA publishes final APS 111 in relation to measuring ADI regulatory capital

On 5 August, APRA published the final revised Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) for ADIs.

The final APS 111 arises out of APRA consultation commenced in October 2019 (for more information, see our earlier Issues 31 and 54). APRA also published its response to the consultation.

APS 111 will come into effect from 1 January 2022.

APRA releases consultation letter on loans impacted by COVID-19

On 30 July, APRA released a consultation letter on regulatory support for ADIs offering temporary financial assistance to borrowers impacted by COVID-19.

Other financial services regulation

Treasury releases draft legislation regarding reforms of unfair contract terms laws

On 23 August, Treasury released exposure draft legislation and exposure draft explanatory materials on reforms to the Australian Consumer Law and the ASIC Act 2001 to help reduce the prevalence of unfair terms in standard form contracts, and improve consumer and small business confidence when entering into standard form contracts.

According to Treasury, this draft legislation includes the following changes relative to what was consulted on previously:

1. Retaining the current automatic voiding provisions in the law. That is, if a court finds a term in a standard form consumer or small business contract is unfair, that term is considered void under the law, without the need for further action or orders to be made. (Previous consultation considered removing these provisions from the law.)
2. Streamlining the court’s power to make orders to void, vary or refuse to enforce part or all of a contract (or collateral arrangement).
3. Clarifying the court’s power to make orders that apply to any existing consumer or small business standard form contracts entered into by a respondent (whether or not that contract is put before the court) that contains an unfair contract term that is the same or substantially similar to a term the court has declared to be an unfair contract term.
4. Clarifying the court’s power to issue injunctions against a respondent with respect to existing or future consumer or small business standard form contracts entered into by a respondent, containing a term that is the same or is substantially the same as a term the court has declared to be an unfair contract term.

Consultation closes on 20 September.

APRA publishes response to proposals to make general and life insurance data non-confidential

On 18 August, APRA published a letter it wrote to general and life insurers outlining its decision to determine class of business and product group data for the general and life insurance industries to be non-confidential.

The letter is a response to an APRA consultation commenced earlier in February 2020 inviting submissions on proposals to increase the transparency of general and life insurance data. According to the letter, APRA states that it:

1. will implement the proposal to determine class of business and product group data to be non-confidential; and
2. will not proceed with the proposal to publish explanations from individual insurers.

Treasury consults on extension of CDR regime to energy sector

On 17 August, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced the release of exposure draft legislation to expand the Consumer Data Right (CDR) regime to the energy sector. The CDR regime currently covers the banking sector.

The package of exposure draft legislation and explanatory material are available on the Treasury’s website.

Minister Hume said that enabling consumers access to share their energy consumption patterns will also encourage greater competition.

Consultation closes on 13 September.

Government conducts further consultation on superannuation portfolio holdings disclosure

On 17 August, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the Government is consulting on exposure draft regulations underpinning superannuation fund portfolio holdings disclosures to members, which are part of the ‘Your Future, Your Super’ reforms.

The exposure draft regulations are available on the Treasury’s website.

The updated drafts follow Treasury’s initial consultation on regulations for portfolio holdings disclosure by superannuation funds earlier this year in April 2021 as part of the ‘Your Future, Your Super’ consultation. For more information, see our earlier Issue 54.

Minister Hume said that these changes will further support strengthening the transparency of the superannuation system and assist members in making more informed decisions.

Consultation closes on 31 August.

APRA publishes new FAQs on Superannuation Data Transformation Project

On 10 and 16 August, APRA published additional frequently asked questions (FAQ) in relation to reporting standards for RSE licensees for Phase 1 of the Superannuation Data Transformation Project.

APRA releases information paper on combining MySuper product performance histories

On 16 August, APRA released an information paper on its approach to administering the annual performance test for superannuation products, with a focus on APRA’s methodology for combining investment performance in the performance test.

The information paper can be found here, and APRA’s letter to RSE licensees can be found here.

Government consults on new financial reporting and auditing obligations for superannuation funds

On 12 August, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced that the Government will consult on exposure draft legislation to require registrable superannuation entities to prepare and lodge audited financial reports with ASIC.

The package of exposure draft legislation and explanatory material is available on Treasury’s website.

Consultation closes on 8 September.

ASIC reviews the first round of super fund annual members’ meetings

On 6 August, ASIC released findings about superannuation funds’ annual members’ meetings based on surveillance of the inaugural meetings held by trustees for a selection of superannuation funds between October 2020 to March 2021.

ASIC stated that its surveillance did not identity significant failures by the funds to comply with the legislated obligations that were in the scope of the review However, it identified room for improvement in trustees’ communications to members and the ways in which they provide opportunities for members to ask questions at the meetings.

APRA releases results and key learnings on COVID-19 stress testing

On 3 August, APRA released its results and key learnings from APRA’s series of stress testing activities on life and general insurers during 2020. APRA stated that these activities demonstrated that insurers are well-positioned to withstand a very severe economic downturn, while still meeting their commitments to policyholders.

ASIC releases report on the TPD ‘safety net’

On 2 August, ASIC released a report on how nine life insurers are addressing the consumer harms ASIC identified in ASIC’s 2019 Report 633 Holes in the safety net: A review of TPD insurance claims.

ASIC Report 696 TPD insurance: Progress made but gaps remain highlights ASIC’s key findings based on the responses made by insurers, and identifies work that ASIC says still needs to be done by insurers and trustees to improve restrictive TPD definitions, essential data capture and claims handling practices.

APRA writes to superannuation trustees about Your Future, Your Super reforms

On 30 July, APRA APRA published a letter written to superannuation trustees in relation to implementing the new Your Future, Your Super reforms.

In the letter, APRA canvassed:

1. the new best financial interests duty;
2. implementation of the reforms by APRA, which includes the performance test, APRA heat maps, investment standards, and APRA’s fund expenditure review; and
3. APRA’s intention to consult on revisions to Prudential Standard SPS 515 Strategic Planning and Member Outcomes in 2022.

Treasury consults on proposed employee share scheme reforms

On 29 July, Treasury published a package of exposure draft material in relation to changes to regulatory and tax arrangements for employee share schemes for consultation.

According to the Assistant Treasurer, Michael Sukkar, the reforms mean that employers will not have to consider the Corporations Act when making employee share scheme offers, provided that they do not charge or lend to employees to whom they offer these remuneration packages, and are not otherwise engaged in regulatory avoidance behaviours.

Broadly speaking, according to the exposure draft Explanatory Memoranda, the purpose of the reforms relate to:

1. enabling specified employee share schemes to be operated without an AFSL and to be exempted from various other obligations (such as hawking restrictions and disclosure requirements), allowing businesses to run employee share schemes without having the same regulatory obligations as financial services providers; and
2. removing the cessation of employment as a taxing point for employee share scheme interests which are subject to deferred taxation.

The Assistant Treasurer said these reforms arise out of the 2021-22 Budget and regulatory reforms previously consulted on by Government.

Read about the changes in our article.

Consultation closes on 25 August.

ASIC releases guidance and customer information requirements to implement the new add-on insurance deferred sales model

On 28 July, ASIC released a new regulatory guide and final customer information requirements as part of its work to implement the new deferred sales model for add-on insurance.

Regulatory Guide 275 The deferred sales model for add-on insurance provides guidance on the requirements that apply to providers of add-on insurance when complying with the deferred sales model, and how ASIC will approach applications for exemption from the deferred sales model. ASIC (Information under the Deferred Sales Model for Add-On Insurance) Instrument 2021/632 determines the information to be given, and the form and manner in which the information is to be given to a customer in order to start an add-on insurance deferral period (deferral period) under subsection 12DP(1) of the Corporations Act.

Treasury consults on the 2021 foreign investment reforms

On 27 July, Treasury released a consultation paper inviting submissions on the operation and performance of recent foreign investment reforms.

The reforms relate to two sets of amending legislation and their supporting regulations. According to the paper,

Consultation closes on 31 August.

Treasury releases updated FIRB Guidance Notes clarify investor obligations following major foreign investment reforms

On 21 July, Treasury released updated FIRB Guidance Notes, which aim to provide greater clarity to investors about their obligations under Australia’s foreign investment framework, including by addressing a number of issues identified since major reforms to the framework commenced on 1 January 2021.

For more information see our article.

Tax

Review of venture capital tax concessions

On 27 July, the Government released a consultation paper on a review of the tax treatment of venture capital, with the Terms of Reference for the review released on 7 July 2021.

The review will be conducted by Treasury and Industry Innovation and Science Australia (IISA) and will cover the ESVCLP, the Venture Capital Limited Partnership (VCLP), and the Australian Fund of Funds (AFOFs) programs.

Consultation is ongoing, and it is expected that the final report will be delivered to the Treasurer towards the end of 2021.