Financial Services in Focus – Issue 58

Insights23 Sept 2021

In this edition, we consider the final breach reporting regulatory guide, electronic execution and virtual meetings legislation, judicial commentary in relation to an AFS licensee’s supervisory arrangements, and much more.

By Harry New and Adrian Verdnik

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

Funds and financial products

Regulations registered for add-on insurance deferred sales model

On 17 September, the Assistant Treasurer, Michael Sukkar, announced the registration of the regulations which support the implementation of an industry-wide deferred sales model for add-on insurance, being the Australian Securities and Investments Commission Amendment (Deferred Sales Model) Regulations 2021 and the Corporations (Fees) Amendment (Deferred Sales Model Exemptions) Regulations 2021.

For information on Treasury’s consultation on the exposure draft regulations, see our earlier Issue 56.

ASIC extends relief for employee redundancy funds

On 8 September, the ASIC Corporations (Amendment) Instrument 2021/767 was registered. ASIC states that the purpose of the instrument is to extend the relief for employee redundancy funds from the managed investment and associated provisions of the Corporations Act until 1 October 2024.

ASIC publishes final breach reporting regulatory guide

On 7 September, ASIC published the final ASIC Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees (RG 78). RG 78 sets out ASIC’s updated guidance in relation to the new breach reporting regime that will come into effect for AFS licensees and Australian credit licensees on 1 October.

In addition to the final regulatory guidance, ASIC also published:

We have written about the new requirements for AFS licensees here.

Earlier, on 5 August, the Financial Sector Reform (Hayne Royal Commission Response-Breach Reporting and Remediation) Regulations 2021 were also registered to support the new breach reporting regime.

Treasury consults on permanent reforms to virtual meetings and electronic execution

On 30 August, Treasury published for consultation exposure draft legislation and explanatory material in relation to using technology to hold meetings and sign and send documents. According to the exposure draft Explanatory Memorandum, the bill:

makes permanent changes relating to the execution of company documents and the electronic communication of meetings-related materials; and
refines the drafting approach taken in the Treasury Law Amendments (2021 Measure No. 1) Bill 2021 (for more information, see our earlier Issue 57).

Consultation closed on 16 September.

Government consults on CCIV exposure draft materials

On 27 August, the Treasurer, Josh Frydenberg, and the Assistant Treasurer, Michael Sukkar, jointly announced the release of exposure draft legislation and explanatory materials to implement the tax and regulatory components of the corporate collective investment vehicles (CCIV) regime for consultation.

According to the joint media release, the proposed regime will provide for the following, following consultation:

equivalent tax treatment of CCIVs with that of Attribution Managed Investment Trusts;
flexibility for CCIVs to use a custodian or a depositary;
flexibility to list a retail CCIV with one sub-fund on a prescribed financial market in Australia; and
flexibility to cross-invest between different sub-funds of a CCIV.

The exposure draft materials are available on this page of Treasury’s website.

Consultation closes on 24 September.

Federal Court finds failures in AFS licensee’s supervisory arrangements

On 2 August, Justice Moshinsky of the Federal Court of Australia handed down His Honour’s decision in Australian Securities and Investments Commission v RI Advice Group Pty Ltd (No 2) [2021] FCA 877.

In 2019, ASIC commenced proceedings against an AFS licensee, alleging contraventions of general obligations under section 912A as well as failures to ensure an authorised representative comply with the advisor’s best interests duties, centring around the licensee’s failure to take reasonable steps in respect of a former financial adviser.

Justice Moshinsky held that ASIC successfully made out breaches of sections 912A(1)(a) and 961L of the Corporations Act. In his judgment, His Honour made the following comments:

the AFS licensee, which was a wholly-owned subsidiary of ANZ, outsourced many aspects of its compliance policies and processes to another division of ANZ. As the division was acting as an agent of the AFS licensee within the scope of its actual authority, the division’s conduct (and any omissions) were attributable to the AFS licensee under section 769B(1) of the Corporations Act;
the knowledge of the AFS licensee’s senior management – specifically, the Chief Executive Officer and the National Operations Manager – were attributable to the AFS licensee (noting His Honour did not consider it necessary to determine whether the knowledge of other individuals can be attributed); and
a failure to raise significant compliance concerns to senior management could (and did, in this instance) demonstrate a failure of compliance processes and procedures, and that the AFS licensee knew, or should have been aware, of serious deficiencies in the form of ways to circumvent internal controls.

Commenting on the operation of section 961L, His Honour stated the following:

‘Although the duty in s 961L is broad, the case law has begun to fill in the contours of what is expected of a licensee by way of compliance with the provision. The authorities indicate that s 961L may require a licensee to take steps to ensure representatives are competent, to monitor and supervise them (including in relation to advice processes, advice quality and conflicts of interest), to ensure compliance concerns are escalated, and to take action that is commensurate with the risks presented by such concerns.‘

In relation to the case, ASIC states that licensees need to have proper systems and processes in place to monitor the advice given by advisers to make sure consumers are protected. In its 2021-25 Corporate Plan, ASIC also identified the supervision of corporate authorised representatives by licensees as a key action.

Financial product advice

ASIC publishes information sheet in relation to DDO for advisers

On 16 September, ASIC published a new ASIC Information Sheet 264 FAQs: Design and distribution obligations for advice licensees and financial advisers (INFO 264).

INFO 264 sets out how design and distribution obligations (DDO) apply to advice licensees and financial advisers when providing personal advice. The guidance includes, among other matters, clarity that:

advice licensees and financial advisers are exempt from meeting the reasonable steps obligation when providing personal advice, but not when providing services such as general advice or execution only services;
advice licensees and financial advisers must comply with reporting and record-keeping obligations whether providing personal advice or general advice; and
the DDO regime provides an exemption for distributors who are not associated with the advice licensee or financial adviser from the reasonable steps obligation if the retail product distribution conduct is necessary to implement personal advice.

Government announces temporary reduction in adviser ASIC levies

On 30 August, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced the Government’s intention to provide temporary and targeted relief for financial advisers by reducing ASIC cost recovery levies for the next two years.

According to the joint media release, Treasury will also commence a review of the ASIC industry funding model in 2022 to ensure it remains fit for purpose.

Financial markets

RBA announces new eligibility criteria to purchases of securities by RBA

On 13 September, the RBA announced the introduction of new eligibility criteria in relation to robust fallback provisions for securities to be accepted as collateral in the RBA’s market operations. The RBA states that the new criteria are part of global reforms to strengthen financial benchmarks.

Instruments to determine equity market products for block trade tiers registered

On 8 September, the ASIC Market Integrity Rules (Securities Markets) Repeal Instrument 2021/773 was registered, and the ASIC Market Integrity Rules (Securities Markets) Determination 2021/772 was registered on the next day.

According to the Explanatory Statement, the purpose of the instruments is to specify equity market products for the purposes of determining block trade tiers under the ASIC Market Integrity Rules (Securities Markets) 2017, and the instruments are consistent with ASIC’s methodology for the block trading framework for equity market products.

ASX consults on third tranche of CHESS replacement rule amendments

On 30 August, the ASX published a consultation paper seeking stakeholder submission on the third of three tranches of operating rule amendments required to facilitate the implementation of the new system that will replace CHESS.

Consultation closes on 14 December.

ASIC consults on amendments to ‘payment for order flow’ prohibition

On 25 August, ASIC released ASIC Consultation Paper 347 Proposed amendments to the prohibition on order incentives in the ASIC market integrity rules (CP 347) for consultation.

According to ASIC, CP 347 sets out ASIC’s proposal to amend the current prohibition on ‘payment for order flow’, which is set out in Part 5.4B of the ASIC Market Integrity Rules (Securities Markets) 2017. ASIC states that it has identified that the prohibition does not deal with certain payment for order flow scenarios, and that it is proposing to close this regulatory gap as a proactive measure.

Consultation closes on 3 November.

Anti-money laundering

AUSTRAC publishes four ML/TF risk assessments in the banking sector

On 6 September, AUSTRAC published four new Australian banking sector money laundering and terrorism financing (ML/TF) risk assessments. The risk assessments relate to:

Australia’s four major banks;
other domestic banks;
foreign subsidiary banks; and
foreign bank branches.

AUSTRAC states that it expects reporting entities in each sector to review their respective assessments to inform their own ML/TF risk assessments, strengthen their risk mitigation systems and controls and to enhance their understanding of risk in the relevant sector.

Banking

APRA publishes FAQs in relation to APS 120

On 16 September, APRA published a new set of frequently asked questions (FAQ) for ADIs in relation to the interpretation of APRA Prudential Standard APS 120 Securitisation (APS 120).

APRA publishes Climate Vulnerability Assessment information paper

On 3 September, APRA published an information paper in relation to the Climate Vulnerability Assessment (CVA). According to APRA, the CVA, in addition to APRA’s draft prudential guidance on climate risk (for more information, see Issue 53), forms a core plank of APRA’s efforts to assist APRA-regulated entities understand and manage the financial risks associated with climate change.

APRA states that it intends to publish the aggregated results of the banks’ CVA analyses in 2022.

RBA announces participation in joint CBDC project

On 2 September, the BIS Innovation Hub, along with the central banks of Australia, Malaysia, Singapore and South Africa, announced a joint project to test the use of central bank digital currencies (CBDCs) for international settlements.

APRA publishes response to ADI data confidentiality consultations

On 2 September, APRA published its response to its 2019 and 2020 consultations on the confidentiality of data submitted to APRA by ADIs.

In the letter, APRA states that the publication of key ADI metrics represents the first stage of the development of a centralised ADI entity-level publication of key prudential and financial data implementing Basel’s Pillar 3 requirements. APRA states that the new publication is planned for release for the first quarter reporting period of 2022.

RBA publishes Corporate Plan for 2021 to 2025

On 31 August, the RBA published its Corporate Plan 2021-22 which covers its reporting periods from 1 July 2021 to 30 June 2025. According to the RBA, the plan sets out the RBA’s mission and key objectives, the activities it undertakes to achieve them and how it measures performance.

APRA publishes response letter for interim ARS 220.0 Credit Quality

On 30 August, APRA published a response letter to submissions on the proposed interim APRA Reporting Standard ARS 220.0 Credit Quality (Interim ARS 220.0).

According to the letter, Interim ARS 220.0 is intended to apply during the phased implementation of APRA Reporting Standard ARS 220.0 Credit Exposures and Provisions, which will complement APRA Prudential Standard APS 220 Credit Risk Management.

APRA states it will proceed with the implementation of Interim ARS 220.0 commencing 1 January 2022.

Other financial services regulation

APRA publishes update on draft insurance in superannuation standard and guide

On 21 September, APRA published a letter to update industry on its proposed revisions to draft Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) and draft Prudential Practice Guide SPG 250 Insurance in Superannuation (SPG 250).

In the letter, APRA states, among other matters, that it is in the process of finalising the amendments, and intends to issue the final standard and guidance in the coming months with the revised SPS 250 effective from 1 July 2022.

Earlier this year in January, APRA consulted on revised drafts of SPS 250 and SPG 250 (for more information, see our earlier Issue 49).

APRA determines ten reporting standards for Superannuation Data Transformation

On 20 September, APRA announced that it has determined the reporting standards developed under the first phase of its multi-year Superannuation Data Transformation project. The standards are available on APRA’s website.

APRA states that the reporting standards include minor amendments to the versions released as part of APRA’s response to consultation in March 2021 (for more information, see our earlier Issue 52).

Treasury consults further on FAR legislation

On 2 September, Treasury published for consultation an exposure draft bill and exposure draft Explanatory Memorandum to establish the Financial Accountability Regime (FAR). The materials follow consultation by Treasury from July to August this year (for more information, see our earlier Issue 56).

The purpose of FAR is to extend the clear standards of conduct established by the Banking Executive Accountability Regime for directors and the most senior and influential executives in ADIs to all APRA-regulated entities.

Consultation closed on 17 September.

Government commences review into occupational exclusions in MySuper default insurance

On 2 September, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced the release of a consultation paper seeking stakeholder submissions on occupational exclusions in default insurance offered through MySuper products.

Consultation closes on 14 October.

ASIC publishes results of IDR survey of superannuation entities

On 2 September, ASIC published its findings from a survey it carried out on registrable superannuation entities about their preparedness for new internal dispute resolution (IDR) obligations coming into effect on and from 5 October.

According to ASIC, while many trustees in ASIC’s survey are taking significant steps to uplift their handling of consumer complaints in the lead up to the new requirements, ASIC has identified some important areas requiring additional effort.

APRA publishes first MySuper performance test

On 31 August, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced that the publication of the outcomes of the first annual performance test for MySuper products. The outcomes are available on APRA’s website.

Earlier, on 25 August, APRA published a set of frequently asked questions (FAQ) to provide guidance to RSE licensees on the Your Future, Your Super performance test.

Treasury publishes Corporate Plan for 2021 to 2025

On 31 August, Treasury published its Corporate Plan 2021-22, setting out its operating environment, key priorities and activities, capabilities, and how it will measure its performance for the reporting period 2021-22 to 2024-25.

Final report of review of Australia’s payments system published

On 30 August, the Treasurer, Josh Frydenberg, and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, jointly announced the release of the final report of the Payments System Review, which is available on Treasury’s website.

The final report, entitled Payments system review: From system to ecosystem, states that the review found that the regulatory architecture needs to progress in several aspects, including that the Federal Government should establish a single, integrated licensing framework for payment services that scales up with businesses as they grow, thus providing clear consumer protection, and facilitating transparency in access to payment systems.

The Treasurer states that Treasury will consult on recommendations ahead of the Government finalising a response before the end of the year.

APRA publishes final remuneration prudential standard

On 27 August, APRA released the final APRA Prudential Standard CPS 511 Remuneration (CPS 511) and a response paper in respect of consultation conducted by APRA earlier this year from April to July.

APRA states that CPS 511 will be implemented under a phased approach, beginning on 1 January 2023 with the largest and most complex ADIs, and that it is currently finalising APRA Prudential Practice Guide CPG 511 Remuneration to support entities in transitioning to the new CPS 511 requirements.

For more information on the consultation, see our earlier Issue 54.

APRA publishes further FAQs for Superannuation Data Transformation

On 27 August and 14 September, APRA published additional frequently asked questions (FAQ) to provide further guidance to RSE licensees on reporting standards for Phase 1 of the Superannuation Data Transformation project.

ASIC publishes Corporate Plan for 2021 to 2025

On 26 August, ASIC published its Corporate Plan 2021-25 (Corporate Plan). On that day, the Federal Government also published a Statement of Expectations in relation to ASIC, and ASIC released a Statement of Intent.

In the Corporate Plan, ASIC states that its regulatory action over the next four years will centre on:

changing behaviours to drive good consumer and investor outcomes;
acting against misconduct to maintain trust and integrity in the financial system;
promoting strong and innovative development of the financial system; and
helping Australians to be in control of their financial lives.

We have written about ASIC’s approach to regulatory enforcement following the Corporate Plan here.

APRA publishes Corporate Plan for 2021 to 2025

On 26 August, APRA published its Corporate Plan 2021-25, which sets out APRA’s purpose and vision, its strategic priorities and how APRA intends to achieve those priorities and associated outcomes.

Draft unfair contract terms reforms published for consultation

On 23 August, the Assistant Treasurer, Michael Sukkar, announced the release of a draft bill to strengthen unfair contract term (UCT) protections in the Australian Consumer Law and the ASIC Act.

The draft exposure legislation and explanatory memorandum are available here on Treasury’s website. According to the draft exposure explanatory memorandum, the reforms strengthen and clarify the existing UCT provisions, introduce a civil penalty provision prohibiting the use of UCT in standard form contracts, and expand the class of contracts covered by the UCT provisions.

Consultation closed on 20 September.