Financial Services in Focus – Issue 59

By Harry New, Adrian Verdnik and Philip Hopley

In this edition, we consider the new DDO interim instruments, ASIC’s updated anti-hawking regulatory guidance and updates in relation to the new breach reporting regime and internal dispute resolution requirements, and much more.

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

Financial products

ASIC makes DDO legislative instruments

On 1 October, the ASIC Corporations (Design and Distribution Obligations Interim Measures) Instrument 2021/784 (Interim Instrument) and the ASIC Corporations (Amendment) Instrument 2021/785 (Amendment Interim Instrument) were registered.

The instruments follow Treasury’s earlier announcement that the Federal Government intends to make amendments to the Design and Distribution Obligations (DDO) regime. The purpose of the Interim Instrument is to give temporary effect to the Federal Government’s policy intentions, pending legal reform. For more information, see our earlier Issue 57.

According to the Explanatory Statement:

1. the Interim Instrument, among other matters:
   1. removes the ‘nil’ reporting requirement for complaints and distribution information;
   2. addresses any uncertainty that employers remain exempt from DDO when providing a PDS for their default fund to employees; and
   3. exempts products from the DDO regime including non-cash payment facilities (except for debit cards, credit cards and stored value facilities), foreign exchange contracts that settle immediately and other products; and
2. the Amendment Interim Instrument amends the meaning of ‘product distributor’ to clarify that employees of licensees are not inadvertently regulated persons for DDO purposes and extends DDO to 31-day notice term deposits.

ASIC makes IDR legislative instrument

On 29 September, the ASIC Corporations, Credit and Superannuation (Amendment) Instrument 2021/753 (Amendment Instrument) was registered. The Amendment Instrument makes amendments to the ASIC Corporations, Credit and Superannuation (Internal Dispute Resolution) Instrument 2020/98 (IDR Instrument).

According to the Explanatory Statement, the purpose of the Amendment Instrument is to incorporate an updated version of ASIC Regulatory Guide 271 Internal dispute resolution (RG 271) published on 2 September, and to remove enforceability from four paragraphs that overlapped with existing legislative requirements.

The new RG 271 regime came into effect on 5 October.

ASIC publishes updated guidance on hawking prohibitions

On 23 September, ASIC published the updated ASIC Regulatory Guide 38 The hawking prohibition (RG 38). ASIC states that the updated RG 38 reflects reforms to the anti-hawking regime that commenced on 5 October. According to ASIC, key features of the reforms include the following:

1. application to all financial products (as defined in the Corporations Act);
2. a definition of ‘unsolicited contact’ that extends the prohibition from in-person meetings and telephone calls, to any ‘real-time interaction in the nature of a conversation or discussion’ without consumer consent;
3. that consumer consent to contact must be positive, voluntary, clear and capable of being reasonably understood;
4. that consent only be valid for six weeks from the date it is given and may be withdrawn by the consumer at any time; and
5. a statutory right of return for consumers where the hawking prohibition has been breached.

We have written about the updated regulatory guidance.

Furthermore, earlier on 22 September, the ASIC Corporations (Amendment and Repeal) Instrument 2021/799 was registered. According to the Explanatory Statement, this instrument is intended to provide consequential amendments to a number of existing ASIC legislative instruments by updating statutory references to the prohibition on the hawking of financial products.

Funds

Treasury consults on changes to litigation funding regulation

On 30 September, the Treasurer, Josh Frydenberg, announced the publication of exposure draft legislative materials for public consultation in relation to litigation funding regulation.

An interest in a litigation funding scheme or arrangement is considered a financial product under the Corporations Act. According to the exposure draft Explanatory Statement, the purpose of the exposure draft legislative amendments are to implement recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services.

The materials are available on Treasury’s website.

Consultation closed on 6 October.

ASIC publishes report on competition in retail funds management

On 24 September, ASIC published a report by Deloitte Access Economics on the state of competition in Australia’s funds management industry. ASIC states that it will take the findings into account in its ongoing work to support effective competition in the funds management industry and to improve investor outcomes.

The report, ASIC Report 792 Competition in funds management, examined competition between fund managers with a focus on outcomes delivered to investors in retail managed financial products.

For more information on the interim report released by Deloitte Access Economics, see our earlier Issue 52.

Superannuation

ASIC releases updated information about the distribution of superannuation products

On 15 October, ASIC announced that it has published updated information for employers and trustees about changes affecting the distribution of superannuation products as a result of recent law reforms (including the design and distribution obligations, anti-hawking amendments, and features of the Your Future, Your Super package).

ASIC has updated:

1. ASIC Information Sheet 89 Communicating with employees about superannuation fund choice: what you can and cannot do, which provides guidance to employers about how they can communicate to their employees about superannuation choices without breaking the law; and
2. ASIC Information Sheet 241 Prohibition on influencing employers’ superannuation fund choice: section 68A of the SIS Act, which provides guidance to superannuation trustees about the prohibition on using inducements to influence employers in their choice of a default fund or to encourage employees to choose or retain membership of a fund.

ASIC reminded trustees that they should be checking if the way they seek to attract and retain employees as members is appropriate, in light of changes to the law and other relevant obligations.

ASIC states that it will conduct a thematic review this financial year on how trustees use employers to distribute superannuation products, and may consider regulatory action.

APRA updates FAQs for Phase 1 of Superannuation Data Transformation

On 8 October, APRA published a set of additional frequently asked questions (FAQ) in relation to reporting standards under Phase 1 of the Superannuation Data Transformation project. Read the FAQs.

APRA publishes 2021 MySuper Product Heatmap FAQs

On 6 October, APRA published a new set of frequently asked questions (FAQ) in relation to the upcoming 2021 MySuper Product Heatmap, which is due to be released in December 2021. The FAQs have been added to the existing list of FAQs in relation to the 2020 MySuper Product Heatmap.

APRA consults on proposed revisions to investment governance prudential standard

On 29 September, APRA announced that it has released for consultation its proposed revisions to Prudential Standard SPS 530 Investment Governance (SPS 530). According to APRA’s letter to RSE licensees, the draft amendments include a number of enhancements to valuation practices, stress testing and liquidity management practices. Read the proposed amendments to SPS 530.

APRA states that it intends to consult on enhancements to the accompanying guidance, being Prudential Practice Guide SPG 530 Investment Governance and Prudential Practice Guide SPG 531 Valuation, in 2022. APRA also states that it intends that the SPS 530 enhancements commence on 1 January 2023.

Consultation closes on 16 February.

Federal Government consults on retirement income covenant legislation

On 27 September, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced the release of exposure draft legislation to introduce a retirement income covenant for superannuation trustees. The exposure draft materials are available on Treasury’s website.

According to Treasury, the exposure drafts reflect feedback received following the release of the retirement income covenant position paper. For more information, see our earlier Issue 56.

Consultation closes on 15 October.

Insurance

APRA releases insights on its risk culture survey

On 14 October, APRA shared its insights about risk culture from its pilot risk culture survey conducted between March and April 2021 of 10 general insurance entities.

APRA developed a framework called the ‘Risk Culture 10 Dimensions’ to assess the risk culture of regulated entities. APRA states that the Risk Culture 10 Dimensions – coupled with the survey results – will allow APRA to access comparable data in a consistent way across regulated entities in order to assess and benchmark risk culture.

APRA states it will benchmark up to 60 more entities in the next 12 months, and will share additional insights with industry.

New private health insurance levy rules registered

On 29 September, the Private Health Insurance (Complaints Levy) Rules 2021 (Rules) were registered. According to the Explanatory Statement, the Rules repeal and replace the previous Private Health Insurance (Complaints Levy) Rules 2020 to alter the rate of complaints levy payable, as well as specify the complaints levy days and the census day for the purposes of the Private Health Insurance (Complaints Levy) Act 1995 (Cth) (Act). The Act imposes levies on private health insurers conducting health insurance businesses.

APRA updates FAQ for health insurers on COVID-19 and the capital framework

On 27 September, APRA announced that it has updated frequently asked questions (FAQ) for private health insurers on the applications of the capital framework for COVID-19 related disruptions. According to APRA, as at 31 September, the minimum limits and guidelines applicable to insurers in their preparation of deferred claims liability has been updated.

Financial product advice

ASIC further extends temporary financial advice relief measures in COVID-19 instrument

On 14 October, ASIC has extended the temporary relief provided in ASIC Corporations (COVID-19-Advice-related Relief) Instrument 2021/268 which ASIC states is designed to help the financial advice industry provide consumers with affordable and timely advice during the COVID-19 pandemic.

ASIC states that it has extended the ‘record of advice’ relief measure, which allows financial advisers to provide a record of advice, rather than a statement of advice, to existing clients requiring financial advice due to the impact of the pandemic, and that the relief will now end on 15 April 2022.

Government consults on legislative measures to support Better Advice Bill

On 29 September, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced the release of exposure draft legislative material for consultation in support of the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Bill 2021 (Better Advice Bill), which is currently before Parliament. According to the Minister, the exposure drafts will implement key elements to support the operation of the bill.

Financial markets

ASIC issues JobKeeper notice and guidance

On 15 October, ASIC issued a notice and guidance to help listed entities comply with their new obligation to disclose information about JobKeeper payments to the market.

ASIC Information Sheet FAQs: Disclosure by listed entities about jobkeeper payments (INFO 263) answers frequently asked questions about a listed entity’s obligation to disclose information about JobKeeper payments, and how that information should be disclosed.

ASX reminds listed entities of JobKeeper notification requirements and rules consultation

On 30 September, the ASX issued Compliance Update no. 08/21. In this update, the ASX:

1. reminded listed entities of their obligation to notify JobKeeper payments to the ASX;
2. provided further information on proposed amendments to the ASX Settlement Operating Rules, ASX Clear Operating Rules, ASX Operating Rules and the ASX Enforcement and Appeals Rulebook to facilitate CHESS replacement (for more information on the consultation, see our earlier Issue 58); and
3. made other announcements in relation to updating the design of an issuer’s logo on CHESS Holding statements and daylight savings.

RBA releases assessment of ASX clearing and settlement facilities

On 29 September, the RBA released the RBA Assessment of ASX Clearing and Settlement Facilities (RBA Assessment). The RBA states that it has concluded that the ASX’s clearing and settlement facilities have conducted their affairs in a way that promotes overall stability in the Australian financial system, however, the ASX will need to place a high priority on addressing recommendations related to operational risk and margin standards.

ASIC preserves short selling relief for deferred settlement trading

On 29 September, the ASIC Corporations (Amendment) Instrument 2021/754 was registered. According to the Explanatory Statement, the purpose of the instrument is to remove the expiry date for deferred settlement relief in ASIC Corporations (Short Selling) Instrument 2018/745 so it ceases at the same time as the rest of the relief in that instrument when it sunsets on 1 October 2028.

The relief was from the short selling prohibition in section 1020B(2) of the Corporations Act for certain deferred settlement trading arrangements involving ASX quoted products.

ASIC makes securities lending instrument

On 29 September, the ASIC Corporations (Securities Lending Arrangements) Instrument 2021/821 (Instrument 2021/821) was registered.

According to the Explanatory Statement, the purpose of Instrument 2021/821 is to make substantial holding disclosure by persons involved in securities lending more practical and meaningful to the market. Instrument 2021/821 provides relief to persons engaged in securities lending in relation to the substantial holding provisions of Chapter 6C of the Corporations Act.

Instrument 2021/821 is repealed on 1 October 2026.

ASIC reminds market participants to stay vigilant about ‘pump and dump’ campaigns

On 23 September, ASIC published a warning in relation to ‘pump and dump’ campaigns led by social media. ASIC states that ‘pump and dump’ activity occurs when a person buys shares in a company and starts an organised program to seek to increase (or ‘pump’) the share price, and then sell (or ‘dump’) their shares and take a profit, and other shareholders suffer as the share price falls.

ASIC states that it has been working closely with market operators to identify and disrupt pump and dump campaigns, and noted that market participants should take steps to identify and stop potential market misconduct (including complying with their obligation to report suspicious activity to ASIC as soon as practicable).

Anti-money laundering

AUSTRAC announces upcoming changes to AUSTRAC Online

On 27 September, AUSTRAC announced substantial changes to AUSTRAC Online as planned as part of its System Transformation Program, and invited regulated entities to participate in the change process.

Consumer credit

ASIC reminds Australian credit licensees of new breach reporting obligations

On 8 October, ASIC published guidance for Australian credit licensees in relation to their new breach reporting obligations that came into effect on 1 October.

ASIC states that it recognises there will be a period of transition and that it will take a reasonable approach in regulating the early stages of these reforms provided industry participants apply best efforts to comply. ASIC referred licensees to its updated ASIC Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees and further guidance on its website.

ASIC gives temporary breach reporting relief for Australian credit licensees

On 30 September, the ASIC Credit (Breach Reporting-Prescribed Commonwealth Legislation) Instrument 2021/801 (Instrument 2021/801) was registered.

According to the Explanatory Statement, Instrument 2021/801 provides temporary relief for Australian credit licensees’ breach reporting obligations by modifying section 50A(3)(c) of the National Consumer Credit Protection Act 2009 (Cth), pending the law reform. The effect of the modification is to limit the scope of ‘core obligations’ under Commonwealth legislation generally to prescribed statutes.

Instrument 2021/801 came into effect on 1 October, when the new breach reporting requirements came into effect.

Banking

APRA increases banks’ loan serviceability expectations to counter rising risks in home lending

On 6 October, APRA wrote to all ADIs advising them that APRA expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.

APRA states that, given risks in the current environment where there is a high level of indebtedness, it expects all ADIs to adopt a more prudent setting for the mortgage serviceability buffer that is used to test borrowers’ capacity to repay.

Other financial services regulation

ASIC releases 2020-21 Annual Report

On 15 October, ASIC released its Annual Report for 2020-21. In releasing the report, ASIC mentioned that its key measures included developing guidance on significant reforms of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, including new design and distribution obligations, breach reporting obligations and the deferred sales model for add-on insurance, which have come into effect recently.

ASIC asks Australian companies to review their whistleblower policies

On 13 October, ASIC wrote to CEOs of Australian public companies, large proprietary companies and trustees of registrable superannuation entities (RSEs) urging them to review their whistleblower policies to ensure they comply with the law.

In releasing its letter, ASIC states that it reviewed a select sample of whistleblower policies and is concerned the majority of those policies did not fully address the relevant requirements.

CDR rules amendments registered

On 5 October, the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, announced amendments made to the Competition and Consumer (Consumer Data Right) Rules 2020 (CDR Rules).

On that day, the Competition and Consumer (Consumer Data Right) Amendment Rules (No. 1) 2021 (Amendment Rules) were registered.

According to the Explanatory Statement, the purpose of the Amendment Rules are to facilitate greater participation in the Consumer Data Right (CDR) regime, provide greater control and choice to consumers, promote innovation of CDR offerings and enable services to be more effectively and efficiently provided to customers.

The Amendment Rules follow consultation conducted by Treasury on an exposure draft version in July this year (for more information, see our earlier Issue 55).

FIRB releases guidance on foreign investment reforms

On 30 September, the Foreign Investment Review Board (FIRB) announced that Treasury has provided further guidance for investors under the foreign investment framework and the application of Treasury’s compliance and enforcement powers. FIRB states that the guidance relates to foreign investment framework reforms that commenced on 1 January.

APRA updates its policy priorities for remainder of 2021

On 24 September, APRA published a letter providing an updated schedule of its policy priorities for the remainder of 2021. According to APRA’s letter, its policy priorities in the fourth quarter of 2020 will be:

1. completing the bank capital reforms;
2. consulting on reforms to the insurance capital framework;
3. consulting on new standards for financial contingency planning and resolution; and
4. updating superannuation standards.

Tax

Treasury releases consultation paper to clarify the treatment of corporate trusts under insolvency law

On 15 October, Treasury released a consultation paper on whether the treatment of corporate trusts in Australia’s insolvency law needs to be clarified.

The consultation paper states that Australia’s current corporate insolvency regime does not expressly cover how companies which structure themselves through a trust, or businesses that have a corporate trustee are to be dealt with during insolvency, and that this differs from companies who do not employ a trust structure, which benefit from a clear statutory regime established under Chapter 5 of the Corporations Act.

The Assistant Treasurer, Michael Sukkar, states that the consultation paper follows recent consultations concerning schemes of arrangement, as well as the independent review of the insolvent trading safe harbour, expected to report by the end of the year.

Consultation closes on 10 December.

Victorian Government releases draft legislation on Windfall Gains Tax

On 13 October, the second reading of the Windfall Gains Tax and State Taxation and Other Acts Further Amendment Bill 2021 was moved in the Victorian parliament. The ‘Windfall Gains Tax’ (WGT) will be a new tax imposed when a WGT event occurs, this being the time land is rezoned. For more information on the WGT see our article.