Thinking | 4 February 2022

Financial Services in Focus – Issue 62

By Vince BattagliaHarry NewAdrian VerdnikPhilip Hopley and Nina Mao

In this edition, we consider the first reported decision under the strengthened civil penalty regime for non-compliance with breach reporting obligations, proposed changes to ASIC’s exchange-traded product naming conventions, and draft CCIV regulations, 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, banking and other financial services regulation.

ASIC consults on proposed changes to business introduction services relief

On 25 January, ASIC commenced consultation on proposed changes to relief for business introduction services from various regulatory requirements under the Corporations Act. The relief provided under ASIC Corporations (Repeal and Transitional) Instrument 2017/186 is due to expire on 1 April 2022. View ASIC’s consultation paper.

According to ASIC, the consultation includes proposals to:

  1. extend the relief for interests in managed investment schemes to 1 April 2025;
  2. amend the relief to update and clarify that the design and distribution obligations apply to business introduction services’;
  3. allow the relief for Chapter 6D securities to expire; and
  4. require persons who rely or cease to rely on the relief from 1 April 2022 to provide notice to ASIC.

Consultation closes on 15 February.

Court hands down first civil penalty for a licensee failing to report breaches to ASIC

On 22 December 2021, Justice Besanko of the Federal Court of Australia handed down his decision in Australian Securities and Investments Commission v Statewide Superannuation Pty Ltd [2021] FCA 1650 which is, according to ASIC, the first case in which a Court has imposed a civil penalty on a licensee for failing to report breaches to ASIC since the strengthened civil penalty regime was introduced in March 2019.

In this case, an administration system failure resulted in the deduction of insurance premiums from members’ superannuation accounts in circumstances where the member no longer had an insurance policy, and the issuance of annual statements stating the same. The Court held that the defendant engaged in misleading or deceptive conduct by issuing annual statements containing misrepresentations that members held an insurance policy and that premiums were entitled to be deducted from their bank account.

Relevantly, the Court accepted the parties’ agreed submissions that the defendant became aware of reportable breaches by no later than 22 July 2019. At that time, although the defendant had started undertaking internal action and staff were still conducting a review of member records and data, it was known that an undefined portion of members received incorrect correspondence and a data fix had not corrected errors for at least some of those members. The Court considered that, although the reporting delay (of either 45 or 34 days, which is beyond the ten business day maximum) was not substantial and the conduct not deliberate, ‘the reporting obligation is an important one in terms of the regulation of the financial services industry’, and imposed a pecuniary penalty of $500,000 in respect of the failure to report the breach (in addition to the penalty of $3,500,000 for making false or misleading representations).

The case was handed down under the former breach reporting regime, however, the new regime is also subject to civil and criminal penalties. We have written about the new breach reporting regime previously.

ASIC’s review of responsible entity governance practices released

On 27 January, ASIC published findings from a high level review of the governance practices of ten large responsible entities of managed investment schemes.

ASIC’s presentation setting out the findings is available online, and sets out key findings, observations and considerations for responsible entities and their boards. ASIC states that it encourages all responsible entities to consider the review findings and proactively take steps to evaluate and improve their governance practices to stay ahead of both financial and non-financial risks, improve compliance and deliver better investor outcomes.

ASIC consults on proposed changes to ETF naming conventions

On 20 January, ASIC commenced consultation on proposals to update the guidance in ASIC Information Sheet 230 Exchange-traded products: Admission guidelines (INFO 230), on naming conventions for licensed Australian exchanges that admit exchange traded products (ETPs).

According to ASIC Consultation Paper 356 ETP naming conventions: Updates to INFO 230, the purpose of the consultation is to:

  1. gather feedback that will allow ASIC to complete a holistic review of stakeholder experience to date with ETP naming conventions in INFO 230; and
  2. consult on some specific updates to our guidance in INFO 230 that are intended to simplify the naming conventions and promote flexibility for the next phase of ETP market development.

Consultation closes on 3 March.

Government consults on exposure draft CCIV regulations and rules

On 21 December, the Assistant Treasurer, Michael Sukkar, announced the release of exposure draft regulations and rules to implement key elements of the corporate collective investment vehicle (CCIV) regulatory framework for consultation.

The exposure draft materials are available on Treasury’s website. The draft regulations and rules relate to matters including financial reporting and record-keeping, voting, custody of CCIV assets, CCIV ownership and disclosure.

Consultation closed on 21 January.

APRA publishes new FAQs in relation to the Superannuation Data Transformation project

On 19 January, APRA published new frequently asked questions (FAQs) on the reporting standards and the reporting of historical data for Phase 1 of the Superannuation Data Transformation project. Read the FAQs.

Treasury consults on updated superannuation co-contribution regulations

On 20 December 2021, Treasury published the exposure draft Superannuation (Government Co‑contribution for Low Income Earners) Regulations 2022 and Explanatory Statement for public consultation.

According to the exposure draft Explanatory Statement, the purpose of the proposed regulations is to remake and improve the operation of the Superannuation (Government Co-contribution for Low Income Earners) Regulations 2004 before they sunset. Treasury states that the substantive changes in the draft regulations are:

  1. to amend the definition of an eligible account so that it excludes those which only provide terminal medical condition benefits in addition to the existing exclusion on accounts which provide only death or incapacity benefits. This change is consistent with the intention that the super co‑contribution not be paid to insurance-only accounts, where the contribution would subsidise the payment of insurance premiums rather than contribute to increasing an individual’s retirement savings; and
  2. to clarify the operation of section 7 relating to where a Government co‑contribution is to be directed in specific circumstances. The draft regulations ensure that only one item will apply in the event of multiple circumstances applying.

Consultation closed on 14 January.

APRA registers instruments making specified reporting information non-confidential

On 20 January, the Australian Prudential Regulation Authority (confidentiality) determination No. 1 of 2022 and Australian Prudential Regulation Authority (confidentiality) determination No. 2 of 2022 were registered and commenced.

Explanatory Statements to determination no. 1 and determination no. 2 state that the purpose of the instruments is to provide that certain information given to APRA under the reporting standards listed in the instruments will be non-confidential. Determination No. 1 relates to information by general insurers, while determination no. 2 relates to information by life insurers.

ASIC publishes guidance for tax (financial) advisors about regulatory reforms

On 23 December, ASIC published guidance for providers of tax (financial) advice services following the passing of the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Act 2021. The newly published ASIC Information Sheet 268 FAQs: Regulation and registration of relevant providers of tax (financial) advice services covers frequently asked questions (FAQs) about the regulation and registration of relevant providers who provide, or intend to provide, tax (financial) advice services.

ASIC states that the Act requires, among other things, that all financial advisors who provide personal advice to retail clients about relevant financial products be registered with ASIC by 1 January 2023.

ASIC announces future consultation on Financial Services and Credit Panel arrangements

On 22 December 2021, ASIC announced that, in early 2022, it will consult on guidance regarding the operation of the Financial Services and Credit Panel (FSCP) and release guidance about how ASIC will exercise its new power to issue warnings/reprimands.

The conferral of statutory functions and powers on the FSCP arises out of Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Act 2021, implemented in response to a recommendation of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry relating to financial advisor disciplinary arrangements.

Regulations to implement financial advisor disciplinary system registered

On 20 December 2021, the Financial Sector Reform Amendment (Hayne Royal Commission Response—Better Advice) Regulations 2021 was registered.

According to the Explanatory Statement, the purpose of the regulations is to support the amendments in the Financial Sector Reform (Hayne Royal Commission Response— Better Advice) Act 2021. The Act implements the Government’s response to recommendation 2.10 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission), which relates to a new disciplinary system for financial advisors.

The regulations commenced on 1 January 2022.

ASIC extends relief for wholesale client confirmation for derivatives market contracts

On 17 January, the ASIC Market Integrity Rules (Securities Markets) Class Waiver (Amendment) Instrument 2022/25 was registered.

According to the Explanatory Statement, the purpose of the instrument is to extend the relief in ASIC Market Integrity Rules (Securities Markets) Class Waiver 2018/303, which provides relief to market participants from the obligation to provide a confirmation to a wholesale client for a market transaction in a derivatives market contract, until 30 November 2023.

The Explanatory Statement further states that the extension will maintain the status quo in the waiver pending any amendment to the ASIC Market Integrity Rules (Securities Market) 2017 to make permanent the effect of the waiver, and continue to allow market participants and ASIC to devote their resources to immediate priorities as a result of the COVID-19 pandemic.

The instrument commenced on 18 January.

ASX publishes response to consultation in 2020 about ASX Clear capital requirements

On 17 January, the ASX released its response to the consultation undertaken in October 2020 relating to proposed changes to capital requirements for ASX Clear Participants. The proposal was to consolidate two capital measure requirements for non-bank ASX Clear participants into a single capital measure.

In its response paper, the ASX also released revised draft rule amendments and stated that implementation of the rule amendments will be no earlier than February 2023.

APRA proposes updated reporting schedule for ADIs

On 20 January, APRA published for consultation an update to the reporting schedule for APRA Reporting Standard ARS 115.0 Capital Adequacy: Standardised Measurement Approach to Operational Risk (ARS 115.0). In its letter to industry, APRA states that it is revising the reporting frequency for the reporting standard from quarterly to annually. The letter to industry and marked-up and clean versions of the reporting standard are available on APRA’s website.

APRA releases 2022 policy and supervision priorities

On 1 February, APRA released its policy and supervision priorities for 2022 by publishing:

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

APRA’s key policy priorities are modernisation of prudential architecture, resilient and prudent institutions, system stability and community outcomes.

In relation to supervision, APRA’s top priorities include rectifying sub-standard industry practices in superannuation and eradicating unacceptable product performance, cyber risk preparedness and responsiveness, a continuing focus on risk culture, upgrading contingency and continuity frameworks and ensuring sound insurance principles are applied in the insurance industries.

APRA releases its 2021 Year in Review

On 28 January, APRA released its 2021 Year in Review.

APRA states the 2021 Year in Review provides APRA’s view on the broader financial environment and outlines how APRA delivered on the priorities and objectives set out in its Corporate Plan across the banking, insurance and superannuation industries, and that it also contains metrics for APRA-regulated industries, including analysis of industry composition, profitability and financial strength.

Government announces expansion of CDR including to ‘Open Finance’

On 24 January, the Treasurer, Josh Frydenberg, the Minister for Financial Services and the Digital Economy, Jane Hume, and the Minister for Communications, Urban Infrastructure, Cities and the Arts, Paul Fletcher, jointly announced the expansion of the Consumer Data Right (CDR) to the telecommunications sector.

The Ministers also announced that the CDR will be expanded to ‘Open Finance’, which will reach not only banking, but also general insurance, superannuation, merchant acquiring and non-bank lending service providers.

The Ministers state that the Government will shortly commence consultations with industry and government stakeholders on proposed rules.

Treasury publishes report identifying ‘Option Finance’ as the next CDR priority area

On 24 January, the Treasury published a report on outcomes from the Consumer Data Right (CDR) Strategic Assessment. According to the Treasury Strategic Assessment Outcomes (Report), the next priority area to grow the CDR has been identified as ‘Option Finance’, which is intended to bring targeted datasets from across general insurance, superannuation, merchant acquiring and non-bank lending service providers into the CDR.

The Report states that Open Finance will be implemented in phases involving the assessment and designation of key datasets within the superannuation, and general insurance sectors and merchant acquiring and non-bank lending service providers in 2022.

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