Financial Services in Focus – Issue 67
In this edition, we consider ASIC’s expectations on AFS licensees’ cyber resilience practices, a judgment arising out of ASIC’s first financial advice action against a timeshare provider, changes to derivatives transaction rules, and much more.
Click on each heading below to read more about each of these areas: financial products, superannuation, insurance, financial product advice and financial markets.
ASIC proposes extension to its binary options product intervention order
On 26 May, ASIC announced that it is proposing to extend its ban on the sale of binary options to retail clients. The ban initially came into effect on 3 May 2021. We have written about the introduction of this product intervention order in our earlier Issue 52. This existing order is set to expire on 7 October 2022.
ASIC announced that it has also released ASIC Consultation Paper 362 Extension of the binary options product intervention order (CP 362). According to ASIC, CP 362 seeks feedback on the proposal to extend ASIC’s product intervention order banning the issue and distribution of binary options to retail clients, until it is revoked or sunsets on 1 October 2031.
Consultation closes on 20 June.
ASIC sets out expectations for AFS licensees in relation to cyber resilience
On 12 May, ASIC published an article for AFS licensees in relation to the recent Federal Court ruling that an AFS licensee contravened financial services laws by having inadequate cyber security risk management arrangements in place. We have written about the impact of this case extensively in our article, ‘AFSL holders on notice for cyber security failings’ (and refer to our earlier Issue 66).
In the article, ASIC sets out its expectations of AFS licensees in relation to managing cyber security risks, and directs licensees to guidance and other materials published by ASIC in relation to cyber resilience.
ASIC instrument regarding clearing derivatives
On 12 May, the ASIC Derivative Transaction Rules (Clearing) Amendment Instrument 2022/224 (Instrument) was registered. According to the Explanatory Statement, the purpose of the Instrument is to amend the ASIC Derivative Transaction Rules (Clearing) 2015 (Rules) by removing products which can no longer be traded or cleared from the definition of a Clearing Derivative in Rule 1.2.3 of the Rules and replacing them with contracts referencing the replacement near risk free rate selected for each currency.
The Instrument follows consultation conducted by ASIC in December 2021 to January 2022 under ASIC Consultation Paper 353 Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015 (CP 353). ASIC published a report setting out its response to CP 353 on 13 May.
The Instrument commences on 14 August.
APRA publishes updates to FAQs on the Superannuation Data Transformation project
On 26 May, APRA updated two 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.
Consultation closes on 10 June.
APRA notifies private health insurance industry of levy discussion paper
On 27 May, APRA announced that it has released a letter to the private health insurance industry in relation to proposed financial institutions supervisory levies for the 2022-23 financial year. The letter is available on APRA’s website. We have written about the discussion paper released by the Treasury on this matter below.
Federal Court judgment highlights the effect on non-disclosure on group life insurance cover. Does fraud ‘unravel everything’?
On 13 May, the Federal Court of Australia delivered its judgment in Sharma v H.E.S.T. Australia Ltd  FCA 536,which set aside an AFCA determination and remitted the matter back to AFCA for a further determination because of a material misdirection concerning the parties’ legal rights and obligations.
The issue in this case was the effect of a fraudulent non-disclosure made by a life insured under a group policy held by a superannuation fund trustee when seeking additional life cover under the group policy that was underwritten. In particular:
- it was held that a fraudulent non-disclosure of the life insured’s medical history resulted in the avoidance of the additional cover, but did not extend beyond that to also avoid the existing group cover;
- the reason for this finding was that the two covers were treated as being separate contracts of insurance, and so the group cover was not avoided by the non-disclosure made when the second, underwritten cover was taken out (sections 27A and 29 of the Insurance Contracts Act 1984 (Cth) (ICA). AFCA correctly directed itself on this part of its determination; and
- it was held that AFCA erred, however, in misdirecting itself that it was fair and reasonable in the circumstances to deny cover under the group policy because common law and equitable principles concerning the effect of fraud entitled the group insurer to avoid the policy. This was because section 33 of the ICA provides that section 29 is an exclusive remedy for non-disclosure – and that section 33 is therefore a code which excludes the possibility of a party seeking any other remedy outside the scope of the ICA, including any common law or equitable remedy.
ASIC releases information about the exam and professional year arrangements
On 9 May, ASIC announced changes to the ASIC notification and exam requirements for new financial advisers and foreign advisers. These changes include:
- removal of the requirement to notify ASIC of professional year arrangements: ASIC has stated that this only impacts the requirement to notify the former Financial Adviser Standards and Ethics Authority (FASEA) of a professional year arrangement between the licensee and adviser. Licensees are still required to notify ASIC when they grant a new financial adviser accelerated progression through Quarter 1 and/or Quarter 2. They are also still required to notify ASIC of when a new financial adviser has completed their professional year and a final completion certificate has been issued; and
- new requirement for new financial advisers and foreign advisers who wish to sit the financial adviser exam: new financial advisers and foreign advisers need to have their eligibility to sit the exam assessed by ASIC before they can book for the exam. According to ASIC, if they determine that a financial adviser or foreign adviser is eligible to sit the exam, they will be issued with an exam eligibility number which must be used to book the exam. To ensure that the eligibility number is issued on time, ASIC recommends that an adviser’s AFS licensee should apply for an exam eligibility number through the ASIC Regulatory Portal no later than 15 days before the last day of the booking period for an exam.
Court holds that timeshare provider breached financial services laws
On 17 May, Justice Downes of the Federal Court of Australia handed down Her Honour’s decision in Australian Securities and Investments Commission v Ultiqa Lifestyle Promotions Limited (in liq)  FCA 561. Among other matters, Her Honour made declarations that a timeshare provider had breached financial services laws by failing to ensure its authorised representatives provided advice that was in the best interests of their consumers.
In this case, the timeshare provider had provided its authorised representatives with scripts, a manual, and other documentation (including a template Statement of Advice). The company also took steps to monitor the performance of its authorised representatives, including reviewing client’s files, and provided training to authorised representatives (albeit insufficient and inadequate in nature). On that basis, Her Honour found that there was a ‘causal relationship between [the timeshare provider’s] conduct and the contraventions by its authorised representatives’, supporting a finding that the timeshare provider breached its duty under section 961L to take reasonable steps to ensure its representatives complied with statutory obligations.
Commenting on the case, ASIC states that timeshare schemes are complex financial products and that, when sold alongside financial advice, it is fundamental – and legally required – that the advice is in the consumer’s best interest and appropriate to their circumstances. ASIC also noted that the judgment arises out of ASIC’s first financial advice action against a timeshare provider.
ASX updates industry on CHESS replacement project
On 11 May, the ASX published a CHESS replacement project update confirming that its previous announcement that there would be a strong likelihood of delay to the go-live date (refer to our earlier Issue 65) was correct and that the April 2023 go-live is no longer viable. The ASX states that a new go-live date will be determined. The update is available from the ASX.
Treasury releases discussion paper on 2022-23 financial institutions supervisory levies
On 27 May, the Treasury released a discussion paper in relation to proposed financial institutions supervisory levies for the 2022-23 financial year. According to the discussion paper, the levies relate to the ADI, superannuation, general insurance, life insurance and friendly societies, and private health insurance industries. The discussion paper is available on Treasury’s website.
Consultation closes on 10 June.
This article was written with the assistance of Nancy Harb, Law Graduate.
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