Financial Services in Focus – Issue 69

ASIC proposes to remake financial requirements instrument for issuers of OTC derivatives

On 30 June, ASIC published a consultation paper seeking feedback on its proposal to remake the class order on financial requirements for issuers of over-the-counter (OTC) derivatives. According to ASIC Consultation Paper 363 Remaking ASIC class order on financial requirements for retail OTC derivative issuers: [CO 12/752], ASIC is proposing to remake the relief under a legislative instrument for a further five years until 1 October 2027 without significant changes.

Consultation closes on 29 July.

FATF publishes update on implementation of FATF standards by virtual asset providers

On 30 June, the Financial Action Task Force (FATF) published a targeted update on the implementation of FATF Standards on virtual assets and virtual asset service providers. We have recently written about the update.

ASIC encourages stakeholders to engage in ISSB consultation on sustainability reporting

On 29 June, ASIC announced that it encourages all relevant stakeholders to make a submission to consultation conducted by the International Sustainability Standards Board (ISSB) on global sustainability reporting standards. According to ASIC, should the exposure draft standards published by the ISSB be adopted internationally, they will inevitably impact Australia’s capital market and participants.

The exposure draft standards are:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
• IFRS S2 Climate-related Disclosures.

Consultation by the ISSB closes on 29 July.

ASIC also announced that the Australian Accounting Standards Board (AASB) is consulting on the exposure drafts published by the ISSB. Consultation by the AASB closed on 15 July.

ASIC updates RG 274 about reporting significant dealings

On 28 June, ASIC noted that it has updated ASIC Regulatory Guide 274 Product design and distribution obligations (RG 274) to state that issuers must provide significant dealing notifications to ASIC through the ASIC Regulatory Portal.

ASIC registers instrument imposing financial requirements on CCIV corporate directors

On 4 July, the ASIC Corporations (Financial Requirements for Corporate Directors of Retail Corporate Collective Investment Vehicles) Instrument 2022/449 (Instrument) was registered.

According to the Explanatory Statement, the purpose of the Instrument is to impose requirements on AFS licensees that are corporate directors of corporate collective investment vehicles (CCIVs) that are broadly equivalent to the financial requirements imposed on responsible entities.

Treasury consults on amendments to disclosure requirements for superannuation AMM notice

On 15 July, the Assistant Treasurer, Stephen Jones, announced that the Federal Government has released for consultation exposure draft regulations outlining proposed technical changes to the disclosure requirements for superannuation annual members’ meeting (AMM) notices. The exposure draft regulations and Explanatory Statement are available on Treasury’s website.

Consultation closes on 28 July.

Federal Government announces it will review Your Future, Your Super laws

On 7 July, the Assistant Treasurer, Stephen Jones, announced that the Federal Government has tasked Treasury to review the operation of the Your Future, Your Super laws after the second round of MySuper performance tests have taken place by August.

According to the Assistant Treasurer, the Federal Government will pause the extension of the MySuper performance tests to beyond MySuper products for 12 months, in order to provide time for the review to take place. The Treasury’s review will also consider whether there have been any unintended consequences from other Your Future, Your Super reforms.

The Assistant Treasurer also announced that the Federal Government will shortly be releasing exposure draft legislation for consultation to pass legislation adjusting the performance test for faith-based products.

ASIC registers new instrument and guidance for superannuation calculators

On 5 July, ASIC announced that it has released ASIC Regulatory Guide 276 Superannuation forecasts: Calculators and retirement estimates and a new legislative instrument updating the relief which facilitates the provision of superannuation calculators and retirement estimates. The instrument, ASIC Corporations (Superannuation Calculators and Retirement Estimates) Instrument 2022/603 (Instrument), was registered on 30 June.

According to ASIC, the Instrument provides a transition period of six months during which providers of superannuation forecasts may rely upon either the existing relief or the new relief.

ASIC states that it updated the relief following consultation with industry through ASIC Consultation Paper 351 Superannuation forecasts: Update to relief and guidance (for more information on the consultation, see our earlier Issue 60). ASIC also published its response to the submissions on its website.

APRA seeks implementation feedback from defined benefit funds on ‘Your Superannuation, Your Choice’ amendments

On 30 June, APRA announced that it has released a letter to registrable superannuation entity licensees of defined benefit funds to seek their input on amendments to the Superannuation Guarantee (Administration) Act 1992 (Cth), which took effect on and from 4 September 2020.

According to the letter, the amendments provide that employers who make contributions for employees under workplace determinations or enterprise agreements made on or after 1 January 2021 need to provide those employees a with choice of fund, enabling more employees to choose a superannuation fund.

Consultation closes on 8 September.

ASIC publishes findings on super trustee communications about performance test results

On 24 June, ASIC published findings from its review of superannuation trustees’ communications with their members following the first annual performance test for MySuper products. ASIC’s findings and expectations are set out in ASIC Report 729 Review of trustee communications about the MySuper performance test (REP 729).

In publishing REP 729, ASIC stated that it expects trustee communications to reflect ASIC’s expectations for prominence, balance and clarity set out in REP 729. These expectations related primarily to:

• general communications (including information on the trustee’s website) about performance test failures;
• mandatory disclosures of performance test failures by notice and on the trustee’s website;
• communication management plans in relation to performance test failures; and
• use of call centres.

APRA publishes FAQs in relation to Superannuation Data Transformation reporting standards

On 23 June, APRA announced that it has published additional frequently asked questions (FAQs) on the Superannuation Data Transformation reporting standards. The additional FAQs are available on APRA’s website.

Federal Court makes determinations of unconscionable conduct in relation to the sale of insurance products

On 8 July, the Federal Court of Australia handed down its decision in Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786 (ASIC v Select). The case concerned the sale of insurance products over the phone to vulnerable consumers, the majority of whom did not speak English as a first language and lived in remote communities.

This case was the subject of a case study considered by the Financial Services Royal Commission in round 4 (experiences with financial services entities in regional and remote communities).

Select AFSL Pty Ltd (Select) held an AFSL and carried on the business of marketing and distributing life insurance, funeral insurance and accidental injury insurance products to retail clients. It carried out its activities through sub-contracting arrangements.

Justice Abraham found that:

• in relation to the sales and retention conduct of its representatives, Select breached the provisions of the ASIC Act that prohibit unconscionable conduct, misleading or deceptive conduct and false or misleading representations, coercion and undue harassment;
• Select also breached section 912A(1)(a) (the general conduct obligation on AFS licensees to act efficiently, honestly and fairly) and the conflicted remuneration provisions of the Corporations Act by implementing an inappropriate incentive program for sales agents that involved defective telephone scripts and a compliance monitoring program that failed to detect inappropriate behaviour; and
• the sole director, secretary and managing director of Select was knowingly involved in some of these contraventions and breached his duty of care and diligence as a director.

These proceedings were commenced by ASIC, and in a media release about the judgment, ASIC states that ‘…in making findings of unconscionable conduct, the Court has emphasised that consumers must have the opportunity to understand and consider the features of the insurance product they’ve been offered’.

The Federal Court will hear the penalty phase of the proceedings as a next step.

APRA publishes finalised prudential standards in preparation for ARPC

On 29 June, APRA announced that it has finalised amendments to the prudential framework for general insurers to support the operation of the Federal Government’s cyclone and related flood damage reinsurance pool, which will be administered by the Australian Reinsurance Pool Corporation (ARPC). In making the announcement, APRA published:

• a letter to the general insurance industry;
• updated APRA Prudential Standard GPS 001 Definitions;
• updated APRA Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge;
• updated APRA Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge; and
• updated APRA Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge.

Treasury seeks feedback on removal of stamping fee exemption for LITs and LICs

On 28 June, the Treasury published a consultation paper seeking post-implementation feedback on the extension of the ban on conflicted remuneration to listed investment companies (LICs) and trusts (LITs), which was implemented on and from 1 July 2020.

Prior to 1 July 2020, one-off volume-based fees that are paid to AFS licensees (or their representatives) for securing investors for capital raises by LICs and LITs (or ‘stamping fees’) were exempted from the ban on conflicted remuneration. According to the consultation paper, the stamping fee exemption for LITs and LICs was removed on the basis that it created an inappropriate, market-distorting distinction between entities.

Consultation closed on 10 July.

ASIC publishes report setting out good practices to prevent ‘pump and dump’ activity

On 14 July, ASIC published a report summarising its review of a series of pump and dump events that occurred in listed equity markets over 2020-21. ASIC states that the report also sets out good practices to help market participants detect, prevent and respond to pump and dump activity.

ASX publishes response to feedback on ASX rule amendments for CHESS replacement

On 30 June, the ASX published its response to feedback received in respect of consultation conducted by the ASX on proposed amendments to the ASX rulebooks to facilitate CHESS replacement (for more information on the consultation, see our earlier Issue 58).

In the response paper, the ASX also sets out changes that it intends to make to the draft rules in response to stakeholder feedback, and further rule amendments. The ASX also published non-confidential submissions on its website here.

ASX consults on market management

On 28 June, the ASX published a consultation paper in relation to market management.

According to the ASX Consultation Paper Market Management this consultation paper is the first in an anticipated sequence of three consultations the ASX will be undertaking as it implements its response to ASIC’s Report 708 ASIC’s expectation for industry in responding to a market outage (REP 708). The ASX has stated that it is aware that the content and outcomes of ASX’s consultation process may directly impact programs of work underway at ASX Participants in response to the expectations on market participants set out in undertaking as ASX implements its response to REP 708.

ASIC reminds market operators and participants to continue implementation of ASIC’s expectations

On 28 June, ASIC announced that it is calling on market operators and participants to continue to implement its expectations to improve the resilience of the Australian equity market during outages, including by facilitating trading on alternative markets.

ASIC states that, by early to mid-2023, it anticipates all market participants will have arrangements for at least new orders to trade on an alternative market during an outage, and that market operators will support this outcome. ASIC also reported on progress by market operators and participants of ASIC’s expectations set out in ASIC Report 708 ASIC’s expectations for industry in responding to a market outage.

ASX announces updates in relation to listing rule changes and new issuer services fees

On 24 June and 7 July, the ASX issued Compliance Updates no. 05/22 and 06/22, respectively. In the updates, the ASX:

• announced that the listing compliance course (which will be required to be completed for compliance with listing rule changes coming into effect on 1 October) is now available;
• confirmed that updated ASX Listing Rules and ASX Guidance Note 32 Reporting on Oil & Gas Activities are available in relation to listing rule changes that came into effect on 1 July;
• notified listed entities that research reports in relation to the adoption of the 4th edition of the ASX Corporate Governance Council’s Principles and Recommendations are available;
• announced that, from 1 July, the ASX will move to a new, simpler pricing model for Issuer Services (which follows consultation undertaken by the ASX during March and April. For more information, see our earlier Issue 64).

AUSTRAC releases updated guidance on threshold transaction reporting

On 27 June, AUSTRAC announced that it has released updated guidance on reporting threshold transaction reports (TTRs) when a customer conducts multiple cash transactions, with a 12-month transition period from 1 July.

AUSTRAC explained that:

• its previous guidance required a reporting entity providing multiple services to a customer that add up to $10,000 or more to decide whether to treat those multiple services as a single reportable transaction, or multiple transaction reporting;
• in its updated guidance, reporting entities will no longer be required to combine multiple transactions and submit a TTR, and each individual transaction is considered to be a separate and distinct designated service; and
• if a reporting entity suspects that a customer is attempting to split up a larger cash transaction into several smaller transactions to avoid TTR reporting, the reporting entity must make a suspicious matter report to AUSTRAC.

AUSTRAC announces changes to cross-border movement reporting

On 27 June, AUSTRAC announced that changes to cross-border movement reporting commenced on 17 June. The changes are implemented under the Anti‑Money Laundering and Counter‑Terrorism Financing and Other Legislation Amendment Act 2020 (Cth).

According to AUSTRAC, previously, reporting entities were required to report the cross-border movement of physical currency of $10,000 or more in all circumstances, and the movement of bearer negotiable instruments (BNIs) only if requested by a police or customs officer. AUSTRAC states that, from 17 June, reporting entities are required to report the cross-border movement of all monetary instruments valued at $10,000 or more (including BNIs and physical currency).

FATF commences consultation on Recommendation 25

On 23 June, the Financial Action Task Force (FATF) announced that it is conducting a review of Recommendation 25 of the FATF Recommendations, which relates to transparency and beneficial ownership of legal arrangements.

The FATF states that it is seeking feedback on:

• the scope of legal arrangements, risk assessment and foreign trusts;
• obligations of trustees;
• definition of beneficial owners;
• obstacles to transparency;
• approach in collecting beneficial ownership information;
• adequate, accurate and up-to-date information; and
• other general matters.

Consultation closes on 1 August.

ASIC makes product intervention orders on short-term credit and continuing credit contracts

On 14 July, ASIC announced that it has made product intervention orders imposing conditions on the issuing of short-term credit and continuing credit contracts to retail clients. The orders arise out of consultation conducted by ASIC in December 2021 and January 2022, which was reported on in our earlier Issue 61.

According to ASIC, the orders reinforce consumer protections by prohibiting the provision of short-term credit and continuing credit contracts which involve unreasonably high fees, in excess of the cost caps in the relevant exemptions in sections 6(1) and 6(5) of the National Credit Code. The orders, Explanatory Statements and notices are available on ASIC’s website.

ASIC adopts no-action position for large banks withholding credit information to avoid harm

On 8 July, ASIC announced that it has adopted a temporary no-action position to enable large banks to withhold the reporting of certain credit information on consumer credit reports where reporting the information could lead to consumer harm, including where a consumer may be the victim of family violence. ASIC’s no-action position is set out in its letter.

Full Federal Court hands down decision on structured fee arrangements for credit

On 28 June, the Full Federal Court handed down its decision in Australian Securities and Investments Commission v BHF Solutions Pty Ltd [2022] FCAFC 108 (ASIC v BHF), which reversed the outcome in the Federal Court handed down in June 2021 (which dismissed ASIC’s application in relation to alleged breaches of consumer credit provisions). ASIC v BHF arose out of lending arrangements provided by BHF Solutions Pty Ltd (BHFS) and Cigno Pty Ltd (Cigno). Under the lending arrangement, Cigno would market loans to consumers, process loan applications and manage collections, in return for various fees levied on the consumer (including a fee that varied according to the amount of the loan). BHFS would advance the loan.

The key issue was whether the lending arrangement was excluded from regulation under the National Credit Code (Code) as ‘the provision of credit under a continuing credit contract if the only charge that is or may be made for providing the credit is a periodic or other fixed charge that does not vary according to the amount of credit provided’ (subject to a maximum cap on charges imposed under the regulations) under section 6(5) of the Code.

BHFS and Cigno argued that, as the fees (including the variable fee) were imposed by Cigno for Cigno’s services in relation to the loan, not for the loan itself, then the fees were not charges subject to the maximum cap.

Justice O’Bryan (Justices Besanko and Lee agreeing) dismissed the narrow interpretation, holding that the Code would then be circumvented by structuring credit arrangements such that no charge is technically levied for the provision of credit, but various charges are levied for other services. His Honour held that a fee would be captured as a ‘charge’ if it ‘is made in exchange for, on account of or by reason of the provision of credit, applied in a commercially practical manner’.

In this case, the variable fee was charged for Cigno’s services to receive, verify, assess and process loan applications. The fee was a charge that ‘is or may be made for providing the credit’ under section 6(5), as it was levied for services that are directed to the provision of credit, are triggered by the provision was credit and are only valuable insofar as credit is being provided.

Commenting on the decision, ASIC stated that it expects companies to be candid about their credit arrangements, and that they should not seek to bypass important consumer protections through artificial structures and mechanisms which expose consumers to additional harm and avoidable cost.

APRA publishes Basel III liquidity reform review findings

On 30 June, APRA announced that it has released an information paper to ADIs presenting the findings of the post-implementation review (PIR) of the Basel III liquidity reforms.

According to APRA Information Paper Post-implementation review of the Basel III liquidity reforms (Information Paper), the Basel III liquidity reforms were introduced in Australia eight years ago. The PIR, the purpose of which is to evaluate whether the implemented policy was operating as intended, was initiated in March 2022.

According to the Information Paper, the findings confirm that the reforms are operating effectively, but that there are potential improvements that could be made to improve efficiency. APRA states that it plans to consult on draft revisions to APRA Prudential Standard APS 210 Liquidity in 2023.

APRA publishes additional FAQ on treatment of residential mortgage loans

On 24 June, APRA announced that it has published an updated frequently asked question (FAQ) for ADIs on the treatment of loans issued under the Federal Government’s Home Guarantee Scheme. You can read the FAQ on APRA’s website.

APRA announces consultations on remuneration disclosure and bank prudential disclosures

On 6 July, APRA announced that it has launched two separate consultations to improve transparency and market discipline within the financial system.

According to APRA:

• the first consultation will focus on proposed new remuneration disclosure and reporting requirements for all APRA-regulated banks, insurers and superannuation funds. The discussion paper, Remuneration requirements for all APRA-regulated entities, is available on APRA’s website; and
• the second consultation focuses on APRA’s proposals to update bank prudential disclosures to align with international standards and the new bank capital framework. The discussion paper, Public disclosure requirements for authorised deposit-taking institutions, is also available on APRA’s website.

Both consultations close on 7 October 2022.

APRA levy instrument for 2022-23 financial year registered

On 30 June, the Australian Prudential Regulation Authority Supervisory Levies Determination 2022 (Determination) was registered. According to the Explanatory Statement, the Determination commences on 1 July and relates to the 2022-23 financial year. The Determination sets out the amount of levy payable and other relevant parameters for the respective leviable bodies.

Federal Government announces cryptocurrency will continue not to be taxed as foreign currency

On 22 June, the Treasurer, Jim Chalmers, and the Assistant Treasurer, Stephen Jones, jointly announced that cryptocurrencies will continue to be excluded from foreign currency tax arrangements under the newly constituted Federal Government. According to the Ministers:

• the Federal Government will therefore move to clarify current arrangements in legislation that will mean crypto-assets will not be regarded as a foreign currency for tax purposes; and
• capital gains tax will continue to apply to crypto assets that are held as investments.

We have written about this announcement in a separate article.