Financial Services in Focus – Issue 74

By Vince Battaglia, Philip Hopley, Georgia Francis and Katelyn Free

In this edition, we consider ASIC’s insights from the reportable situations regime, ASIC’s report on wholesale financial market practices, FATF consultations on beneficial owner treatment, 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, banking, other financial services regulation and tax.

Financial products

APRA commences consultation on amendments to minimum capital requirements for PPF providers

On 14 November, APRA announced that it has commenced consulting on proposed amendments to minimum capital requirements for purchased payment facilities (PPF) providers as set out in APRA Prudential Standard APS 610 Prudential Requirements for Providers of Purchased Payment Facilities.

According to the letter released to industry setting out the proposals, APRA states that the proposal is an interim measure, and that it will provide an update on the planned broader review of prudential standards for PPF providers as part of its annual Policy Priorities update in early 2023.

Consultation on the proposed amendments closes on 14 February 2023.

ASIC publishes enforcement priorities for 2023

On 3 November, ASIC announced that it has published its Enforcement Priorities for 2023.  According to ASIC, its priorities include enforcement actions on greenwashing and predatory lending, as well as a continuing focus on disrupting investment scams.  ASIC states that its enforcement work will not be limited to these priorities and that they may evolve as new and emerging issues or products come to its attention.

RBA releases summary of findings from central bank survey of FX and derivative markets

On 28 October, the Reserve Bank of Australia (RBA) announced that it has released a summary of findings from the latest triennial survey of turnover in foreign exchange (FX) and over-the-counter interest rate derivatives markets that was conducted in the Australian market in April 2022.

According to the RBA, the results highlight that the Australian dollar is still one of the most traded currencies in global FX markets and that increased activity in the Australian market was driven by turnover of FX swaps and outright forwards, which are generally used to hedge currency risk.

ASIC publishes insights from the reportable situations regime

On 27 October, ASIC released its first publication of information lodged under the reportable situations regime. According to ASIC, over 8,000 reports were made to ASIC by financial services and credit licensees under the regime between 1 October 2021 and 30 June 2022.

ASIC states that the numbers show, among other things, that:

1. a much smaller proportion of licensees have reported under the regime than anticipated;
2. licensees are still taking too long to identify and investigate some breaches;
3. more work needs to be done to appropriately identify and report the root cause of breaches; and
4. further improvements are needed to licensees’ practices towards remediating impacted customers.

ASIC Report 740 Insights from the reportable situations regime: October 2021 to June 2022 is available on ASIC’s website.

ASIC reports on practices in wholesale financial markets

On 25 October, ASIC announced that it has released two reports on better and poorer practices in wholesale financial markets, and encouraged participants in these markets to benchmark themselves against the practices.

According to ASIC:

1. ASIC Report 741 Conduct risk in wholesale fixed income markets outlines key conduct risks in fixed income markets; and
2. ASIC Report 742 Managing conflicts of interest in wholesale financial markets sets out the differing levels of sophistication in the management of conflicts of interest.

Senate committee tables report on financial services bills

On 24 October, the Senate Economics Legislation Committee tabled its report in relation to the following bills, which were referred to it by the Senate for inquiry and report:

1. Financial Accountability Regime Bill 2022;
2. Financial Sector Reform Bill 2022;
3. Financial Services Compensation Scheme of Last Resort Levy Bill 2022; and
4. Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022.

The report is available on the committee’s website.

APRA issues letter regarding review of the prudential framework for groups

On 24 October, APRA issued a letter to all APRA-regulated entities setting out a roadmap for a review of the prudential framework for groups. The letter follows APRA’s recent information paper on modernising the prudential architecture which was released earlier this year on 12 September (for more information, see our earlier Issue 72).

According to APRA, the aim of the review is to ensure that the prudential framework is fit for purpose to cater to an increasing array of new groups, and consistently applied to existing structures to ensure a level playing field.

ASIC publishes 2021-22 Cost Recovery Implementation Statement

On 21 October, ASIC published its 2021-22 Cost Recovery Implementation Statement (CRIS), as required under the industry funding model. As noted by ASIC, the statement details ASIC’s estimated levies by industry sector and subsector. ASIC released the draft CRIS in June 2022 for feedback. The final statement summarises the feedback ASIC received.

According to ASIC, final levies will be published in December 2022 and invoiced between January and March 2023.

APRA publishes 2021/22 Annual Report

On 20 October, APRA announced that it has published its annual report for the 2021/22 financial year. The report is available on APRA’s website.

Funds

ASIC instrument to support CCIV regime registered

On 14 November, the ASIC Corporations (Amendment) Instrument 2022/0940 (Instrument 2022/0940) was registered.

According to the Explanatory Statement, the instrument makes various changes to ASIC instruments to account for the implementation of the corporate collective investment vehicle (CCIV) regime. The Explanatory Statement explains that the instrument modifies ASIC instruments to impose broadly equivalent requirements and to give broadly equivalent relief in relation to CCIVs to those imposed and given in relation to managed investment schemes.

ASIC seeks feedback on the Asia Region Funds Passport

On 24 October, ASIC announced that it is inviting the Australian funds management industry to contribute to a review of the Asia Region Funds Passport (ARFP) through a short survey.

According to ASIC, the ARFP is a multilateral framework intended to support the development of an Asia-region funds management industry through improved market access and regulatory harmonisation.  It allows collective investment products offered in one participating economy to be sold to retail investors in another participating economy.

ASIC states that the survey will focus on the level of industry interest and/or preparedness to use the ARFP and the factors informing industry decisions about the ARFP. The survey is available via ASIC’s website and closes on 15 November.

Superannuation

APRA commences consultation on amendments to operational risk management

On 14 November, APRA announced that it has commenced consultation on proposed changes to improve how superannuation trustees manage financial resources to protect fund members from poor operational risk event outcomes.

According to the discussion paper, in response to significant industry evolution, supervisory insights and industry feedback, APRA intends to replace the existing APRA Prudential Standard SPS 114 Operational Risk Financial Requirement with materially reshaped requirements. The discussion paper sets out APRA’s proposed enhancements and seeks feedback from stakeholders across the superannuation industry. APRA states that information provided in response to the paper will inform revisions to the prudential framework, with consultation on the draft standard and guidance expected to commence in mid-2023.

Consultation closes on 17 March 2023.

CFR publishes report on leverage and risk in the superannuation system

On 7 November, the Council of Financial Regulators (CFR) published the 2022 Report to Government on Leverage and Risk in the Superannuation System. According to the CFR, the report focuses on limited recourse borrowing arrangements which allow a superannuation fund to borrow to purchase an asset, with the lender’s rights limited to that asset if the loan defaults. The report is available on the CFR’s website.

APRA consults on minor amendments to SDT reporting standards

On 7 November, APRA announced that it has commenced consultation on minor amendments to reporting standards introduced under Phase 1 of the Superannuation Data Transformation (SDT) project. According to APRA, the proposed amendments clarify investment option reporting and expenses reporting, reduce the frequency of reporting for some requirements and increase the time for submission of data for some requirements.

The discussion paper and draft amendments are available on APRA’s website.

Consultation closes on 2 December.

APRA publishes additional FAQ about Superannuation Data Transformation project

On 21 October, APRA announced that it has published an additional frequently asked question (FAQ) on the Superannuation Data Transformation (SDT) reporting standards, updated an existing FAQ and archived six FAQs. The FAQs are available on APRA’s website.

APRA releases new superannuation publication

On 20 October, APRA announced that it has released the first in a series of new statistical publications to improve the transparency of the superannuation industry, known as the ‘Quarterly Superannuation Industry Publication’.

According to APRA, the publication includes new and expanded data collected as part of APRA’s recently introduced Superannuation Data Transformation reporting standards, including information about products and investment options available in the superannuation industry.

APRA consults on proposed enhancements to superannuation transfer planning

On 10 November 2022, APRA announced that it has released a discussion paper outlining proposals aimed at ensuring superannuation trustees prepare for, manage and execute successor fund transfers more smoothly and efficiently.

According to APRA, the discussion paper outlines the following proposed requirements:

1. requirements in APRA Prudential Standard SPS 515 Strategic Planning and Member Outcomes to ensure all registrable superannuation entity licensees are appropriately prepared to transfer – or receive – members, elevating what was previously guidance;
2. new requirements relating to the transfer of MySuper product assets, in the event of cancellation of an authority to offer a MySuper product; and
3. updated transfer planning guidance to replace existing APRA Prudential Practice Guide SPG 227 Successor Fund Transfers and Wind-ups.

Consultation closes on 10 March 2023.

Insurance

APRA releases findings from insurance risk management review

On 26 October, APRA announced that it has published the findings of its review into the robustness of the general insurance industry’s approach to insurance risk management. The findings are set out in a letter provided by APRA to general insurers.

According to APRA, the review followed the business interruption (BI) issues during the height of the COVID-19 pandemic where lockdowns and other restrictions triggered a spate of claims on BI policies. APRA required 10 insurers to conduct a self-assessment against the robustness of their risk frameworks in the context of BI and extend this assessment to other product lines that could also be vulnerable, including cyber risk.

According to APRA, its supervisory focus for the next period will concentrate on the effective completion of the remediation plans of participating insurers. APRA states that it also expects non-participating insurers to consider conducting their own self-assessments and adapt the learnings to their operations.

Financial product advice

Government announces delay to adviser registration requirement

On 7 November, the Assistant Treasurer and Minister for Financial Services, Stephen Jones, announced that the Government will delay the financial adviser registration requirement until 1 July 2023. The requirement to register was introduced by the Financial Sector Reform (Hayne Royal Commission Response-Better Advice) Act 2021 (Cth).

ASIC states that it will publish guidance in advance of the ASIC Connect portal opening for registration, and that it will be accompanied by webinars to assist industry to comply with the new registration requirement.

Financial markets

Securities markets rules waivers for NSXA and SSX markets extended

On 14 November, the ASIC Market Integrity Rules (Securities Markets) NSXA and SSX Markets (Operators and Participants) Class Waiver 2022/881 was registered.

According to the Explanatory Statement, the purpose of the instrument is to remake and consolidate existing waivers in relation to markets operated by the National Stock Exchange of Australia Limited and the Sydney Stock Exchange Limited, and to extend the relief granted under the waivers to 16 November 2024. The Explanatory Statement explains that the extension is granted in order to allow ASIC further time to review, consult and consider amendments to the ASIC Market Integrity Rules (Securities Market) 2017 so that they operate as intended in smaller securities markets.

ASX issues reporting-related reminders and provides update on ASX rules consultation

On 3 November, the ASX issued Compliance Update no. 09/22. In the update, the ASX:

1. informed listed entities of the availability of the 2023 reporting calendar, and reminded entities of automatic suspension rules for failure to lodge periodic reports in time;
2. issued reminders about related party transactions and funding disclosures in Appendix 4C and Appendix 5C lodgements;
3. informed listed entities on the process of the ASX’s consultation on proposed enhancements to the ASX Listing Rules commenced on 5 April (for more information, refer to our earlier Issue 66); and
4. reminded listed entities that the Market Announcements Platform should be used appropriately.

ASIC welcomes industry consultation on market resilience

On 31 October, the ASX published the ASX Public Consultation ASX Market Management Consultation 2: Potential Enhancements (Consultation Paper). According to the ASX, the Consultation Paper is the second in a sequence of three consultations the ASX will undertake as part of its implementation of ASIC’s expectations from ASIC Report 708 ASIC’s expectations for industry in responding to a market outage. For more information about the first consultation on market management, see our earlier Issue 69.

On that day, ASIC announced that it welcomes the ASX’s consultation on improving market resilience.

According to the ASX, it is seeking stakeholder feedback across the following four proposals:

1. a new order download service;
2. a new trade download service;
3. a ‘cancel only’ session state; and
4. an intraday restart capability.

Consultation closes on 9 December.

RBA releases 2022 annual report

On 27 October, the Reserve Bank of Australia (RBA) published its Annual Report 2022. The annual report explains the role of the RBA, the performance of the RBA against its key objectives as set out in the 2021/22 corporate plan, the management of the RBA and various other matters.

Anti-money laundering

AUSTRAC releases new financial crime guide about trade-based money laundering

On 28 October, AUSTRAC announced that it has released a new financial crime guide developed to assist government agencies and financial service providers to understand and identify trade-based money laundering and, where appropriate, report suspicious financial activity. The financial crime guide, Preventing trade-based money laundering in Australia, is available on AUSTRAC’s website.

FATF consults in relation to Recommendation 24 on beneficial ownership

On 25 October, the Financial Action Task Force (FATF) announced that it:

1. adopted amendments to Recommendation 24 and commenced consultation on the updated Guidance paper to Recommendation 24 on the transparency and beneficial ownership of legal persons; and
2. is conducting a review of Recommendation 25 and its Interpretive Note on the transparency and beneficial ownership of legal arrangements. The review arises out of a white paper consultation conducted by FATF in June 2022 (for more information, see our earlier Issue 69). Consultation

Both consultations end on 6 December.

Banking

APRA publishes risk culture survey of the banking industry

On 10 November, APRA published the results of its inaugural risk culture survey of the banking industry. According to APRA:

1. the survey was undertaken by employees of 18 authorised deposit-taking institutions (ADIs) between October and December 2021, who were asked to share their views on their organisation’s risk management practices; and
2. the survey results highlight the work undertaken by ADIs to improve the communication and escalation of risk issues, as well as establishing and monitoring of desired risk cultures, however there still remains instances of lack of clarity regarding risk management roles and accountabilities, as well as instances of ineffective risk management frameworks and practices.

APRA releases minor amendments to capital framework for ADIs

On 31 October, APRA announced that it has released final prudential standards and guidance with consequential amendments from the updated capital adequacy and credit risk capital requirements for ADIs. According to APRA, the consequential amendments relate mainly to cross-referencing in the ADI prudential framework and ensuring consistency of APRA’s broader prudential framework with the capital reforms.

In a letter released to industry, APRA states that the changes will take effect from 1 January 2023, in line with the effective date of the broader capital reforms. Additional material, including marked-up versions of the updated prudential standards, prudential practice guides and reporting standards is available on APRA’s website.

APRA states that the package follows the publication in November 2021 of APRA’s new bank capital framework. For more information, see our earlier Issue 61.

Other financial services regulation

New cost supervisory levy instruments

On 9 November, the following levy instruments were registered:

1. ASIC (Supervisory Cost Recovery Levy-Annual Determination) Instrument 2022/890 (Instrument 2022/890); and
2. ASIC (Supervisory Cost Recovery Levy-Regulatory Costs) Instrument 2022/889 (Instrument 2022/889).

According to:

1. the Explanatory Statement to Instrument 2022/890, the purpose of the instrument is to specify certain matters that are used in the formulae specified in the ASIC Supervisory Cost Recovery Levy Regulations 2017; and
2. the Explanatory Statement to Instrument 2022/889, the purpose of the instrument is to determine ASIC’s regulatory costs and their attribution to each industry sub-sector for the 2021-22 financial year so as to facilitate the collection of industry levies to recover those regulatory costs.

Relief for voluntary transfers of estate assets and liabilities for licensed trustee companies remade

On 8 November, the Corporations (Transfers of Estate Assets and Liabilities-Ministerial Consent) Determination 2022 was registered.

According to the Explanatory Statement:

1. the purpose of the instrument is to remove the requirement for the Minister’s consent to the transfer of estate assets and liabilities under section 601WBA(2)(a) of the Corporations Act, where the transfers are voluntary transfers of estate assets and liabilities between companies under subsection 601WBD(1) of the Corporations Act; and
2. the instrument remakes Ministerial Determination Trustee Company Transfer of Estate Assets and Liabilities Ch 5D Corporations Act 2001, which ceased on 1 October under the sunsetting process.

Quality of Advice Review releases proposals to reform conflicted remuneration

On 1 November, Treasury released the findings of its review of conflicted remuneration in the insurance, advice and banking sectors. In summary:

1. there are no recommendations to impose any new limits or restrictions on the amounts of commissions that can be paid for insurance – the existing regimes for general and life insurance will continue to apply. The main proposal for change is that general and life insurance products sold under a personal advice model to retail clients will require the client to provide an informed consent in writing in order for the adviser, broker or other intermediary to receive a commission or other benefit.
2. the existing exemption for benefits given by the client for financial product advice is recommended to be modified by expressly stating that the exemption also applies where the client directs a product issuer to pay a fee for financial product advice from the client’s financial product to the AFS licensee or its representative.
3. the current exemption to the ban on conflicted remuneration for benefits given for the issue or sale of a financial product (other than a life risk insurance product) where advice about that product (or class of products) has not been given to the retail client by the AFS licensee or a representative in the 12 months before the benefit is given should be removed.
4. the current exemptions for monetary and non-monetary benefits given to an agent or employee of an Australian ADI if access to the benefit is – in whole, or in part – dependent on the agent or employee recommending a basic banking product, a general insurance product or a consumer credit product should be removed. The removal of these exemptions would not prevent bank employees from being provided with performance-related benefits and incentives under a balanced scorecard approach that includes a broad range of criteria and which do not influence financial product advice provided to a retail client.
5. the existing ban on conflicted remuneration for time-share schemes is recommended to continue but with a commitment to review this position.

Treasury publishes recommendation on amendment to ‘Open Banking’ CDR instrument

On 1 November, the Treasury published a sectoral assessment report setting out Treasury’s final recommendation on an amendment to the definition of ‘product’ in the ‘Open Banking’ designation instrument, following consultation undertaken from August to September. For more information on the consultation, see our earlier Issue 71.

In the sectoral assessment, Treasury recommended the Consumer Data Right (CDR) designation instrument be amended to include the proposed new definition of ‘product’.

APRA releases expectations on calling of capital instruments for banks and insurers

On 1 November, APRA announced that it has released a letter to ADIs, general insurers and life insurers to reinforce the existing prudential requirements for additional Tier 1 capital or Tier 2 capital instruments. The letter sets out APRA’s expectations for ADIs and insurers that are seeking APRA’s approval to call and replace an outstanding Additional Tier 1 Capital or Tier 2 Capital instrument with one that has a higher credit spread or that is otherwise more expensive.

Treasury releases Annual Report 2021-22

On 27 October, the Treasury released its Annual Report 2021‑22, outlining performance against outcomes, program and performance information contained in the Portfolio Budget Statements 2021‑22, Portfolio Additional Estimates Statements 2021‑22 and the Treasury Corporate Plan 2021‑22.

 

Tax

Treasury publishes report on venture capital tax concessions programs

On 27 October, the Treasury published the ‘Venture Capital Tax Concessions Review – Final report’. The programs in scope for the review included:

1. venture capital limited partnerships;
2. early stage venture capital limited partnerships;
3. Australian venture capital fund of funds; and
4. investments made directly by foreign residents registered under Part 3 of the Venture Capital Act 2002 (Cth).

In brief, according to the review, the programs have likely contributed to enhancing the development of skills and experience of venture capital fund managers and encouraged early stage investments. The report is available on Treasury’s website.