Australian regulators weekly wrap — Monday, 26 July 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Business interruption (APRA): the prudential regulator will require a number of general insurers to review the soundness of their risk management frameworks in light of recent issues with business interruption insurance by 30 November 2021. APRA has stated that lockdowns and other restrictions associated with COVID-19 have triggered a spate of potential BI claims, with many insurers exposed through policy wordings that had not kept up-to-date with changing legislation. The resultant legal uncertainty, and significant financial exposure for insurers, has raised concerns about the strength of insurers’ risk management frameworks in the prudential regulator’s eyes. APRA has published the letter (my top read for the week) and guidance material that supports the self-assessment exercise, and has urged non-participating insurers to consider whether a similar self-assessment would enhance their own risk management practices. For those insurers undertaking their FAR implementation, there will be considerable overlap here.
  2. External administration (ASIC): ASIC has updated Information Sheet 29 External administration — controller appointments and schemes of arrangements — most commonly lodged forms (INFO 29) to help external administrators, controllers and scheme administrators comply with their lodgement and publication requirements following the introduction of three new types of external administration since 1 January 2021. These are great resources — I really like the ALRC’s flow-charts on the disclosure and licensing regime, and now ASIC’s output here. The following three new flowcharts have been included in INFO 29 for ease of reference: Flowchart 2A — Liquidator in a creditors’ voluntary winding up (simplified liquidation process); Flowchart 14 — Restructuring practitioner of a company; and, Flowchart 15 — Restructuring practitioner of a restructuring plan for a company.
  3. Internal dispute resolution (ASIC): on 30 July 2020 new IDR standards and requirements were published in Regulatory Guide 271 Internal dispute resolution, which commence on 5 October 2021. The new guidance is much more prescriptive than Regulatory Guide 165 Licensing: Internal and external dispute resolution, which continues to apply to all complaints received before 5 October 2021. ASIC has now released internal dispute resolution reporting documents, which will be tested in a pilot involving financial firms from across relevant industry subsectors in late 2021. The reporting documents include a data dictionary and data glossary. The data dictionary sets out the information that financial firms will be required to collect and report to ASIC, while the data glossary provides explanations about the key terms in the data dictionary. ASIC has said that financial services firms should now consider how to map their own complaints systems to the data dictionary. Given the commencement of DDO, breach reporting & anti-hawking also in October 2021, that is good advice…
  4. Reference checking (ASIC): ASIC has made the ASIC reference checking and information sharing protocol that will give effect to the Financial Services Royal Commission’s recommendations to improve reference checking in the financial advice and mortgage broking industries. The ASIC Protocol sets out obligations for licensees to undertake a reference check and share information on an individual seeking to be employed or authorised as a financial adviser or mortgage broker. Helpfully, ASIC has also released Information Sheet 257 ASIC reference checking and information sharing protocol (INFO 257) which is a much quicker read!
  5. Anti-hawking (ASIC): quite a busy week for the corporate regulator — ASIC is also consulting on proposed updates to its guidance on the prohibition on the hawking of financial products. ASIC’s updated regulatory guide reflects the reforms to the anti-hawking regime under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, which is due to commence on 5 October 2021. These reforms consolidate the three existing hawking prohibitions, take a technology neutral approach, and incorporates for the first time a definition of ‘unsolicited contact’ — consumer consent given by a consumer must be ‘positive, voluntary and clear’. Stakeholders have until 17 August to provide feedback on CP 346, which is quite complicated in its application.

Thought for the future: in the UK debt packager firms advise consumers on how to deal with their debts, often referring them to an Insolvency Practitioner or debt management firm, for which they receive referral fees. They have been regulated for some time, and following an FCA review of the practices of debt packager firms, 5 firms have stopped providing regulated debt advice until further notice and the FCA has used formal powers to stop another firm from providing regulated advice. Debt management firms are now, as of 30 June 2021, regulated by ASIC. Expect to see ASIC apply its focus to weeding out those doing the wrong thing in the near future (which will only be a good thing for the industry and consumers alike).

Australian regulators weekly wrap — Monday, 19 July 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Financial accountability regime (Treasury): recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 of the Financial Services Royal Commission recommended the extension of the Banking Executive Accountability Regime to all APRA-regulated entities, with joint administration from APRA and ASIC. The Government has released for consultation the Financial Accountability Regime (FAR) draft Bill. The Government has also released an information paper on joint administration, a policy paper on prescribed responsibilities and positions, and a Questions and Answers document for consultation. You can read more on the original FAR proposal, which places personal liability on executives for failures within their remits, here. I have spent the weekend going through the changes since the consultation paper released in January 2020. I am in the middle of writing a more detailed update, however, some of the key changes to me are: removal of fines for individuals; a detailed framework on how the regulators will co-operate e.g. they can’t disqualify an AP unless both agree; segregated liability for accountable persons for the product role i.e. along specific products lines-it is still joint and several otherwise; detailed procedural safeguards which favour the regulators from an enforcement perspective — there is even a novel section which is targeted at fining lawyers in certain circumstances! We i.e. Gadens will be preparing a response to the consultation by the cut-off date of 13 July 2021. Of course, we would welcome any views you have and we can incorporate the same in our response if you want anonymously.
  2. Compensation scheme of last resort (Treasury): recommendation 7.1 of the Royal Commission recommended that the three principal recommendations to establish a Compensation Scheme of Last Resort made by the Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework should be carried into effect. The Government has released for public consultation exposure draft legislation that would establish the Compensation Scheme of Last Resort. The draft legislation contains the key features of the scheme, which essentially facilitates the payment of limited compensation to eligible consumers who have received a determination for compensation from AFCA which remains unpaid. The key features of the proposed regime include the ability to authorise an operator of the scheme, eligibility requirements, compensation available for each eligible AFCA determination, the levying framework to fund the scheme, and the governance of the scheme. Responses are also due by 13 July 2021.
  3. Grandfathered commission (ASIC): on 21 February 2019, ASIC received a direction under section 14 of the Australian Securities and Investments Commission Act 2001 to investigate industry’s transition away from grandfathered conflicted remuneration arrangements. Conflicted remuneration is a benefit given to an AFS licensee, or a representative of a licensee, who provides financial product advice to clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the choice of financial product recommended to clients by the licensee or its representative, or the financial product advice given to clients by the licensee or its representative. Grandfathered conflicted remuneration (GCR) is any benefit to which the conflicted or other banned remuneration provisions did not apply because of certain transitional provisions in the Corporations Act and Corporations Regulations 2001. ASIC’s report ‘Ending Grandfathered Conflicted Remuneration’ has been released and sets out ASIC’s findings as to the steps taken by industry participants from 1 July 2019 to 31 December 2020 to end the payment of grandfathered conflicted remuneration ahead of the legal requirement to end these arrangements, and refund previously grandfathered benefits on to product holders. ASIC found that nearly all product issuers ended GCR arrangements before 1 January 2021. 8 product issuers plan to rebate product holders an amount equal in value to the amount of GCR the issuer would have otherwise paid.
  4. Zero interest rates (APRA): the Australian Prudential Regulation Authority has released for consultation a letter to authorised deposit-taking institutions on its draft expectations regarding ADIs’ preparedness for the possibility of zero and negative interest rates. APRA considers the risks arising from an ADI’s lack of preparedness for zero and negative interest rates to be material since this could have significant implications for an ADI’s risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems among other areas. APRA has said it expects ADIs to take reasonable steps to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative. APRA expects ADIs to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022. While the RBA has said that zero of negative interest rates are unlikely, possible that other interest rates determined in the financial markets could fall to zero or below zero at any time. APRA clearly wants banks to be prepared…
  5. COVID-19 & bank stability (FSB): The Financial Stability Board (FSB) today published its Interim Report on the Lessons Learnt from the COVID-19 Pandemic from a Financial Stability Perspective. The report identifies preliminary lessons for financial stability and aspects of the functioning of the G20 financial reforms that may warrant attention at the international level. The report stresses the need to strengthen resilience in non-bank financial intermediation. It further records that the pandemic has also highlighted the importance of effective operational risk management arrangements, the need to enhance further crisis management preparedness, and the importance of promoting financial resilience amidst rapid technological change more generally. It is more bullish on capital and liquidity, which it says ‘may’ warrant further consideration.

Thought for the future: less than a month to comment on the FAR regime is longer then we were given for BEAR, and we have had a consultation paper since January 2020. The timing seems about right to me, and I hope the consultations timeframes for major pieces of work like this do not shrink again.

Australian regulators weekly wrap — Monday, 12 July 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Banking Code of Practice (ABA): the Australian Banking Association has announced it has commissioned an independent review of the Banking Code of Practice. The Code is independently reviewed every three years. The 2021 independent review is being undertaken by Mike Callaghan AM PSM, and is being undertaken in consultation with consumer representatives, small business organisations and other stakeholders. The Terms of Reference outline the scope of the review e.g. it will consider the Banking Code Compliance Committee, and whether there is a need to adjust its duties and powers, including whether sanctions available are appropriate i.e. like exists in the insurance sector. A Consultation Note outlining some of the issues that will be covered in the review has been published, and the review will report by end November 2021.
  2. Complaints statistics (AFCA): Australians lodged more than 70,000 complaints with the AFCA in the past 12 months, leading to more than $240 million in compensation and refunds. Nearly 70 per cent of cases were resolved by agreement after AFCA brought the parties together (mainly, I suspect, because the FS firm wanted to avoid going to hearing), and that nearly 60 per cent of cases were resolved within 60 days. AFCA’s investigations into a range of systemic issues resulted in remediation payments to consumers totalling nearly $32 million in the past financial year. (The total serious contraventions and other breaches referred to regulators such as ASIC since 1 July 2020 were 36.) The consumer-centric language still (annoyingly to me for a body which is supposed to be impartial) exists in the update, but these statistics are well-worth consideration. My top read for the week, you can access them here.
  3. Litigation funding (ASIC): ASIC has released Consultation Paper 345 Litigation funding schemes: Guidance and relief (CP 345) to seek feedback on proposed guidance and relief for litigation funding schemes. It follows changes made in 22 August 2020, which required operators of litigation funding schemes to hold an AFS licence, and litigation funding schemes to be generally be subject to the managed investment scheme regime under the Corporations Act 2001 (Cth).The main ideas which I picked up from the consultation paper were that ASIC is proposing to grant relief from the equal treatment duty in relation to distributions of a settlement or judgment sum obtained in connection with a litigation funding scheme, and extend relief from the dollar disclosure provisions in relation to certain commercially sensitive information. Both are sensible changes.
  4. Alex (APRA): APRA has granted Alex Bank Pty Ltd a licence to operate as a restricted authorised deposit-taking institution and Alex Corporation Limited as a non-operating holding company, under the Banking Act 1959 (Cth). It is a rare and happy development for the banking sector, concentrated as it is — you can see just how concentrated by clicking here.
  5. ‘Greenwashing’ (ASIC): ASIC Commissioner Cathie Armour has warned of increasing ‘greenwashing’, which is where investment opportunities are presented as more socially friendly than they actually are. She stated that: ‘There is growing global unease about the risks of greenwashing of financial products — partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area. This issue has been recognised by international regulators as well as the International Organization of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns. ASIC is participating in this task force.’ Ms Armour warned of the potential for misleading and deceptive conduct, clearly signaling ASIC’s focus on this area, and noted that the potential to mislead can arise as a result of the product issuer being unclear on what standards they use to assess the product as environmentally or socially responsible; or, overstating green credentials that are not sufficiently reflected in their operations.

Thought for the future: 4 months until October 2021, when both the DDO and new breach reporting frameworks will commence. If you are an AFSL holder and haven’t commenced your preparations in earnest, now is the time!

Australian regulators weekly wrap — Monday, 5 July 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Securitisation trusts (Accounting): securitisation trusts that undertake to prepare financial reports in accordance with AASBs will have to prepare general purpose financial statements from 1 July. AASB 2020–1 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities removed the ability for many entities to prepare special purpose finance statements — they must now prepare the more onerous general purpose financial statements.
  2. Opening banking (Treasury): Treasury has released exposure draft amendments to the Consumer Data Right rules and explanatory materials for consultation (version 3 of the rules). Designed to increase the take-up, they: introduce a sponsored tier of accreditation and a CDR representative model; allow consumers to share their data with trusted professional advisers; allow participants to share CDR insights with consumer consent for specific purposes; and create a single consent data sharing model for joint accounts. The consultation ends on 30 July 2021.
  3. Money laundering risk (AUSTRAC): a money laundering and terrorism financing) risk assessment released by AUSTRAC shows a medium level of risk to Australia’s non-bank lending and financing sector. AUSTRAC analysed transactional and suspicious matter reporting by the sector between 1 February 2018 and 31 January 2019. The main threat facing the sector is fraud, particularly loan application fraud, identity fraud and welfare fraud. Non-bank lenders and financiers are also a target for money laundering, relating predominantly to unexpected early loan payouts. My top read for the week, you can access the report here.
  4. Market integrity rules (ASIC): the corporate regulator has released the Proposed amendments to the ASIC market integrity rules and other ASIC-made rules (CP 342). ASIC’s proposals include amendments to the Securities Market Integrity Rules covering accredited derivatives advisers, trades with price improvement, trade confirmations for non-retail clients and regulatory data reporting; amendments to the Futures Market Integrity Rules covering prohibited employment, suspicious activity reporting and client authorisations; amendments to ASIC-made rules generally, covering merits review, waivers and penalty amounts for breaches of the rules. A dense consultation, but with some good ideas that will hopefully reduce the regulatory burden on market participants.
  5. Source of funds (AUSTRAC): KYC procedures, including where appropriate, taking reasonable measures to identify the source of a customer’s wealth and the source of a customer’s funds are an important part of AML/CTF programs. AUSTRAC has released source of wealth and source of funds considerations, including: what is a customer’s source of wealth and source of funds?; why is it important to know a customer’s source of funds and source of wealth?; when would source of funds and source of wealth enquiries be appropriate?; what are reasonable measures?; I have undertaken source of funds and source of wealth enquires, now what? You can read the guidance here.

Thought for the future: I have been catching up on my case rereading (it often takes more than one attempt for me), and this weekend it is Westpac Securities Administration Ltd & Anor v Australian Securities and Investments Commission [2021] HCA 3. It massively broadened the scope of ‘personal advice’ under Chapter 7, including by stating that where there is a pre-existing relationship, a reasonable person may expect the licensee would have taken into account the the consumer’s objectives, financial situation and needs when communicating with the client i.e. providing ‘personal advice’. Many distributors have longstanding relationships with clients, so if they are operating under ‘general advice’ models (as many white labelling firms do) then they are going to need to put measures in place to protect themselves. If they do not, they run the risk of increased liability as provide personal advice comes with far more stringent regulatory requirements. This is especially so when design & distribution comes into play in October 2021, as it requires suitable products only to be given to clients…

Australian regulators weekly wrap — Monday, 28 June 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. RegTech adoption (HKMA): the Hong Kong Monetary Authority (HKMA)has launched a new Regtech Adoption Practice Guide series to provide banks with detailed practical guidance on the implementation of Regtech solutions. The publication of the Regtech Adoption Practice Guide series forms part of the HKMA’s two-year Regtech promotion roadmap announced in November 2020. The inaugural issue provides guidance on “Cloud-based Regtech solutions”. With ever increasing regulatory demands, and regulators investing heavily in technology themselves, seriously considering RegTech solutions (such as Gadens breach manager here) to keep up with demands is a must for banks in my view — my top read for the week, I think the HKMA’s efforts are commendable here!
  2. Financial reports (ASIC): ASIC reviewed the financial reports of 85 listed entities for the year ended 31 December 2020. The review was conducted as part of ASIC’s ongoing risk-based reviews of financial reports, and identified some entities with businesses adversely affected by the pandemic that did not appear to give sufficient attention to the reporting of asset values and financial position. Earlier in the year, ASIC made public announcements about LawFinance Limited and Ainsworth Game Technology Limited who later made negative adjustments profit of $53.5 million and $32.4 million respectively. ASIC stated that: “Our findings emphasise that directors and auditors need to focus on impairment of non-financial assets, particularly as businesses navigate through the continuing impacts of the COVID-19 pandemic.”
  3. ASIC (Parliamentary Committee): ASIC’s new Chair, Joe Longo, has addressed the Parliamentary Joint Committee on Corporations and Financial Services for the first time last week. Perhaps the most interesting point that I extracted, though unsurprising in nature given recent criticisms, is that Mr. Longo is considering ASIC’s operating model and organisational structure in its key internal operations and processes, including corporate services, information technology, finance, people and development, and compliance. When you take a look at ASIC’s organisational structure here, with the strange historical overlap between Commissioners and function heads, that focus can only be a good thing…
  4. Financial Regulator Assessment Authority (Treasury): the Financial Regulator Assessment Authority Bill 2021 has been passed by Parliament, which establishes a new independent body, the Financial Regulator Assessment Authority (FRAA), to regularly review and report on the effectiveness and capability of ASIC and APRA. The FRAA will consist of three independent statutory appointees, and its biennial reports on the regulators’ effectiveness and capability will be tabled in the Parliament.
  5. Financial advisers (Parliament): the Financial Regulator Assessment Authority Bill 2021(Cth) has been introduced. This legislation tackles some of the disciplinary issues that Commissioner Hayne identified with financial advisers, including by: expanding the role of the Financial Services and Credit Panel within ASIC to operate as the single disciplinary body for financial advisers to ensure that less serious misconduct does not go unaddressed; creating new penalties and sanctions for financial advisers who have breached their obligations under the Corporations Act 2001 (Cth); introducing a new registration system for financial advisers to improve the accountability and transparency of the financial services sector; and, transferring functions from FASEA to the Minister responsible for administering the Corporations Act and to ASIC to streamline the regulation of financial advisers. It also introduces a single registration and disciplinary system under the Corporations Act 2001 (Cth) for financial advisers who provide tax (financial) advice services.

Thought for the future: research published by the UK FCA estimates that about 2.3 million UK adults now hold cryptoassets (up from 1.9 million last year). Clearly the demand for cryptoassets is not going anywhere; now for the regulation to catch up. While ASIC made good headway early on in giving guidance on cryptoassets and when they will fall within its remit, its position in 2018’s Information Sheet 225 is greyer than the UK’s FCA current guidance, which has set out a clear “regulatory perimeter” to clarify when crypto assets will fall within its regulatory remit. Time for a refresh!

Australian regulators weekly wrap — Monday, 21 June 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. AML / CTF (Treasury): amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and Anti-Money Laundering and Counter-Terrorism Financing Rules 2006 (Cth) (AML/CTF Rules) came into effect on 18 June 2021, changing the previous due diligence obligations and introducing new obligations for reporting entities. The key amendments to the AML/CTF Act are: reformed Customer Identification Procedures (subject to a small number of exceptions, the previous regime did not allow reporting entities to rely on CIP undertaken by other entities. They now can where there is a valid written agreement between reporting entity and the party undertaking CIP, or where there are reasonable grounds to rely on the other party’s CIP); additional correspondent banking prohibitions; new exceptions to tipping off offences; and, increased pecuniary penalties for cross-border movement of ‘monetary instruments.’ Reporting entities should revisit their AML /CTF programs and systems to see if efficiencies can be extracted from the new amendments. Detailed guidance is available on AUSTRAC’s website here.
  2. Financial reports (ASIC): ASIC has highlighted key focus areas for financial reporting by companies for reporting periods ending 30 June 2021 under COVID-19 conditions. ASIC expects directors, preparers of financial reports and auditors to pay attention to: asset values; provisions; solvency and going concern assessments; events occurring after year end and before completing the financial report; disclosures in the financial report and Operating and Financial Review. I, for one, really appreciate how ASIC does this each year i.e. proactive nudging of the industry to pay attention to what it sees as problem areas, rather than waiting for them to occur and relying on enforcement action(s) alone.
  3. Modern Slavery (NSW): the NSW Special Minister of State gave a motion of his intention to introduce Modern Slavery Amendment Bill 2021; the latest in the tortured history of NSW seeking to introduce its version of the Federal legislation already in place. The bill is currently not available, though all eyes will be on the threshold for reporting i.e. will it be lower than the $100M federal threshold as past iterations of the bill have been?
  4. Foreign Service Providers (ASIC): ASIC has extended to 31 March 2023 transitional relief for foreign financial services providers (FFSPs) from the requirement to hold an Australian financial services licence, pending the outcome of the Australian Government’s consultation about the regulation of FFSPs announced as part of the Federal Budget released on 11 May 2021, the Government announced that it will consult on options to restore regulatory relief for FFSPs who are licensed and regulated in jurisdictions with comparable financial service rules and obligations, or have limited connection to Australia, from holding an AFS licence, and create a fast-track licensing process for FFSPs who wish to establish more permanent operations in Australia.
  5. AUSTRAC make-over (AUSTRAC): the AML / CTF regulator is undertaking a systems transformation program over the next four years to transform the way reporting entities interact and report to AUSTRAC. The system transformation program will replace ‘AUSTRAC Online’. The new system is aiming to be modern and user-friendly, with improved reporting capability and self-service options to help reporting entities meet their regulatory obligations e.g. SMR reporting. Hopefully it has an API functionality, unlikely ASIC’s breach reporting system, to enable entities to summit SMRs and other prescribed transactions to AUSTRAC easily.

Thought for the week: catching up on my reading this weekend, in the recent robo debt class action (Prygodicz v Commonwealth of Australia (No 2) [2021] FCA 634), I noted that former head of Slater & Gordon’s plaintiff class actions practice Murphy J had this to say in his judgment “Finally, for those perpetual critics of the Part IVA class action regime, the present case is one more example where the regime has provided real, practical access to justice. It has enabled approximately 394,000 people, many of whom are marginalised or vulnerable, to recover compensation from the Commonwealth in relation to conduct which it belatedly admitted was unlawful. The proposed settlement demonstrates, once again, that, when properly managed, our class action system works.” Irrespective of your position on class actions, which involve complex macro considerations, this policy-type position statement from a sitting judge sits uncomfortably with me and I would hope we see less of it, lest we eventually become inured to accept statements such as this one from Alito J over in the US Supreme Court where the Obamacare law was just upheld “Today’s decision is the third installment in our epic Affordable Care Act trilogy, and it follows the same pattern as installments one and two. In all three episodes, with the Affordable Care Act facing a serious threat, the Court has pulled off an improbable rescue.”

Australian regulators weekly wrap — Monday, 14 June 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. LIBOR (APRA, ASIC and RBA): ASIC, APRA and the RBA have followed the Financial Stability Board’s lead, and released statements confirming their requirement that the use of LIBOR in new contracts should cease as soon as practicable, and no later than the end of 2021. The Financial Stability Board’s made an announcement to this effect on 2 June 2021. There is some great resources in the FSB’s webpage, including a useful global transition roadmap, which is my top read for the week. They will be helpful in moving away from the benchmark as, in the words of our Australian regulators, “[c]ontinued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system. Firms themselves may also face financial, conduct, litigation, and operational risks associated with inadequate preparation”(Emphasis added)
  2. Anti-money laundering (AUSTRAC): NAB and casino operators Crown, SkyCity and Star Entertainment Group told investors they had been referred to AUSTRAC’s enforcement team following the identification of potential “serious non-compliance” with anti-money laundering and counter-terrorism financing laws. In particular, AUSTRAC told the NAB “there is potential serious and ongoing non-compliance” regarding customer identification procedures, ongoing customer due diligence and compliance with Part A of a joint AML/CTF Program. The bank is not facing civil penalty proceedings, which is in part reflective of the huge effort it has expended in upgrading its AML / CTF framework over the past 3 years; following on the heels of AUSTRAC’s enforcement outcomes regarding Tabcorp, CBA and Westpac, this latest development reinforces the once hibernating AML regulator is now fully awake. (Which is something we are seeking to mitigate the risk for our clients with our new Regtech we have spent a long time developing, the Gadens’ breach manager. See here.)
  3. Class actions (Treasury): on 21 December 2020, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) handed down its report, Litigation funding and the regulation of the class action industry. Recommendation 20 of the report was that the Australian Government consult on: the best way to guarantee a statutory minimum return of the gross proceeds of a class action (including settlements); whether a minimum gross return of 70 per cent to class members, as endorsed by some class action law firms and litigation funders, is the most appropriate floor; whether a graduated approach taking into consideration the risk, complexity, length and likely proceeds of the case is appropriate to ensure even higher returns are guaranteed for class members in more straightforward cases. The PJC found ‘systemic and inappropriate’ skewing of successful class action proceeds in favour of litigation funders, at the expense of class members’ share of the proceeds. The PJC noted litigation funders should be reimbursed for the costs they incur and make a profit which is reasonable and proportionate to the risk they undertake. However, it found that the proportion of proceeds going to litigation funders is often disproportionate to the cost and risk undertaken. The PJC noted that this created an unfairness that is primarily borne by the class members, as their share of the settlement is ‘significantly reduced by the excessive proportion going to litigation funders’. In particular, the PJC highlighted that the practice of percentage-based billing enables windfall profits to be obtained by funders. It noted that percentage based billing can significantly reduce class members’ share of settlement proceeds and is often disproportionate to the actual financial contribution outlaid by the litigation funder. The Federal Court has also acknowledged concerns with the unreasonably low proportion of judgment or settlement sums being received by class members, once litigation funding commissions and legal costs are deducted. The Treasury has now released a consultation paper, which will close on 28 June 2021. Personally, from my experience with class actions, I am very much in favour of statutory minimum returns.
  4. Scams (ACCC): Australians lost over $851 million to scams in 2020, a record amount, as scammers took advantage of the pandemic to con unsuspecting people, according to the ACCC’s latest Targeting Scams report. The report compiles data from Scamwatch, ReportCyber, other government agencies and 10 banks and financial intermediaries, and is based on more than 444,000 reports. Investment scams accounted for the biggest losses, with $328 million, and made up more than a third of total losses. Romance scams were the next biggest category, costing Australians $131 million, while payment redirection scams resulted in $128 million of losses. $143 million was the Amount reported lost to Scamwatch (a 34% increase from $107 million in 2018), and $7,224 is the average loss from scam amounts.
  5. Hayne Royal Commission (Treasury): with the final report handed down in early 2019, and the Government committed to all recommendations, it is timely to revisit where each is at. To that end, please see the handy infographic below — COVID-19 has delayed some of the reforms e.g. FAR, but they are still working their way through the system and will make for a very busy second half to the year!
Royal Commission Reforms — Status as at 2021

Thought for the future: the UK FCA issued warnings on two companies acting as ‘clone firms’ of licensed financial businesses. UBS Capital Wealth and ICO Crypto are on the regulator’s watch, as fraudsters are using UBS AG and Swiss Re Capital Markets Limited details, respectively, to try to convince people that they are a legitimate company. Something to keep an eye out for in Australia, as we battle our own rise in unscrupulous scammers capitalising on the disruption caused by COVID-19…

Australian regulators weekly wrap — Monday, 7 June 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. ‘Cuckoo smurfing’ (AUSTRAC): AUSTRAC has released a new financial crime guide to warn businesses and their customers about the dangers of a money laundering method known as ‘cuckoo smurfing’. It is used by criminals to move funds across borders and make money generated by their illegal activities appear to have come from a legitimate source. Cuckoo smurfing is facilitated by professional money laundering syndicates who work with a corrupt remitter based overseas. The corrupt remitter accepts an instruction from a customer to make a payment to an Australian-based beneficiary customer, and then hijacks the money transfer coming into Australia in order to place funds in the Australian-based beneficiary account which are sourced from criminal activity. You can read more in AUSTRAC’s excellent guidance here, which also contains helpful practical tips for spotting this type of behavior.
  2. Senate committee (ASIC / APRA): the Chairs of both ASIC and APRA have fronted the Senate Economics Legislation Committee. There was very little to ASIC’s opening statement, understandably as the Chair has just come into his role. APRA’s opening statement contained more detail, mainly around APRA’s focus on superannuation. In this regard, Mr Byres stated that APRA will continue to focus on driving superannuation trustees to improve outcomes for their members, through four key channels: enhanced data, greater transparency, a stronger prudential framework, and more intense supervision. Expect greater use of the Financial Accountability Regime (formerly BEAR) by APRA, when it comes into play for super trustees later in the year therefore. Those super trustees who have not started preparing for this regime, should now.
  3. Licensing / PDS (ALRC): the Australian Law Reform Commission (ALRC) undertook preliminary analysis of two key aspects of the legislative framework governing the regulation of financial services: 1) disclosure in relation to the issue or sale of securities and other financial products; and 2) licensing regimes in respect of financial services, credit and superannuation. Noting the complexity of the regimes, amusingly called ‘dark law to the innocent traveler’ by one ALRC lawyer, the ALRC as part of its quest to simplify the Corporations Act 2001 (Cth), has released some wonderful flowchart maps for the licensing regime and PDS / prospective regimes. My top read for the week, you can access them here.
  4. Auditing standards (FRC): the UK Financial Reporting Council has issued a revision of its UK auditing standard on the responsibilities of auditors relating to fraud — ISA (UK) 240 (Revised May 2021) — The Auditor’s responsibilities Relating to Fraud in an Audit of Financial Statements. The revisions to the standard are designed to provide increased clarity as to the auditor’s obligations, and provide that objectives of the auditor are: (a) to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud, including: (i) identifying and assessing the risks of material misstatement of the financial statements due to fraud; (ii) obtaining sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and (b) to respond appropriately to fraud or suspected fraud identified during the audit. Fraud is one of the hardest things to detect in audits, and you will frequently hear the refrain ‘We’re a watchdog, not a bloodhound!’ when speaking to auditors about how they conceptualize their role; in my view, this is a good step forward by the UK.
  5. Capital frameworks (APRA): the prudential has released a letter to banks on the implementation of the capital framework reforms, which will come into effect from 1 January 2023. APRA is now writing to ADIs to set out a clear timeline to finalise the consultation phase, and to support the banking industry’s implementation of the reforms. The ADI capital reforms are designed to embed the industry’s ‘unquestionably strong’ capital position, and improve the flexibility of the framework to respond during periods of stress. APRA expects ADIs to be fully compliant with the revised capital framework from 1 January 2023, including the determination and reporting of capital adequacy. The timeline can be accessed here.

Thought for the future: reading through the ALRC’s flowcharts, firstly, made me very impressed with their work, secondly, reinforced my view that Chapter 7 of the Corporations Act 2001 (Cth) needs to be simplified and its own piece of legislation. Doing so will assist financial institutions in terms of compliance culture, efficiency and reduced cost. It is an obvious step in the post COVID-19 world, searching for economic effectiveness.

Australian regulators weekly wrap — Monday, 31 May 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Regulatory performance (ASIC): the Regulator Performance Framework provides a set of six common KPIs for Australian Government regulators, and ASIC has just released its self-assessment of its performance against the KPIs in 2019–20. It felt it largely met its goals, for e.g. not unnecessarily impeding the efficient operation of regulated entities. What is interesting is the ancillary information ASIC provides to justify its position. Two areas stand out to me. First, enforcement. In 2019–20, there was: an 11% increase in the number of investigations; a 48% improvement in the time taken to file civil penalty proceedings; an increase in the total civil penalties imposed, from $12.7 million to $25 million; and, a 57% increase in the number of custodial sentences imposed (including those fully suspended). There was also a ‘greater focus on individual accountability in ASIC’s enforcement work in 2019–20, resulting in the number of individuals charged with non-summary criminal offences increasing by 35%, and the number of civil penalty claims against individuals increasing by 40%.’ Expect that trend to continue, especially when ASIC gets its hands on the Financial Accountability Regime later this year. Second, the analytics ASIC is increasingly using. ASIC has again emphasized that it is leveraging recent investments in its data capabilities to help it identify early warning signs of harm and misconduct and ensure its regulatory interventions are effectively designed and targeted, stating ‘Our work on whether fund managers’ investment products were ‘true to label’ (i.e. the product name aligned with the underlying assets) was based on data gathered from over 350 managed funds. We used a combination of tools, including risk-based surveillances (to identify products with inappropriate or confusing product labels), investigation, and intervention (sending letters of concern to regulated entities). We asked 37 funds to take corrective action to ensure their products are true to label’. More enforcement, and more tech in the undertaking of that enforcement are the key takeaways for me.
  2. Financial Regulatory Assessment Authority (Parliament): the second and third readings were agreed to on 26 May 2021 of the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021An important piece of legislation, first, it establishes the Financial Regulatory Assessment Authority and provides for its functions and powers. Those are to assess and report on the effectiveness and capability of APRA and ASIC. APRA and ASIC are required to cooperate with the Authority to enable the Authority to perform its functions and exercise its powers. This cooperation includes providing information and documents requested by the Authority. Second, the legislation sets out how members and staff members of the Authority are appointed or made available, and how the Authority makes decisions (including delegations). Third, to safeguard information that APRA and ASIC provide to the Authority, it prohibits the unauthorised use or disclosure of protected information provided to the Authority (contravention of the prohibition is a criminal offence). The creation of the body is in response to the findings of the Financial Services Royal Commission, which highlighted that while APRA and ASIC operate within complex accountability frameworks, the regulators’ effectiveness in delivering on their mandates is not subject to consistent and independent expert review over time.
  3. LIBOR (ASIC): Nathan Bourne, ASIC’s Senior Executive Leader, Markets Infrastructure, recently spoke about the London Inter-Bank Offered Rate (LIBOR) transition i.e. it being phased out by the end of this year. He stressed that firms need to make the transition away from LIBOR a focus, and that increased engagement from the buy-side firms and corporates — both on the identification of relevant alternative reference rates and operational readiness — will be key. Interestingly, he expressed ASIC’s position that from a ‘…conduct perspective, broad reliance on fallback language and legislative solutions does not prioritise positive client outcomes because it does not guarantee legal certainty. In addition, this reliance does not ensure firms and their counterparties are ready for the transition.’ In other words, relying on fallback reference rates in contractual drafting may not be enough to promote good customer outcomes — there is clearly an asymmetry of information here which could limit customers’ ability to negotiate terms.
  4. ME Bank (ASIC): ASIC has filed criminal charges against Members Equity Bank Limited in the Federal Court of Australia . These charges relate to alleged contraventions of sections 12DB(1)(g) and 12GB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (false or misleading representations) and sections 64(1) and 65(1) of the National Credit Code (Cth) (relating to notifications around interest rate changes), between 2 September 2016 and 3 September 2018. The charges relate to ME Bank allegedly failing to notify customers about interest rate changes attached to its home loans. According to media reports, a glitch occurred when transferring data onto ME Bank’s new core banking platform, which caused a mix of customers to be over-charged on interest-only and fixed interest mortgages. Criminal charges for misleading & deceptive conduct — which are strict liability offences — are very rare, so it is will be interesting to see where this case goes.
  5. AMP (ASIC): a busy week for the corporate regulator, ASIC has commenced civil penalty proceedings in the Federal Court against five companies that are, or were, part of the AMP Limited group, alleging that these entities were involved in charging life insurance premiums and advice fees to more than 2,000 customers despite being notified of their death. ASIC seeks declarations of contraventions of the ASIC Act and Corporations Act. ASIC is also seeking pecuniary penalties and other orders to be made by the Federal Court. The concise statement is here, and the main thing to focus on for me — these breaches are all old news, and have been remediated by AMP — is ASIC’s continued reliance on 912A of the Corporations Act 2001 (Cth) i.e. ‘efficiently, honestly and fairly’ as it is a now a civil penalty provision.

Thought for the future: ASIC is no delayer when it comes to technology. Its report in January 2021 covered the voice analytics / technology-assisted-review ASIC is deploying to sift through huge amounts of data, and this week’s scorecard covers some of the tools it has out there in the ether to pick up potential misleading and deceptive conduct. Having recently assisted a client who has been on the other side of one of these notices, I was rather impressed. Aside from being aware of this general trend, my continued sense is that technology needs to meet technology and financial services businesses need to continually reinvest in technology to meet what are increasingly complex and voluminous regulatory burdens obligations placed on them.

Australian regulators weekly wrap — Monday, 23 May 2021

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

Never miss an update by signing up to receive emails here or by following me on LinkedIn here. You can also access past editions of the Australian regulators weekly wrap by clicking here.

  1. Financial institutions levy: financial industry levies recover the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies, including the Australian Securities and Investments Commission, the Australian Taxation Office, and the Australian Competition and Consumer Commission. The Treasury has released a paper which seeks submissions on the proposed financial institutions supervisory levies for the 2021–22 financial year. Interestingly, the funding increases for APRA are set to rise by 20%!
  2. ePayments (ASIC): ASIC aims to improve the existing code around electronic payments including ATM, EFTPOS, credit and debit card transactions, online payments, and internet and mobile banking with a consultation paper. ASIC is focusing on (a) compliance monitoring and data collection; (b) mistaken internet payments, including retrieval of partial funds and the responsibilities of the sending and receiving ADIs; (c) extending the Code protections to small business customers; (d) unauthorised transactions and the pass code security requirements; (e) modernising the Code; (f) complaints handling; (g) facility expiry dates; and (h) transition and commencement of the updated Code. Submissions are due by 2 July 2021.
  3. Prudential risk (APRA) : APRA has issued a letter to ADIs to improve the consistency of the application, capital outcomes and reporting of Risks-not-in-Value at Risk (RNIV) for ADIs accredited to use the internal model approach to traded market risk. RNIV is a concept introduced by the UK Financial Conduct Authority in 2010 to account for risks not captured in a VaR model. (VaR modeling determines the potential for loss in the entity being assessed and the probability of occurrence for the defined loss. Banks commonly apply VaR modeling to firm-wide risk due to the potential for independent trading desks to unintentionally expose the firm to highly correlated assets.) RNIV are required to be identified, capitalised and reported in accordance with the existing Prudential Standard APS 116 Market Risk. The letter to ADIs is available on the APRA website at Market Risk Modelling: Risks-not-in-VAR
  4. Crypto warning (ASIC): ASIC has stated that it has received an increased number of reports from consumers who have lost money after responding to advertisements disguised as fake news articles. In the main, these advertisements promote crypto assets and CFDs; in some instance they false use ASIC’s logo or misleadingly say that the investment is approved by ASIC — a dead giveaway for fraud.
  5. Australia as a technology centre (Treasury): the senate committee tasked with how Australia can market its strengths to position itself globally as a technology and finance centre has released its third issues paper. What I picked up is that the the committee is interested in the economic opportunities posed by blockchain technology and digital asset technology in particular. Thus far, the committee has heard blockchain has applications across sectors and industries. The committee will be assessing options for the development of a comprehensive regulatory framework for cryptocurrency and digital assets. Existing regulatory schemes, especially those in comparable jurisdictions, will be examined.

Thought for the future: the new onerous breach reporting regime is coming in October 2021. Under it, a ‘deemed significant breach’ which needs to be reported is anything — irrespective of the circumstances which: (a) constitutes the commission of an offence and the commission of the offence is punishable on conviction by a penalty that may include imprisonment for: (i) three months or more if the offence involves dishonesty; or (ii) 12 months or more in any other case; (b) contravenes a civil penalty provision (except where excluded by the regulations — of which none have been yet) or for credit licensees constitute a contravention of a key requirement under s111 of the National Credit Code (Sch 1 to the NCCP); (c) contravenes s1041H(1) of the Corporations Act or s12DA(1) of the ASIC Act (misleading or deceptive conduct); or (d) that result, or are likely to result, in material loss or damage to clients, or to members of a managed investment scheme or superannuation entity. My firm has developed a really comprehensive and intuitive hyperlinked register which covers all (a)–(c) above for the key items of legislation e.g. CA, ASIC Act, NCCP, etc. Some of our clients are using this work product to retrospectively consider their incidents register to see how much extra reporting they will need to do come October 2021. Please get in touch if you wish to obtain a copy!