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!

Australian regulators weekly wrap — Monday, 10 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.

  1. Proxy advice (Treasury): proxy advice assists institutional shareholders e.g. super funds to make decisions on how to vote on matters put to shareholders for approval at company meetings. Proxy advisers thus have a large role to play in corporate governance in Australia and give our historically high degree of institutional share ownership, the Government is consulting on the adequacy of the current regulatory regime for proxy advice and developing reform options that would strengthen the transparency and accountability of proxy advice. The consultation paper, which closes for comments on 1 June, is available for comments here.
  2. Remuneration (APRA): APRA has commenced consultation on draft guidance to assist industry meet the requirements of APRA’s updated prudential standard on remuneration. The draft Prudential Practice Guide CPG 511 Remuneration sets out principles and examples of better practice to assist banks, insurers and superannuation licensees comply with prudential standard CPS 511 Remuneration, which will be finished in later 2021. The entire thrust of the new remuneration guide is on non-financial measure of performance, which are notoriously difficult to quantify. The draft prudential practice guide will assist entities comply with the new standard by: outlining examples of better practice in board oversight, including robust challenge and independent scrutiny; setting out frameworks for defining non-financial measures and determining material weight for use in calculating variable remuneration; and, setting out principles for reductions in variable remuneration where there have been poor risk outcomes. The closing date for submissions on the draft CPG 511 is 23 July.
  3. FCA AML action (UK): the UK FCA (our ASIC) has issued its first criminal prosecution against a bank under Money Laundering Regulations (MLRs). The prosecution is brought under the 2007 MLRs and allege an acceptance by the bank of a large sum in cash and other deposits without appropriate KYC and ongoing monitoring of the accounts for the purposes of preventing money laundering. Precisely, the regulator alleges NatWest “failed to adequately monitor and scrutinise” the deposit of £264m in cash in one corporate customer’s account between 2011 and 2016. Money laundering has been an an increasing focus of global regulators, and the FCA clearly wants to prove a point here. If there is a conviction, the fine can be unlimited and, as importantly, the reputational impact on the bank is meant to really hurt. It will be interesting to see if AUSTRAC follows suit.
  4. Debt firms (ASIC): the Government has introduced new laws that mean certain debt management services are now a “credit activity” for the purposes of the National Consumer Credit Protection Act 2009. From 1 July 2021, subject to transitional arrangements, providers of debt management services must hold an ACL with a new authorisation that covers debt management services. What constitutes a ‘debt management service’ is broad, and includes suggesting and/or helping a consumer to: apply for a change to a credit contract for which the consumer is a debtor; apply for a postponement of enforcement proceedings; or, make a complaint or claim to a credit provider, AFCA, ASIC or the Information Commissioner. Also captured is credit assistance management, such as suggesting and/or helping a consumer to apply for a change to information collected by a credit reporting body about a credit contract for which the consumer is a debtor. I personally think it is a welcome development; debt management firms has been associated with some fairly unscrupulous practices in recent years, and regulation will weed out the bad from the good.
  5. Insolvency reforms (Treasury): the Morrision Government is not done amending insolvency laws — thankfully — and has announced that it plans to: consult on how trusts are treated under insolvency law; review whether the insolvent trading safe-harbour provisions remain fit for purpose, and consult on improving schemes of arrangement processes to better support businesses, including by introducing a moratorium on creditor enforcement while schemes are being negotiated. (The stat demand threshold will also be increased from $2,000 to $4,000.) Schemes of arrangement, which allow companies to restructure their debt arrangements, are well overdue in terms of focus, as they are no utilized as much as they could be due to the fact that creditors are in control of the process — to receive approval for any scheme, you need approved by a majority of your company’s creditors, at a creditors’ meeting. Switching to a more debtor friendly process, such as in the US, may see a greater take up of this option.

Thought for the future: AUSTRAC has just released a suite of educational resources, with real-life examples, on how to submit more effective suspicious matter reports . The new resources include a reference guide and checklist, and feature guidance on how to write succinct, accurate and clear grounds for suspicion. I think these are great resources — my top read for the week!

Australian regulators weekly wrap — Monday, 3 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.

  1. Breach reporting (ASIC): ASIC has issued Consultation Paper 340, seeking stakeholder feedback on proposed updates to its draft guidance on upcoming breach reporting reforms. ASIC seeks public comment on the draft guidance and information sheet by 3 June 2021. The consultation paper follows the Treasury consultation seeking to limit the scope of the legislation — which did not go far enough in my view. In the consultation paper, ASIC set outs that it proposes: 1) to give consistent guidance for AFS licensees and credit licensees on how they can comply with the breach reporting obligation, with examples of how the obligation applies in particular situations; 2) to provide high-level guidance to help AFS licensees and credit licensees identify what they must report to ASIC; 3) to include guidance in draft RG 78 about the obligation for licensees to report to ASIC within 30 days after they first know that, or are reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen; 4) to provide high-level guidance on compliance systems for breach reporting to help licensees comply with the breach reporting obligation (which accords my firm’s development of the Gadens breach manager). All of which makes sense, together with an ASIC spreadsheet outlining the “notify, investigate and remediate” for AFSLs and mortgage brokers which set out the obligations for these licensees to investigate certain breaches of the law and notify and remediate clients and consumers in certain circumstances — see here. The new breach reporting regime — stay tuned for a detailed analysis of the regulatory guide soon — will prove to be a large shock to the system in October 2021, as ASIC itself acknowledges stating that it “…expects a significant increase in the volume of reports received as a wider range of entities will be required to report and a wider range of breaches will be subject to reporting.” Together with DDO starting in October 2021, start preparing now is my advice!
  2. AGMs (ASIC): ASIC will extend the deadline for both listed and unlisted entities to lodge financial reports by one month for balance dates from 23 June to 7 July 2021. ASIC has adopted a ‘no action’ position where public companies do not hold their Annual General Meetings (AGMs) within five months after the end of financial years that end up to 7 July 2021, but do so up to seven months after year end. These are likely to be the last COVID-19 related developments are affecting financial reporting, audit and AGM obligations for balance dates after 7 July 2021. ASIC has stated that there is no indication that further extensions of time will be necessary.
  3. Financial resources (ASIC): Under s 912A(1)(d) of the Corporations Act 2001, an AFSL is generally required to maintain adequate resources, including financial resources, to provide the financial services that it is authorised to provide under the terms of its AFSL. These financial requirements are specified in each AFSL and are based on PF 209 and various ASIC legislative instruments. ASIC has made changes that will allow certain AFS licensees to include, where the licensee is a lessee, a right-of-use asset in the calculation of their net tangible assets and, where the right-of-use asset is a current asset, adjusted surplus liquid funds and surplus liquid funds. A sensible change, in my view; revamping the regulatory guides which pertain to calculation of NTA and other ASIC-specific financial metrics would be a worthwhile exercise as well in due course. Working through them can get horribly complicated quickly…
  4. Prudential focus (APRA): Chair Waynes Byres gave a speech to the Committee for the Economic Development of Australia in which he focused on three important issues that he saw were relevant right across the financial sector, and are critical to its long-term strength and resilience. First, climate-related risks. In this regard he noted that one of the biggest challenges in doing so is to shift from subjective judgements to data-driven analysis. The scientific link between rising carbon emissions and warming temperatures is clear, but the tools and methods for risk analysis are still in their relative infancy. Not only are the direct impacts difficult to assess, but so are the potential technological and policy responses. Second, governance, culture, remuneration and accountability. APRA’s view is that systemic weaknesses in GCRA are often the root cause of problems that crystallise into significant, unexpected and damaging financial losses. It highlighted its work on remuneration e.g. the new CPS 511, and a new s pilot risk culture survey involving 10 general insurers, which involves staff in the pilot institutions completing an online survey of 40 odd questions that explore attitudes and behaviours in relation to risk, and willingness and capacity to speak up when things aren’t right. The plan is to role the survey out to 60 + institutions. Third, cyber risk. APRA spoke to CPS 234 Information Security, which came into effect in July 2019, and in November last year, the fact that its new Cyber Security Strategy. Not much new information, though useful nonetheless.
  5. Retail funds (ASIC): the corporate regulator ASIC conducted a review of 14 managed funds between June and November 2020 to identify any potential liquidity issues. The review covered 14 registered funds across three different strategies (four mortgage, five direct property and five fixed income funds) with an aggregate of $1.7 billion in assets under management and approximately 8,500 investors. It identified, in summary, that: there was a significant deterioration in cash received from investor applications versus cash paid out in investor redemptions across the funds during the first half of 2020; there was no material decrease in the liquidity of fund assets over the first half of 2020; most of the funds’ responsible entities introduced enhanced liquidity monitoring in March 2020; and, overall, liquidity risks and redemption rights were appropriately disclosed to investors. ASIC has said that responsible entities should also ensure that their websites accurately represent the reliability of redemptions and distributions (see 20–218MR).

Thought for the future: the Treasurer this week announced the “regulator of regulators”, the Financial Regulator Assessment Authority (FRAA), which will be responsible for overseeing the “effectiveness and capability” of ASIC and the prudential regulator, APRA. It makes complete sense. Parliament is, in my view, ill equipped to be the monitoring body given the expertise gap and politicization that can occurs as anyone who spends time reading the Hansards of the FS Committee will likely pick up.

Australian regulators weekly wrap — Monday, 26 April 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. Enforcement report (ASIC): ASIC has released its enforcement update report for the period 1 July to 30 December 2020. Comparing the 2018 and 2020 calendar years, ASIC has recorded a 64% increase in civil penalty proceedings as well as a 36% increase in the number of criminal proceedings commenced. This included ASIC’s two largest ever civil penalty outcomes — penalties totalling $57.5 million were imposed on two NAB subsidiaries for fees-for-no-service misconduct, and penalties totalling $75 million were imposed on OTC derivatives provider AGM Markets Pty Ltd and two of its authorised representatives for systemic unconscionable conduct. In that case, the court heard that account managers were told to ‘kill your customers’, a reference to encouraging their clients to make deposits and trades. These deposits and trades resulted in trading losses totalling approximately $32 million, which the court found had translated to revenue for the FX provider.
  2. Mayfair 101: Federal Court has restrained Mayfair 101 director James Mawhinney from promoting and raising funds through financial products for 20 years . This follows the 23 March 2021 decision of the Federal Court that found that companies in the Mayfair 101 Group made statements that were false, misleading or deceptive in advertisements for its debenture products. Justice Anderson found Mr Mawhinney has been ‘involved in multiple contraventions’ and his conduct can be ‘characterised as ‘serious, incompetent and reckless and displaying a propensity for conduct in disregard of the requirements of financial services laws.’ His Honour also found Mayfair Wealth Partners, which promoted the Australian Property Bonds, took $100,000 from an investor without issuing the investor with the product or contacting the investor, stating that: ‘… conduct is reprehensible. No competent, fair or reasonable financial services provider takes money from an investor without having proper administrative procedures in place to ensure the relevant product is issued to the relevant investor.’
  3. Financial advisers (Treasury): Commissioner Hayne recommended the establishment of a single disciplinary body for financial advisers and the requirement that all financial advisers who provide personal financial advice to retail clients be registered. Draft legislation has now been released which expands the role of the Financial Services and Credit Panel within ASIC to operate as the single disciplinary body for financial advisers. It also creates new penalties and sanctions which apply to financial advisers found to have breached their obligations and introduces a new annual registration system for financial advisers. There is a really good flow chart of the disciplinary process which you can see here — my top read for the week! You can submit responses to this consultation up until 14 May 2021.
  4. Fintech (UK): this announcement caught my eye earlier in the week. UK Chancellor Rishi Sunak set out proposals to enhance the UK’s competitive advantage in fintech, from regulatory support and reforms to help firms grow to a new taskforce to lead the UK’s work on a central bank digital currency. In essence, the UK is doubling down on its ‘regulatory sandbox’ which is designed to reduce red tape to assist fintech firms successfully make it to market and grow; Australia has a similar version, though my sense is that it is not largely utilised. The proposals include: new FCA ‘scale box’ (a package of measures to enhance its regulatory sandbox) and Centre for Finance, Innovation and Technology to boost growth; UK to lead digitisation of finance with central bank digital currency taskforce and support for new technologies and infrastructures (a new Taskforce, bringing together HM Treasury and the Bank of England, will be established to explore a possible UK central bank digital currency . Two new forums will also be established to engage technical experts, and key stakeholders — including financial institutions, merchants, business users, civil society groups, and consumers — through the process.); and, additional plans for capital markets reform to enhance open and dynamic financial centre — the UK is looking to improve the efficiency of rights issues. All in all, it sounds quite exciting to me and a good effort by the UK.
  5. Climate change (APRA): APRA has released a draft guide for Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229), designed to assist banks, insurers and superannuation funds in managing climate-related risks and opportunities as part of their existing risk management and governance frameworks. The guidance covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure, but APRA states that it does not create new requirements or obligations. There is a nifty infographic that accompanies the update as well, and set it all out in detail. The guide is out for consultation, and APRA is seeking stakeholder feedback on the draft CPG 229 by 31 July 2021.

Thought for the week: there is a lot of information to absorb from the regulators, particularly in the last two years. Getting that information across to the regulated population is critical; I think both ASIC’s and APRA’s use of infographics and related devices is commendable and should be kept up!

Australian regulators weekly wrap — Monday, 19 April 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. Lightspeed finance (ASIC): ASIC has commenced proceedings in the Federal Court against credit assistance provider Lightspeed Finance Pty Ltd and its director Mark James Fitzpatrick for failing to comply with AFCA determinations. Failing to comply with determinations dating back to 2018 and 2019, which were accepted by the client, ASIC alleges that Lightspeed failed to give effect to both AFCA determinations and that Mr Fitzpatrick was knowingly involved in these breaches. Since March 2019, courtesy of Commissioner Hayne, failure to co-operate with AFCA is a civil penalty offence with penalties of $10,500,000 for a company and $1,050,000 for an individual. It is an interesting legislative overlay on a system which is contractual by nature. You can read the concise statement here — my top read for the week!
  2. VW Appeal (Court): the Full Federal Court dismissed an appeal by Volkswagen AG against the penalties handed down earlier for making false representations about compliance with Australian diesel emissions standards. The Federal Court imposed penalties of $125 million in December 2019, and Volkswagen appealed this decision, seeking orders that the Court instead impose the $75 million penalty amount which had been jointly put to the Court by Volkswagen and the ACCC. In dismissing the appeal, the Full Court upheld the $125 million penalty imposed by the Federal Court, and held that the $125 million penalty ‘was not excessive, let alone manifestly excessive’. Interestingly, in a situation that paralleled the Federal Court’s refusal to endorse the Westpac responsible lending settlement ASIC and Westpac initially sought to reach, it is further emphasis that the courts will consider — but not necessary agree with — consent judgment outcomes as to penalties. This is not the US!
  3. Debt collection (ASIC / ACCC): guideline has been jointly produced by the ACCC and ASIC to help businesses understand how the Commonwealth consumer protection laws apply. It applies to both creditors who are directly involved in debt collection and to specialist external agencies who provide debt collection services, including the Australian Consumer Law, the Australian Securities and Investments Commission Act 2001 (Cth), National Consumer Credit Protection Act 2009 (Cth) which includes the National Credit Code. Part 1 covers practical matters in seeking to recover debts e.g. hours of contact, methods of contact, etc. Part 2, brilliantly to my mind, covers the remedies consumers have against overzealous debt collectors, and covers trespass and prohibition of coercion, etc. In an economic world ravaged by COVID-19, and with jobkeeper ended and more debts being chased, I think this is an excellent practical output by ASIC and ACCC.
  4. Business interruption cases (Court): QBE last week become the latest to contribute to the multiple test cases relating to the pandemic winding their way through the courts. QBE’s case adds to matters pursued through the Insurance Council of Australia (ICA) test case process. ICA and AFCA agreed last year on a case to determine whether exclusions that reference the repealed Quarantine Act 1908 and subsequent amendments apply also to diseases under the replacement Biosecurity Act 2015. QBE’s case is against Educational World Travel, which entered voluntary administration last year, and aims to test Victorian legislation that insurers argue has the effect of making exclusions citing the repealed Quarantine Act valid. There are about 5–6 tests cases on foot at the present time, all of which will be highly determinative for the insurance industry, though ultimately it will come down to the contract clauses themselves which most insurers by now will have completed an assay of to determine their position.
  5. Business registers (Treasury): the Modernising Business Registers program will establish a new whole-of-government registry platform. It will bring together ASIC’s 31 business registers and the Australian Business Register onto a new modern system at….the ATO. The Government has announced the appointment of the Commissioner of Taxation as the Commonwealth Registrar of the Australian Business Registry Services. An interesting development, it will certainly free up ASIC, and may cause the 2.7 million registered companies to think about what if any interaction the MBR program will have with the taxation.

Thought for the week: last week my firm released a regtech program which allows financial services firms to identify potential breaches across 7 regimes e.g. money laundering and cyber-attacks and data breaches, collate information and form a legal view within strict statutory timeframes for a low fixed fee or internally for free. The aim is to be a foil to a raft of nasty breach reporting regimes being introduced this year. Learn more here, or get in touch with me directly for a quick demo!

Australian regulators weekly wrap — Monday, 12 April 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. Claims handling as a service (ASIC)ASIC has called on insurers (life / general), insurance claims managers, and claimant intermediaries to lodge licence applications (new and varied) as soon as possible, and by no later than 7 May 2021. If they do not, they may have to stop providing claims handling and settling services after 30 June 2021. (We are doing one at the moment, and it is slower than usual going!) Deputy Chair, Karen Chester said ‘Time is running out for firms to lodge their applications with ASIC. To date [this week] we’ve received fewer than 15 applications for the new claims handling and settling service. Some applications received have also needed to be re-submitted because of their poor quality. We are concerned that firms are running the risk of not submitting a complete application in time to get the benefit of the legislated transition period.’ To put Ms. Chester’s comments in context, there are about 109 general insurers and 30 life insurers in Australia, so less than 10% have applied as of last week…
  2. Financial reporting (ASIC): ASIC prosecuted three companies between 1 July 2020 to 31 December 2020 for failing to comply with their financial reporting obligations. Section 292 of the Corporations Act 2001 (Cth) requires all disclosing entities, public companies, large proprietary companies and registered schemes to prepare financial reports each financial year. Section 319 of the Act require a disclosing entity and registered scheme to lodge the complete financial reports within three months after the end of the financial year. All other entities are required to lodge their financial reports within four months after the end of the financial year. The failures of the three companies were egregious, spanning 5 years each and the fines relatively minimal at $5K each. Still, the willingness of ASIC to focus on this area when previously it has not is notable. It follows a consistent pattern of regulatory focus on reporting; mainly AFSL breach reporting in 2020 and 2021.
  3. Judicial impartiality (ALRC): Australian Law Reform Commission has released two new background papers into the review into judicial impartiality. The first paper focuses on the practical matter of how courts manage claims (and the potential for claims) by litigants that the judicial officer deciding their matter is, or might appear to be, biased. The key issue is that the primary judge, the one in relation to whom the allegation of bias is raised, determines whether the relevant test for bias has been satisfied. This is traditionally justified on the basis that the challenged judge is ‘best apprised of the facts, and is in the best position to determine any such application’ and it avoids tactical manoeuvring. The second background paper provides an overview of the composition of the federal judiciary, the jurisdiction of the Commonwealth courts, the workload of those courts, and the frequency of complaints against judicial officers (noting that such complaints may not necessarily be in relation to an allegation of impartiality or bias). Both papers are worth the time spent to read in the context of the broader inquiry, which has asked the ALRC to consider ‘whether, and if so what, reforms to the laws relating to impartiality and bias as they apply to the federal judiciary, are necessary, or desirable.’
  4. Superannuation IDR (ASIC): RG 271 — Internal Dispute Handling does not take effect until 5 October 2021, though ASIC’s broad expectations of super firms to assist in the transition to meet the new requirements have been released. RG 271 includes reduced timeframes for responding to complaints, including a reduction to a new maximum of 45 days for superannuation complaints; further guidance on the information that funds must include in written IDR responses to allow consumers to understand complaint outcomes and decide whether to escalate their complaint; and, a greater focus on identifying, investigating and, where relevant, resolving possible systemic issues raised by complaints. RG 271 also introduces enforceable standards, which reinforces that trustees need to have oversight of, and be accountable for, their IDR procedures. The updated obligations are more comprehensive than existing requirements and focus with more granularity on the internal operations of the financial service provider. In setting out its expectations, ASIC has stated that super firms need to: 1) consider the intent behind them — this is directed specifically towards legal advisers; 2) thoroughly review existing processes, systems and resources, and trustees should turn their attention to this work now as it may require some time. (For example, ASIC states that there is likely to be changes needed to IT and administration systems for complaints management, including capturing data, processes and procedures, and staff training); 3) super firms need to review their insourced and outsourced arrangements, which may require contractual and/or operational changes; 4) keep the member journey front of mind when reviewing and implementing their IDR processes; 5) consider increasing their investment in skilled staff and systems; 6) focus on having the right governance arrangements and operational transparency in place, underpinned by a member-centric approach; and, 7) use the IDR processes to assist in identifying and managing systemic issues related to complaints. In what is the best and most granular ‘informal’ guidance given I have seen in awhile (my top read for the week), ASIC has stated: ‘… trustees [should] to take an expansive approach to identifying, recording and responding to complaints, and to ensure fund staff are empowered and encouraged to do the same. IDR-related processes should be run efficiently, honestly and fairly — from the handling of complaints to managing identified systemic issues to internal reporting. Trustees should engage with RG 271 early to ensure that they are fully compliant with the new standards by 5 October 2021′.
  5. FATF consultation (AUSTRAC): the international Financial Action Task Force (FATF) is inviting feedback on draft guidance about proliferation financing risk, and on digital currencies and digital currency exchange providers, known internationally as virtual assets and virtual asset service providers. FATF is proposing a risk-based approach to digital currency and digital currency exchange providers. The guidance is not binding in Australia, but will not doubt heavily influence the development of our policy in this space.

Thought for the future: 2021 was always going to be a massive year for regulatory reform, as the major Hayne Royal Commission recommendations come into play. With so many balls in the air, those entities that are coping best from my perspective are the ones giving themselves long lead times to implement regulatory change projects and who are seeking to cross-stitch multiple reforms together rather than leave this after the fact.