Financial services monthly wrap up - July 2019

ASIC implements pause on admission of managed funds with internal market makers

On 30 July 2019 ASIC announced that it has requested that market operators do not admit any managed funds that do not disclose their portfolio holdings daily and have internal market makers.

The pause on such admissions will remain in place while ASIC reviews the regulatory settings for exchange traded managed funds that use internal market makers. ASIC stated that internal market making funds represent approximately 6% of exchange traded products by funds under management.

More information can be found here.

ASIC consults on relief for foreign providers of funds management services to Australian professional investors

On 3 July 2019 ASIC issued Consultation Paper 315 proposing to extend the current licensing relief for foreign financial service providers (FFSP) in Australia, while it further consults on the new licensing relief that will apply to FFSPs.

ASIC proposes to:

1. extend the ‘limited connection relief’ to 31 March 2020 and to allow a transition period to 30 September 2020;
2. introduce a new funds management relief to certain FFSPs subject to a cap on the scale of services they can provide to Australian professional investors;
3. introduce a new foreign AFS licensing regime from 1 April 2020; and
4. extend the ‘sufficient equivalence’ relief until 31 March 2020 and allow a transition period of 24 months from 1 April 2020 for FFSPs relying on the sufficient equivalence relief to comply with the new licensing regime, including for example, submitting an application for a foreign AFS licence and having the application assessed by ASIC.

Submissions are due to ASIC by 9 August 2019. A more detailed update in respect of the proposed relief can be found in our earlier update available here.

ASIC ensures licensees meet their AFCA membership obligations

The Australian Financial Complaints Authority (AFCA) recently advised ASIC that 58 financial services licensees and 217 credit licensees, who previously held external dispute membership with one of the previous schemes, had not obtained AFCA membership and consequently may be in breach of their licence conditions. As part of their general conduct obligations, all financial services licensees and credit licensees in Australia were required to obtain AFCA membership from 1 November 2018.

ASIC has taken proactive measures in relation to each of these licensees to ensure that either AFCA membership was obtained or the licence was cancelled or suspended.

Financial services licensees and credit licensees are reminded that ASIC continues to take proactive steps to ensure licensees are complying with their obligations with respect to their AFCA membership. ASIC’s press release in relation to this matter can be accessed here.

ASIC consults on remaking class order on departed former temporary residents’ superannuation

On 10 July 2019 ASIC released a consultation paper on its proposal to remake Class Order [CO 09/437] Departed former temporary residents’ superannuation–Disclosure relief (Class Order).

The Class Order provides conditional relief to superannuation trustees from obligations to provide an exit statement and notice to departed former temporary resident members. The relief is conditional upon disclosure of specific information in product disclosure documentation and on the trustee’s website (which under the proposal would be changed to the fund’s website).

Submissions are due to ASIC by 21 August 2019.

A copy of the draft consultation paper and ASIC’s press release in relation to the remaking of the class order can be found here.

ASIC consults on proposal to intervene to stop consumer harm in short term credit

On 9 July 2019 ASIC released a consultation paper (CP 316) in relation to its first proposed use of its new product intervention power. The purpose for which ASIC intends to use this power is to address significant consumer detriment in the short term credit industry.

The product intervention power came into effect in April this year with the aim that ASIC use this power proactively to reduce the risk of significant detriment to retail clients resulting from financial products.

In this case ASIC is targeting a short term credit provider and its associate who charge fees under separate contracts to consumers who are on low incomes or in financial difficulty. When taken together, the fees can add up to around 990% of the loan amount.

The intervention order, if made, would apply to these two companies as well as any other firm using this type of business model.

Any submissions were due by 30 July 2019. More information can be found here.

ASIC provides new guidance for certain AFS licence applications

On 5 July 2019, ASIC released Information Sheet 240 AFS licensing – Requirements for certain applicants to provide further information in relation to new information for Australian financial services licensing (AFSL) applications. The changes apply to any AFSL applicant that is:

• a body corporate;
• an Australian Prudential Regulation Authority-regulated body; or
• proposing to offer certain financial services or to operate in specific circumstances,

In particular, ASIC requires any body corporate AFSL applicant to provide details and criminal and bankruptcy checks for all responsible officers, which includes directors and company secretaries as well as responsible managers. This is consistent with recent ASIC practice.

The Information Sheet also sets out the non-core proof documents that ASIC will require depending on the authorisations sought and individual circumstances of the applicant (such as were there is an intention to outsource a material activity) as part of the AFSL application.

A copy of the Information Sheet can be found here and ASIC’s press release can be found here.

ASIC to consult market on securities lending and ‘substantial holding’ disclosure

On 29 July 2019 ASIC published Consultation Paper 319 (CP 319) on securities lending by agents and subsequent disclosure of a substantial holding in a listed entity.

At a high level, ASIC is proposing to grant relied to intermediaries that act as agents in securities lending transactions on similar terms as the relief currently granted to prime brokers under Class Order [CO 11/272] and Regulatory Guide 222 Substantial holding disclosure: securities lending and prime broking (RG 222).

Submissions are due by 6 September 2019 and ASIC expects to provide a final legislative instrument in December 2019. Further information can be found here.

APRA proposes stronger requirements on remuneration requirements in APRA-regulated entities

On 23 July 2019 APRA released a draft Prudential Standard CPS 511 Remuneration (CPS 511) that would apply to all APRA-regulated entities. CPS 511 is intended to address recommendations 5.1 to 5.3 from the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Some of the key changes set out in CPS 511 include:

• ARPA-regulated entities must adjust remuneration outcomes to align with risk outcomes and ensure stronger review and oversight on these issues;
• elevate the importance of managing non-financial risks, so that financial performance measures must not comprise more than 50 per cent of performance criteria for variable remuneration outcomes;
• clawback of remuneration for senior roles must apply;
• minimum deferral periods for variable remuneration of up to seven years will be introduced for senior executives in larger, more complex entities. Boards will also have scope to recover remuneration for up to four years after it has vested; and
• Boards must approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.

The consultation period will close on 23 October 2019. APRA intends that the new prudential standard will be released before the end of 2019 and will take effect from 2021 following appropriate transitional arrangements.

APRA’s media release, the discussion paper and draft CPS 511 can be found here.

APRA welcomes Capability Review report and outlines action plan

On 17 July 2019 APRA announced that it supports all of the 19 recommendations directed at APRA in the Government’s Capability Review report, and that work is already underway on these recommendations.

The report makes observations about the increasingly complex operating environment and the need for APRA to expand its focus and capabilities to enable it to meet its mandate in the future. In particular, recommendations are made in relation APRA”s organisational structure and governance and its approach to supervision an enforcement.

APRA’s response to each of the 19 recommendations can be found here.