This article was co-authored with Remy Michelson and Melanie Lo.
The month of August 2021 saw a release of anticipated updates to the upcoming changes in the funds management, superannuation and insurance sectors. Notably, Treasury has released the draft updated Corporate Collective Investment Vehicle fund legislation and tax framework, the release of the first Your Future Your Super performance test results and APRA and ASIC released their Corporate Plans for 2021-2025. APRA and ASIC have stated their strategic focus is on protecting and strengthening deposit-holders, insurance policyholders and superannuation members during the current period of disruption. APRA and ASIC have also released their approach to various anticipated changes including licensing of new banks, the reforms from the Royal Commission and the annual performance test for MySuper.
Treasury releases draft Corporate Collective Investment Vehicle (CCIV) Tax framework
Treasury has released an updated exposure draft of the proposed tax framework for CCIVs. Key updates are intended to:
- Provide greater flexibility in the CCIV regime for the use of custodian and depository services;
- Facilitate the listing of retail CCIV with one sub-fund on a prescribed financial market in Australia; and
- Facilitate cross-investment between different sub-funds of a CCIV.
The new corporate structure will ensure that CCIVs are recognisable to offshore investors and fund managers.
Further information about the key changes in the exposure draft of the CCIV tax framework is available here.
ASIC publishes Corporate Plan 2021-25
On 26 August 2021, ASIC released its Corporate Plan for 2021-2025. ASIC’s four external strategic priorities target the most significant threats and harms in the regulatory environment:
- promoting economic recovery – including through better and more efficient regulation, facilitating innovation, and targeting regulatory and enforcement action to areas of greatest harm;
- reducing risk of harm to consumers exposed to poor product governance and design, and increased investment scam activity in a low-yield environment;
- supporting enhanced cyber resilience and cyber security among ASIC’s regulated population, in line with the whole-of-government commitment to mitigating cyber security risks; and
- driving industry readiness and compliance with standards set by law reform initiatives (including the Financial Accountability Regime, reforms in superannuation and insurance, breach reporting, and the design and distribution obligations).
ASIC’s internal policies focuses on strengthening its operational capabilities and include the following:
- enhancing communication and engagement with ASIC’s stakeholders and other regulatory agencies, to ensure our actions and achievements have a real and tangible impact;
- improving ASIC’s infrastructure and systems to strengthen its key internal operations, processes and governance frameworks to effectively support our regulatory work;
- enhancing and effectively utilising ASIC’s data and cyber resilience capabilities in fulfilling its regulatory mandate and organisational priorities; and
- continuing to nurture a workplace environment that promotes a culture of speaking up, challenge, accountability and a ‘whole-of-ASIC’ lens, underpinned by a sound system of risk management and compliance.
For the full report and further details, please visit the ASIC website here.
APRA publishes its Corporate Plan for 2021-25
On 26 August 2021, APRA published its updated Corporate Plan for 2021-25 based on the theme of “protected today, prepared tomorrow”. The plan sets out APRA’s strategic priorities for protecting deposit-holders, insurance policyholders and superannuation members during the current period of disruption whilst also focusing on preparing for future challenges. APRA intends to:
- preserve the resilience of banks, insurers and superannuation funds, with a continuing focus on financial strength; cyber risks; governance, risk-culture, remuneration and accountability; and implementing the Government’s Your Future, Your Super reforms;
- modernise the prudential architecture to ensure it is effective and accessible, less burdensome for entities, and more adaptable to the rapidly evolving financial sector; and
- better enable data-driven decision-making by continuing to invest in and embed data as a core enabler for achieving APRA’s purpose and strategy.
The Corporate Plan outlines APRA’s aim of:
- increasing its understanding of, and ability to respond to, the impact of new financial activities and participants, such as technological innovations and new business models that do not fit traditional regulatory approaches;
- helping to find solutions to important challenges, such as superannuation retirement income products, insurance accessibility and affordability, and the financial risks of climate change; and
- adopting the latest regulatory tools, techniques and practices in areas such as specialist regulatory services, enforcement actions, transparency and resolution.
For the full report, please visit the APRA website here.
ASIC announces its approach to new laws reforming the financial services sector
On 12 August 2021, ASIC published its approach to the six reforms resulting from the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) and other inquiries, which will commence in October 2021. The relevant laws which will commence in October 2021 are:
- Reference checking and information sharing requirements (commencing 1 October 2021);
- Breach reporting and the ‘notify, investigate and remediate’ obligations (commencing 1 October 2021):
- Design and distribution obligations (commencing 5 October 2021);
- Hawking (commencing 5 October 2021);
- Deferred sales model for add-on insurance products (commencing 5 October 2021); and
- Internal dispute resolution – RG 271 (commencing 5 October 2021).
ASIC claims the new laws will provide the Regulator with increased visibility of issues in the marketplace, through breach reports, complaints data and data available under design and distribution obligations. Further, the reforms will aim to assist ASIC in identifying problems sooner and address them more efficiently, with less reliance on disclosure to address consumer harms. ASIC also notes that the laws outlined above will offer consumers with sustained protection from the harms raised by the Royal Commission, whilst reducing regulatory gaps.
ASIC states that while these reforms have been in the pipeline for some time, ASIC recognises they require significant changes to businesses’ systems and processes and take effect at the same time industry is facing other challenges, including from COVID-19 and renewed lockdowns. ASIC therefore recognise there will be a period of transition as industry finalises implementation of additional compliance measures, and ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply. However, where firms are not acting in good faith or where ASIC detect conduct causing actual harm, ASIC will not hesitate to enforce the law.
Further details on the different reforms and ASIC’s approach can be found here.
APRA releases results of Your Future, Your Super underperforming funds
On 31 August 2021, APRA released the results of the first performance assessment under the new Your Future, Your Super legislation performance test.
APRA assessed 80 MySuper products under the new rules of which 13 products were identified as underperforming. The Trustees of each of the underperforming funds must communicate the performance test failure to their members. Additionally APRA expects the Trustees of each fund to:
- Identify the causes of underperformance and develop and implement a plan to rectify the underperformance;
- Assess the potential implications of failing the test of the fund and the sustainability of business operations; and
- Develop a contingency plan to, if it becomes necessary in the best financial interests of members, close the product, transfer members to another fund or product and/or exit the industry.
The results of the Your Future, Your Super performance test can be found here.
These assessments will now be conducted annually. In conjunction with this the ATO has released its MySuper comparison tool to compare MySuper products. A personalised version is available to individuals via MyGov, a non-personalised version is available here.
APRA releases results from stress-testing insurers during COVID-19
On 3 August 2021, APRA released its results from stress-testing insurers during 2020. APRA’s stress test were designed to assess insurers’ resilience to further deteriorations in macroeconomic conditions, and the actions they would take in response, both individually and collectively.
The results of the stress test indicated that life insurers (LIs) and lenders mortgage insurers (LMIs) were generally well positioned to withstand a very severe economic downturn, specifically demonstrating that they were able to remain above the minimum capital requirements. Most insurers were able to demonstrate good management action and credibly recovery options.
The stress test provided valuable assurance of insurer’s resilience during economic downturn. For further information, please visit the APRA website here.
First round of superannuation funds’ annual members’ meetings reviewed by ASIC
On 6 August 2021, ASIC released findings on superannuation funds’ annual members’ meetings. The results are based on observation of the inaugural meetings held by trustees for certain superannuation funds between October 2020 and March 2021. ASIC’s observation involved reviewing annual members’ meetings held by 24 superannuation funds, comprising of industry, retail, corporate and public sector funds, and centred on whether the trustees:
- met meeting attendance requirements by relevant directors, executive officers and service providers;
- published minutes of the meeting, including answers to members’ questions, on their funds’ websites; and
- provided a reasonable opportunity for members to ask questions and answered those questions within one month.
Although ASIC did not identify major failures by the various funds to comply with obligations that were in the ambit of the surveillance, ASIC did identify room for improvement in terms of how trustees’ communicate to members and the way they afford members the opportunity to ask questions at meetings. Further, through the findings, ASIC has recognised examples of good practice that could improve member experience, and encourages superannuation trustees to consider these practices and take action to enhance their meetings as appropriate. These good practices including providing clear information to members on how to submit questions prior to and during the meeting, as well as sharing Q&A with the broader membership of the fund.
Further details on the findings and good practices to improve transparency at annual members’ meetings can be found here.
Update on the Design and Distribution Obligations (DDO) regime
Leading up to the October 2021 commencement of the DDO regime, Treasury received feedback from stakeholders and has released a statement on its intent to make a number of amendments. The proposed changes will seek to:
- clarify that margin lending to corporates is exempt from DDO obligations, consistent with the intention that all margin lending is to be exempt from DDO;
- clarify employees of licensees are not subject to their own separate set of DDO obligations;
- ensure 31-day term deposits fall within the DDO regime which is consistent with Government’s intention to capture all basic deposit products;
- provide consistency in the application of retail and wholesale investor definitions across the Corporations Act by ensuring it extends to the DDO regime;
- exempt foreign cash settled immediately from the DDO regime, as the risk for consumers is relatively low; and
- exempt non-cash-payment facilities (NCPFs) from the DDO regime except for certain facilities, specifically credit and debit card facilities and stored value facilities.
Treasury will consult on these changes with stakeholders in due course. For further information, please visit the Treasury’s website here.
ASIC finds gaps remain in the Total and Permanent Disability (TPD) ‘safety net’
On 2 August 2021, ASIC released a report on how nine life insurers are addressing consumer harms in the product design and claims handling space. The report outlined the key changes primarily related to the use of restrictive TPD definitions and onerous claims handling practices. The report found that all nine insurers:
- have started reviewing the restrictive TPD definitions;
- are working with trustees for insurance in superannuation; and
- have improved some claims handling process which should lower hurdles for claimants.
The report also highlighted the residual gaps and areas where improvements are still needed, with particular focus on the ability of trustees and insurers to use data to improve both product data and claims handling. For the full report, please visit the ASIC website here.
ASIC releases results from its review of managed funds’ valuation of illiquid asset during COVID-19
On 10 August 2021, ASIC released findings from its review of managed funds’ illiquid-assets valuation practices throughout the early stages of the pandemic. The Regulator collected data between March and November 2020 when the industry was challenged with significant economic uncertainties due to COVID-19. The purpose of the review was to determine whether the current regulatory parameters for the valuation of illiquid assets are appropriate to protect members’ interest in times of heightened market volatility.
The review examined how ten fund managers valued various typed of illiquid assets as well as the governance frameworks, policies and procedures they used to perform the valuations. Amongst the findings, the fund managers were found to be responsive to the increased valuation risks during the review period, and had adequate arrangements to manage conflicts of interest linked with valuations, and appropriately revalued illiquid assets when needed.
Further details on how ASIC undertook the review and its findings can be found here.
Treasury consults on financial and auditing requirements for superannuation funds
On 12 August 2021, the government released for consultation a draft Bill which sets out the financial reporting and auditing obligations of RSEs. The draft Bill requires RSEs to:
- prepare and lodge financial reports for each financial year and half-year with the Australian Securities and Investments Commission;
- publish the financial report, directors’ report and auditor’s report for a financial year on the RSE’s website and provide details of how to access these reports with the notice of the annual members meeting; and
- provide a copy of the financial reports for a financial year and half-year to members and beneficiaries on request.
Submissions are opened until 8 September 2021.
APRA publishes additional FAQs on Superannuation Data Transformation Phase 1 Reporting Standards
APRA has published additional FAQs and worked examples to provide further guidance on RSE licensees on reporting standards for Phase 1 of the Superannuation Transformation Project. The FAQs provide an update on the staged implementation approach, including an extension to the timeframe for the initial submission of 30 June 2021 data related to trustee-directed products. The new FAQs and worked examples are available on the APRA website here.
APRA releases information paper on combining MySuper product performance histories
On 16 August 2021, APRA released its information paper on its approach to administering the annual performance test for superannuation products. According to the paper, the performance test is a two-part test and involves:
- an assessment of investment performance relative to a benchmark portfolio created using the product’s strategic asset allocation; and
- an assessment of administration fees charged in the last financial year relative to the median fee charged for the category of product.
APRA has also developed a methodology to administer the performance test where there have been within-product changes or across-product changes. The key principles are:
- The product-level performance of a MySuper product is calculated on a quarterly basis using the performance of the underlying option(s).
- A product’s performance is calculated using data reported to APRA on a quarterly basis, with the exception of any quarters where there has been a change in the structure or the nature of the product.
- The benchmark portfolio for the first period after the change is calculated with reference to the strategic asset allocation after the change.
- Where unlisted index returns are required to calculate partial-period benchmark returns and the required unlisted index level is not available at the partial period date, an index value will be derived at that date through linear interpolation using the index values available immediately before and after that date.
The information paper can be viewed here.
APRA releases quarterly private health insurance statistics for June 2021
On 17 August 2021, APRA released its quarterly private health insurance (PHI) publications for the June 2021 quarter. The publication found the following:
- industry profitability improved, driven by stronger insurance profits and investments;
- premium growth increased, following reductions in the year to June 2020;
- net margins increased to 5%; and
- hospital treatment membership increased.
To view the quarterly private health insurance statistics, please visit the APRA website here.
Treasury further consults on portfolio holding disclosure
On 17 August 2021, Treasury conducted a further consultation on the regulations for portfolio holding disclosure by superannuation funds. Following initial feedback from stakeholders, the draft regulations and explanatory memorandum have been amended to:
- introduce a requirement that the information should be easily downloadable from the website of the fund in a delimited file format;
- allow cash and bank bill investments to be aggregated by the relevant institution;
- sub-divide infrastructure and property into directly held and unitised and require percentage ownership for directly held;
- remove the requirement to disclose maturity dates and counterparty name for derivatives; and
- make it clear in the Explanatory Statement that, in addition to the mandatory disclosures, Registrable Superannuation Entities (RSEs) are free to provide supplementary information regarding the portfolio holdings of the RSE’s products in a separate public disclosure.
Consultation is open until 31 August 2021.
APRA releases superannuation statistics for June 2021
On 24 August 2021, APRA released its quarterly superannuation publication for the June 2021 quarter. The key statistics were as follows:
- increase in total APRA-related assets;
- increase in total self-managed fund assets;
- increase in exempt public sector superannuation scheme assets; and
- decrease in balance of life office statutory fund assets.
The statistics are to be released on 31 August 2021. For a summary of the statistics, please visit the APRA website here.
APRA releases general and life insurance statistics for June 2021
On 26 August 2021, APRA released its June 2021 statistics for general and life insurance. For the general insurance industry, the report found the following:
- a net profit after tax of $1.0 billion and return on net assets of 3.4%;
- stronger underwriting results were constrained by COVID-19 related Business Interruption claims; and
- investment market volatility resulted in investment income, although increasing, continued to be lower than pre-COVID-19 levels.
The life insurance industry saw positive results with significant improvement to net profit after tax than the previous year. Notably however, risk products still reported a combined net loss after tax of $18.8 million with particular focus on Individual Disability Income Insurance.
Please view the following APRA websites for the general insurance statistics and the life insurance statistics.
ASIC consults on payment for order flow rule amendments
On 25 August 2021, ASIC released Consultation Paper 347 Proposed amendments to the prohibition on order incentives in the ASIC market integrity rules (CP 347). ASIC noted that its rules currently do not deal with certain payment-for-order flow scenarios (such as arrangements between non-market participant intermediaries).
Although payment for order flow is not prevalent in the Australian equity market, ASIC has identified its continuing growth in other markets and has recognised that it has the potential to create conflicts of interests and negatively impact market liquidity and pricing. ASIC is now considering the application of the existing prohibition on payment for order flow.
ASIC is seeking feedback on its proposal to amend its current prohibition. The consultation will end on 3 November 2021, pending pandemic shutdowns.
Treasury consults on changes to unfair contract terms laws
The Treasury has released draft legislation which will make unfair contract terms unlawful under the Australian Securities and Investments Commission Act 2001 (Cth). These laws have been foreshadowed for some time. Currently no pecuniary penalties apply once a contract term is declared void but this is set to change.
Under the proposed laws:
- a larger number of contracts will be subject to unfair contract terms provisions. Currently, a contract is not a small business contract if the business has 20 or more employees. However, this cap is proposed to be lifted to 100 employees or a turnover of less than $10 million;
- it will be a penalty to propose, apply, rely on or purport to apply or rely on an unfair contract term; and
- while a court can presently declare a contract (or part of a contract) void or unenforceable, a court will also be given the power to make orders appropriate to prevent or reduce loss or damage that has or may be caused by the unfair term.
The new laws also apply to standard form contracts not the subject of the proceeding but which have the same or similar unfair terms. In those circumstances:
- a regulator can seek a court order to apply the orders to a group of affected contracts that contain the same or similar unfair term;
- a court may grant an injunction to prevent a person from entering into any new contracts that contain the same or similar unfair term;
- there will be a rebuttable presumption of unfairness for the same or similar term if the same party proposed the term or the contract is in the same industry as the contract in the other proceeding.
It will become even more important for financial institutions to ensure their standard form contracts do not contain unfair terms.
For more details, see our update.