Financial services monthly wrap-up: April 2021

ASIC bans the sale of binary options to retail clients

On 1 April 2021, ASIC made a product intervention order banning the issue and distribution of binary options to retail clients. Following reviews in 2017 and 2019, ASIC found that approximately 80% of retail clients lost money trading binary options because of the following product characteristics:

• the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
• short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
• negative expected returns.

ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing a number of conditions on contracts for difference offered to retail clients. The ban is to take effect from 3 May 2021 and will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

Further information on the product intervention order can be found here.

ASIC calls insurance firms to lodge claims handling licence

Following the changes to claims handling and settling services from the Hayne Royal Commission, ASIC warned insurance claims handling firms to lodge licence applications (new and variations) by 7 May 2021. Applications submitted after 7 May 2021 risk being rejected at the deadline of 30 June 2021. ASIC cautioned that any rejections occurring close to the 30 June 2021 deadline may mean that the applicant has insufficient time to amend their application.

A complete application accepted by 30 June 2021 will proceed to assessment and a decision will be made to grant or vary an AFS licence. Applicants will be able to provide claims handling and settling services for a 6 month transition period while ASIC assesses the application.

ASIC has also issued the final claims handling and settling service information sheet – INFO 253 which provides the following information:

• sets out who needs to be authorised to provide claims handling and settling services for insurance products and who can act on an AFS licensee’s behalf;
• explains how and when to apply for an AFS licence, or variation to an existing AFS licence, including materials that are needed to support an application, and
• refers to existing regulatory guidance on how to meet the general obligations under section 912A of the Corporations Act 2001, and indicates how the obligations may be tailored to claims handling.

More information can be found here.

Senate Select Committee on Australia as a Technology and Financial Centre releases Second Interim Report

The Senate Select Committee has released the Second Interim Report looking at longer term issues which are key to maintaining Australia’s competitive position in FinTech and RegTech. The Committee has made 23 recommendations including:

• expansion of the Consumer Data Right to promote participation and interoperability with similar schemes in other jurisdictions;
• review of the global talent visa program;
• establishment of a ‘Rules as Code’ innovation hub accompanied by a regulatory sandbox to advance legal coding approaches to Commonwealth legislation and regulation;
• a review of the ability for businesses to access relevant information from government registers to offer digital identity services; and
• promotion of Australia as a destination for international talent in the FinTech and RegTech sectors.

The Committee will now undertake the final phase of its deliberations with a view to presenting its final report on or before the first sitting day in October 2020.

APRA releases consultation to enhance oversight of life reinsurance market

On 8 April, APRA released a consultation package which addressed the concerns on the increased use of offshore reinsurers by life insurers. The proposed updates to the Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) will impose an aggregate limit on the exposure of life insurers to offshore reinsurers, which are not regulated by APRA.

The consultation also proposes changes that will provide clarity on regulatory requirements, facilitate the use of risk mitigation techniques and minimise the regulatory burden associated with bespoke amendments for individual entities.

Consultation is open until 25 June 2021 with the final standard expected to be released by the end of 2021.

ASIC extends temporary relief measure in COVID-19 instrument

On 15 April 2021, ASIC announced that it will extend one of its temporary relief measures designed to help the financial advice industry provide consumers with affordable and timely advice during the pandemic. The extended relief will allow financial advisers to continue to provide a record of advice rather than a statement of advice to existing clients requiring financial advice due to the pandemic.

The extended relief measure follows consultation with industry which identified that many financial advice practices found this measure helpful. The other two measures set out in ASIC Corporations (COVID-19 Advice-related Relief) Instrument 2020/355 will not be extended as these were considered to no longer be necessary.

The record of advice relief measure will be extended to 15 October 2021 and ASIC will continue to monitor the appropriateness of the temporary relief in light of the impact of the pandemic. More information can be found here.

ASIC consults on draft guidance on breach reporting reforms

ASIC has issued Consultation Paper 340, seeking stakeholder feedback on the proposed updates to its draft guidance on upcoming breach reporting reforms commencing 1 October 2021. Arising from the recommendations of the Hayne Royal Commission, the proposed reforms seek to strengthen the existing obligation on AFS licensees to self-report certain breaches of the law to ASIC and extend the obligation to credit licensees.

ASIC is also seeking feedback on the draft information sheet on the new notify, investigate and remediate obligations set to apply to AFS licensees who are financial advisers and credit licensees who are mortgage brokers.

Consultation is open until 3 June 2021 and publication of the final guidance will commence on 1 October 2021. Further details can be found on ASIC's website.

APRA releases guidance on managing the financial risks of climate change

APRA has released for consultation, the draft Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229). The guide is designed to assist banks, insurers and superannuation trustees on managing climate-related risks and opportunities as part of their existing risk management and governance frameworks.

The guidance covers APRA’s view on areas such as governance, risk management, scenario analysis and disclosure but does not create new requirements or obligations. The guidance is designed to be flexible to allow each institution to adopt an approach that is appropriate in light of its size, customer base and strategy.

APRA is seeking stakeholder feedback on the draft CPG 229 by 31 July 2021 with the final guide anticipated to be released before the end of 2021.

More information can be found here.

ASIC extends deadlines for financial reports and amends ‘no action’ position for AGMs

On 23 April 2021, ASIC announced that it will extend the deadline for both listed and unlisted entities to lodge their financial reports by one month for balance dates from 23 June to 7 July 2021 (inclusive).

The purpose of this extension is to assist the reporting process for entities where additional time is required for the completion of the audit process due to challenges presented by COVID-19 conditions, including lack of resources. ASIC has stated that Directors should consider the information needs of shareholders and other users of their financial reports, as well as meeting borrowing covenants or other obligations, when deciding whether to depart from the normal statutory deadlines.

The regulator has also adopted a ‘no action’ position in circumstances where public companies do not hold their annual general meetings within 5 months after the end of financial years that end up to 7 July 2021, but do so up to seven months after year end.

For further details on ASIC’s temporary relief measures, please see ASIC’s website.

ASIC allows certain AFS licensees to use lease assets to satisfy their financial requirements

Following industry feedback on the proposals in Consultation Paper 366 Financial Requirements: Treatment of lease assets, ASIC made changes on 29 April 2021 to allow certain AFS licensees to use their lease assets to satisfy their licence financial requirements.

Under these changes, certain AFS licensees will be able to include a right-of-use asset in the calculation of their net tangible assets (where the licensee is a lessee) and use adjusted surplus liquid funds and surplus liquid funds (where the right-of-use asset is a current asset). ASIC has also modified existing ASF licence conditions so that a right-of-use asset is not to be an excluded asset.

Futher information on these changes can be found here.

ASIC review finds retail managed funds responded well to COVID-19 challenges

As part of ASIC’s broader response to the initial disruption and uncertainty of COVID-19 on financial markets, ASIC’s 2020 review of a targeted selection of retail managed funds found that they did not face serious investor liquidity challenges during COVID-19 and that their liquidity frameworks were generally adequate. The review, conducted between June and November 2020, covered 14 registered funds across three different strategies, and found the following:

• 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, then eased back on this over the following quarter;
• the responsible entities’ liquidity frameworks were generally adequate;
• overall, liquidity risks and redemption rights were appropriately disclosed to investors; and
• responsible entities reported a mixed but not severe impact on fund revenues as a result of COVID-19.

The review covered publicly available material such as product disclosure statements, financial statements, websites and marketing material as well as material produced under compulsory notices such as liquidity framework documents and data on member flow, the liquidity and value of fund assets, distribution payments, and on actions taken by responsible entities to manage liquidity.

Further information can be found here.

Your Future, Your Super: Exposure Draft Regulations released by Treasury

On 28 April 2021, Treasury released a series of Exposure Draft Regulations (Draft Regulations). containing proposed changes to the "Your Future, Your Super" package. Responses to the draft Regulations will remain open until 25 May. Please refer to the Treasury website for information.

Addressing Underperformance in Superannuation

The Treasury Laws Amendment (Your Future, Your Super—Addressing Underperformance in Superannuation) Regulations 2021 notably outlines when APRA is expected to undertake the annual performance tests, the products which fall within the ambit of the annual performance test and the requirements for the test.

Under the Draft Regulations, APRA must commence the annual performance tests at the end of the financial year and notify trustees of its determinations before 1 September.

The products which fall under the scope of the annual performance test are ‘Part 6A products’, which are prescribed as a MySuper Product or a class of beneficial interest in a regulated superannuation fund if that class is identified by regulations. The Draft Regulations have indicated that those products are ‘trustee-directed products’, which is generally defined in the Explanatory Statement as ‘products where the trustee has control over the design of the investment strategy of the product’. Unless APRA decides otherwise, ‘Part 6A products’ which have less than 5 years of performance history, will not usually be the subject of a performance test in that particular financial year.

The Draft Regulations outline the requirements and methodology of the annual performance test to which products will be exposed. According to the Explanatory Statement, “the requirements for the performance test are based on the methodology adopted by the Productivity Commission in its 2018 report, Superannuation: Assessing Efficiency and Competitiveness, and further refined by APRA in its Heatmap analysis, available on the APRA website”. Further, a significant inclusion to the performance test under the Draft Regulations is the consideration of administration fees. Infrastructure and property asset classes have also been split into listed and unlisted assets, to appropriately reflect the differences in risk and returns between these types of investments.

Trustees who fail the performance test will need to provide notice of the failed test to each member who holds that product within 28 days of being notified by APRA. The changes made to the Draft Regulations in relation to the notification requirements, comprehensively set out the exact information that must be contained in a notice of a failed assessment in addition to the form in which it should be provided.

Improving Accountability and Member Outcomes

The Treasury Laws Amendment (Your Future, Your Super—Improving Accountability and Member Outcomes) Regulations 2021 ensures superannuation fund members and stakeholders have access to appropriate levels of information.

The Draft Regulations outline the form in which portfolio holdings of a registrable superannuation entity (RSE) must be disclosed. A table is provided to prescribe the manner in which information about an investment option should be publicly displayed. The Draft Regulations provide a degree of flexibility which enables RSEs to use subsidiary tables in order to encapsulate all necessary information.

Another key inclusion is the prescribed information that must be included with the notice of an annual member’s meeting. This information includes periodic statements given to members, annual reports which have been produced for the year, a summary of the significant event or change notices which have been provided to members in the last 2 years, and an itemised list showing expenses in relation to promotion or sponsorship.

Single Default Account (Stapled Fund)

The definition of a ‘stapled fund’ has been outlined in the Treasury Laws Amendment (Your Future, Your Super—Single Default Account) Regulations 2021. As a result of the Royal Commission’s ‘stapling’ recommendation, the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 introduced that an employee will take their existing superannuation account with them when they change employment, instead of being defaulted into an employer’s nominated fund, stopping the creation of multiple unintended accounts. The Draft Regulations set out the basic requirements for a fund to be considered a ‘stapled fund’ as well as the tiebreaker requirements to help decide which fund is to be ‘stapled’, in the event an employee has multiple funds that satisfy the basic requirements.

Essentially, to be a ‘stapled fund’ for an employee at any particular time, the fund must be:

• a retirement savings account (RSA), complying superannuation fund or complying superannuation scheme of which the employee is a member (or holder); and
• able to accept contributions from the employee’s employer, and the Commissioner must be able to disclose information about the employee and fund to the employer.

If an employee has multiple existing eligible funds, the tiebreaker requirements are (in order):

• The most recent fund identified by the Commissioner to be the employee’s stapled fund;
• The fund that received the most recent contribution for the employee during a period;
• The fund that held the largest account balance at the end of the previous financial year;
• The fund selected by the Commissioner having regard to the commencement dates and “any other relevant maters”.

APRA consultation on prudential standard on remuneration

On 30 April 2021, APRA commenced consultation on its draft Prudential Practice Guide CPG 511 Remuneration which sets out the principles and examples of better practice to asset banks, insurers and superannuation licensees in their compliance with prudential standard CPS 511 Remuneration.

The draft prudential practice guide will assist compliance 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 downward adjustments of variable remuneration where there have been poor risk outcomes.

Consultation is open until 23 July 2021. The final versions of CPS 511 and CPG 511 will be published in the second half of this year.

Further information can be found on APRA's website.