Financial services monthly wrap-up: June-July 2023

Government commits to Quality of Advice review recommendations

On 13 June 2023 Treasury announced that the Government would adopt the bulk of the recommendations made in the ‘Quality of Advice’ review. The reforms aim to address the high cost of financial advice and to ensure easier access to helpful information to better protect consumers. Over the next year, the government will roll out legislation in the following three streams:

• Stream one: removing onerous red tape that adds to the cost of advice.
• Stream two: expanding access to retirement income advice.
• Stream three: exploring new channels for advice, including the merits of expanding the provision of personal advice.

The full media release can be accessed here.

Australia’s climate-related financial disclosure reform set to align with new global baseline: IFRS Sustainability Disclosure Standards

On 26 June 2023 the International Sustainability Standards Board launched the inaugural standards, International Financial Reporting Standards S1 and S2. These standards require entities to disclose information about their sustainability-related financial information (IFRS S1) and climate-related risks and opportunities (IFRS S2). On 27 June 2023, the Australian government released its second consultation paper titled ‘Climate-related financial disclosure’, furthering its intention to strongly align Australia’s forthcoming climate-related disclosure framework with the IFRS S2.

The Commonwealth Government’s second consultation paper expresses the view that strong international alignment is needed to minimise compliance costs for Australian entities that operate internationally, and to ensure Australia is viewed with credibility by international capital markets. Treasury is leading consultation, and the Australian Accounting Standards Board will be responsible for establishing the detailed disclosure standards.

The government’s second consultation paper can be read here. See our recent article on this topic here.

Government to raise the bar in superannuation performance test update

On 16 June 2023 Treasury announced that the Government would be updating the benchmarks used to measure fund performance in the ‘superannuation performance test’ administered by APRA. The updates come in response to the Your Future, Your Super review, which identified several unintended consequences in the operation of the test.

Key changes to the updated test include:

• the minimum testing period will be increased in line with the increase of the longer-term investment testing ‘lookback’ period;
• key benchmarks will be calibrated to ensure that funds are not unintentionally discouraged from investing in certain assets;
• in assessing the representative administration fee for trustee-directed products, platform and non-platform products will be benchmarked against a median fee relevant to this category; and
• the text in the notification letter sent to members in failing Choice products will be adjusted to flag cost considerations for certain members.

The full media release can be accessed here.

ASIC issues first DDO stop order for failure to take reasonable steps in CFD distribution

On 2 June 2023 ASIC made an interim stop order preventing a fund manager from opening trading accounts or dealing in contracts for difference (CFDs) or margin foreign exchange contracts (margin FX) to retail investors.

The regulator’s actions are in response to a questionnaire used by margin FX in an attempt to comply with their DDO obligations, which gave prompts to potential investors to review any ‘unacceptable answers’ and allowed unlimited attempts to pass the questionnaire. ASIC considered that the use of the questionnaire did not adequately enquire into the objectives of investors as to enable the entity to assess whether investors were likely to fall within the target market for that product, and ultimately found the questionnaire in breach of the ‘reasonable steps’ obligation under DDO.

This is ASIC’s first use of its stop order powers in response to a contravention of the ‘reasonable steps’ obligation.

The full media release can be accessed here.

ASIC highlights focus areas for 30 June 2023 reporting

On 6 June 2023 ASIC highlighted the following areas for directors, preparers of financial reports and auditors to consider in the preparation of reports for full and half-years ending 30 June 2023:

• assets 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; and
• the impact of a new accounting standard for insurers.

The regulator also identified that directors and managers should assess how the current and future performance of an entity, the value of its assets and provisions and its business strategies may be effected by the following uncertainties and risks:

• the availability of skilled staff and expertise, which can impact on revenue and costs;
• the impact of rising interest rates on future cash flows and on discount rates used in valuing assets and liabilities;
• inflationary impacts that may differ between costs and income;
• increases in energy and oil prices geopolitical risks, including the Ukraine/Russia conflict impacts of climate change, climate related events and transitioning to ‘net zero’;
• technological changes and innovation;
• COVID-19 conditions and restrictions during the reporting period;
• changes in customer preferences and online purchasing trends;
• the discontinuation of financial and other support from governments, lenders and lessors;
• legislative and regulatory changes; and
• other economic and market developments.

The full media release can be accessed here.

ASIC consults on remaking ‘sunsetting’ class orders on unit pricing discretions for managed investment schemes

On 8 June 2023 ASIC announced it was seeking feedback on its proposal to remake the following managed investment scheme unit pricing class orders:

• CO 13/655 – Provisions about the amount of consideration to acquire interests and withdrawal amounts not covered by ASIC Corporations (Managed investment product consideration) Instrument 2015/84; and
• CO 13/657 – Discretions affecting the amount of consideration to acquire interests and withdrawal amounts.

The regulator considers that these class orders are operating effectively, and has only proposed one minor change to CO 13/657 to simplify the requirement to document exercises of discretion that affect the pricing of interests and reduce the level of prescription in the provisions.

The full media release can be accessed here, and the draft legislative instrument can be accessed here.

ASIC grants relief to insurers from certain transaction requirements

On 9 June 2023 ASIC announced they would be granting relief to life and general insurers to provide modifications and exemptions from the confirmation of transaction requirements contained in section 1017F of the Corporations Act 2001. The relief is set out in the two following legislative instruments:

• ASIC Corporations (Confirming Transactions – Deceased Life Insurance Policyholder) Instrument 2023/437 – providing that confirmation of transactions is not required to be given to a life insurance policyholder if the initial owner of the policy has deceased; and
• ASIC Corporations (Confirming Transactions – Recurring Insurance Benefit Payments) Instrument 2023/438 – providing that confirmation of transactions is not required to be given after a recurring benefit claim has occurred where confirmation has already been given under the recurring benefit claim for a period of 6 months, and the statement is compliant with the Corporations Act requirements.

The relief is set to expire on 1 July 2028.

The full media release can be accessed here, ASIC Corporations (Confirming Transactions – Deceased Life Insurance Policyholder) Instrument 2023/437 can be accessed here, and ASIC Corporations (Confirming Transactions – Recurring Insurance Benefit Payments) Instrument 2023/438 can be accessed here.

ASIC calls on super trustees to appropriately deal with member money

On 26 June 2023 ASIC addressed the results of their review into how superannuation trustees were meeting legal requirements for dealing with money under the Corporations Act 2001. Specifically, ASIC has called upon trustees to ensure they are meeting obligations for dealing with incoming money from consumers if a new or increased interest in a super product cannot be issued by the next business day. The regulator outlined the following issues and areas for improvement:

• using a non-compliant account to hold money;
• not holding money for the required time;
• failure to identify money subject to the requirement; and
• inadequate disclosures to consumers.

The full media release can be accessed here.

ASIC warns super trustees to boost efforts to consolidate duplicate member accounts

On 29 June 2023 ASIC warned superannuation trustees to effectively consolidate their duplicate member accounts. The announcement from the regulator was prompted by the results of a review into nine trustees across industry and retail super funds, which identified that poor trustee practice when consolidating duplicate member accounts was leading to the payment of unnecessary fees by consumers. Particularly, ASIC identified the following concerns:

• some trustees did not have documented business rules for identifying and consolidating multiple accounts on an annual basis across some or all of their funds;
• some trustees did not undertake any form of best interest assessments across their funds, and thus automatically merged all duplicate accounts on the assumption that it would never be appropriate for a member to maintain multiple accounts; and
• some trustees with multiple funds had no internal policy on consolidation of duplicate accounts, instead relying on the administrator to have a process in place.

The full media release can be accessed here.

ASIC issues 38 interim DDO stop orders for pet insurance products

On 29 June 2023 ASIC announced that is has issued 38 interim stop orders in connection to 67 pet insurance products issued by two insurers across varying levels of cover.

ASIC issued the stop orders because it was concerned the target market determinations (TMDs) for the products did not properly consider the financial situation of the target class of consumers. In particular, ASIC was concerned that the insurers failed to consider whether the consumers were able to pay for veterinary expenses in full before receiving a partial reimbursement under a claim.

ASIC expects the insurers to consider the concerns it has raised and take immediate action to ensure it is compliant. In the event they are not addressed in a timely manner, ASIC may consider issuing a final order.

The interim stop orders represent the first time ASIC has exercised its design and distribution obligation powers in relation to TMDs for insurance products and follows a risk-based targeted review of insurance TMDs.

The full media release can be accessed here.

Federal Court imposes largest penalty ever on insurer

On 30 June 2023 the Federal Court imposed the largest ever penalty of $40 million on a general insurer for failing to uphold promises that the insurer will discount insurance premiums for consumers who held one of its branded insurance policies.

The Court found that between March 2014 and September 2019, the insurer made false or misleading representations to over 600,000 consumers by failing to honour its promised loyalty discounts and/or bonuses.

The enforcement action by ASIC closely follows the release of its report in June 2023 that revealed industry wide pricing deficiencies for general insurers.

The full media release can be accessed here.

Findings from joint APRA and ASIC review

On 18 July 2023 APRA and ASIC released findings on trustees’ initial implementation of the retirement income covenant.

Last year the Superannuation Industry (Supervision) Act 1993 was amended to include a retirement income covenant, which places a positive obligation on RSE licensees. The principles-based covenant, which came into effect on 1 July 2022, requires RSE licensees to improve long-term outcomes for members in or approaching retirement. Under the covenant, RSE licensees are required to implement a strategy to assist members to achieve and balance the three objectives of: maximising expected retirement income; managing expected risks to the sustainability and stability of retirement income; and having flexible access to expected funds during retirement.

During the 2022–23 financial year, APRA and ASIC undertook a thematic review of how superannuation trustees are supporting their members under the Retirement Income Covenant, finding that trustees need to do more to enhance retirement outcomes.

Overall, the review found that while trustees are improving their offerings of assistance to members in retirement, there is variability in the quality of approach taken and a lack of urgency in embracing the intent of the covenant.

Key findings from the review show the need for more focus on:

• understanding member needs;
• designing fit-for-purpose assistance; and
• overseeing strategy implementation.

The review highlights key areas where industry needs to accelerate its implementation efforts and encourage innovation by RSE licensees. The full information report can be accessed here.

ASIC issues first DDO stop order for a life insurance product

On 18 July 2023 ASIC has announced that it has issued its first interim stop order against a life insurer with respect to two of its life insurance products.

ASIC issued the interim stop order to protect consumers from acquiring life insurance that may not be consistent with their objectives, financial situation or needs. ASIC was concerned that the TMD failed to consider the impact of key eligibility criteria (i.e. age and minimum employment criteria) on the suitability of the product for certain classes of consumers. ASIC was also concerned that the TMD did not include meaningful distribution conditions that would ensure that the products would be distributed to the appropriate class of consumers.

ASIC expects the life insurer to consider the concerns it has raised and take immediate action to ensure it is compliant. In the event they are not addressed in a timely manner, ASIC may consider issuing a final order.

In its media announcement ASIC has also indicated that it is considering further stop orders for other insurance products and that it expects all general and life insurers to be reviewing their TMD and distribution arrangements accordingly.

The full media release can be accessed here.

APRA and ASIC commence early consultation on FAR

On 20 July 2023 APRA and ASIC released key materials in support of the implementation of the Financial Accountability Regime (FAR) for consultation. Set to replace the Banking Executive Accountability Regime (BEAR), FAR will impose a strengthened responsibility and accountability framework for APRA-regulated entities in the banking, insurance and superannuation industries.

To support early engagement with entities and to enable the timely implementation of the FAR, APRA and ASIC have released a package of documents for consultation including:

• proposed Regulator rules that prescribe information for inclusion in the FAR register of accountable persons, including supporting detail about the ADI key function descriptions; and
• proposed Transitional rules that prescribe information to be provided by banking entities in relation to their existing accountable persons under the BEAR at the transition point.

APRA and ASIC are seeking industry feedback on the proposed regulator and transitional rules by 17 August 2023.

The full media release can be accessed here, and the documents for consultation are available here. See our recent article on this topic here.

APRA finalises new prudential standard on operational risk

On 17 July 2023 APRA announced that it had finalised a new prudential standard applicable to banks, insurers and superannuation trustees, aimed to ensure better management of operation risks. Prudential Standard CPS 230 Operational Risk Management (CPS 230) imposes the following obligations on APRA-related entities (among others):

• effectively manage operational risks, maintain critical operations within tolerance levels and manage risks associated with the use of service providers;
• ensure that clear roles and responsibilities for senior managers are set for operational risk management;
• maintain appropriate and sound information technology capability to meet its current and projected business requirements and to support critical operations and risk management;
• maintain a comprehensive assessment of its operational risk profile;
• design, implement and embed internal controls to mitigate its operational risks; and
• notify APRA as soon as possible, and not later than 72 hours, after becoming aware of an operational risk incident that it determines to be likely to have a material financial impact or a material impact on the ability to maintain its critical operations.

APRA believes that CPS230 will strengthen the management of operation risk across APRA’s regulated population, and that its introduction was prompted by a number of recent operational risk control failures and disruptions. CPS 230 will commence from 1 July 2025.

The full media release can be accessed here, and CPS230 can be accessed here.

APRA responds to consultation on minor amendments to insurance reporting framework

On 6 June 2023 APRA released the finalised reporting standards for insurers impacted by the introduction of the Australian Accounting Standards Board 17 Insurance Contracts. As no submissions on the standards were received during the consulting period, the standards remain the same as those received in draft form on 4 May 2023.

APRA believes the changes will improve usability and remove ambiguity that could lead to inaccurate reporting.

The full media release can be accessed here, and the new reporting standards can be accessed here.

APRA responds to Government expectations

On 7 June 2023 APRA released a Statement of Intent (SOI) in response to the Australian Government’s Statement of Expectations.

The SOI outlines the prudential body’s response to the Government’s expectations as to their function and purpose, highlighting the following matters;

• APRA’s supervision seeks to identify and respond to significant risks in financial institutions and the financial system in a timely and effective manner;
• APRA’s policy and supervisory approaches are risk-based and proportionate to the size, complexity and business model of supervised institutions;
• APRA as resolution authority and administrator of the Financial Claims Scheme requires supervised institutions to be well-positioned to recover from events that may impact their financial viability;
• APRA’s strategic initiative to enable data-driven decision-making will support enhanced insights, improved data sharing and reduced reporting burden over the long-term; and
• APRA uses formal enforcement powers where appropriate to achieve prudential outcomes and deter unacceptable practices.

The full media release can be accessed here.

APRA consults on minor amendments to prudential framework

On 19 June 2023 APRA released for consultation a number of minor updates to prudential framework for authorised deposit taking institutions and general, life and private health insurers. Relevantly for the insurance industry, APRA proposes to update the following prudential standards:

• Prudential Practice Guide CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review – APRA is proposing to amend the scope of this guidance to include private health insurance.
• Prudential Standard CPS 320 Actuarial and Related Matters – APRA is proposing to replace the stress test amount references in relation to private health insurance from this standard as they will no longer be applicable once the revised private health insurance capital framework takes effect on 1 July 2023.

Submissions closed on 19 July 2023.

The full media release can be accessed here, the proposed amendments to CPG 110 can be accessed here, and the proposed amendments to CPS 320 can be accessed here.

APRA publishes answers to an additional frequently asked question on the Superannuation Data Transformation project

On 21 June and 19 July 2023 APRA updated the existing set of answers to frequently asked questions on the Superannuation Data Transformation (SDT) project, providing clarity on when the regulator will revoke pre-SDT Reporting Standards that were replaced under phase one, amongst other things. APRA stated their intent to revoke Reporting Standards ‘SRS 530 Investments’ and ‘SRS 534 Derivative Financial Instruments’ in August 2023.

The full media release can be accessed here, and the FAQs can be accessed here.

APRA publishes updates to FAQs on the Your Future, Your Super package

On 22 June 2023 APRA issued a set of new and updated FAQs to provide further guidance on the administration of the Government’s Your Future, Your Super Performance Test. The new FAQs address the following topics:

• determination of Trustee Directed Product status;
• resubmission of SRS 550.0 reporting;
• determination of Strategic Asset Allocations;
• reporting forms used; and
• use of data collected as part of the SDT project.

The FAQs can be accessed here.

APRA launches new super publication

On 30 June 2023 APRA launched a new statistical publication to provide greater transparency across the superannuation industry. The new publication, known as the ‘Quarterly Superannuation Product Statistics’ will list all superannuation products offered by each APRA-regulated super fund, and will provide information on fees and costs, investment performance and asset allocation.

The full media release can be accessed here, and the inaugural Quarterly Superannuation Product Statistics publication can be accessed http:here.

APRA publishes first round of findings from its industry cyber assessment

On 5 July 2023 APRA released the first round of findings from its ongoing independent cyber assessment. The study is one of the largest of its kind, which is forecasted to include over 300 regulated entities by the end of the year, and seeks to provide an industry wide assessment of compliance with the requirements under prudential standard CPS 234 Information Security. The study was initiated by APRA following high profile cyber breaches exposing vulnerabilities in the financial services industry.

The first round of findings has exposed the following deficiencies:

• failure to properly identify critical and sensitive information assets;
• limited assessments of the information security capabilities of third-parties;
• inadequate control testing programs;
• failure to regularly review or test incident response plans;
• limited internal audit review of information security controls; and
• inconsistencies in making notifications to APRA about material incidents and control weaknesses.

The full media release can be accessed here.

APRA publishes final investment governance guidance

On 20 July 2023 APRA released final guidance on investment governance for superannuation trustees, as part of a broader process of reform by APRA to strengthen investment government practices across the superannuation industry. The guidance is designed to assist trustees in meeting their obligations under Prudential Standard SPS 530 Investment Governance (SPS 530).

Prudential Practice Guide SPG 530 Investment Governance (SPG 530):

• provides guidance to support requirements relating to liquidity management;
• outlines how trustees are expected to consider ESG factors in their overall risk management; and
• introduces a more streamlined approach to guidance.

The full media release can be accessed here, and SPG 530 can be accessed here.

APRA proposes to remake sunsetting standard APS 910 Financial Claims Scheme

On 26 July 2023 APRA commenced a consultation on Prudential Standard APS 910 Financial claims Scheme (APS 910) which is due to sunset on 1 October 2023.

APRA believe that APS 910 plays a critical role in APRA’s crisis management framework, and thus propose to leave APS 910 unchanged aside from minor updates to ancillary provisions.

The consultation will be open for submissions until 23 August 2023.

The consultation letter can be accessed here.

APRA finalises remuneration disclosure requirements for insurers, ADIs and super funds

On 1 August 2023 APRA announced that it has finalised Prudential Standard CPS 511 Remuneration (CPS 511) which establishes new remuneration disclosure requirements for authorised deposit institutions (ADIs), insurers and superannuation entities.

The new requirements are designed to uplift disclosure practices for executive remuneration and responds to concerns that the lack of visibility of executive pay has not properly facilitated financial disincentives for management in the event of risk failures or poor corporate conduct.

Under CPS 511, regulated entities will be required to:

• publicly disclose information on remuneration frameworks, design, governance and outcomes on an annual basis; and
• for significant financial institutions, disclose additional qualitative information including how risk management will factor into decisions about executive remuneration.

The finalised standard is due to come into effect on 1 January 2024.

The media release can be accessed here and CPS 511 can be accessed here.

AUSTRAC has announced that Crown have been ordered by the Federal Court to pay a $450 million penalty over two years, and AUSTRAC has finalised its external audit of the Bell Financial Group and is developing two national AML/CTF national risk assessments

AUSTRAC has announced that Crown Melbourne and Crown Perth have been ordered by the Federal Court of Australia, to pay a $450 million penalty over two years after AUSTRAC launched civil penalty proceedings against them for breaches of the AML/CTF Act. The Court also ordered Crown to pay AUSTRAC’s costs.

More information on the update can be found here.

AUSTRAC has now finalised its external audit of the Bell Financial Group. After considering the final audit reports, AUSTRAC has decided not to undertake further regulatory action. Accordingly, the external audit process is now complete. AUSTRAC has reiterated the importance for the Bell Financial Group to meet its compliance obligations in the future, and will continue to work with the Bell Financial Group to ensure ongoing compliance, and to monitor the remediation and uplift undertaken by the entities in response to the external auditor findings and recommendation. More information on the update can be found here.

AUSTRAC has announced that the Financial Action Task Force have published the following to assist with understanding and identifying risk indicators and suspicious activities for a range of serious financial crime types:

• Countering Ransomware Financing
• Money Laundering from Fentanyl and Synthetic Opioids
• Money Laundering and Terrorist Financing in the Arts and Antiquities Market

More information on the update can be found here.

AUSTRAC is engaging with a range of stakeholders from Commonwealth, state and territory governments, industry and international partners to develop two national risk assessments, one on money laundering and the other on terrorism financing.

The national risk assessments will:

• identify, assess and understand the contemporary and emerging risks facing Australia at both the domestic and international levels;
• provide an evidence base to inform policy and operational responses to identified threats developed by law enforcement, intelligence, integrity, regulatory and border control authorities at the federal, state and territory levels; and
• provide contextual guidance to financial institutions and other industry sectors on the scale and impact of identified money laundering and terrorism financing risks.

More information on the update can be found here.

AUSTRAC released two new AML/CTF e-learning modules aimed at all businesses regulated by AUSTRAC, which focus on:

• conducting enhanced customer due diligence (ECDD)
• submitting suspicious matter reports (SMRs).

More information on the update can be found here.

AUSTRAC released new guidance on debanking designed to:

• help financial institutions understand AUSTRAC’s expectations when providing designated services to businesses they consider higher risk; and
• encourage businesses in affected sectors to engage openly with financial institutions and demonstrate the steps they are taking to address risks within their business.

More information on the update can be found here.

On 27 June 2023, AUSTRAC launched its updated website to include the following improvements:

• industry specific landing pages that make it easier for businesses to find information relevant to their industry;
• simplified navigation and improved search filters for guidance and resources by industry or financial crime type;
• new layouts that make it easier to read and understand long or complex information;
• a new Partners section about AUSTRAC’s partnerships with other agencies and how we work together; and
• easy access to log into AUSTRAC Online from the header of all pages.

More information on the update can be found here.

AUSTRAC announced on 27 June 2023 that the first round of public consultation on proposed reforms to Australia’s currently AML/CTF regime drew to a close and all feedback is being reviewed by the Attorney-General’s Department.

More information on the update can be found here.

AUSTRAC announced that the Financial Action Task Force (FATF) published a June update on international ML/TF risk regarding its lists of High-Risk Jurisdictions subject to a Call for Action and Jurisdictions under Increased Monitoring.

More information on the update can be found here.

Industry Insight: Examining the growth of NAV and hybrid facilities in Funds Financing

Subscription finance (which is leveraged off the back of uncalled capital commitments) has been a popular choice for funds to manage their cash flows in the past, and its uptake continues to grow recently, particularly in higher interest environments. Subscription finance is traditionally used at/near inception of the funds where uncalled capital commitments are plentiful. However, as the investment period of funds mature and the uncalled capital commitments are reduced, funds are looking to switch NAV (net asset value) finance as an alternative funding solution. The popularity of NAV finance has grown significantly in the US and European market over the last 5 years and Asia Pacific may soon follow suit.

The full article can be found here.