Financial services monthly wrap up - August 2019

Treasury releases implementation roadmap on the Royal Commission

On 19 August 2019, the Treasury released its Financial Services Royal Commission Roadmap summarising the Government’s actions to date and explaining how it will deliver in its response to the Royal Commission’s recommendations. The Government has committed to take action in relation to all 76 recommendations and has made 18 additional commitments.

Currently, the Government has completed 15 of the recommendations with another 5 in progress. By the end of 2019, the Government intends to have introduced legislation in response to another 6 recommendations to improve consumer protections and 4 additional commitments to strengthen financial regulators. Further information, including the implementation timeline for the Government, Financial Regulators and Industry actions can be found in the Roadmap here.

ASIC proposes ban on the sale of binary options to retail clients and restrictions on the sale of CFDs

On 22 August 2019, ASIC released Consultation Paper 322 Product Intervention: OTC binary options and CFDs (CP 322) as part of its new market wide product intervention powers. Accompanying CP 322 were two draft legislative instruments and a report Consumer harm from OTC binary options and CFDs (REP 626).

As part of the Consultation Paper 322, ASIC proposes to:

• prohibit the issue and distribution of OTC binary options to retail clients; and
• impose 8 conditions on the issue and distribution of CFDs to retail clients, comprising:

1. leverage ratio limits;
2. margin close-out protection;
3. negative balance protection;
4. prohibition on inducements including ‘free’ gifts, bonus credits and spread rebates;
5. risk warnings;
6. real-time disclosure of total position size;
7. real-time disclosure of overnight funding costs; and
8. transparent pricing and execution.

ASIC believes that unlike binary options, CFDs can serve legitimate trading, investment and risk management purposes provided that appropriate protections are put in place through the introduction of such conditions.

Comments on Consultation Paper 322 are due by 1 October 2019, with more information available in ASIC’s Media Release.

ASIC to review industry transition towards ending grandfathered remuneration for financial advice

On 21 August 2019, ASIC announced it is monitoring the transition away from grandfathered conflicted remuneration arrangements for financial advisers. ASIC will review the steps taken by industry participants to end these arrangements and investigate the extent to which benefits are being passed on to affected clients.

This comes after the Government announced on 30 July 2019 legislation that will end the practice of grandfathering arrangements by 1 January 2021. This move was recommended in the final report of the Financial Services Royal Commission.

ASIC will conduct quantitative reviews including a survey of entities known to pay grandfathered conflicted remuneration to Australian financial service licensees. The review will require them to provide data initially for a 12-month period (from 1 July 2018 – 30 June 2019) and thereafter on a quarterly basis. Qualitative analysis of a smaller sample of entities who pay and receive grandfathered remuneration will also be conducted. Information from both quantitative and qualitative reviews will be reported to the Treasurer by 30 June 2021 and released publicly. More information can be found here.

ASIC releases corporate plan for the next four years

On 28 August 2019, ASIC released its corporate plan for 2019 - 2023 outlining its strategies for supervision and enforcement of the industry whilst also promising a greater use of regulatory tools. Seven key priorities were outlined by the regulator, including:

1. high-deterrence enforcement action;
2. prioritising recommendations and referrals from the Financial Services Royal Commission;
3. delivering as a conduct regulator for superannuation;
4. addressing harms in insurance;
5. improving governance and accountability;
6. protecting vulnerable consumers; and
7. addressing poor advice outcomes.

ASIC has received additional funding in the form of $404 million over the next 4 years. ASIC intends to create more competition among fund managers and strengthen their regulation over superannuation funds. For more information, a full copy of ASIC’s Corporate Plan is available here.

ASIC updates guidance on the Markets Disciplinary Panel’s policies and procedures

On 7 August 2019, ASIC updated its Regulatory Guide 216 Markets Disciplinary Panel in order to simplify and streamline the Markets Disciplinary Panel’s (MDP) policies and procedures following a public consultation late in 2018. The MDP makes decisions about whether infringement notices should be given for alleged contraventions of ASIC’s market integrity rules. Some of the key changes include:

• the consolidation of RG 216 and RG 225 into a single, shorter guide;
• using any published infringement notice as the main method for relaying the MDP’s reasons to the market participant and the market generally;
• replacing the table of factors with 4 key factors which include the character of the conduct, the consequences of the conduct, compliance culture and remediation; and
• excluding market operators from the MDP’s remit.

The update also reflects amendments made to the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) resulting in a potential $3.15 million infringement notice for any alleged contravention of the market integrity rules occurring on or after 13 March 2019. More information can be found here.

ASIC enforcement update - January to June 2019

On 18 August, ASIC released its bi-annual enforcement update Report 625 covering the period 1 January 2019 to 30 June 2019. The report provides an update on key actions taken by ASIC over the last 6 months to enforce the law and support enforcement objectives. 77 investigations were commenced and 48 investigations were completed in the 6 month period, with 51 financial services-related outcomes recorded. The report specifically addresses the corporate governance, financial services, markets and small business sectors.

Report 625 is available on ASIC’s website.

ASX cryptocurrency guidance

On 1 August 2019, the ASX released further guidance to listed companies who are engaged in cryptocurrency-related activities. This follows earlier guidance from ASX to the market of its concerns about listed entities who were engaged in conduct involving cryptocurrency. In those earlier updates, ASX noted that cryptocurrency related activities ‘raise significant legal, regulatory and public policy issues’.

The ASX has strongly encouraged any listed companies engaging in or proposing to engage in cryptocurrency-related activities to read ASIC’s Information Sheet 225 Initial coin offerings and crypto-assets and to seek legal advice from a reputable Australian law firm about its application to the company’s activities.

The guidance emphasised compliance with the ASX’s listing rules as well as other important issues including:

• claims made by listed companies that their cryptocurrency-related activities are regulated or have been approved by ASX or that they are regulated by AUSTRAC;
• the use and issue of Simple Agreements for Future Equity (SAFEs) and Simple Agreements for Future Tokens (SAFTs) by listed entities in conjunction with or as a precursor to an Initial Coin Offering or Initial Exchange Offering, which may raise issues under the ASX listing rules; and
• consultation with ASX and new listings of Listed Investment Companies (LICs), Listed Investment Trusts (LITs) and Exchange Traded Funds (ETFs).

The ASX’s guidance can is available here.

APRA provides six-monthly update on royal commission recommendations

APRA released a six-monthly update on 7 August 2019 on the status of the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. APRA has stated that out of the 10 recommendations from the Royal Commission directed at APRA, 9 will be completed by the end of 2020, with 4 expected to be completed by the end of 2019. These four include responses in relation to:

• valuations of land (recommendation 1.12);
• Banking Executive Accountability Regime (BEAR) product responsibility (recommendation 1.17);
• co-operation memorandum (recommendation 6.10); and
• application of the BEAR to regulators (recommendation 6.12).

Additionally, APRA’s examination of each of the 12 matters in relation to individual entities referred to it by the Royal Commission are advanced. Further information about APRA’s update on the implementation of the recommendations can be found here.

APRA publishes Chair Mr Wayne Byres speech on self-regulation

On 8 August 2019, APRA published Chairman Wayne Byres’ speech to the Banking and Finance Oath conference titled ‘Is self-regulation dead?’.

Mr Byres emphasised the key role that boards and executives play in the guiding the activities of their companies and that they must better regulate their own behaviour despite ‘after-the-event’ punishment acting as a general deterrent against illegal behaviour. Mr Byres particularly emphasised that the responsibility for delivering better community outcomes should not fall entirely upon the regulators, Government and industry generally, but a focus on higher standards of governance, empowering boards to effectively govern the firms they oversee.

A full copy of Mr Byres’ full speech is available on APRA’s website.

APRA commences a cross-industry consultation on amendments to margin requirements

On 14 August 2019 ASIC released a consultation letter on updates to Prudential Standard 226 Margining and risk mitigation for non-centrally cleared derivatives in response to the decision of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions to delay the final implementation phase for margin requirements by 1 year. The changes will apply to all ADIs, general insurers, life companies and registrable superannuation entities who transact in material levels of non-centrally cleared derivatives.

APRA proposes to delay the final implementation phase by one year to 1 September 2021 and also proposes to increase the qualifying level of aggregate average notional amount (AANA) of non-centrally cleared derivatives applicable from 1 September 2020 from AUD 12 billion to AUD 75 billion. The application of margin requirements to APRA covered entities with an AANA of non-centrally cleared derivatives greater than AUD 12 billion will be deferred to 1 September 2021.

APRA also made some other minor amendments which can be found in the consultation letter here.

APRA strengthens rules to combat contagion risk

On 20 August 2019 APRA updated Prudential Standard 222 Associations with Related Entities in an attempt to reduce the risk that problems in a certain part of a corporate group may impact an ADI in the same group. The updates will include:

• A broader definition of related entities that includes board directors and substantial shareholders;
• Revised limits on the extent to which ADIs can be exposed to related entities;
• Minimum requirements for ADIs to assess contagion risk;
• Removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework; and
• A requirement for ADIs to report on their exposure to the risk of having to ‘step-in’ to support an entity to which they are not directly related.

Deputy Chair John Lonsdale emphasised that these updates will reinforce financial system stability in an attempt to learn lessons from the global financial crisis where deficiencies in governance or internal controls in part of a corporate group quickly spread causing damage to the ADI. The updated APS will come into effect from 1 January 2021 and the response to submissions can be found here.

APRA releases the Financial Sector (Shareholdings) Rules 2019 (FFSA Rules)

APRA released on 1 August 2019 new rules which will provide clarity to owners of new entrant financial sector companies on whether they are likely to be approved under the ‘fit and proper test’ in accordance with the Financial Sector (Shareholdings) Act 1998 (Cth) (“the Act”). A person applying for approval to hold more than 20 per cent shareholding in a financial sector company may apply for approval under a ‘national interest’ test or by satisfying the decision maker that the applicant is a fit and proper person.

The new rules set out matters that must be considered in determining whether a person is fit and proper under subsection 14A(2) of the Act. The FFSA Rules and explanatory material can be found on APRA’s website.

APRA releases its corporate plan for 2019-2023

On 29 August 2019, APRA released its corporate plan for the next 4 years. APRA’s 4 key areas of strategic focus have been identified in the plan, including:

• maintaining financial system resilience;
• improving outcomes for superannuation members;
• improving cyber-resilience across the financial system; and
• transforming governance, culture, remuneration and accountability across all regulated financial institutions.

The corporate plan comes into effect immediately and can be found here.

ASIC consults on new guidance for companies

ASIC released Consultation Paper 321 Whistleblower policies on 7 August 2019, calling for industry views about the proposed regulatory guide on the obligation for companies to implement a whistleblower policy. Public companies, large proprietary companies and corporate trustees of registrable superannuation entities must implement a whistleblower policy and make the policy available to their officers and employees by 1 January 2020.

Whistleblower policies aim to provide stronger rights and protections for whistleblowers. Commissioner John Price has stated that ‘transparent whistleblower policies are essential to good risk management and corporate governance.’

Industry feedback and submissions are due by 18 September 2019, with more information available here. If you need assistance with preparing or reviewing a whistleblower policy, please do not hesitate to contact us.

ASIC updates guidance on climate change related disclosure

On 12 August 2019, ASIC published updates in Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors and Regulatory Guide 247 Effective disclosure in an operating and financial review in order to clarify the application of their existing guidance to the disclosure of climate change related risks and opportunities. ASIC has updated its guidance to, amongst other matters:

• incorporate the types of climate risks developed by the G20 Financial Stability Board’s Taskforce on Climate Related Financial Disclosures into the list of examples of common risks that may need to be disclosed in a prospectus;
• highlight climate change as a systematic risk that may need to be disclosed in an operating and financial review (OFR);
• reinforce that disclosures made outside the OFR should not be inconsistent with disclosures made in the OFR; and
• make a minor update to ASIC Information Sheet 203 to highlight climate change and other risks that may be relevant in determining key assumptions that underlie impairment calculations.

ASIC has stated that in the coming year they will conduct surveillance of climate change related disclosure practices by selected listed companies. More information about these changes are available here.