Financial services monthly wrap up: May 2020

ASIC defers the commencement of the design and distribution obligations and mortgage broker reforms

As a result of the significant impact of COVID-19, ASIC announced on 8 May 2020 that it will defer the commencement date of the design and distribution obligations and mortgage broker best interest duty for six months from their original commencement dates. The design and distribution regime was originally due to commence on 5 April 2021 following a two-year transition period, however this has been deferred by six months until 5 October 2021. Similarly, the new mortgage broker best interest obligations were to commence on 1 July 2020, but these have been deferred until 1 January 2021.

The regulator has deferred these commencement dates to allow industry participants to focus on immediate priorities, their customers’ needs and the repercussions emerging from the COVID-19 pandemic. ASIC has noted that it will continue to work on releasing the updated guidance on both reforms by mid-2020. More information about the deferral of both schemes is available on ASIC’s website.

APRA publishes weekly data on temporary early release of superannuation scheme

In accordance with APRA’s Early Release Initiative (ERI) data collection, the regulator has been collecting and publishing data on a weekly basis stipulating the number, value and timing of early release benefits. The ERI data is used to assess the impact and progress of the Government’s temporary release of superannuation scheme as a response to the impact of COVID-19.

In addition to the industry-level data, APRA has also published fund-level data revealing the value, number of payments and the time taken to process payments by each superannuation fund. Superannuation trustees have also been reminded by APRA that they are legally required under the Superannuation Industry (Supervision) Act 1993 (Cth) to process early release payments to eligible beneficiaries “as soon as practicable”. Further information about the regulatory implications for the superannuation industry is available in our article, and the latest ERI data on APRA’s website.

Further extension of financial reporting deadlines granted by ASIC to listed and unlisted entities and ‘no action’ position of Annual General Meetings

ASIC announced on 13 May 2020 that it will extend the deadline to lodge financial reports for both listed and unlisted entities under Chapters 2M and 7 of the Corporations Act 2001 (Cth) (Corporations Act) by one month for certain balance dates up to and including 7 July 2020 balance dates. Unlisted entities will be able to take an additional month to lodge financial reports for year ends from 31 December 2019 to 7 July 2020, and listed entities will be able to take an additional month to report for full year and half-year financial reports for 21 February 2020 to 7 July 2020 balance dates. The extended deadlines have been granted by the regulator to assist those affected by remote working arrangements, travel restrictions and other effects of COVID-19.

Furthermore, ASIC has adopted a ‘no action’ position where public companies do not hold their Annual General Meetings (AGMs) within five months after financial years that end from 31 December 2019 to 7 July 2020, but do so up to seven months after the end. Guidance has also been provided allowing the use of virtual technology to facilitate meetings, including AGMs. Further information on these initiatives are available on ASIC’s website.

2020 General Insurance Code of Practice fast-tracked

On 7 May 2020, the Insurance Council of Australia revised the implementation timeframe for the 2020 General Insurance Code of Practice to better support customers during COVID-19 and recognise the stretched resources of insurers following their need to respond to COVID-19 and recent natural disasters. Provisions supporting customers experiencing family violence, vulnerability and financial hardship will be fast-tracked to be implemented this year, while the remaining parts of the Code will be implemented by 1 July 2021. For more information, see our insurance blog.

ASIC cautions retail investors who are at risk during volatile markets

On 6 May 2020, ASIC shared its analysis of the markets during the COVID-19 pandemic period, which revealed a substantial increase in retail trading in the securities market as well as greater exposure to risk. However, ASIC has identified that while trading has increased, the duration of holding securities has plummeted indicating a surge in short-term ‘day-trading’.

The report highlights a significant increase in trading in exchange traded products, increasing from $703 million during the benchmark period of 22 August 2019 to 21 February 2020, to $1.88 billion in the focus period of 24 February 2020 to 3 April 2020. ASIC’s OTC derivatives trade repository data also shows a large increase in CFD trading activity during the peak of COVID-19 volatility, addressing concerns of leverage and volatility magnifying risk and losses. Further information including the report is available in ASIC’s Media Release.

ASIC issues letter to equity markets participants on setting expectations for equity market resilience

ASIC published its letter issued to all equity market participants on 14 May 2020, setting out its expectations for all market participants to ensure Australia’s equity markets remain resilient. The regulator expects that reasonable steps are undertaken by participants to ensure the number of trades matched from their orders are capable of being handled by their internal processing and risk management systems (and their clearing and settlement operations if applicable), and they support the fair and orderly operation of Australian equity markets. Further details on ASIC’s monitoring of equity market participants as well as its letter is available on ASIC’s website.

Implementation of the Royal Commission recommendations deferred by 6 months

On 8 May 2020, Treasury announced a six month deferral on the implementation of commitments arising from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) as a consequence of the impact of COVID-19. The postponement will enable the financial services industry to focus its efforts on recovery as well as supporting customers and staff. The Government had planned to introduce into parliament some recommendations by 30 June 2020 which concerned a number of findings from the Royal Commission, however this will be pushed back to December 2020. Treasury’s Media Release provides further details on the deferral.

Ban on conflicted remuneration to extend to listed investment companies and trusts

The Government announced on 27 January 2020 that Treasury would undertake a public consultation on the merits of the stamping fee exemption with respect to listed investment companies and trusts (LICs). These stamping fees are upfront one-off commissions paid to financial services licensees for their involvement in capital raisings related to initial public offerings. As part of the public consultation, the Government confirmed on 21 May 2020 that it will extend the ban on conflicted remuneration to LICs, which is due to commence 1 July 2020. Further information is available on Treasury’s website.

ASIC warns consumers that investment advertising is not always ‘true to label’

ASIC has identified a surge in recent months in the marketing of fixed-term investment products and comparing them to bank term deposits. On 7 May 2020, the regulator cautioned consumers to take care when making investment decisions based on such advertising. While these investment products are being advertised as ‘alternatives’ or ‘substitutes’ to term deposits, ASIC views the fixed-term investment products as more risky as they may be issued by entities that are not well-capitalised, not supervised by APRA and are not protected by the Government’s Financial Claims Scheme. ASIC’s Media Release contains more information on the regulator’s warning to consumers.

Litigation funders to be regulated by the Corporations Act and required to hold an Australian financial services licence

On 22 May 2020, Treasury announced that litigation funders will be subject to greater oversight which will require them to hold an Australian financial services licence and comply with the management investment scheme requirements. Currently, exemptions are in place which mean that litigation funders are not subject to the same level of scrutiny and accountability as other financial services and products under the Corporations Act. The removal of these exemptions is due to take place on 22 August 2020, which will provide greater transparency around the functions and operations of litigation funders. Further information is available in Treasury’s Media Release.

ASIC secures over $160 million in remediation for junk consumer credit insurance

ASIC announced on 13 May 2020 the final tranche of over $160 million in remediation made for consumers who were sold junk consumer credit insurance. Remediation is being paid where consumers received insurance where they were ineligible to claim or unlikely to benefit, where lenders used pressure selling and unfair sales tactics, where consumers were incorrectly charged or claims were incorrectly declined, in situations where lenders had inadequate processes to assist with consumers in hardship or where consumers received very little or no value from the product.

More generally, ASIC is continuing to work on a number of mechanisms to reduce the risk of mis-selling, with the ban on unsolicited ‘cold call’ telephone sales of consumer credit insurance and direct life insurance and the introduction of a four-day deferred sales period into the Banking Code of Practice and General Insurance Code of practice. The regulator has indicated that they are continuing to investigate the suspected misconduct of several entities in selling consumer credit insurance, with a view to taking enforcement action. Further information is available in ASIC’s Media Release.

ASIC reminds insurers to prepare for unfair contract terms regime after securing Federal Court win

ASIC was recently successful in the Federal Court in obtaining a declaration that terms within six small business loan contracts were unfair. In a Media Release, ASIC Commissioner Sean Hughes said ‘Importantly, insurance firms should be preparing to extend these obligations in insurance contracts’.

The unfair contract terms regime in the Australian Securities and Investments Commission Act 2001 (Cth) will be extended to insurance contracts on 5 April 2021. More information and analysis will be posted on our Insurance Regulatory Hub as it becomes available.