Financial services monthly wrap-up: December 2020 to January 2021

ASIC releases its Corporate Finance Update: COVID-19 Landscape

On 3 December 2020, ASIC released the third issue of its Corporate Finance update for 2020, which focuses on and highlights various measures that ASIC, as well as other key regulators, are continuing to take as a result of COVID-19. Many of the temporary COVID-related regulatory relief measures introduced in 2020 will remain well into 2021. Updates include an extension to the relief for ‘low doc’ offers, including rights offers, placements and share purchase plans that are made to investors without a prospectus until 1 January 2021, as well as an extension to the ability to electronically sign and lodge deeds of cross-guarantee, assumption deeds and certificates until 21 March 2021.

A copy of the update can be found here.

ASIC releases final Regulatory Guide 274 on Product Design and Distribution Obligations (DDO)

On 11 December 2020, ASIC released its finalised Regulatory Guide 274 Product design and distribution obligations (RG 274) which will come into effect from 5 October 2021.The DDO will bring industry wide changes to the way financial products are formed, promoted and marketed. It is therefore essential that financial product issuers and distributors captured by the DDO regime begin preparing themselves for its commencement. Some key takeaways for product issuers and distributors are as follows:

• issuers must make a 'target market determination' (TMD) for each product covered by the regime;
• issuers and distributors must take reasonable steps that will, or are reasonably likely to, result in 'retail product distribution conduct' (other than certain excluded conduct) being consistent with the TMD;
• distributors to keep records, report dealing outside the TMD and report complaints to issuers;
• issuers to notify ASIC of 'significant dealings' in a product in relation to a retail client that are inconsistent with the TMD; and
• issuers to conduct regular reviews of the TMD and keep records.

Further information, including the regulatory guide and ASIC Instruments is available here on ASIC's website.

APRA and ASIC issue letter Member Outcomes (MO) and Design and Distribution Obligations (DDOs)

On 15 December 2020, ASIC and APRA issued a joint letter to registerable superannuation entity (RSE) licensees, to assist in better understanding the interaction of their requirements. The letter reminds RSE licensees that MO obligations and DDOs are complementary in nature and that the regulatory changes will have a significant impact on every RSE licensee’s operations and product offerings. At a high level, both regimes will require RSE licensees to:

• identify the needs of members;
• determine whether their decisions about choice products and broader business operations are delivering quality outcomes for members; and
• make decisions that are evidence-based and to monitor and review their product offerings and operations on an ongoing basis.

A copy of the letter can be found here.

Insurance regulatory shake-up set to take place in 2021

On 10 December 2020, Parliament passed the Financial Sector Reform (Hayne Royal Commission) Response Act 2020 (Cth). The Act introduces nine reforms directly relevant to the insurance industry:

• Enforceable code provisions;
• Insurer avoidance of life insurance contracts;
• Duty to take reasonable care not to make a misrepresentation;
• Deferred sales model for add-on insurance;
• Caps on commissions;
• Hawking of financial products;
• Use of the terms ‘insurance’ and ‘insurer’;
• Regulation of claims handling and settling services; and
• Strengthened breach-reporting provisions.

These join two reforms already passed, being the unfair contract terms laws and the product design and distribution obligations. While the reforms are not a surprise, implementation is required on a relatively short timeline. For more information, visit our Insurance Regulatory Hub.

ACCC publishes Northern Australia Insurance Inquiry report

The ACCC’s report published on 28 December 2020 follows a three-year inquiry, which commenced in 2017, into the supply of residential building (home), contents and strata insurance in northern Australia. It reveals higher home, contents and strata insurance premiums in northern Australia compared with the rest of the country, due to a number of factors including increased risk in the region. In addition to these findings, the ACCC has made 38 recommendations to improve northern Australian insurance markets across the short, medium and long term.

Business interruption insurance cases decided by the courts

Business interruption insurance claims continue to be an area of intense public interest. The Insurance Council of Australia (ICA) has indicated the Australian insurance industry is facing up to $10 billion in payouts related to COVID-19 if it ends up accepting every claim under the 250,000 potentially affected policies.

A number of business interruption insurance cases have now been decided by the courts.

In the UK, the Supreme Court has handed down its judgment in the appeal of the Financial Conduct Authority’s test case, providing finality to the proceedings. The case of The Financial Conduct Authority v Arch and Others [2021] UKSC 1 largely affirms the result in the High Court while partially allowing the FCA’s appeal. Aspects of it may be persuasive in Australia.

Closer to home, insurers are seeking special leave to appeal the decision in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 to the High Court. The decision at first instance was in favour of policyholders, ruling that policy exclusions which referred to the Quarantine Act 1908 (Cth) and ‘subsequent amendments’ were not effective because that Act had been repealed. The High Court is the last avenue of appeal. If special leave is granted, the case will likely be heard in the first half of the year.

The Federal Court has also handed down a decision in relation to a specific question in the matter of Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance [2020] FCA 228. The decision sheds some light on how exclusions which correctly refer to the Biosecurity Act 2015 (Cth) might be interpreted, suggesting that depending on the particular case in question the exclusions may be effective and have relatively broad application. However, at the time of writing, the final decision on coverage is yet to be handed down.

Exemptions to the deferred sales model for add-on insurance

The Treasury is consulting on potential exemptions to the deferred sales model for add-on insurance products. Following the passage of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), the deferred sales model will commence on 5 October 2021.

The purpose of the consultation is to identify those add-on insurance product classes that represent a ‘very high level of value for consumers and where it would not be appropriate that they are captured by the deferred sales model’. Treasury invites submissions addressing the criteria set out in the consultation note. At this stage, the government intends to use the regulations to exempt compulsory third party and add-on travel insurance products from the deferred sales model, although stakeholder views on an appropriate definition or mechanism to capture these products is currently being sought.

The consultation is open until 15 February 2021.

Regulation of claimant intermediaries

The Treasury has consulted on potential exemptions to the regulation of claimant intermediaries. Following the passage of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), claimant intermediaries who carry on a business of representing consumers to pursue claims may be required to hold an Australian Financial Services Licence (AFSL) or be appointed as an authorised representative of a licence holder.

The draft regulation proposes that mortgage brokers, insurance brokers, qualified accountants, veterinarians, travel agents, financial advisers, property managers, estate management and public trustees will be exempt when performing certain tasks in select circumstances.

Consultation closed on 25 January 2021.

ASIC financial reports review of 30 June 2020 and focus areas for 31 December 2020 under COVID-19 conditions

ASIC has highlighted key focus areas for financial reporting for years ending 31 December 2020. As the impact of COVID-19 continues, the areas identified remain similar to those at 30 June 2020 and include:

• asset values;
• solvency and going concern assets;
• provisions;
• events occurring after year end and before the completion of the financial report; and
• disclosures in the financial report and Operating and Financial review.

As previously indicated, ASIC has extended the deadline to lodge financial reports for listed and unlisted entities under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 January 2021 balance dates. ASIC’s updated ‘frequently asked questions’ provides additional information on audits and financial reports. Further information on focuses for financial reporting during COVID-19 is available in ASIC's media release.

ASIC seeks further feedback on Internal Dispute Resolution data reporting requirements

On 16 December 2020, ASIC announced it was seeking additional feedback on proposed internal dispute resolution (IDR) data reporting requirements by 5pm on Friday 12 February 2021. This follows the release of ASICs March 2019 Consultation Paper 311, which outlined the internal dispute resolution data framework intended to enhance transparency of IDR in the finance sector. From 5 October 2021, the new IDR requirements will apply to financial firms dealing with retail clients, including superannuation trustees, however mandatory IDR data reporting will not commence until a later date.

Further information can be found here.

ASIC releases its first consultation of Derivative Transaction Rules

On 27 November 2020, ASIC released Consultation Paper 334 (CP 334) Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting). The paper outlines changes focused on implementing internationally standard reporting requirements as well as considering aims to ensure that the Reporting Rules are current, consolidated and fit for purpose.

Feedback on CP 334 should be submitted to ASIC by 1 March 2021. Further information can be found here.

ASIC releases updated RG246 on conflicted remuneration

On 10 December 2020, ASIC released its technical updates to Regulatory Guide 246 on Conflicted and other banned remuneration (RG 246) for Australian financial services licensees, representatives and other entities. The updates to RG246 reflect:

• the end of grandfathering of conflicted remuneration for financial product advice from 1 January 2021; and
• the extension of the ban on conflicted remuneration to stamping fees paid in relation to listed investment companies and listed investment trusts (excluding real estate investment trusts) that was in effect from 1 July 2020.

Additionally, in line with previous ASIC advice, the RG clarifies that where a life insurance policy has been cancelled or reduced in the first two years, no timeframe is prescribed by law for repaying commissions being clawed back.

Further information, including the regulatory guide is available on ASIC's website.

ASIC extends relief from portfolio holdings disclosure

The requirement for superannuation funds to disclose portfolio holdings has again been deferred by ASIC. The measure was originally deferred last April amid the COVID crisis, with the new deadline being delayed until 31 December 2021, at which stage superannuation funds will be obliged to disclose information about a fund’s holdings on its website, no later than 90 days from its reporting date. ASIC has stated that the deferral will allow additional time for Government regulations supporting the requirements to be developed. However, depending on when regulations are made, ASIC may assess shortening the current relief period.

Further information can be found here.

ASIC consults on consumer remediation guidance

ASIC released its Consultation Paper 335 on Consumer Remediation: Update to RG 256 on 3 December 2020. Significantly, the proposed changes to RG 256 will apply to all Australian Financial Services (AFS) licences, Australian credit licensees and RSE licensees. The key issues identified for updating RG256 include establishing a two-tiered approach to failures requiring remediation, updating the guidance on the use of assumptions in remediations and amending the review period start date to when a licensee reasonably suspects a failure first caused loss to a consumer. ASIC is seeking feedback and submissions on Consultation Paper 335 by 26 February 2021. Draft guidance will be released following feedback for a second phase of consultation. Further information, including the Regulatory Guide can be found on ASIC's website.

APRA and ASIC issue annual joint engagement update

ASIC and APRA released their first annual update on engagement between the two regulators, outlining their commitment to facilitate cooperation and collaboration to contribute to greater regulatory efficiency and outcomes across the financial sector. Priorities for the two regulators for 2021 include implementation of superannuation reforms, preparation for the Financial Accountability Regime (FAR), and improving performance assessment frameworks, as well as supporting recovery from the COVID-19 pandemic. The full update is available on APRA's website.

Update of APRA’s MySuper Product Heatmap

On 18 December 2020, APRA published its first refresh of the MySuper Product Heatmap since its original publication last year. The heatmap has increased scrutiny on underperforming funds, resulting in estimated savings in total fees and costs of $408m. Additionally, APRA has published an insights paper outlining key insights from the updated heatmap and its impact on improving member outcomes and holding trustees publically accountable for product performance and returns.

The updated heatmap and insights paper can be found here.

APRA paper on BEAR implementation at three large ADIs

On 11 December 2020, APRA released its information paper, detailing findings from its review of the implementation of the Banking Executive Accountability Regime (BEAR) by three of Australia’s largest authorised deposit-taking institutions (ADIs): Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB).

The paper identified that BEAR has helped to deliver:

• greater clarity and transparency of individual accountabilities at ADIs;
• sharpened challenge by boards on actions taken by accountable persons to meet their obligations; and
• more targeted engagement between APRA and ADIs to deliver prudential outcomes.

The paper also shares key examples of better practice that other ADIs can use to improve their implementation of the BEAR, and notes that APRA will continue to monitor progress through its ongoing supervisory activities. Further information and the information paper can be found on APRA's website.