Financial services monthly wrap up: November 2019

ASIC releases updated RG 97 on fees and cost disclosure

On 29 November 2019, ASIC released an updated version of Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97), providing further guidance on the disclosure of costs and fees for issuers of superannuation and managed investment products. The updates follow Darren McShane’s external review (ASIC Report 581) conducted in 2018, as well as ASIC’s review and consultation with industry of RG 97 earlier this year (Consultation Paper 308).

Some of the key changes include the following:

• re-grouping of values in the fees and costs summary to more clearly show fees and costs that are ‘on-going’ and those that are ‘member-activity’ based;
• simplification of ongoing fees and costs into three groups – Administrative, Investment and Transaction;
• the inclusion of a single ‘Cost of Product’ figure in a Product Disclosure Statement (PDS); and
• simplification of the presentation of fees and costs in periodic statements.

ASIC Commissioner Danielle Press stated that while disclosure has its limits, the greater clarity provided in the revised RG 97 should result in more “transparent and useable fees and costs information being produced”. The updated regulatory guide and the associated legislative instrument are drafted with an intention to make the disclosure regime more practical and promote issuer compliance with their legal obligations.

The new disclosure requirements will apply to all PDSs issued on or after 30 September 2020. Periodic and exit statements with reporting periods commencing on or after 1 July 2021 must also comply with the new requirements, however an early opt-in is possible in relation to periodic statements for reporting periods commencing before 1 July 2020 where a fund is ready. The requirements under the existing Class Order and the transitional version of RG 97 continue to apply in the interim, however ASIC have reminded industry that the updated version of RG 97 provides clearer guidance about the existing fees and costs disclosure requirements that have not changed.

Issuers are advised to review their current position and have a clear plan in place for early 2020 for transitioning to the new requirements. In the first quarter of 2020, ASIC will hold a series of public roundtable discussions with industry to ensure the new requirements are understood.

For more information about the updates to RG 97, please see Norton Rose Fulbright’s update as well as ASIC’s Media Release.

ASIC gives guidance on companies’ whistleblower policies and relief to small not-for-profits

ASIC released Regulatory Guide 270 Whistleblower policies (RG 270) on 13 November 2019. A single, strengthened whistleblower regime covering the corporate, financial and credit sectors was introduced by the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019. This regime requires public companies, large proprietary companies, as well as proprietary companies that are trustees of registrable superannuation entities to have a whistleblower policy that is available to their officers and employees by 1 January 2020.

RG 270 provides guidance to companies in establishing a whistleblower policy that complies with the whistleblower protection regime as well as good practice guidance on implementing and maintaining a whistleblower policy. ASIC’s regulatory guidance also sets out the following components that are required for a whistleblower policy to comply with the law, including:

• types of matters covered by a policy;
• who can make and receive a disclosure;
• how to make a disclosure;
• legal and practical protections for disclosers;
• investigating a disclosure; and
• ensuring fair treatment of individuals mentioned in a disclosure.

APRA releases response to submissions on proposed Reporting Standard ARS 722.0 Derivatives

On 18 November 2019, APRA responded to submissions about the proposed Economic and Financial Statistics (EFS) Reporting Standard ARS 722.0 Derivatives (ARS 722.0), which will be used to collect quarterly data on any activity by ADIs or ‘registered financial corporations’ relating to derivatives.

ARS 722.0 will be used to collect quarterly data on the derivatives activity of ADIs as well as registered financial corporations. The proposals seek to provide greater certainty about reporting requirements and reduce the reporting burden for most financial sector entities. Feedback on the Reporting Standard addressed concerns regarding the reporting threshold, implementation date, data quality expectations, adjustments, derivative instrument types as well as intra-group and related party transactions.

APRA’s response to submission on proposed ARS 722.0 ABS/RBA derivatives data collection is available here, as well as further general information including the amended Reporting Standard and Reporting practice Guide on APRA’s website.

APRA sets out stronger, more transparent approach to regulating and supervising GCRA risks

On 19 November 2019, APRA released an information paper setting out a more stringent regulatory approach to governance, culture, remuneration and accountability (GCRA) practices across the prudentially regulated financial sector.

APRA aims to strengthen the resilience of financial institutions, including addressing issues such as poor risk governance, misaligned incentives and other forms of misconduct that have diminished public confidence in the financial sector.

In taking this more intensive approach, APRA acknowledges that it will result, in some circumstances, a more prescriptive set of regulatory requirements and may result in higher compliance costs. The main features of APRA’s new approach to GCRA include:

• strengthening the prudential framework through clarifying expectations of boards and senior managers, consulting with industry to embed risk governance self-assessments and strengthening prudential requirements for remuneration;
• enhancing APRA’s focus on and capacity for GCRA supervision by increasing internal resourcing, investing in new tools and holding entities more forcefully to account when deficiencies are identified; and
• sharing APRA’s insights with industry and the public to reinforce prudential expectations.

Further information can be found on APRA’s website.

APRA unveils MySuper heatmap

On 15 November 2019, APRA published an Information Paper as well as MySuper product heatmap with mock data ahead of the finalised heatmap that APRA will publish in December 2020. The MySuper product heatmap provides an enhancement to industry transparency, which has been designed to provide stakeholders with insights into the outcomes being delivered by Registrable Superannuation Entity (RSE) licensees.

APRA’s information paper contains explanations of how the regulator selected the metrics and benchmarks used in the heatmap, as well as the methodology used to take into account important differences in products’ investment strategy and asset allocation. The heatmap with mock data shows how the heatmap will use a graduating colour scheme to provide clear insights into MySuper products across investment performance, fees and costs, and sustainability of member outcomes. Further information including APRA’s information paper and heatmap with mock data can be found on APRA’s website.

ASIC relief from financial adviser compliance scheme obligations takes effect

On 14 November 2019, ASIC announced that it has granted a three-year exemption to all Australian financial services licensees from the obligation to ensure that their financial advisers are covered by a compliance scheme and the associated notification obligations as required by the Corporations Act 2001.

The relief afforded has followed the Government’s announcement in October 2019 that it would be accelerating the establishment of a single disciplinary body for financial advisers. The disciplinary body will displace the role of compliance schemes in monitoring and enforcing the Financial Planners and Advisers Code of Ethics 2019. Consequently, compliance scheme applicants have withdrawn their applications to ASIC for approval meaning the compliance scheme regime will not move forward at this time. Further information about the relief and adviser compliance scheme obligations can be found on ASIC’s website.

ASIC outlines approach to advice licensee obligations for the financial adviser codes of ethics

ASIC outlined on 26 November 2019 their role and approach in relation to the Financial Planners and Advisers Code of Ethics 2019 (the Code). ASIC stated that all financial advisers will be required to take reasonable steps to comply with the Code from 1 January 2020 and AFS licensees will be required to take reasonable steps to ensure that their financial advisers comply with the Code. However, ASIC will take a facilitative approach to compliance with Standards 3 and 7 of the Code until the new single disciplinary body is operational, which will be monitoring and enforcing individual advisers’ compliance with the Code.

The reasonable steps that ASIC expects AFS licensees to take to ensure that their financial advisers comply with the Code include the following systems and processes:

• making sure that their advisers are aware that they need to comply with the Code from 1 January 2020 onwards;
• providing training and/or guidance to their advisers on the types of conduct that is consistent and inconsistent with the Code;
• facilitating individual advisers’ ability to raise concerns with the AFS licensee about how the licensee’s systems and controls may be hindering their ability to comply with the Code, and acting on those concerns where appropriate;
• considering whether advisers are complying with the Code as part of their regular, ongoing monitoring of adviser conduct; and
• when it is in place, considering the decisions of the new disciplinary body and making any necessary changes to their systems and processes.

More information about licensee’s obligations under the Code can be found in ASIC’s Media Release.

ASIC reports on compliance with financial advice fee disclosure obligations

On 28 November 2019, ASIC released Report 636 Compliance with the fee disclosure statement and renewal notice obligations (REP 636) focussing on the fee disclosure statements and renewal notices issued by financial advisers. REP 636 assesses the compliance of 30 randomly sampled AFS licensees and their use of fee disclosure statements and renewal notices, which were first introduced in 2013 as part of the Future of Financial Advice reforms in 2013.

REP 636 highlighted that consumers receiving financial advice could be at risk of receiving incorrect information about advice fees and in some circumstances being charged fees after ongoing fee arrangements have terminated. Evidence of non-compliance ranged from trivial and technical breaches to more significant breaches. Of the fee disclosure statements reviewed in detail:

• 80% did not include all the required information that clients were entitled to receive;
• 73% did not cover all the information about services that clients were entitled to receive; and
• 44% did not include the amount of each fee paid by the client.

ASIC also reviewed the policies and procedures of the AFS licensees and found that more than half did not have effective processes to remind them when renewal notices are due or to turn off ongoing fees. ASIC Commissioner Danielle Press noted that disclosure alone is not enough and transparent and timely disclosure is necessary to reduce risks that consumers face. A copy of REP 636 is available here, as well as further information in ASIC’s Media Release.

ASIC and APRA issue updated Memorandum of Understanding

ASIC and APRA announced on 29 November 2019 an update to their Memorandum of Understanding (MoU). The MoU seeks to give effect to recommendations 6.9 and 6.10 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), which seek to maximise cooperation between the two regulators including the preparation of an updated joint memorandum.

The update to the MoU facilitates more efficient and timely supervision, investigations and enforcement action and deeper cooperation on policy matters and internal capabilities. The twin peaks model of regulation involving APRA and ASIC has operated for over 20 years and was recommended by Commissioner Hayne to be retained.

APRA and ASIC continue to work with the Government to implement the legislative changes to give effect to the recommendations of the Royal Commission. More information can be found on ASIC’s website.

APRA proposes changes to prudential standard governing insurance in superannuation

APRA has released to the industry proposed revisions to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) for consultation. APRA’s proposed updates to SPS 250 responds to recommendations made in APRA's Post Implementation review of the superannuation prudential framework to enhance APRA’s requirements and guidance on the strategy, design and selection of insurers as well as Commissioner Hayne’s recommendations 4.14 and 4.15 from the Royal Commission.

The proposed revisions to SPS 250 will require:

• a process that allows beneficiaries to straightforwardly opt-out of insurance cover;
• that the level and kind of insurance cover not inappropriately erode the retirement income of beneficiaries;
• that any status attributed to a beneficiary in connection with the provision of insurance is fair and reasonable; and
• independent certification that insurance arrangements are in the best interests of beneficiaries.

The consultation closes on 3 February 2020, with APRA aiming finalise the updated prudential standard by mid-2020. The revised standard will come into effect on 1 January 2021. Further information including the draft prudential standard is available on APRA’s website.

APRA publishes speech reflecting on the year in superannuation regulation

On 14 November 2019, APRA’s Executive General Manager Suzanne Smith delivered a speech at the 2019 ASFA Conference reflecting on APRA’s regulation of the superannuation industry in 2019. Ms Smith noted that APRA’s focus areas for superannuation in 2019 were primarily focused on:

• assessing and improving member outcomes;
• trustee board capabilities and culture;
• risk governance;
• conflicts of interest;
• data and reporting;
• accountability and remuneration; and
• changes in relation to insurance in super.

APRA envisages a number key themes to be at the forefront for 2020, including:

• increasing expectation of trustees around the delivery of improved outcomes for members and making good judgements around the risk return trade-offs;
• rapid regulatory change;
• investment markets and cyber risks to challenge trustees;
• further industry consolidation; and
• trustee focus on simplification and product consolidation.

Ms Smith also announced that from 1 December 2019, APRA will move to a new structure organised along industry lines, meaning that APRA will have a division dedicated to superannuation. Further information and a copy of Ms Smith’s speech is available on APRA’s website.

Treasury releases Retirement Income Review

On 22 November 2019, Treasury released the Retirement Income Review consultation paper, which follows the Treasurer’s announcement of a review into the retirement income system on 27 September 2019. The review will cover the present state of the Australian retirement income system, how it is operating and how it will respond to an ageing society. In particular, the consultation paper addresses the three pillars of Australia’s retirement income system, including government funded and age pensions, compulsory superannuation guarantees as well as voluntary savings.

Responses to this consultation paper are due by 3 February 2020. Further information about the consultation paper can be found on Treasury’s website.

APRA consults on further amendments to the ADI leverage ratio

APRA released on 21 November 2019 a response letter and draft prudential standard for consultation on the leverage ratio requirements for authorised deposit-taking institutions (ADIs), with the exception of foreign ADIs and purchased payment facility providers. The regulator also proposed further amendments to incorporate recent changes to the Basel Committee on Banking Supervision’s leverage ratio standard.

Written submissions on the proposal are due by 7 February 2020. More information about the consultation including a revised draft Prudential Standard APS 110 Capital Adequacy is available on APRA’s website.