Financial services monthly wrap up: October 2019

Bill to end grandfathered conflicted remuneration passed through Parliament

On 14 October 2019, the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 (Bill) passed through Parliament.

The Bill implements recommendation 2.4 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) by amending the Corporations Act 2001 (Cth) in order to:

• remove grandfathering arrangements for conflicted remuneration and other banned remuneration in relation to financial advice provided to retail clients, by 1 January 2021; and
• establish a scheme by regulation under which amounts that would otherwise have been paid as conflicted remuneration are rebated to affected customers, after 1 January 2021.

The Parliamentary Joint Committee on Corporations and Financial Services 2009 Ripoll Report identified conflicted remuneration as the principal cause of poor financial advice provided to clients. ASIC are currently monitoring the process product issuers are undertaking in order to end the grandfathering of conflicted remuneration. The Bill as passed by Parliament can be found here.

ASIC extends relief for portfolio holdings disclosure

ASIC amended Class Order [CO 14/443] on 29 October 2019 in order to provide legal certainty about the first reporting day for portfolio holdings disclosure. 

The portfolio holdings disclosure requirements were introduced into the Corporations Act 2001 (Cth) by the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 (Cth).  The provisions require most superannuation trustees to publish investment holdings information on their websites within 90 days of each ‘reporting day’ (being 30 June or 31 December each year).

Superannuation trustees were required to identify the holdings of the fund on the first reporting date which was to be 31 December 2019, however as a result of regulations being delayed, this date has been extended to 31 December 2020. The continued deferral will facilitate the Government considering and settling its policy position on the requirements, including making regulations to prescribe the content and format of disclosure.

In connection with this deferral, ASIC noted that it supports greater transparency about funds’ portfolio holdings and encourages superannuation trustees to focus on designing website disclosure about holdings that is accessible and clear for their members. ASIC also noted that a number of funds have already taken steps to increase transparency about their portfolio holdings even in the absence of an explicit legislative obligation to do so.

Further information can be found in ASIC’s media release, as well as a copy of Class Order [CO 14/443] and ASIC Corporations (Amendment) Instrument 2019/1056.

ASIC declares "watershed time" for companies to improve focus on non-financial risk

ASIC’s Corporate Governance Taskforce released Report 631 on 2 October 2019, addressing director and officer oversight of non-financial risk. ASIC highlighted that Australia’s largest financial services companies were ‘challenged’ by non-financial risk management and has urged all boards of large ASX-listed companies to read the report and reflect on questions posed throughout.

The report echoes key concerns that Commissioner Hayne addressed in the Royal Commission, particularly with boards not having sufficient information about non-financial risks in order to make fully informed decisions. Other concerns included that companies’ risk appetite and metrics were less mature for non-financial risks than for financial risks, with board risk committees significantly underutilised.

Further details about Report 631 can be found here.

ASIC wins appeal concerning the meaning of ‘personal advice’

On 28 October 2019, the Full Federal Court upheld ASIC’s appeal against Westpac subsidiaries, Westpac Securities Administration Limited (WSAL) and BT Funds Management Limited (BTFM) which concerned the meaning of ‘personal advice’ in the Corporations Act 2001 (Cth). The Full Federal Court held that WSAL and BTFM had provided personal financial product advice to customers in breach of their AFSL. A copy of the judgment is available on the Federal Court website. The Full Court also found that the Westpac subsidiaries failed to comply with the best interests duty. No orders have been made yet.

The decision overturns the first instance decision of Justice Gleeson in the Federal Court, where her honour held that advice to customers about rolling over their superannuation to Westpac related superannuation funds was general advice, not personal advice. Further information can be found in ASIC’s media release.

ASIC calls time on disclosure reliance

On 14 October 2019, ASIC released joint Report 632 with the Dutch Authority for Financial Markets (AFM) assessing the effectiveness of disclosure for financial products on consumer outcomes. Both regulators agree that while mandated disclosure and warnings are necessary, these disclosures alone are often ineffective and insufficient to drive good consumer outcomes. Some of the main problems that were identified include the following:

• disclosure does not ‘solve’ the complexity in financial services;
• disclosure must compete for consumer attention and influence;
• one size disclosure does not fit all – the effects of disclosure are different from person to person and situation to situation;
• disclosure can backfire in unexpected ways; and
• the limited effectiveness of warnings.

The findings in the report are supported by 33 case studies spanning across a decade undertaken in Australia, the Netherlands, the United Kingdom and the United States.

For more information about Report 632, please visit ASIC’s website.

ASIC releases Annual Report 2018-19

ASIC released its Annual Report for 2018-19 on 17 October 2019, covering its activities and performance in light of the findings from the Royal Commission and implementation of Commissioner Hayne’s recommendations. As part of ASIC’s strategic change program, ASIC has:

• significantly increased and accelerated the use of its enforcement action, and is now looking to use the full extent of new penalties and powers, including:

- a 20% increase in the number of ASIC enforcement investigations;

- a 51% increase in the number of enforcement investigations involving Australia’s largest financial institutions (or their officers, employees or subsidiary companies);

- a 216% increase in the number of wealth management investigations;

• established the Office of Enforcement in order to carry out enforcement activities and co-ordinate its enforcement strategy, including implementation of its ‘Why not litigate?’ operational discipline; and
• enhanced important aspects of its supervisory approach including the Close and Continuous Monitoring program and Corporate Governance Taskforce in order to promote permanent culture and behavioural change in financial firms and across the financial services industry.

Further information about ASIC’s activities and performances for the 2018-19 financial year is available here.

European Securities and Markets Authority and ASIC to co-operate on benchmarks

ASIC and the European Securities and Markets Authority (ESMA) announced on 21 October 2019 that they have signed a Memorandum of Understanding (MoU) setting out cooperation arrangements with respect to Australian benchmarks. The respective Chairs of ASIC and ESMA signed the MoU on 9 October 2019.

On 29 July 2019, under Article 30 of Regulation (EU) 2016/1011, the European Commission recognised Australia’s legal and supervisory framework applicable to the administrators of certain financial benchmarks:

• as equivalent to the corresponding requirements under the EU Benchmarks Regulation (BMR), which prescribes a European common framework to ensure the integrity and accuracy of benchmarks used in the EU; and
• are subject to effective supervision and enforcement.

This decision will allow benchmarks declared significant by ASIC to be used in the EU by EU-supervised entities, such as the BBSW, S&P/ASX200, Bond Futures Settlement Price, CPI, and Cash Rate. The MoU sets out cooperation arrangements to complement the EU’s equivalence decision and to ensure information exchange and supervisory coordination. In accordance with the MOU, both authorities agree to confidentiality requirements for any information shared, requests made, and contents of the requests made. Further information about the MOU can be located on ASIC’s website.

APRA publishes speech to the Future Banking Forum – Regulating challenger banks

APRA’s General Manager of Regulatory Affairs and Licensing, Melsande Waterford, spoke at the Future Banking Forum 2019 on 9 October 2019 on regulating challenger banks and the balancing act undertaken by APRA to encourage innovation and new entrants whilst maintaining current standards and minimising risks. In particular, Ms Waterford highlighted that APRA’s mission is not to grant licences to as many banks as possible in as little time as possible, but rather to facilitate the launch of viable entities. The ‘first wave’ of challenger bank applicants include Volt, Xinja, Judo and 86 400, which have all the capabilities of an unrestricted ADI.

To facilitate the application process, APRA has introduced a choice of routes to full ADI authorisation, set up a centralised licensing unit and challenged itself to be more open-minded towards unorthodox or unprecedented proposals. A full transcript of the speech is available on APRA’s website.

ASIC urges consumers to question whether SMSFs are right for them

ASIC has warned Australian investors to consider whether self-managed super funds (SMSFs) are appropriate for their circumstances, with many SMSFs not safeguarding consumers’ intended retirement lifestyle. ASIC Commissioner Danielle Press commented that whilst consumers are well aware of the potential benefits that might stem from the use of a SMSF, they are not alive to the sizeable risks that attach to the potential returns. The Australian Tax Office figures as of 30 June 2019 estimated that the size of all assets held by SMSFs in Australia to be nearly $748 billion  which exceeds the figures held by both industry and retail super funds.

ASIC Report 575 ‘SMSFs: Improving the quality of advice and member experiences’ lists 8 ‘red flag’ indicators which suggest that an SMSF will not be suitable for the client, including but not limited to:

1. the client has a low superannuation balance, and would have a limited ability to make future contributions;
2. the client wants a simple superannuation solution;
3. the client wants to delegate all of the running of the SMSF to a paid advice provider;
4. the client wants to delegate all of the investment decision making to someone else;
5. the client does not have a lot of time to devote to managing their financial affairs;
6. the client has little experience making investment decisions;
7. the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (such persons are prohibited from acting as a trustee); and
8. the consumer has a low level of financial literacy.

Further information about ASIC’s warning and risk identification can be found here.

APRA proposes changes to ADI's regulatory capital requirements

On 15 October 2019, APRA released a consultation paper proposing changes to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111), which establishes the criteria for an authorised deposit-taking institution’s (ADI) regulatory capital requirements. In substance, the proposals seek to increase the amount of equity required to support investments in large subsidiaries whilst reducing that for small subsidiaries. The consultation comes following the Reserve Bank of New Zealand’s proposal for New Zealand’s banks (the four largest of which are owned by Australia’s major banks) to materially lift their regulatory capital.

The specific proposals in the consultation paper include:

• increasing the capital ADIs must hold to offset concentrated exposures to foreign or domestic banking or insurance subsidiaries;
• reducing the capital ADIs must hold to offset smaller exposures to banking or insurance subsidiaries;
• incorporating into the prudential standard various rulings and technical information APRA has published since APS 111 was last substantially updated in 2013; and
• aligning APS 111 with updated guidance from the Basel Committee on Banking Supervision.

The consultation period for APS 111 is open until 31 January 2020, with APRA intending the updated Prudential Standard to come into force on 1 January 2021. Further information about APS 111 including the discussion paper and draft amendments to APS 111 is available on APRA’s website.

ASIC warns AFS licensees to meet financial reporting obligations on time

ASIC has reminded all Australian financial services (AFS) licensees to lodge their annual financial statements and auditor reports by the appropriate due date. AFS licensees who fail to meet the deadline will risk facing regulatory consequences. ASIC Commissioner Sean Hughes has noted that timely lodgement to be an indicator of an AFS licensee’s capacity to comply with the law. Since October 2016, ASIC has suspended 9 AFS licenses and cancelled 22 AFS licenses for failing to lodge their annual financial statements and auditor reports.

More information about ASIC’s warning can be found here as well as key timeframe requirements on ASIC’s website.

APRA releases its annual report

On 16 October 2019 APRA released its annual report for 2018-19. Chair Wayne Byres emphasised that the Australian financial system’s stability and safety should not be taken for granted and effective prudential supervision is crucial to producing such a system. The report outlines significant pieces of work that were instigated or completed in 2018-19 including in the key areas of mortgage lending, information security, remuneration, member outcomes in superannuation, capital requirements for ADIs, the Banking Executive Accountability Regime (BEAR), licensing, life insurance claims and disputes, and private health insurance. More information including the 2018-19 Annual Report can be located on APRA’s website.

ASIC warns trustees on new rules for Putting Members’ Interests First

ASIC has issued a letter to all superannuation trustees on 29 October 2019, calling on them to improve the standard of communication to fund members with respect to the recent Putting Members’ Interests First (PMIF) reforms. The reforms impact member insurance arrangements and trustees are required to write to members with a balance of less than $6,000 by 1 December 2019 explaining these changes. Communication to members should help them understand the effect of the reforms and make good decisions by:

1. providing balanced and factual communications, that include appropriate context about the reforms; and
2. tailoring communications to the needs of their members.

The warning comes after a recent review by ASIC found that communication by many superannuation trustees to their members was inadequate. Further information about the new rules for PMIF can be found in ASIC’s Media Release.

Treasury releases Currency (Restrictions on the USE of Cash) Rules 2019 (Cth)

On 25 October 2019, Treasury released draft rules to accompany the Currency (Restrictions of the Use of Cash) Bill 2019 (Bill). The Bill imposes an economy-wide cash payment limit of $10,000 to combat the black economy. The draft rules supplement this Bill by specifying the types of transactions that are exempt from the cash payment limit and also prescribe the conversion procedure when working out the Australian currency value of foreign or digital currencies for the purpose of the Bill.

Some payments that are not subject to the Bill include, but are not limited to:

• payments related to personal or private transactions;
• payments that must be reported under anti-money laundering and counter-terrorism legislation (and that have been reported);
• payments made or accepted by a public official in the course of their duties;
• payments incidental to the collecting, holding and delivering of cash such as providing cash-in-transit services;
• payments that only equal or exceed the cash payment limit because payment is or includes an amount of digital currency; and
• payments that occur in exceptional situations where no alternative method of payment could reasonably be used.

Further information about the draft rules is available on Treasury’s website.

ASIC consults on using its product intervention power to reform the caryard sale of financial products

On 1 October 2019, ASIC released Consultation Paper 324 ‘Product Intervention: The sale of add-on financial products through caryard intermediaries’ which proposes to reform the sale of add-on insurance and warranties by caryard intermediaries.

ASIC’s product intervention power allows it to intervene where financial products have resulted, or are likely to result, in significant consumer detriment. In the 2016 ASIC Report 492, ASIC found that the lack of price competition and the poor design of products were resulting in poor consumer outcomes whilst the single premium policies had increased the cost for consumers. When announcing the consultation, ASIC Commissioner Sean Hughes stated that policies have been sold where consumers are ineligible to claim under them.

ASIC proposes introducing a deferred sales model for all add-on products and warranties sold by caryards (other than comprehensive or CTP insurance). The 4 day deferral period aims to separate the offer of these products from the sale of the car as well as prohibit face-to-face sales of add-on financial products in a single meeting. ASIC also hopes to compliment this model with additional obligations including ‘knock out’ questions to prohibit products with low or no value and also prohibit the sale of warranties where the maximum amount that can be claimed is $2,000 or less.

Responses to the consultation are due by Tuesday 12 November 2019. For more information about the distribution of add-on insurance and warranties by caryard intermediaries, visit ASIC’s website.