Australia | Publication | January 2020
The months of December 2019 and January 2020 have proven to be a busy time for our Government and regulators, with significant changes and proposals for the funds and financial services sector. In particular, Treasury have released 17 bills in response to 22 recommendations made by Commissioner Hayne in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), as well as ASIC releasing draft guidance for industry consultation on the new product design and distribution obligations.
On 31 January 2020, Treasury released 17 separate bills in response to 22 of the recommendations from the Royal Commission. Currently, the Government has implemented 16 commitments, has legislation before parliament to implement another 8 commitments and has progressed 35 which have been or are currently being consulted on.
The 17 bills propose a number of changes to the financial services, superannuation and insurance industries, with key changes including, but not limited to:
Further information on the exposure draft legislation can be found on the Treasury’s website.
On 19 December 2019 ASIC initiated consultation on its draft guidance for the new financial product design and distribution obligations which are to come into effect in April 2021. The new obligations will require product issuers to develop products that meet the needs of consumers in their intended target market.
ASIC Consultation Paper 325 (CP 325) also sets out additional proposals relating to ASIC’s administration of the design and distribution regime. According to ASIC Deputy Chair Karen Chester, ‘The obligations should drive better business and consumer outcomes. They simply require business to design products that meet genuine consumer needs and use distribution channels that will likely get them to the right consumers.’ Feedback from the industry on the proposed guidance closes on 11 March 2020. Further information can be found on ASIC’s website.
Treasury released on 22 January 2020 its Proposal Paper on the Financial Accountability Regime (FAR), which extends the Banking and Executive Accountability Regime (BEAR) to entities regulated by APRA. The extension is another step in implementing some of the Government’s commitments made in its response in August 2019 to the Royal Commission Final Report. The FAR adopts the central structure of BEAR, although there are a number of key differences.
The consultation period is open to feedback from the industry until 14 February 2020. Notably, the Government has stated that the FAR would be further extended to all other entities in due course, including those regulated by ASIC. Further information on the FAR is available on Treasury’s website.
On 13 December 2019 APRA released a letter outlining the revised proposed timeframe for the implementation of product responsibility requirements under the BEAR. The product responsibility requirements are in the process of being implemented in accordance with recommendation 1.17 of the Final Report of the Royal Commission. Initially, the consultation letter released on 28 June 2019 stated that APRA intended to release a draft schedule for consultation in October 2019, and the final requirements in December 2019. However, the proposal is currently being withheld in order to align the timing with the Government’s proposed extended accountability regime. APRA stated that this was to maximise the effectiveness of the proposed BEAR product responsibility and minimise unnecessary costs for institutions. More information can be found on APRA’s website.
On 11 December 2019 ASIC concluded its review of internal market making practices of non-transparent actively managed funds which are traded on exchange markets. Subsequently, ASIC lifted the pause on the admission of new managed funds with internal market making however subject to a number of controls. ASIC’s review identified a number of market integrity risks under certain marketing-making models, particularly where a market maker uses non-public information as part of its pricing methodology.
Key outcomes from ASIC’s review include:
More information on the review into internal market making for quoted managed funds is available in ASIC’s Market Integrity Update.
APRA published on 21 January 2020 its submission responding to the Senate Select Committee on Financial Technology and Regulatory Technology’s Issues Paper. The Committee was created on 11 September 2019 in order to assess the current Fintech and Regtech landscapes and to report on the effectiveness of current measures which aim to promote these sectors.
Broadly, the submission discusses APRA’s approach to support the Fintech and Regtech sectors, and also the regulatory framework, including:
Further information on APRA’s interaction with Fintech and Regtech is available on the regulator’s website.
On 17 January 2020 APRA published its Year in Review report for 2019, with the report acting as a step towards greater transparency of APRA’s activities for the community. The report addresses APRA’s perspective on the financial climate through a review of the key issues faced by the banking, insurance and superannuation sectors in 2019.
The report reveals the more wide-reaching approaches taken by APRA in 2019, largely in response to greater industry demands. The report also highlights a number of financial metrics for APRA-regulated entities, analysis of industry composition, profitability and financial strength which enable APRA’s activities to be quantitatively measured. Further information as well as the report is available on APRA’s website.
On 19 December 2019 APRA released its annual self-assessment report for 2018/19. The report measure’s APRA’s activities against the Government’s Regulator Performance Framework, which sets out six Key Performance Indicators (KPIs) articulating the Government’s expectations of regulator performance. The six KPIs comprise the following:
Overall, APRA considers that it has met all six KPIs set out in the Framework however recognises that there is still room for improvement. More information on the self-assessment report can be found on APRA’s website.
On 19 December 2019 APRA released a second consultation package on its Superannuation Data Transformation. This forms part of APRA’s multi-year project to upgrade its superannuation data collection through enhancing the comparability and consistency of reported data. In turn, this will make it easier to scrutinise and reliably compare fund and product performance. The two topic papers released as part of Phase 1 of the Superannuation Data Transformation focus on the breadth of superannuation data collection. The two topic papers include:
Information on the Superannuation Data Transformation consulted package is located on APRA’s website.
On 10 December 2019 APRA published its first MySuper Heatmap, which provides an assessment of the performance of every MySuper superannuation product. The Heatmap utilises a graduating colour scheme to provide credible, clear and comparable insights into MySuper products in areas such as investment performance, fees and costs, and sustainability of member outcomes.
The Heatmap was introduced to provide greater transparency on outcomes being delivered on all MySuper products. APRA has also published an Insights Paper which found that analysis using the metrics presented in the Heatmap suggests that good outcomes have been delivered for many members holding MySuper products. APRA expects trustees to review areas of relative underperformance and to develop action plans, which include key deliverables and timeframes to address those areas.
APRA published a letter to authorised deposit-taking institutions (ADIs) on 9 December 2019 which outlined the regulatory capital treatment of their equity investments in the Australian Business Growth Fund (ABGF). This follows APRAs plans to adjust its capital framework for ADIs to support the establishment of the ABGF. An ADI that invests in the ABGF can apply a risk weight of 250% to their investment. To ensure that risks to ADIs of investing in the ABGF are contained, an ADI will only be able to invest up to 2% of its Level 1 Common Equity Tier 1 (CET1) Capital in the ABGF. Additional equity beyond that amount will not be eligible for the 250% risk weight and will be treated according to APRA’s usual requirement of deduction from CET1 Capital. ADIs will be required to notify their Responsible Supervisor if participating in the ABGF.
On 5 December 2019 APRA proposed a substantial increase in the volume and breadth of data that it makes publicly available on authorised deposit-taking institutions (ADIs). These proposals are aligned with APRA’s strategic policy of increasing the transparency of the data it collects, and aligns with Government open data policies. Currently, APRA publishes less than 1 per cent of the ADI data it collects, due to restrictions under the Australian Prudential Regulation Authority Act 1998 (Cth). However, if APRA’s proposed changes take effect, this figure will be significantly increased. A 12 week consultation is currently underway and will conclude on 28 February 2020. Further information can be found on APRA’s website.
On 11 December 2019 ASIC released Report 644 ‘Assessment of ASX’s arrangements for exchange traded AQUA products’. The Report made recommendations which aim to improve ASX Limited’s (ASX) compliance with its market licence obligations. The recommendations follow an assessment of the AQUA market for exchange traded products (ETPs) operated by the ASX. The recommendations focus on three key areas:
According to ASIC, their recommendations are aimed at challenging ASX to more proactively set the direction and standards for AQUA ETPs in the next phase of its development. ASIC also encourages other regulators such as ASIC to review the recommendations to determine what is applicable to their market operation. ASIC’s media release and Report 644 are available on the regulator’s website.
ASIC published its updated guidance on 9 December 2019 on the responsible lending obligations set out in the National Consumer Credit Protection Act 2009 (Cth). The guidance is contained in Report 643 ‘Response to submissions on CP 309 Update to RG 209: Credit licensing: Responsible lending conduct’. After significant consultation, ASIC have updated Regulatory Guide 209 (RG 209) to allow greater clarity and support to lenders and brokers in meeting their obligations. Although there are a number of key changes, ASIC has maintained principles-based guidance that supports flexibility for licensees. The regulator has also published a Navigation Guide to assist users in navigating the updated structure. More information is available in ASIC’s media release.
ASIC released on 6 December 2019 Report 642 ‘Timeshare: Consumers’ experiences’. The Report provides detailed insights into the risks of harm at each stage of a consumer’s journey with time-sharing schemes (timeshare). The key findings from the Report were that, despite some research showing members were satisfied with their timeshare membership, there was in fact an overall dissatisfaction. This stemmed from customers feeling that they were not receiving the expected value from their membership and they had experienced financial stress due to unexpected fee changes, or in some cases, their personal circumstances. ASIC intends to issue a consultation paper in the first half of 2020 to obtain feedback on proposals to address known risks of consumer harm occurring at different stages of timeshare membership. More information including Report 642 can be found on ASIC’s website.
On 20 December 2019, ASIC published its Regtech Initiatives 2018-19 Report which covers observations and findings from four ASIC initiatives in 2019. The four initiatives, which sought to identify how Regtech could help businesses better manage their conduct-of-business compliance issues, included:
A few of the key observations arising out of the Report’s findings were that there is an imperative to implement Regtech, which enables analysis of large, high data volumes at speed, and that there is a need for improved standards on data capture and storage. Moving forward, ASIC intends to continue to promote Regtech by conducting more Regtech initiatives in the remainder of FY2019-20. Further information can be located in ASIC’s media release.
On 18 December 2019, ASIC released its Report 652 ‘Wholesale FX practices in Australia’. The report summarises ASIC’s work in wholesale foreign exchange (FX) markets in 2018 and 2019, highlighting ASIC’s observations on both good and poor practice by participants in the market. In particular, the report reveals a high level of adoption of the FX Global Code, with the report forming part of ASIC’s overall response to addressing threats to FX markets which may cause harms to the real economy and consumers. More information can be found on ASIC’s website.
On 17 December 2019 ASIC announced that it approved an updated version of the Australian Banking Association’s (ABA) Banking Code of Practice. The updated Code will commence on 1 March 2020 and aligns itself with various recommendations from the Royal Commission. Specifically, the updated Code aims to enable greater accessibility of banking products and services and ease the burden on agricultural borrowers affected by drought and natural disaster. Notably, ASIC will not administer the code. An independent Banking Code Compliance Committee will enforce the code and also manage customer complaints through internal dispute resolution, whilst the Australian Financial Complains Authority (AFCA) will manage external dispute resolution. More information can be found on ASIC’s website.
On 16 December 2019 ASIC released its Report 650 ‘Overview of licensing and professional registration applications: July 2018 to June 2019’. Broadly, Report 650 provides an overview of ASIC’s activity and oversight in relation to applications for Australian financial services licences, Australian credit licences, and auditor-related professional registrations. Report 650 makes clear the information which prospective applicants will require, with ASIC emphasising the minimum standards for applications to help protect consumers by ensuring adequate scrutiny is given to applicants. ASIC have encouraged prospective applicants to review the Report to better understand the requirements which will be expected of them. The Report also provides insight into regulatory and policy issues impacting ASIC’s licensing and registration application-related activities. More information can be found in ASIC’s media release.
ASIC released its Report 639 ‘Financial advice by superannuation funds’ on 3 December 2019 which reviews the ways superannuation funds assist members to obtain financial advice and the quality of that advice. The findings revealed that the quality of personal advice was generally appropriate. However, in the Report, ASIC have also provided a number of practical tips to assist trustees, advice licensees and advice providers in improving the quality of their advice. The Report was based on a survey of 25 superannuation funds. ASIC Commissioner Danielle Press stated that ‘Where we did see some risk of detriment, we will be following up with the advice provider and requiring that they review and remediate the affected member.’ For more information, please see ASIC’s media release.
On 12 December 2019 the Government released its Response to the Digital Platforms Inquiry. The response outlines a roadmap which aims to promote competition, enhance consumer protection and support a sustainable Australian media landscape in the digital age. The Government has made a number of commitments in their response:
Further information can be found on Treasury’s website.
On 13 December 2019 ASIC released its Report 646 ‘Insurance in superannuation: Industry implementation of the voluntary Code of Practice’. The Report provides ASICs comments in relation to the industry’s implementation of the Insurance in Superannuation Voluntary Code of Practice. Whilst 70 per cent of superannuation trustees will adopt the Code in whole or part, full implementation is not due for completion until 30 June 2021. The Code sets standards of practice for superannuation funds, with the goal of improving industry practices in benefit design, claims handling and communications to members. Whilst the Report states that ASIC has observed numerous trustees implementing better practices, there is still room for improvement in order to meet high industry standards expected by consumers.
More information can be found on ASIC’s website.
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