Financial services monthly wrap-up: December 2021 and January 2022

Federal Treasury releases exposure draft legislation implementing licensing relief options for foreign financial service providers (FFSPs)

On 20 December 2021, the Federal Treasury released its exposure draft legislation and explanatory memorandum for consultation, which ended on 12 January 2022. This was following on from its earlier consultation in July 2021 that set out a range of licencing options and fast-tracking of the licensing process for FFSPs. The following was proposed:

• Professional investor exemption: this will replace the existing professional investor exemption under the Corporations Regulations but has a different scope and introduces additional conditions, such as notifying ASIC of an intention to rely on this exemption and complying with ASIC’s reasonable requests for assistance;
• Comparable regulator exemption: this is intended to replace the existing sufficient equivalence Class Order exemptions. It covers FFSPs authorised, registered or licensed to provide the same financial service by a regulator in a foreign jurisdiction and provides that where they deliver financial services to wholesale clients the FFSPs will be exempt from holding an AFSL. Further conditions, such as agreeing to information sharing between ASIC and the foreign company’s home regulator, must be adhered to;
• Fit and proper person test exemption: FFSPs authorised to provide financial services in a comparable regulatory regime may fast track the licencing application by relying on an exemption from the fit and proper person test. This removes the certain administrative requirements, such as obtaining criminal background history and solvency checks, and streamlines the overall licencing process.

FFSPs should consider the suitability of an available exemption for their ongoing business, and assess the readiness for new conditions and obligations. We will provide further updates as the legislation is developed. A link to the draft legislation can be found here.

ASIC encourages home insurers to be consumer-centric in handling claims this summer

Following a project reviewing insurance claims for consumers affected by the 2019-20 ‘Black Summer’ bushfires, ASIC has reinforced the need for insurers to manage their customers’ claims ‘efficiently, honestly and fairly’.

The ASIC review involved collecting and monitoring insurers’ claims handling data over a 15 month period across 12 insurers representing over 90% of the Australian home insurance market.

The review was completed in preparation for insurance claims handling legislative reforms commenced from 1 January 2022. From that date, claims handling and settling are now designated as a financial service which requires a licence.

Across the 8,801 claims reviewed, ASIC found:

• 99% of claims determined by insurers were approved in-full or in-part;
• 88% of claimants accepted the insurer’s decision within four months of lodging a claim; and
• 93% of claims are closed, 5% withdrawn and 2% open, as at September 2021

During ASIC’s engagement with the industry for the review, a number of good practices were identified, including:

• Responding swiftly to the event, tracking bushfires and proactively contacting customers in affected areas, encouraging them to lodge a claim or even evacuate;
• Paying the maximum temporary accommodation benefit at the outset of claims assessed as a ‘total loss’, to provide certainty to those claimants;
• Making product design changes to broaden policy coverage for fire damage, and effectively making this change retrospectively; and
• In advance of the upcoming disaster season, undertaking simulation exercises to stress-test a response to simultaneous disasters, including how insurers will respond in a pandemic to allow for assessment and emergency repairs to property.

A link to the ASIC media release can be found here.

ASIC releases findings from review of responsible entity governance practices

On 31 January 2022, ASIC released its findings from a high-level review of the governance practices of 10 large responsible entities of managed investment schemes.

ASIC has emphasised that good governance practices support sound decision-making by the boards of responsible entities by ensuring they are well-informed and less susceptible to conflicts of interest.

For the presentation, ASIC collected information from the responsible entities regarding a broad range of issues, including business models, board composition, performance and governance, compliance committees and service provider oversight.

The review chose responsible entities based on total value of assets under management and assessed a variety of business models. As at 30 June 2021, these responsible entities that were assessed collectively managed approximately $588 billion in registered schemes.

A link to the ASIC media release can be found here and a link to the presentation can be found here.

APRA publishes MySuper and Choice Heatmaps

With a view to increasing transparency, APRA has published its first ‘Choice Heatmap’, alongside its annual MySuper Heatmap.

The Choice Heatmap shows the products and options in which members have made an active decision to invest. APRA’s first Choice Heatmap focuses on a specific segment of the choice sector – multi-sector investment options This represents far greater scrutiny into the investment decisions of members than previously available.

Amongst other things, analysis of the Choice Heatmap shows:

• 60 per cent of investment options in the Choice Heatmap delivered returns below APRA’s heatmap benchmarks over seven years, with over 25 per cent of options having delivered ‘significantly poor returns’;
• performance of choice products varies considerably more than MySuper products; and
• fees and costs of choice products are considerably higher than MySuper products, without obvious benefit in financial outcomes for members.

The 2021 MySuper Heatmap includes the results of the Government’s first Your Future, Your Super performance test. In this performance test 13 superannuation products were labelled a Fail and have 12 months to correct their performance or face regulatory action which may include closure of the fund. Of these, two superannuation funds have been given notice by APRA to close before 31 July 2022.

With intentions to continue this format of publication, APRA will continue to put greater scrutiny on, and demand greater transparency of, the performance of Super products and institutions.

A link to the APRA media release can be found here.

APRA moves to strengthen crisis preparedness in banking, insurance and superannuation

In early December, APRA began consulting on new prudential standards to strengthen the preparedness of banks, insurers and superannuation trustees to respond to any future financial crises.

The two proposed standards, CPS 190 and CPS 900, are aimed at ensuring entities are prepared to deal with threats to their viability. Long term, APRA intends for this to mitigate the potential adverse consequences of the failure of these entities.

The proposed standards include:

• CPS 190 Financial Contingency Planning (CPS 190) would ensure all APRA-regulated entities have plans for responding to severe financial stress.
• CPS 900 Resolution Planning (CPS 900) would require larger APRA-regulated entities to take pre-emptive actions to ensure that, were they to fail, APRA can resolve any failures with limited adverse impacts on the financial system and wider community.

A link to the APRA media release can be found here.

APRA proposes changes to align capital and reporting frameworks for insurance with AASB 17

In early December, APRA proposed updates to the capital and reporting frameworks for insurance, which follows the introduction of Australian Accounting Standards Board 17 Insurance Contracts (AASB 17).

APRA’s approach to integrating AASB 17 into APRA’s capital and reporting frameworks is based on the following principles:

• maintain the resilience of APRA’s capital and reporting frameworks;
• not seek to generally increase or reduce capital levels;
• minimise the regulatory impact for industries; and
• align the frameworks to AASB 17 where appropriate.

Consultation on the draft standards is open until 31 March 2022. APRA intends to release the final standards in the second half of 2022 and AASB17 will come into effect on 1 January 2023.

A link to the APRA media release can be found here and further details on AASB17 can be found on the APRA website here.

ASIC highlights focus areas for 31 December 2021 financial reports under COVID-19 conditions

Leading into reporting season for the period ending 31 December 2021, ASIC identified key focus areas for directors, auditors and entities to focus on. In particular, ASIC has called for attention on the following areas:

• asset values
• provisions
• solvency and going concern assessments
• events occurring after year end and before completing the financial report
• disclosures in the financial report and Operating and Financial Review (OFR).

Apart from this, ASIC emphasises that companies may face uncertainties in respect of reporting due to the ongoing impacts of the pandemic. On this note, ASIC suggests that assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable.

A link to the ASIC media release, including an appendix containing details of the five key focus areas, can be found here.

APRA moves to strengthen capital standards in private health insurance

In December 2021, APRA commenced further consultation on measures designed to strengthen the capital framework for private health insurance (PHI).

The reforms intend to increase the industry’s financial resilience and consumer confidence in the ability of insurers to pay all legitimate claims, even during stress or periods of high claim volume.

The proposed new framework is based on the life and general insurance capital framework (LAGIC) and is closely linked to the aligning the life and general insurance capital and reporting frameworks with new accounting standard AASB-17.

A link to the APRA media release can be found here.

Super trustees offering default income protection insurance urged to check on member outcomes

A 2021 ASIC Review of super trustees has highlighted the need for trustees to examine member outcomes and to what extent they are delivering value for money through insurance products offered through superannuation.

The review examined five large super funds, accounting for roughly 2 million MySuper member accounts, and their offerings of default income protection (IP) insurance on an opt-out basis.

Overall, ASIC determined that there was:

• variation in the types of income that were offset against IP benefits
• disclosures about offset clauses were incomplete and difficult to understand
• no evidence that the trustees had rigorously analysed how their offset clauses affect member outcomes

In light of the review, ASIC is recommending super trustees engage in the following:

• obtain and analyse data, including from their insurer, to assess how offsets affect member outcomes, including whether some groups of members are receiving low or no value;
• improve the extent and quality of disclosures to members relating to IP offsets, especially when a member’s IP insurance will pay a reduced benefit; and
• explain to their members, in clear terms, how ‘offset’ clauses work, so that members can make informed decisions about their insurance.

ASIC signs MoU with Croatian Financial Services Supervisory Agency

The Croatian Financial Services Supervisory Agency (CFSSA) and the Australian Securities and Investments Commission (ASIC) have signed a new Memorandum of Understanding (MoU) regarding mutual assistance in the supervision and oversight of managers of alternative investment funds that operate on a cross-border basis.

A link to the ASIC media release can be found here.

ASIC welcomes new International Sustainability Standards Board and updated climate-related disclosure guidance

On 3 November 2021, at the 2021 United Nations Climate Change Conference (COP 26), the International Financial Reporting Standards (IFRS) Foundation Trustees announced the establishment of the International Sustainability Standards Board (ISSB). This Board will develop baseline climate and sustainability standards to be encouraged globally.

The International Organisation of Securities Commission (IOSCO) Sustainable Finance Taskforce (of which ASIC is a member) recently undertook a review of sustainability disclosure practices in various jurisdictions.

Domestically, ASIC’s involvement in the development of the standards is supported by its publication of Report 593 Climate risk disclosure by Australia’s listed companies in 2018. That report outlines ASIC’s recommendations relating to the consideration and disclosure of climate risk. The report will continue to be updated as international baseline targets are developed and revised.

A link to the ASIC media release can be found here and a link to Report 593 can be found here.

ASIC urges greater focus on material business risk disclosure in financial reports

ASIC has reminded company directors about the importance of a high-quality operating and financial review (OFR), after ASIC’s recent review of financial reports for the year ending 30 June 2021 identified some listed entities that did not disclose material business risks.

The OFR is issued by companies alongside the financial report. ASIC considers the OFR critical to informing the decision-making of investors by disclosing material risks that may affect the achievement of a listed entity’s strategies and prospects.

A link to the ASIC media release can be found here.

ASIC consults on revised ETP naming conventions

On 20 January 2022, ASIC released Consultation Paper 356 ETP naming conventions: Updates to INFO 230 (CP 356), seeking feedback on proposals to update the guidance in Information Sheet 230 Exchange-traded products: Admission guidelines (INFO 230). These publications focus on the naming conventions for licenced Australian exchanges that admit exchange traded products (ETPs).

As ETPs carry different structures, features and risks to more traditional listed products, ASIC puts particular emphasis on how these products are labelled.

Having sought feedback from advisers, industry bodies and licensed exchanges, ASIC determined there was potential for improvement and clarification on naming conventions.

In particular, ASIC’s focus in CP 356 includes:

• revised naming conventions divided into two levels of labelling – primary labels based on product type, and secondary labels for specific risks or strategies;
• clarification of the role of licensed exchanges authorised to admit ETPs to quotation.

ASIC is currently accepting feedback on CP 356 until 3 March 2022.

A link to the ASIC media release can be found here and a link to CP 356 can be found here.

ASIC embarks on regtech innovation initiative into poor market disclosure

Seeking to tackle the ongoing challenges of corporate disclosure, ASIC will be working with five regulatory technology (regtech) entities – Bedrock AI Aus Pty Ltd, DigitalX Limited, Eastern Analytica Pty Ltd, Listcorp Pty Ltd and Pyxta Pty Ltd for the Business Research and Innovation Initiative (BRII) Regulatory Technology (Regtech) Round.

Announced on 21 January 2022, this latest BRII round assesses the potential of regtech to solve challenges across government agencies and departments. BRII was initiated by the Department of Industry, Science, Energy, and Resources.

The government is also offering grants to each of the five successful small-to-medium regtech enterprises (SMEs) to conduct a feasibility study in response to the corporate disclosure challenge.

Overall, the key focus for applicants will be focusing on a technology solution to help ASIC analyse and monitor corporate disclosure, particularly with a focus on:

• continuous disclosure (price sensitive disclosure) and other disclosure obligations to the market;
• financial reporting obligations;
• the prohibition against misleading or deceptive disclosure (such as misleading categorisation of market announcements); and
• the prohibition against practices that manipulate the pricing of securities.

A link to the ASIC media release can be found here.

ASIC consults on proposals to remake relief for business introduction services

On 25 January 2022, ASIC release a consultation paper seeking feedback on changes relating to relief for business introduction services.

The consultation paper, Consultation Paper 357 Remaking relief for business introduction services: ASIC Instrument 2017/186 (CP 357), comes following Class Order, [CO 02/273] Business introduction and matching services, which gave conditional relief from the fundraising, financial product disclosure, hawking and advertising requirements in the Corporations Act 2001

The relief provided under ASIC Corporations (Repeal and Transitional) Instrument 2017/186, which preserves the effect of CO 02/273, is due to expire on 1 April 2022.

CP 357 contains various proposals, including to:

• extend the relief for interests in managed investment schemes to 1 April 2025;
• amend the relief to update and clarify that the design and distribution obligations apply to business introduction services;
• allow the relief for Ch 6D securities to expire; and
• require persons who rely or cease to rely on the relief from 1 April 2022 to provide notice to ASIC.

A link to the ASIC media release can be found here and a link to CP 357 can be found here.

Government commits to payments and crypto regulation reform

On 8 December 2021, the Australian Government released its response to the Review of the Australian Payments System, the Senate Select Committee on Australia as a Technology and Financial Centre Final Report and the Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services.

The response, ‘Transforming Australia’s Payments System’, accepts a large number of the recommendations put forward by the above reviews, covering payments and crypto.

The government commits to, by mid 2022:

• Setting out a long term plan for the payments system;
• Complete consultation on a licensing framework for Digital Currency Exchanges (DCEs) to provide greater confidence in the trading of crypto assets;
• Finalise consultation on custody or depository regime for businesses that hold crypto assets on behalf of consumers so that investors have greater confidence in the safe keeping of these assets; and
• Working with regulators and agencies to address the complex issue of dde-banking.

By the end of 2022, the government aims to have:

• Settled the framework to replace the current one size fits all payment licensing arrangements;
• Received a report from the Board of Taxation on an appropriate framework for taxation of digital transactions and assets;
• Undertaken a mapping exercise of existing crypto currencies and tokens to better inform consumers and others of the risks and benefits that arise;
• Examined the potential of Decentralised Autonomous Organisations (DAOs) and how they can be incorporated into Australia’s legal and financial regulatory frameworks; and
• Received advice from the Treasury and RBA on the feasibility of a retail Central Bank Digital Currency in Australia.

The report heralds an exciting transition for the Australian financial services regulatory environment with Australia being one of the few countries committed to directly regulating DCEs and digital asset custody businesses.