Financial services monthly wrap-up: October 2021

ASIC calls on Australian CEOs to review whistleblower policies

ASIC has written to CEOs of Australia’s largest public companies, large proprietary companies and trustees of registrable superannuation entities (RSEs), asking them to re-evaluate existing internal whistleblower polices to ensure compliance with the law.

Since 1 January 2020, the Corporations Act has required public companies, large proprietary companies, and trustees of registrable superannuation entities (RSEs) to have a whistleblower policy. The request comes following an ASIC review, which sampled whistleblower policies at the company level and confirmed that, despite significant reforms in the regulatory framework in recent years, many whistleblower policies at the company level are not sufficiently compliant or do not fully address the requirements.

Specifically, the letter:

• reinforces to companies their obligation to have a whistleblower policy that aligns with the strengthened whistleblower protection regime;
• identifies where policies reviewed by ASIC were deficient; and
• highlights what entities can do to improve their policies.

ASIC hopes that the letter will improve knowledge of how whistleblowers are protected, or allay fears where they are unsure about how or when to blow the whistle to regulators. In turn, ASIC notes that early whistleblowing helps companies by enabling early detection of misconduct.

A link to the ASIC media release can be found here and a copy of the ASIC letter can be found here.

ASIC launches Federal Court action and calls on general insurers to review pricing practices

ASIC has launched civil penalty proceedings in the Federal Court of Australia against Insurance Australia Limited (IAL). The proceedings arise out of an alleged failure by IAL to honour discount promises made to customers.

ASIC alleges contraventions involving misleading and deceptive conduct and misleading representations made to NRMA Insurance customers, with claims the customers were entitled to discounts on the renewal of home and motor insurance policies. IAL is alleged to have increased the gross insurance premiums on these policies, thereby preventing any net discount to customers.

The alleged breaches may have affected up to almost 600,000 customers between 2014 and 2019, with promised discounts totalling approximately $60 million.

In light of the proceedings, ASIC Deputy Chair Sarah Court encouraged general insurers to:

• identify disparities between the prices they promised their customers and those that customers were charged;
• comply with their breach reporting obligations;
• compensate affected customers, including refunding overpaid premiums; and
• fix the systems, processes, controls and practices that have led to promised discounts not being honoured.

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

ASIC releases updated information about the distribution of superannuation products

On 15 October ASIC released updated information for employers and trustees concerning changes affecting superannuation products. Importantly, ASIC has reminded employers that they have an obligation to ensure that superannuation guarantee contributions are paid on time to their employees’ superannuation fund of choice.

The guidance, ASIC’s Information Sheet 89, Communicating with employees about superannuation fund choice: what you can and cannot do, explains to employers how best to communicate with employees regarding superannuation contributions while complying with the regulations.

ASIC has also updated Information Sheet 241: Prohibition on influencing employers’ superannuation fund choice (INFO 241), which provides guidance to superannuation trustees about the prohibition on using inducements to influence employers in their choice of a default fund or to encourage employees to choose or retain membership of a fund. 

The updated guidance reflects a broader strategy of law reform and market advice as part of the Your Future Your Super (YFYS) package, which aims to strengthen guidance around the distribution of superannuation products, including product design and distribution, and restrictions on hawking.

A link to the ASIC media release can be found here. Additionally, Information Sheet 89 can be found here and Information Sheet 241 can be found here.

ASIC releases 2020–21 Annual Report

On 15 October 2021, ASIC released its Annual Report for the 2020-2021 financial year. Importantly, ASIC stressed the significant challenges that have affected the economy during this period in light of the COVID-19 pandemic.

ASIC Chair Joe Longo noted that ‘[a]cross the financial year, ASIC made targeted interventions and implemented a number of relief measures to assist Australia’s corporate sector, while also making great strides towards implementing the Financial Services Royal Commission reforms.’

Key focuses from ASIC for the period included introducing changes from, and providing guidance on, Royal Commission reforms, including new design and distribution obligations, breach reporting obligations and the deferred sales model for add-on insurance, which have all come into effect in recent weeks and months.

A link to the ASIC media release can be found here and ASIC’s Annual Report for 2020-21 can be found here.

ASIC proposes extending its CFD product intervention order

ASIC has released Consultation Paper 348, Extension of the CFD Product Intervention Order, seeking industry feedback as to whether to extend its product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients until it is revoked or sunsets on 1 April 2031.

The product intervention order is set to expire on 23 May 2022 unless it is extended. Since March this year, ASIC notes that its product intervention order has strengthened protections for consumers in respect of CFDs by reducing CFD leverage, standardising margin close-out arrangements, protecting against negative account balances and prohibiting CFD providers from giving certain inducements to retail clients.

ASIC notes that since its introduction, the order has improved key indicators including negative client closes, margin close-outs for retail losses, and negative balance instances.

A link to the ASIC media release can be found here and a link to CP 348 can be found here.

APRA finalises guidance for new prudential standard on remuneration

On Monday 18 October 2021, APRA issued guidance to assist banks, insurers and superannuation licensees meet their requirements under the new prudential standard CPS 511 Remuneration.

Coming into effect from 1 January 2023, CPS 511 intends to strengthen remuneration practices among APRA-regulated entities. According to APRA, the prudential standard introduces heightened requirements on remuneration and accountability aimed at creating more balanced incentive structures, promoting financial resilience and supporting better outcomes for customers.

A link to the APRA media release can be found here and copies of the guidance can be found here.

Surveillance of investment switching by super fund executives identifies concerns with trustees’ conflicts arrangements

ASIC has engaged in a surveillance program in respect of personal investment switching by directors and senior executives of superannuation trustees. Having considered 23 sample trustees, of both retail and industry funds, the results have generated concerns for ASIC in the ability of trustees to manage conflicts of interest.

In particular, directors and senior executives often hold price-sensitive valuation information. The ASIC surveillance assessed whether fund executives used such information for their own personal gain by switching investment options with knowledge of timing of the revaluation of certain assets.

Although switching investments does not generally involve the requisite acquisition or disposal of a financial product that is a defining characteristic of ‘insider trading’, this type of financial decision may nonetheless contravene laws. Importantly, both ASIC and APRA have a regulatory role in relation to conflict obligations.

In particular, in the context of super trustees and the management of conflicts of interest, ASIC was concerned about the following areas:

• failure to identify investment switching as a risk;
• disparity in board-level engagement on the issue - some boards were proactively engaged, while others were not able to demonstrate that they had considered the issues at all;
• lack of restrictive measures and preventative controls such as trade pre-approvals or switching blackout periods to limit executives’ ability to switch investment options;
• inadequate oversight of investment switching; and
• lack of oversight of related parties.

ASIC’s Regulatory Guide 181, Licensing: Managing conflicts of interest outlines ASIC’s general approach to compliance with the statutory prohibitions against conflicts of interest.

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

APRA urges greater focus on improving governance and strategic planning in super

APRA has called on superannuation trustees to consider strategies to improve strategic planning after conducting multiple reviews of current industry practice. The information paper, published by APRA on 26 October 2021, targets three key areas for APRA in the superannuation space: strategic and business planning; fund expenditure; and unlisted asset valuation practices.

This recent review, the SPS 515 implementation benchmarking review, allowed APRA to evaluate how trustees were meeting the requirements of SPS 515 Strategic Planning and Member Outcomes, published in January 2020.

According to APRA, the key areas for improvement for trustees included:

• greater connection between BPR findings and updates to business plans;
• greater clarity on how strategic objectives support desired member outcomes; and
• more robust analysis of the drivers of business performance and stress testing of financial projections.

A link to the media release can be found here and a link to the information paper is available here.

ASIC quarterly update July to September 2021

On Wednesday 27 October 2021, ASIC released its quarterly update for 1 July to 30 September 2021 (REP 704). The key priorities for ASIC during this period were the provision of regulatory guidance, maintaining market integrity and targeting enforcement action to deter misconduct.

With a particular emphasis on the significant reforms introduced in early October, ASIC Chair Joe Longo noted that ‘ASIC is taking a reasonable, common-sense approach to the implementation of law reforms that commenced earlier this month, including design and distribution obligations, restrictions on the unsolicited selling of financial products (hawking), a deferred sales model for add-on insurance products and new requirements around how breaches are reported to ASIC’.

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

APRA shines light on choice super sector

On 28 October 2021, APRA released its analysis concerning the performance of choice superannuation products ahead of releasing its first Choice Product Heatmap later this year.

The Choice Product Heatmap will provide clear and comparable insights into various product choices for consumers, with a particular emphasis on the issues of investment returns, fees and costs and sustainability.

Choice Products refer to products that members with super benefits have actively chosen to sign up to. These products account for 46 per cent ($859 billion as at 30 June 2020) of total APRA-regulated superannuation benefits.

APRA’s analysis has highlighted a chronic underperformance in the choice sector. In particular, it showed:

• the median administration fees of choice products analysed by APRA are approximately 40 per cent higher than the median MySuper product;
• investment performance displayed considerable variation for options with similar allocations to growth assets; and
• a materially higher percentage of choice options underperformed a risk-adjusted, peer-derived benchmark by more than 75 basis point than MySuper options.

Speaking to the performance of Choice Products and the potential impact of the Heatmap, APRA Executive Board Member Margaret Cole commented that ‘“[t]he new Choice Product Heatmap will make clear which trustees have underperforming choice products and where they need to lift their games. Trustees are expected to identify the reasons for their underperformance and take prompt action to address those issues”.

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

Parliament tables Financial Accountability Regime Bill 2021

On 28 October 2021, the Federal House of Representatives introduced and tabled the Financial Accountability Regime Bill 2021. The Bill makes consequential amendments to various Commonwealth laws to establish the Financial Accountability Regime (FAR) and provides for transitional arrangements relating to the repeal of the Banking Executive Accountability Regime (BEAR) under the Banking Act 1959.

The Bill is set to take effect on the later of:

• 1 July 2022; or
• six months after the Financial Accountability Regime Bill 2021 receives Royal Assent.

From that date, authorised deposit-taking institutions (ADIs) and non-operating holding companies (NOHCs) will become ‘accountable entities’. ADIs will need to assess how to transition from the BEAR to the FAR, including changes to accountability and obligations. Other, non-APRA regulated entities who have not adjusted to BEAR in recent times may have to make significant adjustments.

In effect, the changes to the regime mean entities must:

• begin complying with the Financial Accountability Regime including accountability, key personnel, and notification obligations; and
• map accountabilities and provide appropriate accountability statements to APRA under the Financial Accountability Regime, and update these regularly.

The text of the bill and explanatory memorandum can be found here.

Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021 introduced into Parliament

On 28 October 2021, the Federal House of Representatives introduced and tabled the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021. The Bill proposes to establish a compensation scheme of last resort (CSLR) for consumers:

• who have a determination made in their favour by the Australian Financial Complaints Authority (AFCA); and
• who have not been paid by the AFCA member firm in accordance with AFCA’s determination.

Compensation under the CSLR is intended to be a last resort. This is reflected by the fact that compensation under the CSLR is only payable after AFCA takes steps to require the AFCA member to pay the compensation determined by it to the consumer.

In summary, the key features of the CSLR scheme include the following:

• compensation limit: a compensation limit of up to $150,000 for personal advice, credit intermediation, securities dealing and credit provision for unpaid AFCA determinations;
• funding: the scheme will be funded through an annual levy on relevant industry entities. The total amount payable will be determined by the CSLR operator in a legislative instrument, and will be subject to overall caps on entities in a particular sub-sector; and
• CSLR operator: the operator will be a not-for-profit company, limited by guarantee. The CSLR operator will be required to maintain amounts paid to it for the purposes of the CSLR scheme.

Consultation on the accompanying regulations is currently underway. The CSLR scheme commences on the later of 1 January 2022 and the date after receiving royal assent, and will start paying eligible claims from 1 July 2022.

The text of the Bill and explanatory memorandum can be found here.

Insurance regulatory reforms commence

A number of insurance regulatory reforms commenced on 5 October 2021. These included the:

• product design and distribution obligations;
• new Internal Dispute Resolution Regulatory Guide 271;
• new breach reporting requirements;
• hawking prohibitions;
• deferred sales model for add-on insurance; and
• duty to take reasonable care not to make a misrepresentation to an insurer.

ASIC has announced it will support industry in the transition to the new rules by adopting a ‘reasonable approach in the early stages of these reforms’. For more details, visit our Insurance Regulatory Hub.

Second business interruption insurance test case

On 8 October 2021, the Federal Court of Australia handed down its long awaited decision in Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID-19 insurance test cases) [2021] FCA 1206 (Second Test Case) on business interruption coverage for COVID-19 losses. The judgment considers ten business interruption claims. Five of the claims have been appealed to the Full Federal Court for consideration and is set for hearing from 8 November 2021.

Insurers were largely successful in the Second Test Case. Primarily, the claims failed on the basis that it was not possible for her Honour to conclude that the Commonwealth or State government orders were made as a result of any circumstance at the premises or within a specified radius of the premises, as required by most of the insuring clauses. In one of the cases, the infectious disease insuring clause was held to apply but the court did not go any further in determining whether there was indeed a loss which was covered.

For the full de-brief, see our case note.

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