
Publication
Infringement risk relating to creation and use of the output of a generative AI system
Where the Output of a generative AI system is the same or substantially similar to a third party’s copyright work
Australia | Publication | November 2021
This article was co-authored with Damien Vickovich.
October was another busy month in the funds, super and insurance sectors, as the industry welcomed the advent of the breach-reporting, anti-hawking reforms and new customer complaints handling requirements which took effect on October 5. Notably, ASIC has provided further guidance on each of these topics to assist the industry with its transition.
Another key priority has been the performance of superannuation funds and trustees, as well as the Your Future Your Super reforms, which continue to be front and centre both for ASIC and APRA.
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:
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 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:
A link to the ASIC media release can be found here.
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.
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 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.
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.
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:
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 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:
A link to the media release can be found here and a link to the information paper is available here.
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.
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:
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.
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:
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:
The text of the bill and explanatory memorandum can be found here.
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:
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:
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.
A number of insurance regulatory reforms commenced on 5 October 2021. These included the:
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.
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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Publication
Where the Output of a generative AI system is the same or substantially similar to a third party’s copyright work
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Generative AI systems are trained using vast amounts of data, often taken from sources in the public domain that may be protected by copyright or other intellectual property rights, such as, in the UK and EU, a database right.
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