Financial services monthly wrap up: September 2019

ASIC extends relief for foreign financial services providers

On 10 September 2019, ASIC confirmed that the licensing relief currently afforded to certain foreign financial services providers (FFSPs) has been extended on the same terms until 31 March 2020. The ‘limited connection’ relief as well as ‘sufficient equivalence’ relief were due to expire on 30 September 2019.

Industry feedback as part of ASIC’s Consultation Paper 315 (CP 315) closed on 9 August 2019, with industry yet to receive instruction from ASIC as to whether its proposals to introduce a foreign financial services licence and funds management relief will go ahead. Please visit our website for further information on ASIC’s extension of the relief, as well as ASIC’s CP 315 proposals (including the proposed foreign financial services licence and funds management relief).

If you have any queries or would like discuss your options in providing cross-border financial services into Australia, please do not hesitate to contact us we would be glad to help.

ASIC provides further update on its Royal Commission implementation

ASIC released its second update on 11 September 2019 on its current initiatives responding to the recommendations out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). In particular, the update highlights ASIC’s initiative in aligning its seven priorities outlined in its Corporate Plan 2019 – 2023, including:

• a particular focus on high-deterrence enforcement action;
• prioritising referrals and recommendations from the Royal Commission;
• improving governance and accountability;
• delivering as a conduct regulator for superannuation;
• protecting vulnerable customers;
• addressing harms in insurance; and
• resolving poor financial advice outcomes.

ASIC’s update outlines ASIC’s responses and actions out of Commissioner Haynes’ recommendations, with particular successes including amending the Banking Code, commencing a project to end grandfathered commissions, and the passing of the product intervention power/design and distribution obligations legislation.

The update also includes an appendix with a timeline of major upcoming publications, including updates to ASIC’s Regulatory Guide 97 fees and costs disclosure, financial advice provided by superannuation funds, as well as regulatory guidance for design and distribution obligations. The Royal Commission implementation update is available here.

Government releases Design and Distribution Obligations exposure draft regulations

On 11 September 2019, the Government released for consultation exposure draft regulations and explanatory statement with respect to the new design and distribution obligations (DDO). The draft regulations support the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) by altering the products and persons in relation to which the DDO regime applies. In particular, these draft regulations extend the DDO regime so that it applies to financial products including:

• simple corporate bonds depository interests in simple corporate bonds;
• basic banking products;
• debentures of a body that is an authorised deposit-taking institution (ADI) or a life insurance business;
• custodial arrangements that are not already subject to the new DDO regime, including an interest in an investor directed portfolio service (IDPS); and
• products sold in certain situation where the DDO could be avoided.

The DDO regulations are expected to comment on 5 April 2021. The public consultation to the exposure draft regulations and explanatory statement is open until 11 October 2019. For further information, please visit the Government’s website.

APRA updates its enforcement approach

The Australian Prudential Regulation Authority (APRA) updated its enforcement approach on 3 September 2019, outlining its focus on increasing transparency around the use of its formal enforcement powers. In particular, APRA’s revised enforcement approach sets out its intention to take stronger actions against institutions that fail to meet their legal obligations under the Financial Sector (Collection of Data) Act 2001 (Cth) to report data to ASIC in full and on time.

APRA has made it clear that it will consider when and how to publicise its enforcement actions on a case by case basis. However, unless there are likely to be risks to financial stability and/or to beneficiaries’ interests from publicising such action, APRA will ordinarily publicise the following:

• administrative enforcement actions taken by APRA, including formal directions and licence conditions or infringement notices;
• disqualification of accountable persons under the Bank Executive Accountability Regime (BEAR), or other responsible persons under the prudential framework;
• acceptance of an enforceable undertaking received from a regulated entity or an individual; and
• court-based enforcement actions commenced by APRA.

Further information on APRA’s enforcement approach update as well as its powers generally is available on APRA’s website.

Government releases draft legislation regarding licensing, banning orders, search warrants and intercepting telecommunications material

Following the release of the ASIC Enforcement Review Taskforce Report recommendations in December 2017 and the subsequent response by the Government in April 2018, the Government has released draft legislation for public comment. Released on 11 September 2019, the draft legislation:

• strengthens ASIC’s licensing powers by replacing the ‘good fame and character’ requirement with a ‘fit and proper person’ test for AFS licensing purposes;
• aligns penalties for false and misleading statements across different license applications;
• gives ASIC the power to ban a person from performing functions in a credit or financial services business;
• creates a uniform search warrant power for ASIC across different Acts; and
• allows interception information to be given lawfully to ASIC by interception agencies for serious offences.

The draft legislation and explanatory materials for each of the recommendations can be found on the Government’s website.

Government establishes Select Committee on FinTech and RegTech

The Senate resolved on 11 September 2019 to establish a Select Committee on Financial Technology (FinTech) and Regulatory Technology (RegTech). The Committee, led by Senator Andrew Bragg, will inquire and develop a report on key industry issues including:

• the scope of opportunity for both Australian businesses and consumers through the use of FinTech and RegTech products and services;
• barriers to the update of new technologies in the financial sector;
• the current landscape and use of RegTech practices as well as the opportunities for the RegTech industry to facilitate compliance and reduce costs;
• the progress of FinTech facilitation reform and comparison to global regimes; and
• the effectiveness of Australia’s current initiatives in promoting a positive environment for FinTech and RegTech start-ups.

The Committee is comprised of 6 government members and intends to deliver its final report in October 2020. Further information about the Committee is available of the Parliament of Australia website.

APRA finalises amendments to its cross-industry margin requirements

On 19 September 2019, APRA released its response to industry submissions made in consultation on amendments to Prudential Standard 226 Margining and risk mitigation for non-centrally cleared derivatives (CPS 226). The consultation letter proposed to delay the final implementation phase by one year to 1 September 2021 in order to align with the decision of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions to do the same among other amendments.

APRA is proceeding with the proposed amendments. APRA will also add the United Kingdom’s Prudential Regulation Authority and Financial Conduct Authority to the list of foreign bodies eligible for substituted compliance with APRA’s margin requirements in CPS 226. The response to submissions and the amendments can be found on APRA’s website.

ASIC uses its product intervention orders for the first time to ban short-term predatory lending

ASIC announced its first use of product intervention powers on 12 September 2019 in order to ban a model of lending in the short term credit industry. Short term credit providers are exempt from the National Consumer Credit Protection Act 2009 (Cth) if the fees charged for a loan of up to 62 days does not exceed 5% of the loan amount. However, under particular business models, ASIC claims that certain businesses charged significant upfront, ongoing and default related fees under a separate contract for management and administrative services that can amount to almost 1000% of the value of the loan.

Whilst the order does not seek to modify the existing exemption for short term credit, it does aim to ensure that short term credit lenders do not structure their business in a way that allows them to charge fees that will exceed the current threshold.

On 20 September 2019, Cigno Pty Ltd made an application to the Federal Court seeking to quash the instrument that gives effect to the product intervention order (‘PIO’) and also seeking a declaration that the Short Term Credit PIO is invalid. This order is the first use of ASIC’s new power with a subsequent PIO banning the sale of binary options to retails clients and restricting CFDs currently in the consultation process.

A copy of ASIC’s media release, as well as the amending instrument, explanatory statement and product intervention order notice is available on ASIC’s website.

ASIC remakes ‘sunsetting’ class order relief on changing scheme constitutions

ASIC has remade Class Order 09/552 to continue the existing relief on changing scheme constitutions. Whilst the existing relief was set to end on 1 October 2019, the new instrument ASIC Corporations (Changing Scheme Constitutions) Instrument 2019/700 will continue to provide relief in certain situations to vary how a constitution of a registered scheme may be modified, or repealed and replaced with a new constitution.

More information including the new instrument and the consultation paper issued with respect to this relief can be found on the ASIC’s website.

APRA publishes Chair Wayne Byres’ speech on superannuation member outcomes

On 19 September, APRA released a full transcript of Driving better member outcomes, a speech delivered by Chair Wayne Byres. Mr Byres stated that the new superannuation legislation and standards provide a good framework for APRA to drive a strong focus on member outcomes. He flagged a forthcoming consultation on an overhaul of the current superannuation data reporting regime.

Mr Byres also said that APRA plans to publish a selected set of performance-related measures and benchmarks later this year.