Australian Financial Services Regulatory Update

This edition of the Update addresses:

  1. Recent legal and regulatory developments which relate to licencing and regulatory relief, consumer protection, financial markets, anti-money laundering and capital and prudential requirements for authorised deposit-taking institutions ("ADIs"); 
  2. The recent decision of Federal Court in Australian Securities and Investments Commission v Hutchison [2020] FCA 978, which affirmed that the phrase "in relation to" a financial service is to be construed widely;
  3. The continuing fallout of the Financial Services Royal Commission and the recent cases which demonstrate that ASIC and APRA remain committed to taking enforcement action in relation to matters referred by the Commissioner; and
  4. The latest regulatory enforcement action, including the first criminal conviction for failing to comply with client money obligations.


Licencing and Regulatory Relief

Applications for Relief to be Submitted Through the ASIC Regulatory Portal

From 27 July 2020, the ASIC Regulatory Portal will replace other channels as the primary way to submit applications for relief and various fundraising and corporate finance documents to ASIC.

Litigation Funders to Obtain an AFS Licence

On 24 July 2020, the Corporations Amendment (Litigation Funding) Regulations 2020 ("Regulations") commenced. The Regulations set out the regulatory framework for litigation funding schemes under the Corporations Act 2001 (Cth) ("Corporations Act") and contain transitional arrangements for schemes entered into before 22 August 2020. Under the Regulations, litigation funding schemes entered into on or after 22 August 2020 will generally need to hold an Australian financial services ("AFS") licence and register as a managed investment scheme. ASIC has acknowledged that it may be difficult for litigation funding schemes to comply with certain obligations under the Corporations Act, including in relation to the requirement to provide a Product Disclosure Statement and rules regarding withdrawal from managed investment schemes. To address these practical difficulties and support the transition to the new framework, ASIC issued the ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 on 20 August 2020.

Consumer Protection 

ASIC Seeks Further Consultation on the Proposed Use of its Product Intervention Power

On 5 August 2020, ASIC released for consultation its second proposed product intervention order. The release of the draft product intervention order, which concerns the sale of add-on insurance and warranty products sold with motor vehicles, follows ASIC's earlier consultation through Consultation Paper 324 Product intervention: The sale of add-on financial products through car yard intermediaries, published in October 2019.

On 9 July 2020, ASIC released Consultation Paper 330 Using the product intervention power: Continuing credit contracts, in which it proposes to make an industry-wide product intervention order to prohibit credit providers and their associates from issuing continuing credit contracts in certain circumstances. This proposed intervention follows ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917 issued in September 2019, which banned the provision of short-term credit products unless specified conditions were complied with in relation to fees and charges. ASIC has also consulted on a proposal to make an industry-wide product intervention order in relation to the issue and distribution of over-the-counter binary options and contracts for difference to retail clients.

ASIC Releases Updated Guidance on Complaints Handling

On 30 July 2020, ASIC released an updated and finalised version of Regulatory Guide 271 Internal dispute resolution, which sets out how AFS licensees must deal with consumer and small business complaints under their internal dispute resolution ("IDR") procedures. ASIC notes that the evidence for raising IDR standards across the financial sector comes from research into the consumer journey through the IDR process and on-site visits at NAB, ANZ, CBA, Westpac and AMP during 2019 as part of ASIC's enhanced supervision program. 

Financial Markets

ASIC Warns of Heightened Share Sale Fraud

ASIC has reminded AFS licensees to be more alert to the possibility of share sale fraud and account hacking. Share sale fraud refers to the fraudulent activity of a person who is not who he claims to be, selling shares that do not belong to him. ASIC note they continue to investigate and act on reports of share sale fraud committed against AFS licensees during COVID-19.

Anti-Money Laundering

AUSTRAC Proposes Amendments to Customer Identification Procedures

On 14 July 2020, AUSTRAC released for consultation proposed amendments to Chapter 46 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007, which set out the special circumstances that allow for the applicable customer identification procedure to be conducted after commencing to provide a designated service. AUSTRAC's proposed amendments to Chapter 46 of the AML Rules seek to simplify the existing requirements.

Extensive amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 are still in the pipeline, with the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019 currently before the House of Representatives after being introduced in October 2019.

Capital and Prudential Requirements

APRA Updates its Capital Management Guidance for ADIs

On 29 July 2020, APRA advised that for the remainder of the year, ADIs should seek to retain at least half of their earnings when making decisions on capital distributions, conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity, make use of capital buffers to absorb the impacts of stress and continue to lend to support households and businesses; and plan on the basis of an orderly rebuild in capital levels (where needed).

APRA Announces Extension of Temporary Capital Treatment for Bank Loans 

On 8 July 2020, APRA announced an extension to the temporary capital treatment for bank loans. The temporary capital treatment provides that ADIs who offered borrowers impacted by COVID-19 an option to defer repayments for a period of up to six months need not treat the repayment deferral period as a period of arrears for capital adequacy and regulatory reporting purposes. Additionally, where an ADI restructures an affected borrower's facilities before 31 March 2021 with a view to putting the borrower on a sustainable financial footing, the loan may continue to be regarded as a performing loan for capital and regulatory reporting purposes.

On 13 August 2020, APRA issued a consultation letter to ADIs proposing to give effect to the temporary capital treatment by adding a new Attachment E to Prudential Standard APS 220 Credit Quality (APS 220) and inviting feedback on the draft Attachment E to APS 220. On the same day, ASIC published their expectations of retail lenders when six-month loan repayment deferrals expire.


Federal Court Affirms Wide Construction of "in Relation to" a Financial Service

In Australian Securities and Investments Commission v Hutchison [2020] FCA 978, the Federal Court considered an appeal from ASIC from a decision of the Administrative Appeals Tribunal ("AAT") to lift a banning order imposed by ASIC on an authorised representative of an AFS licencee. The AAT found that the authorised representative's conduct in receiving payment for fees directly from clients was "probably dishonest" but was not "in relation to the financial service that [he] was providing". On appeal, ASIC submitted that the AAT had adopted an unduly narrow construction of the term "in relation to a financial product or financial service" in sections 1041G and 1041H of the Corporations Act by requiring a "direct and substantial" relationship between the relevant conduct, the financial product or service and harm to clients.

The Federal Court accepted ASIC's submission and followed the Full Court of the Federal Court's decision in Australian Securities and Investments Commission v Narain (2008) 169 FCR 211, finding that that the relationship contemplated by the words "in relation to" is such that an indirect or less-than-substantial connection is sufficient. The Federal Court noted that whether such a connection is established will depend on the facts of each case. The Federal Court concluded that the AAT's approach was unnecessarily narrow and remitted the matter to the AAT for re-hearing. 


Whilst ASIC and APRA are focusing their regulatory efforts on the challenges created by COVID-19, they remain committed to taking enforcement action in relation to matters referred by the Financial Services Royal Commission and other serious breaches of the law.

ASIC Commences Proceedings Against BT Funds Management and Asgard Capital Management for Charging Fees for No Service

On 20 August 2020, ASIC filed civil penalty proceedings in the Federal Court against BT Funds Management ("BT"), the wealth management and insurance arm of Westpac, and Asgard Capital Management ("Asgard"), a custodial service provider and a member of the Westpac group. ASIC alleges that Asgard charged 4,040 customers fees for no service. Consequently, ASIC alleges that Asgard contravened section 912A(1)(a) of the Corporations Act, which requires an AFS licensee to do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly. ASIC also alleges that BT and Asgard made a false or misleading representation that advisor fees were no longer being charged in contravention of section 12DB(1)(g) of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") and thereby engaged in misleading and deceptive conduct in contravention of section 12DA(1) of the ASIC Act and section 1041H of the Corporations Act. 

ASIC Commences Proceedings Against StatePlus Super for Charging Fees for No Service

On 20 August 2020, ASIC filed civil penalty proceedings in the Federal Court against State Super Financial Services Australia Limited ("StatePlus"). ASIC alleges that StatePlus charged at least 36,592 members fees for no service. Consequently, ASIC alleges that StatePlus contravened section 912A(1)(a) of the Corporations Act, which requires an AFS licensee to do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly. ASIC also alleges that StatePlus made misleading and defective statements as to the future provision of annual financial advice in contravention of section 935A(1) and accepted monthly payments for financial services where there were reasonable grounds for believing that it would not be able to supply those services within an applicable annual period, in contravention of section 12DI(3) of the ASIC Act.

ASIC Confirms Intention to File Numerous Proceedings Against AMP

On 5 August 2020, ASIC Deputy Chair Daniel Crennan QC told a parliamentary committee that it intends to file numerous proceedings against AMP before the end of the year following a number of internal investigations and joint investigations undertaken with the Commonwealth DPP.

ASIC Will Not Appeal Westpac Responsible Lending Case

On 22 July 2020, ASIC confirmed it will not seek special leave to appeal to the High Court following the Full Court of the Federal Court's decision in Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111. The Full Court of the Federal Court upheld the first instance decision of Perram J, finding that Westpac had not contravened the responsible lending obligations in the National Consumer Credit Protection Act 2009 (Cth).

APRA Imposes Licencing Conditions Before Finding a Breach of the Law 

APRA's imposition of licencing conditions on Colonial First State Investments Limited ("CFSIL") and Suncorp Portfolio Services Limited ("SPSL") on 2 July 2020 demonstrates that APRA is willing to use enforcement tools before concluding whether there has been a breach of the law. APRA's investigations raised concerns about the adequacy of CFSIL and SPSL's internal processes for demonstrating how members' best interests were considered and prioritised. The new licencing conditions require CFSIL and SPSL to document how they consider and prioritise members' interests when they make decisions that materially affect members' interests.


ASIC Commences Proceedings for Alleged Failure to Have Adequate Cyber Security Systems

On 21 August 2020, ASIC filed proceedings in the Federal Court against RI Advice Group Pty Ltd ("RI") for failing to have policies, systems and resources which were reasonably appropriate to manage risk in respect of cybersecurity and cyber resilience. Consequently, ASIC alleges that RI breached its obligations as an AFS licensee and contravened sections 912A(1)(a), (b), (c), (d) and (h) and (5A) of the Corporations Act.

First Conviction in Australia for Breaches of Client Money Offences

A unit of the Bank of New York Mellon, Pershing Securities Australia Pty Ltd ("Pershing"), has pleaded guilty and was sentenced on 5 August 2020 to pay a $40,000 penalty for two counts of failing to comply with the client money obligations, in contravention of the criminal offence provisions under sections 993B(1) and 993C(1) of the Corporations Act. Each offence is a strict liability offence and carries a maximum penalty of 250 penalty units (approximately $45,000). Pershing is the first company to face criminal prosecution for client money offences. 

ASIC Takes Action to Wind Up Illegal Schemes

On 28 July 2020, the Federal Court made orders winding up an unregistered managed investment scheme operated by MyWealth Manager Financial Services Pty Ltd (trading as MyWealth Manager) and 3M Financial Planning Pty Ltd (trading as MCube Planners), and declared that the defendants contravened the Corporations Act by operating the unregistered scheme and failing to hold an AFS licence. The Court also granted injunctions against the defendants, restraining them from carrying on a financial services business in Australia without holding an AFS Licence.

On 10 August 2020, the Federal Court made orders winding up Askk Investment Group Pty Ltd and the unregistered managed investment scheme operated by the defendant, and declared the defendant contravened the Corporations Act by operating the unregistered scheme.

Credit Suisse Fined for Failing to Act in Accordance with Clients' Instructions

On 3 July 2020, ASIC reported that Credit Suisse Equities (Australia) Limited ("Credit Suisse") paid a $75,000 penalty to comply with an infringement notice issued by the Markets Disciplinary Panel ("MDP"). The MDP considered that Credit Suisse had failed to act in accordance with its clients' instructions to conduct an on-market buy-back and that Credit Suisse's conduct was careless because its execution desk employees were inadequately trained in relation to on-market buybacks. Compliance with the infringement notice is not an admission of guilt or liability, and Credit Suisse is not taken to have contravened the requirement to comply with the Market Integrity Rules in section 798H(1) of the Corporations Act.

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