Australian Financial Services Regulatory Update
This edition of the Update covers:
- Recent legal and regulatory developments, including the release of ASIC's immunity policy for market misconduct offences, a FATF consultation on proliferation of financial risk and digital currency, and ASIC and APRA's focus on the management of cyber risk and climate risk;
- A recent decision of the Full Court of the Federal Court of Australia upholding an order compelling compliance with a s 33 notice by an authorised representative of an AFS licensee;
- The continuing fallout of the Financial Services Royal Commission and the recent cases demonstrating ASIC and APRA's continuing commitment to enforcement action in relation to matters referred by the Commissioner; and
- Other regulatory enforcement action, including the Federal Court finding that the Mayfair 101 Group made misleading or deceptive statements in its advertisements and the imposition of AFS licence conditions on a retail OTC derivatives issuer.
Key Legal and Regulatory Developments
ASIC Releases Immunity Policy for Market Misconduct Offences
On 24 February 2021, the Australian Securities and Investments Commission ("ASIC") released an immunity policy for certain contraventions of the Corporations Act 2001 (Cth) ("Corporations Act"), which includes serious offences such as market manipulation, insider trading and dishonest conduct in the course of carrying on a financial services business. Under the new policy, an individual who has engaged with others to manipulate the market, commit insider trading or engage in dishonest conduct when operating a financial services business (Part 7.10 of the Corporations Act) can, in certain circumstances, seek immunity from both civil penalty and criminal proceedings. Applications for immunity under ASIC's policy are only available to individuals, not corporations. Under the policy, immunity will only be available to the first individual who satisfies the immunity criteria and reports the misconduct to ASIC prior to commencement of an investigation into the conduct. ASIC's media release can be found here.
A detailed Jones Day Commentary on ASIC's new immunity policy for market misconduct offences can be found here.
Anti-Money Laundering and Sanctions
FATF Commences Consultation on Proliferation of Financial Risk and Digital Currency
On 6 April 2021, the global Financial Action Task Force ("FATF") commenced consultation on draft guidance about mitigating proliferation financing risk, and on digital currencies and digital currency exchange providers. Guidance and recommendations issued by FATF are not legally binding in Australia, but these international standards strongly influence the development of anti-money laundering and counter-terrorism financing legislation around the world. The public consultation on mitigating proliferation financing risk closes on 9 April 2021. The public consultation on digital currencies and digital currency exchange providers closes on 20 April 2021. The Australian Transaction Reports and Analysis Centre's media release can be found here.
ASIC Stresses That Cyber Risk Should Be Front of Mind
On 10 March 2021, ASIC Deputy Chair Karen Chester gave a speech to the Australian Financial Review's Business Summit during which she referred to cyber risk as the new frontier for both national defence and market integrity. Ms Chester named three reasons why cyber risk matters so much to business today, namely (i) underinvestment in systems has increased exposures (Ms Chester noted that system deficiency was the second most common root cause of breaches recently reported to ASIC by the major banks); (ii) the risk landscape has transformed, with a three-fold increase in the number of common vulnerabilities and exposures reported between 2016–2020; and (iii) much of the increase in vulnerabilities is occurring in systems that are ubiquitous. Ms Chester highlighted ASIC's cyber supervisory endeavours, which include raising awareness for cyber resilience, helping regulated entities prepare for their self-assessment and taking deterrence-based enforcement action. In this regard, Ms Chester referred to the proceedings commenced by ASIC against RI Advice Group, noting that it was the first action taken by ASIC against an Australian Financial Services ("AFS") licence for deficiency cyber security systems, and it won't be the last. ASIC Deputy Chair Karen Chester's speech can be found here.
ASIC and APRA Emphasise the Importance of Managing Climate Risk
In February 2021, ASIC Commissioner Cathie Armour wrote an article that appeared in the Australian Institute of Company Directors' Company Director magazine. It reinforced ASIC's view that disclosing and managing climate-related risk is a key director responsibility and set out four high-level recommendations for directors and officers of listed companies, namely (i) understand and continually reassess existing and emerging risks that may be applicable to the company's business, including climate risk; (ii) ensure the Board is comfortable with the level of oversight they maintain over climate risks and opportunities and the governance structures in place to assess, manage and disclose these risks and opportunities; (iii) carefully consider the requirements relating to operating and financial review disclosures in annual reports under s 299(1)(a)(c) of the Corporations Act; and (iv) consider the voluntary disclosure recommendations issued by the Task Force on Climate-related Financial Disclosures ("TCFD"). ASIC Commissioner Cathie Armour's article can be found here. ASIC's expectations on climate change disclosures have been discussed in a previous Jones Day Commentary, which can be found here.
On 22 April 2021, the Australian Prudential Regulation Authority ("APRA") released for consultation its draft guidance to banks, insurers and superannuation trustees on managing the financial risks of climate change, including with respect to governance, risk management, scenario analysis and disclosure. The draft Prudential Practice Guide CPG 229 Climate Change Financial Risks ("CPG 229") provides guidance on the management of three categories of climate change financial risks, namely physical risks, transition risks and liability risks. CPG 229 reflects APRA's view of sound practice and is aligned with the voluntary disclosure recommendations issued by the TCFD. Consultation on the draft CPG 229 closes on 31 July 2021, with a finalised CPG 229 expected to be released in late 2021. The draft CPG 229 can be found here.
ASIC Bans the Sale of Binary Options to Retail Clients
On 1 April 2021, ASIC made a product intervention order banning the sale of binary options to retail clients. It will take effect from 3 May 2021. ASIC has made the product intervention order following reviews in 2017 and 2019 which found that binary options are likely to result in cumulative losses to retail clients over time because of their 'all or nothing' payoff structure, the short contract duration and negative expected returns. ASIC estimates that retail clients' net losses from trading binary options were around $490 million in 2018. ASIC's product intervention order banning the sale of binary options brings Australian requirements into line with prohibitions in force in comparable markets and follows ASIC's product intervening order imposing conditions on contracts for difference to retail clients, which commenced on 29 March 2021. ASIC's media release can be found here.
Treasury Conducts Review of the Australian Financial Complaints Authority
In March 2021, the Federal Treasury announced a review of the Australian Financial Complaints Authority ("AFCA"). AFCA is the external dispute resolution body established to resolve complaints by consumers and small businesses about financial services providers. The Treasury's review will consider the following matters: (i) whether AFCA is delivering against statutory objectives; (ii) whether the monetary limits on claims and remedies for primary production businesses remain adequate; and (iii) whether the scope, remit and operation of AFCA's Independent Assessor function remain appropriate and effective. Treasury is due to submit their final report to the Minister by 30 June 2021. Treasury's media release can be found here.
ASIC Releases Advice Fee Consent and Lack of Independence Disclosure Legislative Instruments
On 25 March 2021, ASIC made three legislative instruments that deal with advice fee consents and independence disclosure following Royal Assent of the Financial Sector Reform (Hayne Royal Commission Response No.2) Act 2021 (Cth) ("FSR Act"). The FSR Act provides for ASIC to make legislative instruments setting the requirements for:
- The written consent that a fee recipient must obtain from a client before deducting, or arranging to deduct, advice fees from a client account as part of an ongoing fee arrangement (Financial Services Royal Commission Recommendation 2.1);
- The disclosure of lack of independence that an AFS licensee or authorised representative must give clients where they would breach s 923A of the Corporations Act if they used words such as "independent", "impartial" or "unbiased" (Financial Services Royal Commission Recommendation 2.2); and
- The written consent that a superannuation trustee must obtain from a member before deducting advice fees from a superannuation account under a non-ongoing fee arrangement (Financial Services Royal Commission Recommendation 3.3).
In finalising the legislative instruments, ASIC took into account industry feedback on the proposals in Consultation Paper 329 Implementing the Royal Commission Recommendations: Advice fee consents and independence disclosure (CP 329), which was released in March 2020. ASIC's media release can be found here.
Senate Supports Permanent Reforms to the Continuous Disclosure Regime
In March 2021, the Senate Standing Committee on Economics released a report recommending that the Treasury Laws Amendment (2021 Measures No. 1) Bill be passed without amendment. The bill, which was introduced to Parliament on 17 February 2021 and is currently before the Senate, proposes (i) to make permanent the temporary changes to the continuous disclosure obligations in ss 674 and 675 of the Corporations Act which were introduced in May 2020 under Corporations (Coronavirus Economic Response) Determination (No. 2) 2020; and (ii) to align s 1041H of the Corporations Act, which is commonly relied on to bring shareholder class actions in respect of continuous disclosure failures, with the new ss 674 and 675 such that corporations and their directors and officers will only be liable for misleading or deceptive conduct under s 1041H for failing to disclose material information where they have acted with "knowledge, recklessness or negligence". The bill also provides certainty regarding the use of electronic signatures in the executing and witnessing of documents and the use of electronic technology to conduct meetings. The bill can be found here.
ASIC Consults on Draft Guidance on Breach Reporting Reforms
On 22 April 2021, ASIC released for consultation a draft regulatory guide on the reforms to the breach reporting regime introduced by the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) which are set to commence on 1 October 2021. The reforms (i) strengthen the regime for AFS licensees to self-report certain breaches to ASIC by replacing the current reporting obligations in s 912D of the Corporations Act with a new set of obligations; and (ii) extend the reporting regime to credit licensees. ASIC expects a significant increase in the volume of reports received as a wider range of entities will be required to report and a wider range of breaches will be subject to reporting. ASIC is seeking comment on the draft guidance by 3 June 2021. ASIC's Consultation Paper 340 Breach reporting and related obligations can be found here.
Recent Decisions From the Australian Courts
Full Federal Court Upholds Order Compelling Compliance With s 33 Notice
In a previous Jones Day Update, we reported on the decision of Wigney J in ASIC v Maxi EFX Global AU Pty Ltd  FCA 1263 which found that Maxi EFX Global AU Pty Ltd ("Maxi EFX") was required under a s 33 notice issued by ASIC to produce certain documents in its possession, custody or control, notwithstanding the fact that those documents may have been physically retained by a service provider located overseas. Wigney J subsequently made orders compelling Maxi EFX's compliance with the s 33 notice.
In Maxi EFX Global AU Pty Ltd v ASIC  FCAFC 59, the Full Court of the Federal Court heard an appeal by Maxi EFX challenging the orders made by Wigney J on various grounds, including that Wigney J erred in finding that Maxi EFX was in the possession, custody or control of the relevant documents retained by a service provider overseas. The Full Federal Court considered that the six grounds of appeal were premised on two propositions, neither of which the Court could accept, namely (i) that s 33 of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") is unconcerned with the legal relationships between the person who has possession of the book, or the person with the proprietary or other legal interest in it, but rather on the practicality of whether the recipient of the notice is able to produce it; and (ii) as there was uncontradicted documentary evidence that the overseas service providers had possession of the documents and had not provided them to Maxi EFX despite its requests for them to do so, the Court was bound to accept that evidence as a complete answer to Maxi EFX's inability to comply with the s 33 notice. The Court proceeded to dismiss each of the six grounds of appeal, finding that Maxi EFX had failed to establish an error in the findings of the primary judge. Accordingly, the appeal was dismissed. The decision of the Full Federal Court can be found here.
Fallout From the Financial Services Royal Commission
ASIC Commences Proceedings Against NAB Over Account Fees
On 25 February 2021, ASIC commenced proceedings in the Federal Court against National Australia Bank Ltd ("NAB"), alleging that NAB charged customers fees for making certain periodic payments ("PP Fees") when it was not entitled to do so under the bank's standard terms and conditions. ASIC alleges that NAB overcharged customers PP Fees on 195,305 occasions, with a total value of $275,454.60 involving 4,874 personal banking customers and 913 business banking customers. ASIC alleges that by charging the PP Fees, or by notifying customers of the charging of each PP Fee via a bank statement, NAB (i) made false or misleading representations that it was contractually entitled to charge the fees when it was not entitled to in contravention of s 12DB of the ASIC Act; (ii) engaged in misleading or deceptive conduct in contravention of s 12DA of the ASIC Act; and (iii) contravened its obligation as an AFS licensee to comply with financial services laws in contravention of s 912(1)(c) of the Corporations Act. NAB filed a concise statement in response on 28 April 2021. ASIC's media release can be found here.
In similar proceedings, the Australia and New Zealand Banking Group Limited, or ANZ, was ordered by Allsop J of the Federal Court in October 2020 to pay a pecuniary penalty of $10 million for charging fees for making certain periodic payments on 327,895 occasions when it was not entitled to do so under the bank's standard terms and conditions. Allsop J commented in obiter that a necessary consequence of banks' use of adhesion contracts, which are those where one party has substantially more power than the other in setting the terms (e.g., standard banking terms and conditions), is that consumers face a form of disadvantage of not knowing whether regular fees being taken out of their accounts conform with the present up-to-date version of the contract of adhesion sent to them in the past. This heightens the need for banks to be assiduous in their fair, honest and good faith approach to understanding how they administer adhesion contracts to customers. The decision of Allsop J in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 3)  FCA 1421 can be found here.
Other Regulatory Enforcement Action
ASIC Commences Proceedings Against Westpac for Alleged Insider Trading
On 5 May 2021, ASIC commenced proceedings in the Federal Court against Westpac Banking Corporation ("Westpac"), alleging that Westpac engaged in insider trading thereby contravening (i) s 1043A(1)(c) of the Corporations Act (prohibited conduct by a person in possession of inside information); (ii) s 12CB of the ASIC Act (unconscionable conduct); and (iii) s 912A(1)(a) (the obligation to provide financial services efficiently, honestly and fairly). The allegations relate to Westpac's role in executing a $12 billion interest rate swap transaction with a consortium acquiring a majority stake in the electricity provider Ausgrid by the New South Wales government in 2016. ASIC reports that the transaction is the largest interest rate swap transaction executed in one tranche in Australian financial market history. ASIC's media release can be found here.
IOOF Commits to Remedial Action in Relation to Two Financial Advice Licensees
On 26 April 2021, IOOF Holdings Limited ("IOOF") committed to taking remedial action to address deficiencies identified as a result of an ASIC surveillance of two financial advice licensees of IOOF: Bridges Financial Services Pty Ltd ("Bridges") and RI Advice Group Pty Ltd ("RI Advice"). In December 2020, ASIC completed a review of the licensees' supervision and monitoring processes and the quality of advice their advisers provided to a sample of clients. ASIC found that 15% of Bridges' client files and 17% of RI Advice's client files which ASIC reviewed contained indications of some potential client detriment. IOOF has agreed to develop and implement remedial action plans for Bridges and RI Advice to address ASIC's findings and concerns, including, where appropriate, client review and remediation programs. ASIC's media release can be found here.
ASIC Releases Enforcement Update for July to December 2020
On 16 April 2021, ASIC provided an update on its enforcement work undertaken between 1 July 2020 and 31 December 2020. ASIC's enforcement action included:
- Commencing 107 investigations (with 211 investigations ongoing);
- Agreeing to court-enforceable undertakings;
- Obtaining banning orders in respect of 50 individuals;
- Charging 27 individuals in criminal proceedings;
- Commencing 14 civil penalty proceedings (with 18 civil penalty proceedings ongoing); and
- Obtaining civil penalties in the Federal Court totalling $159.8 million, including ASIC's two largest civil penalty outcomes—penalties totalling $57.5 million were imposed on two NAB subsidiaries for charging fees for no service, and penalties totalling $75 million were imposed on over-the-counter ("OTC") derivatives provider AGM Markets Pty Ltd and two of its authorised representatives for systemic unconscionable conduct.
In the financial services sector, ASIC's enforcement action has been predominantly focused on credit misconduct and financial advice misconduct, together representing more than 60% of ASIC's enforcement action (criminal, civil, administrative, enforceable undertaking) during the period. ASIC's Enforcement Update can be found here.
Federal Court Finds Mayfair 101 Made Misleading or Deceptive Statements in Advertisements
On 23 March 2021, Anderson J of the Federal Court handed down a judgment on liability which found that companies in the Mayfair 101 Group made statements that were false, misleading or deceptive in advertisements for its debenture products, following proceedings commenced by ASIC in April 2020. The Court found that companies in the Mayfair 101 Group engaged in misleading or deceptive conduct, and made false or misleading representations, by representing that:
- Mayfair 101's debenture products were comparable to, and of similar risk profile to, bank term deposits, when Mayfair 101's debenture products exposed investors to significantly higher risk than bank term deposits ("Bank Term Deposit Representation");
- The principal investment would be repaid in full on maturity, when investors might not receive capital repayments on maturity, or at all, as Mayfair 101 could elect to extend the time for repayment for an indefinite period of time; and
- Mayfair 101's debenture products were specifically designed for investors seeking certainty and confidence in their investments and therefore carried no risk of default, when there was a risk that investors could lose some, or all, of their principal investment.
ASIC submitted that the Bank Term Deposit Representation was implied by the use of sponsored link internet advertising (among other things) to target investors, which included the use of "meta-title tags" such as "term deposit rates—best term deposit options"; domain names, such as "term deposit guide"; and "adwords" for sponsored searches, including "bank deposits" and "term deposits". With respect to the Mayfair 101's use of sponsored link internet advertising, Anderson J noted that "it is tolerably clear that the Defendants' marketing strategy was addressed to persons searching for a term deposit in order to divert them to the Defendants' websites".
ASIC is seeking pecuniary penalties, injunctions and corrective advertising, which will be determined at a separate hearing on penalty. ASIC's media release can be found here.
ASIC Imposes Additional Licence Conditions on Retail OTC Derivatives Issuer
On 12 March 2021, ASIC imposed additional conditions on the AFS licence of AxiCorp Financial Services Pty Ltd ("AxiCorp") to ensure that AxiCorp has adequate compliance arrangements in place for its OTC derivatives business. Under the additional AFS licence conditions, AxiCorp (i) must appoint an independent expert to review its procedures and controls for complying with its regulatory obligations and implement the independent expert's proposed remedial actions; (ii) must maintain a minimum of three full-time equivalent compliance staff until 31 December 2022; and (iii) must not appoint any Corporate Authorised Representative until 31 December 2022.
The imposition of AFS licence conditions follows proceedings before the Administrative Appeals Tribunal ("AAT"). In January 2020, AxiCorp applied to the AAT for a review and stay of a decision of ASIC to suspend its AFS licence. The AAT granted a stay of the suspension, meaning that AxiCorp could continue providing financial services under their AFS licence, pending final review of ASIC's decision. Following agreement on the imposition of the additional licence conditions, ASIC and AxiCorp filed proposed consent orders with the AAT, setting aside the decision to suspend AxiCorp's AFS licence. On 9 March 2021, the AAT granted the orders and set aside the suspension decision. ASIC's media release can be found here.
ASIC Commences Proceedings Against REST for Misleading and Deceptive Representations
On 2 March 2021, ASIC commenced civil penalty proceedings in the Federal Court against Retail Employees Superannuation Pty Ltd ("REST"), a superannuation trustee, for false or misleading representations made about the ability of its members to transfer their superannuation out of the Retail Employees Superannuation Trust. ASIC alleges that REST made representations that discouraged, and delayed or prevented, members from transferring some or all of their funds to another superannuation fund. ASIC's case is that these members were denied their lawful rights to superannuation portability and choice of superannuation fund, causing members to suffer financial loss. ASIC further alleges that this conduct resulted in REST retaining a higher level of funds under management than would otherwise have occurred. ASIC is seeking declarations, pecuniary penalties and other orders against REST. ASIC's media release can be found here.
A Jones Day Alert on recent civil penalty proceedings commenced by ASIC against industry superannuation funds can be found here.
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