Australian Financial Services Regulatory Update
This edition of the Update covers:
- Recent legal and regulatory developments, including the release of ASIC and APRA's Corporate Plans for 2021-25, ASIC's review of greenwashing practices, new money laundering/terrorism financing risk assessments for the Australian banking sector, and government consultation on cyber security incentives;
- Recent financial services litigation; and
- Other regulatory enforcement action, including a total of $1.86 billion in remediation paid or offered by six of Australia's financial services institutions in relation to financial advice misconduct since 2016 and the closure of a criminal investigation into AMP Financial Planning Pty Limited for fees for no service.
KEY LEGAL AND REGULATORY DEVELOPMENTS
ASIC and APRA Release Their Corporate Plans for 2021-25
On 26 August 2021, the Australian Securities & Investments Commission ("ASIC") and the Australian Prudential Regulation Authority ("APRA") released their Corporate Plans for 2021-25 which set out their regulatory priorities and actions over the next four years.
ASIC's Corporate Plan addresses its new mandate to contribute to the government's economic goals, including to support Australia's post-pandemic economic recovery. The Corporate Plan sets out initiatives to overhaul ASIC's internal governance framework as well as ASIC's new targeted regulatory enforcement strategy, which is focused on poor product design and governance, failure to implement new standards set by law reform initiatives, and failure to adequately manage cyber risks that harm consumers. While ASIC is no longer pursuing a 'why not litigate' strategy, it is clear that ASIC will remain a formidable enforcement regulator—and active litigant—in the areas of greatest harm to consumers and markets. ASIC's Corporate Plan can be found here.
APRA's Corporate Plan is focused on the two pillars of 'protecting today, while preparing for tomorrow'. APRA has acknowledged that COVID-19 continues to be the dominant influence on the economic and financial environment and that financial system stability, competitiveness, and efficiency remain the key priorities. APRA acknowledges there are a number of other challenges which it needs to address, including enhancing cyber resilience across the financial system, helping regulated entities manage the financial risks associated with climate change, promoting high-quality superannuation products, and improving governance and accountability through the Financial Accountability Regime ("FAR"). APRA proposes to address these challenges through a supervision-led approach. APRA's Corporate Plan can be found here.
ASIC and APRA's Corporate Plans for 2021-25 were discussed in more detail in a previous Jones Day Commentary which can be found here.
In a recent Jones Day Webinar, we had the privilege of speaking with Ms Sarah Court, who commenced as ASIC's Deputy Chair and Head of Enforcement on 1 July 2021. Ms Court shared her perspective on ASIC's Corporate Plan and approach to engagement with Australian corporates, including litigation and enforcement; corporate culture; and environmental, social, and corporate governance ("ESG") issues. Two recordings of the webinar are available, including a shorter version of edited highlights as well as the full recording.
ASIC Releases Guidance for Directors and Treasurers on the LIBOR Transition
On 30 August 2021, ASIC issued guidance aimed at directors and corporate treasurers to assist in the transition away from the London Inter-Bank Offered Rate ("LIBOR"). ASIC urges all directors and corporate treasurers to conduct a LIBOR 'stocktake' to identify all areas of their company that are affected by LIBOR (if this has not been conducted already). This stocktake exercise should not be restricted to financial contracts and investment holdings. It should also consider whether LIBOR is used as, or as a part of, discount rates in valuation and risk models, accounting methodologies, and tax treatments, and in nonfinancial contracts and disclosure documents.
Directors and corporate treasurers also need to ensure their company is operationally ready for alternative reference rates ("ARRs") by the end of 2021. This means that the company's systems and processes can accommodate financial contracts that reference ARRs and may need to be updated and tested to support new conventions. When deciding on which rate to use, it is important to consider whether the rate is robust and suitable to the company's objectives and needs. ASIC recommends the ARRs endorsed by international regulators and working groups, namely SOFR (USD), SONIA (GBP), €STR (EUR), TONIA (YEN), and SARON (CHF). ASIC's guidance can be found here.
Independent Investigation Into ASX Trade Outage Concludes
On 23 August 2021, ASIC released the findings and recommendations of the independent expert engaged to conduct a review of a major upgrade (the "Project") to ASX Trade, ASX's equity trading platform, following an outage which occurred on ASX Trade shortly after the upgrade. The purpose of the independent review was to examine whether the Project met internationally recognised standards or frameworks and relevant securities industry practices. Overall, the independent expert found that ASX met or exceeded leading industry practices in 58 out of 75 of the capabilities assessed. However, there were a number of key shortcomings, including (i) the ASX Trade system was not ready to go live, considering ASX's near zero appetite for service disruption; (ii) there were gaps in the rigour applied to the delivery risk and issue management process expected for a project of this nature; and (iii) risk and issue management, Project compliance to ASX practices, Project requirements, and the Project test strategy/planning did not meet accepted industry practices. The independent expert made recommendations in seven key categories: risk, governance, delivery, requirements, vendor management, testing, and incident management. The independent expert's findings and recommendations can be found here.
APRA Releases Inaugural Your Future, Your Super Performance Test Results
On 31 August 2021, APRA released the results from the inaugural MySuper Product Performance Test introduced as part of the Your Future, Your Super ("YFYS") reforms. The MySuper Product Performance Test assessed 76 MySuper products in which there was $900 billion invested across 14 million member accounts. Thirteen out of 76 (16%) MySuper products failed to meet the benchmark prescribed in regulations. In addition to scrutinising the plans of the 13 funds that failed the test, APRA is engaging with trustees at risk of failing the performance test in 2022 to ensure they take the steps necessary to improve performance and to understand their contingency plans. These contingency plans must include prepositioning to be able to give effect to an orderly transfer of members to another fund, if required. The results of the first MySuper Product Performance Test can be found here.
APRA Releases Letter on Implementation of Your Future, Your Super Reforms
On 30 July 2021, APRA released a letter to all Registrable Superannuation Entity ("RSE") licensees on the implementation of YFYS reforms that came into effect on 1 July 2021. APRA's letter sets out its expectations in respect of the new requirements, namely that RSE licensees must have already (i) taken immediate steps to initiate changes to practices, where necessary, to meet the new legal obligations; and (ii) reviewed internal frameworks, policies, and processes to identify and address areas that need to be strengthened in light of the reforms. APRA's letter also outlines its plans for implementing the YFYS reforms, which will involve three core components, namely (i) administering the performance test; (ii) enhancing standards on investment governance; and (iii) reporting on the findings from a thematic review of RSE licensee expenditure management. APRA's letter can be found here.
ASIC Conducts Review of Greenwashing Practices of Managed Funds and Superannuation Funds
In July 2021, ASIC Commissioner Cathie Armour wrote an article in the Australian Institute of Company Director's Company Director magazine addressing greenwashing by managed funds and superannuation funds. In the article, 'greenwashing' refers to the potential for funds to overrepresent the extent to which their practices are environmentally friendly, sustainable, or ethical. ASIC is currently conducting a review to establish whether funds' investments are as ESG-focused as they are claimed to be. Ms Armour notes that the potential to mislead can arise in a variety of ways, including as a result of the product issuer being unclear on what standards they use to assess the product as environmentally or socially responsible, or overstating green credentials that are not sufficiently reflected in their operations. Ms Armour reminds boards of the prohibitions on misleading and deceptive conduct and false or misleading statements in relation to financial products, and encourages boards to look out for any greenwashing and to ask whether their company's disclosure around environmental risks and opportunities or their fund's promotion of ESG-focused investment products accurately reflects their practices in this area. The article written by Ms Armour can be found here.
APRA Publishes New Details on Climate Vulnerability Assessment
On 3 September 2021, APRA published an information paper outlining the purpose, design, and scope of the Climate Vulnerability Assessment ("CVA") that is underway with Australia's largest five banks. Along with its draft prudential guidance on climate risk, which closed for consultation on 31 July 2021, the CVA forms a core plank of APRA's efforts to help its regulated entities understand and manage the financial risks associated with climate change. The CVA will measure the impact on individual institutions and the financial system of two different plausible future scenarios for how climate change, and the global response to those developments, may unfold. This analysis will provide insights into the potential financial exposure of institutions, the financial system, and economy to the physical and transition risks of climate change. Australia's largest five banks are due to submit their first CVA analysis toward the end of this year, with publication of aggregated results and findings expected early next year. Notably, APRA has flagged that it will consider extending the CVA to include the insurance and superannuation sectors in the future. APRA's information paper can be found here.
APRA Releases Final Remuneration Prudential Standard
On 27 August 2021, ASIC released the final revised cross-industry Prudential Standard CPS 511 Remuneration ("CPS 511"), which introduces heightened requirements on remuneration and accountability for remuneration outcomes aimed at creating more balanced incentive structures, promoting financial resilience, and supporting better outcomes for customers across the banking, insurance, and superannuation industries. The finalised CPS 511 is intended to strengthen the existing consequence management and remuneration framework under the Banking Executive Accountability Regime ("BEAR"), which requires authorised deposit-taking institutions ("ADIs") to have a remuneration policy in force which requires that variable remuneration be proportionally reduced to reflect a failure in an accountable person to fulfil their obligations under BEAR. BEAR is proposed to be extended to all APRA-regulated entities under FAR from the later of 1 July 2023 and 18 months after the commencement of FAR—see previous Jones Day Commentary here.
The finalised CPS 511 will require (i) entities to apply material weight to nonfinancial metrics (such as customer complaints, breaches, and regulatory and audit findings) when determining variable remuneration for employees; (ii) entities to reduce variable remuneration, potentially to zero, when warranted by poor risk conduct; (iii) new minimum deferral requirements for variable remuneration; and (iv) increased board oversight, transparency, and accountability on remuneration outcomes. CPS 511 will come into effect from 1 January 2023 for large ADIs, with a phased implementation for other APRA-regulated entities. APRA's media release can be found here.
APRA Releases Update on Key Policy Settings for ADI Capital Framework Reforms
On 21 July 2021, APRA released a letter to ADIs to provide an update on key policy settings for the capital framework reforms, which aim to strengthen the financial resilience of the industry. In summary, as part of the capital framework reforms APRA intends to (i) maintain the approach to capital buffers outlined in the consultation package, including a base level for the counter-cyclical capital buffer, or CCyB, of 1.0% of risk-weighted assets, or RWAs; (ii) modify the proposed capital requirements for higher risk residential mortgage lending, with changes to the definition of long-term, interest-only loans; and (iii) revise certain settings to calibrate the new framework to meet the unquestionably strong benchmarks, and simplify requirements where possible. The capital framework reforms will come into effect from 1 January 2023. APRA's letter to ADIs can be found here. We discussed the ADI capital reforms in a previous Update which can be found here.
APRA Announces Further Regulatory Support for Loans Impacted by COVID-19
On 19 July 2021, APRA announced further regulatory support for ADIs offering temporary financial assistance to borrowers impacted by COVID-19. For eligible borrowers, ADIs will not need to treat the period of deferral as a period of arrears or a loan restructuring. The relief will apply to loans that are granted a repayment deferral of up to three months before the end of August 2021. The relief is intended to provide banks and borrowers with additional flexibility to manage the period ahead. For transparency, APRA will require ADIs to publicly disclose and report the nature and terms of any repayment deferrals and the volume of loans to which they are applied. These relief measures largely mirror the support measures APRA announced in March 2020 which came to an end on 31 March 2021. APRA's media release can be found here.
Anti-Money Laundering and Sanctions
AUSTRAC Releases Four New Australian Bank Sector ML/TF Risk Assessments
On 6 September 2021, the Australian Transaction Reports and Analysis Centre ("AUSTRAC") released four new Australian banking sector money laundering and terrorism financing ("ML/TF") risk assessments. The four assessments examine the threats criminals pose to Australia's major banks, other domestic banks, foreign subsidiary banks, and foreign bank branches operating in Australia. The overall ML/TF risk ratings for the banking sector are medium (foreign subsidiary banks and foreign bank branches) and high (major banks and other domestic banks) due to the generally high proportion of high-risk customers, product, and service offerings that can be used to store and move funds, increasing use of remote service delivery channels and exposure to foreign jurisdiction risk. AUSTRAC's ML/TF risk assessments for the banking sector can be found here.
FATF Updates on Global ML/TF Risk
The global Financial Action Task Force ("FATF"), which sets international AML/CTF standards, has published two recent updates relating to international ML/TF risk. The reports provide an update on jurisdictions which may pose a risk to the international financial system. The update includes a list of high-risk jurisdictions subject to a call for action by which the FATF has called on all members to apply enhanced due diligence to those jurisdictions, as well as a list of jurisdictions subject to increased monitoring. The FATF's updates can be found here.
Government Releases Consultation on Cyber Security Regulations and Incentives
On 13 July 2021, the Australian government opened consultation on options for regulatory reforms and voluntary incentives to strengthen the cyber security of Australia's digital economy. The options the subject of the consultation include governance standards for large businesses, minimum standards for personal information, standards for smart devices, labelling for smart devices, responsible disclosure policies, health checks for small businesses, and clear legal remedies for consumers. The consultation closed on 27 August 2021. The government's consultation paper can be found here.
APRA Finalises New Approach to Licensing and Supervising New Banks
On 11 August 2021, APRA finalised its revised approach to licensing and supervising new ADIs. The revised approach follows a review of APRA's ADI licensing regime aimed at incorporating learnings since the launch of the Restricted ADI licensing pathway in 2018. Under the finalised approach (i) restricted ADIs must achieve a limited launch of both an income-generating asset product and a deposit product before being granted an ADI licence; (ii) there is increased clarity around capital requirements at different stages for new entrants, aimed at reducing volatility in capital levels and facilitating a transition to the methodology for established ADIs over time; and (iii) new entrants are expected to have a more advanced contingency plan to respond to financial stress, including an option to execute the ADI's orderly and solvent exit from banking business. The new approach comes into effect immediately. Details of the new approach can be found here.
Financial Services Royal Commission Reforms Commence
In early October 2021, six reforms arising out of recommendations from the Financial Services Royal Commission commenced. The new laws include the design and distribution obligations, restrictions on the unsolicited selling of financial products (hawking), a deferred sales model for add-on insurance products, reference checking and information sharing requirements for financial advisers and brokers, and new requirements around how breaches are reported to ASIC and disputes are managed internally in firms. ASIC indicated in its Corporate Plan for 2021-25 that it will closely monitor the implementation of these reforms. ASIC's media release commenting on the reforms can be found here.
Parliament Passes Reforms to Continuous Disclosure Regime
On 10 August 2021, the Australian Parliament passed the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, which permanently reforms Australia continuous disclosure regime and related prohibitions on misleading conduct by adding a fault or intention requirement to replace the previous strict liability approach. The permanent reforms follow on from the temporary changes to the continuous disclosure obligations under the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020, which also added fault/intention requirements from May 2020 until 23 March 2021. The permanent reforms took effect on 14 August 2021. The bill as passed by both Houses can be found here.
The permanent reforms to Australian's continuous disclosure regime were discussed in a previous Jones Day Alert.
Treasury Releases Exposure Draft Legislation to Strengthen Unfair Contract Term Protections
On 23 August 2021, the Australian government released for consultation exposure draft legislation which proposes to strengthen the protections against unfair contract terms in the Australian Consumer Law and Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act"). The consultation on exposure draft legislation follows a 2018 review which suggested that while the unfair contract term regime had improved protections for small business in certain industry sectors, it did not provide strong deterrence against businesses using unfair contract terms in their standard form contracts. The exposure draft legislation proposes to strengthen the remedies and enforcement of the unfair contracts regime, expand the class of contracts that are covered by the regime, and clarifies and strengthens the unfair contract provisions generally. The exposure package can be found here.
Treasury Releases Exposure Draft Legislation on Financial Report and Auditing for RSEs
On 12 August 2021, the Australian government released for consultation exposure draft legislation which proposes to introduce new financial reporting and auditing obligations in relation to registrable superannuation entities ("RSEs"). The exposure draft legislation proposes to require RSE licensees to (i) prepare and lodge financial reports for each financial year and half-year with ASIC; (ii) publish the financial report, directors' report, and auditor's report for a financial year on the RSE's website, and provide details of how to access these reports with the notice of the annual members' meeting; and (iii) provide a copy of the financial reports for a financial year and half-year to members and beneficiaries on request. The exposure package can be found here.
RECENT DECISIONS OF THE AUSTRALIAN COURTS
Federal Court Confirms It Has No Jurisdiction to Declare Company Accounts as 'True and Fair'
On 24 August 2021, Wigney J of the Federal Court of Australia set aside an application by Mineralogy Pty Ltd (of which Mr Clive Palmer is a director) seeking a declaration from the court that the company's audited accounts for the year ended 30 June 2014 provide a true and fair view of its financial position for that financial year and that the company complied with its obligations under Ch 2M of the Corporations Act 2001 (Cth) ("Corporations Act") in respect of the preparation and lodgement of its accounts for the year ended 30 June 2014. The 2014 accounts contain a statement that Mr Palmer acted honestly in causing the company to make two payments totalling $12,167,065. Those payments are the subject of a current criminal prosecution against Mr Palmer, with the 2014 accounts lodged with ASIC after the charges were laid. In setting aside the application, the court confirmed that it did not have jurisdiction to entertain the claim or grant of relief sought by the company. Further, even if the court did have jurisdiction, it would in any event have been appropriate to enter judgment against the company on the basis that it has no reasonable prospect of successfully prosecuting the proceeding. The Federal Court's judgment can be found here.
RECENT FINANCIAL SERVICES LITIGATION
NAB to Pay $18.5 Million Penalty in Relation to Fee Disclosure Statements
On 26 August 2021, Davis J of the Federal Court of Australia ordered the National Australia Bank ("NAB") to pay a civil penalty of $18.5 million for failures relating to misleading fee disclosure statements between December 2013 and February 2019. The court found that NAB had (i) charged fees for personal advice without giving customers compliant fee disclosure statements; (ii) failed to provide fee disclosure statements within the required timeframe; and (iii) made false or misleading representations in fee disclosure statements about the amount clients had paid for services and services which the clients received. NAB admitted that its conduct contravened the Corporations Act and the ASIC Act and agreed orders resolving the issue of liability with ASIC, which were put before the court. On penalty, ASIC submitted the appropriate penalty was $40 million, whereas NAB submitted the appropriate penalty was $15 million. The court ultimately imposed a penalty of $18.5 million having regard to NAB's admissions, the implementation of two remediation programs, NAB's cooperation with ASIC, and the fact that it showed substantial contrition and remorse. The Federal Court's judgment can be found here.
ASIC Commences Proceedings Against AMP for Fees for No Service
On 30 July 2021, ASIC commenced civil penalty proceedings in the Federal Court of Australia against six companies that are, or were, part of the AMP Limited Group, alleging these entities charged fees for no service on corporate superannuation accounts. ASIC alleges the AMP companies charged advice fees to more than 1,500 customers despite being notified that those customers were no longer able to access the relevant advice. ASIC further alleges that from July 2015 to April 2019, the AMP companies (i) deducted financial advice fees from 1,540 customers' superannuation accounts despite being aware that the customer had left their employer-sponsored superannuation account and therefore could not access the advice for which those fees were paid; and (ii) failed to ensure that a system was in place that did not charge customers who had left their employer-sponsored account. By engaging in this conduct, ASIC alleges that the AMP companies contravened s 12DI(3) of the ASIC Act by accepting payment without intending or being able to supply as ordered and ss 912A(1)(a) and (c) of the Corporations Act by failing to comply with their general licensing obligations to act efficiently, honestly, and fairly. ASIC's media release can be found here.
OTHER REGULATORY ENFORCEMENT ACTION
Criminal Investigation Into AMP for Fees for No Service Concludes Without Charges Filed
On 16 July 2021, ASIC announced that it had finalised its investigation into the alleged fees-for-no-service conduct by AMP Financial Planning Pty Limited ("AMPFP") arising from its Buyer of Last Resort Policy ("BOLR Policy"). This conduct was the subject of inquiry and evidence at the Financial Services Royal Commission. ASIC's investigation related to suspected criminal conduct regarding the charging of fees for no service in relation to the BOLR Policy in breach of s 1041G (prohibition on dishonest conduct) of the Corporations Act. ASIC also investigated AMPFP for breaches of s 1308(2) (prohibition on making misleading statements) of the Corporations Act in relation to this conduct. ASIC has confirmed that no further action will be taken in relation to this investigation. ASIC's decision to finalise the investigation comes following consultation with the Commonwealth Director of Public Prosecutions. ASIC's media release can be found here.
Remediation Totalling $1.86 Billion Paid or Offered in Relation to Financial Advice Misconduct
On 5 August 2021, ASIC reported that since 2016 six of Australia's largest banking and financial services institutions have paid or offered a total of $1.86 billion in compensation to customers who suffered loss or detriment because of fees for no service misconduct or noncompliant advice. The relevant remediation programs to compensate affected customers commenced following two major ASIC reviews focused on (i) the extent of failure by institutions to deliver ongoing advice services to financial advice customers who were paying fees to receive those services; and (ii) how effectively institutions supervised their financial advisers to identify and deal with 'noncompliant advice' (i.e., personal advice provided to a retail client by an adviser who did not comply with the relevant conduct obligations in the Corporations Act, such as the obligations to give appropriate advice or to act in the best interests of the clients, at the time the advice was given). ASIC's media release can be found here.
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