Australian Financial Services Regulatory Update - July 2021

Jones Day

This edition of the Update covers:

  1. Recent legal and regulatory developments, including Australian regulatory expectations regarding the LIBOR transition, AUSTRAC's issuance of new rules to reflect the recent AML/CTF reforms and the passing of the 'Your Future, Your Super' package of reforms;
  2. 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
  3. Other regulatory enforcement action, including investigations recently commenced by AUSTRAC's Enforcement Team and criminal charges laid against a retail bank for false and misleading conduct.

Key Legal and Regulatory Developments

Financial Markets

The Australian Regulators Reiterate Their Expectations for a Smooth Transition Away From LIBOR

On 4 June 2021, ASIC, APRA, and the RBA issued a joint statement to financial institutions reiterating the importance of ensuring a timely and orderly transition away from LIBOR. The regulators warned that continued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system and that institutions themselves may also face financial, conduct, litigation, and operational risks associated with inadequate preparation. Accordingly, all Australian financial institutions are expected to adhere to the deadline at the end of 2021 for the issuance of new LIBOR contracts and to accelerate the active conversion of legacy LIBOR contracts. The joint statement can be found here.

The joint statement follows a speech given on 27 May 2021, by Nathan Bourne, ASIC's Senior Executive Leader, Markets Infrastructure, during which financial institutions were reminded that ASIC considers the LIBOR transition to be a significant priority and, together with APRA, will continue to engage with key institutions to ensure they are keeping pace with international timelines and milestones. Mr Bourne also reported that ASIC intends to start a second round of communication with corporations and buy-side firms to highlight the urgency of LIBOR transition. Mr Bourne's speech can be found here.

IBOR Transition and OTC Derivatives Transaction Reporting

On 4 June 2021, ASIC issued guidance on the requirements of OTC derivatives transaction reporting under the ASIC Derivative Transaction Rules (Reporting) 2013 (Cth) ("Rules") in respect to the steps taken by counterparties to OTC derivative transactions to provide for and/or implement IBOR transitions. In summary, ASIC's view is that (i) amending existing IBOR-referenced contracts to include reference to fallback rates or adhering to the 2020 ISDA IBOR Fallbacks Protocol does not, of itself, trigger any reporting requirement under the ASIC Rules; and (ii) the replacement of an IBOR with a fallback rate or alternative reference rate as a reference rate in a contract will trigger a requirement to report changed and/or new OTC derivative transaction information or OTC derivative position information. ASIC's guidance can be found here.

ASIC Issues Guidance on Activist Short Selling

On 1 June 2021, ASIC published Information Sheet 255 ("INFO 255") regarding the practice of activist short selling, which involves taking a short position in a financial product and then publicly disseminating information directly or through an agent that might negatively impact the price of the product. INFO 255 describes the impact of activist short selling on markets, provides an overview of the applicable regulatory framework and outlines ASIC's expectations for activist short sellers and authors of short reports, market operators, target entities, and market participants to promote market integrity. INFO 255 can be found here.

ASIC Proposes to Amend the Market Integrity Rules

On 30 June 2021, ASIC released Consultation Paper 342, Proposed amendments to the ASIC market integrity rules and other ASIC-made rules ("CP 342"). ASIC's proposed amendments include (i) amendments to the ASIC Market Integrity Rules (Securities Markets) 2017 (Cth) covering accredited derivatives advisers, trades with price improvement, trade confirmations for non-retail clients, and regulatory data reporting; (ii) amendments to the ASIC Market Integrity Rules (Futures Markets) 2017 (Cth) covering prohibited employment, suspicious activity reporting and client authorisations; and (iii) amendments to ASIC-made market integrity rules generally, covering merits review, waivers, and penalty amounts for breaches of the rules. Submissions on CP 342 are due by 6 August 2021, following which ASIC will consider the feedback, publish a feedback report and submit the amended rules for Ministerial consent. CP 342 can be found here.

ASIC Consults on Crypto-Asset-Based ETPs and Other Investment Products

On 30 June 2021, ASIC released Consultation Paper 343, Crypto-assets as underlying assets for ETPs and other investment products ("CP 343"), seeking feedback on proposals about exchange-traded products (ETPs) and other investment products that provide retail investors with exposure to crypto-assets, such as listed investment companies, listed investment trusts, and unlisted registered managed investment schemes. ASIC considers that these products have unique features and risks which need to be recognised by market operators and product issuers in performing their functions and meeting existing regulatory obligations. Key areas of focus for market operators and issuers in CP 343 include: (i) identifying crypto-assets that are appropriate underlying assets; and (ii) establishing good practice in respect of pricing, custody, risk management, and disclosure. Submissions on CP 343 are due by 27 July 2021, following which ASIC will consider the feedback, publish a feedback report and a final information sheet on good practices. CP 343 can be found here.

Capital Requirements

ASIC Makes New Market Integrity Rules for Capital

On 16 June 2021, ASIC made the ASIC Market Integrity Rules (Capital) 2021 (Cth) ("Capital Rules"), which seek to simplify the existing capital regime by replacing the separate rule books for securities market participants and futures market participants to create a common set of rules. The Capital Rules also seek to align Australia's standards with comparable international capital frameworks and the financial requirements of the Australian Financial Services ("AFS") Licensing regime. ASIC's media release can be found here.

APRA Issues Letter to ADIs on the Implementation of the Capital Framework Reforms

On 2 June 2021, APRA issued a letter to authorised deposit-taking institutions ("ADIs") regarding the implementation of reforms to the ADI capital framework that were announced as part of a consultation package in December 2020. The reforms are aimed at embedding 'unquestionably strong' levels of capital, improving the flexibility of the framework, and improving the transparency of ADI capital strength. The recent letter to ADIs sets out APRA's roadmap for consultation and industry engagement to 1 January 2023, when the new framework comes into effect. APRA's roadmap covers key policy releases, reporting requirements, industry workshops, and the process for capital model approvals. APRA expects ADIs to be fully compliant with the revised capital framework from 1 January 2023, including the determination and reporting of capital adequacy. APRA will seek assurance from the relevant accountable person at each ADI on the accuracy of capital ratios. ASIC's letter to ADIs can be found here. The revised ADI capital framework was discussed in a previous Jones Day Update, which can be found here.

APRA Issues Letter Regarding Market Risk Modelling

On 18 May 2021, APRA issued a letter to ADIs regarding the market risk modelling of risks not included in Value at Risk ("VaR") models ("RNIV"). ADIs that are accredited under APS 116 Market Risk ("APS 116") to use the internal model approach to traded market risk use VaR models to determine their regulatory market risk capital. However, these VaR models rarely completely capture all of a bank's traded market risk. Model gaps, such as RNIV, are required to be identified and reported in accordance with APS 116. The purpose of APRA's letter is to set out APRA's expectations and improve the consistency of the application, capitalisation, and reporting of RNIV. APRA's letter can be found here.

Anti-Money Laundering and Sanctions

AUSTRAC Issues Revised Rules to Reflect AML/CTF Act Reforms

On 15 June 2021, AUSTRAC made the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2021 (No. 1) (Cth) ("Instrument") which amends the Anti-Money Laundering and Counter-Terrorism Financing Rules 2007 (No. 1) (Cth) ("AML/CTF Rules") to reflect the recent reforms to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) ("AML/CTF Act"). The reforms to the AML/CTF Act were introduced by the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth) ("Amendment Act"), which was passed by Parliament in December 2020.

The Instrument amends Chapters 3, 6, 7, and 10 of the AML/ CTF Rules to reflect the following reforms introduced by the Amendment Act, which came into force on 17 June 2021:

  • The requirement that financial institutions conduct due diligence assessments before entering into, and for the duration of, any correspondent banking relationship that will involve a vostro account;
  • The requirement that a reporting entity complete the applicable customer identification procedures, including verification of identity, before providing any designated service to a customer; and
  • The expanded set out circumstances in which a reporting entity may rely on the applicable customer identification procedures undertaken by a third party. This includes permitting reporting entities to enter into an agreement or arrangement for reliance on a third party.

The Instrument can be found here. The reforms introduced by the Amendment Act were discussed in a previous Jones Day Update, which can be found here.

Governance

ASIC Highlights Focus Areas for 30 June 2021 Financial Reports Under COVID-19

On 10 June 2021, ASIC released a list of key areas that it expects directors, preparers of financial reports and auditors to pay attention to when preparing 30 June 2021, financial reports, including asset values, provisions, solvency and going concern assessments, events occurring after year end and before completing the financial report, and disclosures in the financial report and Operating and Financial Review. In the media release announcing the key areas and associated guidance, ASIC emphasised that as COVID-19 conditions continue to evolve, the quality of financial reports and related disclosures remain more important than ever for keeping investors informed. Further, ASIC noted that its regular review of the full-year financial reports as of 30 June 2021 will focus on selected entities and industries more affected by the COVID-19 conditions. ASIC's media release can be found here.

Consumer Protection

ASIC Issues Guidance on Ongoing Fee Arrangements

On 15 June 2021, ASIC published Information Sheet 256 ("INFO 256") regarding the obligations that apply to financial advisers who provide personal advice to retail clients under an ongoing fee arrangement, in which the client pays the adviser a fee (however described or structured) during a period of more than 12 months. In addition to the existing obligation to give retail clients a fee disclosure statement, from 1 July 2021, broad additional obligations apply where there is an ongoing fee arrangement. The obligations to seek to renew an ongoing fee arrangement annually and to obtain a client's written consent to deduct ongoing fees were introduced by the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021 (Cth). INFO 256 can be found here.

ASIC Conducts Review of the E-Payments Code

On 21 May 2021, ASIC released consultation paper 342 ("CP 341") seeking feedback on proposed updates to the e-Payments Code ("Code"), a voluntary code of practice that regulates electronic payments, including ATM transactions, online payments, BPAY, EFTPOS transactions, credit and debit transactions, and internet and mobile banking. The Code contains consumer protections that complement those in the financial services regulatory regime in Ch 7 of the Corporations Act 2001 (Cth) ("Corporations Act"), the National Consumer Credit Protection Act 2009 (Cth) ("National Credit Act"), and the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act"). In CP 341, ASIC proposes to make updates to the provisions of the Code regarding compliance monitoring and data reporting, mistaken internet payments, small business protections, unauthorised transactions, and complaints handling. CP 341 can be found here

Legislative Reform

Parliament Passes the 'Your Future, Your Super' Reform Package

On 17 June 2021, the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 (Cth) was passed by both Houses. The bill as passed replaces the current best interest duty of trustees and directors in ss 52 and 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) with a 'best financial interests' duty and, concerningly, imposes a reverse evidentiary burden on trustees in relation to this duty (among other things). The bill was passed by the Senate on 17 June 2021, with a number of Parliamentary amendments, including amendments that remove controversial regulation-making powers to prescribe additional requirements where failure to comply with the additional requirements would be a contravention of the 'best financial interests' duty. The amendments agreed to by the Senate, to remove the relevant regulation making powers, follow amendments agreed to by the House of Representatives on 3 June 2021, which removed another controversial regulation-making power to prohibit a trustee of a registerable superannuation entity from making certain payments or investments. The bill also introduces (i) an annual performance test for MySuper products and other products specified in regulations with consequences for failing an assessment, including notification to members and a prohibition on accepting new members into a product if it has failed the performance assessment in two consecutive years; and (ii) a requirement for employers to make contributions for new employees, who commence employment on and after 1 November 2021, to a 'stapled fund' for that employee unless the employee selects a fund. The bill received Royal Assent on 22 June 2021. The bill can be found here. Exposure drafts of the provisions of the bill, released in December 2020, were discussed in a previous Jones Day Update, which can be found here

Proposed Reforms to the Regulation of Financial Market Infrastructures

On 8 June 2021, the Australian Government released the report of the Council of Financial Regulators' ("CFR") review into reforms to the regulation of financial market infrastructures ("FMI"). FMIs include financial market operators, benchmark administrators, clearing and settlement facilities and derivative trade repositories that enable, facilitate, and support trading in Australia's capital markets.

The CFR's report follows the announcement in the Budget for 2021-22 that the Government, will, in line with the report's recommendations, introduce an FMI regulatory reform package to ensure financial regulators have sufficient powers to intervene to manage a crisis and pre‑emptively identify and manage risks. Specifically, the Government's reform package will (i) introduce a crisis management regime that will allow the RBA to manage a failure at a domestic clearing and settlement facility; (ii) enhance the supervisory and licensing powers of ASIC and the RBA in respect of FMIs; and (iii) streamline and clarify certain regulatory powers. The Government has yet to introduce a bill to Parliament. The Government's media release can be found here.

Financial Regulatory Assessment Bills Introduced to Parliament

On 23 June 2021, the Financial Regulator Assessment Authority Bill 2021 (Cth) and the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021 (Cth) were passed by both Houses. The bills will give effect to recommendations 6.13 and 6.14 of the Financial Services Royal Commission by establishing the Financial Regulator Assessment Authority to periodically review the capability and effectiveness of ASIC and APRA. The bills received Royal Assent on 29 June 2021. The bills can be found here and here.

Licencing

Relief for Foreign Financial Services Providers Reconsidered

On 11 May 2021, the Australian Government released the Budget for 2021-22 and in a surprise move included a proposal to consult on the restoration of previous well-established regulatory relief for foreign financial services providers ("FFSPs") that deal with wholesale clients and professional investors and who are licensed and regulated in jurisdictions with comparable financial service rules and obligations ("Sufficient Equivalence Relief") or have limited connection to Australia ("Limited Connection Relief"). The Government has also proposed to consult on options to create a fast-track licensing process for FFSPs who wish to establish more permanent operations in Australia. The Budget Papers for 2021-22 can be found here.

As a result of the Government's proposals regarding FFSPs in the Budget for 2021-22, on 11 June 2021, ASIC was forced to extend the transitional arrangements for FFSPs currently relying on the Sufficient Equivalence Relief and Limited Connection Relief, which were due to expire on 31 March 2022. As a result, FFSPs currently relying on the Sufficient Equivalence Relief or Limited Connection Relief can continue to do so for an additional 12 months to 31 March 2023, pending the outcome of the Government's consultation. ASIC's media release can be found here.

Fallout From the Financial Services Royal Commission

ASIC Commences Proceedings Against AMP for Charging Deceased Customers

On 27 May 2021, ASIC commenced proceedings in the Federal Court of Australia against five entities ("AMP entities") that are, or were, part of the AMP Limited group ("AMP"). ASIC alleges that the AMP entities were involved in charging life insurance premiums and advice fees to more than 2,000 customers despite being notified of their death. By engaging in the alleged conduct, ASIC alleges that the AMP entities contravened the general obligations of AFS Licensees in s 912A(1) of the Corporations Act and various obligations under the ASIC Act, unconscionable conduct in connection with financial services under s 12CB(1). In a media release, AMP acknowledged the proceedings commenced by ASIC and reported that it had identified and self-reported the issue to ASIC in 2018. AMP confirmed it had remediated all affected customers in the order of $5.3 million, which was completed in May 2020. ASIC's media release can be found here.

Other Regulatory Enforcement Action

Full Federal Court Upholds ASIC's First Product Intervention Order

On 29 June 2021, the Full Court of the Federal Court of Australia dismissed an appeal by Cigno Pty Ltd ("Cigno"), which sought to quash ASIC's first product intervention order ("PIO") prohibiting a particular short-term lending model unless certain conditions were complied with. The relevant short-term lending model involves two elements: (i) short-term credit provided to consumers by a credit provider, mostly for small amounts up to $1,000; and (ii) collateral management services provided to that customer by a separate associate. Both the credit provider and the service provider charge fees to the customer. Cigno, a provider of the type of collateral management services described above, sought judicial review of ASIC's decision to issue the PIO on the basis that the PIO contained several errors of law. Cigno was unsuccessful before the primary judge and appealed that decision. In dismissing Cigno's appeal, the Full Court held at [53] that in assessing whether a class of financial products had resulted in, or will or is likely to result in, significant detriment to retail clients within the meaning of s 1023D of the Corporations Act (a requirement for the making of a PIO) ASIC is entitled to consider not just the characteristics of the relevant financial product, but also the particular circumstances in which it is supplied. The judgment of the Full Court can be found here.

Investigations Into NAB and SkyCity Referred to AUSTRAC's Enforcement Team

On 7 June 2021, National Australia Bank Limited ("NAB") released a statement to the market that NAB had been informed by AUSTRAC in a letter dated 4 June 2021, that it is AUSTRAC's view that there is "potential serious and ongoing non-compliance" by NAB with the AML/CTF Act. The potential serious non-compliance includes concerns relating to customer identification procedures, ongoing customer due diligence, and compliance with Part A of NAB's AML/CTF Program. The matter has been referred to AUSTRAC's Enforcement Team. In the letter to NAB, AUSTRAC stated that it has not made any decision about whether or not enforcement action should be taken. AUSTRAC stated that, at this stage, it is not considering civil penalty proceedings and that this decision is reflective of the work undertaken by NAB to date. In the statement, NAB noted that it had disclosed the existence of AML/CTF compliance issues in various public disclosures since 2017 and over this period has invested approximately $800 million to uplift its financial crime and fraud controls with more than 1,200 people dedicated to managing financial crime risks. NAB's statement can be found here.

On the same day of NAB's statement to the market, SkyCity Entertainment Group Limited ("SkyCity") also announced it had been informed by AUSTRAC's Regulatory Operations Team that AUSTRAC had identified potential serious non-compliance by SkyCity Adelaide Pty Limited with the AML/CTF Act. The potential serious non-compliance includes concerns relating to ongoing customer due diligence, adopting and maintaining an AML/CTF Program and compliance with Part A of an AML/CTF Program. The matter has been referred to AUSTRAC's Enforcement Team, though AUSTRAC has not yet made a decision on the appropriate regulatory response. SkyCity's statement can be found here

ME Bank Charged for False and Misleading Conduct

On 25 May 2021, Members Equity Bank Limited ("ME Bank") was criminally charged in the Federal Court of Australia by the Commonwealth Director of Public Prosecutions following an investigation and subsequent referral from ASIC. The charges relate to allegations that ME Bank engaged in false and misleading conduct in contravention of ss 12DB(1) and 12GB(1) of the ASIC Act and ss 64(1) and 65(1) of the National Credit Code in Sch 1 of the National Credit Act, which require credit providers to give customers 20 days written notice of interest rate or repayments changes under a loan. The alleged contraventions concern home loan customer communications issued in the period September 2016 to September 2018. In a media release, ME Bank stated that the issues had been self-reported to ASIC in October 2018 and affected customers were remediated by June 2019 in the order of $105,000. ME Bank subsequently confirmed that issues had been addressed and were not ongoing. ASIC's media release can be found here.

Earlier in the month, on 4 May 2021, the Banking Code Compliance Committee ("Committee") confirmed it had sanctioned ME Bank for serious and systemic breaches of the Banking Code of Practice ("Code") after finding that the bank's communications to certain customers about charges to their redraw amounts in April 2020 were poor and ineffective. Specifically, the Committee found that ME Bank had breached clause 17 of the Code, which requires banks to provide timely, clear and useful communications to customers, and clause 10 of the Code, which requires banks to engage with its customers in a fair, reasonable and ethical manner. The Committee acknowledged that ME Bank had apologised for its poor communication, made contact with all affected customers, and implemented a Management Action Plan to identify and address the root cause of the issue. The Committee's media release can be found here.

ME Bank was acquired earlier this year by Bank of Queensland ("BoQ") from a group of industry super fund shareholders. It is understood that the BoQ was aware of the matters being investigated by ASIC and the matters were dealt with in the sale negotiations regarding warranties and indemnities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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