Gadens Regulatory Recap – 11 July 2024

This edition of the Gadens Regulatory Recap highlights recent developments from ASIC, APRA, AFCA, ACCC, Treasury, and legislative updates, including various enforcement actions taken by the regulators.

ASIC

1. AFS licensees required to notify ASIC about ‘experienced provider pathway’ declaration

From 1 July 2024, AFS licensees must notify ASIC within 30 business days if they receive a written declaration from a financial adviser eligible for the experienced provider pathway. The pathway, available since 21 September 2023, allows advisers to satisfy qualification and professional year standards through a declaration. The declaration must be promptly given to their AFS licensee.

For declarations received before 1 July 2024, AFS licensees have 30 business days after that date to notify ASIC of such declarations. Notices should be lodged via ASIC Connect. The Financial Advisers Register will not indicate whether an adviser is using the pathway. Guidance on ensuring eligibility is provided in ASIC’s Information Sheet 281.

Failure to notify ASIC within the specified timeframes may result in criminal and/or civil penalties. Timeframes for notification vary based on when the declaration is given or made, as detailed in two tables: one for authorising AFS licensees and one for self-licensed relevant providers.

2. ASIC releases Information Sheet 283 Supervising your representatives’ business communications for market intermediaries

ASIC is calling on market intermediaries such as investment bankers, participants of exchange and over-the-counter markets, security dealers and corporate advisors to assist in strengthening business communications. The promotion of compliance with ASIC’s information Sheet 283 Supervising your representatives’ business communications (Info Sheet 283) ensures consumer confidence in prevention of misconduct such as the misuse of confidential or inside information, market abuse, insider trading, market manipulation and bribery and fraud. Info Sheet 283 deals with common challenges including the emergence of new and popular communication channels and systems for identifying surveillance systems.

3. New Banking Code of Practice approved by ASIC for February 2025 release

Following an extensive consultation period, ASIC has approved a new version of the Australian Banking Association’s Banking Code of Practice (BCOP). The new BCOP will commence on 28 February 2025.

Some of the changes to the BCOP include:

• an updated ‘vulnerability’ definition which includes incarcerated persons as a customer at risk of experiencing vulnerability;
• expanding the definition of a ‘small business’, increasing the upper limit of aggregate borrowings from $3 million to $5 million; and
• amended conduct standards for subscribing banks to ensure that they do all thing necessary to ensure services provided under the BCOP are provided efficiently, honestly and fairly.

ASIC has aimed to ensure that there was no diminishment of key provisions of the BCOP in the process of updating the BCOP. ASIC’s focus is to ensure that the BCOP will make a difference to the banking sector and provide good outcomes for customers.

4. ASIC appeals BPS Financial/Qoin Wallet decision

ASIC has appealed the Federal Court’s recent decision in Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 (Primary Decision), in which the Court held that BPS Financial Pty Ltd could issue non-cash payment facility financial products (being the Qoin crypto wallet) as an authorised representative of an AFS licensee under the ‘authorised representative’ exemption under s 911A(2)(a) of the Corporations Act (AR Exemption).

The use of the words ‘on behalf of’ in the text of the AR Exemption has historically caused some uncertainty around the practical scope of the AR Exemption, particularly in relation to financial services that may only be capable of being provided in the capacity of principal under a strict interpretation of agency law and other key Chapter 7 provisions.

The outcome of the appeal will have significant licensing and structuring implications for financial services businesses, and is anticipated to provide much needed clarity around the scope of financial services that can be provided by authorised representatives of AFS licensees.

5. ASIC proposes managed investment scheme legislative instrument be allowed to sunset

ASIC has invited feedback from interested stakeholders, responsible entities, Australian financial services licensees, superannuation trustees, platform operators, and consumer groups on the proposed sunsetting of the ASIC Corporations (Land Holding for Primary Production Schemes) Instrument 2024/15 on 1 October this year.

This instrument modifies the Corporations Act 2001 (Cth) to include extra requirements to be satisfied by responsible entities where they make an offer of interests in a managed investment scheme with, or including, rights attaching to or arising from the land on which the scheme will occur.

Requirements include the responsible entities’:

• taking of and maintenance of reasonable steps to ensure regulatory approvals;
• protection of rights of members to use the land on which the primary production occurs by registering an interest in the land under state or territory land title laws;
• registration of interests in such a way that they cannot be adversely affected by any future interests or the interests of others; and
• empowerment to require members to make payments to meet obligations where the registered interest is a lease or the conference of the right to use the land.

All submissions should be sent to ASIC by 9 August 2024.

6. June 2024 financial adviser exam results released by ASIC

ASIC has released the exam results from the 25^th Financial Advisers Exam cycle. In June 2024, 235 people sat the exam with 70% of candidates passing. There is a 92% overall pass rate for this exam, with over 21,260 individual candidates sitting it to date.

Financial advisers are assessed on the practical application of their knowledge in a range of competency areas and are required to pass the exam to comply with their professional standards. More information on the financial adviser exam can be found here.

7. ASIC Enforcement Activities: ASIC has been active in the enforcement space in the last fortnight

ASIC is continuing to crack down on green washing having issued 17 notices in relation to alleged environmental, social and governance misconduct. Fertoz Limited an ASX listed company was found to have made inaccurate and misleading statements as to its sustainability and received two infringement notices totalling $37,560. The statements were made in relation to funding a Philippines Reforestation Project and the alleged planting of initial hectares of trees.

Guildfords Funds Management Pty Ltd (Guildfords) AFSL has been cancelled by ASIC for failing to meet a number of obligations under the Corporations Act. To minimise the impact of the cancellation on Guildfords on its clients’ its AFSL (subject to conditions) will continue to be in force until 30 December 2024 for providing services incidental to the day-to-day operations.

Airrails Pty Ltd (Airrails) AFSL has been suspended by ASIC for the period of 21 June 2024 to 21 September 2024 for failing to meet its general obligations under s 912A of the Corporations Act. Airrails failed to lodge its annual financial statement, auditor’s report and audit opinion for the financial year ending 30 June 2023 which resulted in ASIC making the suspension.

Ferratum Australia Pty Ltd (in Liquidation) has been ordered to pay a total of $16 million in penalties for contraventions of the National Consumer Credit Protection Act and the National Credit Code. The contraventions including entering into contract which imposed prohibited fees (and charging those fees), incorrectly calculating payout fees and failing to maintain systems that ensure it charged its customers properly.

PayPal’s standard form contracts with small businesses were found to be unfair by the Federal Court as its effect was to allow PayPal to retain fees that it had erroneously charged small businesses. PayPal business account holders were provided only 60 days to notify PayPal of any errors or discrepancies in fees that PayPal had charged them, or else the fees would be accepted as accurate. ASIC alleged the term was unfair as its effect was that PayPal could escape any consequences of wrongly or overcharged fees if the small business did not notify it. The term was unfair within the meaning of s 12BG of the ASIC Act as the term caused a significant imbalance in the parties’ rights and obligations under the contract, was not reasonably necessary to protect PayPal’s legitimate interests and causes detriment to PayPal’s users should the term be relied upon. The unfair term was declared void and PayPal was ordered to be restrained from applying, relying on, or enforcing, the term in its contracts with small businesses.

APRA

8. APRA releases responses following minor updates to capital framework for ADIs consultation

On 26 June 2024, the APRA released a letter responding to submissions on minor updates to the ADI capital framework. The letter accompanies the final prudential standards, reporting standards and prudential practice guides, which were updated to reflect industry feedback. The changes were technical in nature. The updated framework takes effect from 30 September 2024 to allow time for ADIs to implement the new requirements. The letter and accompanying standards and guides can be accessed here.

9. Speech delivered by APRA Chair John Lonsdale at the Australian Banking Association Conference

On 26 June 2024, APRA Chair John Lonsdale addressed the Australian Banking Association Conference in Melbourne. The speech discussed regulatory challenges, the future of banking, and APRA’s dual role in supervising the banking sector and listening to feedback from industry leaders, regulators, and government bodies. Lonsdale particularly acknowledged the prevalent industry concern that excessive risk aversion might be limiting access to vital services, including credit.

In addressing this concern, Lonsdale emphasised the need to balance safety with dynamism, recognising the argument for loosening regulatory constraints to enhance credit flow, particularly for new ventures. However, he stressed the importance of maintaining a strong, stable banking system to protect the community and support the economy. Reflecting on the global financial crisis of 2007-2008, he highlighted the enduring significance of the Basel III reforms and the Financial System Inquiry’s push for banks to hold increased capital.

Moving forward, Lonsdale emphasised that APRA is open to fine-tuning regulations to reduce complexity and support innovation without compromising stability. Lonsdale concluded by reiterating APRA’s commitment to a balanced approach that fosters both safety and competitive efficiency, crucial for sustaining economic growth in a challenging environment.

10. Finalised framework for Interest Rate Risk in the Banking Book requirements released by APRA

In response to submissions to the December 2023 consultation, APRA has finalised its revisions to the Interest Rate Risk in the Banking Book in regard to requirements for ADIs. The following prudential standards have been revised:

• Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117);
• Reporting Standard ARS 117.0 IRRBB Repricing Analysis Collection (ARS 117.0); and
• Reporting Standard ARS 117.1 IRRBB Capital Charge Collection (ARS 117.1).

The final revised APS 117 will be effective from 1 October 2025.

11. APRA and ASIC call on superannuation trustees to improve oversight of retirement strategy implementation

APRA and ASIC have urged superannuation trustees to intensify efforts in tracking and measuring the impact of strategies designed to improve retirement outcomes for their members. A recent survey revealed that while some progress has been made, significant gaps remain since a joint thematic review a year ago identified a lack of urgency in embracing the Retirement Income Covenant, introduced in 2022.

Key findings from the survey, which included responses from 48 trustees, show:

• about three quarters of trustees consider measuring retirement outcomes a priority, but only a few have made substantial progress in tracking and measuring retirement income strategies. Only eight trustees prioritised tracking the effectiveness of retirement-focused assistance;
• many trustees are working to better understand their members’ retirement needs and promoting access to relevant information, but only one in five planned improvements are expected to be completed by mid-2024; and
• challenges in implementing the covenant include issues with the financial advice framework, privacy and security concerns, costs of collecting more member data, and low member engagement and financial capability.

APRA Deputy Chair Margaret Cole expressed concern over the slow progress in tracking strategy success, emphasising the need for effective success metrics. ASIC Commissioner Simone Constant highlighted the importance of trustees in improving retirement outcomes for the growing number of Australians eligible to access their superannuation savings. The Commissioner urged trustees to assess and close gaps, leveraging examples of progress from the industry update.

12. APRA updates Superannuation Prudential Standard SPS 515 Strategic Planning and Member Outcomes following consultation

Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515) has been updated to improve strategic planning and member outcomes in the superannuation industry. The updated standard and its related guidance have reinforced trustees’ duty to act in the best financial interests of members in all business operations.

In the media release, APRA deputy chair Margaret Cole referred to the further scrutiny on spending that will come into effect for superannuation in March 2025 with the incoming Financial Accountability Regime.

These amendments will apply from 1 July 2025.

ACCC

13. National Consumer Congress 2024 introduction and ACCC keynote address | ACCC

Gina Cass-Gottlieb, Chair of the ACCC, outlined key priorities and initiatives during her keynote address at the National Consumer Congress 2024. Emphasising the theme ‘The Road Ahead,’ Cass-Gottlieb highlighted the ACCC’s commitment to enhancing consumer safety in Australia. Key priorities for 2024/25 include focusing on the safety of nursery products and addressing risks associated with online sales, sustainability in products, emerging technologies including AI, and improving product safety data collection and analysis. She highlighted recent enforcement actions regarding button battery safety standards and ongoing efforts to enforce new safety standards, such as those for infant sleep products and toppling furniture. Cass-Gottlieb advocated for a robust regulatory framework, including amendments to support the adoption of evolving standards and enhance consumer protection. Her address stressed the importance of proactive measures to safeguard consumers amidst economic pressures, aiming for safer and more reliable products across the market.

Treasury

14. Treasury invites feedback on Meetings and Documents Amendments to legislation

Treasury has commenced a consultation on the effectiveness of changes made to the Corporations Act 2001.

Specifically, Treasury is seeking feedback up until 19 July 2024 on amendments made by:

• the Corporations Amendment (Meetings and Documents) Act 2022 (Cth) and
• Schedule 1 to the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth).

These changes allowed for the technology neutral sending of documents, signing of documents under s 127 and s 126 of the Corporations Act, and meeting of members and directors. Initially intended to be temporary, these amendments were made to facilitate the operation of companies and registered schemes during the COVID-19 pandemic and were later made permanent at the request of many businesses and industry groups.

These amendments will be analysed with reference to the efficient and effective operation of Australian companies and capital markets. A final report with the outcomes of this review will be provided to the Government by the Panel on 14 August 2024.

Legislative updates

15. Senate report recommends that Australian Government recognises ASIC has ‘comprehensively’ failed; Finds ASIC’s remit ‘too much and not enough’

On 3 July 2024, the Senate Economics References Committee released their Australian Securities and Investments Commission investigation and enforcement report following their two-year inquiry. The report provides 11 recommendations for the Australian Government that address ASIC’s ‘significant structural, resourcing and cultural issues’ by calling for a ‘radical’ and ‘wholesale’ imagining to their approach to enforcement and investigation. All recommendations provided stem from the finding that ASIC has ‘comprehensively failed to fulfil its regulatory remit’. Throughout, the Government is urged to question whether ASIC’s ‘remit is too broad for it to be an effective and efficient agency’ and for it to strongly consider separating the ‘overburdened and monolithic’ regulator’s functions between a companies regulator and a separate financial conduct authority.

The Inquiry has further found that corporate law is ‘underenforced’ in Australia, with ASIC’s increases in resourcing not resulting in commensurate uplifts in their performance. In the 2021-22 period, ASIC took no further action in 66 per cent of reports received, with a fraction of these proceeding to formal investigation at an average of 117 investigations a year. In response, ASIC submitted during the inquiry that it is ‘not a complaint handling body’. In relation to enforcement, the committee found that ASIC has decreasingly litigated matters through the courts as it seeks to pursue the ‘right matters’. Additionally, the report states that the lack of sanctions that can be imposed on a commissioner, should they breach the ASIC Code of Conduct, contributes to a culture whereby ASIC believes it is ‘immune from accountability’.

Further recommendations provided in the report include that the Australian Government:

• urgently address shortcomings in Australia’s system for handling reports of alleged corporate misconduct by making it a legislative requirement that ASIC/future regulatory authorities investigate reports of alleged misconduct at an appropriate rate;
• make it a legislative requirement that ASIC/future regulatory authorities establish and maintain a high-level of transparency of investigation and enforcement outcomes;
• investigate amending whistleblower protections in the Corporations Act to include financial incentive and/or compensation to those who make a substantiated disclosure;
• ensure regulatory authorities adopt an enforcement approach which prioritises the litigation of all serious instances of suspected breaches of corporations law;
• review a new governance structure for ASIC/future regulatory authorities and ensure that a legislated code of conduct be included that allows for the Chair and other statutory appointees to be sanctioned for workplace misconduct;
• reverse its decision, announced in the 2023-24 Budget, to reduce the frequency of FRAA reviews from every two years to every five years; and
• reassess the funding arrangements for ASIC/future regulatory authorities.

16. Upcoming public hearings inquiry into financial services regulatory framework in relation to financial abuse:

The Parliamentary Joint Committee on Corporations and Financial Services has called for written submissions on financial services regulatory framework in relation to financial abuse. The written submissions were due by 14 June 2024, with the intent of the committee to report to the Parliament by October 2024. Submissions are available to be made both publicly and privately.

The inquiry into financial abuse in Australia will focus on the ability of financial institutions to respond to financial abuse and potential areas of reform to increase prevention, protection and proactive systems.

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Authored by:

Matthew Bode, Partner
Kelly Griffiths, Partner
Michael Kenny, Partner
Sinead Lynch, Partner
Daniel Maroske, Partner
Kate Mills, Partner
Caroline Ord, Partner
Anna Fanelli, Senior Associate
Tehlyn Murray, Associate
Patrick Simon, Associate
Bronte Anderson, Lawyer
Monica Baur, Lawyer
Fiona Ng, Lawyer
Ellie Pitcher-Willmott, Lawyer
Safira Dashwood, Paralegal
Rose Hou, Paralegal
Steven Schwartz, Paralegal