Gadens Regulatory Recap – 21 February 2024

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

ASIC

1. ASIC to crack down on predatory lending: ASIC has promised it will turn its attention to high-cost credit and predatory lending to consumers and small businesses, noting pressures on the cost of living and the need to protect vulnerable Australians in times of financial hardship. ASIC voiced particular concern about business models that are structured to circumvent consumer credit protections, and indicated they would take a hard-line approach against directors of companies operating these models. ASIC stated another focus of 2024 would be compliance with financial hardship obligations, recognising that prompt responses to hardship notices are essential for those experiencing financial distress. ASIC noted its intention is to give directors the chance to review their practices before they face regulatory scrutiny.
2. Third consultation on proposed changes to derivative reporting rules: ASIC has released a third round of consultation setting out further proposed changes to record keeping and reporting requirements relating to certain derivative transactions under the soon to be in force ASIC Derivative Transaction Rules (Reporting) 2024 (2024 Rules) and the in-force ASIC Derivative Transaction Rules (Clearing) 2015 (Clearing Rules). At a high-level, the new consultation paper proposes to:

• simplify and permanently exclude exchange-traded derivatives from reporting requirements under the 2024 Rules, with a corresponding simplification of the Clearing Rules by re-defining a clearing derivative as certain kinds of OTC derivatives defined under the 2024 Rules;
• align the scope of certain reportable transactions in the 2024 Rules to reflect mainstream interpretation by foreign ASIC reporting entities; and
• address ASIC’s concerns with the operation of alternative reporting rules, by removing these provisions from the 2024 Rules and de-prescribing current prescribed repositories.

Consultation submissions are open until 28 March 2024.

3. ASIC grants class no-action position regarding Unfair Contract Terms for institutional markets: On 2 February 2024, ASIC granted a limited class no-action position for institutional markets under the Unfair Contract Terms (UCT) reforms introduced on 9 November 2023. The limited class no-action position was granted following the urgent application for no-action relief by the Australian Financial Markets Association (AFMA) on 29 September 2023. AFMA cited industry concerns that the amended regime would extend to certain sophisticated participants in financial markets who are not small businesses or consumers intended to be captured under the UCT regime. A contravention of the relevant UCT provisions by institutional investors (as set out as the class of counterparties) will not be pursued by ASIC.
4. ASIC Enforcement Activities: ASIC has delivered several enforcement activities over the last fortnight.

In one of the first decisions of its kind, the Federal Court has found that crypto fintech business, Web3 Ventures, trading as Block Earner (Block Earner) engaged in unlicensed financial services conduct and operated an unregistered managed investment scheme (MIS) between March and November 2022 in contravention of s 601ED(5) of the Corporations Act 2001 (Cth) – carrying on financial services business without an Australian Financial Services Licence in contravention of s 911A of the Corporations Act. This was on the basis that its crypto-backed “Earner” product met the definition of a MIS and was a facility for making a financial investment, notwithstanding that crypto currencies, on their own, are not (currently) considered to be financial products. However, the Court did not accept ASIC’s argument that the “Access” product also constituted a MIS, as there was insufficient connection between any pooling of client funds and the generation of returns. While the decision is naturally significant to the crypto and fintech industries, particularly the Court’s acknowledgement of legal uncertainties around the common law proprietary characteristics of cryptocurrency assets, the case provides an up-to-date analysis of the MIS definition and what may constitute a facility for the making a financial investment in any industry. This important decision provides some clarity as to when crypto-backed products should be considered financial products which require licencing under the law.

The Federal Court has also ordered Brite Advisors Pty Ltd to be wound up on just and equitable grounds. ASIC made the application during an ongoing investigation that identified a USD$69 million discrepancy in the assets Brite represented itself as holding to its clients.

ASIC has commenced proceedings against:

• several entities associated with the “Paladin Group”, David Hodgson, Macrolend Pty Ltd, and Great Southland Limited, alleging unlicensed financial services and misrepresentations to investors, including allegedly misrepresenting the value of certain assets of group companies by close to $1 billion; and
• two Melbourne men, Joseph Cullia and Zoran Markovic, alleging involvement in a sophisticated SMSF scam targeting Australian investors.

Following an ASIC investigation and referral to the Commonwealth Director of Public Prosecutions, the former director of Reiwa-Capital, Russel Sandiford, has pleaded guilty to two counts of dishonest conduct in relation to a financial product. Over a two-year period, Mr Sandford obtained nearly $450,000 from 74 clients for investment in trading activity, however, the funds were primarily used for personal expenses and other non-trading activities.

Separately, ASIC has made interim stop orders on four PDSs for classes of units of a registered scheme known as the “Shield Master Fund”, promoted and managed by Keystone Asset Management Ltd due to concerns that the PDSs may contain various misleading statements, and inadequately disclose certain key operational information.

Finally, ASIC has cancelled the AFSL of Brava Capital Pty Ltd (formerly known as Dayton Way Securities Pty Ltd), citing involvement of Sydney businessman David Sutton who has been permanently banned from providing financial services, performing any function involved in carrying on a financial services business, and controlling an entity carrying on such a business.

APRA 

5. Federal Court grants injunction to stop unauthorised banking business: On 13 February 2024, the Australian Prudential Regulation Authority (APRA) was granted an injunction by the Federal Court of Australia to prevent Robert Bruce Gray from operating an unauthorised banking business without a licence as authorised deposit-taking institution licensed by APRA. The injunction permanently restrains Robert Bruce Gray from:

• representing, advertising or stating that any business or purported business operates as a banking business;
• operating any banking business in Australia; and
• using or assuming the word “bank” or related words in relation to any business, purported business or purported bank.

6. APRA Interim Policy and Supervision Priorities Update: APRA has published an Interim Policy and Supervision Priorities update (Update) outlining its upcoming areas of focus for the first six months of 2024. The Update states that APRA has reprioritised its supervision and policy agendas to respond to emerging risks and progress recent policy forms, with a particular focus on:

• operational and cyber resilience for all regulated entities, reflecting the growing reliance on digital technologies by entities and the community;
• embedding lessons from last year’s global banking turmoil through targeted changes to the prudential framework for authorised deposit-taking institutions;
• lifting superannuation trustees’ practices on retirement incomes, implementing recommendations from the Financial Regulator Assessment Authority (FRAA) review, enhancing transparency and aligning APRA’s heatmaps with the performance test; and
• across insurance, continuing to balance financial sustainability with the need to enhance affordability and availability.

7. ASIC and APRA release joint letter on the Financial Accountability Regime (FAR) ADI commencement and implementation: On 5 February 2024, APRA and ASIC released a joint letter on the Financial Accountability Regime (FAR) to all authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (NOHCs). With the Minister Rules in the process of being finalised, ASIC and APRA granted ADIs and NOHCs additional time under 30 June 2024, to finalise compliance with FAR, including:

• complying with enhanced or core notification requirements; and
• submitting registration applications for new accountable persons.

ASIC and APRA intend to release Transitional Rules, Regulator Rules and reporting form instructions following the release of the Minister Rules.

8. APRA updates FAQs on Superannuation Data Transformation and Outcomes Assessment: APRA has updated its website with further frequently asked questions for both the Superannuation Data Transformation (SDT) project and the outcomes assessment under section 52(9) of the Superannuation Industry (Supervision) Act 1993. The new FAQs for the SDT Project relate to reporting obligations for RSE licensees, and the new FAQs for the Outcomes Assessment are intended to assist RSE licensees in undertaking the assessment.

ACCC

9. Mazda to pay penalties for misleading and deceptive conduct: Mazda to pay $11.5m for misleading consumers about consumer guarantee rights for serious vehicle faults | ACCC

Mazda has been fined $11.5 million in penalties for misleading and deceptive conduct and making 49 separate false or misleading representations to nine consumers. The Court further ordered Mazda to pay $82,000 in compensation to some of the consumers, implement an Australian Consumer Law compliance program, publish a corrective notice on its website and notify dealers of the Court’s findings and pay a contribution to the ACCC’s costs.

The false or misleading representations related to consumer guarantees applicable to recurring and serious faults with Mazda vehicles within two years of purchase. The consumers requested refunds or replacement vehicles, but were told by Mazda that the only remedy available was a repair. After multiple unsuccessful repair attempts, including complete engine replacements, Mazda offered partial refunds on purchase price or replacement vehicles if the consumer made substantial payments.

ACCC Deputy Chair Catriona Lowe commented that Mazda’s conduct “failed to make any genuine attempt to consider and apply the consumer guarantees provisions”.

10. ACCC welcomes designated complaints legislation: On 15 February 2024, the ACCC released commentary welcoming the introduction into parliament of the Competition and Consumer Amendment (Fair Go for Consumers and Small Business) Bill 2024, which proposes a scheme allowing certain consumer and small business groups to make designated complaints to the ACCC.

The scheme involves the Minister approving complaints against required criteria, including, broadly, that a complaint:

• relates to significant and systemic market issues which affect Australian consumers or small businesses; and
• relates to a breach of the Competition and Consumer Act or the ACCC’s powers or functions under that Act.

The ACCC will then be required to assess and publicly respond to the designated complaint within 90 days, including by stating what, if any, further action will be taken.

The scheme will provide an “official avenue” of information from consumer or small business advocacy groups to assist with ACCC’s compliance enforcement outcomes. ACCC Chair Gina Cass-Gottlieb commented that the scheme will “reinforce public confidence in the responsiveness of ACCC to […] issues significantly impacting the community”. The scheme is expected to commence from July 2024.

11. ACCC launches industry survey on ACL mandatory reporting requirements: On 12 February 2024, the ACCC opened an industry survey to gather data in relation to suppliers and their understanding of, and compliance with, mandatory reporting requirements relating to consumer goods and products under Australian Consumer Law.

Broadly, under these requirements, all participants in the supply chain for consumer goods and related services must report any death, serious injury or serious illness associated with their good or related service to the ACCC within two (2) days. Other stakeholders, such as industry association representatives or legal counsel, are welcomed to respond to the survey on behalf and from the perspective of a supplier/s. The industry survey will close on 3 March 2024.

OAIC

12. OAIC releases its submission to Treasury’s Merger Reform Consultation Paper: On 12 February 2024, the OAIC released its submission to the Treasury’s Merger Reform Consultation Paper. The paper seeks views on the current merger control regime in Australia and potential areas of improvement, with the OAIC’s contribution addressing the competition-privacy law link and pushing for consumer privacy interests to be an active consideration in assessing the impact of a merger on competition.

In particular, the key recommendations made are to require, by law:

• the following factors to be considered in the merger control test:
  • nature and significance of assets, including data and technology, being acquired; and
  • potential impacts to consumer privacy as part of a merger assessment; and
• consultation between the ACCC and OAIC as part of assessing mergers, where those mergers involve significant amounts of personal information or intersect with privacy and data protection issues.

The OAIC’s reasoning is based on the privacy concerns for individuals where personal information holdings are combined in a merger, as well as where a reduction in competition reduces the ability for consumers to avoid engaging entities with poor privacy practices.

13. OAIC consultation on the Privacy (Credit Related Research) Rule: The OAIC’s public consultation on the draft Privacy (Credit Related Research) Rule 2024 is now open to individuals, agencies and organisations for comments. The draft 2024 Rule will be replacing the Privacy (Credit Related Research) Rule 2014, which will sunset on 1 October 2024. The OAIC has published the Consultation Paper, as well as a draft remade 2024 Rule to guide the consultation process. The closing date for submissions is COB Monday 11 March 2024, and submissions can be made via email at consultation@oaic.gov.au.

ALRC

14. FAQs: The Legislative Data Framework: The ALRC has published plain-language FAQs on the Legislative Data Framework, expanding on Recommendation 58 of its Final Report Confronting Complexity: Reforming Corporations and Financial Services Legislation – summarised in Gadens’ Regulatory Recap on 23 January 2024.

The plain-language FAQs suggest that a Legislative Data Framework that treats legislation as a dataset – containing data on matters such as the number and scale of legislation in force, the exercise of legislative powers, and amendments over a given time period – can address this “unnecessarily complex” area of law by:

• offering a resource that helps stakeholders navigate and understand Corporations and Financial Services legislation;
• helping government administer and reform the legislation; and
• allowing stakeholders to hold government accountable for the legislation’s development over time.

This is the sixth in a series of articles published by the ALRC elaborating on the Report’s recommendations since late January 2024.

Treasury

15. Consultation on proposed country-by-country reporting measures for multinationals: Treasury has opened consultation on proposed new tax transparency measures which would require multinational entities to publish tax information on a country-by-country basis, as well as a statement on the entity’s taxation approach. The new measure is aimed at improving tax transparency in Australia, and increasing alignment with the European Union’s regime.

The deadline for submissions is 5 March 2024.

16. Final Report on Review of the Franchising Code of Conduct: Treasury has published the final report (Final Report) on its review of the Franchising Code of Conduct (Code). The Final Report concludes that the Code is generally fit for purpose and should be remade subject to 23 recommended items for reform, including but not limited to:

• extension of protections for new vehicle dealerships to all franchisees;
• simplification of provisions relating to termination for serious breaches;
• simplification and consolidation of pre-entry information given to prospective franchisees;
• simplification of franchisor obligations under the Code in relation to existing franchisees; and
• a possible fundamental shift to a licensing regime if supported by further comprehensive analysis.

Legislative Updates

17. Parliament debated the following Bills relevant to financial services regulation in the past fortnight:

• Treasury Laws Amendment (Consumer Data Right) Bill 2022: Seeking to enable consumers to direct accredited persons to instruct on actions on their behalf through the CDR framework (such as to make payments, open/close accounts and switch providers).
• Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023: Seeking to amend the Corporations Act 2001 to require Australian public companies to produce a ‘consolidated entity disclosure statement,’ setting out certain information about their subsidiaries in their annual financial reports.
• Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023: Seeking to, among other things, amend the Corporations Act 2001 to reinstate the Australian Financial Complaint Authority’s jurisdiction to hear certain complaints relating to superannuation.
• Modern Slavery Amendment (Australian Anti-Slavery Commissioner) Bill 2023: Seeking to establish an independent statutory office of the Australian Anti-Slavery Commissioner which, among other things, would offer businesses a resource to engage on strategies relevant to modern slavery in their supply chains.

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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
Zira Norman, Senior Associate
Clare Smith, Associate
Patrick Simon, Associate
Raymond Huang, Lawyer
Fiona Ng, Lawyer
Chris Girardi, Lawyer
Declan Melia, Lawyer
Emilia Norwood, Seasonal Clerk
Harriet Topliss, Seasonal Clerk