Gadens Regulatory Recap

This edition of the Gadens Regulatory Recap considers a series of developments from ASIC, APRA, and AUSTRAC, as well as reviewing the significant developments arising from the release by Treasury of the Strategic Plan for Australia’s Payments System.

ASIC

1. ePayments Code: The updated ePayments Code released in June 2022 (Code) required all subscribers to be in compliance with the Code by 2 June 2023. The Code seeks to strengthen existing consumer protections in the following areas:

• compliance monitoring and data collection
• mistaken internet payments
• unauthorised transactions
• complaints handling
• facility expiry dates.

The Code has been extended to also covers payments made using the New Payments Platform.

2. ESG at AFR Summit: On 5 June 2023, the Chair of ASIC, Mr Joe Longo, presented a keynote speech at the Financial Review’s Environmental, Social and Governance (ESG) Summit in Sydney.

The underlying premise of the address was that ESG is not a trend and is at the forefront of ASIC’s priorities. Organisations need to focus on providing shareholder returns in line with ESG principles and not perceiving these principles as an optional value-add to their business.

Companies should be considering:

• How can sustainability and financial reporting harmoniously and holistically function together?
• How can we ensure that marketing and advertising teams work with their legal and risk teams to ensure cohesion around sustainability-related claims (and thereby avoiding potential greenwashing claims)?
• What assurances and processes can be implemented to ensure that the board is appropriately informed and confident about the information it is disseminating?

3. ASIC highlights focus area for 30 June reporting: ASIC have released guidance for directors, auditors, and preparers of financial reports ahead of 30 June 2023 reporting deadlines. The guidance urges directors to ‘ensure that investors are properly informed on the impact of changing and uncertain economic and market conditions, ‘net zero’ targets and other developments on financial position and future performance’.
4. Enforcement: ASIC has been extremely active in the enforcement space over the last fortnight. Relevant enforcement action includes a series of banning orders relating to a financial adviser, a former credit broker, and various directors, including the director of Foxi Capital AU Pty Ltd and a Brisbane-based adviser. ASIC has also disqualified directors, including one in Victoria for three years and a property development director for five years, and cancelled the registration of 29 SMSF auditors, and suspended the AFSL of Lantern RE Ltd for failure to lodge financial statements, audit reports, and compliance plan audit reports. The regulator has also issued stop orders for failure to take reasonable steps in CFD distribution and on Humm following a buy now pay later review.

Separately, charges have been laid against various directors following ASIC investigations for fraud and dishonest conduct and misuse of company funds, while the former Head of Operations for BBY Limited was sentenced for three charges of dishonestly obtaining a financial advantage. Finally, the Federal Court ordered Layaway Depot Pty Ltd to pay a penalty of $375,000 for breaches of the Credit Act, having charged excessive interest rates on 70 loans taken out by consumers.

APRA

5. APRA discusses its 2021-22 Annual Report: On 2 June 2023, APRA released its Opening Statement to the House of Representatives Standing Committee on Economics. APRA intends to strengthen the safety of the Australian financial system through its key supervision priorities which include, embedding capital reforms for insurers and banks, ongoing work to address insurance challenges, heightened supervision of cyber resilience and continuing to hold trustees to account to improve outcomes for superannuation members.
6. Updated Statement of Expectations and Statement of Intent in place for APRA: On 7 June 2023, the Australian Government released an updated Statement of Expectations (SoE) for APRA, setting out how the Government expects the prudential authority to carry out responsibilities in regulating superannuation funds, insurance companies, and banks. While the SoE focuses on APRA’s role in ensuring the Australian financial system remains safe, resilient, and competitive, there is now an explicit requirement that APRA considers risks relating to climate change, including promoting transparency in relation to financial risks and adoption of climate reporting standards. In response, APRA has released a Statement of Intent, outlining how it will manage relationships with other regulatory agencies, industry, and the Government.
7. APRA releases updated lending standards to reinforce expectations for ADIs: On 9 June 2023, APRA set out expectations for banks in the management of exceptions to housing lending policies in a letter to Australian authorised deposit-taking institutions (ADIs). APRA emphasised that, other than in limited exceptional circumstances, banks must apply minimum criteria when assessing the repayment capacity of borrowers, including a 3.0% minimum serviceability buffer to be applied above the housing loan interest rate. This buffer is required to provide a contingency for interest rate rises, and unforeseen changes in a borrower’s income or expenses and to mitigate risk. APRA has requested that ADIs notify their supervisor ahead of material changes to any exceptions processes, noting that exceptions trends will be closely monitored. Any bank that reports large volumes of policy exceptions will be subject to heightened supervisory attention.
8. BOQ agrees to enforceable undertakings with APRA and AUSTRAC relating to AML/CTF failings: On 31 May 2023, Bank of Queensland (BOQ) agreed to court enforceable undertakings with both APRA and AUSTRAC in relation to failings in its AML/CTF systems and controls, and consequential breaches of APRA’s prudential standards across 2022 and 2023.

Under the court enforceable undertaking with APRA, BOQ is required to:

• prepare a remediation plan detailing activities BOQ will undertake to address the weaknesses
• submit the remediation plan to APRA for approval
• appoint an independent reviewer to provide written reports on the implementation of the remediation plan
• the requirement to hold an operational risk capital add-on of $50 million until such time as the remedial action plan has been delivered to APRA’s satisfaction.

With AUSTRAC, BOQ is required to:

• comply with an ongoing remedial action plan specifically in relation to its AML/CTF program
• engage an external auditor to report back to AUSTRAC on the progress made.

AUSTRAC

9. AUSTRAC releases guidance on debanking high-risk customers: In the wake of the debanking of Binance, which we addressed last fortnight, AUSTRAC has released guidance for financial intuitions for the treatment of high-risk customers, and how high-risk customers should respond to requests from their financial institutions. AUSTRAC largely recommends that financial institutions avoid debanking, where possible, noting that doing so reduces the capacity of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) framework by forcing at-risk customers into unregulated channels.

Treasury

10. Treasury releases its Strategic Plan for Australia’s Payments System: Following on from its Consultation Paper in December 2022, the Federal Government has published its Strategic Plan for Australia’s Payments System and Payments System Modernisation (Licensing: Defining Payment Functions) Consultation paper (Licensing Consultation Paper), outlining a raft of legislative and policy changes to the current payments system regulatory framework. The changes are significant and wide-ranging. Treasury has heralded the Strategic Plan as the biggest overhaul of Australia’s payments system in 35 years. Key changes include:
    • expanded regulatory powers for the RBA extending to all operators in the payments sector, including the New Payments Platform and digital wallet providers
    • a new payments licensing framework under the Payment Systems (Regulation) Act 1998 (Cth)
    • eliminating the use of cheques by 2030
    • transitioning away from the Bulk Electronic Clearing System currently used for electronic funds transfers to the New Payments Platform
    • a new tiered, risk-based licensing framework for “payment service providers” (PSPs), based on a defined list of payment functions, which will replace the existing non-cash payments regime under the Corporations Act.

The Government is inviting submissions on the payment functions that are intended to underpin the new licensing framework. Gadens will shortly be publishing a more in-depth article on the Strategic Plan and Licencing Consultation Paper and working with clients to assist them in making submissions on aspects affecting their payment products.

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Authored by:
Caroline Ord, Partner
Kate Mills, Partner
Matthew Bode, Partner
Michael Kenny, Partner
Daniel Maroske, Director
Anna Fanelli, Senior Associate
Elizabeth Ziegler, Senior Associate
Kaleb Cox, Senior Associate
Philip O’Brien, Senior Associate
Zira Norman, Senior Associate
Freya Vom Bauer, Associate
Nigel Mok, Associate