This edition of the Gadens’ Regulatory Recap highlights recent developments from ASIC, APRA, OAIC, ACCC, RBA and Treasury, including various enforcement actions taken by the regulators.
- Parliament passes FAR Bill: After almost two years in Parliament the Financial Accountability Regime Bill 2023 (FAR) has passed both houses. FAR will replace the Banking Executive Accountability Regime (BEAR) and significantly extend accountability obligations beyond the banking industry to general, life, and private health insurers, registrable superannuation entities and significant related entities.
FAR will come into force for the banking industry six months after it receives Royal Assent and will apply to the insurance and superannuation industries 18 months later. The regime is set to expand accountability obligations to all directors and most senior executives of applicable entities, tighten structuring of remuneration packages for executive level staff, facilitate greater public transparency around track records and current responsibilities of accountable persons, and impose more substantial penalties than previously applied under BEAR.
The new regime will be administered by ASIC and APRA jointly, and increased enforcement action is anticipated.
- Parliament passes AML/CTF amendments: On 4 September, the Senate passed the Crimes and Other Legislation Amendment (Omnibus) Act 2023 (assented to on 13 September), which among other matters, amends to the AML/CTF Act to:
- strengthen AUSTRAC’s ability to use infringement notices, by clarifying the application of civil penalty provisions for ongoing failure of an entity to enrol with AUSTRAC as a reporting entity before providing a designated service. Previously AUSTRAC had no power to deal with serious and ongoing enrolment breaches. The amendment clarifies that a separate contravention occurs each day that an entity fails to apply for enrolment, with AUSTRAC now able to issue infringement notices for each contravention. This will increase the penalties that apply for non-compliance with the enrolment obligation. The amendment also gives AUSTRAC the option to pursue civil penalty proceedings for more serious and systemic contraventions;
- clarify the existing secrecy and access framework to make it clear that sensitive AUSTRAC information obtained under specified provisions of the AML/CTF Act and the Financial Transaction Reports Act 1988 cannot be inappropriately disclosed for the purposes of, or in connection with, court or tribunal proceedings; and
- explicitly authorise AUSTRAC to arrange for the use of a computer program (including automated programs) to automatically take administrative action (i.e. make a decision, exercise any power or comply with any obligation) under the AML/CTF Act or Rules.
- ASIC issues new legislative instruments for financial resource requirements and platforms: ASIC has released five new legislative instruments remaking existing Class Orders this fortnight:
- ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 applies to licensed custodians and depository service providers, and retains the existing tailored cash needs, net tangible assets, cash or cash equivalents, and audit opinion requirements that were previously set out in Class Order [CO 13/761], with minor amendments;
- ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647 consolidates the financial resource requirements for responsible entities and IDPS operators in existing Class Order [CO13/760] and the financial requirements for corporate directors of retail CCIVs in existing ASIC Instrument 2022/449. Only minor amendments to the substantive requirements have been made, and only in respect of licensed corporate directors of retail CCIVs;
- ASIC Corporations (Investor Directed Portfolio Services Provided Through a Registered Managed Investment Scheme) Instrument 2023/668 retains the existing relief for certain IDPS-like schemes under Class Order [CO 13/762] with only minor changes to allow operators to provide clients with electronic access to near real-time information about their investments without obtaining specific approval from the client;
- ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669 retains the existing relief for IDPS schemes under Class Order [CO 13/763], with only minor changes to access to investment information (similar to new relief for IDPS-like schemes), and to clearly provide that an IDPS operator must comply with obligations under section 1017E of the Corporations Act 2001 (Cth) in respect of money received from an IDPS member for a financial product prior to issue; and
- ASIC Corporations (Discretions for Setting the Issue Price and Withdrawal Price of Interests in Managed Investment Schemes) Instrument 2023/693 substantially retains existing unit issue and withdrawal price discretions for responsible entities of registered managed investment schemes previously set out under Class Orders [CO 13/655] and [CO 13/657], with minor drafting changes including simplification of the requirement to document exercises of discretion that affect the pricing of interests.
In addition, ASIC is currently consulting on a proposal to remake the following Class Orders as new legislative instruments in substantially the same form:
- [CO 13/519], which provides equal treatment relief to responsible entities of registered schemes and the corporate director of a retail CCIV in various situations, including regarding some offers of interests or shares to a member with a registered address outside Australia and New Zealand; and
- [CO 13/656], which provides relief in relation to responsible entities setting the issue price of forfeited interests in registered schemes.
- ASIC proposes to remake financial reporting legislative instrument: On 5 September, ASIC proposed to remake ASIC Class Order [CO 13/1050] Financial reporting by stapled entities (Class Order) with its sunsetting date nearing on 1 October 2023. ASIC invited feedback on its proposal by 13 September 2023, but expressed its view that this Class Order is operating efficiently and effectively by allowing disclosing entities to present consolidated and combined financial statements for a previous reporting entity or to present the financial statements in a single financial report.
- ASIC proposes to extend electronic precontractual disclosure legislative instrument: On 5 September, ASIC proposed to extend for 12 months, pending law reform, the operation of ASIC Credit (Electronic Precontractual Disclosure) Instrument 2020/835 while Parliament considers moving the exemptions provided under the Instrument to the Treasury Laws Amendment (2023 Law Improvement Package No. 1) Bill 2023. It is for that reason that ASIC has only sought a temporary extension of this Instrument rather than remaking it before it sunsets on 1 October 2023. Given the Instrument allows credit licensees and representatives to provide electronic pre-contractual disclosure to consumers in the same manner as other credit disclosure documents, the extension is a welcomed relief.
- ASIC targeting OTC derivatives: ASIC is targeting the distribution of over-the-counter (OTC) derivatives and other high-risk retail products, following a recent review which found ‘significant room for improvement in how they meet their design and distribution obligations (DDO)’. Over 60 Australian financial services licensees offer complex, high-risk OTC derivatives to retail clients in Australia, such as contracts for difference (CFDs), crypto derivatives and other novel derivative arrangements. ASIC’s review Report 770 Design and distribution obligations: Retail OTC derivatives found DDO issuers are heavily reliant on client questionnaires as a primary distribution filter, and engage in mass marketing of OTC derivatives towards consumers for whom these complex financial products may not be suitable.
Since March 2023, ASIC has taken regulatory action against five issuers of retail OTC derivative products for breaches of DDO, resulting in 10 interim stop orders relating to retail OTC derivatives, with further investigations of high-risk product issuers underway. ASIC issued its first DDO proceedings in the Federal Court against CFD issuer eToro and will continue to take appropriate regulatory action where it sees DDO contraventions and risk of consumer harm.
- ASIC consults on insolvent trading guidance: ASIC has opened consultation seeking feedback on proposed updates to its approach to interpreting and administering sections 588GA and 588GB of the Corporations Act 2001 (Cth), which set out a safe harbour for company directors from civil lability for insolvent trading. Consultation closes to industry on 26 October 2023.
- ASIC Annual Forum 2023 – Full program released: The full program and speaker line-up for the November 2023 ASIC Annual Forum in Melbourne has been released, and tickets are now available.
- Enforcement: In the past fortnight, ASIC has continued to deliver on its 2023 enforcement priorities, delivering a range of enforcement actions.
An audit partner at BDO has been ordered to not perform the duties of a registered company auditor until 31 December 2023 following an ASIC investigation and a decision by the Companies Auditors Disciplinary Board, which found that he failed to meet the minimum standard under the Australian Auditing Standards. A director of various electrical services companies has been disqualified from managing corporations for the maximum period of five years due to his involvement in the failure of three companies, which included that he was not aware that he was a director of one of the companies for a period of more than five years, and a former CEO was permanently banned from performing any function involved in the operation of a financial services business or credit provider, following a conviction for engaging in dishonest conduct. ASIC has also issued an interim stop order on Storehouse Residential Trust (ARSN 135 182 074), a registered managed fund promoted by K2 Asset Management Ltd, due to target market determination deficiencies, including a mismatch between the investment risk profile of the fund and the types of investors identified as being within the target market.
ASIC has also commenced proceedings against PayPal Australia Pty Limited (PayPal), alleging that standard form contracts with small business customers contain an unfair contract term. Specifically, the term gives PayPal business account holders 60 days to notify PayPal of errors or discrepancies in fees that have been charged, with ASIC alleging that the term is unfair because practically it permitted PayPal to retain overcharged or incorrectly applied fees if notification is not provided within 60 days.
Separately, the Federal Court has ordered a $1.2 million penalty against ACBF Funeral Plans Pty Ltd (in liquidation) (ACBF) for misrepresenting the sale and promotion of funeral expense insurance to Aboriginal and Torres Strait Islander people. The Court found that ACBF represented to plan holders that they would receive a lump sum payment of their chosen benefit amount, when in fact they would only be reimbursed for funeral related expenses up to the benefit amount upon production of proof that those expenses had been incurred.
The Federal Court has found that Ferratum Australia Pty Ltd (in liquidation) charged prohibited fees and overcharged customers on small amount credit contracts. In setting out the judgement, Justice Kennett stated that, “Ferratum was (or at least should have been) well aware of the deficiencies in its system and their potential to affect customers yet persisted with that system.”
Finally, the Federal Court has approved a $50 million settlement in Slater & Gordan’s consumer credit insurance class action against Commonwealth Bank, the Colonial Mutual Life Assurance Society, and AIA Australia in respect of customers who were allegedly sold insurance products despite not consenting or not being able to make a claim.
- Findings from CPS 511 pre-implementation review: APRA has released its findings from its pre-implementation review of Prudential Standard CPS 511 Remuneration (CPS 511), designed to prescribe minimum standards for remuneration practices.
APRA has found, in general, that there have been sincere efforts to strengthen and increase risk management in remuneration frameworks. Acknowledging the infancy of CPS 511, APRA has encouraged industry to ameliorate practices in the following areas:
- effective controls in managing potential conflicts arising from compensation arrangements of third-party service providers;
- understanding of how selected non-financial measures will drive desired behaviour, risk outcomes and performance; and
- greater oversight in the proposed processes to ensure remuneration consequences result from poor risk management outcomes.
CPS511 is already in effect from 1 January 2023 for ADIs that are deemed significant financial institutions (SFIs), from 1 July 2023 for superannuation and insurance SFIs, and will apply to all other APRA-regulated entities from 1 January 2024.
- APRA consults on amendments to capital adequacy reporting standard: APRA has recently opened a short consultation period regarding proposed revisions to the capital framework for authorised deposit-taking institutions. By consulting with the industry and accepting submissions on proposed changes and revisions to Reporting Standards ARS180.0 Counterparty Credit Risk and ARS226.0 Margining and risk mitigation for non-centrally cleared derivatives, APRA intends to implement ‘unquestionably strong’ capital ratios and the Basel III reforms. Submissions from industry are due by 22 September 2023.
- APRA finalises updated Financial Claims Scheme standard: APRA has announced that following a consultation period with the industry, the Regulator is now in the process of finalising proposed minor administrative updates to Prudential Standard APS910 Financial Claims Scheme. These revisions relate to Australia’s deposit insurance scheme which takes into consideration the unlikely event where an Australian financial institution may fail. The revisions will come into effect from 1 October 2023.
- APRA releases findings on review of superannuation trustees’ treatment of private equity asset: APRA has conducted a targeted review of unlisted asset valuation governance in response to the deterioration in investment market conditions over the course of 2022. The overarching purpose of the review was to assess compliance with APRA’s unlisted asset valuation governance requirements and form a view on key superannuation sector risks. Private equity technology company, Canva Pty Ltd (Canva), was selected as a suitable case study due to its public profile as an asset in a higher-risk asset class.
APRA determined that the majority of registrable superannuation entity (RSE) licensees’ governance practices related to their valuation of Canva were appropriate. However, APRA identified several areas for improvement including:
- inadequate interim revaluation triggers in valuation policies;
- deficiencies in information provided to the Board;
- gaps in Board skillsets, willingness to challenge information provided and access to expertise; and
- lack of consideration of the expected performance and unit pricing impact of valuation decisions.
APRA has stated that it will continue to conduct reviews of RSE licensee practices in relation to Prudential Standard SPS 530 (Investment Governance in Superannuation), with the objective of appropriate and equitable member outcomes and management of investment risk.
- OAIC releases update to Notifiable data breaches report: On 5 September 2023 the OAIC released the Notifiable Data Breaches Report for January to June 2023. Key findings of the January to June reporting period included:
- 409 data breaches were reported to the OAIC, a 16% decrease from the previous data reporting period;
- malicious or criminal attacks were the leading cause of data breaches, accounting for 70% of notified breaches;
- human error breaches, which accounted for 26% of reported breaches, were the fastest to be identified, with 81% identified within 30 days or less;
- the health and finance sectors experienced the most data breaches, with health reporting 63 breaches (15% of all notifications) and finance reporting 54 breaches (13% of all notifications); and
- the majority of all data breaches affected 100 or fewer people (63%).
Following the release of the report, Commissioner Falk stated that “organisations need to be alert to this growing attack surface and have robust controls in place to minimise the risk of a data breach.”
- ATO signals stronger debt recovery action: Deputy Commissioner Vivek Chaudhary has confirmed in an address to the Tax Institute 2023 Tax Summit that the ATO will be allocating substantial additional resources to tackling recovery of ballooning collectible debt, across the following five focus areas:
- unpaid superannuation guarantee charge, particularly in relation to small businesses;
- debt raised through ATO audit programs, including under the GST Compliance Program, Tax Avoidance Taskforce, Shadow Economy, and Serious Financial Crime;
- refund fraud, particularly in relation to recent GST refund scams that have been widely promoted on social media platforms in recent months;
- aged high value debts over $100,000 held by multinational groups and privately owned groups that have been overdue for more than two years. The ATO has signalled that it will reduce access to recover concessions and payment plans, and will progress straight to firmer actions; and
- employers with self assessed debts.
The Deputy Commissioner also signalled that the ATO intends to ramp up debt disclosure in relation to outstanding director penalty notices, to promote recovery of approximately $5 billion of outstanding DPN related debt.
- Commissioner’s address to the tax Institute’s Tax Summit 2023: On 6 September, Commissioner of Taxation, Chris Jordan gave an address at the Tax Institute Tax Summit in which he championed the successful decade-long reinvention of the ATO under his tenure through the modernisation of business services and consistently building trust and confidence with stakeholders through professionalism, reliability and fairness.
In this his final address as Commissioner, he also emphasised the ATO’s future focused theme to ‘Spark Change’ by:
- improving exponentially and continuing to maintain constructive collaboration with industry stakeholders;
- consistently delivering with a digital and data driven taxation system in mind;
- urging tax professionals to ensure they are fit for the future through strong ethics, financial intelligence and data literacy; and
- continuing to provide easy access to clear helpful information and guidance.
- Businesses urged to remove unfair contract terms ahead of law changes: From 9 November 2023, the Australian Consumer Law (Competition and Consumer Act 2010 (Cth), Schedule 2) will expressly prohibit the proposal, use or reliance by businesses on unfair contract terms in standard for contracts with consumers and small businesses (up to 100 employees). The ACCC welcomes the changes to the unfair contract terms regime as a motivating factor for businesses to take steps to ensure their standard form contracts are fair.
The test for determining an unfair contract term has not changed, however, significant penalties will apply from 9 November 2023 for contraventions, including maximum penalties which are the greatest of:
- $50 million;
- three times the value of the ‘reasonably attributable’ benefit obtained from the conduct; or
- if the benefit cannot be determined by a court, 30% of adjusted turnover during the breach period.
The ACCC released practical guidance for businesses to consider as part of their contractual review, including:
- using clear and simple language;
- considering whether a term is necessary to protect legitimate business interest from both perspectives;
- transparent and key terms are made apparent to consumers at the time of sign-up and renewal;
- the inclusion of counter-balancing terms which limit any unilateral variation of the contract a business may have;
- excluding terms which seek to limit consumer guarantees, or rights a consumer may have under law; and
- the avoidance of broad terms.
For more information on the unfair contract terms regime and examples of unfair terms, please see our Gadens publication here.
- Swift Networks to pay $1.2m penalty for rigging bids for WA mining camps tenders: On 7 September 2023 the Federal Court ordered Swift Networks Pty Ltd (Swift), a specialist technology company, to pay a penalty of $1.2 million for engaging in cartel conduct. The conduct in question was bid rigging, with Swift admitting to agree with a competitor, DXC Connect Pty Ltd and DXC Technology Australia Pty Ltd, that one would submit a higher tender bid than the other in response to tender requests for Pilbara mining village projects. ACCC Commissioner Liza Carver stated that “bid rigging is a serious breach of competition laws. Cartel conduct such as this can lead to higher prices for other businesses, and ultimately consumers.” Bid rigging occurs when competitors in a tender process agree that they will not genuinely compete for a tender. This may include participants taking turns to be the “winner” of a tender process, agreeing about the terms that they may submit, and competitors agreeing not to tender. Swift was also ordered to implement Competition and Consumer Act compliance, education and training programs, and to pay a portion of the ACCC’s costs.
- ACCC commences court actions against eHarmony for alleged misleading online dating membership statements: The ACCC has commenced proceedings against eHarmony Inc (eHarmony) in the Federal Court regarding allegations that organisation breached the Australian Consumer Law by making misleading statements as to pricing, renewals, and duration of paid memberships.
The ACCC alleges that eHarmony engaged in misleading conduct by failing to prominently disclose the automatic renewal of paid premium memberships and a potential ‘subscription trap’. At times, automatic renewal was hundreds of dollars higher than the initial subscription. Terms and conditions relating to the automatic renewal were displayed in a small font late in the purchase process.
It is also alleged that basic (and free) membership allowed members to access services purported to only be available to paid premium members. The ACCC alleges that eHarmony failed to display accurate minimum and total purchase prices for paid premium memberships, as required by law, and that customers were misled about their ability to cancel memberships.
- ACCC calls for views on Australia Post’s proposed price increase: Australia Post has sought to increase its basic postage rate by 25% from January 2024. Required under the Competition and Consumer Act 2010 to assess Australia Post’s price notification, the ACCC is now seeking consumer feedback on the proposal. Australia Post’s proposed hike comes off the back of a government review in 2023 considering the need to modernise postal services and to restructure operations to lower costs and keep the entity competitive in an increasingly digitised market. Responses to the consultation close on Friday 29 September 2023.
- The new Gas Market Code: industry’s responsibilities and the ACCC’s role speech: On 7th September 2023, ACCC Chair Gina Cass-Gottlieb gave a speech at the annual Energy and Resources Law Association Conference focusing on the ACCC’s role in ensuring the longevity of Australia’s east coast gas market, through its implementation of the new Gas Market Code.In light of global events over the past year, the ACCC has further refined its focus on the price and availability of gas supply and the volume of gas exported worldwide, when compared with the volume available on the Australian east coast for local demand. The ACCC has repeatedly warned that there is a risk of gas supply shortfalls in the domestic market and as a result, have introduced emergency gas price caps.Earlier in July this year, the ACCC introduced a new Gas Market Code, with the Regulator being in charge of enforcing the code, including compliance and reporting functions. Ms Cass-Gottlieb reiterated that the Code’s purpose was to ‘facilitate a well-functioning domestic wholesale gas market with adequate gas supply at reasonable prices and on reasonable terms for both suppliers and buyers.’
- Consumer Experiences in Financial Services: A Research Study Collaboration: The Australian Law Reform Commission (ALRC) has published the results of its survey into research of consumer experiences in financial services. The report focuses on fairness in the provision of financial services and appropriate policy responses, including the potential implementation of a Treating Customers Fairly (TCF) regime in Australia.
A TCF regime is a ‘principles based’ regulatory framework designed to promote fairness and consumer protection within the financial services industry. The concept was first introduced in the United Kingdom in response to a series of financial scandals arising from relaxed stringency in the name of ‘self-regulation’. Similar regimes have since been implemented in South Africa and New Zealand.
An Australian TCF regime could conceivably augment or supplant the existing provisions of the financial services legislation which include similar overarching obligations on financial services providers (e.g. the ‘efficient, honest and fair’ test in section 912A of the Corporations Act 2001 (Cth)). Though this would be a radical overhaul of the financial services regime and there may not be sufficient political appetite for such a drastic change following the comprehensive suite of legislative reforms in recent years. For now, this discussion appears to be purely academic.
The ALRC’s Final Report for this Inquiry is due by 30 November 2023. Watch this space for a further update from Gadens following the release of the Final Report.
- AFCA’s Appropriate Lending to Small Businesses Consultation: AFCA is currently reviewing how complaints are made by eligible small businesses as to how credit is provided to them. The Consultation is open until 29 September 2023.
The new draft policies are being developed to provide transparency with regard to what to expect from AFCA processes, greater clarity about the way AFCA investigates complaints and makes decisions, and ensures AFCA continue to deliver consistent outcomes for complaints to AFCA. The documents will help complainants, financial firms and stakeholders understand how AFCA considers complaints in the two key areas of Responsible Lending and Appropriate Lending to Small Business. AFCA is calling for submissions from stakeholders on:
- the types of small business complaints that can be considered under AFCA’s Rules;
- the assessment of a financial firm’s credit assessment appropriateness;
- the consideration of industry codes, regulatory guidance, and good industry practice in decision-making;
- the determination of a fair outcome when a firm has provided an inappropriate loan; and the calculation of loss and determination of compensation amounts are all key aspects of the process.