Regulator updates

APRA's 2021 supervision and policy priorities (1 February 2021)

APRA released its policy and supervision priorities for the coming year. In line with APRA’s 2020-2024 Corporate Plan, a key focus is to further “enhance the resilience and crisis readiness of Australia’s financial system”. The regulator has outlined that it intends to meet this focus by delivering policies developed in the following areas over the next 12 to 18 months:

  • Superannuation:
    • Strategic Planning and Member Outcomes (SPS/SPG 515 and SPG 516)
    • Insurance in Superannuation (SPS 250/SPG 250)
    • Investment Governance (SPS 530)
    • Outsourcing (SPS 231)
    • Risk Management (SPS 220)
    • Governance (SPS 510)
    • Conflicts of Interests (SPS 521)
    • Fit and Proper (SPS 520).
  • Cross-industry:
    • recovery and resolution planning
    • Operational Risk, Service Provision (CPS 231), and Business Continuity Management (CPS 232)
    • stress testing PPG
    • climate-related financial risk prudential practice guide
    • Governance (CPS 510)
    • Risk Management (CPS 220)
    • Remuneration (CPS 511)
    • Fit and Proper (CPS 520).

APRA’s has also developed similar goals for improving its supervisory role in 2021. The APRA’s 2021 Supervision Priorities report included:

  • review of SPS 515 implementation – Business Performance review
  • fund expenditure review
  • outsourcing review
  • trustee capabilities review
  • unlisted asset valuation review
  • the Superannuation Data Transformation project
  • improving transparency – Choice heatmap
  • addressing areas of underperformance.

APRA’s ‘Year in Review – Safeguarding Australia financial wellbeing’ (5 February 2021)

The review outlines APRA’s view on the financial environment and details its key activities for the year. It also contains metrics for APRA’s regulated industries and supplements APRA’s annual report and financial statements which are submitted to the Australian Government after the end of each financial year (to June 30).

The review concludes that Australian financial systems remain “fundamentally sound after one of the most challenging and testing years many industries have ever faced”. The report also acknowledges that for 2021 the environment ahead remains highly uncertain. By resetting its priorities during the pandemic, APRA has assisted the industry by providing a range of regulatory concessions while not weakening the fundamental strength of the financial system. The report outlines:

  • the financial sector resilience during 2020
  • a new operating environment for the financial sector as a consequence of the economic impact of COVID-19
  • specific sector development, including superannuation which outlines:
    • information on the early release scheme
    • number of superannuation entries and exits for the year
    • administration and operating expense ratio vs net assets data
    • asset allocation
    • increasing transparency of super performance objective.
  • the internal operation of APRA.

Inquiry into the prudential regulation of investment in Australia’s export industries (17 February 2021)

The Joint Standing Committee on Trade and Investment Growth will inquire into and report on the opportunities and challenges for Australia’s export industries in particular examining how changes in prudential standards in banking, insurance and superannuation have impacted the industry. The relevance for superannuation trustees is the standing committee’s terms of reference 2 and 3:

  • term of reference 2 – the investment guidance and advice provided by Australia's financial regulators, including APRA, the Reserve Bank of Australia, and ASIC, to banking, insurance and superannuation institutions, and also to publicly-listed companies, in relation to investment in Australia's export industries
  • term of reference 3 – the approach and motivations of our financial institutions, including banks, insurers and superannuation funds, as well as publicly-listed companies, to their investment in Australia's export industries.

The Committee invites submissions addressing the terms of reference by Wednesday, 31 March 2021.

Open consultation – ATO’s updated list of open consultations for public feedback (18 February 2021)

The ATO has updated its current consultations relevant to superannuation funds, including:

  • [202036] Proposed tax controls over third party data guidance – the purpose of this review is to seek feedback on the development of proposed tax controls over third party data guidance, including examples of best practice tax controls over third party data. The review is important for superannuation funds as the data is used to prepare the entity’s income tax return or distribution statements for beneficiaries. The consultation is set to be completed by March 2021
  • [202041] YourSuper comparison tool – the consultation is part of the Your Future, Your Super package reforms and is described as making it easier to compare the fees and performance of super funds in the market, creating more competition and making super fund work harder to manage money. The consultation is set to be completed by May 2021
  • [202009] Super contributions caps – the impact of compensation payments from financial service providers focus on the proposed fact sheet for individuals that explains the contribution caps implications when a compensation payment from their financial service provider is made to their superannuation fund. This consultation has been placed on hold but is expected to be completed by June 2021.

AFCA review: Terms of reference (22 February 2021)

The Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Act 2018 requires the Minister to establish an independent review of the operation of AFCA. The Act also requires the Minister to table the review report in Parliament within 15 sitting days after receiving the report. The Treasury will be undertaking the review and the final report will be handed to the Minister for Superannuation, Financial Services and the Digital Economy by no later than 30 June 2021.

The terms of reference provide the following guidance for submissions:

  • delivering against statutory objectives
    • is AFCA meeting its statutory objective of resolving complaints in a way that is fair, efficient, timely and independent?
    • are AFCA’s dispute resolution approach and capability producing consistent, predictable and quality outcomes?
    • are AFCA’s processes for the identification and appropriate response to systemic issues arising from complaints effective?
    • do AFCA’s funding and fee structures impact competition? Are there enhancements to the funding model that should be considered by AFCA to alleviate any impacts on the competition while balancing the need for a sustainable fee-for-service model?
  • monetary jurisdiction in relation to primary production businesses – do the monetary limits on claims that may be made to, and remedies that may be determined by, AFCA in relation to disputes about credit facilities provided to primary production businesses, including agriculture, fisheries and forestry businesses, remain adequate?
  • internal review mechanism – AFCA’s Independent Assessor can review complaints about the standard of service provided by AFCA in resolving complaints. The Independent Assessor does not have the power to review the merits or substance of an AFCA decision. Questions for interested parties are:
    • is the scope, remit and operation of AFCA’s Independent Assessor function appropriate and effective?
    • is there a need for AFCA to have an internal mechanism where the substance of its decision can be reviewed? How should any such mechanism operate to ensure that consumers and small businesses have access to timely decisions by AFCA?

ASIC Consultation Paper CP 334 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation closing date extended (22 February 2021)

In response to a number of requests from stakeholders, ASIC decided to extend the closing date for feedback on the ASIC Consultation Paper ‘CP 334 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation’ by two weeks to 15 March 2021.

The consultation focuses on proposals to amend the derivative transaction rules made under section 901A of the Corporations Act, including:

  • setting out the Unique Transaction Identifier (UTI) structure and format in a technical specification and the text of UTI rules for transaction events in the ASIC Rules
  • implementing UTI Guidance step 1 (CCP – central counterparty), UTI Guidance step 2 (clearing member) and UTI Guidance step 3 (trading platform) as steps 1, 2 and 3 respectively in the ASIC Rules for UTI generation and reporting
  • implementing the elements of Table 4 as the steps of UTI rules for single-jurisdictional transactions within the ASIC Rules. As these steps are intended to align with the EU rules, the proposal is subject to the final EU rules
  • making a formal proposal in relation to a UTI cross-jurisdictional test
  • not making a formal proposal in relation to a method for determining the jurisdiction with the sooner deadline for reporting
  • that the UTI generator rules for a cross-jurisdictional transaction are the same as that for a single-jurisdictional transaction
  • making a formal proposal for ‘special purpose’ rules
  • providing for an ultimate determinant as per the UTI Guidance
  • the ASIC Rules require that ASIC reporting entities, when acting as a UTI generator, generate a UTI and provide it to their counterparty with an obligation of timeliness
  • including data elements related to dates and timestamps in the ASIC Rules
  • including data elements related to counterparties and beneficiaries in the ASIC Rules
  • including data elements for ‘direction’ that make the same elections as proposed by European Securities and Markets Authority in the ASIC Rules
  • including data elements related to collateral and margins in the ASIC Rules the
  • excluding data elements related to counterparty rating triggers from the ASIC Rules
  • including data elements related to prices in the ASIC Rules
  • including data elements related to notional amounts and quantities in the ASIC Rules
  • including data elements related to credit derivative swap index transactions, other payments, and custom baskets in the ASIC Rules
  • including in the ASIC Rules the non-critical data elements
  • developing and prescribing technical specifications to the ASIC Rules
  • amending the ASIC Rules in respect of legal identity identifiers
  • repealing section 6 ‘Exemption 2 (Entity Information)’ and section 6B ‘Exemption 2B (Joint Counterparties)’ of ASIC Corporations (Derivative Transaction Reporting Exemption) Instrument 2015/844 in relation to reporting entities other than reporting entities that are foreign subsidiaries of Australian reporting entities
  • amending the ASIC Rules to ensure that transactions with Australian retail clients are reportable transactions with specific rules
  • gathering information about the scope and practices of reporting entities undertaking alternative reporting in order to better inform any future proposals ASIC may make in relation to alternative reporting in the second round of consultation
  • considering the most effective approach to addressing ASIC’s concerns in relation to delegated reporting
  • clarifying that the deadline for reporting the UTI rules within the ASIC Rules is a singular time (referring to Sydney time)
  • repealing or amending the relevant outdated provisions of the ASIC Rules.

Interested parties can submit responses to the consultation by 26 March 2021.

Legislation

Your Future, Your Super changes: Bill introduced (17 February 2021)

The Treasury Laws Amendment (Your Future, Your Super) Bill 2021 was introduced into the Parliament targeting three areas:

  • single default accounts
  • underperformance in superannuation
  • best financial interests duty.

We set out the significant changes proposed to each of these areas below.

Single default accounts

On or after 1 July 2021, in the absence of a new employee choosing a superannuation fund, an employer must determine whether that new employee has a “stapled fund” and, if a stapled fund exists, contributions should be paid into that stapled fund instead of paying into the employer’s chosen default superannuation fund.

Underperformance in superannuation

The Bill proposes a new ‘Annual Performance Assessment’, requiring APRA to action annual performance tests each year for MySuper products and other products set out by the yet to be drafted regulations. Under the rules, if a fund fails the annual performance assessment, the trustee must notify all members and if it fails the assessments in two consecutive years, the trustee will be prohibited from accepting any new beneficiaries into the fund’s product.

Best financial interests duty

The Bill proposes to amend the SIS best interests covenant by requiring trustees to act in the ‘best financial interests’ of beneficiaries, noting that while this has always been a requirement, the Explanatory Memorandum provides great detail as to what activities may fall outside of that scope. Further, the proposed amendments place a reverse onus of proof so that a trustee will need to show evidence that the expenditure and investments have been made in the best financial interests of beneficiaries if civil proceedings are brought against it.

The Bill has been referred to the Senate Economics Legislation Committee, with a report due by 22 April 2021.

Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 (25 February 2021)

The Bill passed both Houses of Parliament and awaits Royal Assent. Once enacted, the Act will amend the Corporations Act to require a financial services licensee or authorised representative to provide written disclosures in respect of any lack of independence while also amending SIS to bolster protections for superannuation members against ‘fee for no services’.

While the Financial Services Royal Commission recommended prohibiting the deduction of advice fees to MySuper products altogether, the proposed amendments will only prohibit ‘ongoing’ advice fees from being deducted from MySuper accounts “by allowing non-ongoing client authorised fees”.

The government argues this compromise will allow members to access one-off financial advice, with fees charged to their superannuation account while ensuring that additional fees are not charged to members for services already provided.

Cases

Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3 (3 February 2021)

By a unanimous decision handed down on 3 February 2021, the High Court of Australia dismissed an appeal by Westpac which sought to overturn a ruling of the Full Federal Court that it had provided ‘personal advice’ to existing customers in contravention of the conditions of its AFSL (read our full discussion here).

The key question for the High Court to determine was whether the financial product advice Westpac gave members over the phone was ‘personal advice’ within the meaning of section 766(3)(b) of the Corporations Act because “the advice was given or directed to the member in circumstances where a reasonable person might expect Westpac to have considered one or more of the member’s objectives, financial situation and needs.”

Our thoughts

The High Court held that the advice given to the 14 members during the telephone calls was ‘personal advice’ within the meaning of section 766B(3) because:

  • the substance of the advice included a recommendation that the member roll over their superannuation – made to influence the member to roll over his or her superannuation to Westpac
  • a reasonable person might have expected Westpac to have considered one or more of the member’s objectives, financial situation and needs.

Knowledge of the member’s financial situation

In the case of the 14 members, each received a ‘personal communication’ which “specifically related to the member’s personal financial situation in relation to his or her superannuation”.

The Court confirmed that in order to provide personal advice, an adviser does not need to have a comprehensive understanding of the member’s financial situation. Personal advice only requires that the adviser has considered, or a reasonable person might expect the adviser to have considered, one or more of the definition’s three requirements – a person’s objectives, financial situation, or needs.

Some issues arise here:

  • a provider does not require a comprehensive knowledge of all three requirements. Instead, the term “considered” should be understood to mean “took account of”. In other words, the term “considered” should not be interpreted “as importing a requirement of an active and comprehensive process of evaluation”
  • when considering what a reasonable person ‘might expect’, the standard is “one of reasonable possibility, not reasonable probability”
  • financial product advice is not considered to be personal advice simply because a provider has not considered each of a person’s objectives, financial situation or needs. It is sufficient for a provider to only consider at least one of those three requirements (for example, a person’s objectives), though noting that it is a requirement under the FOFA Safe Harbour Rules that a provider considers each of those three requirements
  • providers need to ensure that not only are their general advice strategies, disclosures and scripts sufficiently robust to ensure that they do not crossover into personal advice territory, but that:
    • any advice that may do so also meets or can fall within the FOFA Safe Harbour Rules framework
    • such advice does not raise questions as to whether the provider (or its representatives) is failing to meet its AFSL or any other authorisation obligations.

General disclaimers are only as good as the actions taken under them

The joint majority considered that the verbal disclaimers provided to members were not sufficient to render the financial product advice as general advice. This is because immediately after the disclaimer was made, the Westpac representative elicited the member’s objectives from them and used social proofing techniques to confirm the validity of those objectives.

For example, one adviser confirmed to a member that saving on fees and manageability are “two main reasons our clients do like to bring their super together” and that doing so “does make a lot of sense from a management point of view, for sure”.

Gordon J held that “the significance of the general advice warning must be assessed in light of all the circumstances. [It] was given only once, at the beginning of the telephone conversation. Members were subsequently asked directly about their personal objectives. [They] were not encouraged to seek personal advice before deciding whether to accept the rollover service.”

AFSL holders should be aware that having an established practice of providing general disclaimers will not necessarily protect them from being found to have provided personal advice. The High Court’s decision demonstrates that when determining whether financial product advice is to be classified as general or personal in nature, all circumstances will be taken into account. In other words, the facts will speak for themselves.

No fees charged can still be considered personal advice

The High Court made clear the fact that the superannuation roll-over service offered free of charge by Westpac was, “at best neutral in relation to the reasonable expectations of a member” in circumstances where Westpac had a pre-existing relationship with the member and the rollover served Westpac’s interest.

In other words, a reasonable person might expect that where a finance service provider is acting in its own interests, a fee for the provision of personal advice is less likely to be required. Of relevance was the fact that the members had already paid fees to Westpac for financial services related to superannuation.

However, it may be argued that the definitions of ‘financial product advice’, ‘personal advice’ and ‘general advice’ are not characterised or differentiated by whether a fee or cost is charged – the Act is silent on that and there is no ambiguity in the text. Both forms of financial product advice are predicated on the intentions of a provider (or what could reasonably be considered as being such intentions) and not whether the client paid for such advice.

ATO impact statement on Commissioner of Taxation v Douglas case (11 February 2021)

The ATO has issued an Impact Statement on the case of Commissioner of Taxation V Douglas [2020] FCAFC 220 which examined three test cases on the question of when an invalidity payment will be classified as either a superannuation lump sum or superannuation income stream benefit. The invalidity payments were initially paid from pensions to individuals under the Military Superannuation and Benefits Scheme (MSB Scheme) or the Defence Force Retirement and Dead Benefits Scheme (DFRDB Scheme).

The court held that two out of the three cases were to be classified as superannuation lump sum payments. In accepting the decision, the Commissioner acknowledged the rules of the MSB Scheme (MSB rules) under which the invalidity benefits were paid do not satisfy the pension standards in the SISR. To satisfy the relevant standard in sub-regulation 1.06(2) of the SISR, the MSB rules had to ensure:

  • the pension is paid at least annually throughout the life of the primary beneficiary or reversionary beneficiary
  • the size of payments of benefit in a year is fixed, allowing for variation only as specified in the governing rules.

In each respect, the court found the MSB rules nor the DFRDB Scheme ensured benefits were paid annually and, therefore, under proper construction of the SISR, the payment could not be classified as a superannuation income stream but a lump sum payment.