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Fintech Update: July 2018
In this update, we examine the latest regulatory and legislative developments in the fintech sector. Noteworthy updates include, the Australian government passing a bill to support the implementation of the Asia Region Funds Passport, as well as releasing a draft bill for consultation on the proposed design and distribution obligations and product intervention power. The Australian Securities and Investments Commission (ASIC) is also consulting on proposed changes to capital requirements for market participants, and consulting on prescribing a period for assessing the suitability of consumer use of credit cards.
While not discussed in this update, companies should note that ASIC has made available an external expert review of Regulatory Guide 97, which makes a number of recommendations regarding the disclosure of fees in product disclosure statements. ASIC has stated it will release a consultation paper in the first half of the 2018-19 financial year setting out proposed responses to the issues raised. Please be in touch should you wish to discuss.
- Second tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 released
- Government passes Asia Region Funds Passport bill, opens consultation on associated Regulations
- ASIC cracks down on use of the word ‘independent’
- Government releases draft bill for the design and distribution obligations and product intervention power
- ASIC consults on proposed changes to capital requirements for market participants
- FASEA releases draft examination guidance
- ASIC releases report and consultation paper on the use of credit cards
- International developments in cryptocurrencies and distributed ledger technology (DLT)
Fintech fact: According to a recent ASIC review, 12 credit providers account for more than 98.5% of the credit card market in Australia.
Second tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 released
The Federal Government has released for public consultation the second tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (CCIV Bill) and accompanying explanatory materials for comment. The new corporate collective investment vehicle (CCIV) structure is intended to offer an internationally recognisable investment vehicle which can be readily marketed to foreign investors, including through the new Asia Region Funds Passport (discussed in this update). This consultation follows the government's release of the first tranche of the draft CCIV Bill, which closed on 18 July 2018 and covered, among other things, a revision of the new chapter containing core provisions establishing how CCIVs and sub-funds will operate (see our previous update here).
The second tranche exposure draft includes:
- external administration of a CCIV in a winding up situation. This includes winding up on a sub-fund by sub-fund basis by treating the CCIV in a winding up situation as if it is comprised only of the sub-fund in respect of which the CCIV is wound up;
- the application of the Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act) (specifically, the financial services regime) to CCIVs. Chapter 7 will generally apply to CCIVs and corporate directors in a substantially similar manner to other companies, with some modifications to ensure parity with the requirements for registered schemes; and
- the liability of the corporate director of a CCIV for contraventions of the law by the CCIV. The provisions re-route offences and penalties committed by the CCIV, and the associated penalty, to the corporate director, so that members of a CCIV do not suffer loss.
The explanatory materials also include a detailed description of the proposed penalties framework for CCIVs (including the proposed penalties for a contravention of a provision in the new Chapter 8B) and the proposed approach to takeovers, compulsory acquisitions and buy-outs of a CCIV. However, the provisions for these aspects of the CCIV Bill are under development.
The consultation period closes on 10 August 2018.
The Australian Government has passed the Corporations Amendment (Asia Region Funds Passport) Bill 2018 (Bill), which brings into effect the long-contemplated Asia Region Funds Passport (Passport) (discussed in our previous insight here). The Government has also opened consultation on draft Passport Regulations and related explanatory materials. The details of the new bill and consultation have been discussed in depth here.
ASIC has recently taken intervening steps regarding the use of the restricted terms 'independent' and 'independently owned'. Following surveillance of industry websites, ASIC has required four financial advice companies to cease and amend false claims of independence that could mislead consumers.
Under the Corporations Act, a person who carries on a financial services business or provides financial services is prohibited from using terms such as 'independent', 'impartial', 'unbiased', or any other term of like import in relation to the business or service except where that person meets certain conditions such as not receiving any commissions, volume-based payments or other gifts or benefits. In June 2017, the corporate regulator clarified its position that terms such as 'independently owned', 'non-aligned' and 'non-institutionally owned' are considered restrictive terms. Financial services providers were given a six-month grace period in which to become compliant, with ASIC more recently cracking down on the use of such terms.
ASIC has indicated that it will continue to publicly name advisers who do not comply with their obligations not to use restricted terms unless factually true, to ensure that consumers are not mislead about the nature of the service they are receiving.
Government releases draft bill for design and distribution obligations and product intervention power
The Australian Government has released for consultation an exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018 (Cth) (Bill), which is intended to introduce design and distribution obligations in relation to financial products. The details of the Bill have been discussed in depth here.
ASIC has released Consultation Paper 302: Proposed changes to ASIC's capital requirements for market participants (CP302), which proposes to alter the minimum prescribed amount of capital that a participant is required to hold under the market integrity rules. Specifically, the consultation relates to proposed changes to the Futures Capital Rules and the Securities Capital Rules.
ASIC has proposed to make the following changes to the Futures Capital Rules to:
- require market participants of futures markets to comply with a risk-based capital regime instead of the existing net tangible asset regime;
- create a single capital rule book for securities and futures market participants; and
- introduce a commodity position risk amount.
Futures markets participants will also be required to hold core capital of at least A$1,000,000 at all times.
ASIC has proposed to include the following changes to the Securities Capital Rules:
- an increased core capital requirement (securities market participants will be required to hold core capital of at least A$500,000 at all times);
- new requirements such as reporting a net asset balance of zero or lower and an underwriting risk requirement;
- the removal of some rules and risk calculation methods; and
- amended definitions of key terms (eg, 'liquid' and 'qualifying debt instruments').
The proposal seeks to create a financial buffer of core capital to decrease the risk of market disruption from a disorderly wind-up. If market participants are sufficiently capitalised, they will also be better able to absorb losses and are more likely to be able to meet their financial obligations to clients.
The consultation period closes on 15 August 2018.
The Financial Adviser Standards and Ethics Authority (FASEA) has released Consultation Paper 3: Financial Adviser Examination for comment. The new examination applies to financial advisers that are registered as authorised representatives, employees or directors of an Australian financial services licensee (or related body corporate) and authorised to provide personal advice to retail clients in relation to financial products. Financial advisers that are registered prior to 31 December 2018 will be required to pass the examination before 1 January 2021, with new entrants (entering the industry after January 2019) required to pass the examination after they have completed their tertiary degree, but before commencing their professional year. FASEA has proposed that the examination will test the application of an adviser's knowledge in the following areas:
- The Corporations Act (particularly Chapter 7 financial services and markets);
- The FASEA Code of Ethics;
- Behavioural finance - client and consumer behaviour, engagement and decision making;
- Financial advice construction - suitability of advice aligned to different consumer groups; and
- Applied ethical and professional reasoning and communication.
The consultation period closes on 31 July 2018.
ASIC has released Report 580 Credit card lending in Australia and Consultation Paper 303 Credit cards: Responsible lending assessments (CP303), which detail ASIC’s findings following a review of the credit card market in Australia and proposed next steps. The details of the report and consultation have been discussed in depth here.
There have been a number of developments around the globe in relation to cryptocurrencies. Regulators in Malta, India and the Philippines have made significant headway into implementing frameworks to more comprehensively regulate implementation of distributed ledger technology (DLT) and cryptocurrency more generally. These developments have been discussed in detail here.