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Funds + Financial Services: Recent Developments
This periodic update provides information on a number of recent significant legislative and regulatory developments in the funds and financial services industry. This includes the publication of the latest consultation paper in Treasury’s review of the Australian Securities and Investments Commission’s (ASIC) enforcement powers which proposes that ASIC have the power to ban senior persons within financial services businesses and the introduction of a Bill to Parliament proposing the establishment of a new licensing system in the Corporations Act 2001 (Cth) for financial benchmark administrators.
In other developments, the Full Federal Court has considered the requirements associated with accurately completing ASIC’s online forms and ASIC has published a revised version of Regulatory Guide 126 (RG 126) as its review into licensees’ professional indemnity (PI) insurance arrangements concludes. While not discussed in this update, it is also worth noting that draft legislation and explanatory materials introducing the Asia Region Funds Passport and Corporate Collective Investment Vehicles to the Corporations Act were recently released. We have discussed those Bills in a separate update.
- Treasury consults on ASIC’s power to ban senior persons in the financial sector
- Australian Financial Complaints Authority moves closer to establishment
- A new licensing regime for financial benchmark administrators
- ASIC bans flex commissions in the car finance market
- Full Federal Court decision provides guidance on responding to ASIC questions when completing online forms
- ASIC updates Regulatory Guide 126
As part of its ongoing review into ASIC’s enforcement powers (previously discussed here and here), the Commonwealth Treasury has released a position and consultation paper on the possibility of expanding ASIC’s powers under the Corporations Act to allow the regulator to ban senior persons in the financial sector from performing their functions. It is proposed in the consultation paper, that ASIC have the power to ban a person from performing a specific function in a financial services business (including from being a senior manager or controller of a financial services business), as well as from performing any function within a financial services business.
The taskforce has proposed three main grounds upon which a person could be subject to a ban by ASIC including where:
(a) ASIC has reason to believe that the person is not a fit a proper person, is not adequately trained or competent to provide a financial service or financial services or to perform the role of officer or senior manager in a financial services business;
(b) a person has been an officer, partner or trustee of a financial services or credit licensee that has been either the subject of a report by the Australian Financial Complaints Authority (the stand-alone dispute resolution body replacing existing external dispute resolution regimes from 1 July 2018) regarding a failure to comply with a determination of that authority, or a corporation that was wound up and a liquidator lodged a report about the corporation’s inability to pay debts; or
(c) a person has breached their director’s duties under the Corporations Act.
Submissions on the consultation paper are invited by 4 October 2017.
The Treasury Laws Amendment (Putting Consumers First - Establishment of the Australian Financial Complaints Authority) Bill 2017 (Bill) has been introduced to the Parliament. The Bill delivers on a Budget commitment to establish a consolidated provider of external dispute resolution (EDR) services (discussed here) and an enhanced internal dispute resolution (IDR) framework for the financial system. Specifically, the Bill would:
- ensure that consumers and small business have free access to a single EDR scheme, known as the Australian Financial Complaints Authority (AFCA), which will resolve disputes about products and services provided by financial firms;
- require all financial firms, including superannuation funds, to be AFCA members;
- establish a new authorisation framework for the AFCA scheme, which provides the Minister (rather than ASIC) with the powers to authorise, vary, revoke and regulate the AFCA scheme;
- enhance reporting obligations and require AFCA to refer certain matters to ASIC, APRA or the Commissioner of Taxation where necessary;
- provide AFCA with the power to join third parties to superannuation complaints, obtain information and documentation and require people to attend conciliation conferences;
- require AFCA to give written reasons for any superannuation complaint determination;
- grant ASIC with a specific directions power to direct AFCA to increase some or all of the monetary limits that relate to the value of claims that can be considered by AFCA or the value of remedies that AFCA may determine; and
- require financial firms to report their IDR activities in accordance with ASIC requirements and allow ASIC to publish information it receives under new reporting requirements.
In determining whether to authorise the proposed AFCA scheme, the Minister must take into account a number of ‘general considerations’ relating to accessibility, independence, fairness, accountability, efficiency and effectiveness of the scheme. The Minister will only authorise AFCA when confident that sufficient systems and processes are in place and, if the scheme fails to meet these standards, then the Minister can revoke authorisation. The Minister can also impose conditions on the authorisation of AFCA, which the Minister stated is to ensure that AFCA is appropriately transparent (ie, by including publication requirements on any reviews of AFCA). AFCA’s determinations in relation to superannuation complaints may be appealed to the Federal Court on questions of law.
In the wake of ASIC’s BBSW investigation and continuing litigation, the Government has recently introduced a Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 (Bill) to Parliament which, if passed, will amend the Corporations Act to provide for a new regulatory regime that must be observed by financial benchmark administrators. The Bill is intended to reflect the International Organization of Securities Commissions' Principles for Financial Benchmarks, which prescribe desirable characteristics of a regulatory regime for financial benchmarks and aligns Australia’s regulatory regime with that of other key jurisdictions, including the UK, EU, Japan, Singapore and Canada. Currently, systemically important financial benchmarks are not subject to a specific regulatory regime. The new regime aims to strengthen financial regulation in Australia in order to better protect Australians from the possible abuse and manipulation of financial benchmarks. The Bill contains the following features:
- Administrators of ‘significant financial benchmarks’ must be licensed according to a new licensing scheme, administrators of ‘other financial benchmarks’ can voluntarily opt-in to this scheme.
- ‘Significant financial benchmarks’ are those that ASIC declares as ‘systemically important to the Australian financial system’ and these are benchmarks where, if the availability or integrity of the benchmark were disrupted, there would be a material risk of financial contagion or systemic instability, or a material impact on retail or wholesale investors in Australia.
- Body corporates can apply for a Benchmark Administrator Licence (licence) by lodging an application with ASIC. ASIC may grant a licence to administer a specified financial benchmark where they are satisfied that the application was made in accordance with certain regulatory requirements, the applicant will comply with its obligations and that no disqualified individual appears to be involved in the applicant.
- Multiple financial benchmarks may be specified in the same licence, however the legislation applies as if each benchmark was covered under a separate licence (ie, in the event of suspension or cancellation of a licence, each benchmark is dealt with separately).
- Foreign body corporates are only eligible for a licence if they are registered bodies corporate under the Corporations Act. Where a benchmark is generated or administered overseas, ASIC may rely on a regulator in a foreign country in exercising its regulatory functions. ASIC may only do so if it is satisfied that there is an adequate level of supervision of the financial benchmark based on its assessment of the regulatory regime in the foreign jurisdiction. If ASIC is not satisfied by the foreign regulator’s supervision, then ASIC must be satisfied there are adequate cooperation arrangements in place with the foreign regulator to ensure that the benchmark is adequately supervised.
- Licensees are subject to a number of obligations, including obligations relating to compliance, reporting, access to facilities, and the provision of assistance to ASIC, APRA and the Reserve Bank where applicable.
ASIC may make financial benchmark rules that apply in relation to licensees and the financial benchmarks they administer. ASIC may also make compelled financial benchmark rules, to deal with certain critical circumstances such as the failure of a significant financial benchmark. In such a circumstance, ASIC will have power to compel market participants to make submissions to ensure the continued generation of a financial benchmark. This has been introduced to ‘futureproof’ the regulatory regime, as no significant Australian benchmark currently rely on submissions. The Bill also introduces specific criminal offences and civil penalties which will apply to conduct that manipulates a financial benchmark or manipulates a financial product used in Australia to set a financial benchmark. The Treasurer has stated that he intends the Bill be passed before the end of the year so that the regime commences simultaneously with that of the EU.
The Government has also recently introduced the ASIC Supervisory Cost Recovery Amendment Bill 2017 (Levy Amendment Bill). The Levy Amendment Bill applies the industry funding regime (discussed in our earlier update) so that benchmark administrator licensees are added to a certain category of entities from which ASIC may recover its regulatory costs. Other entities in the same category include market licensees, participants in a licensed market, clearing and settlement facility licensees and derivative trade repository licensees.
ASIC has formally banned flex commissions in the car finance market through the ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780 (Instrument). Flex commissions are paid by lenders to car finance brokers, typically car dealers, and allow dealers to set the interest rate on a car loan. Flex commissions generally operate so that dealers earn larger commissions where they set higher interest rates. ASIC recently led a public consultation on the effects of flex commissions on consumers, which found that they generally lead to consumers paying excessive interest rates on their car loans. Consequently, ASIC have decided to ban flex commissions from 1 November 2018.
The Instrument means that the lender, not the broker or dealer, will be responsible for determining the interest rate that applies to a particular loan. Dealers will be prohibited from suggesting a different rate that earns them a greater commission and have limited capacity to discount the interest rate and receive lower commissions.
Criminal offences and civil penalties attach to breaches of these prohibitions. ASIC proposes to monitor the effectiveness of the Instrument by requiring holders of an Australian credit licence to provide ASIC with information about the annual percentage rate, credit fees and charges under credit contracts before and after commencement of the Instrument.
Full Federal Court decision provides guidance on responding to ASIC questions when completing online forms
The Full Federal Court in Callychurn v ASIC  FCAFC 137 has overturned certain grounds of a decision of the Administrative Appeals Tribunal banning Ms Callychurn, of Unique Mortgage Services Pty Ltd (UMS), from credit activities. UMS operated as a finance and mortgage broker and was an intermediary between credit providers or lessors and consumers. Relevantly, Mr Frugtniet, a previous director of UMS and fit and proper person for the purposes of UMS’ Australian credit licence, was in 2011 disqualified from practising as a lay associate of a legal practice in Victoria for three years. This decision had been upheld by the Victorian Court of Appeal in 2012. Mr Frugtniet also had authorisations to carry on business as a conveyancer and migration agent.
UMS lodged annual compliance certificates with ASIC in 2011 and 2012 using an approved online ASIC form. Mr Frugtniet was removed as a fit and proper person of UMS in January 2013, after the annual compliance date in December 2012. This was recorded in the 2012 annual compliance certificate. However, the auto-completing ASIC online form for the annual compliance certificate incorrectly recorded Ms Callychurn as the only fit and proper person at the annual compliance date in December 2012. Ms Callychurn could not manually correct this error in the online form. The case concerned whether UMS had:
- not disclosed that Mr Frugtniet was not authorised to carry on any trade, business or profession when completing the 2011 and 2012 annual compliance certificates; and
- had failed to record that Mr Frugtniet had been a fit and proper person at the company’s 2012 annual compliance date.
The Court’s decision
On the first ground, the Full Federal Court found that the Tribunal had erred in its decision, because Mr Frugtniet’s VCAT proceedings did not make him unauthorised to carry on a trade, business or profession for which an authorisation was required as no authorisation was required to be a lay associate of a legal practice. The Court also found that ASIC had no evidence that the first appellant had any knowledge that Mr Frugtniet needed to have been ‘authorised’ to carry on his other businesses as a conveyancer and migration agent, so her answers to the online questions were not false or misleading.
While ASIC acknowledged the ‘computer problem’ in relation to the second ground, they submitted that the first appellant should have contacted ASIC to seek clarification as to how best to complete the form so as to accurately reflect the true position, and that a failure to do this meant the information provided was false or misleading. The Court rejected this submission. The Court found that Ms Callychurn had correctly recorded Mr Frugniet’s cessation as a fit and proper person and company secretary at the annual compliance date. The Court also held that ASIC must have known the restrictions of its own online forms and that there was no evidence that ‘contacting ASIC’ would have enabled the completion of the compliance certificate any differently.
Why is this decision important?
This decision provides comfort to both licensees who complete annual compliance certificates and generally to any person regulated by ASIC who completes online forms for several reasons:
- If, when completing ASIC’s online forms, the structure or set-up of the online ASIC form leads to a misleading impression, but a person has filled out the form correctly and honestly to the best of their ability, there are no grounds for finding that the person has made a declaration that is false or misleading.
- The Court noted that ASIC’s online forms are to be read as a whole and that, for a statement to be false or misleading, the statement must both actually convey and intend to convey a false or misleading statement.
- A failure to contact ASIC about difficulties in completing an online form is not sufficient to justify a finding that a person made false or misleading declarations.
Additionally, as the Court’s findings in relation to Mr Frugtniet’s authorisations to be a lay associate of a legal practice demonstrate, ASIC’s questions in online forms are to be interpreted and answered literally. ASIC cannot require additional disclosures beyond the words of the questions in the online form. This decision provides welcome certainty to any person who has encountered difficulty in providing answers that are accurate in response to ASIC’s auto-completing online forms.
ASIC has recently published a revised version of RG 126, which sets out ASIC’s guidance in relation to meeting the compensation requirements which apply to Australian financial services (AFS) licensees. The publication of a revised version of RG 126 follows a review of professional indemnity insurance held by 56 AFS licences.
The review focused on the adequacy of cover for defence (legal) costs, and costs associated with fraud and dishonesty. It concluded that generally small AFS licensees surveyed had policies containing an overall indemnity limit that complied with requirements. Three of the 56 AFS licensees reviewed did not have PI insurance that complied with the defence costs requirements. ASIC has worked with these licensees to ensure they obtain PI insurance. ASIC has also worked with two insurance companies to amend their standard policy terms relating to fraud and dishonesty cover to ensure the amended terms comply with RG 126.
RG 126 has also been revised to clarify that fraud cover is not required by licensees that are single person companies (one director is the company's sole financial adviser/representative, shareholder and employee). This aligns the regime for single person companies with that which applies to sole traders.
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