In this update, we examine the latest regulatory and legislative developments in the fintech sector. Among other updates, regulatory guidance has been released for the Australian Financial Complaints Authority (AFCA), and the Treasury is consulting on the first tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (Cth).
While not discussed in this update, companies should note that ASIC has opened consultation on a modified licensing regime for foreign financial service providers carrying on a financial services business in Australia with wholesale clients (discussed here). Companies should also note that the Financial Sector (Collection of Data) Regulations 2018 (Cth) have been made, which re-make the Financial Sector (Collection of Data) Regulations 2008 (Cth) without substantive change. Please be in touch should you wish to discuss.
- ASIC temporarily extends relief for managed investment and superannuation schemes from certain disclosure obligations
- Transitional steps to AFCA announced
- Productivity Commission releases draft report on efficiency and competitiveness of superannuation
- Treasury consults on Mandatory Comprehensive Credit Reporting Regulations
- ASIC signs memorandum on cross-border enforcement cooperation
- First tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (Cth) released
- Bank of International Settlements releases Annual Economic Report
- International developments in cryptocurrencies and distributed ledger technology (DLT)
Fintech fact: In a global banking survey, 85% of banks considered digital transformation to be a core business priority.
The Australian Securities and Investments Commission (ASIC) has announced that it has extended the operation of two ASIC instruments relating to certain disclosure obligations of managed investment schemes (MISs) and superannuation trustees. These include Class Order 12/749 Relief from the Shorter PDS regime (CO12/749) and ASIC Superannuation (RSE) Instrument 2017/570 (Instrument 2017/570).
CO12/749 (now extended by ASIC Corporations (Amendment) Instrument 2018/473) gives relief to exclude multifunds, superannuation platforms and hedge funds from the disclosure requirements of the shorter Product Disclosure Statement (PDS) regime under the Corporations Regulations 2001 (Cth). This regime requires the disclosure for certain financial products to be presented in a short, simple manner. However, as multifunds, superannuation platforms and hedge funds are more complex products, it has been determined that the shorter PDS requirement is not appropriate, and therefore relief should be granted (and now extended).
Instrument 2017/570 (now extended by ASIC Corporations (Amendment) Instrument 2018/574) gives relief from the Superannuation Industry (Supervision) Act 1993 (Cth) requirement for superannuation funds to publish personal information and information about standard employer sub-plans on their websites. The relief from this requirement has been implemented as the Government consults with the industry regarding the potential for this provision to require sensitive information to be disclosed in relation to the commercial terms negotiated with different employer sponsors.
Both instruments were due to expire on 30 June 2018, however they have now been extended until 30 June 2022 and 30 June 2024, respectively. ASIC has indicated that this additional time shall allow for greater consideration of the policy position in relation to disclosure obligations of MISs and superannuation trustees.
The Minister for Revenue and Financial Services announced the establishment of AFCA last month (discussed here). ASIC has since announced disclosure relief and released guidance for its oversight of AFCA. AFCA has also opened consultation on the proposed rules governing its jurisdiction and process. These have been discussed in depth here.
The Productivity Commission (PC) has released its draft report Superannuation: Assessing Efficiency and Competitiveness. The PC has focused on outcomes for super fund members and presented the findings based on a framework designed from the perspective of members’ best interests. It ranged from considering members’ accumulation, transition and retirement phases as well as the default, choice, self-managed and corporate fund member segments.
Key findings of the draft report include that:
- Australia’s super system needs to adapt to meet needs of modern workforce and growing number of retirees;
- structural issues with superannuation are common, including members having multiple accounts and establishing underperforming funds;
- a significant number of super products were underperforming even after considering differences in investment strategy, with most underperformers in the retail segment;
- these outcomes have largely been driven by inadequate competition, governance and regulation in the super industry, with the PC noting that regulators are too focused on funds and not members;
- to improve functioning of default products, the PC suggests members only ever being allocated a default product once and have the choice based on a ‘best in show’ shortlist; and
- improvements to governance rules, insurance through funds and regulator engagement is required to address these concerns.
The PC will be holding public hearings in late June 2018. Submissions on the report are to be received by 13 July 2018.
The Treasury has now closed consultation on an exposure draft of the National Consumer Protection Amendment Mandatory Comprehensive Reporting) Regulations 2018 (Draft Regulations). The Draft Regulations are intended to give effect to the Government’s mandatory comprehensive credit reporting scheme, as introduced via the National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) Bill 2018 earlier this year. The Draft Regulations:
- exclude certain types of accounts from being supplied within the mandatory regime;
- specify additional events which require ongoing reporting under the mandatory regime;
- place restrictions on credit reporting bodies from disclosing information they have received or derived through the mandated regime;
- set out the types of information that credit providers and credit reporting bodies must include in statements to the Treasurer; and
- set out circumstances when ASIC can issue an infringement notice for a civil penalty.
Under the scheme, major banks will be required to supply credit information to credit reporting bodies from 1 July 2018. Once introduced, the scheme is likely to give lenders access to a deeper, richer set of data to aid in encouraging new entrants and small lenders, including innovative fintech firms, to compete for small business and retail customers with positive credit histories.
ASIC has signed the International Organization of Securities Commissions’ (IOSCO) Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU). In doing so, ASIC has become one of the first regulators to
commit to an enhanced standard for cross-border enforcement cooperation. The scope of cooperation includes assisting foreign regulators by compelling physical attendance for testimony, obtaining and sharing audit work papers, communications and other information relating to the audit and review of financial statements, and providing guidance on freezing of assets. The EMMoU also provides the framework for ASIC to request reciprocal assistance from fellow signatories.
The EMMoU is likely to strengthen the enforcement tools available to ASIC and assist ASIC and the other signatories in protecting market stability. With regulators around the world responding to the risks and challenges posed by globalisation and advances in technology, the EMMoU will particularly assist in combatting cross-border fraud and misconduct.
The EMMoU builds upon the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). The MMoU is the global benchmark for international cooperation in the enforcement of securities and derivatives laws and regulations, and ASIC has been a signatory since 2002.
The Federal Government has released an exposure draft of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (CCIV Bill) and accompanying explanatory materials for public comment. The new corporate collective investment vehicle (CCIV) structure is intended to make Australian funds more familiar to foreign investors, and is proposed in conjunction with the Asia Region Funds Passport initiative. The Government has previously consulted on a draft CCIV Bill (see our previous insight here). While broadly similar to the previous draft, the first tranche of the new exposure draft CCIV Bill covers:
- a revised draft of the new chapter in the Corporations Act 2001 (Cth) (Corporations Act), containing the core provisions establishing how the CCIV and its sub-funds will operate;
- amendments to the Corporations Act in relation to meetings rules and members' rights and remedies; and
- an outline in the explanatory materials of the proposed legislative approach to depositary independence.
The second consultation tranche is anticipated to cover the remaining substantive aspects of the regulatory framework for CCIVs, including external administration, consequential amendments to the financial services framework in the Corporations Act as it relates to CCIVs, and penalty provisions.
The Treasury is currently inviting submissions from industry participants, with the consultation period concluding on 11 July 2018.
The Bank of International Settlements (BIS) has released its Annual Economic Report (Report), which outlines global developments, prospects and risks. Notably for fintechs, the Report examines the impact of technological change in the financial sector and the introduction of non-bank intermediaries. The Report states that banks have been able to exploit scale economies and reduce costs through technology such as DLT, but that changing client expectations have resulted in increased competition to traditional banks. The Report suggests that in future, regulators from different fields and jurisdictions may need to cooperate further, giving the example of client data sharing between banks and non-banks. Such cooperation has been seen in Australia with the introduction of Open Banking (discussed here).
The Report notes that the introduction of competition in the banking sector has also generated new exposures that may be insufficiently covered by current risk management practices. Calling for tighter supervision, the Report suggests stress tests as a key tool and for supervisory attention to fall to the performance of non-banks in snapback or stress scenarios.
The Report also examines the rise of cryptocurrencies, analysing whether cryptocurrencies can serve as money and the specific economic problems cryptocurrencies seek to address. Generally, the Report found that cryptocurrencies currently cannot serve as money due to their economic limitations and the broader lack of public trust in cryptocurrencies. However, the Report notes that blockchain and DLT could be used with success in applications such as simplifying administrative processes in the settlement of financial transactions.
There have been many developments around the globe in relation to cryptocurrencies. Regulators in the United States (US) and Lithuania have provided further clarification on the application of securities laws to tokens and token offerings, while the Reserve Bank of Australia (RBA), International Monetary Fund (IMF) and the Hong Kong Monetary Authority (HKMA) have spoken on cryptocurrencies in relation to central banks.
This has been discussed in detail here.