In light of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, we are in the depths of a period where financial institutions are facing unprecedented changes in their regulatory landscape.
The Federal Government has announced (and, no doubt, will continue to announce on the back of findings from the Royal Commission) significant reform proposals, which reflect the increasing scrutiny of the financial services sector. The task of managing regulatory compliance continues to evolve, which will affect almost all areas of banking and financial services in Australia.
Partner Michelle Levy (view CV), Senior Associate Katie Gardiner and Lawyer Jamil Diu summarise the expected developments in the coming year below, which will continue to be monitored and updated.
Modern Slavery Act 2018 – commenced 1 January 2019
The Modern Slavery Act 2018 commenced on 1 January 2019 and introduces mandatory reporting requirements for entities carrying on a business in Australia with an annual global consolidated revenue of $100 million or more. These entities (although any entity may voluntarily report) must submit a Modern Slavery Statement on an annual basis addressing issues including: operations and supply chains, potential modern slavery risks and actions taken to address those risks.
Entities which have an annual turnover of below $100 million but above $50 million and are a commercial organisation with NSW employees will need to prepare an annual modern slavery statement in accordance with the Modern Slavery Act 2018 (NSW). While a commencement date is yet to be set by proclamation (and the NSW Government has stated that it expects commencement on 1 July 2019), it should be noted that, unlike the Commonwealth regime, failure to comply with the NSW regime will result in a penalty of 10,000 penalty units ($1,100,000).
Treasury Laws Amendment (Banking Measures No. 1) Act – credit card reforms (remainder) commenced 1 January 2019
The Treasury Laws Amendment (Banking Measures No. 1) Act 2018 amended existing laws in relation to banking, insurance, credit, registrable corporations and financial system regulation. The Act commenced on 1 January 2019 (with changes to circumstances in which a credit contract is suitable for a consumer having taken effect from 1 July 2018), which among other things will: prohibit the offering of unsolicited credit card limit increases; simplify interest charge calculations; and allow consumers to reduce credit limits and terminate credit contracts online.
Professional standards of financial advisers – regime commenced 1 January 2019
Following recommendations in 2014 from the Parliamentary Joint Committee to lift standards in the financial advice sector, the Federal Government passed legislation amending the Corporations Act 2001 (Cth), which commenced on 15 March 2017. Starting 1 January 2019, new financial advisers will be required to meet higher educational requirements, pass an exam, complete a year of work and training and meet continuing professional development requirements. Existing financial advisers have until 1 January 2024 to comply with the higher education requirement and 1 January 2021 to pass the exam. From 1 January 2020, all financial advisers must comply with a code of ethics and be covered by a compliance scheme. Employers of financial advisers will be responsible for ensuring that their employees meet educational requirements and abide by a code of ethics.
Review into the Competitiveness of the Super System – final report released on 10 January 2019
The Productivity Commission's review of the competitiveness and efficiency of Australia's superannuation system was established to "make recommendations to improve outcomes for members and system stability as well as reduce barriers for competitiveness and efficiency of the system", using the criteria developed by the Productivity Commission in stages 1 and 2 of the inquiry. We considered the review in our Unravelled publication here. On 10 January 2019, the Commission released its final report which (among other items) recommended the use of a 'best in show' shortlist of the top 10 top performing funds for all new members new to the workforce, limiting all fees to be on a recovery-basis and banning trail commissions, and strengthening the delineation between the roles and regulatory oversight of APRA and ASIC.
Asia Region Funds Passport – regime commenced on 1 February 2019
The Corporations Amendment (Asia Region Funds Passport) Act 2018 commenced on 18 September 2018. The Act follows the Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport on 30 June 2016 between Australia, Japan, Korea, New Zealand and Thailand. Eligible funds will be permitted to be offered across the participating nation's economies under a common set of regulatory requirements – thereby promoting competition and reducing barriers to entry for eligible funds. The regime commenced on 1 February 2019 and applications will become open for passport funds to the relevant participating countries.
Financial Services Royal Commission – final report released on 1 February 2019
On 14 December 2017, Letters Patent were issued to the Honourable Kenneth Hayne AC QC for the establishment of a Royal Commission into alleged misconduct into the banking, superannuation and financial services industry. The Terms of Reference for the Commission can be found here. The Commission released its Final Report by 1 February 2019. Allens has an online hub dedicated to the Financial Services Royal Commission located here.
Capital adequacy framework changes for ADIs – submissions closed on 8 February 2019
Following the 2014 Financial System Inquiry, APRA released a discussion paper on 8 November 2018 proposing changes to the capital adequacy framework for ADIs (available here). The changes aim to facilitate the orderly resolution of ADIs in case of failure, and to minimise the likelihood that taxpayer support would be required should a major institution fail. APRA expects the proposed changes would require additional Tier 2 capital of between four and five percent of RWA for the four major Australian banks. For other ADIs, the need for additional loss absorbency would depend on the nature and complexity of their functions. Depending on the outcome of the discussion paper, APRA expects to notify ADIs of increases to their total capital requirements from 2019. ADIs would have four years from the point of notification to meet the new requirements.
Early release of superannuation benefits – submissions closed on 15 February 2019
From December 2017, the Treasury conducted a review into the framework for the early release of superannuation benefits on compassionate grounds and severe financial hardship grounds. In November 2018, the Treasury released a consultation paper setting out the results of their review and their draft proposals for reform (available here). A number of the proposed changes would relax aspects of the current regime, allowing greater access to early release, while others aim to strengthen the integrity of the current arrangements, ensuring that superannuation is accessed as a last resort in cases of hardship. The Treasury also proposes to make the rules surrounding early release more uniform and consistent, ensuring that they can be administered fairly and effectively at the expense of some flexibility in particular circumstances.
Leverage ratio requirements for ADIs – submissions closed 22 February 2019
In February 2018, APRA proposed the introduction of a non-risk-based leverage ratio to act as a backstop to the risk-based capital framework for ADIs. The proposal was supported by recommendations from the Basil Committee on Banking Supervision, as well as the Financial System Inquiry. In November 2018, APRA released a response to submissions received on the initial proposal. The response paper, available here, proposes a revised calibration of the minimum leverage requirement for ADI's who use the internal ratings-based approach to credit risk, noting that this was an area of stakeholder concern. The response paper also shifts the proposed implementation date for the leverage ratio to 1 January 2022, to align with broader revisions to the risk-based capital framework.
Corporate Collective Investment Vehicle – fourth tranche submissions closed 28 February 2019
Following the 2009 Johnson Report and the Board of Taxation's report on tax arrangements applying to collective investment vehicles (CIVs), which both recommended the establishment of a broader range of CIVs in Australia (as an alternative to the often lesser understood unit trusts), the Government announced the introduction of a new framework for Corporate Collective Investment Vehicles in Australia. We previously covered the first three tranches of public consultations here. On 17 January 2019, the Treasury announced the fourth tranche of public consultations. In this tranche, the Government seeks feedback on exposure drafts for the Treasury Laws Amendment (Corporate Collective Investment Vehicle Bill) 2018: Regulatory Framework (which sets up the regulatory framework for CCIVs, including requiring CCIVs to generally be subject to company law) and Treasury Laws Amendment (Corporate 4 Collective Investment Vehicle) Bill 2018: 5 TSY/45/032 (Tax treatment) (which addresses the tax treatment of CCIVs). Public submissions in relation to the exposure drafts closed 28 February 2019.
Simplifying, clarifying and enhancing the ASX listing rules – submissions closed 1 March 2019
In November 2018, ASX released a consultation paper on proposed changes to their listing rules. The changes are grouped in eight broad categories based on their intended function. These functions include improving market disclosure and other market integrity measures, enhancing ASX's powers to monitor and enforce compliance with the listing rules, and providing more and better guidance to issuers. A summary of the proposed rule changes, as well as a marked up text of the listing rules, are available here. Subject to regulatory approvals, new guidance will be issued in May 2019, and the new rules will take effect from 1 July 2019.
Introduction of the 'Protecting Your Super Package' – commenced 13 March 2019
As part of the 2018-2019 Federal Budget, the Federal Government introduced a range of proposed changes to the superannuation industry under the Protecting Your Super Package. On 21 June 2018, the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 was introduced into Parliament, and the Senate Economics Legislation Committee published its report in relation to the proposed Bill on 13 August 2018. The changes include various measures to protect superannuation balances, such as: opt-in insurance for members with inactive MySuper or choice accounts (for a continuous period of 16 months); passive fees (i.e., administration and investment) capped at 3% per annum for accounts with balances below $6,000; and banning of exit fees. Following amendments in the Senate, changes implementing opt-in insurance for persons under 25 years' old and for low balance accounts ($6,000) were removed and rolled into a new Treasury Laws Amendment (Putting Members' Interests First) Bill 2019. The Bill passed Parliament on 18 February 2018 and commenced on 13 March 2019.
Strengthening Corporate Penalties – commenced 13 March 2019
In light of the ASIC Enforcement Review Taskforce's recommendation to strengthen penalties for corporate and financial sector misconduct, the Government introduced the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. The strengthening of penalties is two-fold: to increase civil and criminal penalty amounts in the Corporations Act, ASIC Act, National Consumer Credit Protection Act and Insurance Contracts Act; and to amend the existing penalty system (including by inserting new civil penalty offences, introducing a revised definition for 'dishonest' as being according to the standards of ordinary people and enabling the court to make a relinquishment order). This Bill passed Parliament on 18 February 2019 and commenced (with the exception of contingent amendments) on 13 March 2019.
Ending grandfathered conflicted remuneration for financial advisers – submissions closed 22 March 2019
On 22 February 2019, the Treasury released its Exposure Draft for the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019. The Exposure Draft will implement Recommendation 2.4 of the Royal Commission and remove grandfathering arrangements for conflicted remuneration in relation to financial advice provided to retail clients. The grandfathering arrangements permit conflicted remuneration, volume-based shelf-space fees and asset-based fees on borrowed amounts under arrangements entered into before 1 July 2013 to continue to be paid. These will be removed under the Exposure Draft, which has an expected commencement date of 1 July 2021. Public consultation for the Exposure Draft closed on 22 March 2019.
Introduction of the Retirement Income Framework – submissions closed 28 March 2019
Following the Financial System Inquiry's recommendation for Comprehensive Income Products for Retirement, the Federal Government has proposed to adopt these recommendations in its Retirement Income Framework. These proposed changes are intended to develop 'a retirement income framework to increase flexibility and choice for retirees and help boost living standards'. A Consultation Paper on the Development of a Framework for Comprehensive Income Products for Retirement was released by the Treasury on 15 December 2016 and a Retirement Income Covenant Position Paper on 17 May 2018 as part of Stage One of the Framework. Most recently, Treasury released its Retirement Income Disclosure Consultation Paper on 10 December 2018 which proposes a standardised document for disclosing retirement income products.
Insurance claims handling – submissions closed 29 March 2019
On 1 March 2019, the Treasury released its Consultation Paper on Insurance Claims Handling. The Consultation Paper (available here) proposes to implement recommendation 4.8 of the Royal Commission, which was to remove "handling and settlement of insurance claims, or potential insurance claims" from being excluded as a financial service. Following removal, requirements under the Corporations Act imposed on Australian Financial Services licensees would apply in the course of insurance claims handling. This would include, for example, the duty to act efficiently, honestly and fairly under section 912A(1)(a) of the Corporations Act, but could also trigger disclosure obligations to the extent that personal financial advice is provided to retail clients. Consultation on the proposed changes and their impact on stakeholders (including how to avoid adverse consequences e.g., by excluding certain documents being provided as constituting financial product advice) closed on 29 March 2019.
Regulatory Guide 97 (fees and costs disclosure) – submissions due 2 April 2019
On 24 July 2018, ASIC published Mr Darren McShane's external report on RG 97 Disclosing fees and costs in PDS' and periodic statements. The external report is a lengthy read, but Allens have summarised the recommendations made by Mr McShane in its Unravelled publication here. On 8 January 2019, ASIC released its Consultation Paper 308 Review of RG 97 Disclosing fees and costs in PDSs and periodic statements which outlined the recommendations in the external report which it intended to adopt (including, for example, consolidating indirect investment and administration fees with the currently reported investment fee and administration fee respectively). Public submissions may be made in relation to the Consultation Paper by 2 April 2019.
Enforceability of financial services industry codes – submissions due 12 April 2019
On 18 March 2019, the Treasury released its Consultation Paper on the 'Enforceability of financial services industry codes'. The Consultation Paper (available here) proposes to implement recommendation 1.15 of the Royal Commission, which recommended that industry codes approved by ASIC would include 'enforceable code provision(s)'. This is proposed to cover Australian Financial Services licensees and their authorised representatives, all APRA-regulated entities and Australian Credit Licence holders. An industry code participant that contravened one or more enforceable code provisions in an industry code would also breach the law (and the Consultation Paper currently proposes that statutory remedies for breach of promise would be available to a customer of the industry code participant). Public submissions may be submitted by 12 April 2019.
Responsible lending conduct – submissions due 20 May 2019
On 14 February 2019, ASIC released Consultation Paper 309: Update to RG 209: Credit licensing: Responsible lending conduct (available here). In light of the Financial Services Royal Commission, ASIC released CP 309 which proposes to update its existing regulatory guidance for Australian credit licensees in relation to their responsible lending obligations. Relevantly, ASIC proposes to clarify the verification process of a consumer's financial situation (including potentially using an 'if not, why not?' approach) and the role of benchmarks to verify a consumer's financial situation (with a view to ensuring that a 'realistic figure' is used). Submissions close on 20 May 2019.
Capability Review of APRA – report due 30 June 2019
On 11 February 2019, the Treasurer announced a capability review of APRA by a panel comprising Graeme Samuel AC, Diane Smith-Gander and Grant Spencer. This follows recommendation 6.13 of the Royal Commission, which recommended that a capability review be conducted to assess APRA's ability to 'respond to an environment of growing complexity and emerging risks for APRA's regulated sectors'. The Terms of Reference (available here) was published on 13 March 2019 and parties were invited to make written submissions by 10 April 2019.
Banking Code of Practice – banks to comply by 1 July 2019
Following Phil Khoury's independent review of the 2013 Code of Banking Practice (Code), the Australian Banking Associated undertook a review of the Code with a view to addressing the 99 recommendations made in Mr Khoury's report. On 31 July 2018, ASIC approved the new Code, with a commencement date from 1 July 2019. The new Code prohibits lending contracts with businesses borrowing up to $3 million to include a range of prescribed potentially unfair terms, alongside offering additional protections for retail consumers (e.g., fostering accessible banking for indigenous communities and improving dispute resolution processes).
BEAR – requirements for small and medium ADIs commences 1 July 2019
The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 was passed by both Houses of Parliament on 7 February 2018 and received Royal Assent on 20 February 2018. Allens' previous article on BEAR can be found here. The accountability, key personnel, deferred remuneration and notification requirements under BEAR for small and medium ADIs commence 1 July 2019 (with such obligations having commenced for large ADIs on 1 July 2018).
Open banking data regime – pilot program to commence from 1 July 2019
On 31 March 2017, the Productivity Commission handed down its final report into data availability and use to the Federal Government. The Treasurer indicated in the 2017 budget that the Federal Government will implement 'a new open banking regime to give customers control of data about them and to facilitate choice between products and providers'. On 9 May 2018, the Treasurer announced that Open Banking will be phased in from July 2019 with all major banks to make customer data available to customers in relation to credit and debit cards, and deposit and transaction accounts. Remaining banks will be required to implement Open Banking with a 12-month delay. This was delayed to no later than 1 February 2020, with a pilot program being conducted by the major banks in Australia commencing July 2019.
Enhancing whistleblower protections – to commence 1 July 2019
The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 was introduced to the Senate on 7 December 2017. On 8 February 2018, the Senate referred the Bill to the Economics Legislation Committee for inquiry. The report by the Committee was tabled on 22 March 2018. Importantly, the Committee recommended that the Bill be passed and noted the Australian Competition and Consumer's view that passing the Bill would not preclude further development of whistleblower protections. The Bill passed Parliament on 19 February 2019 and the amendments to consolidate and broaden whistleblower protections in the corporate, credit and financial sectors (including establishing a protection regime for information disclosures by individuals for tax law breaches or misconduct relating to an entity's tax affairs) will commence from 1 July 2019.
ASIC Investigation on grandfathered conflicted remuneration – to commence 1 July 2019
On 21 February 2019, the Treasurer gave a direction to ASIC under Australian Securities and Investments Commission (Investigation into Grandfathered Conflicted Remuneration for Financial Advice) Direction 2019 to investigate the extent to which persons giving or accepting grandfathered conflicted remuneration, as at 1 July 2019, are changing their arrangements to end the practice prior to 1 January 2021 and passing the benefit of ending the practice on to clients, whether through direct rebates or otherwise. ASIC is required by section 17(2) of the ASIC Act to prepare a report at the end of the investigation.
Australian Financial Complaints Authority (AFCA) – remit to extend to 30 June 2020
On 20 February 2019, the Treasurer made the notifiable instrument AFCA Scheme (Additional Condition) Amendment Authorisation 2019. In most cases, AFCA is not able to consider complaints that have occurred more than six years ago (which reduced to two years in cases involving an internal dispute resolution process). The Instrument removes this time limit for the period from 1 July 2019 to 30 June 2020. During this period, AFCA may consider complaints for conduct that has occurred or ended after 1 January 2008 (i.e., complaints that have occurred over the past decade). Some complaints are excluded, such as complaints in relation to superannuation death benefits and those which a decision or determination have been made by a court or tribunal.
Foreign financial service providers – licensing relief expires 30 September 2019
In June 2018, ASIC released Consultation Paper 301 Foreign financial services providers which proposed the repeal of the existing 'sufficient equivalence' and 'limited connection' relief from holding an Australian Financial Services licence commonly relied upon by foreign financial service providers. On 21 September 2018, ASIC extended the operation of the existing 'sufficient equivalence' and 'limited connection' relief in ASIC Corporations (Amendment) Instrument 2018/807 to 30 September 2019. Since then, ASIC wrote to respondents of Consultation Paper 301 on 19 December 2018 to outline its proposal to maintain some form of the limited connection relief, but will proceed with repealing the sufficient equivalence relief and establish a modified AFS licence (with a 12 month transition period). Allens published a Client Update on this development here. ASIC is expected to release a consultation paper on the limited connection relief, and a draft Regulatory Guide and instruments for the sufficient equivalent relief in the first half of 2019.
Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2017 – report tabled on 20 April 2018
On 6 December 2017, the Minister for Justice introduced the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2017 into Parliament. The Bill introduced a deferred prosecution agreement scheme in Australia and a new offence of failure to prevent bribery by an associate. It also proposed amendments to the current foreign bribery laws. On 7 December 2017, the Senate referred the Bill to the Legal and Constitutional Affairs Legislation Committee for inquiry and a report was tabled on 20 April 2018.
Design and Distribution Obligations and Product Intervention Power – bill in Parliament
The Financial System Inquiry's recommended to introduce a) design and distribution obligations for financial products to ensure they are targeted at the right people; and b) a temporary product intervention power for ASIC when there is a risk of consumer detriment. On 20 September 2018, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 was introduced into Parliament. Proposed amendments include: imposing design and distribution obligations for financial products (adopting a customer-centric approach to the offering of financial products); and providing a temporary product intervention power for ASIC. The Second reading debate was conducted on 24 October 2018.
Improved consumer outcomes for mortgage broking – ASIC to implement
ASIC released a report in March 2017 on remuneration arrangements within the mortgage broking industry. It made a number of proposals (including changes to the standard commission model and bonuses, improving oversight of brokers by lenders, and establishing a public reporting regime in relation to competition and consumer outcomes in the home loan market). ASIC proposes to implement these initiatives before a further review of the market is conducted in three to four years. Most recently, in ASIC's submission to the Financial Services Royal Commission on 3 April 2018, the regulator noted that a flat fee arrangement by lenders to brokers may (subject to further consideration) be a viable way to deal with conflicts of interest in remuneration structures.
Monitoring leverage and risk within the superannuation system – report expected
In 2015, as part of its response to the Financial Services Inquiry, the Federal Government commissioned the Council of Financial Regulators and the ATO to monitor leverage and risk in the superannuation system and report back in three years' time. The Federal Government did not agree with the Financial Service Inquiry's recommendation to prohibit limited recourse borrowing by superannuation funds, on the basis that the data provided was insufficient to justify any intervention.
Putting Members' Interest First (Superannuation) – bill in Parliament
In light of the Royal Commission and following removal of the proposed changes to implement opt-in insurance for persons under 25 years' old and for low balance accounts ($6,000) in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, these amendments were removed and rolled into a new Treasury Laws Amendment (Putting Members' Interests First) Bill 2019. The Bill was introduced to Parliament on 20 February 2019 and is currently being considered by the House of Representatives.
Strengthening superannuation member outcomes – bill in Parliament
In December 2018, APRA released a suite of new and amended material in light of its Discussion Paper on Strengthening Superannuation Member Outcomes (i.e., the new Prudential Standard SPS 515: Strategic Planning and Member Outcomes, amended Prudential Standard SPS 220: Risk Management, new Prudential Practice Guide SPG 515: Strategic and Business Planning and new Prudential Practice Guide SPG 516 Outcomes Assessment). The changes are intended to improve accountability by RSE Licensees, which include imposing more focus on expenses, requiring them to have a business plan and introducing an annual outcomes assessment. Allens previously provided a client update on the Discussion Paper here. These changes will be further amended upon the passing of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (currently in the Senate) which legislates the outcomes assessment. There continue to be developments, as amendments proposed and passed by the Senate are now being considered in the House of Representatives.
Strengthening trustee arrangements for registrable superannuation licensees – bill in Parliament
The Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 was introduced to the Senate on 14 September 2017 with a commencement day set as the day after receiving Royal Assent. The proposed amendment follows the 2014 Financial System Inquiry Report and the 2010 Review of the Governance, Efficiency, Structure and Operation of Australia's Superannuation System, both of which considered that greater independence on superannuation trustee boards was desirable. If passed, RSEs will be required to have at least one-third independent directors and the Chair of the Board of Directors must be one of those independent directors. The second reading was moved on 14 September 2017 and the bill is currently being debated before the Senate but has not progressed since December 2017.
Superannuation objective – legislation in Parliament
Following on from recommendations arising out of the Financial System Inquiry, the Superannuation (Objective) Bill 2016 was developed to enshrine the objective of the superannuation system. After a consultation period, a report was released on 14 February 2017. The report recommended that the Senate should pass the bill. The bill is currently before the Senate but has not progressed since the second reading was moved on 23 November 2016. The legislation is expected to commence on whichever is first out of 1 January, 1 April, 1 July or 1 October after the day the legislation receives Royal Assent. We considered the Bill in our Unravelled publication here.