In November 2020, ASIC released a number of anticipated industry reports, providing an update on the buy now pay later industry as well as licensing and professional registration activities for 2020. The superannuation and funds management sector also had some notable developments, including the exposure draft legislation and explanatory memorandum released as part of the ‘Your Future, Your Super’ reforms, the release of the final report of the Retirement Income Review and new ASIC guidance on unregistered managed investment schemes.
ASIC releases data on buy now pay later industry
On 16 November 2020, ASIC released its latest Report 672 (REP 672) on the buy now pay later (BNPL) industry, commenting on its growth and evolution, consumer experience as well as recent regulatory developments. The regulator’s consumer research indicated that in the last 12 months, the exponential growth of the BNPL industry has been evidenced by an increase in transactions from 16.8 million to 32 million, an increase of 90%.
The BNPL industry will be subject to regulatory changes in the future, with the design and distribution obligations scheduled to come into effect in October 2021 as well as the development of a code of conduct. REP 672 highlights that BNPL arrangements in many other international regulatory frameworks remain outside the perimeter of standard consumer credit legislation, with ASIC noting that industry self-regulation, such as the Australian Finance Industry Associate’s BNPL Code, plays an important part in consumer protection and reminded the industry of ASIC’s product intervention powers. Further information including a copy of REP 672 is available in ASIC’s Media Release.
ASIC provides update on licensing and professional registration activities for 2020
ASIC published an update on its licensing and professional registration activities for 2020 (REP 671) outlining its licensing applications for the 2019-20 financial year, impacts from the COVID-19 pandemic as well as changes to the licensing process. The regulator noted that it received 1,500 licensing and registration applications, and that it continued to meet most of its service charter timeframes with 76% of Australian financial services (AFS) licence applications finalised within 150 days. As a result of COVID-19, the licensing regime underwent various changes including additional requisitions in connection with AFS and credit licence applications and also not taking action to cancel licences by providing an extended period to commence operation until at least February 2021.
REP 671 notes ASIC’s new strengthened regulatory toolkit, allowing the regulator to refuse to grant an AFS or credit licence if they are satisfied there was an omission of a material matter from the application or from a statement supporting the application. The report also addresses the new ‘fit and proper person’ test, the Australian Government’s enhanced regulatory sandbox, design and distribution obligations as well as ASIC’s product intervention powers. More information on the new requirements for licensees, licensing activities as well as REP 671 is available on ASIC’s website.
Government releases ‘Your Future, Your Super’ exposure draft legislation and explanatory material
On 26 November 2020, the Australian Government released as part of the ‘Your Future, Your Super’ reforms its exposure draft legislation and explanatory materials for public consultation. The reforms seek to introduce four key initiatives, including:
- ‘stapling’ superannuation accounts to a member;
- introduction of an online YourSuper comparison tool;
- an annual objective performance test; and
- increased accountability and transparency for trustees with respect to acting in the best interests of members and disclosure prior to Annual Members’ Meetings.
In line with previous announcements, regarding the proposed amendments in relation to ‘stapling’, the default position on commencement of employment will change. An employee will no longer be defaulted into an employer’s nominated fund and instead, an employer will contribute to an employee’s existing fund unless the employee specifically chooses to move to a different fund, therefore stopping the creation of multiple unintended accounts.
Additionally, the draft legislation sets out that APRA will conduct an annual performance test for MySuper products, and other products. The requirements for the annual performance test will be set out in the regulations (not yet released). Where a product fails the test for two consecutive years, no new members will be able to sign up to the product. However, APRA will be able to lift the prohibition if certain circumstances (to be specified in the regulations) are met.
The online comparison tool will enable APRA to rank and publish superannuation products on a website maintained by the ATO, allowing members to easily compare funds. It is proposed that regulations will be made specifying one or more formulas for the ranking of superannuation products, providing greater transparency and certainty for superannuation providers.
Responsible Entity Theta Asset Management Ltd (in liq) and Managing Director penalised for defective PDS
The Federal Court in Western Australia held on 19 November 2020 that Theta Asset Management Ltd (In Liquidation) as well its Managing Director breached the Corporations Act 2001 (Cth) (Act) on numerous occasions by issuing five defective Product Disclosure Statements (PDSs) for the Sterling Income Trust (Trust). Justice McKerracher held that both Theta and its Managing Director Mr Marie issued defective PDSs as they contained misleading and deceptive statements, that Theta engaged in conduct that was misleading or deceptive, or likely to mislead or deceive investors, that it failed to comply with the Trust’s compliance plan, and that Mr Marie failed to exercise the degree of care and diligence a reasonable person would exercise if they were in his position as Managing Director.
The Court ordered Theta to pay a penalty of $2 million with respect to the contraventions and Mr Marie pay a $100,000 penalty, however ASIC noted it would not recover Theta’s penalty as it would decrease the availability of funds to distribute to Theta’s creditors. The judgement has broader implications not just for responsible entities or Australian financial services licensees but also for corporations and their officers more generally, highlighting ASIC’s trend to pursue officers for personal liability, as well as reinforcing the importance of appropriate disclosure to the market and good governance. Further information can be found in our update, as well as ASIC’s Media Release and the Court Orders on ASIC’s website.
ASIC releases new Information Sheet on requirements for unregistered managed investment schemes
On 25 November 2020, ASIC published a new Information Sheet 251 (INFO 251) addressing the licensing requirements for trustees of unregistered managed investments schemes that issue, vary or dispose of interests in unregistered schemes that are financial products. INFO 251 clarifies ASIC’s position that a trustee of an unregistered scheme that relies on the intermediary authorisation exemption in s 911A(2) (b) of the Act cannot also be an authorised representative in relation to making offers to arrange to issue, vary or dispose of a financial product under an arrangement for that registered scheme.
Furthermore, ASIC has stipulated that a trustee relying upon the authorised representative exemption cannot rely upon this exemption in order to avoid the requirement to hold an AFS licence to issue, vary or dispose of an interest in an unregistered scheme for which it is the trustee. More information about the authorised representative and intermediary authorisation exemptions is available on ASIC’s website.
Government releases the Retirement Income Review Final Report
The Government released the Retirement Income Review Final Report on 20 November 2020, assessing the three pillars of our retirement income system, being the Age Pension, compulsory superannuation and voluntary savings. While the Final Report does not make any recommendations, it does make a number of observations, including:
- increases in the superannuation guarantee result in lower wages growth and affect living standards;
- more efficient use of saving in retirement could have a bigger impact on improving retirement income than increasing the superannuation guarantee rate;
- people with very large superannuation balances receive large tax concessions;
- there has not been sufficient resources and attention given to people to assist them to optimise their retirement income;
- superannuation savings are supported by tax concessions for the purpose of retirement income, however most retirees leave the bulk of their retirement wealth as a bequest;
- as the superannuation system matures, people will increasingly fund more of their own retirement; and
- the objective of the system should be recast to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.
The overall message of the Final Report is that, “The evidence indicates that the Australian retirement income system is effective, sound and broadly sustainable. But it can be improved.” The full report can be found here.
ASIC releases draft information sheet on insurance claims handling
On 27 November 2020, ASIC released a draft information sheet on insurance claims handling and settling services. The information sheet follows the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 which requires persons providing these services to be covered by an AFS licence. The draft information sheet outlines who needs to be authorised to provide claims handling and settling services, who can act on behalf of an AFS licensee, how and when to apply for an AFS licence, how to meet AFS licensee obligations, as well as how these obligations may be tailored to claims handling.
The regulator has also released a draft version of C12 Proof: Claims Handling and Settling Service Statement. Applicants applying for an AFS licence authorisation for claims handling and settling services will be required to supply this statement as part of their application. Further information including the draft information sheet is available on ASIC’s website.
Financial sector, Insurance and Super law shake-up set to take place in 2021
On 12 November 2020, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was introduced into Parliament, proposing 12 new measures. These proposed changes address:
- enforceable code provisions;
- the avoidance of Life Insurance Contracts and the duty to take reasonable care not to make a misrepresentation;
- the implementation of an industry deferred sales model for add-on insurance products;
- caps on vehicle dealer commissions;
- the prohibition on hawking of financial products;
- restrictions on the terms ‘insurance’ and ‘insurer’;
- claims handling and settling services;
- trustees of registrable superannuation entities should have no other duty;
- adjustments of ASIC and APRA’s roles in superannuation;
- reference checking and information sharing protocol;
- breach reporting and remediation; and
- statutory obligations to co-operate and formalise ASIC meeting procedures.
In regards to superannuation changes, from 1 January 2021, ASIC will share responsibility with APRA for the administration (supervision and enforcement) of the duties of trustees and directors to exercise powers in the best interests of beneficiaries as well as responsibility for the sole purpose test. The Corporations Act and ASIC Act will also be amended to add a “superannuation trustee service” to the short list of financial services, and an additional duty will be imposed on RSE licenses that trustees of registrable superannuation entities should have no other duty than operating the superannuation fund. Further information about these proposed reforms is available in our blog as well as on Parliament’s website.
ASIC releases research on insurance in superannuation
On 20 November 2020, ASIC published a report Consumer engagement in insurance in super (REP 673), highlighting that members faced a number of hurdles including limited knowledge, lack of confidence and many unable to achieve what they had set out to do. With over 20 million superannuation accounts in Australia, approximately half of these accounts have life insurance attached to their superannuation. The regulator commissioned Susan Bell Research to undertake qualitative consumer research assessing members’ motivations and experiences about enquiring about their insurance arrangements. REP 673 provides a timely reminder to superannuation trustees on ensuring information is easily accessible, clear and appropriately tailored for their members. More information including the report is available in ASIC’s Media Release.
ASIC to further extend financial reporting deadlines for both listed and unlisted entities and amends its ‘no action’ position
ASIC announced on 11 November 2020 that it will extend the deadline for both listed and unlisted entities to lodge their financial reports in accordance with Chapters 2M and 7 of the Corporations Act 2001 (Cth) by 1 month for certain balance dates up to and including 7 January 2021 balance dates. The purpose of this extension is to assist the reporting process for entities where additional time is needed due to remote working arrangements, travel restrictions and the impact of COVID-19 generally. The regulator has also adopted a ‘no action’ position in circumstances where public companies do not hold their annual general meetings within 5 months after the end financial years from 31 December 2019 to 7 January 2021, but do so up to 7 months after year end. For further details on ASIC’s temporary relief, please visit ASIC’s Media Release.
APRA publishes data on the temporary early release of superannuation
APRA continues to publish its weekly data on the temporary COVID-19 superannuation Early Release Scheme (ERS), with data provided at both an industry and fund level. As at 30 November 2020, the ERS has made $35.3 billion in payments, with the average payment of $7,650 being made within 3.3 business days. The fund-level data shows that 100 out of the 175 funds completed more than 90% of payments within the 5 business day guideline specified by APRA, with the 10 funds with the highest number of applications received from the Australian Tax Office making 3.1 million payments totalling $23.2 billion. Additional commentary and data is available on APRA’s website.
New CPS 234 Information Security Webinar
Norton Rose Fulbright in conjunction with Intralinks have produced a webinar on APRA Prudential Standard CPS 234 pertaining to information security. The key topics discussed in the webinar include:
- CPS 234 issues in contract negotiations;
- the challenges and tips for success to ensure compliance with CPS 234; and
- the transition period available to APRA regulated entities.
CPS 234 aims to ensure that APRA regulated entities take appropriate actions to be resilient against information security incidents including cyber-attacks by maintaining information security capabilities that are proportionate to the information security vulnerabilities and threats. The key requirements of CPS 234 are defining the information security responsibilities within an organisation, maintenance of information security capacity which enables the continued sound operation of an entity, the implementation of controls to protect information assets and the notification of APRA when a material information security incident occurs.