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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
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Australia | Publication | February 2023
This article was co-authored with Ella Crowley-Burrows, Marc Kopelowitz and Joel McKay.
As 2022 came to a close, the regulators concluded the year with a busy month in December. Notably, ASIC ended the year by reminding stakeholders of the importance of ensuring that claims made in relation to a product were accurate, especially in the context of environmental claims, reflecting ASIC’s increased focus on greenwashing in 2022. ASIC also updated its guidance on self-managed superannuation funds, removing the focus on superannuation account balances and instead opting for a more holistic suitability test. APRA published a range of key statistics, issued final prudential standard CPS 190, and its Covid-19 FAQs and released the 2021/2022 Annual Superannuation Statistics.
Additionally, AUSTRAC published guidance addressing greater access to financial services for people from diverse backgrounds and challenging circumstances. AUSTRAC also released the first national proliferation financing risk assessment, highlighting the usage of financial services within proliferation financing.
In anticipation of full and half-year financial reports being lodged on 31 December 2022, ASIC has published guidance for directors, preparers of reports and auditors of its expectations and focus areas. ASIC reiterated the long standing principle that asset valuations and projections of a company’s future financial performance contained in its reports must have a reasonable basis and that any assumptions, business strategies and risks must be adequately disclosed. This is a timely reminder for industry stakeholders to assess their disclosure practices and consider exposure to business risks, and comes in the context of ASIC’s ongoing focus on “greenwashing” activities (see our article on this issue here).
Relevantly, unfolding and changing macroeconomic conditions will need to be considered by directors and management when preparing their annual and half-year reports. As a non-exhaustive list this may include rising inflationary pressures, geopolitical risks arising from the Russia/Ukraine conflict and the systemic risks posed by climate change. ASIC recognises that the uncertain nature of these circumstances means that value judgments may have to be made when valuing assets and making forward looking estimates. While value judgments are permissible in certain circumstances, ASIC has emphasised that the nature of the underlying uncertainty and assumptions relied on in making the value judgment must be disclosed.
You can access the media release here.
ASIC and APRA have responded to consumer complaints and reportable situations from insurers about premium increases in retail life insurance policies by issuing a joint letter to CEOs of all life insurance and friendly societies.
The letter outlines the concerns that both regulators have and their expectations for existing policies and the design of future product offerings.
The ASIC media release and the letter can be accessed here.
The APRA media release can be accessed here and the letter can be accessed here.
On 9 December 2022, ASIC released Report 751 ‘Disputes and deficiencies: A review of complaints handling by superannuation trustees’. This report examined compliance with the obligations in Regulatory Guide 271 Internal dispute resolution by a group of 35 trustees. Overall, the report found that some trustees had inadequate systems for managing complaints and ASIC put all superannuation trustees on notice to improve their internal dispute resolution systems.
ASIC Commissioner Danielle Press stated, “superannuation fund members have a right to make complaints to their fund and to expect their complaints to be handled fairly and in a timely manner, yet, our review found trustees have fallen short.”
The key issues identified in the review include:
ASIC’s media release can be accessed here.
In early December, Commissioner Sean Hughes published an article on ASIC’s website clarifying ASIC’s expectations for sustainability-related disclosures.
Mr Hughes noted that sustainable finance and climate related-disclosures were becoming more common in the market across superannuation funds, managed funds and listed companies however that there was room for improvement in these disclosures.
He noted that there was an overall lack of consistency and comparability in disclosures and that the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) were only being selectively adopted. ASIC encourages the use of the TCFD as the framework for listed companies to make any climate-related disclosures. The TCFD recommendations align with international standards outlined by the International Sustainability Standards Board which means that transitioning to the international standards will then be easier for any entity adopting the TCFD standards.
Mr Hughes also referred to ASIC’s 2022 Information Sheet 271 on how to avoid greenwashing, and stressed the importance of companies having reasonable grounds for making any sustainability-related target. Mr Hughes also noted the importance of clear, action-based plans to avoid making misleading statements.
The article can be accessed here.
On 12 December 2022, ASIC released an update outlining key enforcement actions taken during the July to September quarter (REP 753).
ASIC issued its first design and distribution obligations (DDO) stop order in July 2022, with five interim stop orders being issued between July and September. ASIC chair Joe Longo stated that, “The DDO regime represents a fundamental shift in consumer protection in financial services, giving ASIC the capability to prevent consumer harm and move quickly when firms do not meet their obligations.”
The report highlighted ASIC’s achievements in the quarter, such as assisting industry to respond better to family violence situations and overseeing remediation to Australian consumers.
Key takeaways for industry from this report include ensuring that investment performance representations for funds are appropriate, and calling on superannuation trustees to review and improve their internal dispute resolution arrangements.
The media release can be accessed here.
On 1 December 2022, APRA released the final standard on recovery and exit-planning (CPS 190). The new standard aims to improve financial resilience and ensure regulated entities are better able to manage periods of financial stress.
CPS 190 will come into effect from 1 January 2024 for banks and insurers, and from 1 January 2025 for RSE licensees.
The media release can be accessed here.
As a response to the COVID-19 pandemic, APRA released initial guidance on how deferred claims liability should be valued in June 2020. It continued to re-evaluate its approach as the pandemic developed.
In December 2022, ASIC updated two of its FAQs by:
The media release can be accessed here and the new FAQs can be accessed here.
The Superannuation Data Transformation (SDT) Strategic Forum (SDTSF) was held on 22 November 2022 and provided industry stakeholders the opportunity to a dialogue concerning the implementation of new superannuation data collection systems. APRA has released the notes from the SDTSF which can be accessed here.
The full media release can be accessed here.
On 14 December 2022, APRA released the annual fund-level statistics and annual MySuper statistics for 2022.
The annual fund-level superannuation statistics include information on the profile and structure, financial position and performance conditions of release and fees and membership information for each fund.
The Annual MySuper statistics report includes information relating to all MySuper products, including its detailed profile and structure, financial performance, fees and membership information.
APRA’s media release can be accessed here. The Annual fund-level superannuation statistics are available here. The Annual MySuper statistics are available here.
APRA has released the MySuper heatmap for 2022, which analyses every MySuper superannuation product on the criteria of fees, long-term sustainability of member outcomes and investment returns.
The heatmap has been used since 2019 as a way for APRA to monitor product performance and to create greater transparency for consumers.
Key findings from the 2022 heatmap include:
The full media release can be accessed here and the superannuation heatmaps can be accessed here.
On 15 December 2022, APRA released the bi-annual life insurance institution-level statistics publication. The institution-level statistics publication contains individual insurer-level information about financial performance, position, capital base and solvency data.
The media release can be accessed here. The life insurance institution-level statistics can be accessed here.
On 16 December 2022, APRA published an article titled ‘is IDII back on track?’ which discussed the future sustainability of the individual disability income insurance (IDII) sector in light of recent profits after several years of losses.
APRA examined the source of these new profits and concluded that while they were a positive sign for the sustainability of the industry, the increased profitability was largely based on cyclical factors which could reduce or reverse. The article concluded that it was too early to say definitively whether the IDII sector has returned to a permanent state of profitability.
APRA’s media release can be accessed here.
On 30 January 2023, Margaret Cole, Deputy Chair of APRA, addressed the Connexus Financial Superannuation Chair Forum on the theme of ‘setting a clear course for better member outcomes’.
Ms Cole stated that while APRA’s role was to continue to drive improvement in the industries it regulates, ultimately member outcomes rest with the superannuation funds themselves. Ms Cole further signalled that APRA will shortly be publishing its supervision and policy priorities for 2023 but indicated that the priorities for superannuation for 2023 would be similar to 2022’s aim of ‘transformation through action’. APRA would continue to target sub-standard industry practice and would continue to publish data relating to superannuation funds to ensure maximum transparency for consumers concerning the performance of each fund.
Ms Cole also highlighted that another of APRA’s goals for 2023 would be improving retirement outcomes and that APRA, along with ASIC, was conducting a thematic review into how a sample of trustees have implemented the retirement income covenant. The regulators will use their findings to consider updating SPS 515.
The increasing threat of cybercrime was touched on at the close of Ms Cole’s speech and she reminded her audience that recent attacks have highlighted vulnerabilities within institutions that boards need to address.
The full speech can be accessed here.
On 31 January 2023, APRA released key superannuation statistics for the financial year ending 30 June 2022. Notable statistics include that in FY 21-22:
All the statistics can be accessed here.
On 9 December 2022, AUSTRAC released guidance to banks and superannuation funds with the aim of supporting people from diverse backgrounds and challenging circumstances access financial services. This guidance has been developed in consultation with a broad range of industry groups including the Australian Banking Association, the Australian Institute of Superannuation Trustees and other community organisations.
The guidance outlines that certain customer groups may face barriers in meeting standard requirements for customer identification, leading them to be excluded from accessing essential financial services. Particularly, it notes entities should apply a risk-based approach to alternative identification (with a flexible approach in particular circumstances), and provides potential options for alternative identification such as referee statements or government correspondence.
The guidance is accessible here.
On 14 December 2022, AUSTRAC released Australia’s first proliferation financing risk assessment. AUSTRAC has identified significant proliferation financing threats, including those stemming from use of Australian financial services to procure dual-use goods, secure trade financing and remit payments associated with trade activity related to proliferation financing and evade sanctions. To date, this has primarily involved the use of major domestic and foreign banks, and on occasion remittance and foreign exchange providers.
The report also outlines results of an industry survey in relation to proliferation financing and compliance. Notably, a significant number of the institutions surveyed (39%) were concerned about proliferation financing, but less than other threats, while a substantial portion (28%) were not concerned at all.
The risk assessment report is accessible here.
On 8 December 2022, ASIC published regulatory guidance (Information sheet 274) for Australian Financial Service (AFS) licensees who advise on self-managed superannuation funds (SMSFs). The updated regulatory guidance aims to address long held concerns surrounding the provision of SMSF advice, which some fear places too much emphasis on balance threshold requirements at the expense of other factors, such as the costs, risks and (potentially onerous) trustee responsibilities involved in self-managing a superannuation fund.
Following ASIC’s industry consultation earlier in 2022, and emerging research which found no demonstrable difference between the performance of SMSFs with 200k and 500k balances, ASIC has abandoned its previous threshold requirement (previous guidance contained in Information Sheet 206 recommends a $500,000 threshold). Information Sheet 274, which consolidates previous guidance contained in Information sheet 206 and 205, does not nominate a minimum threshold but makes clear that the balance of a superannuation fund should just be one of many factors considered when determining the suitability of operating a SMSF. To this end, ASIC has attached case studies (all involving the same balance but with differing prospects of suitability) to illustrate how other factors may impact the suitability of operating a SMSF.
ASIC has also clarified that it expects advisors to adequately disclose the risks and costs involved with operating a SMSF (which in extreme circumstances may involve exposure to criminal liability) and ensure that clients have prepared an adequate exit strategy in advance of setting up a SMSF.
The media release can be accessed here and the updated Information Sheet can be accessed here.
Publication
This article first appeared in the September 2024 issue of Financier Worldwide.
Publication
The Digital Markets, Competition and Consumers Act (DMCC Act) received Royal Assent on 24 May 2024 and is generally expected to come into force in autumn this year.
Publication
On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules).
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