Financial services monthly wrap-up: September 2023

1. NSW Government passes the Crimes Amendment (Corrupt Benefits for Trustees) Act 2023

On 12 September 2023, NSW Parliament passed the Crimes Amendment (Corrupt Benefits for Trustees) Bill 2023 (NSW) (Bill). The Bill, which commenced on 20 September 2023 (as the Crimes Amendment (Corrupt Benefits for Trustees) Act 2023 (NSW) (Act)) with retrospective effect, amends the Crimes Act 1900 (NSW) (Crimes Act) and introduces an express requirement of “corrupt” conduct to establish the offence under section 249E.

Section 249E of the Crimes Act, as previously drafted, made it an offence for a trustee to receive or solicit a benefit from a person as an inducement or reward for the appointment of any other person to be a person entrusted with the property without the consent of either each person beneficially entitled to the property, or the Supreme Court.

The intended purpose of section 249E was to prevent a person entrusted with property (i.e. a trustee) from being persuaded by the prospect of personal gain to exercise their power to appoint a substitute trustee. However, recent decisions of the New South Wales Supreme Court, in particular the decision in Application of MLC Investments Limited [2022] NSWSC 1541, found that a corrupt purpose was not an essential element of the offence under section 249E, which meant that many routine good faith transactions could have been captured by the offence.

The Act has amended section 249E to expressly provide that the conduct constituting the offering, giving, receiving or soliciting of the benefit must be done “corruptly”. As a consequential change, the requirement to obtain consent from each beneficiary of the trust, which many stakeholders considered impractical, particularly in the context of large superannuation and managed funds with many thousands of members, has been removed, as has the option of obtaining consent of the Supreme Court.

The retrospectivity provisions in the Act operate such that any conduct before commencement that might have been an offence under the old provisions, but not under the new provisions, is not an offence. In other words, pre-commencement offences are “cured” unless the relevant conduct was corrupt in the terms of the new section 249E.

The Act and explanatory materials can be accessed here.

2. ASIC expresses disappointment at the distribution of OTC derivatives and other high-risk products to retail clients

On 6 September 2023, ASIC expressed its disappointment at the widespread distribution of over-the-counter (OTC) derivatives and other high-risk retail products, after a recent report found that issuers were falling short of their design and distribution (DDO) obligations.

This statement was made after the release of Report 770 Design and distribution obligations: Retail OTC derivatives (REP 770) which outlined how issuers of retail OTC derivatives are meeting DDO obligations and highlighted areas for improvement. Principally, REP 770 calls for issuers to:

• address over-reliance on client questionnaires as a primary distribution filter;
• review mass marketing of OTC derivatives; and
• make greater use of available data to assist the design of derivative products, target market determinations (TMDs) and distribution arrangements.

ASIC warned that it will not hesitate to take further action against issuers of retail OTC derivative products, especially in cases of egregious breaches of its DDO obligations.

The full media release can be accessed here.

3. ASIC issues new legislative instruments for financial resource requirements and platforms

On 7 September 2023, ASIC announced that it had issued two new legislative instruments relating to financial requirements:

• ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647; and
• ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648.

The new instruments were released following ASIC’s consultation in March (Consultation Paper 367) and replaced class orders [CO 13/760] and [CO 13/761]. They prescribe the financial resource requirements for responsible entities, IDPS operators and corporate directors of retail CCIVs (Instrument 2023/647), and custodians (Instrument 2023/648).

ASIC also released two new legislative instruments relating to investor directed portfolio services (IDPS) and IDPS-like schemes, commonly referred to as platforms:

• ASIC Corporations (Investor Directed Portfolio Services Provided Through a Registered Managed Investment Scheme) Instrument 2023/668; and
• ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669.

The new instruments replaced class orders [CO 13/762] and [CO 13/763] with some minor changes. Notably, both instruments allow operators to provide clients with electronic access to near real-time information about their investments, without the client’s prior written consent. Furthermore, Instrument 2023/668 provides that an IDPS operator must comply with section 1017E of the Corporations Act 2001 (Cth) when dealing with money received from an IDPS member for a financial product before the product is issued.

The four new legislative instruments are set to expire on 1 October 2028. The full media release can be accessed here.

4. ASIC remakes three class orders for managed funds

On 15 September 2023, ASIC announced that it had remade three class orders which were set to expire on 1 October 2023, being: [CO 13/655] in relation to equal treatment relief to the responsible entity of a registered scheme in various situations, together with [CO 13/656] and [CO 13/657] which provide certain relief in respect of the unit pricing discretions for managed investment schemes.

These new instruments will expire on 1 October 2028. ASIC also announced that Regulatory Guide 134 Funds Management: Constitutions will also be updated to reflect the release of these new class orders.

The full media release can be accessed here.

5. ASIC extends date for financial adviser registration requirement

On 20 September 2023, ASIC announced that it would extend the date for registration of financial advisers with ASIC to 1 February 2024.

This extension was intended to allow additional time for:

• Parliament to consider proposed amendments to the Treasury Laws Amendment (2023 Measures No. 1) Bill (Cth) (the Bill), which still remains before Parliament;
• ASIC to assist the financial advice industry to understand and comply with the registration requirement by issuing regulatory guidance and conducting webinars; and
• Australian financial service (AFS) licensees to understand the registration requirement and to make necessary applications to register their relevant providers with ASIC.

The full media release can be accessed here.

6. ASIC sues crypto exchange alleging design and distribution failures

On 20 September 2023, ASIC commenced proceedings in the Federal Court of Australia against Bit Trade Pty Ltd (Bit Trade), the provider of the Kraken crypto exchange, alleging that Bit Trade failed to comply with the design and distribution obligations relating to financial products for retail clients, for the margin trading product it offers to Australian customers.

ASIC alleges that Bit Trade’s margin trading product is a credit facility, as it offers customers credit for use in the sale and purchase of certain crypto assets on the Kraken exchange. Bit Trade describes this as “margin extension” as customers can receive an extension of credit of up to five times the value of the assets they use as collateral.

ASIC is seeking declarations, a pecuniary penalty and injunctions prohibiting the ongoing alleged contravening conduct. Against this backdrop, ASIC has warned the crypto industry that it will continue to scrutinise products to ensure compliance with applicable regulatory obligations.

ASIC’s concise statement in respect of the proceedings can be accessed here. The full media release can be accessed here.

7. ASIC releases 2023 annual licensing report

On 21 September 2023, ASIC published its annual licensing report: REP 772 Licensing and professional registration activities: 2023 update. This report outlined ASIC’s licensing and professional registration activities, discussed new and proposed changes to processes, and noted other ASIC work that affects licensees.

Notably, the report revealed that between June 2022 and July 2023, ASIC:

• received 1,272 Australian financial services (AFS) licence and Australian credit licence (credit licence) applications, 401 of which were withdrawn or rejected;
• finalised 1,464 AFS and credit licence applications;
• granted 332 new AFS licences and 149 new credit licences;
• approved 867 AFS and credit licence variation applications from existing licensees;
• approved the registration of 118 company auditors, 44 SMSF auditors and supported the approval of 29 liquidators;

The full media release can be accessed here.

8. ASIC calls on licensees to strengthen remediation procedures

On 25 September 2023, ASIC called on Australian financial services and credit licensees to ensure that affected customers are remediated quickly and fairly, and in line with Regulatory Guide 277 Consumer Remediation (RG 277).

This announcement was made following ASIC’s recent review of certain large financial institutions’ implementation of RG 277. The review found that some policies and procedures were inconsistent with RG 277 and could lead to poor outcomes for customers. (see key findings of the review can be accessed here).

ASIC’s announcement is also relevant given the recent passing of the Financial Accountability Regime Act 2023 (Cth) (FAR Act), which came into force on 15 September 2023. The FAR Act requires accountable entities to nominate an accountable person responsible for oversight of remediation programs.

The full media release can be accessed here.

9. APRA releases findings on implementation of cross-industry standard on remuneration

On 6 September 2023, APRA released findings from a review of how entities are approaching the implementation of Prudential Standard CPS 511 Remuneration (CPS 511).

APRA’s findings demonstrate that entities are making efforts to strengthen the alignment of remuneration and risk management in their remuneration frameworks. The review also identified common gaps during the review process that should be considered by entities to ensure a sustainable change.

The letter to industry releasing findings from the review can be accessed here. The full media release can be accessed here.

10. APRA consults on amendments to capital adequacy reporting standard

On 11 September 2023, APRA commenced a short consultation period on its proposed changes to Reporting Standard ARS 180 Capital Adequacy: Counterparty Credit Risk.

The proposed amendments align reporting requirements for non-significant financial institutions (non-SFIs) with APRA’s previous prudential guidance and the creation of a new Reporting Standard ARS 226 Margining and risk mitigation for non-centrally cleared derivatives for the Reporting Form ARF 226 Margining and risk mitigation for non-centrally cleared derivatives, which is currently located in Reporting Standard ARS 180.

This consultation closed on 22 September 2023.

The consultation letter and proposed amendments to the reporting standards can be accessed here. The full media release can be accessed here.

11. APRA finalises updated Financial Claims Scheme standard

On 12 September 2023, APRA finalised minor administrative updates to Prudential Standard APS 910 Financial Claims Scheme (APS 910), following a short consultation. APS 910 came into effect on 1 October 2023 and forms a key component of APRA’s crisis management framework.

The full media release can be accessed here.

12. APRA extends due dates for the submission of quarterly data reporting for insurers

On 20 September 2023, APRA announced a four week extension to insurers for the submission of most of the Australian Accounting Standards Board 17 (AASB17) Insurance Contracts reporting forms for the September 2023 and December 2023 reporting periods.

The extension is applicable to all reporting forms, except for the following 4 Private Health Insurance forms, which are required for premium round process:

• HRS 101.0 Regulatory Income Statement – Supplementary Information
• HRS 110.0 Prescribed Capital Amount
• HRS 112.0 Determination of Capital Base
• HRS 115.0 Insurance Risk Charge

The letter to industry can be accessed here. The full media release can be accessed here.

13. APRA strengthens standard to enhance member outcomes in superannuation

On 21 September 2023, APRA announced that it planned to strengthen Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515) to drive better outcomes for superannuation members in areas such as trustee expenditure of member funds, management of financial resources and the transfer of members in and out of funds.

APRA’s proposed reforms to SPS 515 aim to:

• ensure that expenditure requirements better align with the best financial interest duty and, for the retirement phase, to support the retirement income covenant, by requiring trustees to justify the purpose of expenditure relating to business operations;
• lift the bar on trustees’ management of financial resources, by ensuring trustees maintain a prudent approach in areas such as fee setting and managing member-funded reserves; and
• improve management of risks to members who were being transferred across funds.

The discussion paper on the proposed reforms to SPS 515 can be accessed here. The full media release can be accessed here.

14. APRA seeks feedback on improving effectiveness of hybrid capital bonds

On 21 September 2023, APRA released a discussion paper and called for submissions on a range of proposed improvements to the effectiveness of Additional Tier 1 capital instruments (Hybrid Bonds) for use in a potential bank stress scenario.

Hybrid Bonds are a type of capital that banks can hold to support their resilience and protect depositors by absorbing losses during a period of severe stress or to support an orderly resolution in the event of a failure. In such circumstances, a bank could decline to pay discretionary coupons to investors (akin to dividends for shares), convert the instruments to equity, or write them off.

In addition to written submissions, APRA announced it will hold discussions with industry on potential improvements this year. APRA plans to formally consult on any proposed changes to prudential standards or guidance in 2024.

The full media release can be accessed here.

15. APRA consults on updates to modernised Economic and Financial Statistics reporting standards and guidance

On 27 September 2023, APRA released for consultation its proposed updates to the Economic and Financial Statistics (EFS) reporting standards and guidance. The updates were drafted in conjunction with the Australian Bureau of Statistics and the Reserve Bank of Australia. The consultation closes 6 November 2023.

The consultation letter, updated EFS standards and guidance, and draft summary of the proposed changes can be accessed here. The full media release can be accessed here.

16. APRA releases intermediated general insurance statistics for June 2023

On 28 September 2023, APRA released its bi-annual intermediated general insurance statistics for June 2023, which provide an overview of intermediated general insurance placed with APRA-authorised general insurers, Lloyd's underwriters and unauthorised foreign insurers.

The June 2023 statistics, explanatory notes and glossary can be access here. The full media release can be accessed here.

17. AUSTRAC strengthens customer identification procedures for online gambling service providers

On 28 September 2023, AUSTRAC introduced stricter applicable customer identification procedures (ACIP) applying to online gambling service providers. These measures will help ensure that online gambling services are not exploited by criminals or used by individuals on the National Self Exclusion Register.

From 29 September 2024, all online gambling service providers must complete ACIP before creating an online gambling account or commencing to provide any designated service. Interim arrangements will be in place from 29 September 2023 to 28 September 2024.

More information on the update can be found here.

18. Treasury consults on legislating the objective of superannuation

Between 1 to 29 September 2023, Treasury published two draft exposure legislations for consultation in response to feedback from stakeholders on the need to legislate the objective of superannuation. These were: the Superannuation (Objective) Bill 2023 (Cth) and Superannuation (Objective) (Consequential and Transitional Provisions) Bill 2023 (Cth).

The proposed objective of superannuation is “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

The aim of the definition is to provide a shared direction for government, the superannuation industry and Australians, and to ensure that future changes to the superannuation system are compatible with its objective by requiring policymakers to assess proposed changes to super legislation for compatibility with the objective.

The exposure draft legislation and explanatory materials can be accessed here.

19. Treasury consultation periods ending for the month of September

Between 7 August 2023 to 8 September 2023, Treasury published a range of consultation papers, exposure draft legislation and explanatory materials for consultation, including:

• Licensing exemptions for foreign financial services providers (FFSPs), which closed on 8 September 2023;
• Review of the regulatory framework for managed investment schemes (MISs), which closed on 29 September 2023.

The exposure draft legislation and explanatory memorandum for the proposed licensing exemptions for FFSPs can be accessed here. The consultation paper for the review of the regulatory framework for MSIs can be accessed here.