Financial services monthly wrap-up: September 2021

ASIC releases final report on competition in the Australian funds management industry

On 24 September 2021, ASIC released the final report on the state of competition in the Australian funds management industry.

The impetus for the report is the requirement for ASIC under the Australian Securities and Investments Commission Act 2001 to consider the impact of its performance on competition in the financial system.

In summary, the report found:

• retail investors account for around five per cent of all funds under management, but the managed funds industry affects the wealth of a much larger number of Australians through superannuation;
• the managed funds industry is competitive, evidenced by new market entrants, innovation and comparatively low fees by global standards;
• there is no single source of truth in the market that allows for direct comparison between funds;
• both retail and wholesale investors are sensitive to the performance of funds. Economic transaction costs affect investors’ decisions to buy, sell and change managed funds, and if transactions costs are not clear, may lead investors to remain in underperforming funds;
• retail investors are not highly engaged with funds management. This is because there are many intermediaries between fund managers and retail investors which can create conflicts of interest;
• retail investors may not receive the full benefits of competition between fund managers on fees and discounts due to principal-agent and transparency issues (for example, where intermediaries have a financial relationship); and
• some participants in the managed funds industry have conflicts of interest, which can affect outcomes for retail investors (for example, fund managers do not have control over platform fees charged by intermediaries to retail clients).

A link to the ASIC media release can be found here and the final report prepared by Deloitte can be found here.

ASIC publishes updated regulatory guidance on prohibition of hawking financial products

On 23 September 2021, ASIC published its updated Regulatory Guide 38 (RG 38) on the prohibition of hawking financial products.

The updated RG38 reflects the reforms to the anti-hawking regime under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, which commence on Tuesday 5 October 2021.

Under the prohibition a person must not offer a financial product to a retail client in the course of or because of unsolicited, real-time contact. A consumer must consent to being contacted, and that consent must be positive, voluntary and clear.

Last month, ASIC provided guidance on its enforcement approach to ensuring compliance with the reformed anti-hawking provisions. ASIC noted it will take a “reasonable approach” in the early stages of implementation of the reforms, provided industry participants use their best efforts to comply.

A link to the ASIC media release can be found here and the updated RG38 can be found here.

ASIC warns of ‘pump and dump’ campaigns for listed stocks on social media

On 23 September 2021, ASIC published a warning on the concerning trend of the ‘pump and dump’ of listed stocks on social media. ‘Pump and dump’ activity occurs when a person or group purchases shares in a listed company, and then creates an organised social media campaign to inflate (or ‘pump’) the share price by generating excitement in the stock. This may include distributing false news about the company’s prospects. The person or group then sells (or ‘dumps’) their stocks, taking a profit. The remaining shareholders then lose out as the share price falls.

The ‘pump and dump’ of listed stocks may amount to market manipulation, which is prohibited under the Corporations Act 2001. Penalties for market manipulation can include fines of over $1 million and up to 15 years imprisonment.

ASIC has encouraged listed entities to immediately submit a suspicious activity report to ASIC or notify the ASX if they detect any suspicious activity in their listed securities. Signs of ‘pump and dump’ activity which listed entities should look out for include where a group of investors trade in the same stock, at the same time, and in the same trading direction. This may include where investors have the same account contact details, or transfer funds between themselves.

A link to the ASIC media release can be found here. Further guidance on reporting suspicious activity to ASIC can be found here.

ASIC releases annual update on licensing and registration activities

On 15 September 2021, ASIC released its annual report on the licensing and registration activities of Australian financial services licence (AFSL) holders, Australian credit licence (ACL) holders, liquidators, company auditors and self-managed superannuation fund auditors for the 2020-21 financial year.

In summary, the report found that during the 2020-21 financial year:

• ASIC received 1,883 applications for new or varied AFSLs and ACLs, an increase from the 1,346 applications received during the last financial year. ASIC largely attributes this increase to the licencing reforms relating to insurance claims handling and debt management services;
• ASIC approved 458 new AFSLs and ACLs, compared to 394 in the last financial year;
• ASIC approved 537 variation applications for existing AFSLs and ACLs; and
• 90% of all applications for new or varied AFSLs were finalised by ASIC within 251 days of receiving an application, with 90% of applications for new or varied ACLs finalised within 110.

A link to the ASIC media release can be found here and the full report can be found here.

ASIC extends exemptions for employee redundancy funds

On 9 September 2021, ASIC announced that employee redundancy funds would continue to be exempt from the licensing and managed investment scheme requirements under the Corporations Act 2001 (MIS requirements). The exemptions, which were scheduled to end on 1 October 2021, have been extended by ASIC until 1 October 2024.

Employee redundancy funds pool contributions from employers for the purpose of redundancy payments to employees. Under the exemptions, employee redundancy funds are not required to:

• hold an AFSL;
• register the employee redundancy fund as a managed investment scheme; and
• comply with the MIS requirements, including in relation to product disclosure statements, ongoing disclosure requirements and anti-hawking.

A key purpose for ASIC extending this exemption is to provide certainty to affected employee redundancy funds while a new regulatory framework for employee redundancy funds is before Parliament for debate (see Schedule 2 of the Fair Work Laws Amendment (Proper Use of Worker Benefits) Bill 2019).

A link to the ASIC media release can be found here.

ASIC releases update on enforcement activity for the first half of 2021

On 9 September 2021, ASIC released its ‘Enforcement Update’ for January to June 2021. The update includes the outcomes of ASIC’s enforcement activities over this period in line with its stated priority of enforcing a ‘fair, strong and efficient financial system for all Australians’

In summary, between the months of January and June 2021, ASIC recorded the following enforcement outcomes:

• $29.6 million in civil penalties were imposed by the courts;
• 133 individuals or companies were prosecuted for strict liability offences;
• 70 people or entities were removed or restricted from providing financial services or credit;
• 19 people were disqualified or removed as directors of companies;
• five people were imprisoned and five other given non-custodial sentences;
• three infringement notices were issued by ASIC, and $392,000 in infringement penalties were paid; and
• one court enforceable undertaking was accepted by ASIC.

Between January and June 2021, ASIC also commenced 12 civil penalty proceedings in the areas of insurance, superannuation, financial markets, auditor conduct and credit.

A link to the ASIC media release can be found here and ASIC’s ‘Enforcement Update’ can be found here.

Time for certain public companies to hold annual general meetings (AGMs) extended by ASIC

On 8 September 2021, ASIC extended the time for certain public companies to hold their AGMs. The extension, enacted under the ASIC Corporations (Extension of Time to Hold AGMs) Instrument 2021/770 (the Instrument), grants:

• public companies, with balance dates between 21 February 2021 and 7 July 2021, an additional two months to hold their AGMs, and
• public companies limited by guarantee, with balance dates between 24 January 2021 and 7 April 2021, an additional four months to hold their AGMs.

These extensions were granted by ASIC on the basis that COVID-19 imposed restrictions have made it difficult for public companies to hold their AGMs in accordance with the times required by the Corporations Act 2001. These measures are in addition to the temporary measures recently introduced under the Treasury Laws Amendment (2021 Measures No. 1) Act 2021, which permits companies to convene and hold meetings using technology until 31 March 2022.

A link to the ASIC media release can be found here.

ASIC publishes updated guidance on breach reporting by AFSL and ACL holders

On 7 September 2021, ASIC published its updated Regulatory Guide 78: Breach reporting by AFS licensees and credit licensees (RG 78) to assist licensees in meeting the new breach reporting requirements which come into force on Friday 1 October 2021.

AFS licensees will have to report breaches that they discover after 1 October 2021, even if the breach occurred before that date.  However, credit licensees do not have to report breaches that occurred before 1 October even when identified after 1 October 2021. As a result, credit licensees will have a relatively gradual implementation upon commencement. For AFS licensees, the new obligations strengthen and clarify the existing reporting obligations, whereas for credit licensees, this is the first time that they will be obliged to report certain breaches of the law to ASIC.

As with ASIC’s enforcement of compliance with the new anti-hawking provisions, ASIC has noted it will take a “reasonable approach” in enforcing compliance with the new breach reporting requirements in the early stages of implementation, provided AFSL and ACL holders use their best efforts to comply.

ASIC has also released Information Sheet 259 (INFO 259), which provides information on the actions AFSL and ACL holders are required to take to comply with their breach reporting obligations, including in relation to notifying affected customers of a breach of law, investigating the nature and extent of the breach, and obligations to remediate affected customers within certain timeframes.

A link to the ASIC media release can be found here. Links to INFO 259 and RG 79 can be found here and here.

ASIC releases survey on preparedness of registrable superannuation entity (RSE) licensees for new internal dispute resolution (IDR) requirements

On 2 September 2021, ASIC released the results of its survey on the preparedness of RSE licensees for the new enforceable IDR requirements under Regulatory Guide 271 Internal dispute resolution (RG 271).

ASIC undertook this work to assist trustees with their preparations for RG 271, which establishes new standards and requirements for how all financial firms will need to deal with consumer complaints from 5 October 2021.

The survey found that RSE licensees have taken significant steps to improve their handling of consumer complaints in the lead up to the reforms. However, ASIC identified the following areas as requiring further work:

• attention to governance arrangements;
• application of the expanded definition of ‘complaint’;
• implementation of the new maximum timeframes for IDR responses;
• identification, ownership and reporting of systemic issues; and
• data capture and integration.

A link to the ASIC media release can be found here and RG 271 can be found here.

APRA releases revised prudential standard on investment governance in superannuation for consultation

On 29 September 2021, APRA released for consultation its proposed revisions to Prudential Standard SPS 530 Investment Governance (SPS 530).

SPS 530 aims to ensure registrable superannuation entity licensees meet their obligations to prudently select, manage and monitor investments.

According to APRA, the proposed revisions are aimed at ensuring RSE licensees better meet their obligations to prudently select, manage and monitor the investments of their members.

The proposed changes to SPS 530 are focused on three key areas:

• improving the stress testing processes of RSE licensees;
• asset valuation practices, frameworks and policies; and
• liquidity management practices, including the detail of RSE licensees’ liquidity management plans.

A link to the APRA media release can be found here. APRA is inviting feedback on the proposed revisions to SPS 530 with consultation open until 16 February 2022.

APRA publishes updated FAQs on capital framework for COVID-19 related disruptions

APRA has updated the FAQs in relation to the application of the capital framework for COVID-19 related disruptions for private health insurers. Specifically, the FAQs intend to provide clarification on the considerations and communication protocols required for private health insurers to prepare prudentially sound deferred claims liability provisions.

A link to the APRA media release can be found here. The updated FAQs, which replace those issued in March, are available on APRA’s website and can be found here.

APRA releases updated policy priorities for Q4 of 2021

On 24 September 2021, APRA released its updated policy priorities for Q4 of 2021. APRA’s priorities are to:

• complete the bank capital reforms, including releasing three standards for capital adequacy by November. APRA intends that these reforms will take effect from January 2023. Further information on the bank capital reforms can be found here;
• consult on reforms to the insurance capital framework, including to reflect changes in Australian accounting standards and to align the capital framework for private health insurance with other industries;
• release for extended consultation in November new standards for financial contingency planning and resolution;
• update the standards for insurance in superannuation and investment governance; and
• release final guidance on managing the financial risks of climate change. APRA is yet to clarify when during Q4 this guidance will be released.

A link to the APRA media release and policy priorities document can be found here and here.

APRA publishes additional FAQs on Superannuation Data Transformation Phase 1 reporting standards

On 23 and 27 September 2021, APRA published further additional FAQs for RSE licensees to provide guidance on meeting the reporting standards for Phase 1 of the Superannuation Data Transformation.

The FAQs and worked examples clarify reporting issues raised by RSEs and provide an update on the staged implementation approach, including an extension to the timeframe for the initial submission of data due by 30 September 2021 to due by 28 October 2021.

A link to the APRA media releases can be found here and here. The FAQs are available on APRA’s website and can be found here.

APRA releases bi-annual intermediated general insurance statistics

On 22 September 2021, APRA released its bi-annual intermediated general insurance statistics for the six months ending June 2021. The statistics provide an overview of intermediated general insurance placed with APRA-authorised general insurers, Lloyd's underwriters and unauthorised foreign insurers. 

In summary, for the six months ending June 2021:

• total premiums invoiced by intermediated general insurance businesses were $14.124 billion, compared to $15.141 billion in the previous six months ending December 2020;
• of these total premiums, intermediated general insurance businesses placed with APRA-authorised general insurers invoiced the majority of premiums at $11.689 billion, followed by those placed with Lloyd's underwriters. Intermediated general insurance businesses placed with unauthorised foreign insurers invoiced the least amount of premiums at $793 million; and
• the total number of intermediaries slightly increased from 1,656 in the six months ending December 2020 to 1,666.

A link to the APRA media releases can be found here. Further information on the statistics can be found here.

APRA releases update on revised standard and practice guide for insurance in superannuation

On 21 September 2021, APRA released an update on its proposed revisions to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250) and Prudential Practice Guide SPG 250 Insurance in Superannuation (SPG 250). The key changes are in response to recommendation 4.14 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which recommended that related party insurance arrangements and ‘priority and privilege’ arrangements entered into by RSE licensees are independently certified.

Consultation and submissions on the amendments to SPS 250 and SPG 250 are now closed. Following APRA’s review of these submissions and feedback, APRA has confirmed:

• SPS 250 will include a requirement for the independent certification of insurance arrangements with related parties; and
• while independent certification of ‘priority and privilege’ arrangements will not be required under SPS 250, APRA intends to:

• include a provision in SPS 250 requiring RSE licensees to obtain independent certification;
• broaden the scope of the insurance management framework to include consideration of contractual terms and business practices that may indicate ‘priority and privilege’ arrangements;
• require that an independent, comprehensive review of an RSE licensee’s insurance management framework is undertaken every three years to assess whether ‘priority and privilege’ arrangements are still appropriate and in the best financial interests of members; and
• require RSE licensees consider whether any ‘priority and privilege’ provisions in insurance arrangements are affecting the financial outcomes of its members.

APRA intends to issue the final revised SPS 250 and SPG 250 in the coming months. The revised SPS 250 is anticipated to come into force from 1 July 2022.

A link to the APRA media release can be found here.

APRA releases its 10 Superannuation Data Transformation reporting standards and regulatory

On 20 September 2021, APRA released its 10 updated Superannuation Data Transformation reporting standards as part of Phase 1 of the Superannuation Data Transformation project. These reporting standards include minor amendments to those originally published by APRA, in response to the prudential regulator’s consultations on the Superannuation Data Transformation reforms in March this year.

The 10 reporting standards aim to improve the data reported to APRA by superannuation trustees, including in relation to insurance, expenses, member accounts and fees and costs. The 10 updated reporting standards can be found here.

A link to the APRA media release can also be found here.

Australian Securities and Investments Commission Amendment (Deferred Sales Model) Regulations 2021 released

On 17 September 2021, the Australian Securities and Investments Commission Amendment (Deferred Sales Model) Regulations 2021 (Amending Regulation) was released. The Amending Regulation gives effect to the new deferred sales model for add-on insurance, which commences on Tuesday 5 October 2021. The following classes of add-on insurance products are exempted from the operation of the deferred sales model:

• add‑on comprehensive motor vehicle or vessel insurance products;
• add‑on compulsory third party motor vehicle insurance products;
• add‑on home and contents insurance products;
• add‑on home building insurance products;
• add‑on landlord insurance products;
• add‑on limited motor vehicle or vessel insurance products;
• add‑on transport and delivery insurance products;
• add‑on travel insurance products;
• business‑related add‑on insurance products; and
• superannuation‑related add‑on insurance products.

A copy of the Amending Regulation can be found here. Further information on the deferred sales model reforms can be found in our August monthly wrap-up here.

Insurance Council of Australia (ICA) releases news measures to improve availability and affordability of insurance for SMEs

On 20 September 2021, the ICA released new measures aimed at improving the availability and affordability of commercial insurance products for SMEs. The measures are in response to the final report into the role of the private insurance market (Final Report).

A key measure in the announcement was the creation of the Business Advisory Council (BAC). The BAC’s role will be to bring together business and insurance to develop practical solutions to make insurance for SMEs available and affordable. Other measures announced by the ICA in response to the Final Report include:

• the creation of an ICA Board committee to consider proposals by the BAC to intervene in situations where there is no single provider of cover;
• examining the simplification of commercial policy definitions and documentation for SMEs;  
• considering consistent industry-wide protocols in situations where significant increases occur on already high-cost premiums; 
• continuing support of work to improve the transparency of broker fees;
• improving engagement with government to ensure policy accounts for insurance issues, and to reform insurance taxes and levies;
• furthering the development of risk management and mitigation advice and education; and
• advocating for the expansion and improved useability of APRA’s National Claims and Policies Database.

A link to the ICA media release can be found here. The Final Report can be found here.

ICA publishes annual report on insurance catastrophe resilience and calls for a national approach

On 8 September 2021, the ICA published its annual ‘Insurance Catastrophe Resilience Report’.

In summary, the report calls for state and federal governments to jointly undertake six policy initiatives to better protect Australians from the impacts of future natural disasters:

• greater investment in resilience capability, particularly at the state level, to protect the most vulnerable communities to natural disasters;
• improving building quality and standards to provide greater protection from extreme weather events;
• better land use planning to ensure future homes and communities are built out of harm’s way;
• removing state taxes on insurance to improve coverage levels;
• developing a national approach for the movement of essential recovery personnel across state and territory borders, including exemptions from COVID-19 imposed travel restrictions; and
• coordinating disaster clean-ups following a natural disaster to allow the recovery process to occur as soon as possible.

The report also provides an update on the recovery from the 2019-20 Black Summer bushfires, which has resulted in insurer payouts of almost $5.5 billion.

A link to the ICA media release can be found here. The report can be found here.

Second business interruption test case being heard in the Federal Court

The hearing of Australia’s second business interruption test case concluded this month in the Federal Court. The case involved nine small business claims from a range of business sectors and locations, which were lodged with the Australian Financial Complaints Authority for resolution.

Among other issues, the Court was asked to determine:

• the meaning of policy wording in relation to an ‘outbreak’ and of a disease ‘occurring’ within a particular geographical radius of a business; and
• the impact of government mandates on policies.

At the same time, the Federal Court also heard a case regarding the interpretation of the Victorian Property Law Act 1958 on business interruption policies written under Victorian law, referring to the now repealed Quarantine Act 1908.

The judgments are yet to be handed down. However, the decisions will likely be significant in providing insurers and policyholders with guidance on issues relating to pandemic coverage under business interruption policies.

Further information on the cases can be found on the Federal Court’s website here.