Keeping on top of the latest financial services regulatory & compliance trends?
Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian regulators weekly wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.
- Crypto report (Parliament): I have now spent a bit of time on the new crypto bill. By way of reminder, on 19 September 2022, Senator Andrew Bragg released a draft private member’s bill, entitled the Digital Assets (Market Regulation) Bill 2022 (Bill). Under the Bill, a licence is required to carry out the following activities in Australia: operate a digital asset exchange; provide a digital asset custody service; or, issue stablecoins. For the protection of national security and in the interests of transparency, the Bill imposes a reporting requirement on banks facilitating the e-Yuan. The Bill takes place against the Token Mapping exercise the Government is engaged in, and the RBA’s CBDC pilot. My unstructured thoughts are set out below: 1) It will certainly serve the aim of increasing the pressure on the Albanese Government, who are focusing their energies on token mapping when really Australian crypto businesses need clear rules. As a country we’re losing ground to the US, UK and Singapore while we’re dithering. Legal purists and academics love token mapping, but industry just needs certainty. Now. 2) That said, it is a poorly drafted bill for a number of reasons: a) first, it leaves too much of the heavy lifting to future regulations which would be left to Treasury or ASIC. There is always a balance between principles-based rules and prescriptive ones — this bill is so principles-based, however, it is difficult to extract much meaning from beyond the fact that multiple new licences will be required; 2) second, there are a number of confusing factors (e.g. will the definition of “Digital Assets Exchange” capture crypto brokers who have different business models and requirements)? That is unclear. Does it capture NFTs? It seems so, and this is very different to financial markets (and shouldn’t be regulated as such). That is because the definition of “digital asset” is broad and differs to the Treasury proposed definition for the CASSPr regime by removing concepts relating to the ownership of assets being substantially affected by cryptographic proof. 3) third, there are fundamental structural issues raised during the past consultation which have not been addressed (e.g. a brand-new licence which essentially mutates the existing AFSL). Why not modify the existing one, being a known commodity? Also, what does the “fair, orderly and transparent operation” of digital asset exchanges even mean? These are crypto assets — we are not talking about the ASX here… 4) fourth, Bragg has taken from the US Lummis/Gillibrand bill. Interestingly, over in the US, if Lummis-Gillibrand becomes law, all stablecoin tokens in circulation (in the US) must be 100% backed by US dollars, US government debt or other assets that fall in the same category. Bragg proposes that our stablecoins can be backed by Aussie dollars or another foreign currency. Also similar is the fact that, stablecoin issuers will have to meet capital adequacy requirements while also ensuring that stablecoin holders can always exchange their coins for an equivalent cash amount. This keeps the door open for banks and other financial institutions to produce and use stablecoins for payments; 5) fifth, there is an equivalence section for operators who hold foreign licences. We can probably expect to see regulatory arbitrage here, as there is obviously an advantage to setting up in jurisdictions with lower thresholds to entry e.g. lower capital requirements. This is not uncommon as is in some sectors. How this will work for custody service providers, who also need a licence, is very unclear under the legislation. Many current crypto operators have custody in the US or other parts of the world. Will they need to set up operations in Australia to continue to service our jurisdiction? What does custody even mean in this context? Is crypto data or property — we haven’t said yet, but other jurisdictions such as the UK have put in the hard yards. In summary, it is a political bill which is designed to advance the discussions around crypto regulation — which is a good thing, while the Albanese Government is myopically focusing on token mapping — but a poor piece of policymaking which a critical industry deserves better on. The legislation will be difficult and expensive for the industry to absorb by virtue of the multiple new licensing requirements, capital requirements, and very broad undefined principles-based elements. It is a blunt trauma instrument, when we need a scalpel to separate the good from the bad operators and encourage the fledgling industry against its global competition. My preference in the coming period would be for there to be enough constructive engagement with all of the industry to identify the aspects of their models that are clearly in need of an uplift, give them time to get that uplift right, without negatively affecting them during a recession.
- Debanking (Treasury): Council of Financial Regulators’ released a paper on potential policy responses to address the problem of de‑banking in Australia. The Treasury is now considering the following proposals made by them: 1. collect de-banking data; 2. introduce transparency and fairness measures i.e. there is little opportunity for businesses and individuals to seek review of the banks’ decisions; 3. advise the major banks of the Government’s expectation that they provide guidance on their risk tolerance and requirements to the affected sectors ; 4. consider funding capability uplift within the affected sectors — targeted guidance, outreach and education by AUSTRAC and other agencies on regulatory compliance should help uplift the compliance processes of businesses in the affected sectors, particularly small enterprises. All well and good, but one key way to reduce the serious impact of debanking is to push forward with the RBA’s CBDC projects. See here.
- Misleading & deceptive conduct (ASIC): ASIC has launched legal action against Latitude Finance Australia and Harvey Norman Holdings Ltd over the promotion of interest free payment methods. From January 2020 to August 2021, advertisements promoting ‘no deposit’, ‘interest free’ payment methods over a specified term for purchases at Harvey Norman were allegedly misleading because: 1) they did not disclose that consumers could only use the interest free payment method if they applied for and used a Latitude GO Mastercard; and 2) they failed to adequately disclose establishment fees and monthly account service fees. A interesting development, and one sure to be watched closely — fees are not interest in my view, and it is fine to conditionally advertise i.e. interest free only if certain conditions are met. I do understand where ASIC is coming from though, as while the advertisement may be technically correct the surrounding context may make it misleading. In Australian Competition and Consumer Commission v TPG Internet Pty Ltd, the Court clarified that the central question is whether the impugned conduct, viewed as a whole, has a sufficient tendency to lead a person exposed to the conduct into error (that is, will they form an erroneous assumption or conclusion about the matter). As additional guidance, and because is such an important topic, from my readings the Courts have also indicated that: (a) conduct is likely to mislead or deceive if there is a real/not remote chance or possibility of it doing so;(b) it is not necessary to prove an intention to mislead or deceive; (c) it is unnecessary to prove that the conduct in question actually deceived or mislead anyone; (d) it is not sufficient if the conduct merely caused confusion though ; and (e) if the conduct in question is directed to the public (or a section of the public), the Court will consider the likely effect on an ordinary and reasonable person in the relevant class to whom the conduct is directed. So ASIC has some very broad grounds to play within here, in conducting its action…
- Insolvency laws (Treasury): the Parliamentary Joint Committee on Corporations and Financial Services began an inquiry into corporate insolvency in Australia. The terms of reference is quite broad, covering everything from how recent reforms are going, to the impact of COVID-19 to whether we need to change unfair preference laws. A lot of tinkering with the insolvency laws in recent years, which is wholly unsurprisingly given the economic circumstances caused by COVID-19. Expect things to swing more in debtors favour as a recession looms..
- Outsourcing (APRA): APRA has released a paper on how super trustees can improve management of outsourcing arrangement. APRA’s review, conducted between February 2019 and October 2021, involved an in-depth review of the management of outsourcing arrangements across a sample of 10 retail superannuation trustees. APRA’s key observations focus on three areas: 1) trustees’ assessment of service providers’ value-for-money. APRA found that some trustees had scoped their benchmarking activities too narrowly, and consequently missed the opportunity to understand, challenge and improve the value to members obtained from certain outsourcing arrangements. A common pitfall APRA observed was for benchmarking exercises to focus on justifying existing costs and service standards, rather than seeking to challenge the status quo; 2) trustees’ measurement and monitoring of service providers’ performance. ASIC found that the best examples of this area had detailed reporting e.g. regular/timely/reliable, access insights via discussion e.g. insightful, succinct commentary and robust governance processes e.g. monitoring and oversight; and 3) trustees’ oversight of service providers. APRA noticed that most value is gained when the trustee office can effectively challenge and influence the trustee’s service providers. This relies on the office having an appropriate mandate and the necessary skills and capability.
Thought for the future: as part of the FCA’s Consumer Investments Strategy the FCA have said that they want to establish a simplified advice regime for mainstream stocks and shares ISAs where the risks to consumers are relatively low. The same should be done in Australia, where we are suffering from a financial industry decimated in the wake of the Royal Commission. Personal advice needs to be broken down further…