Australian regulators weekly wrap — Monday, 11 May 2020

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.

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  1. DDO and Mortgage Broker Duties (ASIC): frankly, it has been a good week to be a regulatory lawyer — ASIC has announced it will defer the commencement date of the mortgage broker best interest duty and remuneration reforms and the design and distribution obligations for six months from their original commencement dates, given the significant impact of COVID-19. ASIC will defer the commencement date for the mortgage broker reforms until 1 January 2021. ASIC will defer the commencement date for the design and distribution obligations until 5 October 2021. Underscoring the point I made above, however, ASIC has said that it expects that entities will continue preparing for commencement on the extended timeline. While these are big and time consuming reforms, there is enough information on them to get underway. ASIC released draft guidance on the mortgage broker best interests duty for consultation on 20 February 2020, with consultation closed on 20 March 2020. Draft guidance for the design and distribution obligations was released for consultation on 19 December 2019, with consultation closing on 11 March 2020.
  2. Electronic signatures (Treasury): On 5 May 2020, the Treasurer made a determination modifying the operation of provisions of the Corporations Act 2001 (Cth), the Corporations Regulations 2001, the Insolvency Practice Rules and the Passport Rules (Determination). The Determination is a temporary modification — it expires after 6 months — in relation to the operation of certain Corporations Act provisions to mitigate the impact of COVID-19. Importantly, it provides for the modification of section 127 of the Corporations Act to facilitate electronic execution of documents. Generally, electronic signing of documents is governed by the Electronic Transactions Act 1999 (Cth) (ETA). As the Corporations Act is exempt from the ETA, issues do arise given the secondary need for ‘authentication’ — in essence, contracting parties need to ‘look behind’ the digital signature to double check that the electronic signature was intended to be placed there by the relevant person. Otherwise, there may be no valid execution as was the situation in Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor [2019] SASC 123. Section 6 of the Determination assists with establishing the ‘authentication’ standard required and, provided it is complied with, section 7 of the Determination sets out the assumptions that can be made about the execution of the documents under s 129(5) of the Corporations Act 2001 (Cth) e.g. the director had power, complied with the constitution, etc; a reference to a document appearing to have been signed in accordance with section 127(1) of the Act includes a reference to a document appearing to have been executed in accordance with section 127(1) of the Act operating as modified by section 6 of the Determination. It can be a convoluted area of the law, and you can obtain more detail on the Determination here, but suffice to say that electronic execution of documents is made easier for financial services firms provided they comply with the prescribed method.
  3. Enforcement update (ASIC): ASIC has released its enforcement update report for the period 1 July 2019 to 31 December 2019. A copy of the report can be found here. There is a useful statistic page on page 5. 60 investigations commenced, and 40 closed in this period. Slightly down on the 77 investigations commenced and 48 investigations completed in the previous six month period (January — June 2019). I always find the indication of the focus points going forward quite useful. ASIC’s enforcement strategy for 2019–21 is to: a) identify, prioritise, and act quickly and decisively on the most important enforcement matters to obtain criminal and civil court-based outcomes that discourage and punish misconduct; b) use ASIC’s expanded enforcement toolkit, including new and increased civil and criminal penalties; c) use emerging technologies to enhance ASIC’s enforcement capabilities; d) better communicate ASIC’s enforcement priorities, outcomes and performance. Item (a) is pro-forma language, but the remaining items are interesting — expect further use of the PIP power (especially post ASIC’s recent Cigno victory) and s.912A now that it has teeth. And for ASIC to rely more on its technology assisted review platforms to process lots of information to speed up its investigation timelines. From what I have seen, those timelines e.g. for document requests and the like are ever compressing. Finally, I think item (d) is sensible and what the corporate regulator should be doing to give clarity. In terms of particular areas of focus, ASIC’s new Office of Enforcement will prioritise these types of matters in 2019–21: a) Royal Commission referrals and case studies; b) misconduct related to superannuation and insurance; c) cases that engage ASIC’s new powers or provisions that carry new or higher penalties; d) illegal phoenix activity; e) auditor misconduct; f) new or emerging types of misconduct, including misconduct carried out online or with the use of emerging technologies. Not too much here, though there are two points to make. First, ASIC’s longstanding focus on superannuation and insurance does not appear to be abating any time soon. Second, and underscoring the above broader point, ASIC appears very keen to test its new powers...
  4. Fixed Income Products (ASIC): not included in the above report, but firmly on ASIC’s radar is fixed income products dressed up like term deposit products. ASIC Commissioner Karen Chester has said that products claiming to be like term deposits “spruiking even a 2 or 3 percentage point higher return than a term deposit represent significantly higher risk” than money at the bank and that [ASIC] are also seeing products offering only marginally higher returns with much higher risk profiles” (AFR 7 / 5). Following its public brawl with Mayfair 101, which was covered in last week’s briefing, expect ASIC to be paying additional scrutiny to the marketing material of fixed income product advertising by fund managers.

Thought for the future: Survive. Reset . Thrive. It is a mantra that appears to have been doing the rounds and, with the long-anticipated Treasury and ASIC announcement, my broad sense is that legal, risk and compliance functions are going to be able to start move into the reset phase in the coming months. That will involve re-scoping implementation project timetables to accommodate the additional time provided by the Government and ASIC, considering how best to commence those which have not begun and perhaps any remaining lobbying to be done e.g. for particular targeted forms of relief from ASIC or APRA e.g. ‘no action’ letters.

(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)



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