Jul 18, 2021
5 min read
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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- Financial accountability regime (Treasury): recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 of the Financial Services Royal Commission recommended the extension of the Banking Executive Accountability Regime to all APRA-regulated entities, with joint administration from APRA and ASIC. The Government has released for consultation the Financial Accountability Regime (FAR) draft Bill. The Government has also released an information paper on joint administration, a policy paper on prescribed responsibilities and positions, and a Questions and Answers document for consultation. You can read more on the original FAR proposal, which places personal liability on executives for failures within their remits, here. I have spent the weekend going through the changes since the consultation paper released in January 2020. I am in the middle of writing a more detailed update, however, some of the key changes to me are: removal of fines for individuals; a detailed framework on how the regulators will co-operate e.g. they can’t disqualify an AP unless both agree; segregated liability for accountable persons for the product role i.e. along specific products lines-it is still joint and several otherwise; detailed procedural safeguards which favour the regulators from an enforcement perspective — there is even a novel section which is targeted at fining lawyers in certain circumstances! We i.e. Gadens will be preparing a response to the consultation by the cut-off date of 13 July 2021. Of course, we would welcome any views you have and we can incorporate the same in our response if you want anonymously.
- Compensation scheme of last resort (Treasury): recommendation 7.1 of the Royal Commission recommended that the three principal recommendations to establish a Compensation Scheme of Last Resort made by the Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework should be carried into effect. The Government has released for public consultation exposure draft legislation that would establish the Compensation Scheme of Last Resort. The draft legislation contains the key features of the scheme, which essentially facilitates the payment of limited compensation to eligible consumers who have received a determination for compensation from AFCA which remains unpaid. The key features of the proposed regime include the ability to authorise an operator of the scheme, eligibility requirements, compensation available for each eligible AFCA determination, the levying framework to fund the scheme, and the governance of the scheme. Responses are also due by 13 July 2021.
- Grandfathered commission (ASIC): on 21 February 2019, ASIC received a direction under section 14 of the Australian Securities and Investments Commission Act 2001 to investigate industry’s transition away from grandfathered conflicted remuneration arrangements. Conflicted remuneration is a benefit given to an AFS licensee, or a representative of a licensee, who provides financial product advice to clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the choice of financial product recommended to clients by the licensee or its representative, or the financial product advice given to clients by the licensee or its representative. Grandfathered conflicted remuneration (GCR) is any benefit to which the conflicted or other banned remuneration provisions did not apply because of certain transitional provisions in the Corporations Act and Corporations Regulations 2001. ASIC’s report ‘Ending Grandfathered Conflicted Remuneration’ has been released and sets out ASIC’s findings as to the steps taken by industry participants from 1 July 2019 to 31 December 2020 to end the payment of grandfathered conflicted remuneration ahead of the legal requirement to end these arrangements, and refund previously grandfathered benefits on to product holders. ASIC found that nearly all product issuers ended GCR arrangements before 1 January 2021. 8 product issuers plan to rebate product holders an amount equal in value to the amount of GCR the issuer would have otherwise paid.
- Zero interest rates (APRA): the Australian Prudential Regulation Authority has released for consultation a letter to authorised deposit-taking institutions on its draft expectations regarding ADIs’ preparedness for the possibility of zero and negative interest rates. APRA considers the risks arising from an ADI’s lack of preparedness for zero and negative interest rates to be material since this could have significant implications for an ADI’s risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems among other areas. APRA has said it expects ADIs to take reasonable steps to prepare for scenarios in which the cash rate and/or market interest rates may fall to zero or become negative. APRA expects ADIs to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022. While the RBA has said that zero of negative interest rates are unlikely, possible that other interest rates determined in the financial markets could fall to zero or below zero at any time. APRA clearly wants banks to be prepared…
- COVID-19 & bank stability (FSB): The Financial Stability Board (FSB) today published its Interim Report on the Lessons Learnt from the COVID-19 Pandemic from a Financial Stability Perspective. The report identifies preliminary lessons for financial stability and aspects of the functioning of the G20 financial reforms that may warrant attention at the international level. The report stresses the need to strengthen resilience in non-bank financial intermediation. It further records that the pandemic has also highlighted the importance of effective operational risk management arrangements, the need to enhance further crisis management preparedness, and the importance of promoting financial resilience amidst rapid technological change more generally. It is more bullish on capital and liquidity, which it says ‘may’ warrant further consideration.
Thought for the future: less than a month to comment on the FAR regime is longer then we were given for BEAR, and we have had a consultation paper since January 2020. The timing seems about right to me, and I hope the consultations timeframes for major pieces of work like this do not shrink again.
