Australian regulators weekly wrap — Monday, 12 September 2022

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. FAR (Parliament): IT. IS. FINALLY. HERE. AND. I. AM. EXCITED! This week, the Federal Government introduced the Financial Accountability Regime Bill 2022 (Cth). The bill reintroduces the Financial Accountability Regime Bill 2021 (Cth), which was introduced by the previous Government but lapsed with the calling of the federal election in April. The new bill is identical to the previous iteration (with the exception of new commencement dates) and implements a number of recommendations from the Financial Services Royal Commission. You can read more in our update here, which also contains a number of our past updates. In summary, the bill introduces a new accountability regime for the banking, insurance and superannuation industries. The regime is designed to improve the risk and governance cultures of financial institutions by imposing a strengthened responsibility and accountability framework for those institutions and the directors and the most senior and influential executives (accountable persons) of those institutions. They are personally responsible for conduct failures in their divisions e.g. “honesty, integrity, due skill, care and diligence”, unless they take reasonable steps. There are ancillary financial liability provisions for those who aid and abet breaches. If passed, the regime will apply to the banking industry six months after commencement (March 2023), and to insurance and superannuation industries 18 months after commencement (March 2024). Make no mistake, FAR is absolutely THE most consequential change to the Australian financial services regulatory regime in a generation and takes a good amount of time to implement (we are assisting a number of insurers and super funds now). Do begin your preparations early, and if you want to arrange a free training session to get the benefit of our insights since 2015 (counting FAR’s UK forerunners), please reach out directly to me!
2. CSLR (Parliament): Legislation to establish the financial services Compensation Scheme of Last Resort, was also introduced into Parliament on 8 September 2022. The CSLR is a proposed scheme that will provide compensation to eligible victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent. Again, the legislation hasn’t materially changed. What is interesting, is that the Government has released a draft consultation paper on the proposed regulations for comments. The draft regulations specify matters relating to the CSLR operator’s reporting requirements and identify persons upon whom a levy will be imposed. The draft regulations also outline the methods that underpin the calculation for the amount of levy payable and how they differ based on the type of levy being imposed. Technical stuff, but what is worth noting is that those payments to AFCA will increase.
3. Crypto taxation (Parliament): in June, the Government announced it would introduce legislation to exclude crypto assets such as Bitcoin from being treated as a foreign currency for Australian income tax purposes. The proposed legislation maintains the current tax treatment of crypto assets. The Government has just released exposure draft legislation, Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation treatment of digital currency, and associated draft explanatory material. A great step forward, but the biggest one remains — is crypto property or data in a legal sense? Do we just legislate it is a the former, ala NZ, or consider creating some new distinct form of property, ala UK? Either is fine to my mind — though the UK’s approach is more jurisprudentially pure — but we do need to get onto this one sooner rather than later so we can have rules certainty.
4. Token mapping (Treasury): something important I learned this week at Intersekt. The token mapping exercise does not mean that the Government focus on licensing crypto is on hold. I had thought that it would, and while I am unsure as to what specifically is being done — not the short-lived CASSPr from the sounds of things, this does give me confidence. The burgeoning crypto industry deserves clear rules.
5. Binary options (ASIC): ASIC has extended its product intervention order banning the issue and distribution of binary options to retail clients until 1 October 2031. In the 13 months to 3 May 2021, before the ban took effect, ASIC found that retail clients incurred significant aggregate net losses trading binary options. For example: 74–77% of active retail clients lost money trading binary options; retail client accounts made net losses of $14 million in aggregate; and, loss-making retail client accounts made net losses totaling $15.7 million, while profit-making retail client accounts only made net profits of $1.7 million. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of the following product characteristics: an ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client loses their entire investment; short contract duration (e.g. the average contract duration of binary options traded with one provider was less than six minutes); and, negative expected returns (i.e. the present value of the expected payoff for a binary option contract is lower than the initial investment). I know that binary options have a lot of harm associated with them, and that many other jurisdictions overseas have taken this step, still outright banning products based on this risk profile does sit uneasily with me.

Thought for the future: since the GFC, advanced financial services economies around the world have had two major macro changes. Principles-based regulation e.g. increases in the legislation of rule requirements like ‘integrity’ and ‘fairness’, and personal accountability for individuals. FAR embodies both, and will now be operated by ASIC and APRA; it marks a larger shift for Australia than say the position in the UK, which was already more used to this style of regulation when the UK SMCR (their version of FAR) came into effect and will take time to work through.