Australian regulators weekly wrap — Monday, 13 December 2021

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. Payments system (Treasury): Treasury is planning to legislate “the largest reforms to our payments systems in a quarter of a century”. The overhaul of the payments system will provide protections for consumers who make purchases on their mobile phones, use buy now, pay later platforms, and invest in cryptocurrency. Most of the reforms are not expected to be settled until various agencies consult and report back to the government at the end of 2022. In relation to payments, by mid-2022 the Government will have: 1) set out a strategic longer-term plan for the payments system, developed with industry and reviewed annually; 2) settled the details of additional powers for the Treasurer to set payment system policy; and 3) determined the changes necessary to modernise payments system legislation to accommodate new and emerging payment systems, including consideration of BNPL and digital wallets. In relation to crypto, by mid-2022 the Government will have: 1) completed consultation on the establishment of a licencing framework for Digital Currency Exchanges to provide greater confidence in the trading of crypto assets; 2) finalised consultation on a custody or depository regime for businesses that hold crypto assets on behalf of consumers so that investors have greater confidence in the safe keeping of these assets; 3) received advice from the Council of Financial Regulators, working with other relevant agencies, on the underlying causes and policy responses to the complex issue of de-banking. By end-2022 the Government will have: 1) settled the framework to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements; 2) received a report from the Board of Taxation on an appropriate framework for the taxation of digital transactions and assets; 3) undertaken a mapping exercise of existing crypto currencies and tokens to better inform consumers and others of the risks and benefits that arise; 4) examined the potential of so-called Decentralised Autonomous Organisations and how they can be incorporated into Australia’s legal and financial regulatory frameworks. I think this is a necessary, comprehensive and bold approach — the possibilities for crypto are endless, and the Government’s embrace of it is a wise move. It will position Australia well in the future world; the consultation paper is easily my top read for the week!
2. Cyber resilience (ASIC): ASIC released its latest report on the cyber resilience of firms operating in Australia’s financial markets. Report 716 Cyber resilience of firms in Australia’s financial markets: 2020–21 provides an update on organisations’ cyber resilience in the two years since the publication of Report 651. In summary, there has been a small improvement in the cyber resilience of firms operating in Australia’s financial markets, the increase of 1.4% falls far short of the 14.9% improvement targeted for the period. The shortfall is the combined result of overly ambitious targets, escalation in the cyber threat environment and disruptions caused by the pandemic. ASIC has encouraged all firms to consider the report for managing these risks, and stated that failure to invest in supply chain risk management could lead to significant consumer harm that might warrant ASIC investigation and action.
3. Clearing rules (ASIC): following the global financial crisis, the G20 committed to reforming over-the-counter (OTC) derivatives markets. One of the key commitments made was to require all standardised OTC derivative transactions to be cleared through central counterparties. These reforms were directed towards improving transparency, mitigating systemic risk, and protecting against market abuse in OTC derivatives markets. On 3 January 2013, legislation providing a framework to implement these G20 commitments in Australia came into effect. This allowed ASIC to make rules imposing central clearing requirements for certain products within interest rate derivative classes determined by the Minister. Since the ASIC Derivative Transaction Rules (Clearing) 2015 were implemented, there have been international efforts to transition away from certain benchmark rates that are used in a range of financial instruments, including interest rate derivative contracts. ASIC has released a consultation paper to outline its proposed approach to amending the product scope of the rules to reflect changes in OTC derivative markets that will have taken place by 3 January 2022. It is proposing to remove products that reference certain discontinuing benchmarks and replace them with contracts that reference replacement near risk-free rates selected for each currency. Responses are due by 24 January 2022, and you can read the consultation paper here.
4. Project Atom (RBA): research into the use of distributed ledger technology (DLT) and digital financial assets is advancing rapidly. The use of DLT and smart contracts has the potential to deliver benefits in the form of greater efficiency, transparency, liquidity and accessibility in asset markets, as well as enable the issuance of new forms of money, such as central bank digital currency (CBDC). A private research project examined the potential use and implications of a wholesale form of CBDC, with a focus on: how access to a tokenised CBDC could be extended to a wider range of wholesale market participants than just commercial banks; the potential benefits of integrating tokenised CBDC with a digital asset in the form of a tokenised syndicated loan on interoperable DLT platforms; and, how an enterprise-grade version of the Ethereum blockchain platform could address some of the technical limitations in the public version of Ethereum. The report, which can be found here, identified that digitisation of syndicated loans on a DLT platform could provide significant efficiency gains and reduce operational risk by replacing highly manual and paper-based processes related to the origination and servicing of these facilities. Moreover, integrating a tokenised CBDC on the same blockchain platform enabled instantaneous delivery-versus-payment settlement of the loan drawdown, novation and repayment, and the smart contract functionality of DLT could potentially also be used to ‘program’ the automatic execution and settlement of more complex multi-stage and multi-party transactions involving conditions and interdependencies.
5. ASIC review (FRAA): the first Financial Regulator Assessment Authority (FRAA) review will be a targeted assessment of ASIC’s effectiveness and capability in strategic prioritisation, planning and decision-making, ASIC’s surveillance function, and ASIC’s licensing function. The FRAA, which was created after the Hayne Royal Commission, is tasked with reviewing and reporting on the effectiveness and capability of ASIC and the Australian Prudential Regulation Authority. The FRAA will provide its report to Government by the end of July 2022. The consultation paper is here, and submissions are due by 28 January 2022.

Thought for the future: Australia’s embrace of crypto at a Governmental and private enterprise level is heartening. It will place us well to lead the changes in the financial system that are inevitable — the 4 trillion worldwide crypto market is not going anywhere. We need carefully calibrated, practical and forward thinking regulation to protect and encourage its growth, which appears to be the early indication from the Government.