Australian regulators weekly wrap — Monday, 13 June 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. Crypto legislation (US): I am not sure what is happening in the US with leaked documents recently, but the WSJ has leaked the draft crypto legislation which you can read here. A dense document — it is US legislation after all — some of the key points are: the bill is centered around the terms ‘digital asset’ and ‘digital asset exchange’; digital assets have been treated as a form of property (instead of data); a policy goal of the bill has been to lower taxes to encourage innovation in the area — that is evident throughout the bill, e.g. section 205 ‘Tax Treatment of Digital Asset Lending Agreements and Related Matters’ establishes that digital asset lending agreements are not generally taxable events; ‘mining’ and ‘staking’ of digital assets (along with raising funds for charitable purposes) will be excluded from tax requirements (via s501(c)(7) of the Internal Revenue Code of 1986); there are to be some rules around tax compliance — from 1 January 2025 brokers will have to produce annual returns reporting any transfer (which is not part of a sale or exchange) of a digital asset with an unrelated party; the CFTC components also strictly spells out the holding of customer assets. For e.g., it is establishing a requirement for merchants (licensed) to segregate digital assets to minimise the risk of customer loss under their custody; section 404 includes several requirements digital exchanges will have to meet, as well as additional rules for margin or leveraged trading e.g. only permit trading in assets not open to manipulation (which sounds tricky for organisations to regulate!); digital assets are viewed as ‘consumption’ goods rather than ‘investment’ goods, although it is case-by-case, and the bill has some practical protections for consumers e.g. Title V Responsible Consumer Innovation places stringent disclosure obligations on foreign issuers of ancillary assets. Finally, and interestingly, stablecoin issuers will have to meet its entire customer obligations in their capital adequacy requirements — this is a response to the Terra stablecoin collapse. A fascinating insight into US policymakers’ considerations, which will no doubt pop up in our own as Australia grapples with how to regulate crypto-currency under a new Government! (Reach out if you want a more detailed briefing, which we have prepared.)
2. EPIC Investments (ASIC): ASIC has cancelled the AFSL of Epic Property Investments Ltd (Epic), which operates 2 registered managed investment schemes. ASIC took this action because Epic has not held professional indemnity insurance since 21 April 2021. Epic was unsuccessful in its attempts to obtain the required insurance cover. As a result, ASIC considered that Epic has failed to comply with its obligations on an ongoing basis and was not providing retail clients with consumer protections required under the regulatory regime for AFS licensees. Given that the insurance market is exceptionally hard at the moment, and following the RI Advice case, this strikes me as very harsh. Consumer protection is important, undoubtedly, but can be met through other means than a cottage industry of decreasing PI insurers. Appropriately structured terms where the underlying asset is cash at bank, bank guarantees, or say real property assets offer the same if not more protection. This licensing requirement could do with a rethink in my view…
3. ePayments (ASIC): a long time coming, the new ePayments Code has been released. The ePayments Code provides consumer protections in relation to electronic payments, including ATM, EFTPOS, credit and debit card transactions, online payments, and internet and mobile banking. It sets out a process for customers to get help from their financial institution in retrieving funds they have mistakenly paid to the wrong person. ASIC has updated the following areas of the Code: compliance monitoring and data collection; mistaken internet payments; unauthorised transactions; complaints handling; and, facility expiry dates.
4. Risk survey (APRA): it is worth subscribing to Government tender portals, as occasionally you get some gems — APRA is seeking information on the services to support an industry-wide risk culture benchmarking survey. Specifically, APRA is seeking a supplier to provide a tool which will enable a survey of up to 70 regulated entities across approximately 200,000 employees. The purpose of this RFI is to allow APRA to build a better understanding of the capabilities, capacity and indicative pricing for future procurement activities. No more Survey Monkey surveys, prudential entities can no doubt look out for this one in the near future!
5. Scams (ACCC): Australians lost over $205 million to scams between 1 January and 1 May, a 166 per cent increase compared to the same period last year. The majority of losses over this period have been to investment scams with $158 million lost, an increase of 314 per cent compared to the same period last year. The majority of losses to investment scams involved crypto investments, with $113 million reported lost this year. People aged 55 to 64 reported the highest total losses, $32 million between 1 January and 1 May and over 80 per cent of losses reported by this age group was lost to investment scams ($26m). Generally speaking, Australians’ have poor financial literacy comparative to other development countries, and education is part of the answer. Another part of the answer is to support access to financial advisers instead of loading them up with regulation…

Thought for the future: there are the big ticket items which individuals focus on in terms of the challenges in the financial services industry e.g. new breach reporting rules, DDO and FAR. Then there is the surrounding practice e.g. court actions, license actions, etc. The former is largely stable now, whereas the latter strikes me as a quite hard — the regulators appear to have lost none of their hawkishness in the wake of the Hayne Royal Commission…