Australian regulators weekly wrap — Monday, 14 June 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. LIBOR (APRA, ASIC and RBA): ASIC, APRA and the RBA have followed the Financial Stability Board’s lead, and released statements confirming their requirement that the use of LIBOR in new contracts should cease as soon as practicable, and no later than the end of 2021. The Financial Stability Board’s made an announcement to this effect on 2 June 2021. There is some great resources in the FSB’s webpage, including a useful global transition roadmap, which is my top read for the week. They will be helpful in moving away from the benchmark as, in the words of our Australian regulators, “[c]ontinued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system. Firms themselves may also face financial, conduct, litigation, and operational risks associated with inadequate preparation”. (Emphasis added)
2. Anti-money laundering (AUSTRAC): NAB and casino operators Crown, SkyCity and Star Entertainment Group told investors they had been referred to AUSTRAC’s enforcement team following the identification of potential “serious non-compliance” with anti-money laundering and counter-terrorism financing laws. In particular, AUSTRAC told the NAB “there is potential serious and ongoing non-compliance” regarding customer identification procedures, ongoing customer due diligence and compliance with Part A of a joint AML/CTF Program. The bank is not facing civil penalty proceedings, which is in part reflective of the huge effort it has expended in upgrading its AML / CTF framework over the past 3 years; following on the heels of AUSTRAC’s enforcement outcomes regarding Tabcorp, CBA and Westpac, this latest development reinforces the once hibernating AML regulator is now fully awake. (Which is something we are seeking to mitigate the risk for our clients with our new Regtech we have spent a long time developing, the Gadens’ breach manager. See here.)
3. Class actions (Treasury): on 21 December 2020, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) handed down its report, Litigation funding and the regulation of the class action industry. Recommendation 20 of the report was that the Australian Government consult on: the best way to guarantee a statutory minimum return of the gross proceeds of a class action (including settlements); whether a minimum gross return of 70 per cent to class members, as endorsed by some class action law firms and litigation funders, is the most appropriate floor; whether a graduated approach taking into consideration the risk, complexity, length and likely proceeds of the case is appropriate to ensure even higher returns are guaranteed for class members in more straightforward cases. The PJC found ‘systemic and inappropriate’ skewing of successful class action proceeds in favour of litigation funders, at the expense of class members’ share of the proceeds. The PJC noted litigation funders should be reimbursed for the costs they incur and make a profit which is reasonable and proportionate to the risk they undertake. However, it found that the proportion of proceeds going to litigation funders is often disproportionate to the cost and risk undertaken. The PJC noted that this created an unfairness that is primarily borne by the class members, as their share of the settlement is ‘significantly reduced by the excessive proportion going to litigation funders’. In particular, the PJC highlighted that the practice of percentage-based billing enables windfall profits to be obtained by funders. It noted that percentage based billing can significantly reduce class members’ share of settlement proceeds and is often disproportionate to the actual financial contribution outlaid by the litigation funder. The Federal Court has also acknowledged concerns with the unreasonably low proportion of judgment or settlement sums being received by class members, once litigation funding commissions and legal costs are deducted. The Treasury has now released a consultation paper, which will close on 28 June 2021. Personally, from my experience with class actions, I am very much in favour of statutory minimum returns.
4. Scams (ACCC): Australians lost over $851 million to scams in 2020, a record amount, as scammers took advantage of the pandemic to con unsuspecting people, according to the ACCC’s latest Targeting Scams report. The report compiles data from Scamwatch, ReportCyber, other government agencies and 10 banks and financial intermediaries, and is based on more than 444,000 reports. Investment scams accounted for the biggest losses, with $328 million, and made up more than a third of total losses. Romance scams were the next biggest category, costing Australians $131 million, while payment redirection scams resulted in $128 million of losses. $143 million was the Amount reported lost to Scamwatch (a 34% increase from $107 million in 2018), and $7,224 is the average loss from scam amounts.
5. Hayne Royal Commission (Treasury): with the final report handed down in early 2019, and the Government committed to all recommendations, it is timely to revisit where each is at. To that end, please see the handy infographic below — COVID-19 has delayed some of the reforms e.g. FAR, but they are still working their way through the system and will make for a very busy second half to the year!

Royal Commission Reforms — Status as at 2021

Thought for the future: the UK FCA issued warnings on two companies acting as ‘clone firms’ of licensed financial businesses. UBS Capital Wealth and ICO Crypto are on the regulator’s watch, as fraudsters are using UBS AG and Swiss Re Capital Markets Limited details, respectively, to try to convince people that they are a legitimate company. Something to keep an eye out for in Australia, as we battle our own rise in unscrupulous scammers capitalising on the disruption caused by COVID-19…