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.
- Share transfers (ASIC): ASIC has released updated regulatory guidance to formalise its policy on when it will give Chapter 6 relief for share transfers under s444GA of the Corporations Act. Section 444GA allows shares of a company in administration to be transferred by an administrator as part of a deed of company arrangement. The updated guidance is set out in: Regulatory Guide 6 (RG 6) Takeovers: Exceptions to the general prohibition and Regulatory Guide 111 (RG 111) Content of Expert Reports. ASIC will generally require explanatory materials to be provided to shareholders, including an Independent Expert Report (IER) prepared on a non-going concern basis in accordance with RG 111 Content of Expert Reports demonstrating that shareholders have no residual equity in the company, and the IER to be prepared by an independent expert (other than the administrator) in accordance with RG 112 Independence of experts. I have seen some healthy debate in the insolvency industry about ASIC’s position that someone independent from administrators prepare the report. One argument is that it adds unnecessary costs, and that administrators are perfectly capable of doing this report. On the other side, the argument goes that administrators are not sufficiently independent enough to prepare the report. I am in the latter camp; for something as critical as share transfers in a distressed scenario, where the information asymmetry is marked, you want the person advocating you transfer your shares i.e. the administrator separate to the person telling you what they are worth i.e. the valuer.
- Adelaide & Bendigo (APRA): APRA has increased Bendigo and Adelaide Bank’s minimum liquidity requirement for failing to comply with APRA’s ADI prudential standard on liquidity. The breaches of APS 210 — Liquidity are historical in nature, and Bendigo and Adelaide Bank’s current liquidity position is now above APRA’s minimum regulatory requirements. Bendigo and Adelaide Bank informed APRA in September of multiple breaches of APS 210 stemming from IT coding that incorrectly classified some retail deposits in the most stable category of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The breaches raised questions over the bank’s past risk management practices, and ability to accurately calculate and report its liquidity ratios. APRA will require a comprehensive review by an independent third party into the bank’s adherence with APRA’s liquidity requirements. APRA will also require Bendigo and Adelaide Bank to apply a 10 per cent add-on to the net cash outflow component of its LCR calculation, which will remain in place until the independent review is finalised and short-comings have been rectified to APRA’s satisfaction. The matter raises an interesting point — everyone always focuses on breaches of s.912 of the Corporations Act 2001 (Cth) for AFSL holders. Less prominent, but far broader, are breaches of s. 62A(1B) of the Banking Act 1959 (Cth) which is predicated on an ADI breaching a prudential standard. There are lot, as you can see by clicking here…
- Life Insurance (APRA): APRA has released its Life Insurance Claims and Disputes Statistics publication, covering a rolling 12-month period from 1 July 2019 to 30 June 2020. APRA’s Life Insurance Claims and Disputes Statistics publication presents the key industry and entity-level claims and disputes outcomes for 20 Australian life insurers writing direct business (i.e. excluding reinsurance). The statistics are accessible here, and make for interesting viewing. Claims made through policies which are not taken out via group super have a lesser admittance rate, and a much higher (almost double) claims paid ratio than other policies. Claims paid ratio is the dollar amount of claims paid out in the reporting period as a percentage of the annual premiums receivable in the same period.
- CFDS (ASIC): ASIC has made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients. A CFD is a contract between two parties, typically described as “buyer” and “seller”, stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time. ASIC’s order, which has been in the works for some time and is broadly consistent with other markets, reduces CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses. From 29 March 2021, ASIC’s product intervention order will restrict CFD leverage offered to retail clients to specified maximum ratios; standardise CFD issuers’ margin close-out arrangements; protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account; and prohibit giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads). ASIC also confirmed it will not require issuer-specific risk warnings or other disclosure-based conditions as originally proposed in Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322). While ASIC reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs, and no doubt they are a highly risky product, I do feel a bit conflicted on this one. This is not an example of regulatory arbitrage, or an inherently problematic product — it is just a highly risky one that most retail customers are not equipped to handle. If they do, however, should it be a case of buyer beware? I can see very good arguments on both sides…
- AUSTRAC Annual Report (AUSTRAC): The AUSTRAC annual report 2019–20 has been released. My top read for the week, it sets out AUSTRAC’s activities in the past year, including: partnering with agencies including the Australian Taxation Office and Services Australia to prevent and detect fraud against, and criminal exploitation of, Australian Government programs introduced in response to COVID-19, such as the early release of superannuation and JobKeeper; the addition of five new Fintel Alliance members, which has supported the AUSTRAC-led public-private partnership to expand its focus to 24 crime types and commence 29 operations in 2019–20; supporting industry with a range of measures to assist industry in complying with their legislative obligations during COVID-19; and collaboration with the Australian Banking Association and the Australian Israeli Chamber of Commerce of NSW, to make a change to an Anti-money Laundering and Counter-terrorism Financing Rule to help Australians fleeing domestic violence and financial abuse. Looking forward, AUSTRAC states that it will use the $104 million funding boost announced as part of the 2020–21 Federal Budget to dedicate more resources to ensuring regulated businesses comply with their anti-money laundering and counter-terrorism financing obligations, increasing the detection of non-compliance as well as the delivery of an enhanced reporting system for its 15,000 reporting entities. Make no mistake, AUSTRAC enforcement hungry approach is not going away. Not with all the praise (and budgetary recognition) it has had in the wake of its results with Westpac, CBA and Tabcorp. Now to see how Crown Casino fares..
Thought for the future: the US Foreign Corrupt Tax Practices Act is a more than 40-year-old law banning companies from bribing foreign officials to win business. It has been wielded fearfully by the US DOJ since the Bush administration; not under President Trump though, who is not a big fan of it. In his Presidency the number of new corporate anti-bribery investigations has fallen, according to data collected by Stanford Law School’s Foreign Corrupt Practices Act Clearinghouse. In 2019, publicly traded companies disclosed that just six new government investigations were initiated in 2019. That compares to an average of 20 investigations initiated per year over the past 10 years, according to the Clearinghouse. If Biden is elected on 3 November, will the trend reverse in 2021?
(These views are my own and do not constitute legal advice. These updates are not designed to be comprehensive. Photo credit Tom Wheatley)