Australian regulators weekly wrap — Monday, 23 September 2019

The Australian regulators weekly wrap is a weekly alerter which quickly sets out five noteworthy developments from the past week. It is designed to help you in keeping up to speed with what is happening in Australian financial services regulation.

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1. DDO / PIP (Treasury): a development I missed in last week’s update (apologies!), the Morrison Government has released for public consultation exposure draft regulations to support the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth). ASIC’s product intervention powers are already publicly in play - the design & distribution obligations are the flip-side of that major legislative reform which passed in April 2019. In essence, DDO requires: a) product issuers to make a “target market determination” in relation to specified product; b) product distributors not to distribute those affected products unless a target market determination is in place; and c) both issuers and distributors must take reasonable steps to determine that the distribution is consistent with the target market determination. (“Reasonable steps” is wording coming up in a lot of recent legislation...) Generally applying to retail products, breaches can give rise to civil penalty proceedings or criminal action. PIP / DDO is a sizable regulatory reform (thankfully DDO comes into effect in April 2021) which organisations are starting to grapple with now; the regulations are helpful as they give further clarity to the range of products and entities that are subject to the DDO regime. For example, the regulations make clear that credit provided for business purposes is outside the regime. “Basic banking products”, howsoever that may be conceptualised, are caught though.
2. Banking inquiry? (ACCC): the Australian (18 / 19) reports that the ACCC is seeking the Treasurer’s approval to conduct an inquiry into the banks on the grounds that they may not be treating customers fairly. A formal directive to examine the industry’s competitiveness would allow the ACCC a broad range of powers, including to issue information demands such as in the recent digital platforms inquiry. (As a side note, information demands like these are coming in fast from regulators at the moment and placing time and budgetary pressure on corporate legal and compliance teams — look out for my forthcoming article on some practical strategies to use in mitigating these issues!). Particular focus points for the inquiry would be strategies which deter customers from switching, high fees / interest rates for longer term customers and product variability across institutions. The inquiry would be informed by the Productivity Commission’s August 2018 report, which found: “…larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers. Many of the highly profitable financial institutions have achieved that state with persistently opaque pricing; conflicted advice and remuneration arrangements; layers of public policy and regulatory requirements that support larger incumbents; and a lack of easily accessible information, inducing unaware customers to maintain loyalty to unsuitable products.”
3. IOOF action (APRA): APRA has lost its case seeking to impose licence conditions on wealth manager IOOF / certain subsidiaries and to ban five of its executives from managing people's retirement savings on the grounds that they failed to act in the best interests of their superannuation clients, as required under the Superannuation Industry (Supervision) Act 1993 (Cth). The underlying subject matter of the case was covered in the Hayne Royal Commission. Essentially, IOOF made an accounting mistake and sought to compensate its members by using monies from one of its superannuation funds (instead of its corporate resources). In dismissing IOOF’s case, Jagot J said in her judgment that there were systemic flaws in it. The really interesting thing is that Her Honour dismisses the idea that the breach report effectively establishes the breach in and of itself at [520] -[523] (just these paragraphs are my read of the week!) stating at [520]: “APRA’s apparent assumption that the facts and the documents speak for themselves is undermined when the nature of the systemic flaw (that is, a flaw confined to distributions crossing reporting periods which was not reasonably anticipated when the system was configured) and the terms of the documents are considered”.
4. Gallop action (ASIC): ASIC has won its case against Gallop International Group Pty Ltd (In liquidation) (GIG), related entities and former director Mr Ming-Chien Wang. Charlesworth J of the Federal Court found GIG operated a financial services business without holding a financial services licence, published statements which were false and misleading and engaged in misleading and deceptive conduct — GIG caused or permitted investors’ funds to be transferred its account “for purposes unrelated to the investments and that GIG did not hold investors’ funds in a designated trust account. Accordingly, the financial products and services provided by GIG did not have the benefits and characteristics represented on the GAM website and the GIG website”. The Court found that Mr Wang was knowingly concerned in GIG’s contraventions. What makes this case notable is that, if made, ASIC’s proposed civil penalty will be the highest ever at $3 million! On the current court timetable, that is likely to be on 26 September 2019.
5. Superannuation (APRA): back to superannuation, and APRA’s Chair Wayne Byrnes has delivered a speech in which he states that “Productivity Commission and the Royal Commission have concluded the superannuation system is not delivering sufficiently well. Trustees have not always been focused on their members’ best interests, aggregate fees and costs are too high, insurance has not always been good value for money, and there has been too much inefficiency in the system”. APRA has a three pronged approach to dealing with these issues, being: 1) stronger standards / enforcement; 2) better data collection; and 3)transparency i.e. giving the data back to industry. Sticking with the first part of the strategy, that is a reference to Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019. That legislation provides a directions power and civil penalty power against trustees / directors for breaching their duty to act in members’ best interests.

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(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)