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.
- BEAR — now FAR (Legislation): a huge development— on 22 January 2020, The Treasury released the Government’s proposed model for the expansion of the BEAR regime to all APRA-regulated entities e.g. banks, superannuation and insurance firms. The consultation time for the extended BEAR — now to be called the “Financial Accountability Regime” (FAR) (not the “Financial Executive Accountability Regime” or FEAR as some had hypothesized)- is very short; 14 February 2020. While expected, I do find this less than ideal given the magnitude of the changes proposed. The changes proposed by the Government with the proposed FAR regime include: 1) APRA will be able to veto director and senior executive appointments; 2) 40% of all variable remuneration is to be deferred for a minimum of 4 years, unless it is under $50,000 p.a. (no claw-back though, like in the UK); 3) additional prescribed responsibilities, including senior executive responsibility for breach reporting, dispute resolution and “setting of incentives” (banks will need to revisit their past work under BEAR); 4) an additional personal conduct obligation, being the need to take “reasonable steps” to ensure that the entity complies with its “licensing obligations” (so this will bring in ASIC’s favourite, s.912A of the Corporations Act 2001 (Cth); 5) individuals face disqualification and civil penalties ($1.05M) if they breach their obligations (I think D&O premium splitting will come back, therefore); and 6) APRA and ASIC will administer the new regime. I have summarised the key points of the Government’s proposal, provided some initial analysis and practical guidance to assist affected entities in this briefing here (my top read for the week — a bit cheeky, I know!). Affected entities need to consider whether they wish to make a submission now.
- Retail bitcoin investing (ASIC): Raiz users will now also be able to invest in Bitcoin, as ASIC has given Raiz’s retail bitcoin fund approval. It is the first such approval granted by ASIC. For those who have not come across the service, Raiz is a micro-investing platform aimed at millennials. It allows people to invest small amounts in the stock market by using an app to connect them with an Exchange Traded Fund (ETF). (ETFs are an investment fund traded on stock exchanges, and invest in a range of shares and other assets e.g. commodities.) Raiz does not require knowledge of investing, overcomes some transaction barriers by pooling customers’ funds and has a number of clever ways that allow users to make micro-donations e.g. rounding up transactions from your bank account and investing the balance via Raiz. For example, my $3.80 coffee will come up as $4 on my bank account — the $0.2 balance has been invested in Raiz. ASIC’s approval is interesting, as it has hitherto been suspicious of crypto assets, though was perhaps inevitable as this asset class steadily increases.
- 2019 in review (APRA): the prudential regulator has released an inaugural annual publication designed to highlight the actions and decisions APRA has taken over the past year to fulfill its mandate. The report outlines APRA’s perspective on the financial environment and the key issues that have faced the banking, insurance and superannuation sectors last year. It is divided into three parts. Chapter 1 relates to financial sector resilience, and covers things like APRA’s focus on GCRU (i.e. Governance, Culture, Remuneration and Accountability), its “constructively tough” enforcement approach, the new CPS 511 and capability review. It is a useful summary of the key action items of the past year, but there is no material new information here from what I can see. Chapter 2 relates to specific industry sections, and contains some more useful information and metrics in my view for specific industry segments e.g. natural disasters and the impact on general insurers. Chapter 3 relates to life at APRA e.g. organisational structure and diversity etc. I think it is a moderately useful report, and there is value in continuing going forward. It does little to change my private perception, however, that APRA generally releases less actionable information than ASIC.
- Regtech (APRA): APRA has made a submission to the Senate Select Committee on Financial Technology and Regulatory Technology in which it outlined how it is evolving its regulatory framework and approach to support the developing FinTech and RegTech sector, while ensuring risks are appropriate managed. These measures include introducing the restricted ADI licensing framework in 2018 that provides an alternative pathway to a full licence for new banking entrants (which I think is a great initiative given how cumbersome it can be to obtain an ADI!), setting up a dedicated team to engage with applicants on the licensing process and regulatory expectations (another useful initiative) and by participating in the Council of Financial Regulators (CFR) (members include the RBA, APRA, ASIC and the Treasury) which is reviewing the regulatory framework to reduce complexity, increase competition and foster innovation. It is an interesting read, though the main action for the FinTech and RegTech community is understandably centered around ASIC with its Innovation Hub and sandbox regime. Many FinTech / RegTech entities do not require the blessing or assistance of the prudential regulator, though that is much less the case for the conduct regulator…
- Illegal money transfers (AUSTRAC): CEO Nicole Rose has previously stated that small home-based money transfer operators can be exposed to human trafficking, child exploitation, illegal firearms sales and drug networks. As such, the AML / CTF regulator has been undertaking a community campaign targeting illegal money transfer dealers. Between August and November, more than 130 AUSTRAC staff visited over 400 registered money transfer businesses and over 240 people attended town hall meetings. The campaign is now finished, and AUSTRAC plans to consolidate its findings to determine the appropriate next steps and continue to assess reports of suspected unregistered remittance dealers and take any action required. As it has been doing for the past two years, expect the newly-aggressive AUSTRAC to use the additional information it has gathered to initiate formal enforcement action where possible.
Thought for the future: the volume and complexity of regulation is increasing, in particular in financial services with its focus on principles-based laws / personal liability. As are the penalties for getting it wrong. Companies, especially smaller ones, are struggling to keep up and spending increasing amounts of money on legal and compliance. Technological solutions not only offer a way to comply with the increasing demands, but also to enhance businesses. The regulators are also adopting technology at pace (see an AFR article on 22 / 1 that I commented on here in this regard). Traditional RegTech using Robotic Process Automation, Big Data Analysis, AI, and Machine Learning has focused on 5 categories; 1) compliance e.g. AI searching for new regulations; 2) identity management e.g. AI-assisted KYC; 3) risk management e.g. fraud detection; 4) regulatory reporting; and 5) transaction monitoring. My sense is that more bespoke applications will start to arise, based on major new laws. Take FAR (formerly BEAR) for example. Given that APRA will be able to veto directors / executives where it holds information which conflicts with that person’s obligation to demonstrate “integrity” etc, RegTech applications which can crawl public and semi-public domains to obtain information that will assist in the due-diligence vetting process is not so far-fetched a possibility. Arguably a touch “black mirror” though…
Do you think I overlooked something or would like more information? If so, please send me a message!
(These views are my own and do not constitute legal advice. Photo credit Tom Wheatley)