Financial Services and Credit Monthly Update May 2024
Our latest Financial Services and Credit Monthly Update is now available, covering the month of May 2024. Click the button to download the PDF.
CONSUMER CREDIT
ASIC tells lenders to improve hardship support
The Australian Securities and Investments Commission (ASIC) has released a report on lenders’ support for customers in financial hardship, following its review of 10 large Australian home lenders. The report highlights failures to identify customers in financial distress, shortcomings in handling of hardship requests, onerous assessment and approval processes, and poor communications with customers. It is reported that 35% of customers dropped out of the hardship application process at least once, and that 40% of customers who received hardship assistance through payment reduction or deferral fell into arrears after the assistance ended. ASIC has urged lenders to act on the findings in the report and prioritise improving their support for customers in hardship.
CONSUMER PROTECTION
ASIC alerts on investment scam developments
ASIC has issued an alert to consumers about new methods of investment scams being deployed by scammers, in particular regarding fake bond and term deposit offerings. Scammers are reported to be increasingly impersonating less well-known financial services businesses with little to no digital footprint so as to restrict consumers’ ability to conduct due diligence. As part of the changing methods, scammers are also mirroring real businesses’ documents and credentials (e.g. Australian business numbers, Australian financial services licence numbers, etc.) and creating fake reviews online.
ASIC has urged consumers to be wary of investment scams that set up bank accounts in the consumer’s name or that request funds to be directed to a third-party account that is not in the financial services business’s name or held by the bank offering the service. The alert also provides examples of common signs of investment scams.
Warning against dodgy cold caller and online baiting tactics
ASIC has published a warning to consumers against cold calling operators adopting high-pressure sales tactics and online clickbait advertising to tempt consumers to receive inappropriate superannuation switching advice. ASIC says that these operators make unsolicited calls to consumers using personal information that they obtained from third-party data brokers or by employing online clickbait. They often refer the customers to financial advisers who recommend switching into super products with higher risk investments, fees and charges. ASIC is encouraging consumers to hang up calls from cold calling operators and to ignore clickbait advertisements.
National Anti-Scam Centre scam update report
The National Anti-Scam Centre's scam update for the first quarter of 2024 shows scam losses dropping by 10.8% for Scamwatch and 41.2% for the Australian Financial Crimes Exchange from the previous quarter. The centre also helped shut down 5,000 investment scam websites with ASIC since July 2023. The Federal Government will add $67.5 million in the 2024-25 Budget to implement reforms that require banks, telcos, social media platforms to prevent and fight scams. The legislation for the scams codes framework is expected this year.
CORPORATE
Review of changes to continuous disclosure laws
The Treasury has published a report of the independent review of changes to the continuous disclosure laws made by the Treasury Laws Amendment (2021 Measures No.1) Act 2021 (Cth) (2021 Amendments). Continuous disclosure laws impose an obligation on listed entities to disclose information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, on a continual basis and in a timely manner. The 2021 Amendments introduced an additional requirement (a fault element) to establish a contravention of these laws, namely that ASIC (in the case of civil penalty proceedings) or a private litigant (in the case of civil compensation proceedings) must prove that the disclosing entity knew, or was reckless or negligent with respect to whether, the information would, if it were generally available, have a material effect on the price or value of the entity’s securities. The independent report sets out findings regarding the impact of the 2021 Amendments and provides recommendations to the Federal Government. The report recommends removing the fault element for ASIC actions but retaining it for actions by private litigants.
FINANCIAL ADVICE
ASIC INFO 281 on experience provider pathway
On 22 May 2024, ASIC released INFO 281 on the experienced provider pathway for financial advisers. The pathway is an alternative way for financial advisers to satisfy the qualifications standard and the professional year standard without needing to undertake further education and training. INFO 281 guides relevant providers on accessing the pathway, including making necessary declarations.
FINANCIAL SERVICES
Consultation on carbon markets regulatory guide
ASIC is seeking submissions on the proposed updates to the Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? (RG 236) to address the safeguard mechanism reforms. The updates relate to changes which have occurred since the last re-issue of RG 236 in May 2015, notably in regard to Australian Carbon Credit Units. Consultation is open until 3 June 2024.
FOREIGN INVESTMENT
Foreign investment framework reforms
On 1 May 2024 the Treasurer announced reforms to Australia’s foreign investment framework. The reforms aim to make the framework more robust, streamlined, and transparent. An updated foreign investment policy document has been released to reflect the changes.
The Government is implementing a risk-based approach to reviewing foreign investment proposals and says it will have more robust, efficient, and effective arrangements to scrutinise complicated or higher-risk proposals, dedicating more resources to screening foreign investment in critical infrastructure, minerals, technology, and sensitive data sets. The processing regime is being streamlined to provide faster approvals for known investors making investments in non-sensitive sectors with a good compliance record, to reduce wait times and compliance costs. Consultation timeframes will be shortened, paperwork reduced for repeat investors, and Treasury will adopt a new target of processing 50% of cases within 30 days from 1 January 2025. The Government will also incentivise early applications, allow foreign investors to purchase established Build to Rent properties, and remove regulatory duplication in the assessment of competition issues.
Consultation on exempting interfunding from notification requirement
As part of the foreign investment reforms announced in May 2024 (see above), the Federal Government is seeking submissions on draft regulations to exempt interfunding transactions from mandatory notification requirements and fees under the Foreign Acquisitions and Takeovers Act 1975 (Cth). Interfunding refers to transactions between investment entities managed by the same or related responsible entity, and they often involve high-volume and low-value transactions. The regulations implementing the exemption aim to reduce the regulatory burden for foreign investors in relation to this lower-risk passive investment activity while maintaining appropriate Government control. Submissions closed on 31 May 2024.
PRIVACY AND DATA
Digital ID
The Digital ID Act 2024 (Cth) received assent on 30 May 2024. The Act:
legislates and strengthens a voluntary Accreditation Scheme for digital ID service providers that wish to demonstrate compliance with best practice privacy, security, proofing and authentication standards;
legislates and enables expansion of the Australian Government Digital ID System (AGDIS) for use by the Commonwealth, State and Territory governments and eventually private sector organisations;
embeds privacy and consumer safeguards; and
strengthens governance arrangements for the Accreditation Scheme and the AGDIS, including by establishing the Australian Competition and Consumer Commission as the Digital ID Regulator, and expanding the role of the Information Commissioner to regulate privacy protections for digital IDs.
PRUDENTIAL
APRA letter on new private health insurance capital framework
The Australian Prudential Regulation Authority (APRA) has issued a letter to all private health insurers (PHIs) outlining its observations from reviews of a number of PHIs’ Internal Capital Adequacy Assessment Process Summary Statements and analysis of the impacts of the implementation of the new PHI capital framework.
Member Therese McCarthy Hockey’s speech on artificial intelligence
On 22 May 2024, APRA Member Therese McCarthy Hockey represented APRA at the AFIA Risk Summit in Melbourne and delivered a speech on how APRA-regulated entities should approach the implementation of generative artificial intelligence (AI) tools in their businesses. Ms Hockey’s speech highlighted both potential benefits and risks that generative AI can bring about. She said APRA welcomed the use of AI in the financial services industry, but she emphasised the need for APRA-regulated entities to have board oversight, robust technology platforms and strong risk management, including having a “human in the loop”. Ms Hockey also said that APRA had no plan to introduce regulatory requirements to mitigate AI risks, as current regulations were sufficient to deal with generative AI for the time being.
AML/CTF
Second tranche AML/CTF reforms
The Commonwealth Attorney-General’s Department has released the second stage consultation papers regarding proposed reforms to the Australian anti-money laundering and counter-terrorism financing (AML/CTF) regime. The reforms are aimed at simplifying and clarifying the regime to ease businesses’ compliance with their obligations and modernising it to accommodate the changing business structures and technologies across the economy. The second-round consultation closes on 13 June 2024.
The key element of the proposed reforms is to bring ‘tranche two’ entities, consisting of lawyers, accountants, trust and company service providers, real estate professionals, and dealers in precious stones and metals, into the scope of the regime.
DISPUTES AND ENFORCEMENT
ASIC first court win against crypto-asset payment facility
The Federal Court has found BPS Financial Pty Ltd (BPS) engaged in unlicensed conduct in its offering of the ‘Qoin Wallet’, a non-cash payment facility which utilised a crypto-asset token called ‘Qoin’ without holding an AFSL or being authorised by a licence holder. BPS was also found liable for misleading or deceptive conduct and for making false or misleading representations concerning Qoin Wallet, including statements to the effect that:
Qoin Wallet was officially registered or approved when it was not;
the number of Qoin merchants was increasing when it was declining; and
Qoin tokens can exchanged through independent exchanges when the only exchange that accepted Qoin prior to 2021 was BTX Exchange, and it was not independent of BPS.
BPS operated as the authorised representative of various financial services licensees. As part of its findings in the case, the Court held that it was possible for an authorised representative to be the issuer of a financial product, which overturned ASIC’s long-standing position that only a licensee can be a product issuer. For more comments on this aspect of the case, see our article.
J.P. Morgan Securities fined for market gatekeeper failure
The Markets Disciplinary Panel (MDP) has imposed a $775,000 fine on J.P. Morgan Securities Australia Limited (JPM) for failing to identify 36 orders placed by a client between 11 January and 3 March 2022 as suspicious for being submitted with the intention of creating a false or misleading appearance of the market for, or the price of, certain wheat futures contracts. The MDP found that JPM’s failure was careless and that JPM should have detected the conduct and acted more expeditiously when it was alerted by ASIC, given that there were a number of factors arousing suspicion. JPM has complied with the infringement notice and paid the fine.
SkyCity agrees to pay penalty over AML/CTF failures
SkyCity Adelaide Pty Ltd (SkyCity) has reached an agreement with the Australian Transaction Reports and Analysis Centre (AUSTRAC) on a proposed $67 million penalty following AUSTRAC’s allegation that it allowed $4 billion in suspicious transactions and failed to conduct due diligence on its high-risk customers. In forming the agreement with AUSTRAC, SkyCity admitted that it operated in breach of AML/CTF legislation, including that its AML/CTF programs failed to meet the requirements under the legislation, and that it failed to conduct the relevant due diligence. AUSTRAC’s proceedings against SkyCity mark its third action against a casino operator for non-compliance with AML/CTF obligations, after actions against Star Entertainment and Crown Resorts.
DDO stop orders issued against Trademax Australia
ASIC has imposed two interim stop orders restraining Trademax Australia Limited (Trademax) from opening trading accounts or dealing in contracts for difference or margin foreign exchange contracts to retail investors. The stop orders followed ASIC’s concerns that Trademax failed to take reasonable steps to ensure that its retail investors fell within its target markets for the two products. Trademax’s failure related to its reliance on an inadequate questionnaire for retail investors and a lack of other controls in its onboarding process to determine whether investors were within its target market for the products.
Cigno and BSF engaged in unlicensed credit activities
The Federal Court has found Cigno Australia Pty Ltd (Cigno) and BSF Solutions Pty Ltd (BSF) liable for engaging in credit activity without an Australian credit licence and charging consumers prohibited fees. The directors of each Cigno and BSF were also found to have engaged in unlicensed credit activity. Cigno and BSF operated a “No Upfront Charge Loan Model” under which a consumer could borrow money from BSF and not pay any fees or interest if the loan was not in default; however, the consumer would also enter into an “Account Keeping Agreement" with Cigno under which the consumer was effectively charged for the provision of the credit obtained from BPS through other fees. The Court agreed with ASIC’s submission that these fees were credit fees and charges, so that the credit provided was regulated under the consumer credit legislation.
Mercer Super licence conditions
APRA has imposed additional licence conditions on Mercer Superannuation (Australia) Limited (Mercer Super) to address identified deficiencies in risk management and compliance management. Mercer Super admitted to significant breaches of prudential standards SPS 220, SPS 231, and SPS 232. Effective from 27 May 2024, the new licence conditions require an operational effectiveness review and an attestation from the Trustee Chair confirming remediation and compliance.