In this edition of Gilbert + Tobin’s Financial Services Regulation Newsletter, we focus on key legal developments over the last fortnight.
Contents
On the pulse
ASIC: Greenwashing: A view from the regulator - see speech .
ASIC calls on super trustees to improve gatekeeping of member savings - see media release .
ASIC consults on updated guidance for carbon market participants - see media release .
ASIC: Market Integrity Update Issue 158 - see Market Integrity Update: Issue 158 (April 2024).
APRA Executive Board Member Suzanne Smith - Speech to the All Actuaries Summit 2024 - see speech .
APRA publishes letter to support the implementation of the new PHI capital framework - see media release .
AUSTRAC: Second stage consultation on reforming Australia’s AML/CTF regime is now open - see media release .
Consultation on the fifth edition of the Corporate Governance Principles and Recommendations - see the Council’s consultation package .
IOSCO welcomes IESBA’s consultation on the Proposed International Ethics Standards for Sustainability - see IOSCO media release .
ATO: Global Tax Chiefs and SFCT build capability to combat crypto crime - see media release .
Court of Appeal confirms meaning of "involves dishonesty" for offences resulting in automatic disqualification of company directors - Waters v Diesel Holdings Pty Ltd [2024] VSCA 77
Consultation on Draft Buy Now, Pay Later (BNPL) Legislation Closes - see consultation .
Senate Committee recommends passing climate-related financial disclosure legislation - see report .
Attorney General: Boosting Australia’s anti-money laundering and counter-terrorism financing regime - see media release .
G+T Insight - Opportunities and Risks of Large Language Models in Financial Services - Chris Whittaker, Silvana Wood and Peter Waters (6 May 2024)
ASIC
ASIC: Greenwashing: A view from the regulator
On 2 May 2024, Australian Securities and Investments Commission (ASIC) Chair Joe Longo gave a keynote speech at the Responsible Investment Association Australasia (RIAA) Conference 2024 in which he made some observations about ASIC's perspective and approach to greenwashing, how ASIC is addressing the issues it sees, and what ASIC expects of industry in complying with regulatory requirements.
Key points from the speech include:
While the shift to sustainable finance may constitute a once-in-a-generation transformation, the fundamental underlying principles of accuracy and transparency are not new.
ASIC supports the introduction of internationally aligned, mandatory climate-related financial disclosure requirements in Australia towards this end, but climate reporting constitutes only one means of reducing greenwashing.
Combating greenwashing is critical to supporting trust in sustainable finance-related financial products and services. ASIC's view is that a compliant business is a profitable business because it supports everyone's best interests.
ASIC's greenwashing interventions are founded on enforcing well-established legal obligations that prohibit misleading and deceptive conduct, and ASIC's focus is on entities that ASIC considers carelessly give inaccurate or misleading statements.
The main types of conduct that have caused ASIC to intervene are, in summary:
net zero statements and targets, that are either made without a reasonable basis or that are factually incorrect;
the use of terms such as "carbon neutral", "clean" or "green", that are not founded on reasonable grounds;
the overstatement or inconsistent application of sustainability-related investment screens; and
the use of inaccurate labelling or vague terms in sustainability-related funds.
are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) and meet certain size requirements; or
have emissions reporting obligations under the National Greenhouse and Energy Reporting scheme.
For the full speech, see ASIC: Greenwashing: A view from the regulator.
G+T article, see ASIC’s first greenwashing win in Federal Court
ASIC calls on super trustees to improve gatekeeping of member savings
ASIC is calling on superannuation trustees to renew efforts to protect members from unscrupulous operators amid evidence of inadequate oversight of advice fee deductions.
A newly published ASIC report outlines key findings from a review of the progress superannuation trustees have made in addressing deficiencies in their monitoring of fee deductions for the provision of financial advice.
The review found that these deficiencies — brought to light through ‘fees for no services’ cases heard by the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry — continue to pose risks and cause detriment to members.
ASIC recognises the importance of access to quality financial advice about superannuation, and acknowledges it is common for advice fees to be deducted from superannuation accounts. However, trustee vigilance can mitigate risks to members from unscrupulous operators, including cold calling businesses using high-pressure sales tactics leading to inappropriate superannuation switching advice— as flagged in ASIC’s earlier release (refer 24-092MR).
From a sample of 10 superannuation trustees representing approximately eight million members, managing a combined $923 billion in assets (as of 30 June 2023), ASIC found over a 12-month period:
over $990 million in advice fees charged across more than 476,000 member accounts;
three trustees reported not checking any advice documents on a risk or random basis;
fee caps as high as $20,000 or 5% of a member’s balance were in place, with few trustees implementing controls to protect members with low balances;
members of 70% of trustees were found with advice fee deductions exceeding $15,000;
variability in onboarding and monitoring processes for financial advisers, including limited checks of ASIC’s registers by some.
“Despite repeated calls for an uplift in practices from ASIC and APRA in joint letters issued in 2019 and 2021, our latest review shows continued deficiencies in trustee oversight of advice fee deductions by some trustees,” ASIC Commissioner Simone Constant said.
ASIC urged superannuation trustees to reassess their oversight processes and consider the following steps to strengthen member protections:
reviewing the ways financial advice documents are sampled to identify unscrupulous advisers providing harmful advice
objectively considering the caps on advice fee deductions, including by using objective criteria to assess the cost of adviceto help trustees determine appropriate fee caps;
enhancing adviser onboarding practices, including by vigilantly monitoring for financial advisers involved with cold calling businesses and using fact finds of advice licensees;
regularly checking ASIC’s Financial Adviser Register for unexpected adviser movements that might indicate a problem, maintaining watchlists and monitoring patterns or irregularities in advice fee deductions, withdrawals of member consent and rollovers into the fund
ASIC will publish an Information Sheet in the coming weeks, which sets out how financial services laws apply to cold calling operators, financial advisers, and financial advice licensees.
See ASIC media release and REP 781: Review of superannuation trustee practices: Protecting members from harmful advice charges.
ASIC consults on updated guidance for carbon market participants
ASIC is proposing to update Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? ( RG 236 ) to address the safeguard mechanism reforms. The proposed updates also address changes that have occurred since RG 236 was last re-issued in May 2015.
ASIC has released a consultation paper on proposed updates to its regulatory guidance for participants in the carbon market in relation to Australian financial services licensing requirements.
The proposed updates address the implications of the safeguard mechanism reforms to the financial services and markets section of the Corporations Act 2001 (Cth). The reforms will allow the Clean Energy Regulator to issue a new type of carbon product, safeguard mechanism credit units (SMCs), from January 2025. SMCs will be a type of eligible international emission unit and therefore regulated as a financial product under the Corporations Act 2001 (Cth).
ASIC invites feedback on its proposals to update RG 236 by 3 June 2024.
See Consultation Paper 378 Safeguard mechanism reforms: Updates to RG 2236 (CP 378) and ASIC media release .
ASIC: Market Integrity Update Issue 158: April 2024
ASIC has published ASIC Market Integrity Update: Issue 158 (April 2024) , which includes media releases about:
The winding up of retail over-the-counter derivative issuer Prospero Markets Pty Ltd by the Federal Court on just and equitable grounds, following an investigation that resulted in former officers and responsible managers of Prospero being charged with money laundering offences in October 2023.
ASIC's cancellation of the Australian financial services licence of JB Markets Pty Ltd for failing to comply with the financial requirements of the licence and to have adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements.
ASIC's crackdown on breaches of regulatory data obligations.
ASIC's encouragement of market intermediaries to adopt multifactor authentication to reduce the incidence of account compromise and mitigate the risk of cyber breaches.
See Market Integrity Update: Issue 158 (April 2024).
ASIC key actions and proceedings
ASIC wins first court outcome regarding a non-cash payment facility involving crypto assets - The Federal Court has found BPS Financial Pty Ltd (BPS ) engaged in unlicensed conduct when offering the ‘Qoin Wallet’, a non-cash payment facility which used a crypto-asset token called ‘Qoin.’ See ASIC media release .
Financial Services Licensee sentences for failing to lodge annual financial reports - Australian Financial Services Licensee Odyssey Equity Finance Pty Ltd of Keilor East, Victoria, was sentenced on 24 April 2024 in the Dandenong Magistrates’ Court for failing to lodge financial reports with ASIC for each of the financial years ending 30 June 2020, 2021 and 2022. See ASIC media release .
ASIC protects small business by disqualifying four directors for failures relating to the management of small proprietary companies - During the period 1 January to 31 March 2024, ASIC has banned four directors from managing corporations following their role in the collapse of multiple small proprietary companies leaving many creditors unpaid including the Australian Taxation Office, employees and other small business creditors. Some of the directors had also engaged in illegal phoenix activity and used company funds to make payments to related parties for no commercial reason. See ASIC media release .
ASIC sues Magnis and Frank Poullas over disclosure failures - ASIC has launched civil penalty proceedings in the Federal Court against Magnis Energy Technologies Limited, alleging the company failed to disclose material information about its self-described “flagship” lithium-ion battery manufacturing facility. ASIC is also suing Magnis executive chairman Frank Poullas for his involvement in Magnis’ alleged disclosure failures and for alleged breaches of his director’s duties, arguing that he failed to ensure Magnis met its disclosure obligations. See ASIC media release .
ASIC issues warning over dodgy cold calling operators and online baiting tactics - ASIC is warning consumers to be wary after an ASIC review identified some cold calling operators using high-pressure sales tactics and online click-bait advertisements to lure consumers into receiving inappropriate superannuation switching advice. See ASIC media release .
ASIC freezes assets of Brisbane financial advisor - ASIC has commenced urgent proceedings in the Federal Court against Sunny Mahendra Prakash and his related companies, Principal Financial Services Pty Ltd, Self-Managed Super Pty Ltd, Provest Enterprises Pty Ltd and Super Funds Australia Pty Ltd ITF Principal Superannuation Fund (Related Companies). See ASIC media release.
Western Australian directors convicted for failing to have director identification numbers - Two Western Australian directors have been convicted in the Perth Magistrates Court and fined $5,000 each for failing to comply with director identification requirements. See ASIC media release .
APRA
APRA Executive Board Member Suzanne Smith - Speech to the All Actuaries Summit 2024
On 1 May, APRA Executive Board Member Suzanne Smith delivered a speech at the All Actuaries Summit 2024. A number of challenges to the insurance industry were identified, including the following:
New retail business sales have dropped more than 50 per cent in the past five years and for every new retail policy coming into force around three are lapsing.
The industry’s long-term sustainability has been questioned due to some pricing practices and legacy product design. Product innovation has not kept pace with societal, demographic and lifestyle changes. Our workforce today is much more diverse and fluid compared to the one the products were originally designed for. The pandemic has increased mental health concerns, particularly for young people, and society is aging. Consumer trust in the industry has also eroded, driven not only by out-dated product design, but also by negative experiences with fluctuating retail and group premiums, poor claims processing experiences in the group space and a confusing array of products.
External factors like rising interest rates and cost-of-living pressures are exacerbating the trend for people to opt-out of insurance, particularly when premiums are increasing.
Suzanne Smith also identified opportunities to rebuild relevance and trust within the community, including:
Insurers have the opportunity to create innovative products that are adapted to today’s demographics and risk profiles, for example, the need of the ageing population for quality retirement solutions.
The industry can increase transparency around risk assessment, product design, pricing, sales and claims processes to rebuild trust. Consumers need a clear understanding of their coverage so they can feel confident in their insurance, not just left hoping for the best in the face of disaster. The industry can embrace the “Design and Distribution Obligation” and the “Target Market Determination” to better serve consumers.
See the full speech .
APRA publishes letter to support the implementation of the new PHI capital framework
APRA has issued a letter to all private health insurers (PHIs) sharing the observations from its review of a number of PHI Internal Capital Adequacy Assessment Plan Summary Statements as well as feedback on the initial implementation of the new capital reporting standards.
This follows the commencement of APRA's new capital framework for PHIs from 1 July 2023 which will improve capital management practices for the industry and brings PHIs into line with the other insurance industries.
The letter is available on the APRA website at: APRA’s observations on the implementation of the new PHI capital framework . See APRA media release .
AUSTRAC
Second stage consultation on reforming Australia’s AML/CTF regime is now open
On 2 May, the Attorney-General announced the second stage consultation on reforming Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. This stage includes the Attorney-General’s Department (the Department) releasing consultation papers, which outline a series of detailed proposals for reforming the AML/CTF regime. These papers were developed following feedback from the first round of consultation, which ran from April to June 2023.
The Department is seeking feedback on the proposed reforms by 5:00 pm AEST Thursday 13 June 2024.
View the papers on the Department’s website .
The Australian Government is committed to protecting Australians and preventing criminal abuse of our financial system. This includes efforts to ensure Australia’s AML/CTF regime continues to effectively deter, detect and disrupt money laundering and terrorism financing, responds to the constantly evolving threat environment and meets international standards.
Summary of the proposed reforms
The proposed reforms extend the existing AML/CTF legislation to certain high-risk services, also known as tranche 2 services. This includes services provided by lawyers, accountants, trust and company service providers, real estate agents, and dealers in precious metals and stones.
The reforms also aim to:
simplify and modernise the regime in line with international standards and best practice;
reduce complexity and regulatory burden on industry;
make sure the regime responds to the constantly evolving threat environment; and
harden Australian businesses and sectors against exploitation by serious organised criminals.
Key themes from submissions so far
The first round of consultation identified broad support for the reforms, and submissions reflected the diversity in the affected sectors. Overall, stakeholders supported the proposed reforms to clarify AML/CTF obligations and remove ambiguity from the current provisions. Current reporting entities supported changes to simplify customer due diligence obligations and AML/CTF program requirements in particular.
Visit the Department’s website to see submissions from the first round of consultation .
How to respond to the consultation
The Department is seeking views from all stakeholders, including both current and proposed new reporting entities. Submissions are due by 5:00 pm AEST Thursday 13 June 2024.
To make a submission and find out more about the reforms and the consultation process, visit the Department’s website .
See AUSTRAC media release .
AUSTRAC InBrief Newsletter
AUSTRAC has released the May issue of InBrief, where brings you the latest news and updates from AUSTRAC. In this issue you will find information about:
their new CEO and his vision for AUSTRAC;
how you can participate in the second stage consultation on reforming Australia’s AML/CTF regime; and
lessons you can learn from Crown’s civil litigation.
For more AUSTRAC news subscribe to InBrief .
Other bodies and regulators
Consultation on the fifth edition of the Corporate Governance Principles and Recommendations
On 27 February 2024, the ASX Corporate Governance Council released consultation materials for a proposed fifth edition of its Corporate Governance Principles and Recommendations (the "Principles and Recommendations").
The Council’s consultation package is available now and includes the Consultation Draft of the proposed Fifth Edition of the Principles and Recommendations, a mark-up of this document against the current Fourth Edition, and a Background Paper with a series of consultation questions.
The consultation closed on 6 May 2024.
IOSCO welcomes IESBA’s consultation on the Proposed International Ethics Standards for Sustainability
IOSCO today congratulated the International Ethics Standards Board for Accountants (IESBA) on achieving an important milestone by publishing for consultation their Proposed International Ethics Standards for Sustainability Assurance and Other Revisions to the Code Relating to Sustainability Assurance and Reporting (the Standards).
Based on its review of the Standards and additional stakeholder engagement, IOSCO outlined its general observations and its six key priority areas for IESBA’s consideration in developing the final Standards:
Definition of sustainability information
Scope of International Independence Standards
Non-compliance with laws and regulations
Group Sustainability Assurance engagements
Value Chain
Transparency when reporting on PIEs
See IOSCO media release .
ATO: Global Tax Chiefs and SFCT build capability to combat crypto crime
Earlier in May, specialists from across Joint Chiefs of Global Tax Enforcement (J5) jurisdictions delivered crypto asset investigation training to over 50 members of Australia’s Serious Financial Crime Taskforce (SFCT).
This collaboration between the J5 and SFCT comes at a critical time, as crypto assets are increasingly utilised in criminal activities, including to launder the proceeds of tax crime. Criminals are drawn to trading in crypto assets due to perceived anonymity and the ease and speed with which they can be traded anywhere in the world.
The training provided the opportunity to explore real-world case studies and emerging technologies to support the identification, investigation, and prosecution of cyber targets related to tax crime and money laundering.
Participants from the SFCT enhanced their skills in crypto asset analysis and investigation, and increased their knowledge of the technologies and tools to support this.
For more information on the J5, an alliance between tax and law enforcement experts from Australia, the United Kingdom, the United States, Canada and the Netherlands, visit here .
For more information on the SFCT, an Australian joint-agency taskforce led by the ATO to address serious financial crime, visit ato.gov.au/sfct .
For more information on the ATO’s collaboration with the J5, visit ato.gov.au/J5 .
See ATO media release .
Legislation and proposed legislation
Consultation on Draft Buy Now, Pay Later (BNPL) Legislation Closes
The Australian Government r ecently released draft legislation to regulate BNPL products under the National Consumer Credit Protection Act 2009 (Credit Act). According to the Government, the amendments are intended to bring BNPL products - which to date have not been regulated under consumer credit laws - in line with the way other credit products are regulated. However, certain modifications will be made to ensure that regulation is flexible, adaptable, and proportionate to the kinds of risks associated with BNPL products.
The draft legislation proposes to regulate BNPL products under a new definition of regulated credit known as “low-cost credit contracts” (LCCCs). Providers of LCCCs would have to abide by many of the same obligations as traditional credit providers, such as:
holding an Australian Credit Licence;
implementing an ASIC-approved dispute resolution process; and
the various requirements of the Credit Code such as precontractual disclosure obligations (amongst others).
The key adjustment to the way LCCCs will be regulated is in the kind of assessment required to be made when considering whether credit is suitable for a consumer. Under the draft legislation, LCCC providers would be able to elect between complying with the current Responsible Lending Obligations (RLOs) under the Credit Act or a modified “scaled down” version of the RLOs.
The modified RLOs still require that the credit being provided to a consumer is not unsuitable for them. However, when making that evaluation, an LCCC provider will, in many circumstances, be able to undertake a reduced number of regulatory steps compared to a regular RLO assessment.
Public comment on the draft laws closed on 9 April 2024. Treasury is now considering the submissions for any technical drafting issues, with the final bill expected to be introduced later this year.
See Treasury Consultation .
Senate Committee recommends passing climate-related financial disclosure legislation
On 3 May 2024, the Senate Economics Legislation Committee published its report on the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (Bill), recommending that the Bill be passed.
The Bill includes:
The main types of conduct that have caused ASIC to intervene are, in summary:Mandatory climate-related financial disclosures for entities that:
net zero statements and targets, that are either made without a reasonable basis or that are factually incorrect;
the use of terms such as "carbon neutral", "clean" or "green", that are not founded on reasonable grounds;
the overstatement or inconsistent application of sustainability-related investment screens; and
the use of inaccurate labelling or vague terms in sustainability-related funds.
are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) and meet certain size requirements; or
have emissions reporting obligations under the National Greenhouse and Energy Reporting scheme.
(Schedules 1, 2 and 3 to the Bill.)
A crisis management and resolution regime for Australia’s financial market infrastructure. Alongside this, the Bill enhances the licencing, supervisory and enforcement powers of ASIC and the Reserve Bank of Australia.
See Senate Committee Report .
Attorney General: Boosting Australia’s anti-money laundering and counter-terrorism financing regime
The Australian Government will invest $166.4 million in this month’s budget to implement reforms to Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime.
Each year billions of dollars of illicit funds are generated from illegal activities such as drug trafficking, tax evasion, people smuggling, cybercrime, arms trafficking and other illegal and corrupt practices.
According to the Government, Australia is falling short of meeting the standards required to combat criminal abuse of our financial system, and at increased risk of becoming a haven for money laundering.
Australia is now one of only five jurisdictions out of more than 200 that do not regulate tranche-two entities being lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones.
This is placing Australia at risk of being ‘grey-listed’ by the Financial Action Task Force (FATF), which could result in significant harm to the economy.
The Government recently commenced the next stage of consultation on reforms to Australia’s AML/CTF regime, to combat criminal abuse of our financial system.
The budget investment will enable AUSTRAC to implement the new regime and to support industries meet their obligations. It will also allow AUSTRAC to deliver comprehensive education and guidance to support businesses, especially newly-regulated entities.
The reforms are critical in supporting law enforcement partners in their fight against transnational, serious and organised crime and protecting Australians.
See Attorney General’s media release.
Corporate cases
Court of Appeal confirms meaning of "involves dishonesty" for offences resulting in automatic disqualification of company directors:
Waters v Diesel Holdings Pty Ltd [2024] VSCA 77
The Victorian Court of Appeal has unanimously confirmed that the scope of section 206B(1)(b)(ii) of the Corporations Act 2001 (Cth), which provides for the automatic disqualification of a person as a director of a company for an offence that "involves dishonesty", captures only those offences in which dishonesty is at least inherent in, or an element of, the offence, rather than being capable of being directed at offences more broadly, such as the breach of bail conditions or family violence intervention orders.
This was an unsuccessful appeal from the decision of M Osborne J in Diesel Holdings Pty Ltd v Waters [2023] VSC 455.
G+T Articles
G+T Insight - Opportunities and Risks of Large Language Models in Financial Services - discusses a research report by the Alan Turing Institute, HSBC, and the UK Financial Conduct Authority on the cautious yet potentially rapid upcoming adoption of large language models in the financial services sector, highlighting opportunities, current usage, future predictions, and concerns regarding integration, security, and regulatory challenges - Chris Whittaker, Silvana Wood and Peter Waters (6 May 2024)
Calendar dates
31 May 2024 - Submissions deadline for feedback regarding review of Australia’s credit reporting framework
28 June 2024 - Final report due in the Senate inquiry into greenwashing
30 June 2024 - Report due regarding the inquiry into ASIC’s capacity and capability to respond to reports of alleged misconduct
1 July 2024 - New Commonwealth Fraud and Corruption Control Framework will come into effect
1 October 2024 - Report on the independent review of Australia’s credit reporting framework due
1 January 2025 - Mandatory climate-related financial disclosures for Group 1 entities proposed to apply in respect of financial years starting on or after this date
15 March 2025 - Financial Accountability Regime takes effect for superannuation and insurance bodies