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In this edition, we discuss the publication of additional information on the Financial Accountability Regime (FAR) by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), the publication of guidance by ASIC on the requirement for certain entities to include a consolidated entity disclosed statement (CEDS) in their annual financial report, final orders made by the Takeovers Panel (Panel) in connection with the application by Sequoia Financial Group Limited (Sequoia) in relation to its affairs, and the Federal Court’s finding that Firstmac Limited (Firstmac) breached its design and distribution obligations in connection with the distribution of an investment product. 

In Risk Radar, we examine two national risk assessments (NRAs) by the Australian Transaction Reports and Analysis Centre (AUSTRAC) on money laundering and terrorism financing and their implications for minimising corporate financial and reputational risk.

REGULATION

ASIC and APRA issue additional information on the Financial Accountability Regime 

On 11 July 2024, ASIC announced that, together with APRA, it had published new information to help insurers and superannuation trustees prepare for the commencement of the FAR. The new information comprises a joint letter summarising key issues raised during public consultation and the regulators’ response, and corresponding amendments to the Regulator rules (which prescribes information requirements for inclusion in the FAR register of accountable persons regarding key functions). Key concerns raised during public consultation included: (a) the scope of certain key functions; (b) the lack of guidance on how key functions apply to groups, significant related entities and non-operating holding companies; and (c) the relevance of certain key functions and their descriptions to the insurance and superannuation industries. The amendments to the Regulator rules are aimed at dealing with these concerns. The FAR already applies to the banking industry and will come into effect for the insurance and superannuation industries from 15 March 2025.

ASIC publishes guidance on consolidated entity disclosure statements in annual financial reports 

On 9 July 2024, ASIC published Information Sheet 284 which provides guidance on the new requirement for public companies to include a CEDS in their annual financial report which either: (a) if the accounting standard requires the company to prepare consolidated financial accounts, discloses details of each entity within the company’s consolidated group; or (b) if the accounting standards do not require the company to prepare consolidated financial statements, contains a statement to that effect. Further, the directors’ declaration must state whether, in the directors’ opinion, the CEDS is true and correct. The CEO and CFO of listed public companies must also include a statement in their declaration to the directors that the CEDS is true and correct. Among other things, ASIC has noted that the CEDS is a separate statement and does not form part of the notes to the financial statements and that the materiality provisions in the accounting standards do not apply to the requirement to include a CEDS (i.e. all relevant entities must be included even if they are dormant).

LEGAL

Takeovers Panel makes final orders in connection with Sequoia’s application in relation to its affairs 

As discussed in last week’s edition of Boardroom Brief, the Panel announced on 28 June 2024 that it had made a declaration of unacceptable circumstances in connection with an application by Sequoia in relation to its affairs. The Panel considered that among other things: (a) there were undisclosed associations between certain Sequoia shareholders, including shareholders who had requisitioned a section 249D general meeting to move resolutions to remove two Sequoia directors; and (b) those associated parties had contravened the Corporations Act 2001 (Cth) by increasing their collective voting power in Sequoia to above 20% through the acquisition of additional shares. The Panel subsequently announced on 12 July 2024 that it made final orders including to (in effect): (a) impose a voting freeze on proportions of the additional shares acquired; (b) restrict the associated shareholders from acquiring additional shares in Sequoia while the voting freeze applies; and (c) require the associated shareholders to make corrective disclosure.

Federal Court finds Firstmac Limited breached its design and distribution obligations

On 10 July 2024, the Federal Court found that Firstmac had breached its design and distribution obligations by cross-selling its ‘High Livez’ investment product to 780 consumers who held existing term deposits with Firstmac without first taking reasonable steps to ensure consistency with its target market determination for this product. ASIC noted in its media release on 10 July 2024 that this is the first finding of this kind by an Australian court. ASIC Deputy Chair Ms Sarah Court stated that the regulator commenced proceedings against Firstmac because it was "concerned that customers were exposed to the risk they might obtain a financial product that was not appropriate to their needs and objectives". Justice Downes noted that the steps Firstmac took were wholly inadequate in light of its statutory obligations. NEDs should consider the design and distribution obligations for any financial products that require a target market determination.

RISK RADAR

Latest insights into Australia's money laundering and terrorism financing risks  

On 9 July 2024, AUSTRAC published two NRAs in relation to money laundering in Australia and terrorism financing in Australia. The risk assessments report on the scale, sophistication and threat of money laundering and terrorism financing in Australia. The NRA on money laundering found that launderers favour conducting their operations through traditional methods involving cash, banks, and real estate. The NRA on terrorism financing found that retail banking and cash exchanging remain the preferred avenues for shifting funds, with social media and crowdfunding platforms emerging as key channels for fundraising terrorist activities. According to AUSTRAC CEO Mr Brendan Thomas, "the risk assessments will help businesses understand the methods that criminals use to launder proceeds of crime or fund extremist violence". NEDs are encouraged to review the NRAs to understand how their companies may be exposed and to ensure that their companies have the necessary anti-money laundering and counter-terrorism financing measures in place, to minimise financial and reputational harm. The new NRAs supplement AUSTRAC’s existing range of resources designed to support regulated businesses.