Australian Financial Services Regulatory Update | January-June 2024

This edition of the Update covers:

• Recent legal and regulatory developments, including the joint release of APRA and ASIC guidance concerning the new Financial Accountability Regime, APRA's announcement that it will publish superannuation expense data to enhance transparency in the industry, ASIC's recently announced expectations of superannuation trustees in monitoring investment performance, introduction of climate-related disclosure requirements, and ASIC's review of lending practices.
• Recent financial services litigation, including ME Bank's sentencing after pleading guilty to criminal charges in connection with its consumer lending activities, a successful appeal by ASIC in its misrepresentations case against ACBF Funeral Plans and Youpla Group, and the Federal Court's finding that a crypto-backed product offered by Block Earner was a financial product for which a financial services licence was required. 
• Other regulatory enforcement action, including ASIC's issuance of an infringement notice to Melbourne Securities for greenwashing, ASX's payment of a $1 million penalty for order information transparency failures, and a $67 million penalty settlement between SkyCity and AUSTRAC for alleged AML/CTF breaches.

KEY LEGAL AND REGULATORY DEVELOPMENTS

Financial Reporting 

Climate-Related Financial Disclosure

The government introduced Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (the "Bill"), which includes a new regime for standardised requirements for mandatory disclosure of climate-related risks and opportunities in Australia. The new requirements are proposed to commence from 1 January 2025, with transitional provisions that categorise entities into three groups for implementation over a four-year period depending on size. Read our April 2024 Commentary on the Bill here.

The Bill empowers the Australian Accounting Standards Board to issue internationally aligned sustainability reporting standards that large Australian businesses and financial institutions must comply with, which will include an annual sustainability report to disclose climate risks and opportunities. The requirements will initially apply to listed companies, unlisted companies that meet the criteria for a "large" company, registrable superannuation entities, and registered managed investment schemes. 

ASIC Chair Joe Longo, in a speech given on 23 April 2024, confirmed that ASIC will develop and issue regulatory guidance, which will include a new regulatory guide and other resources to assist those who prepare and those who use sustainability reports. He noted that more than 6,000 entities will be required to report in the next few years and encouraged entities to start preparing now. 

On 3 May 2024, the Senate Economics Legislation Committee published a report on the Bill supporting the Bill's passage, with a dissenting report from Coalition Senators. See the report here. The Bill has since passed the House of Representatives without amendment and has been passed to the Senate for consideration.

ASIC 30 June 2024 Focus Areas

On 15 May 2024, ASIC announced an expanded program of work to enhance the integrity and quality of financial reporting and auditing in Australia. The announcement is available here.

Areas of focus will include asset values, adequacy of provisions, subsequent events, and disclosures.

Financial Accountability Regime

APRA and ASIC Release Rules and Information Package on the Financial Accountability Regime

On 8 March 2024, ASIC and APRA issued guidance in relation to the Financial Accountability Regime ("FAR"). The FAR imposes a strengthened responsibility and accountability framework aimed at improving the risk governance cultures of APRA-regulated entities, their directors, and most senior executives. Jointly administered by APRA and ASIC, the FAR implements some of the recommendations handed down by the 2019 Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The FAR replaces the Banking Executive Accountability Regime ("BEAR"), which commenced in 2018.

The FAR was scheduled to begin applying to authorised deposit-taking institutions ("ADIs") and their authorised nonoperating holding companies ("NOHCs") on 15 March 2024, but will only begin to be enforced in relation to these entities from 1 July 2024 due to the minister's delay in signing off on operating guidelines. The FAR will take effect for insurance entities, their licensed NOHCs, and superannuation trustees from 15 March 2025. 

The 8 March guidance includes regulator rules stipulating information requirements for the FAR register of accountable persons, rules to facilitate the transition for ADIs from the BEAR to the FAR, descriptions of ADI key functions, and reporting form instructions. The 8 March media release is available here.

On 14 March 2024, ASIC and APRA subsequently released an information package to assist banks, insurers, and superannuation trustees to prepare for the FAR. The information package includes the following guidance materials relevant to those industries:

• An information paper to assist entities and their accountable persons in understanding and complying with their FAR obligations;
• An updated accountability statement guide and template to help entities subject to the FAR enhanced notification obligations to prepare accountability statements; and
• Reporting form instructions to assist entities in reporting FAR breaches to APRA and ASIC.

The 14 March media release is available here.

Consumer Protection 

ASIC Shuts Down Scam Websites and Increases Surveillance to Protect Consumers

On 4 March 2024, ASIC announced that it had shut down nearly 3,500 investment scam websites through its scam website takedown capability, which was launched in July 2023. ASIC Chair Joe Longo said that ASIC had 'already examined the way major banks detect, prevent and respond to scams, resulting in ASIC setting expectations that all financial institutions take steps to improve their approaches. We have now turned our attention to a broader range of banks and superannuation trustees to ensure they're doing all they can to protect their members and customers from predatory scammers'.

Longo also flagged ASIC's focus on 'scrutinising the way lenders comply with their hardship obligations, how banks support First Nations consumers to access low-fee accounts, and how superannuation trustees deliver important member services, such as how they handle death benefits claims'. The media release is available here.

ASIC Report on Financial Hardship

On 20 May 2024, ASIC released Report 783 Hardship, hard to get help: Lenders fall short in financial hardship support, available here. 

The report set out the findings from ASIC's review of the lending policies and procedures of 30 large lenders and 10 large home lenders to understand their approach to financial hardship. The findings include:

• Assessment procedures for hardship applications were often stressful, inefficient and inflexible, involving onerous assessment and approval processes, and 35% of customers dropped out of the process on at least one occasion.
• There were inconsistencies in how lenders communicate with customers about the outcome of a hardship notice, including failure to provide adequate written reasons for declining hardship notices, and providing inconsistent and sometime inaccurate information about the impact of a hardship notice. 
• Lenders have inadequate arrangements for supporting vulnerable Australians, including those experiencing family violence. There were multiple examples where lenders failed to identify and provide appropriate support to vulnerable customers. 

The report noted that lenders have been making improvements and engaged with ASIC constructively during the review. However, ASIC believes the report highlights that much more work is required for lenders to improve their support for customers in hardship.

Superannuation

ASIC Urges Improved Oversight of Performance of Choice Super Investment Options

On 21 February 2024, ASIC released a report on ASIC's review of the performance of superannuation 'Choice' products (investment options that members choose themselves). 

The report's findings include that in ASIC's view, there was insufficient emphasis on and a lack of transparency for consumers about 'Choice' investment options that failed to meet performance expectations. ASIC expects trustees should:

• Prioritise investment performance throughout the product life cycle;
• Have systems in place to detect and address persistent underperformance;
• Regularly monitor investment option performance against return objectives and benchmarks;
• Ensure they have sufficient capacity to manage investment options, including clear and comprehensive policies, resources, and data reporting arrangements;
• Effectively communicate with members about performance, which could include targeted communications and comparisons of actual returns to return objectives; and 
• Act in response to sustained underperformance to minimise member risks.

Following the review, ASIC is considering a range of regulatory responses where ASIC identified deficiencies in advice about underperforming options. 

The media release is available here, and ASIC's Report 779: Superannuation choice products: What focus is there on performance? is available here.

APRA to Publish Data on How Super Trustees Are Spending and Investing Members' Funds

On 27 March 2024, APRA announced that from August this year, it will commence publishing new data on how members' funds are being spent and invested by superannuation trustees. According to APRA's media release, the information will detail:

• The breakdown of expenses for the whole industry, and more specific expense categories for each fund, including administration, advice, member services, marketing, trustee board (including director remuneration), and other corporate overheads (such as travel and entertainment); and
• Recipients of payments made by each fund to industrial bodies and related parties, in relation to promotion, marketing or sponsorship expenses, and any political donations.

APRA will also publish data on 'the type of investments the industry holds in relation to property and infrastructure, alternative strategy funds, listed equity and private equity'. 

The publication initiative is aimed at increasing transparency in the industry and facilitating greater scrutiny of superannuation entity spending. 

APRA's media release is available here.

ASIC Calls on Super Trustees to Improve Gatekeeping of Member Savings

On 9 May 2024, ASIC released Report 781 Review of superannuation trustee practices: protecting members from harmful advice charges. The report is available here.

The report outlines ASIC's findings from a review of superannuation trustees' practices for monitoring fee deductions for financial advice. 

The review assessed a sample of 10 superannuation trustees representing approximately eight million members over a 12-month period. The key finding was that there are continued deficiencies in oversight of fee deductions by some trustees, the key issues being:

• Inadequate onboarding processes for advisers and licensees, and inadequate monitoring of them;
• Lack of proactive checking of samples of advice documents; and
• Insufficient controls on the amount of fees deducted. 

ASIC believes these deficiencies have been resulting in inappropriate erosion of members' account balances and urges trustees to improve their practices. 

Prudential Guidance

APRA Releases New Guidance on Operational Resilience

On 13 June 2024, APRA released new guidance to assist banks, insurers, and superannuation trustees to strengthen their approach to operational risk management. The new Prudential Practice Guide CPG 230 Operational Risk Management ("CPG 230") offers guidance to aid APRA-regulated entities in their compliance with Prudential Standard CPS 230 Operational Risk Management ("CPS 230"). CPS 230 was finalised in July 2023 and will take effect from 1 July 2025. Key changes made to the guidance material in response to industry feedback include:

• Revisions to the consultation draft of CPG 230 so that it comprises shorter guidance that is more focused on how to comply with CPS 230 rather than actions constituting "better practice"; 
• Entities that are categorised as non-significant financial institutions, or "non-SFIs", will have a 12-month extension on requirements under CPS 230 relating to business continuity and scenario analysis; 
• APRA has released a three-year supervision program to support implementation of CPS 230; and
• The regulator has published a "day one" checklist to assist entities in compliance.

APRA's media release, together with a link to CPG 230 and CPS 230, is available here. Its supervision program and the compliance checklist is available here.

RECENT FINANCIAL SERVICES LITIGATION

Federal Court Finds AFS Licence Was Required for Block Earner Crypto Product 

On 9 February 2024, Jackman J of the Federal Court of Australia found that from March to November 2022, Web3 Ventures Pty Ltd (trading as Block Earner) engaged in unlicensed financial services conduct when offering its crypto-backed Earner product to consumers. The product allowed consumers to earn fixed yield returns from various crypto assets. The decision marks one of the first Australian applications of the financial services law to crypto-backed products.

In his decision, Jackman J found that Block Earner provided unlicenced financial services and operated an unregistered managed investment scheme ("MIS") when offering Earner. Significantly, the Earner product was considered to meet the definition of a MIS and a facility for making a financial investment under the law.

ASIC Deputy Chair Sarah Court said the decision provided 'clarity as to when crypto-backed products should be considered financial products which require licencing under the law' and cautioned that '[f]irms offering products with crypto assets must carefully consider whether their offerings are financial products under the existing regime' and 'ensure that they are appropriately licenced and authorised before distributing them'. 

The court did not accept ASIC's submission that Block Earner's variable yield crypto asset-based offering was a financial product which attracted licensing obligations. The court's analysis was that this product did not involve 'pooling' of contributions by investors to produce financial benefits—for this product Block Earner set up individual accounts for investors, and an investor's return was based on ownership of tokens and the financial performance of the tokens purchased for that investor. The court's ruling was that the product was not either a MIS, an investment facility, or a derivative. 

ASIC's media release and the judgment are available here.

On 4 June 2024, the court made orders relieving Block Earner from liability to pay a pecuniary penalty in relation to the contraventions. Although finding that the contraventions were "serious", Jackman J was satisfied that Block Earner acted honestly when it offered the Earner product and that, in all the circumstances of the case, Block Earner ought fairly to be excused for the contraventions. ASIC's media release together with the judgment are available here.

ME Bank Sentenced Following Guilty Plea to Criminal Charges

On 19 January 2024, Bromwich J of the Federal Court of Australia ordered a $820,000 penalty against Members Equity Bank Limited ("ME Bank"), after the bank pleaded guilty to charges of making false and misleading representations under ss 12DB(1)(g) and 12GB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") and failing to provide required written notices in relation to home loans, in contravention of ss 64(1) and 65(1) of the National Credit Code ("NCC"). This was the first criminal prosecution under section 12DB of the ASIC Act. The prosecution followed an investigation and referral by ASIC.

In the period from 25 May 2018 to 3 September 2018, ME Bank sent 589 letters to home loan customers notifying them of incorrect minimum repayment amounts to be paid after the expiry of either a fixed-rate or interest-only period. The stated repayment amounts were less than the actual amounts required to repay the loans. Subsequently, ME Bank also failed to send letters to some customers informing them that the interest rate and minimum repayment amount was changing after the expiry of an interest-only or fixed-rate period.

The penalty comprised $750,000 for the charge under the ASIC Act and $70,000 for charges under the NCC. 

ASIC's media release, the judgment, and the orders are all available here.

ASIC Successful on Appeal in Misrepresentations Case Against ACBF and Youpla

On 29 February 2024, Murphy, O'Bryan, and Shariff JJ of the Full Court of the Federal Court of Australia upheld ASIC's appeal against ACBF Funeral Plans and its parent, Youpla Group Pty Ltd, finding that the insurance provider had engaged in misleading and deceptive conduct.

In October 2020, ASIC commenced proceedings against the entities, alleging that they had made four misrepresentations:

• That ACBF was Aboriginal owned or managed;
• That their product had Aboriginal community approval;
• That their product was more beneficial to Aboriginal consumers; and
• That plan holders would receive a lump sum payment of their chosen benefit amount, when in reality they would only be reimbursed for funeral-related expenses up to the benefit amount upon production of proof that those expenses had been incurred.

On 5 September 2023, Goodman J of the Federal Court of Australia found that the entities were only liable in relation to the fourth representation, imposing a $1.2 million pecuniary penalty.

On ASIC's appeal, the Full Court found that the first representation was also misleading. The proceeding will now be remitted to the trial judge to determine the penalty.

ASIC's media release is available here.

Federal Court Finds Finder Earn Crypto Product Not a Financial Product

On 14 March 2024, Markovic J of the Federal Court of Australia found that Finder Wallet Pty Ltd did not provide unlicensed financial services in relation to its crypto asset product, Finder Earn. 

ASIC alleged that the product was a debenture, and therefore Finder Wallet contravened the Corporations Act by carrying on a financial services business without holding an AFSL and by offering a debenture to retail clients without a disclosure document or TMD. 

The court did not accept that the product was a debenture, finding that the product was an investment by the customer by giving money to Finder Wallet to purchase cryptocurrency on behalf of the customer, which was then transferred or loaned to Finder Wallet in exchange for a promise by Finder Wallet to repay the cryptocurrency plus the return earned on the crypto asset.

Entities providing services in relation to crypto-related products should be aware that such products may be financial products attracting consumer protection obligations, including licencing or authorisation obligations. 

ASIC's media release and the judgment are available here. The media release refers to ASIC's Information Sheet 225: Crypto Assets, which provides guidance on the circumstances in which a crypto-related offering may be a financial product and has not at this stage been updated.

On 10 April 2024, ASIC lodged an appeal, citing concerns that 'the Finder Earn product was offered without the appropriate licence or authorisation and therefore without the benefit of important consumer protections'. The appeal has been listed for a one-day hearing on 22 August 2024. ASIC's media release concerning the appeal is available here.

Full Federal Court Dismisses Appeal by Provide Capital in ASIC Proceedings for Failure to Produce Documents in Response to S33 Notice

On 22 February 2024, the Full Court of the Federal Court dismissed an appeal by Provide Nominees Pty Ltd (trading as Provide Capital). 

In the context of an ongoing investigation, ASIC had served a notice on Provide Capital to produce documents pursuant to s 33 of the ASIC Act, with which Provide Capital did not comply. 

If a person fails to comply with a s 33 request, ASIC is permitted under s 70 of the ASIC Act to certify that noncompliance to the court and seek orders for the production of the documents. On 2 December 2022, ASIC commenced proceedings against Provide Capital, seeking orders under s 70 of the ASIC Act. On 25 September 2023, O'Bryan J of the Federal Court ordered Provide Capital to produce the documents.

On 20 October 2023, Provide Capital appealed the decision to the Full Federal Court, in which Provide Capital alleged that ASIC failed to include the words 'without reasonable excuse' when certifying to the court that Provide Capital had failed to provide the documents. ASIC contended that ASIC was only required to certify Provide Capital's failure to produce documents and its action did not extend to certifying that the failure was 'without reasonable excuse'. The court determined that the orders previously made by O'Bryan J in the Federal Court were correct, dismissing the appeal and ordering Provide Capital to pay ASIC's costs.

On 21 March 2024, Provide Capital filed an application for special leave to appeal to the High Court. On 6 June 2024, the High Court dismissed the special leave application.

ASIC's media release is available here.

Federal Court Finds Term in Auto & General Insurance Company's Insurance Contracts Is Not Unfair

On 22 March 2024, Jackman J of the Federal Court of Australia found that a term in Auto & General's insurance contracts requiring policy holders to notify of any changes to their home and contents was not an unfair contract term under the ASIC Act.

ASIC submitted that the term was unfair because the term:

• Imposed an obligation on customers to notify Auto & General if 'anything' changes about their home or contents (with a nonexhaustive list of examples), which imposes an unclear obligation on the customer regarding what they need to disclose to Auto & General;
• Suggested that Auto & General has a broader right to refuse claims or reduce the amount payable under claims if the customer did not meet the notification obligation that is available under the Insurance Contracts Act; and
• Could mislead or confuse the customer as to their true obligations and rights under the contract. 

Jackman J did not consider that the obligation to notify created a significant imbalance between the parties. His Honour interpreted the obligation to notify 'anything' as clearly importing an obligation to notify any change to information that the insured had previously disclosed to Auto & General, and found that this is how a reasonable insured would interpret the obligation. His Honour then accepted that 'it [was] reasonably necessary to protect the defendant's legitimate interests for it to have powers under the contract to put itself in the position it would have been in had the insured disclosed information revealing the risk'; therefore the powers to refuse or reduce claims were not unfair. His Honour did accept ASIC's submission that there was some uncertainty and a lack of clarity in interpretation of the term, but that factor alone was not sufficient for the term to be 'unfair'. 

ASIC Deputy Chair Sarah Court commented that 'ASIC pursued this case as part of its consumer protection focus on unfair contract terms in insurance contracts. ASIC believes that contract terms, especially those in standard form contracts, should be proportionate, transparent, and clear so that consumers can readily understand their rights and responsibilities under the contract'.

ASIC's media release is available here.

On 19 April 2024, ASIC announced that it had appealed the decision of Jackman J to the Full Court of the Federal Court, citing concerns that the impugned term could mislead or confuse policyholders given the ambiguity of the obligations it imposes. The appeal has been listed for hearing on 28 August 2024. The media release is available here.

OTHER REGULATORY ENFORCEMENT ACTION

SkyCity and AUSTRAC Agree to $67 Million Penalty for Alleged AML/CTF Breaches

In May 2024, SkyCity and AUSTRAC agreed to a $67 million penalty settlement in proceedings concerning SkyCity's alleged noncompliance with anti-money laundering and counter-terrorism financing ("AML/CTF") laws.

AUSTRAC commenced proceedings against SkyCity in December 2022, alleging that SkyCity:

• Failed to appropriately assess the money laundering and terrorism financing risks it faced, including the likelihood and impact of those risks, and to identify and respond to changes in risk over time;
• Did not include in its AML/CTF programs appropriate risk-based systems and controls to mitigate and manage the risks to which SkyCity was reasonably exposed;
• Failed to establish an appropriate framework for board and senior management oversight of the AML/CTF programs;
• Did not have a transaction monitoring program to monitor transactions and identify suspicious activity that was appropriately risk-based or appropriate to the nature, size, and complexity of SkyCity;
• Did not have an appropriate enhanced customer due diligence program to carry out additional checks on higher-risk customers; and
• Did not conduct appropriate ongoing customer due diligence on a range of customers who presented higher money laundering risks.

AUSTRAC's media release regarding commencement of proceedings is available here. 

The $67 million penalty settlement was approved by the Federal Court of Australia at a penalty hearing on 7 June 2024. SkyCity was also ordered to pay AUSTRAC's costs at $3 million. AUSTRAC's media release regarding the penalty is available here. 

ASIC Accepts Court Enforceable Undertaking From Elepay

On 2 February 2024, ASIC announced that it had accepted a court enforceable undertaking from Elevare Pay Easy Pty Ltd ("Elepay"), a provider of 'buy now, pay later' services. The undertaking relates to Elepay's noncompliance with its Design and Distribution Obligations ("DDO") under Pt 7.8A of the Corporations Act. 

The DDO prescribe requirements to ensure financial products are designed to meet consumer needs and are distributed to consumers that the product is suitable for. For the purposes of the DDO, credit facilities are included as "financial products", and DDO therefore applies to "buy now, pay later" products.

Under the DDO, issuers must make a target market determination ("TMD"). Elepay admitted that from 5 October 2021 to 15 March 2023, Elepay did not have TMDs for seven credit products it distributed to consumers. During this period, Elepay lent $13.748 million to 1,658 retail clients. 

Elepay offered, and ASIC agreed to accept, an undertaking committing to engage an independent expert to report on clients identified as falling outside the TMDs, fees, and charges paid by those clients, whether Elepay's TMDs were DDO-compliant and recommendations to rectify any deficiencies. Elepay is obliged to notify clients identified as falling outside the TMDs of the expert's findings, cease charging those clients fees and charges, and refund any fees or charges already paid.

ASIC's media release is available here.

ASIC Issues Infringement Notice to Melbourne Securities for Greenwashing

On 28 February 2024, ASIC announced that Melbourne Securities Corporation Limited had paid $13,320 to comply with an infringement notice relating to misleading statements made in respect of a Bloom Climate Impact Fund. Statements in the fund's PDS said that the fund would seek to avoid investments in excluded activities, including fossil fuels. 

However, the fund's revenue thresholds allowed for investments in companies that obtained up to 33% of their revenue from the excluded activities, and this was not disclosed to investors. The fund acquired and held a direct investment in General Electric Co., which derived 16% of its revenue from fossil fuels in the 2022 financial year—this investment represented 0.96% of funds under management when acquired in March 2022 and was divested in March 2023. 

ASIC alleged the representations about seeking to avoid investments in the excluded activities were misleading on the grounds that the revenue thresholds were not consistent with a statement that the fund was seeking to avoid investments in the excluded activities. 

ASIC's media release is available here. The media release refers to 16 other infringement notices that ASIC has issued to seven other entities in relation to alleged ESG misconduct. 

ASIC Issues First Infringement Notice to Market Operator, ASX Limited

On 7 March 2024, ASIC announced that ASX Limited had paid a $1,050,000 penalty for failing to comply with the Market Integrity Rules. ASIC considered that the ASX contravened the rule requiring pre-trade transparency 8,417 times between April 2019 and December 2022. Under this rule, the ASX is required to provide information about orders currently available. ASX failed to make that information available about orders for certain equity market products as a result of an incorrect system configuration.

ASIC indicated that while there was no evidence of loss, ASIC was concerned about the damage to public confidence in the operation of the market, and this was an aggravating factor in determination of the penalty. 

This is the first time ASIC has issued an infringement notice to a market operator. 

ASIC's media release and the Infringement Notice are available here.

This issue comes in the midst of uncertainty as to the implementation of a new Clearing House Electronic Sub-register System ("CHESS"), following the failed 2022 blockchain project (but is unrelated to the project). ASIC Chair Joe Longo told the Australian Financial Review '[w]e really don't know a lot yet about how they will replace CHESS … [a]nd we don't know a lot yet about how these [legislative] reforms will actually play out and be implemented. My job is to step back and assess the situation … I think they are making progress, but I don't think we can be complacent about it.'