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Regulatory developments in the funds management and financial services industry have continued unabated in 2020. Many of the developments have been introduced to implement the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
Not all regulatory developments have enjoyed the same level of attention from the Government. In particular, the proposed Corporate Collective Investment Vehicle regime that was first introduced in 2017 has stalled, side-lined to accommodate the additional regulation aimed at addressing the regulatory weaknesses exposed in the Royal Commission.
We have been involved in the consultation of most of these developments. This has left us well placed to advise our clients on the ever-evolving regulatory landscape.
This article provides an overview of the following regulatory developments:
We finish the article with a note about the impact of Covid-19, the growing importance of ESG factors in asset management and a highly anticipated decision to be handed down by the High Court of Australia.
On 10 March 2020, the Australian Securities and Investments Commission (ASIC) issued ASIC Regulatory Guide 176 (RG 176) which outlined the new regulatory framework for foreign financial services providers (FFSPs) providing financial services to Australian wholesale clients. See more information on RG 176 and our detailed note on the topic.
The revised RG 176 reflects ASIC’s removal of the existing licensing exemption being the “sufficient equivalence relief” that had been first introduced in 2003 for many FFSPs from several foreign jurisdictions. The “sufficient equivalence relief” applied when an FFSP provided certain financial services to wholesale clients in Australia and was regulated by an overseas regulatory framework that was sufficiently equivalent to the regulatory requirements in Australia.
ASIC also removed the “limited connection relief”, which had also been in place since 2003. It applied when an FFSP only required an Australian financial services (AFS) licence because the FFSP was deemed to be carrying on a financial service business in Australia pursuant to section 911D of the Corporations Act 2001 (Cth) (Corporations Act). This section is, effectively, a deeming provision that applies the financial services licensing regime to certain persons located outside of Australia. It provides that a financial services business is taken to be carried on in Australia by a person if, in the course of carrying on the business, the person engages in conduct that is intended to induce people in Australia to use their financial services, or is likely to have that effect, whether or not the conduct is intended, or likely, to have that effect in other places as well.
Like the “sufficient equivalence relief”, the “limited connection relief” only applied when financial services were provided to wholesale clients.
These exemptions have been replaced by the introduction of a foreign AFS licence and funds management licensing relief.
While foreign AFS licensees will be relieved from some of the Australian regulatory requirements, they will be subject to a number of additional regulatory requirements that do not apply to usual AFS licence holders. These include the requirement to do the following:
carry on a business in the relevant foreign jurisdiction;
appoint an agent at the time it purports to rely on the exemption and not fail to have an agent for 10 consecutive business days (unless it is a company that is registered in Australia as a foreign company);
reasonably believe it would not contravene any home jurisdiction laws relating to the provision of financial services if it were to provide them there; and
notify ASIC, within 15 business days, of significant changes to the licensee’s registration / authorisation in its home jurisdiction, exemptions or other relief it obtains in its home jurisdiction and of any investigation or action undertaken by overseas regulators against it in a foreign jurisdiction in relation to the financial services it provides in that jurisdiction.
From 1 April 2022, FFSPs may be given relief from the requirement to hold an AFS licence if they are only carrying on a financial services business in Australia because of the operation of s 911D of the Corporations Act in relation to the provision of “funds management financial services” to certain “eligible Australian users” – effectively a subset of wholesale clients. Unlike the limited connection relief, FFSPs that wish to rely on this relief will have to notify ASIC and comply with other requirements.
On 8 May 2020, ASIC announced the deferral of the design and distribution obligations (DD Obligations), which were originally set to take effect from 5 April 2021. The new start date is 5 October 2021.
The DD obligations are aimed at making the design of financial products more consumer focused and to reduce the likelihood that consumers will purchase unsuitable products. The introduction of the DD obligations is similar to existing laws in the United Kingdom and European Union that currently require issuers to design financial products that meet the needs of an identified target market and to be distributed to that specific market.
In Australia, this will be achieved by the requirement to prepare and publish a target market determination (TMD). The TMD must include the following:
Accompanying the requirement to prepare a TMD are related obligations imposed on both issuers and distributors of financial products, including the obligation to take reasonable steps to ensure that products are issued and distributed within the target market.
On 17 June 2020, ASIC issued ASIC Regulatory Guide 272 (RG 272). Under RG 272 ASIC has the power to make a product intervention order (PIO) when a financial product or a class of financial products will result, or is likely to result, in significant consumer detriment. ASIC can make an individual PIO which would apply to a specific product issued by a licensee or a market-wide PIO which would apply to a particular class of financial products across the industry. A financial product would be deemed to cause significant consumer detriment if the threshold level of harm or damage arises from the product’s features, defective disclosure, poor design or inappropriate distribution. Under this power ASIC may ban specific products, amend or restrict the marketing of products or order the amendment of financial product features. RG 272 refers to Cigno Pty Ltd v Australian Securities and Investments Commission  FCA 479 in asserting that the detriment is sufficiently connected to the product if it would not have occurred if the product was not available in the those circumstances.
On 30 March 2020, ASIC released its updated breach reporting regulatory guide for AFS licensees. The full media release can be accessed here and the updated ASIC Regulatory Guide 78 (RG 78) here. The regulatory framework requires AFS licensees and responsible entities to report significant breaches or likely significant breaches of their obligations to ASIC as per section 912D of the Corporations Act. All breaches must now be reported through the ASIC Regulatory Portal.
An AFS licensee is required to report to ASIC as soon as practical, but no later than ten (10) business days of becoming aware of the breach if:
In order to maintain compliance, AFS licensees should:
Since March 2019 when the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 came into force, a body corporate that does not report a breach or likely breach, as required by section 912D of the Corporations Act, incurs a civil penalty of the greatest of:
Previously, a failure to comply with section 912D of the Corporations Act was a criminal offence, but not one of strict liability, so a fault element needed to be established.
On 17 February 2020 the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures)) Bill 2019 received its royal assent. The Bill gives ASIC greater enforcement powers and introduced the following key changes:
On 23 July 2020 the Corporations Amendment (Litigation Funding) Regulations 2020 were published. These regulations provide that litigation funders will be subject to the AFS licencing and managed investment schemes (MIS) regulatory regimes for all “litigation funding schemes” (as defined in the Regulations) entered into from 22 August 2020.
Not all actions funded by litigation funders are “litigation funding schemes”. The Regulations are, effectively, targeted at class actions; single plaintiff actions and insolvency actions continue to be exempt from these requirements.
In midst of the continuing regulatory reform, COVID-19 has presented challenges for the financial services industry. While the Government has introduced changes to facilitate the operation of business in a COVID-19 environment, the decision to permit early access to superannuation has caused many fund managers to have to liquidate assets, giving rise to liquidity concerns. In the context of liquidity concerns, ASIC has reminded responsible entities of their duties in connection with valuing assets of registered schemes.
On 11 August 2020, ASIC issued an article pertaining to the valuation of managed fund assets during the COVID-19 pandemic. In short, it encouraged responsible entities to ensure that:
The first half of 2020 has also seen an increase in appetite for funds to engage in strictly ESG portfolios or to have an ESG class of units available for investors as part of a broader portfolio. ESG portfolios are those that take into account environment, social and governance factors in selecting the underlying investments. Environmental factors include use of renewable energy, carbon footprint size and efficient resource use and management. Social factors comprise of positions on human rights and the treatment of employees, namely with reference to the new modern slavery legislative framework. Governance factors incorporate regulatory and compliance records, as well as boards of directors of investee companies in relation to remuneration and appointments.
Subsection 1013D(1)(l) of the Corporations Act requires a product disclosure statement to set out the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of investments.
As the impacts of COVID-19 continue to be felt, it is likely that ESG investing will increase in line with the number of funds that pursue investment strategies and apply investment guidelines that take into account ESG factors.
Finally, a reminder of one of the most anticipated decisions in the financial services industry - Case No. S69/2020 - Westpac’s appeal to the High Court of Australia of ASIC v Westpac Securities Administration Limited  FCAFC 187..
The case considers whether Westpac’s conduct, under its campaign to have their customers roll over external superannuation accounts into Westpac Group superannuation accounts, constituted general or personal advice. In its decision, the Full Court of the Federal Court held that Westpac’s conduct constituted personal advice, not general advice, within the meaning of s 766B of the Corporations Act; this reversed the decision by Gleeson J at first instance. The distinction is significant; different regulatory obligations apply to a person providing personal advice and general advice. These differences include the obligation to act in the best interests of the client when providing personal advice, as well as the obligation to give a client a Statement of Advice.
The case also considers whether the Westpac AFS licensees complied with their obligation to do all things necessary to ensure that financial services were provided “efficiently, honestly and fairly” (s 912A(1)(a) of the Corporations Act), an issue that is likely to be of particular interest to the High Court and should provide instructive guidance and clarification on this requirement to all AFS licensees.
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