Financial Services Thinking – Issue 27

Welcome to Financial Services Thinking where we highlight the news from the corporate regulators. 

Read our ‘Hot Tip’ about ASIC’s continued focus on fund advertising and the critical need to ensure your advertising is reviewed for potential misleading and deceptive statements.

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ASIC

ASIC releases guidance on Financial Services Guide and Credit Panel (FSCP)

On 3 August 2022, ASIC released an updated Regulatory Guide 263: Financial Services and Credit Panel (RG 263).

The FSCP is a pool of industry participants appointed by the ASIC Commissioner to be included on sitting panels which consider suspected misconduct by a financial adviser.

ASIC must convene a sitting panel in prescribed circumstances outlined in RG 263 and may make a variety of orders, ranging from giving a warning or reprimand to the adviser to prohibiting the registration of a financial adviser.

For those affected by a FSCP decision, ASIC Information Sheet 273 has also been updated to outline the rights for financial advisers affected and the process to apply to vary or revoke a FSCP decision.

Reach out to our specialist Litigation team if you are affected by a FSCP decision.

ASIC’s approach to breach reporting

ASIC has announced it will focus on improving the operation of the reportable situations or breach reporting regime throughout 2022-2023. ASIC says it is aware of the current implementation issues and the increased burden the reporting obligations have on licensees. ASIC plans to work with industry stakeholders to enhance the regulatory portal and is considering issuing further practical guidance for licensees. We will update you when further guidance becomes available.

Compliance with the breach reporting regime is of critical importance. Failing to do so constitutes a further breach and gives ASIC more ammunition when it is considering the appropriate action it should take against a licensee.

If you have any questions about your current breach reporting obligations, reach out to partner Elliott Stumm or a member of our Funds Management team.

ASIC surveillance shines light on AFS licensee internal dispute resolution processes

ASIC’s surveillance of superannuation trustees internal dispute resolution (IDR) processes is a timely reminder for AFS licensees to ensure they comply with Regulatory Guide 271: Internal Dispute Resolution. ASIC’s observation highlights their focus on how AFS licensees are recording complaints, the response timeframes, following IDR processes, and failure to notify complainants that a response will not be provided within the maximum timeframes. 

ASIC Commissioner Danielle Press recently commented, 'We expect all trustees to have in place effective arrangements that support expressions of dissatisfaction from their members and deliver fair, transparent, and timely member outcomes. Trustees should continually monitor and update their processes to ensure these remain fit-for-purpose'. 

If you have any questions about your current IDR processes and systems, please contact Selina Nutley from our Funds Management and Litigation teams.

ASIC’s surveillance of target market determinations continues

Fund managers should take note of ASIC’s warning to super trustees to improve the effectiveness of target market determinations (TMDs) after a sample review of compliance with the new design and distribution obligations (DDO) found poor practices. Many of ASIC’s observations apply equally to the funds management industry and should be considered by fund managers when reviewing their TMDs. ASIC expects target markets and review triggers to be defined using specific and quantifiable measures instead of broad objectives. ASIC also recommends annual ongoing reviews of TMDs to avoid a ‘set and forget’ approach which can result in harm if the product is inconsistent with the objectives, financial situation and needs of consumers in the target market.

We can help you with—

• conducting regular desktop audits of your financial products having regard to the review triggers in your TMDs and any dealings that are not consistent with the TMDs, and
• reviewing your TMDs at least annually.

If you need help or have any questions, please reach out to partner Sean McMahon, consultant Jeunesse Meldrum, or a member of our Funds Management team.

ASIC’s Corporate Plan 2022 – 2026

ASIC has released its Corporate Plan outlining its strategic priorities and action plan for the next four years. One of ASIC’s strategic priorities relates to product design and distribution. ASIC considers non-compliance with the design and distribution obligations (DDO) to be one of the most significant threats to Australia’s regulatory environment. ASIC is looking to reduce the risk of harm to consumers of financial and credit products caused by poor product design, distribution, and marketing, especially by driving compliance with new requirements.

ASIC’s other strategic properties are as follows:

• Sustainable finance: Supporting market integrity through proactive supervision and enforcement of governance, transparency, and disclosure standards in relation to sustainable finance.
• Retirement decision making: Protecting consumers, especially as they plan and make decisions for retirement, with a focus on superannuation products, managed investments, and financial advice.
• Technology risks: Focusing on the impacts of technology in financial markets and services, driving good cyber-risk and operational resilience practices, and addressing digitally enabled misconduct, including scams.

Treasury

Effectiveness and capability of ASIC

On 25 August 2022, the Financial Regulator Assessment Authority (FRAA) tabled its report, Effectiveness and Capability Review of the Australian Securities and Investments Commission. The report assesses ASIC’s effectiveness and capability across strategic prioritisation, planning and decision making, surveillance, and licensing. The FRAA made four recommendations around enhancing ASIC’s use of data and technology, strengthening its engagement with stakeholders, enhancing its ability to measure effectiveness and capability, and continuing to broaden its mix of skill sets.

Reducing the complexity of financial services legislation

The Australian Government has invited stakeholder comments on two suites of draft legislation released on 24 August. The draft legislation seeks to implement formal recommendations and informal suggestions made by the Australian Law Reform Commission (ALRC) in Interim Report A of its Review of the Legislative Framework for Corporations and Financial Services Regulations (ALRC Financial Services Interim Report).

The first suite, the Treasury Laws Amendment (Measures for consultation) Bill 2022: ALRC Financial Services Interim Report, aims to simplify the current laws to increase efficiencies and provide greater certainty to stakeholders.

The second tranche of legislation, the Treasury Laws Amendment (Measures for consultation) Bill 2022: Rationalisation of ending ASIC instruments, proposes to move matters currently contained in ASIC legislative instruments into the Corporations Act or the National Consumer Credit Protection Act (Cth).

Consultation closes on 20 September 2022.

Review of ASIC’s industry funding model

Treasury published the terms of reference for the review of ASIC’s industry funding model on 8 August. The review will consider and make recommendations on:

• The types of costs and nature of ASIC’s activities that are recovered from the industry.
• How ASIC allocates costs to sectors and decides its focus on regulatory activities.
• Industry levy amounts.
• Whether the design and legislative framework for the industry funding model remains appropriate.
• The suitability and transparency of the consultation mechanisms. 

Stakeholders can provide input into the consultation process throughout late 2022.

If you have any queries about the industry funding model, contact a member of our Funds Management team.

Treasury consults on inclusion of ASIC legislative instrument 2022/61 into primary legislation

On 24 August 2022, the government released draft legislation proposing to bring the relief currently contained in ASIC Corporations (Describing Debentures—Secured Notes) Instrument 2022/61 (Instrument) permanently into the Corporations Act. The Instrument currently allows debentures secured by intangible property, such as loans receivable, to be categorised as secured notes instead of unsecured notes where the debentures do not satisfy the ‘debenture’ or ‘mortgage debenture’ tests. 

Responses to the draft legislation are due by 20 September 2022.

Financial Services Council

ESG disclosure guidance for investment managers

On 3 August 2022, the Financial Services Council (FSC) published FSC Guidance Note No 44 Climate Risk Disclosure in Investment Management (Guidance Note). The Guidance Note is relevant to ASIC’s ‘greenwashing’ campaign and follows the release of Information Sheet 271 by ASIC in June which is aimed at assisting investment managers and product issuers with environmental social and governance (ESG) related disclosure. In particular, the Guidance Note recommends funds are specific about their ESG investment objectives and approaches, using auditable metrics that are verifiable by reference to the underlying investments. 

We can help with your questions about ESG related disclosure. Reach out to our Funds Management team for more information.

Hot tip!

Misleading and deceptive fund advertising on ASIC’s radar

ASIC has misleading and deceptive statements in fund advertising on its radar. In the recent stop order against RES Investment Fund, the key issue was the description of the assets of the fund in advertising products which suggested investors were investing directly into a company. However, they were investing in a fund which made a loan to the company. Given ASIC’s focus, it is critical to ensure your advertising is reviewed for potential misleading and deceptive statements. 

If you receive any form of communication from ASIC, it is important you act promptly, including seeking advice and considering pausing the advertisements in question. Any action from ASIC can have wide ranging business and reputational consequences, particularly as ASIC is moving towards greater transparency (‘naming and shaming’) around its dealing with fund managers. Our Funds Management team can assist with a proactive audit of your advertising material, or help you respond to any notices or correspondence received from ASIC.