This edition of Financial Services Thinking highlights the latest news from the corporate regulators and important industry developments.

We invite financial advisers to listen to the latest Ethics for Advisers podcast series from Professional Planner where Litigation partner Selina Nutley explores some real life ethical scenarios financial advisers encounter in their everyday professional lives.

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Treasury

Surviving the latest changes to the new Design and Distribution Obligations 

Issuers and distributors of financial products are no doubt busy preparing for the 5 October 2021 start date of the new Design and Distribution Obligations (DDOs).

Following feedback from stakeholders, the Government intends to clarify employees of licensees are not subject to their own separate set of DDO obligations; clarify the products captured by DDO (eg all basic deposit products are caught, but margin lending to corporates is exempt); and confirm the retail and wholesale investor definitions in the Corporations Act extend to the DDO regime.

ASIC will consider exercising its powers to make short-term interim changes to the law ahead of the Government’s response. This will provide greater certainty and avoid the need for issuers and distributors to implement product governance arrangements for products that are not intended to be caught by the reforms.

Our DDO Survival Guide sets out what you need to do so you are ready to comply on 5 October 2021.

We are working with many of our clients on their DDO survival guide already and our Funds Management lawyers can assist you to meet these new requirements.

CCIV – regulatory and tax framework

The Government has released draft legislation to implement the regulatory and tax components of the corporate collective investment vehicle (CCIV) regime.

A CCIV is an investment vehicle with a corporate structure like vehicles overseas. A single CCIV can offer multiple products and investment strategies within the same vehicle. If you need more information about the CCIV this article by partner Langton Clarke provides a useful overview of the regime.
The proposed new law includes—

• changes to the Corporations Act for establishing CCIVs and their operational and regulatory requirements
• the tax legislation, which ensures the tax treatment of CCIVs aligns with the existing treatment of attribution managed investment trusts, providing investors with the benefits of flow-through taxation.

The Exposure Draft is open for submissions until 24 September 2021.  Our lawyers understand the new CCIV regime and can answer your queries.

ASIC

ASIC’s new Corporate Plan

ASIC has just released its Corporate Plan for 2021-25 outlining its strategic priorities for the next four years, being:

1. Promoting economic recovery, including through better and more efficient regulation, facilitating innovation, and targeting regulatory and enforcement action to areas of greatest harm.
2. Reducing risk of harm to consumers exposed to poor product governance and design, and increased investment scam activity in a low yield environment
3. Supporting enhanced cyber resilience and cyber security among ASIC’s regulated population, in line with the whole-of-government commitment to mitigating cyber security risks.
4. Driving industry readiness and compliance with standards set by law reform initiatives (including the Financial Accountability Regime, reforms in superannuation and insurance, breach reporting, and the design and distribution obligations).

For the first time since its Corporate Plan for 2018-22, ASIC has moved away from its prevailing ‘why not litigate?’ position. The regulator has committed to remaining a ‘strong and targeted law enforcement agency’ and an ‘active litigator against misconduct’ but enforcement actions will prioritise areas of greatest harm and the protection of vulnerable consumers and investors. ASIC has committed to engaging actively and transparently with industry when it comes to the significant law reforms being implemented.

ASIC has also committed to enhancing communication and engagement with stakeholders and regulatory agencies, improving infrastructure and systems, enhancing and utilising data and cyber security capabilities, and continuing to develop a workplace culture underpinned by risk management and compliance.

Managed funds’ valuation of illiquid assets

ASIC recently conducted a review of the asset valuation practices of 10 fund managers of listed and unlisted registered schemes across both the retail and wholesale sector. ASIC collected data from 1 March to early November 2020, when the industry was dealing with significant economic uncertainties due to the pandemic.

Findings showed that responsible entities (REs) were responsive to the increased valuation risks by increasing the frequency of valuations, expanding the sources of information to benchmark valuations and assumptions, and re-valuing illiquid assets downwards and upwards as appropriate. REs provided timely valuations of their illiquid assets and had adequate conflict of interest arrangements in place.

Better valuation practices include—

• close board supervision of valuation processes and involvement in the adoption of the external valuations
• segregation of roles, involvement of independent committees and the use of multi-level review processes for internal and external valuations to ensure the accuracy of valuations and to support a robust conflict of interest framework
• recognition of conflicts in valuation processes as a standing organisational conflict and addressing these in compliance frameworks to ensure robustness and independence in the valuation process
• clearly defined valuation frequencies and trigger points (such as percentage variation of internal valuation compared to the last external valuation) for external valuations to take place.

We strongly encourage all REs to review their valuation practices and adopt these better practices where appropriate. REs should also review their compliance plan to ensure it reflects updated valuation policies.  Contact us if you have any queries.

ASIC’s approach to new financial services sector reforms

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has resulted in six law reforms introducing or modifying the—

1. Design and Distribution Obligations
2. restrictions on the unsolicited selling of financial products (hawking)
3. deferred sales model for add-on insurance products
4. reference checking and information sharing requirements for financial advisers and brokers
5. breach reporting requirements
6. internal dispute resolution requirements.

The new laws commence early October 2021, and we expect preparations are well underway for issuers and distributors of financial products.

ASIC recognises ‘there will be a period of transition as industry finalises implementation of additional compliance measures, and ASIC will take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply’.

However, ASIC will not be relaxing the early October 2021 start dates so financial product issuers and distributers must ensure they are aware of their obligations and understand the changes they need to implement.

If you are unsure how the reforms impact your business or need assistance, please contact our experienced Funds Management team.

Breach reporting relief for new IDR standards

The new internal dispute resolution (IDR) standards will come into effect on 5 October 2021. Licensees’ breach reporting obligations have been amended so individual breaches of IDR standards in Regulatory Guide 271 Internal Dispute Resolution are not deemed to be 'significant' and automatically reportable under the new breach reporting regime.

This amendment has been made so licensees are not obliged to report minor and technical breaches of the IDR standards which are unlikely to cause consumer detriment, alleviating unnecessary reporting. Licensees will still have to consider the general ‘significance’ test as well as the other deeming provisions (such as where the breach results in material loss to consumers) where they breach the IDR standards.

Read our recent article or contact a member of our Funds Management team to discuss how these changes affect your current policies and procedures.

AUSTRAC

Proposed changes to AML/CTF rules

AUSTRAC recently sought public consultation on draft changes to the Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules) The proposed changes include:

• Financial institutions be permitted to open an account without first identifying the customer, providing no transaction (other than an initial deposit at the time of account opening) is conducted.
• The definition of ‘store value card’ be amended to exclude certain accounts and cards.
• The issue of an interest in a litigation funding scheme be exempt from the operation of the AML/CTF Act.
• Exempt payroll and superannuation clearance services from the operation of the AML/CTF Act.

ASX

Reminder to listed entities

ASX issued a Compliance update reminding listed entities about—

• lodging draft notices of AGM with ASX for review before they are sent to security holders. ASX may take five business days to advise whether it objects to a draft document and may extend that deadline if it needs further time to review the document.
• annual listing fees for FY2022 were due on 31 July 2021.
• the requirement to notify ASX of the issue of equity securities under an employee incentive scheme.

Hot tip!

Ethics for financial advisers – where compliance ends and the Code begins

Financial advisers are experiencing a watershed moment as they grapple with putting new ethical standards into practice. Tick-a-box approaches to compliance might not only be expensive and time consuming, they could also be holding advisers back from taking the next step in their transition towards professional status.

Listen to Litigation partner Selina Nutley discuss real life scenarios financial advisers encounter in their everyday professional lives in Professional Planner’s latest Ethics for Advisers podcast series.