Welcome to Financial Services Thinking, our regular publication showcasing the latest news from the corporate regulators.

We also share a ‘hot tip’ about ASIC issuing its first court proceeding alleging greenwashing, which will set a critical precedent for future greenwashing actions.

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ASIC

ASIC publishes first regulatory developments timetable

ASIC has recently published a regulatory developments timetable aimed at helping industry and businesses better anticipate when ASIC will issue draft or final guidance, or the anticipated making of a legislative instrument. The timetable will generally exclude review, surveillance, and enforcement activities. ASIC has indicated it expects to release updated class orders for the corporate collective investment vehicle (CCIV) regime. Read our CCIV Guide for what you need to know about the steps to get started and how to launch a CCIV product in the market. We can help you get the authorisations you need and launch your CCIV product.

ASIC prosecutes companies for failing to lodge financial reports

ASIC has again reminded corporations to be vigilant with their financial reporting and shown an increased interest in taking action against entities failing to adhere to their obligations. Between 1 July 2022 and 31 December 2022, ASIC prosecuted 15 companies for failing to comply with their obligations to lodge financial reports, obtaining over $115,000 in financial penalties.  It is important to appreciate the significance of failing to lodge financial reports, as it is a breach often pointed to when ASIC determines to cancel or suspend AFS licences.

ASIC tells Star to set aside $150 million for AML/CTF fines and penalties

ASIC has instructed The Star Entertainment Group (Star) to set aside $150 million to pay for alleged non-compliance with anti-money laundering (AML) laws. For some time, Star has been in the media for potential actions by AUSTRAC for alleged non-compliance with AML/CTF laws. Given the uncertainty of potential fines, Star lodged a financial report for the year ending 21 December 2022 with no provision for fines and penalties for non-compliance with AML/CTF laws.
 
While it is likely Star had internally set aside funds, ASIC has responded criticising the lack of provision to pay potential fines. This highlights that financial reports are not simply ‘tick box’ exercises. Reporting must be thorough, accurate, and reflective of actual business circumstances. It also shows regulators are ready to join arms, with ASIC and AUSTRAC taking a unified front against Star.
 
Reach out to our Funds Management team for help with your AML/CTF compliance.

Credit to rent product stopped

To protect consumers from obtaining loans that potentially may not be suitable, ASIC has recently issued an interim stop order on One Credit Pty Ltd (OCC) preventing it from dealing in its Scorebuilder and Safetynet loan products which allowed consumers to utilize credit to pay their rent.
The order was issued on the basis OCC’s target market determination (TMD) was deficient as it—

• failed to include specific details about the financial situation or needs of the target market, and
• did not have sufficient distribution conditions to identify and exclude the class of consumers identified in the TMD as ineligible for the loans.

To date, ASIC has issued 23 design and distribution obligation interim stop orders, 18 of which have been lifted. 

Read our article about DDO learnings and reach out to a member of our Funds Management team if you are unsure whether your TMD is compliant or it needs to be reviewed.

ATO

Cyber safety—a priority

Following a series of cyber-attacks last year, the ATO is urging businesses to put cyber safety at the top of their priority list in 2023.  The ATO encourages businesses to implement the Australia Cyber Security Centre’s Essential Eight mitigation strategies as a starting point to safeguard against cyber incidents. ASIC has aligned itself with this position, previously stating it will take action against entities that fail to adhere to appropriate cyber practices.

Reach out to our Funds Management team to discuss the importance of AFS licensees appropriately managing cyber risk, as this is a key area of the regulator’s focus. We previously wrote about a recent Federal Court case where it was found an AFS licensee breached its obligations to act efficiently and fairly when it failed to have adequate risk management systems in place to manage cybersecurity risks.

AUSTRAC

New memorandum of understanding

AUSTRAC has recently signed a Memorandum of Understanding with the United Kingdom’s Financial Conduct Authority and His Majesty’s Revenue and Customs. The Australian financial services market is readily adopting UK practices, so this remains an evolving space, as the memorandum of understanding may spur a future shift in AML/CTF regulation in Australia.

Treasury

Quality of Advice Review Final Report

The Quality of Advice Review Report was provided to the government in December 2022 and included 22 recommendations, including—

• broadening the definition of personal advice in the Corporations Act
• removing the requirement for a general advice warning to accompany general advice
• requiring wholesale clients relying on an accountant’s certificate to provide written consent to be treated as a wholesale client.

The Quality of Advice Review Final Report, released on 8 February 2023, updated the recommendations released in the Quality of Advice Proposals Paper, including:

• General advice should remain as a regulated financial service (previously it was recommended general advice should be deregulated).
• A fiduciary's best interests duty should apply to relevant providers (financial advisers who satisfy relevant professional standards and charge a fee to the client, or the issuer of the product pays a commission) with no safe harbour steps.

Whether the recommendations are taken up remain to be seen, but the proposed changes will undoubtedly affect fund managers and Australian financial services licensee holders, particularly those that provide services to retail clients.

Consumer credit changes incoming?

Treasury released the National Consumer Credit Protection Amendment (Financial Sector Reform) Regulations 2023 on 20 February. The regulations propose a variety of measures, including—

• adding an additional requirement that licensees verify the financial situation of consumers before entering into a contract with them
• consumer income requirements for both small amount credit contracts and consumer leases for household goods
• anti-avoidance measures targeted at avoidance purposes relating to credit contracts and product intervention orders
• the prescription of new civil penalties subject to the National Consumer Credit Protection Act infringement notice regime.

These changes will be relevant to clients holding an Australian credit licence and targeting retail consumers. Consultation of the Regulations closes on 20 March 2023. Please reach out to a member of our financial services Funds Management team if you would like to know more.

Token mapping: Australian Government seeks feedback on proposed approach to crypto regulation

Treasury is seeking feedback from stakeholders on its consultation paper on the use of token mapping as an approach to regulate crypto products.  Responses may be submitted up until 3 March 2023. A full copy of the consultation paper and instructions on how to respond are available on Treasury’s ‘Token Mapping’ website.

Hot Tip

ASIC sees red on greenwashing

As expected for some time, ASIC has finally issued its first court proceeding alleging greenwashing. This matter will set a critical precedent for future greenwashing actions, particularly in relation to misleading statements on the sustainable nature and characteristics of investment options. Beyond ensuring disclosure documents are `true to label’, fund managers’ policies and procedures on assessment, reporting, and divestment of non-compliant assets will no doubt come under scrutiny. With indications of a number of investigations on foot, and ASIC announcing greenwashing as a 2023 enforcement priority, we can expect to see further action as the year progresses. You can read more in our recent article by lawyer Jordan Windress, and we will keep you up to date with further developments. Reach out to our Funds Management team if you need to review your offer documents.