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ASIC: Where to strengthen your procedures

Thursday 8 March 2018

While the finance industry has not yet seen this year’s regulatory priorities from the Australian Securities and Investments Regulator (ASIC), those who were paying attention to the wider regulatory guides and consultation papers released last year should get a pretty clear picture of where the regulator will focus its attention.

Recently, Paula McCabe and Pip Bell from PMC Legal did a presentation that looked at what is on the horizon when it comes to the possible enforcement priorities from the regulator.

Together, they identified the major areas on which regulated entities should be focussed.


Poor culture and conduct
McCabe suggested there will be continued focus from the regulator on conflicted remuneration. This means that special attention needs to be given to RG 246.

This regulatory guidance was released last December and officially came into effect in January this year, superseding the previous guidance released in March 2013.

“RG 246 was revised, largely, to deal with legislative changes in the insurance sector,” said McCabe. “However, there were some updates to the existing guidance applied outside the insurance sector.”

Without any specific guidance on where ASIC’s focus might centre, McCabe suspects the regulator may focus on higher-risk Responsible Entities (REs). This might include smaller REs and those who outsource some of their obligations.

In addition, McCabe suspects this will mean looking at the accuracy and timeliness of disclosures, as well as the reporting of financial information.

One of the common challenges identified is that of those who overlook their obligations around substantial shareholder notifications and the reporting of their relevant interests.


Financial vulnerability of consumers at key decision points 
According to McCabe, this will include a focus on product design. Sale distribution practices will also continue to remain in the corporate regulator’s spotlight.

For entities, this means looking at those situations where customers are being sold products not aligned with their risk appetite, or that they don’t understand. It also includes examining whether or not customers are being misled about the expected performance, or cost, of the product—or being misled about the product itself.

When it comes to managed funds, there is a need to consider cost and funds disclosures.

There will also be focus on social media and new media to promote products, and to ensure any marketing includes disclosures about the performance of the product. McCabe believes ASIC will continue to “…shadow the market, looking for malpractice.”

“Entities should also look at RG 53, which provides guidance on past marketing materials, to ensure their marketing materials are compliant with this requirement.”

It is worth noting, however, that potential challenges exist when trying to comply with RG 97. A report on the practical implementation of RG 97 will be published in the first half of this year; however, this, in itself, presents a challenge for organisations rolling out their product disclosure documents.

“Do they roll out their PDS now, while RG 97 is still on ice?” McCabe said.

According to McCabe, business should roll out their PDS because they still have to comply with the current requirements.

“I think a lot people gave a big sigh of relief and were tempted to leave their PDS alone,” she said.

Many PDS refer readers to the RE’s website for updates on indirect costs and transactional and operational costs.

Money Management reported that the corporate regulator admitted pulling back on RG 97 because of significant pressure from the superannuation industry:

“There were a series of very difficult and technical issues that were proving quite challenging to resolve.”

For those products aimed at retail clients, there needs to be what was defined as ‘target market determination’ to set the parameters of where the product can be sold. This will affect product issuers and distributers.

There may be a similar focus on periodic statements. McCabe suggested there had been a spike in reports to ASIC about periodic statements not be given on time or being sent out with insufficient or inaccurate content.

Disruption and innovation
Digital disruption is another big area. Coincidentally, ASIC has already held its second RegTech Liaison meeting for the year in which they looked at the local and international evolution of the relationships between regulators, industry and RegTech, as well as the conduct regulator’s interest in natural language processing.

Mark Adams, Innovation Hub Coordinator at ASIC, and Chair of the Australia-wide liaison event, said businesses should be concerned, in the immediate term, about the licensing of fintech businesses through the ‘regulatory sandbox’.

In addition, ASIC will be looking at group buying sites, peer-to-peer lending, and comparison websites. And in the RE space specifically, it is expected ASIC will look at platforms that are specifically involved in marketplace lending.

“Hopefully, ASIC will give some guidance on products that sit outside the regulatory regime, like bitcoin and crypto currency,” said Adams.

It is expected that ASIC will also look at regulatory oversight in the crowdsourcing space.


Risk management and cyber threats
Businesses should be paying attention to the amended RG 259 that addresses cyber risk.

“We expect the ASX will be under the spotlight to prove they can continue to provide market infrastructure—especially since, as you all know, there have been some outages in the past 12-to-18 months. They will be required to demonstrate that they can continue to operate as usual.”

Cross-border businesses, services and transactions in an uncertain environment
There is an expectation that the corporate regulator will continue its review of foreign financial service providers that rely on licensing relief when providing services to wholesale clients in Australia.

“Their revised policy is expected to be issued some time towards the end of September this year,” said McCabe.

There is an expectation ASIC continue work to help influence IOSCO policies, as well as to play a major role in supporting the Asia funds passport.

Organisations need to check where they sit when it comes to developing their compliance program with the some of the new expectations from the regulator.


Bell addressed some of the other developments that form part of ASIC’s growing powers.

The Cost Recovery Implementation Statement (CRIS), for example, came out in October last year with an expectation of what ASIC expects to spend.

This month, indicative levies are due to be published; however, businesses will then have to wait until ASIC’s annual report is released at the end of the financial year to know how much money the regulator has actually spent.

The next step will be the creation of a legislative instrument, which is expected to happen in December of this year. Invoices will then be released in January 2019, with payment expected by February.

External Dispute Resolution
One of the issues that featured prominently was the general position towards external dispute resolution (EDR) and the development of the Australian Financial Complaints Authority (AFCA).

According to Bell, in addition to being a ‘one-stop shop’ for complaints, there will also be ‘higher monetary units and compensation caps’ for small businesses to access.

Helen Coonan has been announced as Chair of new complaints body, which is expected to begin receiving its first complaints in November of this year. Minister Kelly O’Dwyer is also expected to authorise a not-for-profit company to operate the AFCA.

In response, ASIC has released their own regulatory guidance pertaining to the AFCA, RG 139.

Predominantly aimed at banks, the Banking Executive Accountability Regime (BEAR) legislation will also capture banks’ subsidiaries.

Large Authorised Deposit-taking Institutions (ADIs) will be accountable under this regime, which comes into effect in July of this year. Medium ADIs will be captured in July 2019.

ADIs are being included because of their potential to negatively impact the ADIs’ brand, which is considered enough to undermine confidence in ADIs in general.

Increasing Penalties
One of the issues highlighted was the ASIC Enforcement Review Taskforce. This forms part of the ongoing conversation that penalties in Australia have lagged behind those in the US and UK; thus, there is a growing push to ensure Australia’s own penalties are made equivalent.

It is expected that the Taskforce’s report on this will come through some time this year.

“If all the recommendations were to be accepted, then figuratively speaking, Australia’s corporate and finances watchdog will become a Rottweiler,” Bell said.