Reflecting on 2022, our National Financial Services & FinTech team shares some of the industry trends and significant matters of the year, and what we can expect in the next 12 months.

"Regulatory reforms affecting the financial services industry have continued to roll out over 2022, including some long-awaited reforms in relation to electronic delivery and execution that were finally made in response to the COVID pandemic. And increasing interest rates have resulted in many providers having to revisit processes they've not had to put into action for over a decade! The industry has continued to evolve rapidly, and I'm pleased to say that our team has been there to support our valued clients every step of the way."

Shannon Adams - Practice Team leader

Industry insights

This year, the financial services industry has seen significant reform, proposed regulation and increased scrutiny, following unprecedented security breaches.

The recent Optus and Medibank hacks shone a spotlight onto the importance of having strong and reliable privacy and cyber security measures, particularly for Australian Financial Services licence (AFSL) holders. This was evident in Australian Securities and Investments Commission v RI Advice Group Pty Ltd [2022] FCA 496 (ASIC v RI Advice), where the Federal Court (FCA) held that RI Advice's cybersecurity measures were inadequate, and that Directors of AFSL organisations may be held personally liable if the organisation's measures were found to breach the Corporations Act 2001 (Cth). As a result, Directors and Officers must ensure the appropriate specialists are being used to examine and establish adequate controls to minimise risks related to cybersecurity and cyber resilience. Organisations should have in place a cyber breach plan BEFORE they experience a cyber hack. Delays in responding to a cyber hack enhance the possible damage scenarios.

We have also seen a regulatory response to the need to minimise the threat of financial hardship for consumers of products such as Consumer Leases and Small Amount Credit Contracts. The Financial Sector Reform Bill 2022 (FSR Bill) - which was introduced alongside the long-awaited Financial Accountability Regime Bill 2022 - proposed an 'anti-avoidance' provision for small amount credit contract and consumer lease products. The FSR Bill was passed on Friday 2 December 2022.

Earlier in the year, we saw the FCA overturn the decision of Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11, and rule that litigation funding agreements are not managed investment schemes (MIS) in LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103. This means that funded class actions are not required to register as a 'scheme' - consequently, reducing the regulatory hurdles for class action litigation funders and potentially increasing the number of funded class actions we will see in the future.

Based on the increasing focus on penalising breaches of the Competition and Consumer Act 2010 and amending Australia's legislation on unfair contract terms, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 was passed in late October. We have seen both ASIC and the ACCC bring a number of investigations and other legal proceedings to the courts, so we suggest companies get on the 'front foot' and ensure they are across the changes and review their current contracts.

Another reform which will impact organisations are the changes around new product design and distribution obligations. These reforms will see issuers be required to inform ASIC of a significant dealing in a financial product that is inconsistent with the product's Target Market Determination (TMD). ASIC has also issued stop orders in relation to interests in a fund and shares in two separate but related companies. These orders are markers of a shift in ASIC's focus to compliance, and we suggest organisations take action to minimise the likelihood of having inconsistent distribution with the TMD, as well as ensuring the requirements of the Design and Distribution Regime are clear and actionable.

In October, ASIC released Report 740 - the first report released under the new breach reporting regime. The new regime was brought into effect in 2021 with the aim of altering licensee self-reporting behaviour on breaches. Report 740 suggests that the breach reporting regime is not performing as expected. We saw a significant disparity in reporting conduct - as well as expectations - between licensees. This indicates that whilst the new breach reporting regime was introduced to provide greater clarity and consistency, there are still areas for improvement We expect to see further changes throughout 2023.

It has been a turbulent year in the blockchain and digital assets industry following the collapse of a number of high profile exchanges and funds includin FTX, Three Arrows Capital and Celsius. We nevertheless continued to see a high level of activity in the blockchain industry as developers continue building through crypto winter and investors look to take advantage of more favourable valuations.

A major theme in 2022 was regulation as industry leaders domestically and overseas called for enhanced regulation of crypto-asset intermediaries and greater clarity in relation to the regulatory treatment of crypto-assets. In November, the Federal Government announced that it would accelerate plans to introduce a legislative regime for cryptocurrency exchanges and custodians in 2023. Senator Bragg, who led the Senate Inquiry into Australia as a Technology and Financial Centre, also released a draft private member's bill which will no doubt be the subject of further debate as the Treasury pursues a consultation on token mapping in early 2023 as a stepping stone to introducing its own draft legislation.

As we entered the final months of 2022, ASIC stepped up enforcement action in relation to crypto-asset based products initiating proceedings against BPS Financial Pty Ltd for allegedly unlicensed conduct in relation to its crypto asset, Qoin, and Block Earner in relation to its crypto-asset based yield offering. ASIC also issued interim stop orders against Holon Investments Australia Limited relating to the distribution of three funds to retail investors because of non-compliant target market determinations. We anticipate further regulatory enforcement activity in 2023 as ASIC steps up its scrutiny of regulated crypto-asset offerings and targets unregulated crypto-asset offerings that mimic traditional financial products.

Finally, we saw the Federal Government turn to the 'Buy Now, Pay Later' sector and proposed mandatory regulation. Whilst there is currently a voluntary 'Buy Now, Pay Later' (BNPL) code, we saw the government look to regulate through the National Consumer Credit Protection Act, which we expect to be introduced in 2023. This regulation would see Australian consumers obtain additional support with managing their cashflow, as well as ensuring BNPL products are safe and marketed as such.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.