Welcome to the October edition of Financial Services Thinking showcasing the latest news from ASIC, including the corporate regulator's continued focus on all things relating to the design and distribution obligations (DDO).

We also share a Hot Tip about new legislation which recognises long-serving financial advisers.

ASIC

ASIC report on distribution of OTC derivatives under DDO regime

On 6 September, ASIC published the findings of its review of compliance with the design and distribution obligations (DDO) by issuers of retail over-the-counter (OTC) derivatives. The findings in Report 770 Design and distribution obligations: Retail OTC derivatives (Report 770) outline how issuers of retail OTC derivatives are meeting DDO and highlights areas for improvement.

Report 770 calls for issuers to address their over-reliance on client questionnaires as a primary distribution filter; review their mass marketing of OTC derivatives; and make greater use of available data to assist the design of derivative products, target market determinations and distribution arrangements.

According to ASIC Deputy Chair Karen Chester, ASIC is disappointed some high-risk retail product issuers have changed little in response to their DDO. Ms Chester also noted ASIC will not hesitate to take further action from stop orders through to court proceedings, especially where ASIC sees egregious failures.

Discover some recent learnings about DDO in our latest article Refreshing your approach to DDO—do you meet ASIC's expectations on TMDs? and reach out to our specialist Funds Management team who are currently undertaking DDO reviews.

ASIC sues Australian crypto exchange for alleged DDO failures

ASIC has initiated civil proceedings against Bit Trade, the provider of the Kraken crypto exchange to Australian customers. ASIC alleges Bit Trade failed to adhere to the design and distribution obligations (DDO) for its margin trading product on the Kraken platform, accusing Bit Trade of not making a target market determination before offering the product to Australian customers, as required by law. The margin trading product is considered a credit facility by ASIC, as it extends credit to customers for trading crypto assets.

ASIC notes since the introduction of the DDO regime in October 2021, at least 1,160 Australian customers have incurred a total loss of approximately $13 million using this product. ASIC is seeking declarations, pecuniary penalties, and injunctions against Bit Trade for its alleged non-compliance with regulatory obligations.

This is a timely reminder of the importance of adhering to DDO to protect consumers.

Get in touch with our Funds Management team to understand the steps you should take to satisfy ASIC's expectations.

AFS and credit licensees urged to bolster remediation procedures

ASIC is calling on AFS and credit licensees to swiftly and fairly remediate affected customers following its review of some major financial institutions' remediation practices. The review revealed inconsistencies with ASIC's Regulatory Guide 277 Consumer Remediation (RG 277) which could lead to negative outcomes for customers. Licensees are urged to align their remediation procedures with RG 277, focusing on areas such as remediation review periods, beneficial assumptions, foregone returns or interest calculations, reasonable efforts in contacting consumers, low-value payment thresholds, and improved governance frameworks emphasising fairness. ASIC warns that failure to provide fair and timely remediation could result in regulatory action.

Get in touch with a member of our Funds Management team to discuss your remediation procedures.

Do ASIC's new financial resource requirements apply to you?

ASIC recently released four new legislative instruments relating to the financial requirements imposed on AFS licensees and updated Regulatory Guide 166 AFS licensing: Financial requirements (RG 166).

A big change relates to authorised providers of custodial or depository services, which includes most wholesale fund managers. The new instrument re-defines the term 'revenue', which is relevant to the amount of net tangible assets (NTA) a custody provider is required to hold (if they are subject to that requirement).

Read our latest Alert ASIC's new financial requirements—one big change for wholesale fund managers by partner Elliott Stumm for all the details.

Other changes have been made when comparing the new regulatory guide and instruments against the old ones (including in relation to responsible entities). It is important you receive the right advice around how the financial requirements apply to you—particularly given the implications that may flow from a breach of those requirements.

Reach out to our Funds Management team to discuss what ASIC's latest changes might mean for you.

New Financial Accountability Regime

On 5 September, the long-awaited Financial Accountability Regime Bill 2023 was finally passed by Parliament.

FAR replaces and extends the Banking Executive Accountability Regime by imposing tough new accountability obligations on banks, insurers, and superannuation funds. The Assistant Treasurer said FAR ensures these institutions clearly identify individuals who will be held accountable for the actions of the organisation. An executive who breaches these obligations can be penalised with a loss of income, disqualification from working in the sector, and individual civil penalties for assisting in the organisation's contravention of its obligations.

FAR will be administered jointly by ASIC and APRA, and will be rolled out in phases, applying to the banking industry from March 2024 (six months after receiving royal assent) and to superannuation funds and insurers from March 2025 (18 months after the Bill's royal assent).

ASIC remakes class orders for managed funds

On 15 September, ASIC remade four class orders that were due to sunset on 1 October 2023

  • [CO 13/519] Changing the Responsible Entity
  • [CO 13/655] Provisions about the amount of consideration to acquire interests and withdrawal amounts not covered by ASIC Corporations (Managed investment product consideration) Instrument 2015/847
  • [CO 13/656] Equality of treatment impacting on the acquisition of interests, and
  • [CO 13/657] Discretions affecting the amount of consideration to acquire interests and withdrawal amounts.

[CO 13/655] has been remade on substantially the same terms in ASIC Corporations (Discretions for Setting the Issue Price and Withdrawal Price for Interests in Managed Investment Schemes) Instrument 2023/693, [CO 13/519] Changing the Responsible Entity has been remade on substantially the same terms in ASIC Corporations (Changing the Responsible Entity) Instrument 2023/681, and [CO 13/656] and [13/657] have been substantially remade in ASIC Corporations (Equality of Treatment Impacting on the Acquisition of Scheme Interests and CCIV Shares) Instrument 2023/697.

The new legislative instruments that replace these class orders sunset on 1 October 2028. ASIC will also update Regulatory Guide 134 Funds Management: Constitutions shortly to reflect the release of the new instruments.

HOT TIP

Long-serving financial advisers recognised

New legislation has been passed whereby financial advisers with at least 10 years' experience providing personal financial product advice to retail clients under an AFS licence, and have a clean record, are exempt from obtaining further qualifications. To rely on this exemption, the financial adviser must make a written declaration confirming they are an experienced provider and submit a notice of the declaration to ASIC.