In this Funds Update for 8 September 2023:
- ASIC publishes Corporate Plan 2023–2027 with strategic focus on DDO
- ASIC issues new legislative instruments for financial resource requirements and platforms
- ASIC publishes review of OTC derivatives issuers' compliance with DDO
- ASIC proposes to remake financial reporting legislative instrument for stapled entities
- Commonwealth Parliament passes financial accountability regime bills
ASIC publishes Corporate Plan 2023–2027 with strategic focus on DDO
On 28 August 2023, ASIC published its Corporate Plan 2023–2027 (the Plan), which outlines the corporate regulator's priorities over the next four years.
The Plan outlines, amongst other things, ASIC's aim to continue pursuing targeted, risk-oriented surveillance measures to rectify deficiencies in the design and distribution obligations (DDO) of financial products.
ASIC intends to monitor compliance with all requirements, increasing its surveillance focus on the 'reasonable steps' obligations. ASIC also intends to apply a DDO obligations lens when responding to poor consumer outcomes that it identifies.
The Plan also notes that one of ASIC's strategic priorities is to support market integrity and efficiency through supervision and enforcement of current governance and disclosure standards to reduce harms from greenwashing, while engaging closely on climate-related financial disclosure requirements.
ASIC issues new legislative instruments for financial resource requirements and platforms
On 7 September 2023, ASIC announced that it has released four new legislative instruments and updated its guidance regarding the financial resource requirements that apply to certain categories of Australian financial services licensees and platforms. The legislative instruments seek to renew existing instruments which were due to sunset on either 1 October 2023 or 1 October 2024.
Financial resource requirements
The new legislative instruments relating to financial requirements are:
- ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647 – this applies to responsible entities of registered schemes, IDPS operators and corporate directors of retail corporate collective investment vehicles; and
- ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 – this applies to licensed custodians.
ASIC made these new instruments after considering the submissions received in response to Consultation Paper 367 Remaking ASIC class orders on financial requirements: [CO 13/760], [CO 13/761] and ASIC Instrument 2022/449, which we previously reported on in our Funds Update of 10 March 2023.
To reflect the terms of the new legislative instruments and address key issues covered in Report 769 Response to submissions on CP 367 Remaking ASIC class orders on financial requirements, ASIC has also updated Regulatory Guide 166 AFS licensing: Financial requirements.
Two legislative instruments were made in relation to investor directed portfolio services (IDPS) and IDPS-like schemes, which are commonly referred to as platforms:
- ASIC Corporations (Investor Directed Portfolio Services Provided Through a Registered Managed Investment Scheme) Instrument 2023/668; and
- ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669
ASIC made these new instruments after considering industry submissions received in response to Consultation Paper 369 Remaking ASIC class orders on platforms: [CO 13/762] and [CO 13/763].
The instruments are mostly the same as the old class orders. The key changes are as follows:
- Change to the 'quarterly report of electronic access on a
substantially continual basis' clause for both instruments:
- The licensee/responsible entity (RE) can now give electronic access to the prescribed investment information on a substantially continuous basis if the client has consented or has received reasonable notice that they can receive such information electronically in lieu of receiving a quarterly report.
- There are new conditions to this – the RE must provide the ability to opt-out of receiving the information electronically (and the member must not have opted out).
- For the IDPS instrument, it now provides that the IDPS operator must still comply with sections 1017E (Dealing with money received for financial product before the product is issued), 1020D (Part cannot be contracted out of) and 1021O (Offences of issuer or seller of financial product failing to pay money into an account as required) of the Corporations Act.
- For IDPS fees and costs disclosure, Part 2 of Schedule 10 still applies as if it was a managed investment product, except that the costs incurred for accessible investments are not required to be included as management fees and costs, performance fees or transaction costs (previously, there was differing treatment of costs incurred for accessible investments, depending on when the IDPS Guide was given or 'elected' to be treated as given).
- For IDPS, the required level of professional indemnity insurance for the licensee has been amended to take into account the value of all relevant IDPS property and corporate collective investment vehicle assets.
ASIC publishes review of OTC derivatives issuers' compliance with DDO
On 6 September 2023, ASIC announced that it has published Report 770 (Report 770), which summarises ASIC's targeted review of how issuers of retail OTC derivatives (including contracts for differences (CFDs), crypto derivatives and novel derivative arrangements) are meeting their DDO.
In Report 770, ASIC outlines its findings from the review and discusses factors for issuers and distributors to consider when reviewing their product governance arrangements. ASIC's key findings include:
- Use of available data and filtering – some issuers do not use information available to them to assist them in designing derivative products or objectively assessing whether the product would likely be consistent with the objectives, financial situation and needs of the consumers in the target market. ASIC's view is that it is better practice to use such available data to filter out consumers for whom the product would likely be inappropriate.
- Granularity of TMDs – while nearly all the target market determinations (TMDs) reviewed identified the high-risk nature of OTC derivatives and generally reflected the appropriate risk profiles and consumer characteristics for high-risk products of this kind, ASIC considered that some TMDs needed to use more specific and detailed parameters in describing the target market.
- Over-reliance on client questionnaires – ASIC observed that many retail OTC derivative issuers relied on client questionnaires as a primary filter to determine if consumers were reasonably likely to fall within the target market, and that some questionnaires contained serious flaws.
- Over-reliance on existing controls – many CFD issuers relied on controls developed for meeting disclosure benchmarks in Regulatory Guide 227 (RG 227), which pre-date the DDO but ASIC considers that distribution controls based on RG 227 alone are unlikely to be sufficient to meet an issuer's obligation to take reasonable steps likely to result in retail distribution conduct being consistent with the TMD.
- Marketing practices – some issuers engage in mass marketing of OTC derivatives to a broad consumer audience, which in the absence of strong distribution controls may be incompatible with an issuer's narrow target market and the obligation to take reasonable steps likely to result in distribution conduct being consistent with the TMD. ASIC considers that a better marketing practice is to target campaigns to specific distribution channels and publications that are likely to reach the target market.
- Poorly defined TMD review triggers – several examples of unrealistic or poorly defined review triggers that would not assist an issuer to identify whether its TMD was no longer appropriate.
- Leadership engagement needed – ASIC considered that there could be more engagement by the board and senior leadership of retail OTC derivative issuers with arrangements for complying with the DDO.
DDO remains a key focus for ASIC. As at 6 September 2023, ASIC has issued 82 interim stop orders under the DDO, including 10 orders relating to retail OTC derivatives. Of the 82 interim stop orders issued, 77 have been lifted following actions taken by the entities to address ASIC's concerns or where the products were withdrawn, and five remain in place. ASIC has also commenced three civil penalty proceedings for alleged breaches of DDO.
ASIC proposes to remake financial reporting legislative instrument for stapled entities
On 5 September 2023, ASIC announced that it is proposing to renew ASIC Class Order [CO 13/1050] (CO 13/1050), having determined that CO 13/1050 continues to operate effectively and efficiently. ASIC is not proposing to make any substantial changes to CO 13/1050.
CO 13/1050, which is scheduled to sunset on 1 October 2023, allows stapled entities which are disclosing entities to present combined financial statements or consolidated financial statements of the stapled group where they have prepared combined financial statements or consolidated financial statements for a previous reporting period, notwithstanding that the entities may not meet the requirement to prepare consolidated financial statements under Accounting Standard AASB 10 Consolidated Financial Statements.
CO 13/1050 also allows the stapled entities relief to continue to present their respective financial statements together in a single financial report.
The deadline for providing feedback to ASIC is 13 September 2023.
Commonwealth Parliament passes financial accountability regime bills
On 5 September 2023, the Financial Accountability Regime Bill 2023 and the Financial Accountability Regime (Consequential Amendments) Bill 2023 were successfully passed by the Commonwealth Parliament without amendment.
The Financial Accountability Regime (FAR) will impose a strengthened responsibility and accountability framework for APRA-regulated entities in the banking, insurance and superannuation industries and their directors and most senior and influential executives. Through this framework, the FAR seeks to improve the risk and governance cultures of those financial institutions.
The FAR will replace the Banking Executive Accountability Regime (BEAR), which came into effect on 1 July 2018. Unlike the BEAR, which was solely administered by APRA, the FAR will be jointly administered by APRA and ASIC. In addition to authorised deposit-taking institutions (ADIs), the FAR will also apply to insurance companies and superannuation trustees.
The FAR will apply to ADIs six months after the Financial Accountability Bill 2023 receives Royal Assent, and to insurance and superannuation entities 18 months following Royal Assent.
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.