Australian Regulators Weekly Wrap — Monday, 13 February 2023

13 February 2023
Liam Hennessy, Partner, Brisbane

Keeping on top of the latest financial services regulatory & compliance trends?

Investing time in your professional development within a rapidly changing financial services industry is challenging. To meet that challenge, the Australian Regulators Weekly Wrap is designed to keep you at forefront of your practice by quickly setting out the top 5 developments from the past week, analysis and practical considerations for the future.

  1. Future of financial advice (Treasury): The Treasury has released the Quality of Advice Review Final Report (Report). The Report adopts the same views as past proposals papers on many key issues including that more financial product advice should be personal advice, the providers of personal advice should have a duty to give ‘good advice’ (replacing the best interests duty), the focus should be on internal records for personal advice, and not on disclosure to clients, and the regulation of ongoing fee arrangements should be streamlined. Fascinatingly (and concerningly), however, the Government departed from the past proposals paper by holding that: general advice should be retained as a regulated financial service and, a fiduciary best interests duty should apply to financial advisers and that there be no safe harbour steps. There is a heap of other recommendations e.g. the need for a new AFSL authorisation for personal advice and the need to meet the associated organisational competency requirements for some licensees, so the report is easily my top read for the week! The Government is currently consulting on the paper, and given the increase in work it presents across the AFS population i.e. expanding personal advice, this is a really important one to have your say on!
  2. Crypto reform (Treasury): The Treasury has released its approach to making crypto safer for consumers. The approach has three elements. The first, is strengthening enforcement, stating that ‘ASIC is increasing the size of its crypto team and is upping enforcement measuresSecond, bolstering consumer protection. Treasury plans to reform the licensing and custody of crypto assets as we know, but it says that it is particularly focusing on the subset of crypto assts that currently fall outside the financial services regulatory framework. There will also be obligations and operational standards for crypto asset service providers to ensure they adequately safe‑keep assets for customers. Consultation on the design of the custody and licensing framework will begin mid-2023. The third, is establishing a framework for reform which is basically the token mapping exercise. That piece of work is designed to ensure policymakers and stakeholders to focus on regulatory gaps and ensure that emerging risks are identified and controlled.
  3. Guarantors (BCCC): The BCCC has warned about the risks of guarantees, given the rising interest rate requirement, and reiterated the requirements set out under the Banking Code of Practice, which includes obligations to ensure customers make fully informed decisions before agreeing to be a guarantor. “Ensuring you are clear about what you are signing up for, in agreeing to guarantee a loan, is essential because of the large financial risks involved” is the message from the BCCC’s CEO to the broader market, and suggestive that this will be an area of focus for the BCCC – which has limited enforcement powers – in the future.
  4. ASIC’s reform (ASIC): No official word yet on the generational ASIC’s reshuffle that will lead to faster enforcement (see Ronald’s great work here). With a Senate Inquiry in the background as to the regulator’s enforcement effectiveness, new powers e.g. DDO / PIP (and soon FAR) and resources e.g. crypto unit it will be quite the news. My sense is that they will combine supervision and enforcement teams, while of course shifting more resources into financial services and wealth.
  5. Kraken (SEC): Kraken has agreed to cease offering or selling ‘securities’ through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties to the US regulator. Kraken offered and sold its crypto asset ‘staking services’ to the general public, whereby it pooled certain crypto assets transferred by investors and stakes them on behalf of those investors. Staking is a process in which investors lock up – or ‘stake’ – their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain. When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms. The SEC alleged that this activity involved securities laws, which Kraken was not complying with as it thought otherwise. SEC Chair Gary Gensler stated: “Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws…Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection”. US Securities laws are very different to Australia’s, of course, though this is a notable development.

Thought for the future: consumer protection is critical in financial services, of course, but needs to be balanced against realistic expectations on licensed entities. This year is going to be an important one to get the alchemy right in the policymaking environment for digital assets businesses and ASIC enforcement more broadly.

Published on Australian Regulators Weekly Wrap

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Authored by: 

Liam Hennessy, Partner

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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