Gadens Regulatory Recap – 25 July 2023
25 July 2023
This edition of the Gadens’ Regulatory Recap highlights recent developments from ASIC, APRA, AUSTRAC, ACCC, ATO and Treasury, including important FAR updates and details on regulation of AI and treatment of high-risk crypto exchanges.
- ASIC’s greenwashing antidote of transparency and meaningful disclosure: From June 2022 to March 2023, the Australian Securities and Investments Commission (ASIC) has taken 35 regulatory interventions against greenwashing activities, which are said to ultimately erode investor confidence in the market for sustainability related corporate strategies and financial products. In May, ASIC published a short report on the 35 interventions which highlighted that ASIC intervened where:
- there was no reasonable basis for claims such as ‘green’, ‘clean’, ‘carbon neutral’ and net zero statements;
- PDSs and websites for ESG-related financial products had vague scope or application for sustainability related investment screen; and
- Sustainability related funds used vague terminology or inaccurate labelling.
ASIC’s interventions included issuing public infringement notices, securing timely corrections and commencing civil penalty proceedings.
- ASIC and APRA commence early consultation on FAR: APRA and ASIC have commenced early consultation on FAR and have released key materials to stakeholders designed to facilitate the implementation of the regime, which will replace the incumbent Banking Executive Accountability Regime (BEAR).
FAR will impose additional responsibility and accountability requirements on directors and executives of APRA regulated entities, with harsher penalties for a breach anticipated. The regime will initially apply to banks six months after the Financial Accountability Bill 2023 receives Royal Assent. Insurance and superannuation entities will be caught under the regime 18 months after the Bill receives Royal Assent.
Submissions are open until 17 August 2023.
- ASIC and APRA review regarding super outcomes planning: In a thematic review of how superannuation trustees are supporting members under the Retirement Income Covenant, ASIC and APRA have found that trustees need to take steps to make more progress towards enhancing retirement outcomes for members. Key findings from the review, which examined the progress made by 15 trustees responsible for 16 industry, retail, corporate, and public sector funds, included:
- Trustees need to take steps to identify and address gaps in the information held about their members;
- Trustees need to ensure ‘fit-for-purpose’ assistance strategies are in place, ensuring that they use metrics to determine the efficacy of assistance measures; and
- Trustees need to ensure that retirement income initiatives are integrated into overall business plans.
- ASIC to consult industry roundtable on proposed CHESS replacement: Following the ASX scrapping its failed $250m blockchain-backed CHESS replacement platform in late 2022, ASIC has requested that the ASX establish an industry consultation group to advise on how best to implement the new proposed CHESS replacement platform. The ASX is currently considering a range of possible strategies for updating or replacing the CHESS platform and is exploring opportunities across a number of different technology and product-based solutions. The proposed industry roundtable will consult on significant strategic clearing and settlement issues relating to cash equities trading in Australian markets, including CHESS replacement strategy.
- Enforcement: ASIC has continued various enforcement activities over the last fortnight. ASIC disqualified a director for four years and another for three and a half years due to their involvement in the failure of three companies each, and cancelled the AFSL of FTX Australia, noting that the licence had previously been suspended in November 2022. ASIC has continued to act against SMSF auditors, having disqualified five SMSF auditors and imposed conditions on a further three since 1 April 2023 for breaches of their obligations. Finally, ASIC issued its first stop order for a life insurance product, bringing the total stop orders issued in response to defective TMDs to 81. Gadens has recently explored the design and distribution obligations and ASIC’s action in relation to deficient TMDs here.
- Financial Regulator Assessment Authority issues review report into APRA: The Financial Regulator Assessment Authority (FRAA) has released its review report into the effectiveness and capability of APRA’s supervision and resolution of the superannuation industry. The report recognised the importance of APRA’s role and concluded that the supervision of superannuation is effective, whereas the resolution function requires further development.
The report included five key recommendations, including that APRA should:
- increase efforts to identify risks in superannuation, including emerging and systemic risks and their potential consequences;
- prioritise and invest in initiatives to retain and develop staff to build appropriate skills and industry knowledge;
- invest in data and technology capabilities and processes to provide timely insights and minimise the regulatory burden associated with data and information requests;
- provide trustees with plans of proposed supervisory activity and keep trustees informed, publish methodologies and more detailed insights, and consider communicating more timely and detailed insights across industry; and
- prioritise the development of its resolution capabilities.
APRA has indicated that it supports the recommendations made by FRAA.
- APRA finalises prudential standard CPS230 on operational risk: On 17 July 2023, APRA finalised Prudential Standard CPS230 Operational Risk Management (CPS230), which is targeted at the management of operational risk and response to business disruptions by insurers, banks and superannuation trustees including through:
- enhancing third-party risk management through the appropriate management of material service provider risk;
- new requirements to identify weaknesses in existing controls; and
- strengthening business continuity planning to effectively respond to severe disruptions.
APRA also released the draft Prudential Practice Guide CPS230 Operational Risk Management to assist regulated entities with the implementation of CPS230 and invites consultation on the draft guidance by 13 October 2023.
- APRA releases final guidance on investment governance for superannuation trustees: APRA has released guidance to assist trustees in meeting obligations under Prudential Standard SPS530 Investment Governance (SPG 530).
Prudential Practice Guide SPG 530 Investment Governance (SPG 530) provides:
- additional guidance to support requirements relating to liquidity management, stress testing and asset valuations;
- an outline of how APRA expects trustees will consider environmental, social and governance risk factors as part of their overall investment risk management;
- greater clarity in areas requested by industry in applying the standard; and
- a more streamlined approach to guidance, bringing SPG 530 in line with APRA’s Modernising the Prudential Architecture strategic initiative.
- Penalty imposed on Crown in AUSTRAC ruling: On 1 March 2022, AUSTRAC commenced proceedings in the Federal Court of Australia against Crown Perth and Crown Melbourne (together, Crown) for alleged serious and systemic non-compliance with Australia’s AML/CTF laws in at least 546 instances. The alleged non-compliance related to breaches of section 36(1) (ongoing customer due diligence) and 81(1) (reporting entity to have an AML/CTF program) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).On 30 May 2023, AUSTRAC and Crown jointly proposed that Crown would pay a penalty for various contraventions admitted by Crown, including that it:
- failed to appropriately assess the AML/TF risks they faced and to identify and respond to changes in risk over time;
- did not have appropriate risk-based systems and controls in their AML/CTF programs to mitigate and manage the AML/TF risks they faced;
- failed to establish an appropriate framework for Board and senior management oversight of their AML/CTF programs; and
- did not conduct appropriate ongoing customer due diligence on a range of specific customers who presented higher money laundering risks.
On 11 July 2023, Justice Michael Lee ordered Crown to pay a penalty of $450 million over two years. In negotiating a penalty, Crown noted that a higher penalty would cause it financial hardship.
- Digital Platform Regulators Forum puts AI on the agenda: The heads of the members of the Digital Platform Regulators Forum (DP-REG) met recently to review its strategic priorities for the previous financial year and to set new priorities for the year ahead.
The DP-REG is an initiative of Australian independent regulators to share information about, and collaborate on, cross-cutting issues and activities on the regulation of digital platforms. Its members are the ACCC, ACMA, eSafety and the OAIC.
The focus for the year ahead, through the working groups created in FY2023, is to continue to:
- assess the impact of digital platform technologies (including algorithms);
- improve the transparency of digital platforms’ activities and how they protect their users from potential harm; and
- work on increasing collaboration and capacity building between the DP-REG members.
Additionally, to understand and assess the benefits, risks and harms of generative artificial intelligence and how AI intersects with the regulatory remit of each DP-REG member.
- RBA Board changes: In response to recent review of the RBA, Phillip Lowe has announced plans for a number of changes to the RBA Board’s operational strategies, including less frequent but longer board meetings, media conferences explaining decisions after each meeting, greater board oversight over research into monetary policy and financial stability; and cooperation with Treasury to undertake 5-yearly open and transparent reviews of monetary policy frameworks.
Further changes are expected to be considered by the RBA following establishment of the proposed Monetary Policy Board, and the bank is currently implementing operational measures to move towards a more open and dynamic work culture following the RBA review published in April 2023.
- ACCC invites views on data broker industry: Recently, the ACCC’s Digital Platforms Branch has invited submissions on Australian data broker services from all parts of the industry, such as consumers, businesses and interested stakeholders.
The ACCC is focused on gaining further insights into the business practices of data brokers, including the collection of personally identifying information from a variety of both social media and government sources, and the subsequent use of this information to create reports which are either on-sold or shared with third parties and/or other organisations.
Interested parties are encouraged to lodge their submissions by 7 August 2023.
- Greenwashing guidance: The ACCC have published draft guidelines to assist businesses when making environment-related claims to the market. The aim of the guidelines is to ensure that statements are not misleading and/or deceptive, but are accurate, truthful and informative.
The ACCC’s draft guidance outlines eight practical principles that should be taken into consideration and implemented by businesses when making representations to the public in this area. Practical principles include clear concise language to enable consumers to undertake a meaningful evaluation of the assertions being made by businesses, as well as evidence to support the statements.
The consultation period closes 15 September 2023.
- ATO speech on Strategic co-operation and collaboration to combat financial crime: On 31 May 2023, acting ATO Deputy Commissioner, John Ford delivered a keynote address at the Financial Crime Summit highlighting both the challenges and responses to combating financial crime.
While the ATO recognised the push towards a total digitalised financial services industry driven by client expectations, concerns remain that the benefits of digitalisation provide fraudsters with greater ammunition to strike.
In response, the ATO has declared a strategy to balance the ease of client service with system integrity by:
- strengthening its internal prevention initiatives to greater levels of sophistication;
- investing further into a newly established dedicated fraud detection team; and
- pursuing industry partnerships to collaboratively address fraud as a shared risk.
- NAB bans high-risk crypto exchanges: Following on from the Commonwealth Bank of Australia’s recent about-face on its previous embrace of the crypto sector, NAB has announced that it will block payments to high-risk cryptocurrency exchanges. The bank has publicly stated that the restrictions are intended to reduce the instances of fraud and scams, though it has refused to name the banned exchanges. The moves by CBA and NAB could be interpreted as a signal that the big four banks are reverting to their former anti-crypto stance. Or it may be that the banks are reluctant to fully embrace the sector until there is further regulatory clarity. It will be interesting to see how the approach of the banks evolves as the sector becomes increasingly regulated both here and overseas over the medium to long term. This follows a similar ban of Binance from Westpac.
- Government discussion paper on regulation of AI: Submissions on the Government’s discussion paper on the regulation of AI have now closed. The Supporting responsible AI: discussion paper was released in early June and invited discussions around whether further regulatory and governance mechanisms are required to mitigate emerging risks from AI. This has been a topical issue as of late, with a certain high profile U.S. tech billionaire recently predicting ‘catastrophic risks to society’ if the sector is not properly regulated. The Australian Government is somewhat more measured in its discussion of the subject, but the issue is firmly at the forefront of regulators’ minds. Watch this space for further updates from Gadens leading up to the release of the Government report later this year.
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Caroline Ord, Partner
Daniel Maroske, Partner
Kate Mills, Partner
Kelly Griffiths, Partner
Matthew Bode, Partner
Michael Kenny, Partner
Sinead Lynch, Partner
Anna Fanelli, Senior Associate
Elizabeth Ziegler, Senior Associate
Philip O’Brien, Senior Associate
Zira Norman, Senior Associate
Nigel Mok, Associate
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.