Gadens Regulatory Recap – 5 March 2024

This edition of the Gadens Regulatory Recap highlights recent developments from ASIC, APRA, ACCC, the OAIC, and the ATO including various enforcement actions taken by the regulators.

ASIC

1. ASIC calls on industry to better respond to underperformance in choice superannuation investment portfolios: On 21 February 2024, ASIC released a report investigating how financial advisers, superannuation trustees and Australian financial services licensees (collectively, Superannuation Professionals) monitor and respond to underperformance within choice superannuation investment portfolios (Choice Portfolios). Members with Choice Portfolios actively decide which financial products to invest in, typically with the assistance of Superannuation Professionals. ASIC launched this investigation due to concerns that members with Choice Portfolios often continue to invest in financial products which have significantly underperformed against benchmarks for an extended period of time. As part of its investigation, ASIC looked at how a selection of Superannuation Professionals responded to underperformance of financial products within Choice Portfolios. It found that Superannuation Professionals were often aware of and monitoring underperforming financial products, but the members themselves were usually not. ASIC also uncovered that Superannuation Professionals frequently failed to engage in targeted communication with members about persistent, significant underperformance relative to benchmarks. ASIC has now called on Superannuation Professionals to address the issues identified in its report by, amongst other things, having systems in place to better monitor and communicate to members of Choice Portfolios about underperforming investments.
2. ASIC and the National Anti-Scam Centre release guidance on online investment trading platforms: ASIC and the National Anti-Scam Centre have released a warning to consumers relating to online investment trading platform scams, with more than $8 million lost across 400 reported scams in 2023. Australians have been warned to beware of fake news articles and deepfake videos of public figures endorsing various online investment opportunities. Scamwatch reports indicate that the most prolific scams include ‘Quantum AI’, ‘Immediate Edge’, ‘Immediate Connect’, ‘Immediate X3’, and ‘Quantum Trade Wave’.When deciding whether to invest and reduce the risk of investment scams, Australians are urged to check ASIC’s investor alert list and ASIC’s investment guidance page.
3. ASIC releases enforcement and regulatory update for October to December 2023: ASIC has released Report 780, providing an update on enforcement and regulatory matters from October to December 2023. Relevantly, the report indicates that during the period:

• 83 investigations were commenced;
• civil investigations took an average of 15 months;
• criminal investigations took an average of 24 months;
• 80% of ASIC’s litigation (both criminal and civil) were successfully completed;
• $59.8 million in civil penalties was imposed by the courts;
• 9 criminal convictions were obtained;
• 347 surveillances were completed;
• 19 new civil proceedings were filed; and
• 19 new criminal litigations were commenced.

ASIC also highlighted in the report that, since the regulator’s scam website takedown capability was launched in July 2023, nearly 3,500 investment scam websites have been taken down, and the regulator is continuing to prioritise preventing consumer losses due to investment scams.

4. ASIC enforcement activities: In what has been an active fortnight for the regulator, ASIC has engaged in a wide range of enforcement activities.
   
   ASIC disqualified a Sydney director from managing corporations for a period of five years following the failure of seven companies that he was director of, after finding he acted improperly and failed to meet his obligations as an officer. ASIC also cancelled the Australian financial services licence of NextGen Financial Group Pty Ltd, following orders of the Federal Court in November 2023 that the organisation be wound up in insolvency. ASIC also cancelled the licence of Valorton Capital Pty Ltd as the organisation had not provided financial services since its licence was granted in October 2022. The regulator also accepted a court-enforceable undertaking of a former financial adviser, Mr Sivdeep Jaidka, on the grounds that he had failed to comply with sections 961B and 961G of the Corporations Act 2001 (Cth) (Corporations Act) with respect to advice provided relating to Self-Managed Superannuation Funds. Under the terms of the undertaking, Mr Jaidka has agreed that he will not carry on a financial services business, provide financial services, or act in a managerial capacity of a financial services business for five years.

After its investigation of Prospero Markets Pty Ltd following the Australian Federal Police’s Operation Avarus-Nightwolf (which Gadens previously wrote about in the October 2023 edition of the National Integrity Spotlight), ASIC has applied to the Federal Court to wind up the retail OTC derivative issuer on just and equitable grounds, noting that the regulator has a broad range of concerns about the management of the business, and that Prospero’s AFSL was suspended in December 2023.

ASIC also successfully sought sequestration orders in the Federal Court against social media ‘finfluencer’ Tyson Robert Scholz, following Mr Scholz’s failure to pay costs ordered by the Federal Court. The Federal Court had previously found that Mr Scholz had contravened section 911A of the Corporations Act for carrying on a financial services business without an Australian financial services licence.

The Full Federal Court has upheld ASIC’s appeal in its case against ACBF Funeral Plans Pty Ltd and Youpla Group Pty, ultimately finding that the funeral expenses insurance provider misrepresented to Aboriginal consumers that it was Aboriginal owned or managed. ASIC Deputy Chair Sarah Court stated that “the decision provides some formal acknowledgement of that harm and will be a deterrent to anyone who tries to mislead Aboriginal consumers about whether a business is Aboriginal owned or managed.”

In a separate, but somewhat related matter, ASIC has issued an interim stop order preventing Coral Coast Distributors (Cairns) Pty Ltd from having customers at Urban Rampage retail stores enter agreements to pay for goods on credit through Centrepay deductions. ASIC has expressed concerns that these consumers are low-income recipients of Centrelink benefits, residing in remote indigenous communities and may be particularly vulnerable and at risk of financial hardship.

ASIC obtained interim travel restraint orders against the former director of Blockchain Global Limited (in liquidation) whilst ASIC continues to investigate the directors of Blockchain Global over their roles in the collapse of a crypto-asset exchange it operated. The orders prevent Mr Liang (Allan) Guo from leaving the country while ASIC’s investigation remains ongoing.

Finally, ASIC commenced proceedings in the Federal Court against Mr David Paul Hodgson, MacroLend Pty Ltd, and Great Southland Limited with respect to alleged unlicensed financial services and misrepresentations made to investors. ASIC alleges that, since at least 5 January 2015, MacroLend was unlicenced when it raised more than $47.4 million from 169 investors. ASIC also alleges that Great Southland, an entity registered in Belize, has been operating unlawfully in Australia and has obtained over $60 million from 89 investors, which included 46 Australians.

APRA

5. APRA updates guidance for General Insurers on large exposures: On 19 February 2024, the Australian Prudential Regulation Authority (APRA) announced by way of letter to all general insurers and level 2 insurance groups, that it is updating guidance in relation to the reporting of large general exposures in GRS_117_0. As part of this, APRA has: 

• developed lists of standard wordings for the fields ‘exposure description’ and ‘counterparty group name’ and in the event the standardised wording does not correspond to an entry on the lists, to continue to report the item as unchanged; and 
• reminded insurers to report the counterparty ABN or ACN when reporting large exposures.

6. APRA commences consultation on proposed amendments to operational risk financial requirement for superannuation: On 19 February 2024, APRA commenced consultation on proposed amendments to Prudential Standard SPS 114 operational risk financial requirement (ORFR) and associated guidance. In consideration of industry feedback, APRA’s approach will focus on integration with CPS 230 and better enabling use of the ORFR when needed. APRA proposes to amend SPS 114 and supporting guidance, Prudential Practice Guide SPG 114 Operational Risk Financial Requirement (SPG 114), to:

• amend notification requirements facilitating use of the ORFR;
• clarify the purpose of the ORFR;
• widen the range of ORFR uses; and
• introduce a direct and transparent relationship with CPS 230. 

The proposed changes are expected to better position RSE licensees to use ORFR for its intended purpose of managing disruption impact and smooth operational risk related losses across different beneficiary cohorts. The consultation will be open for submissions until 13 May 2024. Subject to the outcomes of the consultation, APRA plans to finalise updates to SPS 114 later in 2024, with an updated SPS 114 to commence in 2024, to align with (or follow) CPS 230. 

ACCC

7. ACCC proposes to authorise joint renewable energy purchasing group: On 18 January 2024, the Australian Competition and Consumer Commission (ACCC) received an application from 1Circle Pty Ltd to form a group with members of the Business Renewables Buying Group (the Group). The Group is seeking to pool their electricity demand and conduct a joint procurement and negotiation process for the supply of electricity and generation certificates from renewable energy sources. On 28 February 2024, the ACCC issued a draft determination proposing to grant authorisation to the Group for a period of 11 years. 

In the meantime, the ACCC has granted an interim limited authorisation for the Group to initiate the joint electricity procurement whilst the ACCC conducts its assessment. This does not extend to agreements with suppliers of electricity services.  

Submissions in response to the draft determination can be made here and close Friday 15 March 2024.  

8. Westpac’s proposed acquisition of HealthPoint not opposed: On 28 February 2024, the ACCC issued a media release indicating that it will not oppose Westpac Banking Corporation’s proposed acquisition of HealthPoint, concluding that the acquisition is unlikely to result in a substantial lessening of competition. 

The ACCC’s assessment focused on the whether the proposed acquisition would provide Westpac with the ability or incentive to inhibit competing banking and channel partners’ use of the HealthPoint application.  

HICAPS, the only current alternative, is exclusive to and wholly owned by NAB. Despite this, most market participants were not concerned about the proposed acquisition given HICAPS is the “significantly largest supplier” of private health insurance point of sale claiming and settlement services, and that through its proposed ownership of HealthPoint, Westpac is in fact likely to be incentivised to work with existing banking and channel partners to compete with HICAPS.  

9. ACCC’s review of past merger decisions draws into question the effectiveness of undertakings: On 27 February 2024, the ACCC released a report reviewing three past merger decisions to identify ways it might improve the quality of future merger investigations and decisions. Most notably, the report drew into question the effectiveness of undertakings offered pursuant to section 87B of the Competition and Consumer Act 2010 (Cth). In ANZ Terminals’ acquisition of GrainCorp Liquid Terminals Australia, one of the mergers considered as part of the review, the ACCC accepted a court enforceable undertaking that ANZ Terminals would not acquire additional parcels of land at the Port of Melbourne without the ACCC’s permission. Whilst the parties complied with the obligations set out by the undertaking, the market conditions post-acquisition played out differently to those anticipated by the ACCC at the time of authorising the transaction, which ultimately diluted the effectiveness of the undertaking. Commenting on the report, ACCC Chair Gina Cass-Gottlieb said that the “findings are important” and “likely to influence our approach in future matters”.
   

OAIC

10. OAIC commences investigation into HWL Ebsworth over data breach: On 21 February 2024, it was announced that the Australian Information Commissioner had commenced an investigation into the information handling processes of HWL Ebsworth Lawyers, following a data breach reported to the Office of the Australian Information Commissioner (OAIC) on 8 May 2023. The OAIC’s preliminary inquiries into the matter commenced in June 2023.

Specifically, the OAIC’s investigation is into the firm’s practices relating to the security and protection of information held, as well as the notification of the data breach by those affected. Relevantly, the Privacy Act 1988 (Cth) requires that an organisation is required to take steps to notify affected individuals of an eligible data breach as soon as practicable.  

The Commissioner has a range of options following the investigation, including making a determination, and seeking civil penalties in the Federal Court. 

11. OAIC data breach report highlights risks of supply chains: On 22 February 2024, the OAIC released its latest data breach statistics, with the Commissioner indicating that the OAIC has continued to receive a high number of notifications relating to multi-party breaches, often involving breaches of cloud or software providers, stating that “organisations need to proactively address privacy risks in contractual agreements with third-party service providers.”

Relevantly, the OAIC reported that in the July to December 2023 period:

• 483 data breaches were reported, a 19% increase from the first half of the year;
• 121 secondary notifications were received, an increase from 29 notifications in January to June 2023;
• malicious or criminal attacks were the leading source of data breaches (322 notifications), with the majority of those being cyber security incidents (211 notifications);
• the health and finance sectors are the top reporters of data breaches, with 104 and 49 notifications respectively;
• 65% of data breaches reported affected 100 people or fewer;
• the top cause of data breaches resulting from cyber security incidents stemmed from phishing (28%), compromised or stolen credentials (27%), and ransomware (27%); and
• the top causes of human error breaches were personal information sent to wrong email recipients (33%), unauthorised disclosure (20%), and personal information sent to the wrong mail recipients (10%).

ATO

12. Commissioner’s address to the National Press Club 2024: Tax Commissioner Chris Jordan gave a speech to the National Press Club on 21 February 2024 ahead of his resignation from the role. The speech reflected on his 11-year tenure and the significant transformations in the Australian Tax Office (ATO) during that time. The Commissioner’s legacy includes significant progress in combating multinational tax avoidance, landmark victories against major companies like Apple and Google, and a shift towards the digitisation of the ATO.

Looking ahead, the Commissioner outlined the ATO’s vision for the future, including full digitisation by 2030, increased focus on cybersecurity concerns, and enhanced powers to strengthen the ATO’s ability to combat tax evasion.

13. Levelling-up SMSF Compliance – The Regulator’s Update: In a speech at the SMSFA conference, Deputy Commissioner Emma Rosenzweig outlined the ATO’s efforts to combat illegal early access to Self-Managed Superannuation Funds (SMSFs). The Deputy Commissioner acknowledged that most SMSFs comply with relevant regulations, but the ATO is particularly concerned about those engaging in illegal early access, where members withdraw retirement savings before meeting release conditions.

Deputy Commissioner Rosenzweig emphasised the need for professional advisers to play a role in preventing illegal access to SMSFs by educating clients and reporting suspicious activities. The ATO aims to level up its response to the issue by intensifying compliance monitoring, disqualifying trustees, and collaborating with law enforcement agencies to safeguard the integrity of the SMSF system. 

14. Statement on debts on hold program: The ATO has released a statement addressing concerns raised by the community regarding the debts on hold program. The program involved the ATO placing debts deemed ‘uneconomical to pursue’ on hold. The latest ATO statement confirmed that it is not currently pursuing or offsetting debts placed on hold before 2017. The ATO has halted all actions related to such debts whilst they review and develop a pragmatic approach, taking into account community concerns.

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Authored by: 

Matthew Bode, Partner
Kelly Griffiths, Partner
Michael Kenny, Partner
Sinead Lynch, Partner
Daniel Maroske, Partner
Kate Mills, Partner
Caroline Ord, Partner
Anna Fanelli, Senior Associate
Zira Norman, Senior Associate
Philip O’Brien, Senior Associate
Fiona Ng, Lawyer
Martin Van Aardt, Lawyer