Australia's financial services regulatory and compliance landscape is changing rapidly - Clyde & Co's weekly Regulatory Roundup will ensure you are up to date with the most important changes. In each edition, we will set out five key developments from the past week for you to consider.
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1. FAR: Finally! The Financial Accountability Regime Bill (2023) has passed Parliament, and now awaits Royal Assent. It is arguably the most significant change to Australia’s financial services regulatory landscape in a generation. It requires banks, insurers and superannuation funds to identify directors and senior executives, detail their specific responsibilities in ‘accountability statements’ and conduct their activities in accordance with broader obligations e.g., ‘integrity’, ‘skill’ and ‘co-operation’ with ASIC and APRA. If they don’t, they can be personally liable, as can the organisation. Simple in theory, and fiendishly hard to implement in practice - expect to take 6 to 9 months for implementation for medium sized retail insurer - you can read more on the practical aspects of implement in our articles here. For those interested, we can also send you our submission to APRA/ASIC on their recent ADI guidance (which we think will affect the GIs, LIs and RSEs in due course).
2. Digital assets regulation: the Senate Committee on Economics Legislation has recommended rejection of Senator Bragg's crypto licensing private member's bill. The report stated that the draft legislation “fails to interoperate with the established regulatory landscape, creating a genuine concern for regulatory arbitrage and adverse outcomes to the industry”. There was a lot of positives in the bill, which covered licensing and custody requirements for digital asset providers (and which we provided consultation on / appeared before to Senate to provide evidence). Another, perhaps less pronounced, reason for the bill's rejection is the separate process the government has in place, via Treasury, to create a licensing and custody regulatory framework. Treasury’s new consultation paper, informed by responses to the previous token mapping exercise it did, is expected in the near future. Sen Bragg's bill is a private members bill from an opposition party politician i.e. it was not proposed by the Government, and is separate to its eagerly anticipated work.
3. CPS 511: the prudential regulator has undertaken a review on how entities are approaching the implementation of Prudential Standard CPS 511 Remuneration (CPS 511). An area we are spending a lot of time on with our insurance clients (the wording of the standard means it can apply more broadly than for just the prudential entity e.g. to 'group' executives domestically, or based overseas), APRA identified the following common gaps in implementation: "limited progress implementing controls to manage potential conflicts arising from compensation arrangements of third-party service providers; inadequate understanding of how selected non-financial measures (NFMs) will drive desired behaviour, risk outcomes and performance; and insufficient rigour in the proposed processes to ensure remuneration consequences result from poor risk management outcomes." Noting that CPS 511 will need to be cross-stitched with FAR (the overlaps are not perfect), non SFIs should be well on their journey to getting the policy AND the surrounding infrastructure e.g. decisioning frameworks, privilege protocols, etc in place. You can read the report here.
4. Funds - resource requirements: ASIC has updated the financial resource requirements that apply to some categories of AFSL holders and and platforms. ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 applies to licensed custodians, and covers their net tangible asset requirements. ASIC has also stated that it will updated the (always complicated) Regulatory Guide 166 AFS licensing: Financial requirements in response to these changes. Given the importance of NTA, ASLF and ASF to all funds, it is worth revisiting these ones as part of compliance & controls reviews.
5. OTC derivatives: the conduct regulator has released Report 770 Design and distribution obligations: Retail OTC derivatives, which explored how issuers of retail OTC derivatives are interacting with their design & distribution requirements. It identified appreciable areas for improvement, for example some target market determinations lacked sufficient granularity, and there was an over-reliance on client questionnaires as a primary distribution filter. The report offers practical areas for focus, for example reviewing mass marketing of OTC derivatives, and, making greater use of data e.g. client's profit & loss from trading activities to assist the design of derivative products, target market determinations and distribution arrangements.
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ASIC is disappointed that some high-risk retail product issuers have changed little in response to their design and distribution obligations. (ASIC Deputy Chair Karen Chester)
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