Australia's current financial services regulatory & 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. Pricing promises: ASIC commenced civil penalty proceedings against RACQ Insurance Ltd (RACQ) in the Federal Court in early 2023, alleging that RACQ’s PDSs contained potential breaches under ss 12DF, 12GBA, and 12GBB of the ASIC 2001 (Cth) for misleading and deceptive information about the application of discounts to insurance policies. For each of its insurance products, RACQ offered various optional benefits covers (Optional Benefits Premiums), the purchase of which would attract an additional premium on top of the base premium payable for that insurance product. RACQ used a pricing engine and algorithm to calculate a customer’s total payable amount, which didn't take into account the Optional Benefits Premiums. The court found that the PDSs would have been understood by ordinary and reasonable customers to mean that any discounts for which they qualified would apply to the entire premium payable for an RACQ Insurance Product, including any Optional Benefits Premiums. The practical takeaways have already been set out in ASIC Report 765; insurers need to develop and implement robust product governance processes to support the delivery of pricing promises and PDSs to consumers. Effective product governance should be rolled-out across the product lifecycle and should be supported by robust controls. ASIC also recommended that insurers properly define pricing promises and track all pricing promises to delivery through a centralised repository of past and present pricing promises. The repository could store eligibility details, internal approvals, and marketing materials for each pricing promise, which can then be control tested.
2. Scams - mandatory industry code: there will be new mandatory (and very broad!) industry codes to outline the responsibilities regarding scam activity, with a focus on banks, digital communications platforms and telecommunications providers. In essence, a positive obligation on these sectors to combat scams. The primary law would include a definition of scams, and the initial sectors designated within the Framework. The obligations will be quite broad and focus on prevention, detection, response and reporting to regulatory bodies e.g. “A business must develop, maintain, and implement an anti-scam strategy that sets out the business’ approach to scam prevention, detection, disruption and response, based on its assessment of its risk in the scams ecosystem”. You can read the consultation paper here, which builds on other policymaker / regulator initiatives e.g. ASIC's great Scams Website initiative.
3. Fund tokenisation: the UK City Minister’s forum for examining the impact of technology on the UK’s investment management sector has published its first report on fund tokenisation. It essentially focuses on creating a blueprint for implementing fund tokenisation in the UK, recognising the potential of this technology to propel the funds sector forward. The report has been well received from the UK FCA, which has said that: “We are working with industry to explore potential uses of fund tokeniation which could make collective investment schemes more efficient, transparent, and accessible to a wider range of consumers.” It is unsurprising. The potential of blockchain technology to create far more efficient fund structures - registries for a start(!) - is immense. Then you have the ability to overlay legal rights from tokens onto of existing financial products e.g. units in a fund, to make trading activity safer and more efficient. The potential amazing use cases go on and on!
4. AUSTRAC Enforceable Undertaking: AUSTRAC has accepted an Enforceable Undertaking from Perth Mint to uplift its compliance with AML/CTF laws. It follows an assessment undertaken in August 2022 which identified non-compliance with the AML/CTF laws, and AUSTRAC's direction to appoint an external auditor to assess its compliance with its AML/CTF obligations. Interestingly, the EU (see here) requires Perth Mint to commit sufficient resources to adequately implement its remediation program promptly, or risk further enforcement action. The focus on FTE to operate the remediation is a notable one, and reflects the reality that AML / CTF programs (incl. onboarding, transaction monitoring and reporting) require appropriate resourcing to operate in line with the size, complexity and business operations of the company. Too often, we see this aspect neglected in practice to the organisation's ultimate detriment.
5. ESG / Morningstar: Morningstar has paid $29,820 to comply with two infringement notices issued by ASIC in which ASIC alleged its investor funds invested under the PDS for the Morningstar International Shares (Unhedged) Fund were exposed to weapons investments, despite Morningstar’s ESG Policy stating that such investments would be excluded. You can read the notices here, which again demonstrate the growing focus of ASIC on ESG-related matters and market disclosures, particularly in the international equities space. Super funds, IPDS operators and other funds managers need to be acutely aware of this risk, especially in the indirect investment space i.e. where third parties are utilised / have appropriately robust contracts and controls in place to ensure that their market disclosures matches the underlying investments.
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"To sum up, transparency and engagement are at the heart of business – and especially at the heart of investor relations. This means there should be a special focus on keeping those front of mind when it comes to continuous disclosure obligations, sustainable finance reporting, and shareholder responsibility and activism" (ASIC Chair Joe Longo)
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