Financial Services « Australian Regulatory Compliance Review from Langes+ Lawyers

May 13, 2013

Unfair terms in general insurance contracts

Treasury has released for comment exposure draft legislation and explanatory material to give consumers protection against unfair contract terms in general insurance contracts.

The key elements of the draft legislation are:

the new unfair contract terms regime will apply to general insurance contracts on an equivalent basis to the regime applying to other financial products or services in the Australian Securities and Investments Commission Act 2001. The new regime is modified appropriately for contracts of general insurance;
consumers and the Australian Securities and Investments Commission (ASIC) will be able to take action for unfair terms in a standard form consumer contract of general insurance, such as seeking a court declaration that a term is unfair. A court will have access to a range of remedies in such circumstances;
an insurer found by a court to have an unfair term will be in breach of the duty of utmost good faith and will not be able to rely on the term;
ASIC will be given powers to enforce unfair contract terms for general insurance contracts by reference to the enforcement and investigation powers it has in the Australian Securities and Investments Commission Act 2001;
the amendments will apply to standard form consumer contracts of general insurance entered into, or renewed, on or after the commencement day, and to terms varied on or after the commencement day. The commencement day will be 12 months after the day the Act receives Royal Assent, giving general insurers a transition period to review their standard form consumer contracts for unfair terms.

The draft legislation will apply to:

standard form consumer contracts of general insurance which are entered into, or renewed on, or after, commencement; and
a term in a standard form consumer contract of general insurance that is varied on or after commencement.

Insurers will be given a 12 month transition period to review their standard form consumer contracts for unfair terms before the commencement of the changes.

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Posted 13th May 2013 by admin in Consumer Law, Financial Services, Insurance

Chief Risk Officer requirement for ADIs and insurers

APRA has released for consultation a proposed cross-industry prudential standard to harmonise and consolidate its risk management requirements for ADIs and insurers– Prudential Standard CPS 220 Risk Management (CPS 220).

The proposed CPS 220 will replace the existing industry-specific risk management standards for general insurers and life insurers, and will include the risk management requirements for ADIs that are currently spread across a number of ADI prudential standards.

CPS 220 will not apply to the superannuation industry. Instead, RSE licensees must comply with the superannuation-specific risk management prudential standard due to commence on 1 July 2013.

The most important changes contained in CPS 220 are the requirements for:

a Chief Risk Officer (CRO) who is independent from business lines, the finance function and other revenue-generating capabilities. The CRO must not be the Chief Executive Officer, the Chief Financial Officer, Appointed Actuary or Head of Internal Audit; and
the establishment of a separate Board Risk Committee that provides objective non-executive oversight of the implementation and on-going operation of the institution’s risk management framework. The Committee must be chaired by an independent director who is not the chair of the Board.The chair of the Board Audit Committee may also chair the Board Risk Committee.

APRA is proposing that the Risk Committee must operate under a different charter than the Board Audit Committee, although APRA’s composition requirements will not prohibit the same people sitting on both committees.

The Board Risk Committee is required to provide prior endorsement for the appointment or removal of the CRO. If the CRO is removed from their position, the reasons for removal must be discussed with APRA as soon as practicable, and no more than 10 business days, after the Committee’s endorsement is agreed upon.

The Board Risk Committee must invite the CRO to attend all relevant sections of meetings of the Committee.

APRA proposes that the chair of the Board and the chair of the Board Risk Committee make an annual attestation as to the adequacy and effectiveness of its risk management framework.

Prudential Standard CPS 510 Governance will also be changed to require the Board Audit Committee to provide prior endorsement for the appointment or removal of the APRA-regulated institution’s auditor and Head of Internal Audit. If the auditor or Head of Internal Audit is removed from their position, the reasons for removal must be discussed with APRA as soon as practicable, and no more than 10 business days, after the Committee’s endorsement is agreed upon.

APRA expects to finalise the proposed CPS 220, updated CPS 510 and a prudential practice guide prior to their implementation date of 1 January 2014.

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Posted 13th May 2013 by David Jacobson in Financial Services, Insurance, Risk Management, Superannuation

Appointing new financial services representatives

ASIC has warned financial services licensees to ensure their recruitment processes detects representatives who have previously worked for a business ASIC has taken action against.

Under ASIC’s Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104) licensees must:

ensure migrating representatives are competent and adequately trained. It is important that they are effectively screened and their background checked,
have adequate supervisory arrangements in place to identify and address deficiencies quickly, and
have adequate financial, technological and human resources to supervise and monitor new representatives, especially in cases of business growth.

The Future of Financial Advice reforms strengthens ASIC’s licensing and banning powers in relation to all licensees by giving ASIC powers to:

refuse to issue or to cancel/suspend a licence where the licensee is likely to contravene their obligations instead of needing to establish that they will contravene or have contravened their obligations;
ban individuals from providing financial services if they are likely to contravene a financial services law; and
ban individuals from providing financial services if they are not of good fame and character or not adequately trained or competent to provide financial service.

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Posted 13th May 2013 by David Jacobson in Corporations Act, Financial Services

Data risk and privacy

The OAIC’s comments on APRA’s draft Draft Prudential Practice Guide (PPG 235) Managing Data Risk is a useful guide to analysing an organisation’s data security procedures from a privacy perspective:

does the procedure concern the collection, disclosure, use and storage of “personal information” (as defined in the Privacy Act?)
does “confidentiality” include “privacy”?
are the obligations regarding the handling of personal information set out in the Privacy Act (including the Privacy Principles) considered?

NPP 1 (which will be replaced by APP 2 which deals with the collection of solicited personal information) requires that:

personal information may only be collected where necessary for a function or activity of the organisation
collection must not be by unfair or unlawful means, and
reasonable steps must be taken to provide the individual to which the information relates with notice of specified matters, including the identity of the organisation collecting the information, the purpose of the collection, and the contact details of the organisation.

NPP 2 (which will be replaced by APP 6) provides that personal information may only be used or disclosed for the purpose for which it was collected (the ‘primary purpose’), unless a specified exception applies. This requires an organisation to have a clearly defined purpose for the initial collection of personal information, which is also consistent with the requirements of NPP 1.

NPP 4 (which will be replaced by APP 11) relates to data security and requires organisations to take ‘reasonable steps’ to protect the personal information that they hold from misuse or loss and from unauthorised access, use, modification or disclosure.

The OAIC is currently developing guidance on the reasonable steps with respect to information security that organisations are required to take under the Privacy Act.

The OAIC has also published a voluntary Data Breach Notification Guide which outlines steps that organisations should consider in preparing for and responding to information security breaches, including notifying affected individuals. The Government is considering mandatory data breach notification provisions.

NPP 9, which relates to trans-border data flows, currently provides that organisations cannot avoid their Privacy Act obligations by sending personal information offshore.

NPP 9 generally prohibits an organisation from disclosing personal information to someone in a foreign country who is not subject to a comparable information privacy scheme, unless the individual has consented.

NPP 9 will be replaced by APP 8 which deals with cross-border disclosures of personal information: this principle will not prohibit cross-border disclosures of personal information but organisations will be accountable for any disclosure of personal information outside Australia, unless one of a number of exceptions applies. Before any actual cross border disclosure of personal information occurs, an organisation must have put into place appropriate arrangements in relation to the information.

The Tax File Number Guidelines 2011 (TFN Guidelines) issued under the Privacy Act regulate the collection, storage, use, disclosure, security and disposal of individuals’ TFN information.

Guideline 6 of the TFN Guidelines states that TFN recipients must take ‘reasonable steps’ to safeguard TFN information. This includes protecting TFN information from misuse and loss, and from unauthorised access, use, modification or disclosure, and ensuring that access to records containing TFN information is restricted to individuals who need to handle that information for legal purposes.

Part IIIA of the Privacy Act governs the handling of credit information files, credit reports and other credit worthiness information about individuals by credit reporting agencies and credit providers. CRAs and credit providers must also ensure that credit information files and credit reports are subject to security safeguards as are ‘reasonable in the circumstances’.

The OAIC suggests that the Draft APRA Practice Guide also refer to de-identification as a tool for managing data risks.

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Posted 13th May 2013 by David Jacobson in Financial Services, Privacy, Risk Management, Web/Tech

May 2, 2013

Draft MySuper Regulations released

Treasury has released for comment draft Superannuation Legislation Amendment (MySuper Measures) Regulation 2013 to implement the MySuper reforms.

A key feature is a product dashboard which will provide a single page summary of key performance indicators for each MySuper product. See the sample product dashboard.

These indicators will include an annual dollar disclosure of fees, the target investment return and a clear statement of investment risk.

The Regulation:

prescribes the way in which information in the product dashboard is to be worked out and presented;
prescribes how fees for superannuation products are to be disclosed in product disclosure statements;
prescribes the portfolio holdings information that will be publicly available on an registrable superannuation entity (RSE) licensee’s website;
specifies the types of documents and information that trustees will need to publish on their websites (including information on trustee and executive officer remuneration);
requires RSE licensees to include the latest product dashboard in the member’s periodic statement; and
requires trustees to inform members that they can request written reasons for decisions made (and in cases where no decision has been made) in relation to non-death benefit complaints.
requires dual regulated entities to inform the Australian Securities and Investments Commission (ASIC) of events that may lead to material adverse changes in their financial position;
prescribes factors that may be used for a lifecycle investment strategy;
permits the governing rules of a superannuation fund to limit contributions that are transfers from a foreign superannuation fund;
clarifies the circumstances in which a person is a defined benefit member to ensure they are excluded from certain MySuper requirements, and gives priority to accumulation interests (of both members and other beneficiaries) over defined benefit interests in the event of a winding-up of a technically insolvent defined benefit fund;
makes various technical and consequential amendments such as: requiring RSE licensees to provide the Australian Prudential Regulation Authority (APRA) with early disclosure of successor fund transfers and other information; applying relevant provisions to persons involved in the management of an RSE licensee that is also a First Home Saver Accounts provider; and to update references in the regulations; and
repeals and/or amends existing regulations relating to subject matter that will be dealt with in APRA prudential standards and to update the definition of an eligible rollover fund.

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Posted 2nd May 2013 by David Jacobson in Financial Services, Superannuation

ASIC review of capital guaranteed products

ASIC has released Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products (REP 340) which contains a health check of the Australian market for unlisted retail structured products promoted as having capital protection or a capital guarantee.

The report found retail investors often have a poor understanding of these complex investments because of the way that some of these products are labelled, with confusing or potentially misleading messages about the level of risk investors are exposed to.

The use of terms such as ‘qualified’, ‘limited’, ‘conditional’ or ‘contingent’ in conjunction with the phrase ‘capital protected’ or ‘capital guaranteed’ may not be sufficient to avoid the phrase as a whole being likely to mislead or deceive consumers about the risk to their capital, particularly where, if certain conditions are met, the whole of the capital will be at risk.

Despite being labelled or described with terms such as ‘capital protected’ and ‘conditional capital protected’, some products have knock-in clauses and performance hurdles that may lead to investor losses. The report highlights concerns around:

the accuracy and balance of advertising for these products
the labelling and description of reverse convertible products as offering ‘conditional capital protection’ or ‘conditional protection’. The value of these investments is usually linked to the worst performing reference share, meaning investors could lose some or all of their money, and
certain ‘internally geared’ structured products that are described as entailing a compulsory capital protected loan, where all of the investor’s outlay is at risk of loss if reference assets don’t perform. Where the investment exposure is ‘notional’, there may also be risks for investors who claim tax deductions on their payments.

If significant issues in the market persist, ASIC will consider appropriate regulatory options, particularly in relation to the description of medium-risk and high-risk financial products using terms such as ‘capital protected’.

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Posted 2nd May 2013 by David Jacobson in Consumer Law, Corporations Act, Financial Services

April 29, 2013

Government responds to Trio and St.John reports on investor losses

The Minister for Financial Services and Superannuation has released the Government’s response to the report by the Parliamentary Joint Committee on Corporations and Financial Services on the collapse of Trio Capital (the Trio Report) as well as the report by Mr Richard St. John on Compensation arrangements for consumers of financial services.

The Government accepts the majority of the reports’ recommendations including legislative changes to strengthen the professional indemnity insurance requirements of providers of financial services that deal with retail consumers, changes to improve the communication of risks to investors and to ensure the adequacy of regulatory processes and consultation papers by Treasury on powers to support ASIC in its enforcement role and to improve the governance arrangements of managed investment schemes.

The Government will consult on whether ASIC should have more powers when an AFSL holder changes ownership.

The implementation of the Government’s response will be coordinated by a Superannuation Regulators Working Group, comprised of representatives from Treasury, APRA, ASIC and the ATO.

An industry-funded last resort scheme to compensate consumers impacted by a financial collapse was not recommended by Mr St. John, who noted that at this stage such a scheme would be inappropriate and possibly counterproductive. The Government accepts this recommendation. It will warn SMSF trustees that they do not have the same access to compensation as APRA-regulated funds in the event of theft or fraud.

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Posted 29th April 2013 by David Jacobson in Corporations Act, Financial Services, Superannuation

Farm finance proposals

The Commonwealth Government has announced a Farm Finance package consisting of four measures:

short–term assistance in the form of concessional loans of up to $650,000 for productivity enhancement projects or debt restructuring
funding for up to 16 additional full–time counsellors with the Rural Financial Counselling Service
increasing the non-primary production income threshold for Farm Management Deposits (FMDs) from $65,000 to $100,000, and allowing consolidation of existing FMD accounts
establishing a nationally consistent approach to farm debt mediation.

The government will introduce legislation to give effect to the FMD changes. It is anticipated that the changes will take effect from 1 July 2014.

The government will work with the banking and agricultural sectors as well as the states and territories to progress a consistent approach to farm debt mediation. NSW and Victoria have different schemes and Queensland does not have one: Background

The Government has written to the State and Northern Territory (NT) Governments asking for their support in delivering components of the package.

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Posted 29th April 2013 by David Jacobson in Financial Services

April 26, 2013

Making sense of regulatory news

Whether you call it “being connected” or “the fear of not knowing”, more of us are getting our news electronically faster than the print media and evening television news can deliver it.

The problem with the “river of news” is putting it into context and identifying what is important to you.

With the volume of regulatory and market information you receive daily to make sure you’re not missing out on what’s going on (including news you get from us), it’s sometimes easy to think that rather than set up another project you should just do what everyone else is doing to get by.

The only way to make sure you’re not missing out on the important things is to understand what they are so you can identify your risks and set your priorities!

To provide the context for the compliance river of news and help you identify the important information we have set up a website containing videos, resources and tests.

Have a look at what we’ve done. It’s online so you don’t have to travel to a conference.

It complies with ASIC’s CPD requirements. And the website keeps training records for you.

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Posted 26th April 2013 by David Jacobson in Compliance, Financial Services

Deferral of abolition of NSW duties

The NSW Premier has announced that the following categories of NSW stamp duty, which were due to be abolished as from 1 July 2013, will continue to be charged indefinitely in order to fund education reforms:

transfer duty on unquoted marketable securities;
transfer duty on non-real (ie, non-land) business assets; and
mortgage duty (unless already exempt).

This means that duty will continue to be charged on transactions involving:

transfers of, or declarations of trust over shares in unlisted companies registered in NSW; units in unit trusts scheme where the register is maintained in NSW or, if outside Australia, then the manager is a NSW company or natural person resident in NSW; goodwill and intellectual property (including patents and trademarks) of a business carried on in NSW; statutory licences or permissions granted under Commonwealth law and exercised in respect of NSW; statutory licences, permissions or poker machine entitlements granted under NSW law; and
loans where security is granted over property wholly or partly in NSW, or the making of further advances where such mortgage or charge has already been granted.

More details are expected in the NSW State Budget.

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Posted 26th April 2013 by David Jacobson in Business Planning, Financial Services, Tax, Uncategorized