ASIC and APRA provide update on post-Financial Services Royal Commission regulation
ASIC and APRA, in addition to the Royal Commission recommendations addressed to them specially, are working with the Federal Government to assist the development of legislative reform.
With the first anniversary of Commissioner Hayne's Final Report behind us, ASIC and APRA have provided their respective progress updates on implementing the Royal Commission recommendations, as well as providing a snapshot of their respective focus in a post-commission regulatory environment.
By way of summary, since its last update in September 2019, ASIC has undertaken the following:
- Operationalised and expanded its Office of Enforcement (OOE);
- Continued its enhanced supervision program across large listed entities in the financial services and other sectors, focusing on non-financial risk management and oversight;
- Completed implementation of four of the 10 recommendations made by the Royal Commission that were directed at ASIC, and provided significant input into the legislative reform program arising from the Royal Commission; and
- Continued to implement and use ASIC's new regulatory powers to identify and address misconduct and poor customer outcomes.
Status of Royal Commission referrals and case studies
ASIC is expediting the finalisation of Royal Commission referred investigation and enforcement work. Of the 13 referrals made to ASIC, seven remain under investigation, and ASIC has commenced civil penalty proceedings in relation to two, referred one to the Commonwealth Director of Public Prosecution (CDPP) and concluded its investigations without taking further action in relation to the remaining three.
In addition to these 13 referrals, ASIC has also finalised one proceeding relating to a NAB branch manager  and commenced civil penalty proceedings in relation to four of the 32 case studies examined by the Commission. Of those 32 case studies, ASIC has referred a further two to the CDPP, are currently investigating 17 and has concluded its investigation with no further action in relation to the remaining eight case studies.
Office of Enforcement
Our previous update noted the significant amount of funding ASIC received as part of the Federal Budget in 2019-20 ($404.8 million). Budget guidance published by the Federal Government indicates that ASIC will receive further significant funding for 2020-21.
That funding is flowing through to the front line. As of January 2020, ASIC noted a significant uptick in enforcement activity, citing a 10% increase in the number of enforcement investigations and a 52% increase in enforcement investigations involving AMP, ANZ, CBA, NAB, and Westpac. ASIC has indicated that investigations on foot cover a range of misconduct relating to amongst other things, directors' and officers' breaches, insider trading, market manipulation, auditor and liquidator breaches and breaches of licensing obligations.
ASIC has provided guidance on what the OOE is currently prioritising, most notably misconduct relating to superannuation and insurance, cases that engage ASIC's new powers and provisions that carry high penalties for contravention as well as the identification of new or emerging types of misconduct, including misconduct carried out online or with the usage of emerging technologies. ASIC also noted their continued prioritisation of areas such as significant market misconduct, misconduct that involves a high risk of significant consumer harm (particularly vulnerable customers) or misconduct which exhibits governance failures at board or an executive level.
Based on ASIC's Update, it seems that additional funding will allow ASIC to continue to strategically deploy resources (for example, through the use of external counsel and law firms) in pursuit of their 'why not litigate' approach in order to effectively deter similar, new or emerging, forms of misconduct across the financial services sector.
Update on the implementation of recommendations directed to ASIC
In addition to the recommendation directed to ASIC's approach to enforcement, ASIC has indicated that it has acted, as a matter or priority, to implement recommendations that were directed at ASIC or where ASIC can take the initiative:
- Regulation of the superannuation industry: ASIC has welcomed legislative reforms increasing ASIC's role as a regulator of superannuation conduct and has provided support to the Federal Government's release of proposed legislation for consultation. Consultation on the proposed legislation closed on 28 February 2020.
- Amendments to the Banking Code of Practice: ASIC approved an update to the Banking Code of Practice, coming into effect from 1 March 2020. The updates to the Code relate to the accessibility of banking products and services as well as the maintenance of consumer and small business protections. According to ASICs Update, its decision to approve the code was contingent on an understanding that the Australian Banking Association would make further changes to the Code in 2021.
- Enforceable Code provisions: ASIC has provided input to the Government's proposed legislative reform in relation to industry codes. Such reforms will allow for greater sanctions to be applied for breaches of industry codes of conduct. Reforms are scheduled for introduction into Parliament before 30 June 2020.
- Life insurance commissions: ASIC will commence a review of a sample of life insurance advice and a review of underinsurance.
- End of grandfathering commissions: The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Act 2019 was passed in October 2019, requiring grandfathered conflicted remuneration arrangements to end as of 1 January 2021. ASIC are investigating (at the direction of the Treasurer) to what extent the grandfathering of conflicted remuneration arrangements are being voluntarily ended before 1 January 2021.
Update on ASIC's general regulatory activity
Between September 2019 and February 2020, ASIC has been active in the regulation of the financial services industry, including in relation to:
- Strengthened supervision: ASIC's Update notes that its enhanced and intensive supervisory initiatives have progressed significantly over the last 6 months. ASIC has conducted on-site reviews at the four major Australia financial institutions and AMP. ASIC is rreinforcing its intention to encourage enduring cultural and behavioural change, and to promote the earlier identification of issues that may cause financial harm to customers and reputational harm to Australia's major financial institutions. In addition to observing practices relating to incident and issue management, internal dispute resolution and non-financial risk management, ASIC is also focused on corporate governance and the treatment of non-financial risks by directors and officers and executive remuneration. Finally, ASIC is also scrutinising audit quality – for example, by reviewing how conflicts of interest are managed in the six largest audit firms.
- Remediation: ASIC continues to focus on remediation of instances where financial services entities engage in misconduct that leads to consumer loss. Despite having no express power to direct remediation to be carried out or conducted in particular way, ASIC has a strong focus on monitoring the remediation programs undertaken to ensure their appropriateness. ASIC intends to release updated guidance on its remediation policies and is also providing assistance to the Federal Government on reforms designed to enhance ASIC's ability to intervene with remediation.
Usage of new regulatory tools and powers
- Product intervention power: ASIC will release guidance on its approach to using its power to make a product intervention order when it is satisfied that a product, or class of product, has resulted, will or result or is likely to result in significant consumer detriment. ASIC used this power for the first time in September 2019 in relation to certain short terms lending.
- Design and distribution obligations: ASIC initiated consultation on draft guidance in December 2019, due for closure next week. These obligations will require financial product firms to distribute products that meet the needs of consumers, coming into effect from April 2021. In October 2019, ASIC also published joint work with the Dutch Authority for Financial Markets to assist financial service providers with the implementation of the design and distribution obligations.
- Mortgage broker best interests duty: The Federal Government recently passed legislation amending the National Consumer Credit Protection Act 2009 (Cth) requiring mortgage brokers to act in their consumers' best interests. ASIC has released a Consultation Paper for proposed guidance on the new best interest duties and obligations implemented by the amending legislation.
- New licensing and banning powers: The Federal Government has supported a number of recommendations from the ASIC Enforcement Review Task Force. Legislation has been passed to provide ASIC with enhanced supervision and enforcement powers, enhanced searching powers to align with the Crimes Act 1914 (Cth) as well as the introduction of a "fit and proper person" standard for AFS Licensee applications.
- Superannuation and insurance: ASIC has provided significant input to the Federal Government on legislative reforms that work to make ASIC the primary superannuation conduct regulator. ASIC are also actively working to ensure the design and sale of insurance products is appropriate to consumers.
- Responsible lending and credit: ASIC has provided updated guidance that it considers clarifies the scope of the responsible lending obligations. ASIC is also continuing to monitor the buy now pay later sector.
- Financial advice: As at 31 December 2019, compensation paid by or offered by six of Australia's largest financial institutions to consumers who suffered loss or detriment from non-compliant advice or conduct amounting to a 'fee for no service' offering amounted to nearly $750 million. ASIC is continuing to investigate and scrutinise compliance of financial advice licensees.
- Market supervision and market infrastructure: Relevantly, ASIC continues to focus on emerging risks, placing focus on the cyber resilience capabilities of firms operating in Australian markets. ASIC Report 651 released in December 2019, provides insights into new and emerging market trends in relation to digitisation.
- ASIC communications, guidance and regulatory reports: ASIC released guidance in December 2019 in relation to its work to scrutinise audit quality, providing findings from its active reviews of audit files as well as guidance on audit quality measures and indicators supplementing ASIC's findings.
In its update, APRA noted that it had addressed three recommendations directed to it in full and was making progress on the remaining seven Royal Commission recommendations. APRA has also been undertaking detailed reviews of the 12 Royal Commission referrals involving 9 APRA-regulated entities.
In addition, APRA has released an information paper outlining its agenda for transforming governance, culture, remuneration and accountability. The agenda will, amongst other things, require industry to ensure its internal governance and frameworks promotes a risk culture which supports effective risk management practices to deliver positive prudential outcomes for both the financial institution and the consumer.
APRA and ASIC Co-operation - Joint Royal Commission Recommendations
- Co-Operation Memorandum between ASIC and APRA: In accordance with a recommendation from the Royal Commission, ASIC and APRA released an updated Memorandum of Understanding (MOU) in November 2019, providing a detailed framework for engagement, co-ordination and co-operation between the agencies. The MOU details the commitment of both ASIC and APRA to engage proactively on matters relevant to the other's responsibilities to minimise duplication of effort, facilitate early detection of prudential conduct issues and promote a more timely supervisory or enforcement responses.
- ASIC Management Accountability Regime and Governance and Senior Executive Accountabilities: The FSRC recommended that the purpose of the Banking Executive Accountability Regime (BEAR) also be applied to both ASIC and APRA – both regulators released their accountability framework in December 2019.
- ASIC introduced its accountability regime for individuals which have senior executive responsibility for the control or significant part of the operations of ASIC. APRA similarly introduced its Governance and Senior Executive Accountabilities framework applicable to APRA Members, Executive Directors, Director of Strategy/Chief Risk Officer and the Chief Internal Auditor.
Supporting legislative reform
ASIC and APRA, in addition to the Royal Commission recommendations addressed to them specifically, are working with the Federal Government to assist the development of legislative reform. For example, APRA is providing assistance with legislative reforms that give effect to the Financial Accountability Regime (that will extend the BEAR regime). ASIC is also focused on implementation arrangements for new laws as they commence.