As the COVID-19 pandemic continues to provide uncertainty and challenges for all industry sectors, the funds and financial industry has remained in the spotlight for August 2020. In particular, ASIC has reminded responsible entities of their requirements with respect to valuing managed fund assets and APRA has assessed the management of superannuation fund liquidity due to the impacts of COVID-19. ASIC has also provided guidance on the Government’s enhanced regulatory sandbox, replacing ASIC’s FinTech regulatory sandbox, as well as revised Corporate Plans for both APRA and ASIC.
ASIC reminds responsible entities of obligations regarding valuations of their managed fund assets during COVID-19
On 11 August 2020, ASIC published an article reminding responsible entities (REs) of their requirements to ensure regular and current valuations of their managed fund assets, having regard to the nature of the assets. The regulator is conscious that the valuation of illiquid assets has been difficult due to the financial and economic uncertainties as a result of the COVID-19 pandemic.
With respect to fund assets, and in particular illiquid assets, an accurate valuation is required for an RE to determine the:
- unit price in order for investors to enter into and exit from a scheme;
- value of units of a scheme for performance measures;
- price for buying and selling specific assets (including stakes in a company); and
- value of assets in financial reports, as required by the Corporations Act 2001 (Cth).
Furthermore, ASIC has reminded REs to ensure that:
- valuations are regularly performed and current, and are performed using appropriate methods and assumptions;
- estimates are developed on a reasonable basis and consider whether past performance is reflective of future outcomes;
- valuation policies are regularly reviewed and valuations performed by unbiased valuers; and
- assets are promptly written down should the cash flows of an asset be negatively impacted due to COVID-19 restrictions.
A copy of the article is available on ASIC’s website.
APRA issues article on managing super fund liquidity in the midst of COVID-19
As part of APRA’s Insight publication, the regulator highlighted a number of challenges faced by superannuation trustees as they continue to address both financial and non-financial risks on behalf of their members due to the impact of COVID-19. APRA noted that while the Government’s superannuation Early Release Scheme was a significant measure to assist people experiencing loss of income and financial hardship, it also raised concerns with respect to liquidity challenges, market volatility and difficulties in estimating short-term cash requirements.
APRA identified the challenges of maintaining actual asset allocations which are consistent with the strategic asset allocations in trustees’ investment strategies as well as the need for improvement in the management of liquidity risk. The regulator emphasised that trustees must:
- review their Liquidity Management Plan as well as liquidity stress testing practices to account for new information and ensure strategic asset allocations and assumptions remain appropriate;
- ensure that ‘liquidity events’ (such as members switching investment options or capital drawdowns) are appropriately defined in their Liquidity Management Plan and are frequently reviewed;
- entrench the results of liquidity stress testing into the formulation and review of their investment strategies;
- account for extreme scenarios whereby liquidity stress testing takes into account the likelihood of liquidity risks such as member switching, market downturns and increased redemption requests; and
- ensure that where liquidity stress testing is outsourced to a third party, there are measures in place to ensure that the testing is updated to reflect changing environments and the results of the testing are made available in a timely manner.
APRA will continue to observe how superannuation trustees are managing fund liquidity and ensure appropriate outcomes are provided for members. Further information on superannuation fund liquidity during COVID-19 is available in APRA’s Insight – Issue 3 2020.
Relief granted to assist members of frozen funds make hardship withdrawals
ASIC announced on 26 August 2020 relief measures for operators of managed funds to facilitate withdrawals by members who are facing financial hardship due to COVID-19. ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 provides conditional relief to REs of registered managed investment schemes that have had their funds frozen by easing statutory restrictions on REs and improving member access to investments where they satisfy specific hardship criteria. Excluded are IDPS-like schemes, mortgage investment schemes, registered litigation funding schemes and time sharing schemes.
Where a fund is frozen, the RE has paused or cancelled redemptions in order to preclude withdrawals from destabilising the fund, whereby members will not be able to access their investments for a period of time. This hardship relief intends to make it easier for REs of frozen funds to enable investors to withdraw who are suffering financial hardship, however REs must be acting in the best interests of members. Information on the requirements for REs as well as hardship eligibility criteria are available in ASIC’s Media Release.
APRA publishes data on COVID-19 superannuation Early Release Scheme
APRA has continued to issue data at both an industry and fund level on the temporary superannuation Early Release Scheme. As at 31 August 2020, the Early Release Scheme has made approximately $32.2 billion in payments, with the average payment of $7,683 being made within 3.3 business days. The fund-level data shows that the ten superannuation funds with the highest number of applications received from the Australian Tax Office have made 2.8 million payments, totalling $21.2 billion. More information on the Early Release Scheme is available on APRA’s website.
ASIC publishes expectations of retail lenders when loan repayment deferrals due to COVID-19 cease
ASIC has reiterated its expectations of lenders in order to provide fair and appropriate outcomes to consumers where their 6 month loan repayments due to COVID-19 are expiring over the next few months. Lenders must ensure that their credit activities are provided efficiently, honestly and fairly and that they have processes in place to ensure an orderly transition for consumers. Some of the key expectations of ASIC include that:
- lenders must make reasonable efforts to contact consumers in a timely manner prior to their repayment deferral expiring, giving consumers sufficient time to consider their options;
- lenders provide consumers with information to assist their decision-making;
- lenders try to contact consumers through a variety of communication channels;
- where consumers cannot resume full repayments on their mortgage, lenders must make reasonable efforts to interact with consumers directly and offer further assistance where appropriate;
- if a consumer is dissatisfied with the lender’s response, lenders must comply with ASIC’s Regulatory Guide 165 Internal and external dispute resolution and in particular the requirement to notify consumers of their right to lodge a complaint with the Australian Financial Complaints Authority in accordance with s 72 of the National Credit Code.
ASIC provides guidance on the Government’s enhanced regulatory sandbox
The Government’s enhanced regulatory sandbox (ERS) is scheduled to commence on 1 September 2020, providing FinTechs and InsurTechs a class waiver from licensing for certain financial services and credit activities. ASIC released guidance on 25 August 2020 to assist innovative financial businesses to test their products and services under the ERS, which replaces ASIC’s sandbox created in December 2016.
ASIC Information Sheet 248 Enhanced regulatory sandbox (INFO 248) provides information on the types of financial services and products and credit activities an eligible person can provide for up to 24 months. INFO 248 also provides a comparison between ASIC’s sandbox and the new ERS, including information on the new eligibility criteria, the requirements to satisfy the net public benefit test and innovation test as well as ongoing conditions to rely upon the ERS exemption. Further background on the ERS, including ASIC’s INFO 248 and regulations are accessible on ASIC’s website.
Transition to new regulatory regime for litigating funding scheme
From 22 August 2020, litigation funders are regulated under the Corporations Act 2001 (Cth) (Corporations Act), requiring operators of litigation funding schemes to hold an Australian financial services licence and to comply with the managed investment scheme regime in Chapter 5C of the Corporations Act. As part of the transition to the new regime, ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 provides exemptions from:
- the condition to regularly value scheme property;
- the obligation to provide a Product Disclosure Statement (PDS) to passive members of open litigation funding schemes, provided that the PDS is available on the operator’s website and is referred to in advertising material;
- the statutory withdrawal processes for members who withdraw from a class action under court rules;
- the obligation to disclose detailed information on fees and costs, as well as labour standards, environmental, social and/or ethical considerations.
A no-action position has also been released by the regulator with respect to the obligation under Chapter 2C of the Corporations Act to establish and maintain a register of members of a registered litigation funding scheme. More information is available in our previous update as well as ASIC’s website.
APRA issues new frequently asked questions on its MySuper Product Heatmap
APRA issued new frequently asked questions (FAQs) on 21 August 2020 with respect to its MySuper Product Heatmap. The FAQs highlight that a new 2020 MySuper Product Heatmap will be released in December 2020 covering investment performance as well as fees and costs with respect to MySuper products. Data on sustainability of member outcomes and investment performance will be current until 30 June 2020, with data on fees and costs based on Product Disclosure Statements as at 1 October 2020. APRA’s revised FAQs are available on its website.
ASIC publishes its Corporate Plan for 2020-24
On 31 August 2020, ASIC published its Corporate Plan for 2020-24 highlighting its strategic priorities and actions in addressing the impact of COVID-19 as well as long term regulatory issues. In particular, the regulator has highlighted the following priorities responding to the COVID-19 pandemic:
- protecting consumers from harm during increased vulnerability;
- supporting Australian businesses;
- maintaining financial system stability and resilience;
- identifying, disrupting and taking enforcement action against harmful conduct; and
- building the regulator’s organisational capacity during difficult times.
The regulator’s long term priorities include preventing misconduct, improving management of key risks, encouraging confident financial system participation, addressing consumer harm, reducing misconduct by professional service providers and directors, reducing poor product design, and delivering as a conduct regulator for the superannuation industry. ASIC’s Corporate Plan for 2020-24 is available on ASIC’s website.
APRA issues its Corporate Plan for 2020-24
APRA published its revised 2020-24 Corporate Plan on 31 August 2020 to account for the substantial impact of the COVID-19 pandemic. The regulator addressed that it is committed to delivering 4 key community outcomes, including financial sector resilience, improving superannuation member outcomes, transforming governance, culture, remuneration and accountability, as well as improving cyber resilience. With respect to its internal capabilities, APRA’s priorities including improve its risk-based supervision, its resolution capacity and external engagement, as well as transforming data-enabled decision-making, as well as culture and leadership. More information as well as a copy of the Corporate Plan is available on APRA’s website.
APRA to recommence issuing new licences and prudential policy program
In March 2020, APRA announced due to the impact of COVID-19 it would suspend its planned policy and supervision initiatives, following by suspending the issuance of new licences in April 2020. APRA reported on 10 August 2020 that it will resume public consultations on select policy reforms as well as a staged resumption of the issuing of new licences. In particular, the policy reforms that will recommence through public consultation include the cross-industry prudential standard on remuneration, insurance capital reforms to incorporate changes in the accounting framework, prudential standard for insurance in superannuation, guidance on the superannuation ‘sole purpose’ test, as well as ADI capital reforms. Details on the revised policy program and recommencement of issuing new licences is available in APRA’s Media Release.
ASIC consults on the proposed use of its product intervention powers for the sale of add-on motor vehicle insurance products
On 5 August 2020, ASIC announced that it is seeking industry feedback on the proposed use of the product intervention orders to address consumer detriment arising from the sale of add-on insurance and warranties by card yard intermediaries. The proposals affect insurance products and warranties. If a product intervention order is issued, these products will be subject to a deferred sales model and specific reporting obligations to ASIC will apply.
The proposed changes, as addressed in the draft ASIC Corporations (Product Intervention – Add-on Motor Vehicle Financial Risk Products) Instrument 2020, take into consideration feedback from ASIC’s earlier consultation in October 2019 in ASIC Consultation Paper 324 Product intervention: The sale of add-on financial products through caryard intermediaries. In particular, the proposed amendments provide for a general transition period, a number of revised definitions, general and specific prohibitions applying to intermediaries and product issuers as well as conditions relating to the terms of mechanical risk products. The consultation closed on 19 August 2020. The proposed measures are in addition to the proposed deferred sales model for add-on insurance products generally which is yet to be passed by Parliament. Further information is available in ASIC’s Media Release as well as our recent article.
APRA issues letter to ADIs on loans impacted by COVID-19
APRA issued a consultation letter to authorised deposit-taking institutions (ADIs) on 13 August 2020 on the reporting requirements and capital measures with respect to loans affected by COVID-19. The regulator provided a draft ‘Attachment E’ to APS 220 Credit Quality on the temporary capital treatment which was subject to a consultation period until 21 August 2020. APRA also provided a draft ‘Attachment B’ to Reporting Standard ARS 923.2 Repayment Deferrals which addresses the entity-level data APRA intends to collection and publish with respect to loans impacted by COVID-19. A copy of the consultation letter as well as further information is available on APRA’s website.
ASIC’s update on compensation for financial advice misconduct
The regulator announced that as at 30 June 2020, six of Australia’s largest authorised deposit taking institutions and financial services institutions have offered a total of $1.05 billion in compensation to customers that have suffered loss or detriment due to non-compliant advice or ‘fees for no service’ misconduct. Since 2015, ASIC has commenced two major reviews to:
- examine the extent of failure of institutions to provide ongoing advice services to customers that were paying fees to receive those service (see ASIC Report 499 Financial advice: Fees for no service); and
- ascertain how effectively institutions supervised their financial advisers to identify and address non-compliant advice (see ASIC Report 515: Financial advice: review of how large institutions oversee their advisers).
Further details including a breakdown of the compensation payments offered or paid by institutions is available in ASIC’s Media Release.