The month of May saw a broad range of activities within the financial services industry. ASIC released the results of its review into compliance with the design and distribution obligations as well as updating the industry on their greenwashing actions. ASIC also commenced proceedings against an insurer, alleging unfair contract terms in an insurance contract, and gave a summary of its regulatory and enforcement activity for the March 2023 quarter in its ‘report card.’ Meanwhile, APRA released new reporting standards for the Superannuation Data Transformation Project and new prudential standards for strengthening recovery and resolution planning. The prudential regulator also released its quarterly suite of insurance and superannuation statistics, as well as published its report on trends in affordability and availability of insurance products. APRA also announced a targeted investigation into industry superannuation funds’ payments to unions. AUSTRAC has agreed to a proposed $450 million penalty with Crown, accepted a court enforceable undertaking from Bank of Queensland Limited, and opened a survey to the public to develop national money laundering and terrorism financing risk assessments. AUSTRAC also continues to engage with industry in respect of the proposed government financial crime reforms.
Federal Budget 2023/24
On 9 May 2023, Treasury delivered the 2023/24 Federal Budget. Some measures introduced relevant to the financial services industry include:
- Amendments to tax legislation to allow general insurers to continue to use audited financial reports as the basis for their tax returns in response to concerns raised over new accounting standard AASB 17 Insurance Contracts.
- Introduction of ‘Payday Super’. Effective 1 July 2026, employers will be required to pay their employees’ super guarantee entitlements on the same day that they pay salary and wages.
- Increased tax on earnings on super balances over $3 million. Effective 1 July 2025, the Government is increasing the concessional tax rate applied to accumulation phase earnings for people whose superannuation balance exceeds $3 million, bringing the headline tax rate to 30% (up from 15%).
- Sustainable finance. The Government intends to provide additional funding to support its sustainable finance agenda, including $4.3 million to support ASIC’s greenwashing surveillance and enforcement activities. Funding has also been allocated to establish a sovereign green bond program to raise capital for environmental and climate change related programs.
Treasury’s budget documents may be accessed here.
ASIC releases results of review into how investment product issuers are meeting the design and distribution obligations
On 3 May 2023, ASIC released the results of their review into how investment product issuers are meeting the design and distribution obligations (DDO), ultimately calling on issuers to ‘lift their game.’
The central finding of the report was that there is considerable room for improvement in DDO implementation across all investment products, regardless of the size of the product issuer. Such a finding is reinforced by ASIC’s issuing of 26 stop orders on investment products in the last 9 months.
ASIC identified several key areas in which issuers of investment products could improve on their DDO, namely:
- designing products with consumers in mind, with no overreliance on target market determination (TMD) templates;
- defining target markets with sufficient granularity to clearly delineate consumers within a target market;
- adequately stating the appropriate risk level of the product and not relying solely on the ‘Standard Risk Measure’;
- only treating a product as highly diversified where it is invested across multiple asset classes;
- clearly and accurately identifying the investment timeframe and the withdrawal rights of the product;
- including distribution conditions in the TMD;
- not relying on the consumer to self-certify that they fall within the target market; and
- having detailed and documented internal processes for DDO, including regular TMD reviews and oversight.
ASIC also warned that further scrutiny of DDO is to follow, stating their intent to review how product issuers interact with their distributors, and how issuers monitor product governance arrangements and review data in the coming months.
ASIC updates the implementation timeframe for the internal dispute resolution data reporting framework
On 5 May 2023, ASIC announced updates to the implementation timeframe for the internal dispute resolution (IDR) reporting framework. All financial firms should check the amending legislation to see when they are required to begin submitting IDR data reports to ASIC.
The amending legislation can be accessed here.
ASIC provides an update on greenwashing actions
On 10 May 2023, ASIC released a report outlining details of the 35 interventions it has made since the beginning of its greenwashing surveillance activities on 1 July 2022. The report states that an increasing number of listed companies, managed funds and superannuation funds are making claims about their environmental, social and governance (ESG) credentials, and provides guidance on how to avoid greenwashing by using examples of deficient ESG disclosures from a number of their interventions.
ASIC highlighted the following themes in its report:
- net zero statements and targets without a reasonable factual basis;
- ‘carbon neutral’, ‘clean’, ‘green’ and like terminology without a reasonable underpinning;
- descriptions of screened investments that overstate, mislead or are applied inconsistently; and
- vague unexplained terminology and the inaccurate labelling of funds.
ASIC hopes the report will further inform the market on how to avoid greenwashing.
ASIC takes civil action for unfair and misleading contract terms in insurance
On 12 May 2023, ASIC announced that it has commenced civil proceedings in the Federal Court of Australia against an insurer, alleging that three types of its life insurance policies contained unfair and misleading terms. This follows the case we reported in our April 2023 FS Wrap Up.
Central to the enforcement action is the operation of ’pre-existing condition’ terms, which confer a right on the insurer to deny coverage if the insured failed to disclose a pre-existing medical condition and if, in the opinion of a medical practitioner, those symptoms existed prior to the insured entering into the policy. This medical opinion may be relied on by the insurer even in the absence of a formal diagnosis being made.
ASIC alleged that the term is unfair and misleading in operation since it grants the insurer the discretion to deny coverage in circumstances where the insured was not aware of the pre-existing condition, and is allegedly inconsistent with the operation of section 47 of the Insurance Contracts Act 1984 (Cth). Relevantly, this section prohibits insurers from excluding coverage for non-disclosure where the insured was not aware of the condition at the time they took out insurance and a reasonable person could not have been expected to have been aware.
The enforcement action builds on legislative developments in the unfair contract terms regime which in April 2021 expanded to cover insurance contracts, and in November last year was amended to introduce civil penalties for breach of the unfair contract term prohibition. The amendments commence in November 2023.
ASIC report card: Enforcement and regulatory activity in the first quarter of 2023
ASIC released its quarterly report card covering the period from January to March 2023.The report provides an overview of ASIC’s strategic priorities, namely:
- a focus on market integrity –disclosure obligations, insider trading, market manipulation;
- combatting misconduct –consumer remediation guidance, helping banks respond to family violence, penalties for superannuation advice breaches, product intervention orders; and
- surveillance outcomes and law reform – reportable situations regime, insurance claims handling, compliance with internal dispute resolution arrangements.
Other key matters in the quarterly report include ASIC’s efforts to:
- ensure sustainability-related claims made by financial institutions were accurate;
- reduce the risk of harm to consumers caused by poor design and distribution of financial products, noting stop orders on financial products with deficient or non-compliant target market determinations;
- promote good practices for handling whistleblower disclosures;
- improve insurance in superannuation; and
- monitor remediation over financial advice misconduct.
ASIC’s full quarterly report can be accessed here.
APRA consults on minor amendments to insurance reporting framework
On 4 May 2023, APRA released minor amendments to the finalised reporting standards for insurers impacted by the introduction of AASB 17.
These amendments are designed to improve the functionality of the reporting standards by improving usability and removing ambiguity that could lead to inaccurate reporting.
APRA provides answers to additional frequently asked question on the Superannuation Data Transformation project
On 9 and 24 May 2023, APRA published answers to an additional set of frequently asked questions (FAQs) on the Superannuation Data Transformation reporting standards, building on the 11 published last month. The answers have been provided to clarify any uncertainty regarding recent minor amendments to the standards.
The FAQs can be accessed here.
APRA releases findings from review of amendments to the Superannuation Guarantee (Administration) Act 1992
On 10 May 2023, APRA released findings from a review of the amendments to the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA), introduced by the Treasury Laws Amendment (Your Superannuation, Your Choice) Act 2020 (Cth).
The amendments worked to extend the circumstances in which a choice of fund must be offered to employees to include where contributions are made for them under a workplace determination or enterprise agreement made after 1 January 2021, as well as introducing an additional exemption to the choice of fund requirements.
The review found that the amendments had not resulted in any unintended consequences on the operation of defined benefit schemes, and that no further amendments to the SGAA were necessary.
APRA releases report on the National Claims and Policies Database
On 10 May 2023, APRA released a report on the policies and claims data that APRA collects in its annual National Claims and Policies Database (NCPD). The report uses this data to draw insights on trends in affordability and availability of insurance products.
The key findings of the report were:
- the average premium for public and product liability insurance products has grown by 40% since 2015;
- the average premium for professional indemnity insurance products has grown by 27% since 2015; and
- the number of large directors and officers insurance claims has almost tripled from the period from 2009 to 2015 to 2019 to 2021.
APRA finalises new prudential standards for strengthening recovery and resolution planning
On 18 May 2023, APRA finalised Prudential Standards CPS 190 and CPS 900, having commenced consultation of these standards in December 2021. The standards are designed to strengthen the preparedness of banks, insurers and superannuation funds to respond to a financial crisis.
CPS 190 Recovery and Exit Planning will ensure all APRA-regulated entities develop plans for responding to severe financial stress, including actions to restore financial resilience or exit regulated activity in an orderly manner. The standard will come into effect from 1 January 2024 for banks and insurers, and 1 January 2025 for registerable superannuation entity licensees.
CPS 900 Resolution Planning will require large or complex APRA-regulated entities to support APRA in preparing bespoke resolution plans to ensure any failures can be resolved in an orderly manner. This standard will come into effect from 1 January 2024 and will be implemented on an entity-by-entity basis.
The full media release can be accessed here.
APRA updates RSE licensees on the Superannuation Data Transformation Phase 2 roadmap
On 19 May 2023, APRA issued a letter to all registerable superannuation entity licensees outlining updates to the roadmap for consulting on reporting standards under Phase 2 of the Superannuation Data Transformation project.
The letter outlined that APRA intends to commence consultation on the proposed reporting standards in November 2023, which had previously been scheduled to start in May 2023.
APRA releases superannuation statistics for March 2023
On 23 May 2023, APRA released its Quarterly Superannuation Performance publication and Quarterly MySuper Statistics report for the March 2023 quarter. The publication contains aggregate summaries of financial performance and asset allocation across the superannuation industry and highlighted the following key statistics:
- total superannuation assets increased by 3.2 per cent to $3.5 trillion over the quarter;
- contributions totalled $37.5 billion for the quarter and increased by 11.3 per cent in the year to March 2023 to $159.0 billion; and
- the rate of return for superannuation entities with more than six members for the March 2023 quarter was 3.5 per cent, as opposed 0.4 per cent for the previous four quarters.
APRA releases private health insurance statistics for March 2023
On 24 May 2023, APRA released its quarterly private health insurance publications for the March 2023 quarter. The publication provides industry aggregate summaries of key financial and membership statistics for the private health insurance industry, and highlighted the following key statistics:
- despite a 2.1% growth in net profit after tax for the March 2023 quarter compared to the December 2022 quarter, for the year ending 31 March 2023, the industry reported a net profit after tax of $1.6 billion, down 19.2 per cent from the prior year;
- premium revenue in the year ending 31 March 2023 increased by 2.6 per cent; and
- investment income in the year ending 31 March 2023 increased by 14 per cent.
APRA releases life insurance statistics for March 2023
On 25 May 2023, APRA released its quarterly life insurance performance statistics publication for the March 2023 quarter. The publication provides industry aggregate summaries of financial performance, financial position, capital adequacy and key ratios, and highlighted the following key statistics:
- net profit after tax for the March 2023 quarter compared to the December 2022 quarter was up 44.4%, however, despite this strong quarter, for the 12 months ending 31 March 2023 the industry reported a net profit after tax of $1 billion, down 4.9 per cent from the prior year; and
- ‘Group Lump Sum and Group Disability Income Insurance’ business reported an improvement in performance for the year ending 31 March 2023.
APRA releases general insurance statistics for March 2023
On 25 May 2023, APRA released its quarterly general insurance performance statistics and quarterly general insurance institution-level statistics publications for the March 2023 quarter. The publication provides industry aggregate summaries of financial performance, financial position, capital adequacy and key ratios, and highlighted the following key statistics:
- despite an 18% reduction in net profit after tax for the March 2023 quarter compared to the December 2022 quarter, for the year ending 31 March 2023, the industry reported a net profit after tax of $3.7 billion, up 195 per cent from the previous year;
- the industry reported a 12.4 per cent increase in the underwriting result from the previous year; and
- gross incurred claims remained relatively stable in the year ending 31 March 2023.
APRA determines reporting standards following minor amendments to Superannuation Data Transformation Phase 1
On 29 May 2023, APRA announced that it had determined nine updated reporting standards following the regulators proposed minor amendments to these standards under Phase 1 of the Superannuation Data Transformation project. The updated standards are:
- Reporting Standard SRS 101.0 Definitions, accessible here;
- Reporting Standard SRS 251.0 Insurance, accessible here;
- Reporting Standard SRS 332.0 Expenses, accessible here;
- Reporting Standard SRS 550.0 Asset Allocation, accessible here;
- Reporting Standard SRS 605.0 RSE Structure, accessible here;
- Reporting Standard SRS 606.0 RSE Profile, accessible here;
- Reporting Standard SRS 705.0 Components of Net Return, accessible here;
- Reporting Standard SRS 705.1 Investment Performance and Objectives, accessible here; and
- Reporting Standard SRS 706.0 Fees and Costs, available here.
The media release can be found here.
APRA investigates industry super payments to unions
On 31 May 2023, APRA launched a formal investigation into industry superannuation funds’ payments to unions, and whether these payments are in breach of a trustee’s duty to act in the best financial interests of its members.
AUSTRAC and Crown agree to proposed $450 million penalty and AUSTRAC accepted enforceable undertaking from Bank of Queensland
AUSTRAC and Crown Melbourne and Crown Perth (together, Crown) filed joint submissions with the Fedral Court of Australia proposing a $450 million penalty in relation to Crown’s breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 Act (Cth) (AML/CTF Act). A court hearing has been set down for 10-11 July 2023, at which Justice Lee will determine the appropriate penalty.
Crown has admitted that it operated in contravention of the AML/CTF Act in the following ways:
- Failed to appropriately assess the money laundering and terrorism financing risks they faced, and identify and respond to changes in risk over time.
- Did not have appropriate risk-based systems and controls in their AML/CTF programs to mitigate and manage the money laundering and terrorism financing risks they faced.
- Failed to establish an appropriate framework for Board and senior management oversight of their AML/CTF programs.
- Did not have a transaction monitoring program that was appropriate to the nature, size and complexity of their business.
- Had an enhanced customer due diligence program that lacked appropriate procedures to ensure higher risk customers were subjected to extra scrutiny.
- Did not conduct appropriate ongoing customer due diligence on a range of specific customers who presented higher money laundering risks.
More information on the update can be found here.
AUSTRAC has accepted a court enforceable undertaking from the Bank of Queensland Limited (BoQ) to improve its compliance with AML/CTF laws, bind it to an ongoing remedial action plan and engage with an external auditor who will report back to AUSTRAC. AUSTRAC’s follow up assessment of BoQ in June 2022 found that it was non-compliant in the following 4 key areas; applicable customer identification procedures, enhanced customer due diligence, AML/CTF risk assessment, and governance and assurance.
This enforceable undertaking coincides with an additional enforceable undertaking with APRA in relation to the BoQ’s risk management practices and risk culture.
More information on the update can be found here.
The Financial Action Task Force (FATF) monitors countries on their effective implementation of the FATF standards including understanding money laundering, terrorism financing and proliferation financing risks, and ensuring the necessary frameworks are in place to address risks effectively.
AUSTRAC is developing two national risk assessments to demonstrate to FATF that Australia understands the money laundering and terrorism financing risks across the economy. To assist with the risk assessments, AUSTRAC has opened an anonymous survey to the public closing on 16 June 2023 with the aim to:
- identify, assess and understand the current and emerging risks confronting Australia;
- provide an evidence base to inform policy and operational responses developed by law enforcement, intelligence, integrity, regulatory and border control authorities at the Commonwealth, State and Territory level to the identified threats; and
- provide contextual guidance to financial institutions and other industry sectors on the scale and impact of identified money laundering and terrorism financing risks.
More information on the survey can be found here.