April was another fast moving month in the financial services sector. ASIC released updates to the breach reporting requirements to introduce new guidance and clarify existing guidance regarding reportable situations. The regulator also provided further communications surrounding the superannuation performance test, as well as commenced proceedings against an insurance company alleging unfair contract terms in an insurance contract. Meanwhile, APRA provided a revised timeline on the implementation of new prudential standards in the banking, insurance and superannuation industries. APRA also released an updated heatmap of Choice Super products, including information on their methodology for combining product performance histories for the superannuation performance test.

April also saw the Federal Government release two important pieces of draft legislation for consultation. First, the proposed amendments to the superannuation performance test and financial adviser education standards. Second, the Attorney-General announced the release of the first of two consultation papers on reforms to simplify and modernise the AML/CTF regime and address risks in certain professions with the roll out of “Tranche II” reforms. Reporting entities and relevant industry participant members can make submissions on the proposed reforms until 16 June 2023. In addition, AUSTRAC launched new AML/CTF e-learning modules, and released a new financial crime guide on preventing child sexual exploitation and updated guidance on conducting employee due diligence and AML/CTF training.

1  Government releases draft amendments to the annual superannuation performance test

On 4 April 2023, the Federal Government released the outcomes of its review into the Your Future, Your Super laws. The review outlined the following areas of concern:

  • the performance test uses only a single measure of performance based on implementing an investment strategy which can unintentionally influence investment decisions to reduce the risk of failure by encouraging short-termism;
  • the performance test does not reflect the diversity and objectives of choice products;
  • the default sorting of products by fees in the YourSuper comparison tool unintentionally increases the ranking of products with relatively poor investment performance that had temporarily lowered fees;the superannuation stapling process is increasing the administrative burden on employers’ onboarding processes. Thus, some employers are seeking to avoid it by encouraging new employees to make an active choice of superannuation fund; and
  • there is uncertainty as to what the “best financial interests duty” means in practice for trustees.

In response to concerns surrounding the performance test, the government has proposed draft legislation titled Superannuation Industry (Supervision) Amendment (Your Future, Your Super – Addressing Underperformance in Superannuation) Regulations 2023 which intends to change the operation of the test in the following ways:

  • prospectively increasing the testing period from 8 to 10 years to encourage longer-term investment decisions;
  • calibrating key benchmarks to ensure that funds are not unintentionally discouraged from investing in certain assets;
  • making adjustments to the notification letter that trustees of failed products send to members;making minor changes to improve accuracy and reduce administrative burden for APRA; and
  • ensuring the test is fit-for-purpose when it is extended to trustee-directed products this year.

The Government is accepting submissions on the proposed amendments until 2 May 2023.

The full media release can be accessed here, and the draft legislation can be accessed here.

2  Government consults on financial adviser education standards reform

On 18 April 2023, Treasury stated their commitment to developing a financial advice industry with strong professional standards, but noted that since 2019, more than 10,000 financial advisers have left the industry in response to the education and qualification standards imposed by the previous government. Among other things, those standards require:

  • existing financial advisers to complete an approved academic qualification by 1 January 2026 where their previous qualification is not deemed sufficient (whilst continuing to provide financial advice full time);
  • new entrants to the financial advice profession to complete an approved qualification that meets the exact conditions prescribed for by the legislation; and
  • financial advisers who are also registered tax agents to meet additional education requirements to be a qualified tax relevant provider.

As a transitionary measure, the Government has introduced draft amending legislation aimed at recognising the experience of existing financial advisers and providing flexibility for new entrants who are unable to meet the required qualifications for technical reasons. Notably, the draft legislation provides that:

  • financial advisers with 10 years of fulltime experience and a clean disciplinary record will not be required to undergo further study to meet the qualification standards by 1 January 2026;
  • greater flexibility will be provided to new entrants who have completed an approved academic qualification, but who do not meet the conditions prescribed by the legislation for technical reasons (eg. having commenced their studies earlier than the dates specified for their qualification).

The Government considers these amendments will reduce unnecessary barriers to entry that currently exist in the financial advice industry.

The full media release can be accessed here, and the draft legislation can be accessed here.

3  ASIC commences proceedings alleging unfair contract terms in an insurance contract

For the first time, ASIC has commenced proceedings alleging the presence of unfair contract terms in an insurance contract. The provision in question is found in Auto & General Insurance Company’s standard form home and contents insurance.  The provision requires customers to notify them ‘if anything changes about your home or contents.’

The regulator has alleged that this provision causes a significant imbalance in the parties’ rights and obligations arising under the relevant contract because:

  • the requirement to notify Auto & General of ‘anything’ that changes is onerous;
  • the notification imposes an ambiguous and unclear obligation on the consumer;
  • suggests that Auto & General has a broader right to refuse claims or reduce the amount payable under claims than is available under the Insurance Contracts Act; and
  • the term could mislead or confuse the customer as to their true obligations and rights under the contract.

Further, ASIC has also alleged that the provision causes a significant imbalance in parties’ rights and obligations under the contract, is not reasonably necessary to protect Auto & General’s legitimate interests, and would cause a detriment to customers if the term is relied on.

ASIC is seeking declarations that the term is, and other orders.

The full media release can be found here.

4  ASIC tells super trustees to focus on their members in communications about performance test failure

On 12 April 2023, ASIC released the results of a review of the performance communications made by the 4 super trustees that failed the annual performance test for MySuper products for a second consecutive year in 2022. The review found that whilst the relevant trustees had complied with their mandatory disclosure obligations to notify members of the failure, the performance communications made were reactive, often inconsistent with other communications, and lacked clarity.

In order to ensure members understand the impact of relevant changes such as mergers, ASIC suggested that trustees consider, from the member’s perspective, what communications members will receive and when they will receive them. The regulator also suggested that trustees:

  • provide consistent messaging about performance across the fund website;
  • ensure that communications about short-term performance are balanced and do not  undermine the fact that the product failed the test; and
  • provide clear transcripts for call-centre staff to discuss the performance failure with members.

The full media release can be accessed here.

5  ASIC releases updated guidance for licensees on reportable situations

On 27 April 2023, ASIC released updates to Regulatory Guide 78 – Breach reporting by AFS licensees and credit licensee(RG 78) to clarify existing guidance and provide new guidance on operational issues that have recently arisen.

These updates to RG 78 are intended to support the use of the data for ASIC’s regulatory purposes and public reporting, as well as to reduce regulatory burden on industry.

ASIC is also making minor changes to the prescribed form for lodging reportable situations which will be implemented on 5 May 2023.

The full media release can be accessed here. Our client alert can be accessed here.

6  APRA provides answers to frequently asked questions on the Superannuation Data Transformation project

On 6 April 2023, APRA published answers to 11 frequently asked questions (FAQs) on the Superannuation Data Transformation reporting standards. These answers are provided to clarify any ambiguity in the minor amendments finalised by APRA on 3 March 2023 (see here).

The full media release can be accessed here, and the answers to the FAQs can be accessed here.

7  APRA provides update on the implementation of new operational risk standard

On 13 April 2023, APRA released an updated timeline for the implementation of the new cross-industry Prudential Standard CPS 230, which is designed to strengthen the management of operational risk in the banking, insurance and superannuation industries.

APRA intends to:

  • release a final version of CPS 230 in mid-2023;
  • move the effective date of the new standard to 1 July 2025; and
  • provide transitional arrangement for pre-existing contractual arrangements with service providers, with the requirements in the standard applying from the earlier of the next contract renewal date or 1 July 2026.

The full media release can be accessed here.

8  APRA publishes data on latest life insurance claims and disputes

On 18 April 2023, APRA released its Life Insurance Claims and Disputes Statistics publication, covering the period from 1 January 2022 to 31 December 2022. The publication presents the key claims and disputes outcomes for 17 Australian life insurers writing direct business.

Some notable points from the publication include:

  • a gradual decrease in the claims paid ratio for group products; and
  • a sharp increase in dispute lodgement ratios for individual projects, largely driven by disability income insurance.

The full media release can be accessed here, and the publication can be accessed here.

9  APRA consults on proposed class exemption to own or control an RSE licensee

On 19 April 2023, APRA released a draft instrument to exempt certain class of RSE licensee directors from the change of control and ownership provisions of the Superannuation Industry (Supervision) Act 1993 (Cth).

The exemption seeks to remove the requirement to obtain approval to own or control an RSE licensee, for RSE licensee directors who are not entitled to a personal financial benefit from an RSE licensee shareholding. APRA deems this exemption necessary as some RSE licensee directors are required to hold shares in the RSE licensee for the term of their appointment, and that governance concerns with these individual directors are already managed through other prudential requirements.

APRA is inviting submissions on the draft exemptions to be submitted by 17 May 2023.

The explanatory letter can be accessed here, and the draft exemption can be accessed here.

10  APRA releases update on combining product performance histories for the performance test

On 20 April 2023, APRA issued two updates on combining product performance histories for the Superannuation performance Test.

The first was a draft technical determination that would remove the need for APRA to make individual determinations for lifecycle MySuper products for which performance histories are required to be combined. The determination will relocate existing guidance relating to within-product changes in the MySuper product information paper into a legal instrument, removing the need for APRA to make individual determinations for every affected product.

The second was an information paper outlining APRA’s methodology for combining performance histories of trustee-directed products (TDP) for this year’s performance test which are based on principles used for MySuper products, which are:

  • the performance of a TDP is calculated on a quarterly basis, with each investment option treated as an individual TDP; and
  • a product’s performance is calculated using data reported to APRA on a quarterly basis, with the exception of any quarters where there has been an across-product change. For such quarters, the performance is calculated by splitting the quarter into partial periods to reflect the product before and after the change. An RSE must report data for the associated partial periods to APRA.

The full media release can be accessed here, the draft technical determination can be accessed here, and the information paper can be accessed here.

11  APRA increases transparency of Choice super products with latest heatmap

On 26 April 2023, APRA published its latest superannuation Choice Heatmap, which covered 163 products representing $292 billion worth of members’ benefits and almost half of the funds under management in the Choice accumulation sector. It compared products across key metrics including investment returns, fees and product sustainability.

Importantly, the Heatmap showed an improvement in the performance of Choice investment options, with only one in five options with an 8-year history underperforming heatmap benchmarks, compared to one in four options in the 2021 Choice Heatmap.

It also showed that Choice products which are closed to new members are more likely to underperform and have higher fees than those that are open to new members.

The full media release can be accessed here, and the heatmap can be accessed here.

12  Government consults on AML/CTF reforms

On 20 April 2023, the Attorney-General announced the release of the first of two consultation papers on reforms to simplify and modernise the existing AML/CTF regime and address risks in certain professions, such as lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones. Industry members have been invited to make their submissions on the proposed reforms by 16 June 2023.

The reforms aim to:

  • modernise and clarify the regime in line with international standards and best practice;
  • reduce complexity and regulatory burden on industry;
  • ensure the regime remains fit for purpose, and
  • harden Australian businesses and sectors against exploitation by serious organised criminals.

More information on the update can be found here and at NRF’s microsite on these reforms here,

13  AUSTRAC releases training modules and guidance on anti-money laundering and counter-terrorism financing (AML/CTF)

AUSTRAC has released two new anti-money laundering and counter-terrorism financing (AML/CTF) e-learning modules.

The new modules are:

  1. Applicable Customer Identification Procedures
  2. Beneficial owners and politically exposed persons

These modules are aimed at reporting entities that conduct applicable customer identification procedures for non-individual customers, such as companies and trusts.

More information on the update can be found here.

AUSTRAC has also developed a new financial crime guide, in partnership with the Australian Federal Police and Australian Centre to Counter Child Exploitation, to help businesses identify and stop the purchase of child sexual exploitation material and report suspicious activity. 

More information on the update can be found here.

In addition, AUSTRAC has released updated guidance to help businesses meet their AML/CTF obligations around employee due diligence and AML/CTF risk awareness training.

More information on the update can be found here.