Monthly technical roundup - September 2023

2023-24 Federal Budget social security measures passed

On 10 August, the Social Services and Other Legislation Amendment (Strengthening the Safety Net) Act 2023 (Cth) received Royal Assent.

This Act implements several social security measures that were announced in the 2023-24 Federal Budget by:

• expanding qualification for the parenting payment (single) to single principal carers where the youngest child is aged under 14 years of age (up from under eight years);
• increasing the base rate of working age and student payments by $40 per fortnight. The increase will apply to the JobSeeker Payment, Youth Allowance, Parenting Payment (Partnered), Austudy, and Disability Support Pension (Youth);
• expanding eligibility for the higher JobSeeker Payment rate to recipients aged 55 years and over (down from age 60) who have been receiving benefits for nine or more continuous months; and
• increasing the maximum rates of Commonwealth rent assistance by 15 per cent.

The measures will come into effect from 20 September 2023.

Financial Accountability Regime

The Financial Accountability Regime Act 2023 (Cth) and the Financial Accountability Regime (Consequential Amendments) Act 2023 (Cth) both received Royal Assent on 14 September 2023.

The new laws establish a financial accountability regime to impose accountability, key personnel, deferred remuneration and notification obligations on directors and senior executives of financial entities in the banking, insurance and superannuation industries.

The Financial Accountability Regime will apply to the banking sector from March 2024, and the insurance and superannuation sectors from March 2025.

First Home Super Saver Scheme and recognising experience in the financial adviser industry

The Treasury Laws Amendment (2023 Measures No. 3) Bill 2023 (Cth) passed both houses on 6 September 2023 and now awaits Royal Assent.

It includes changes to the First Home Super Saver (FHSS) scheme to allow:

• the ability to request the release of contributions 90 days after entering into a contract (previously 14 days).
• users of the scheme to amend or revoke applications made under the scheme
• eligible people to use the scheme if they have entered into a contract to purchase their first home, but have not yet become the legal owner.
• clarify that FHSS scheme amounts returned to superannuation funds do not count towards individuals' contribution caps.

It is not yet clear when these changes will commence, and some may be backdated to 1 July 2018.

In addition, the Bill recognises experience in the financial adviser industry. In particular it:

• removes tertiary education requirements for financial advisers with a clean disciplinary record and 10 or more years of experience
• makes technical amendments to address certain limitations in the education requirements for new entrants, and financial advisers who are registered tax agents.

This portion of the Bill will commence the day after Royal Assent.

2023-24 Federal Budget superannuation and small business support measures

On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (Cth) was introduced to Parliament.

The Bill contains amendments to the Income Tax Assessment Act 1997 (Cth) as follows.

Non-arm’s length expense rules for superannuation entities

The Bill amends the non-arm’s length income (NALI) rules where the superannuation fund incurs non‑arm’s length expenses (NALE), as announced in the 2023 Federal Budget. In particular:

• NALE can be either a specific or general expense. A general expense is an expense that is not related to gaining or producing income from an asset of the fund. A specific expense is any other expense;
• for general expenses, the amount of income that is taxed as NALI is twice the difference between the amount that would have been incurred had the parties been dealing at arm’s length and the amount that was actually charged to the fund;
• the Bill does not propose any changes to the treatment of specific expenses;
• the total amount taxed as NALI is capped at the fund’s taxable income for the year, not including assessable contributions or related deductions;
• these changes apply to income derived after 1 July 2018, but not expenses incurred before 1 July 2018; and
• large APRA-regulated funds including exempt public sector superannuation funds, pooled superannuation trusts and approved deposit funds are exempt from the NALI rules to the extent they relate to NALE.

If passed, the amendments commence on the first 1 January, 1 April, 1 July or 1 October after the day the Bill receives Royal Assent.

$20,000 instant asset write-off for small businesses

The Bill increases the instant asset write-off threshold from $1,000 to $20,000, allowing small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. This is a temporary measure to support small businesses improve their cash flow and reduce compliance costs.

This change will commence on the first 1 January, 1 April, 1 July or 1 October after the day the Bill receives Royal Assent.

Legislating the objective of superannuation

Following the consultation paper released in February 2023, the Government released for consultation exposure draft legislation on 1 September 2023 for the Superannuation (Objective) Bill 2023 and the Superannuation (Objective) (Consequential and Transitional Provisions) Bill 2023.

The exposure draft legislation and explanatory materials incorporate feedback received from stakeholders on the need to legislate the objective of superannuation to provide a shared direction for government, the superannuation industry and Australians.

The proposed objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.

The key concepts within the objective are not intended to be considered on a standalone basis. Policy-makers will need to make informed decisions on any trade-offs that may be required between the different concepts to ensure that superannuation policy delivers on the broader objective in a cohesive way.

The intent of the proposed legislation is to require policy-makers to demonstrate to the Parliament, and Australians, how any future changes to superannuation law are consistent with the legislated objective.

The objective is not intended to change the operation or interpretation of existing superannuation law, prudential standards or governing rules of superannuation entities, such as the ways in which members can currently access their superannuation, but is more so a reminder to superannuation trustees of their role in the system, including to support members holistically during their working life, and their transition to retirement.

Consultations close on 29 September 2023.

Aged care taskforce established

On 3 August 2023, the Government announced the establishment of The Aged Care Taskforce (Taskforce), seeking feedback on draft aged care funding principles.

The Taskforce will:

• review funding arrangements for aged care;
• develop options for a fair and equitable system for everyone in Australia; and
• build on the recommendations in the Royal Commission into Aged Care and Safety.

The Aged Care Taskforce Terms of reference detail the aged care matters on which the Taskforce will provide advice to the Government, including:

• approaches to funding and contribution to support innovation in the delivery of care;
• a fair and equitable approach when assessing the means of older people accessing residential and in-home aged care, including the scope of income and assets included in the assessment of means;
• issues relating to the inclusion and exclusion of different service types in the new in-home aged care service list;
• consumer contributions for in-home aged care, in addition to reforms that will support a future transition to a single in-home aged care system; and
• changes to the arrangements for pricing and funding hotel and accommodation costs in residential aged care, including phasing out refundable accommodation deposits.

Consultations closed on 31 August 2023 and Taskforce members will provide an interim report to the Government in October 2023 and a final report in December 2023 for the recommendations to be considered.

Review of regulatory settings for managed investment schemes

On 4 August, the Government announced the release of a consultation paper seeking feedback on the appropriateness of the existing regulatory framework for managed investment schemes. The review aims to ensure the existing framework remains fit‑for‑purpose and effectively protects investors from unnecessary financial risk.

The paper considers several issues relating to managed investment schemes, some of which include:

• whether the wholesale client thresholds used to classify a recipient of financial product or services as a ‘retail’ or ‘wholesale’ client (e.g. individual wealth test, professional investor test) remains appropriate;
• whether changes to existing procedures are warranted (e.g. design and distribution obligations) and should conditions be imposed on certain schemes when offered to retail clients;
• reviewing the roles and obligations of responsible entities;
• reviewing the liquidity requirements for managed investment schemes;
• whether an insolvency regime is required for managed investment schemes; and
• whether any issues arise for investors because of the dual jurisdictional responsibility (Commonwealth and State) when schemes invest in real property.

The consultation period closes on 29 September 2023.

Proposed extension to design and distribution obligations (DDO) instrument

On 15 August 2023, ASIC announced it is seeking industry feedback on its proposal to extend the ASIC Corporations (Design and Distribution Obligations Interim Measures) Instrument 2021/784 for another five years.

The instrument which was initially made for a period of two years provides relief for distributors from the obligation to report to product issuers if no complaints were received during a reporting period. ASIC plans to extend its operation to retain certainty for industry ahead of any law reform.

The proposed changes include:

• extending the expiry of the instrument from 5 October 2023 to 5 October 2028; and
• removing an exemption for cashless welfare arrangements which is no longer required following the making of the Corporations Amendment (Design and Distribution Obligations – Income Management Regimes) Regulations 2023.

The deadline for submissions was 25 August 2023 and the proposed changes will commence on the day after the instrument is registered.

Warning of further action against market misconduct

Following the release of Report 767 ASIC enforcement and regulatory update: April to June 2023 (REP 767), ASIC issued a warning to market participants on 2 August 2023 that strong and targeted enforcement action will continue in the coming months as part of its focus on protecting consumers and upholding market integrity.

The report details ASIC’s key enforcement and regulatory actions taken between April and June 2023 and a summary of its enforcement outcomes for the period of 1 January 2023 to 30 June 2023. Some of the key highlights include:

• $109.1 million of civil penalties were imposed by the courts;
• 125 criminal charges were laid against individuals prosecuted;
• 70 investigations commenced, with 144 ongoing;
• 19 individuals disqualified or removed from directing companies; and
• 46 individuals banned or suspended from providing financial services or engaging in credit activities.

ASIC to focus on protecting vulnerable consumers and small businesses in 2023-24

On 28 August 2023, ASIC released its Corporate Plan 2023-27 (Focus 2023-24) outlining its priorities for the next four years.

As scams, digitally-enabled misconduct and predatory lending practices are increasingly prevalent, ASIC will take further enforcement action to protect Australian consumers and small businesses.

ASIC’s key focus over the next four years will be to deliver on its strategic priorities, which include:

• Product design and distribution - reduce the risk of harm to consumers of financial, investment, credit and credit-like products, caused by poor product design, distribution and marketing, especially by driving compliance with design and distribution obligations;
• Sustainable finance - support market integrity and efficiency through supervision and enforcement of current governance and disclosure standards to reduce harms from greenwashing, while engaging closely on climate-related financial disclosure requirements;
• Retirement outcomes - protect consumers, especially as they plan and make decisions for retirement, with a focus on superannuation products, managed investments and financial advice; and
• Technology risks - focus on the impacts of technology in financial markets and services, drive cyber and operational resilience practices, including within companies and financial market infrastructure, and act to address digitally enabled misconduct.

As part of delivering on its strategic priorities, ASIC will focus on six core strategic projects, including:

• Scams;
• Sustainable finance practices;
• Crypto-assets;
• Design and distribution obligations;
• Cyber and operational resilience; and
• Digital technology and data.

ASIC had previously announced its enforcement priorities in November 2022. It will publish its updated enforcement priorities for 2024 later in the year to align with the changing economic conditions, and emerging trends and risks outlined in its Corporate Plan.

Three ‘sunsetting’ class orders for managed funds remade

On 15 September 2023, ASIC announced it has remade three class orders that were due to expire on 1 October 2023 under the Legislation Act 2003. The ASIC class orders (CO) are:

• [CO 13/655] – Provisions about the amount of consideration to acquire interests and withdrawal amounts not covered by ASIC Corporations (Managed investment product consideration) Instrument 2015/847;  
• [CO 13/656] – Equality of treatment impacting on the acquisition of interests; and 
• [CO 13/657] – Discretions affecting the amount of consideration to acquire interests and withdrawal amounts.  

The new legislative instruments that replace these class orders sunset on 1 October 2028. 

To reflect the release of the new instruments, ASIC will shortly update Regulatory Guide 134 Funds Management: Constitutions. 

August 2023 adviser exam results

On 15 September 2023, ASIC released the results of the financial adviser exam held in August 2023.

Of the 205 candidates who sat the exam, 73% passed. In releasing the results, ASIC has also stated that to date, 20,718 candidates have sat the exam and over 92% of those candidates have passed.

The next exam sitting will be held on 9 November 2023 and the last day to enrol for that sitting is 20 October 2023.

Updated prudential standard on remuneration finalised and pre-implementation review findings published

On 1 August 2023, APRA announced that it had  finalised Prudential Standard CPS 511 Remuneration (CPS 511), which includes new requirements for authorised deposit-taking institutions (ADIs), insurers and super funds to publicly disclose information about their remuneration.

The key changes to CPS 511 include:

• a requirement for APRA-regulated entities to annually publish information on their remuneration frameworks, design, governance and outcomes; and
• a requirement for larger and more complex entities to disclose additional quantitative information, including payments to top executives, and how a material weight on non-financial measures such as risk management is placed.

APRA stated that the new disclosure requirements will commence for all entities from their first full financial year after 1 January 2024, and additional flexibility around the timing of disclosures will be provided within six months of an entity’s financial year-end.

On 6 September 2023, APRA subsequently published its findings from an implementation review of CPS 511.

The review was conducted in two phases between September 2021 and December 2022, with the objective to understand how entities approached implementation of CPS 511. It covered 39 entities in total, with the first phase following 15 entities as they prepared to implement the standard, while the second phase was a one-off survey of the remaining entities.

All entities were asked to rate the level of change required to implement CPS 511. Remuneration design was identified by approximately 80% of entities as being the area requiring the greatest uplift to existing practices, while more than 60% of the entities surveyed considered remuneration governance to require only a low level of change. Approximately 70% of entities rated the overall change required from implementation as moderate.

While APRA was generally comfortable with entities’ progress to implement CPS 511, they were more focused on the design of their remuneration frameworks, given the timing of the review. To ensure sustainable change, industry should consider the following common gaps observed during the review: 

• limited progress implementing controls to manage potential conflicts arising from compensation arrangements of third-party service providers;
• inadequate understanding of how selected non-financial measures (NFMs) will drive desired behaviour, risk outcomes and performance; and
• insufficient rigour in the proposed processes to ensure remuneration consequences result from poor risk management outcomes.

APRA will be better able to assess whether CPS 511’s key objectives have been fully satisfied once remuneration outcomes start to be determined under the new requirements.

While the review predominantly involved significant financial institutions, the findings are relevant to all APRA-regulated entities, intended to support wider industry implementation, promote consistent application and clarify expectations in key areas.

2023-24 Corporate Plan published

On 29 August 2023, APRA released its APRA Corporate Plan 2023-24.

The Plan outlines developments in APRA’s priorities for the next four years in response to new risks impacting the global financial system.

APRA considered key challenges such as rising interest rates and high inflation, geopolitical instability, a growing threat of cyber-attacks and scams, and an increase in the frequency of natural disasters, to guide its strategic priorities, which include:

• addressing system-wide risks by enhancing cross-industry stress-testing, and ensuring macroprudential policy settings remain appropriate for the operating environment;
• a heightened focus on operational resilience, including cyber resilience, crisis management and operational risk management, to maintain the continuity of critical financial services;
• climate-related financial risks, including a Climate Vulnerability Assessment for general insurers and embedding climate risk in APRA’s approach to supervision; and
• improving superannuation transparency to provide members with enhanced insights about investment performance and increasing APRA’s focus on retirement outcomes.

The core focus areas supporting APRA’s delivery of key outcomes and its strategic priorities include:

• Policy development - APRA’s development and maintenance of a comprehensive framework of prudential standards and practice guides. APRA’s standards set out enforceable requirements, with the prudential practice guides providing guidance on how entities may adhere to and implement the prudential standards;
• Risk-based supervision – use of APRA’s supervision framework, review and approval processes, SRI model, and data collected from regulated entities to provide oversight of regulated entities, industries and the financial system. APRA will increase supervision intensity to address identified issues, as required;
• Enforcement – the adoption of a “constructively tough” and transparent approach to the use of formal enforcement tools when a regulated entity does not comply with prudential standards and expectations. These tools include applying additional capital requirements, directing entities to take or cease actions, imposing licence conditions and court-based enforceable undertakings; and
• Resolution – implementation of a prompt and effective response to the likely failure of a regulated entity to achieve an orderly exit and minimise disruption and losses to beneficiaries.
  

Updated Financial Claims Scheme standard finalised

On 12 September 2023, APRA announced it had finalised minor administrative updates to Prudential Standard APS 910 Financial Claims Scheme (APS 910), after a short consultation.

APS 910 forms a key component of APRA’s crisis management framework. It requires authorised deposit-taking institutions (ADIs) to be operationally ready for the activation of the Financial Claims Scheme (FCS), Australia’s deposit insurance scheme. The scheme provides insurance protection for deposits if needed in a crisis. The FCS would provide protection for deposits up to $250,000 per account holder per ADI.

The remade standard will come into effect on 1 October 2023.