Wednesday 19 February 2020

Recent developments

Welcome to the February technical roundup. Several exposure drafts were released towards the end of January as part of the Government’s commitment to implement the Hayne recommendations following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).

Acts

Reducing Pressure on Housing Affordability

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 received Royal Assent on 12 December 2019. The Act extends the foreign resident CGT regime to deny foreign and temporary tax residents’ access to the CGT main residence exemption, as well as providing an additional affordable housing capital gains discount of up to 10%.


Foreign Acquisitions and Takeovers Fees Imposition

The associated Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Act 2019 also received Royal Assent on 12 December 2019. The Act amends the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 to impose reconciliation fees on developers who sell a near-new dwelling to a foreign person under a near-new dwelling exemption certificate (and is companion legislation to the Housing Affordability Bill).

Bills

Financial Sector Reform – Protecting Consumers

On 6 February 2020, the Financial Sector Reform (Hayne Royal Commission Response - Protecting Consumers (2019 Measures)) Bill 2019 was passed by both houses and now awaits Royal Assent.

The Bill addresses recommendations from the Royal Commission including:

  • Extending the existing protections of the unfair contract terms regime to insurance contracts (commencing 5 April 2021).
  • Ensuring consumer protection provisions apply to funeral expense policies (commencing the day after the Bill receives Royal Assent).
  • Requiring mortgage brokers to act in the best interest of consumers and addressing conflicted remuneration for mortgage brokers (effective 1 July 2020).


Financial Sector Reform – Stronger Regulators

The Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Bill 2019 was also passed by both houses on 6 February 2020 and now awaits Royal Assent.

The Bill grants ASIC new enforcement and supervision powers in response to the recommendations of the ASIC Enforcement Review Taskforce and the Royal Commission, including:

  • Introduction of an ongoing "fit and proper person" test to strengthen ASICs licensing powers
  • Extend banning order powers, and grounds on which a banning order can be issued
  • Harmonise ASIC search warrant powers across ASIC-administered Acts and bring them into line with the search warrant powers in the Crimes Act 1914 (Cth)
  • Allow interception agencies (such as the police, ASIO and anti-corruption bodies) to provide lawfully intercepted telecommunications information to ASIC for serious offences that ASIC can investigate or prosecute; and
  • align the penalties for false and misleading statements in AFS and Credit Licence applications.

These new enforcement and supervision powers will come into effect the day after the Bill receives Royal Assent (although the power to share intercepted telecommunications with ASIC will also apply to information held by an interception agency before Royal Assent).
 

Social Security: Simplifying Income Reporting

On 6 February 2020, the Government introduced the Social Services and Other Legislation Amendment (Simplifying Income Reporting and Other Measures) Bill 2020 to Parliament. This follows the release of an exposure draft Bill and explanatory materials on 28 January 2020.

The Bill aims to improve and simplify the way that employment income is reported and assessed for social security purposes.

Currently the Social Security Act 1991 assesses employment income in the social security instalment period in which it is earned, derived or received. In practice, because employment income is earned before it is paid, social security recipients are often required to estimate their income, resulting in incorrect entitlement payments.

The Bill amends the Act, to ensure that employment income is assessed once it has been paid to a social security recipient and will minimise misreporting employment income and social security overpayments.

The Bill also amends the provisions in the Veterans’ Entitlements Act 1986 regarding the work bonus and pension scheme bonus.

The changes are scheduled to start from 1 July 2020.
 

Reuniting more superannuation

The Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 was introduced to Parliament on 6 February 2020.

This Bill amends various acts to facilitate the closure of eligible rollover funds by 30 June 2021 and allow the Commissioner to reunite amounts he or she receives from eligible rollover funds with a member’s active account.

The amendments in the Bill will commence the day after Royal Assent.

Exposure Drafts

Advice fees in superannuation

In response to recommendations 3.2 and 3.3 of the Royal Commission, the Government has released for exposure draft legislation and explanatory materials to:

  • Remove a superannuation trustee’s capacity to charge advice fees from MySuper products. Superannuation trustees would still be permitted to charge fees in relation to intra-fund advice as administration fees.
  • Remove the capacity of a superannuation trustee to charge advice fees to a member (other than fees for intra-fund advice) unless certain conditions are satisfied. For ongoing fee arrangements, the new conditions would include the new requirements outlined in Recommendation 2.1 (annual renewal, identification of services that will be provided and consent to the charging of fees).

The consultation period ends 28 February 2020.
 

Ongoing fee arrangements and disclosing lack of independence

In response to recommendations 2.1 and 2.2 of the Royal Commission the Government released for exposure a draft Bill and explanatory materials on 31 January 2020. The exposure draft aims to:

  • insert new specific obligations in the Corporations Act 2001 (Corporations Act) in relation to fee recipients (a financial services licensee or authorised representative) providing personal financial product advice to retail clients under ongoing fee arrangements; and
  • draft regulations relating to the new record-keeping requirements (recommendation 2.1); and
  • amend the Corporations Act to require entities (a financial services licensee or authorised representative) who are authorised to provide personal advice to a retail client to disclose in writing to the client where they are not independent and why that is so (recommendation 2.2).

The consultation period ends 28 February 2020.


No other role

On 31 January the Government released an exposure draft legislation and accompanying explanatory materials for public comment which implements recommendation 3.1 of the Royal Commission. The draft legislation will prohibit superannuation trustees from having duties other than those arising from, or in the course of, the performance of its duties as a trustee of a superannuation fund.

The consultation period ends 28 February 2020.


Restricting use of the term ‘Insurance’ and ‘Insurer’

The Royal Commission made several recommendations to ensure consumers were protected against potentially misleading or deceptive products, including funeral expenses.

The Government released exposure draft legislation on 31 January 2020 which implements an additional commitment in response to recommendation 4.2 of the Royal Commission. This commitment will make it a strict liability offence for a business to describe a product or service that they offer as insurance, if the product or service is not insurance, in circumstances where it is likely that the product or service could mistakenly be believed to be insurance.

The consultation period ends 28 February 2020.


No hawking of financial products

On 31 January 2020 the Government released exposure draft legislation which implements recommendations 3.4 and 4.1 of the Royal Commission:

  • Recommendation 3.4 prohibits the hawking of superannuation products.
  • Recommendation 4.1 prohibits the hawking of insurance products.

Consistent with the Final Report of the Royal Commission that ‘no financial product should be hawked to retail clients’, the new hawking rules apply to other financial products including managed investment schemes and securities.

The consultation period ends 28 February 2020.


Duty to take reasonable care not to make a misrepresentation to an insurer

On 31 January 2020, the Government released exposure draft legislation for public comment which implements recommendation 4.5 of the Royal Commission.

Recommendation 4.5 implements a duty to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts. The changes ensure that obligations for disclosure applied to consumers do not enable insurers to unduly reject the payment of legitimate claims.

This duty will replace the existing duty of disclosure contained in Part IV of the Insurance Contracts Act 1984. The duty of disclosure is important to ensure that insurers can appropriately price the risks being underwritten through limiting the risk of fraud and misleading disclosures. However, the current requirements fall short of adequately

The consultation period ends 28 February 2020.


Implementation of ASIC Enforcement Review Taskforce - Directions Power

The Government has released exposure draft legislation to provide ASIC with powers to give directions to financial services and credit licensees consistent with the recommendations of the ASIC Enforcement Review Taskforce (ASIC ERT).

The exposure draft was published on 31 January 2020 and the consultation period ends 28 February 2020.


Enforceability of financial services industry codes

The Royal Commission recommended that certain provisions of financial services industry codes be made ‘enforceable code provisions’ and that the law provide for the establishment of mandatory financial services industry codes.

On 31 January 2020, the Government introduced an exposure draft and explanatory materials to amend the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 to strengthen the existing legislative framework for financial services industry codes of conduct to allow ASIC to designate enforceable code provisions which, if breached, may attract civil penalties, and to create a new mandatory code of conduct framework.

These amendments implement Recommendation 1.15 of the Financial Services Royal Commission.

The consultation period ends 28 February 2020.
 

Superannuation regulator roles

The Government released exposure draft legislation on 31 January 2020 to implement recommendations 3.8, 6.3, 6.4 and 6.5 of the Royal Commission.

  • Recommendation 3.8 and 6.3 will adjust APRA and ASIC’s roles in relation to superannuation to accord with the principles that APRA is the prudential regulator and ASIC the conduct and disclosure regulator.
  • Recommendation 6.4 will give ASIC joint responsibility for enforceable provisions in the SIS Act which have consumer protection as their touchstone.
    • In addition, the coverage of the Australian financial services licensing regime in superannuation will be extended. This will ensure ASIC has access to appropriate powers and enforcement tools and can successfully perform its role as superannuation conduct regulator under the recommendations above.
  • Recommendation 6.5 ensures that APRA’s role is unchanged. APRA remains responsible for prudential and member outcomes regulation in superannuation.

The consultation period ends 28 February 2020.


Strengthening breach reporting

On 31 January 2020 the Government released exposure draft legislation which implements recommendations 1.6, 2.7, 2.8, 2.9 and 7.2 of the Royal Commission.

  • Recommendations 2.8 and 7.2 will strengthen breach reporting requirements for Australian financial services licensees.
  • Recommendation 2.7 will establish a compulsory scheme for checking references for prospective financial advisers. This is modelled on the existing ABA Reference Checking Protocol.
  • Recommendation 2.9 will require Australian financial services licensees to investigate misconduct by financial advisers and appropriately remediate clients affected by the misconduct.
  • Recommendation 1.6 will apply the new obligations under recommendations 2.7, 2.8, 2.9 and 7.2 to Australian credit licensees in relation to conduct by mortgage brokers. This will also introduce breach reporting requirements for Australian credit licensees more generally.

The consultation period ends 28 February 2020.

Legislative Instruments

Relevant Providers Degrees, Qualification and Courses Standard

On 31 January 2020, the Financial Adviser Standards and Ethics Authority (FASEA) registered the Corporations (Relevant Providers Degrees, Qualifications and Courses Standard) Determination 2020 on the Federal Register of Legislation.

This instrument repeals and remakes the Corporations (Relevant Providers Degrees, Qualifications and Courses Standard) Determination 2018. It includes several additional approved bachelor and higher degrees, and equivalent qualifications, for the purposes of the education and training standard that relevant providers (financial planners and advisers) must meet under paragraph 921B(2)(a) of the Corporations Act 2001.

It also makes a determination under paragraph 1546B(1)(b) of the Corporations Act 2001 for existing providers, describing courses that give the provider qualifications equivalent to the education and training standard in subsection 921B(2) of the Act.

Regulator views

APRA

Sustainability measures for individual disability income insurance

On 2 December 2019 APRA published an open letter to all life insurers and friendly societies to set out measures APRA is introducing to address the poor performance of individual disability income insurance (IDII or more commonly known as Income Protection insurance) and move the product to a sustainable state.

  • With effect from 31 March 2020, APRA expects that life companies discontinue writing IDII contracts where insurance benefits are not based on income at time of claim, including agreed value (and endorsed agreed value) contracts. Life companies that continue to write agreed value policies after 31 March 2020 face the risk of APRA imposing conditions on their registration to not do so or being given directions not to issue such policies.
  • With effect from 1 July 2021, APRA expects that income at risk for all new IDII contracts be based on annual earnings at the time of claim, not older than 12 months.

In addition, with effect from 1 July 2021, APRA expects that:

  • New IDII contracts will be designed so that insurance benefits do not exceed 100 per cent of earnings at time of claim for the first six months of the claim, taking account of all benefits paid under the IDII product as well as other sources of earned income; and
  • after the initial six months, insurance benefits are limited to 75 per cent of earnings at time of claim (subject to a dollar maximum of $30,000 per month).
  • Life companies will only offer new IDII contracts where the initial contract is for a term not exceeding 5 years; and
  • there is a right for the policy owner to elect to renew the contract for further periods (not exceeding 5 years) without a medical review on the terms and conditions applicable to new contracts that are then on offer by the life company. Changes to occupation and financial circumstances should be considered on renewal.
  • Life companies will have effective controls in place to manage the risks associated with long benefit periods (e.g. having a stricter disability definition for long benefit periods); and
  • set internal benchmarks for new IDII products with long benefit periods which reflect the risk appetite and the effectiveness of the controls.

On some of the measures, APRA is seeking feedback on specific design details, but not on the direction of its expectations. Feedback is due by 29 February 2020.


MySuper heatmap

APRA released its first Heatmap for MySuper products on 10 December 2019.

The heatmap uses a graduating colour scheme to provide like-for-like comparisons across three areas: investment performance, fees and costs, and sustainability of member outcomes.

APRA have said it will refresh the heatmap at least annually but will update it in the first half of 2020 to assess any early improvements.

APRA has contacted the trustees of the worst performing MySuper products and asked them to provide or update action plans outlining how they will address weaknesses. If they are unable to make substantial improvements in good time, APRA said it will consider other options, including pressuring them to consider a merger or exit the industry.

AFCA

Compensation scheme of last resort consultation

In a submission published on 5 February 2020, AFCA announced that it has reconfirmed its support for creating a compensation scheme of last resort (CSLR).

AFCA said it and its predecessor have long advocated for a compensation scheme of last resort to fill a major gap in protection for consumers of financial services.


Making insurance claims handling a financial service

On 28 January 2020 AFCA published a submission in response to draft legislation released by Treasury on 29 November 2019.

AFCA agrees with the Royal Commission Recommendation 4.8, which is to remove the exclusion of handling and settling insurance claims from the definition of a ‘financial service’ in the Corporations Act 2001.

In their submission AFCA outlines that the new licensing requirements in the draft legislation may affect the resolution of insurance complaints. While supporting the proposal to impose new disclosure requirements for cash settlements, AFCA suggests some aspects of the requirements should be strengthened.

Other

Board of taxation to review CGT rollover provisions

On 12 December 2019, the Assistant Treasurer Michael Sukkar announced that the Board of Taxation has been requested to undertake a review into Australia's system of CGT rollovers and associated provisions. The terms of reference for the review asks the Board to focus on considering practical ways to simplify existing rollovers. The terms of reference can be found on the Board of Taxation's website.


No transfer balance cap indexation for 2020-21

The consumer price index data for the December 2019 quarter has been released by the Australian Bureau of Statistics (ABS) and will result in the general transfer balance cap (TBC) remaining at $1.6 million for 2020-21.

In order for the TBC to index to $1.7 million for 2020-21 the December 2019 quarter figure needed to be 116.9 or higher. The figure reported by the ABS was 116.2, meaning indexation is likely to occur in 2021-22.


FASEA releases preliminary response to submissions on the Code of Ethics Guidance

On 20 December 2019, FASEA issued a Preliminary Response to Submissions – FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance to provide clarification on the interpretation and application of the Code relating to a number of matters raised by stakeholders during the consultation.

FASEA will continue to consult and engage with stakeholders in the lead up to the implementation of the Single Disciplinary Body.


FASEA releases December exam results

FASEA has released exam results from the third Financial Adviser Exam held in December 2019. The exam was held in 8 metropolitan and 11 regional centres across Australian from 5-11 December.

The exam was marked to a credit standard and 86% of the 2981 candidates who sat the exam achieved a pass.

Registrations for the February exam have now closed, with over 2,200 advisers registered. The exam will be held from 13-18 February in 17 locations across Australia.

Registrations for the April 2020 exam sitting in 18 locations (including regional locations) are now open, with the June 2020 exam registrations opening 2 March 2020.

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