Welcome to Issue 27 of the FSC Policy Update – a fortnightly member briefing on the main legislative and regulatory changes across the financial services industry. In this issue, the FSC team analyses a number of Royal Commission recommendations (and proposed legislation to implement them), Modern Slavery and the Retirement Income Review.
Last week, the annual FSC Member Drinks took place at the beautiful offices of our event host partner EY. We welcomed more than 100 guests to celebrate the start of another huge year with an Archie Rose gin and tonic tasting experience. I was delighted to award bottles of Pol Roger champagne to several FSC members who were recognised by the FSC team for their diligent service to policy development. Find out who won this year’s Member Recognition Awards for going above and beyond here.
To share any relevant feedback with the FSC about this issue, please email the team.
Sally Loane, FSC CEO
Click on the topic of interest below to read more
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RC Recommendation 1.15: Enforceability of financial services industry codes
Enhancements to Unfair Contract Term Protections
Compensation Scheme of Last Resort
Performance Analytics Expert Group
2020 GIPS Standards – Explanation of the Provisions
Financial Accountability Regime (FAR)
RG 97: Fees and Costs Disclosure Superannuation and Collective Investment Vehicles: An Update
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PARLIAMENT AND REGULATION
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Both Houses of Parliament will sit this week, with the House of Representatives also sitting next week.
The following proposed legislation currently is scheduled to be debated in the Senate:
- Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 – the Super Guarantee amnesty legislation.
- Treasury Laws Amendment (2019 Measures No. 3) Bill 2019 – which contains changes to the tax treatment of the rollover of death benefits. The FSC has concerns this legislation does not meet the policy intent – see tax section below.
- Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 – the Eligible Rollover Fund (ERF) wind-up legislation.
The Treasury Laws Amendment (2020 Measures No. 1) Bill 2020 was introduced to Parliament on 12 February 2020. This legislation will provide permanent CGT relief for merging superannuation funds and expand the definition of Significant Global Entity (SGE) to include investment entities. The FSC has strongly supported the CGT change but expressed concerns about the SGE change. This legislation will be discussed by the FSC tax expert group (see also discussion in the tax section below). This Bill is scheduled for debate in the House this week.
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MEDIA RELEASE
12 FEBRUARY 2020: 2020-21 BUDGET SUBMISSION
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SUPERANNUATION
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The Gateway Network Governance Body (GNGB) Executive Officer Michelle Bower and GNGB Chair Jan McClelland AM appeared in front of the Senate Select Committee on Financial Technology and Regulatory Technology on 19 February.
The GNGB is an incorporated entity managing the governance of the Superannuation Transaction Network (STN), and the FSC is a co-sponsor. The FSC’s submission to the Committee supported the GNGB’s submission.
As the body tasked with maintaining the security and integrity of the STN, the GNGB highlighted the need for any new Open Super design to take into account the existing STN infrastructure and mandate secure, standardised, streamlined and well-governed access to Open Super data.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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The FSC has made a detailed submission to the Retirement Incomes Review.
The submission has a key policy focus on:
- The need for a clear, agreed objective of superannuation to underpin policy decisions;
- The importance of key reforms to improve the system and deliver improved consumer outcomes, including the introduction of a ‘default once’ framework and a retirement incomes covenant, to support good retirement outcomes;
- Supporting an increase of the Superannuation Guarantee to 12% by demonstrating that many Australians will have inadequate retirement incomes without the increase;
- Demonstrating that the current taxation settings for superannuation are broadly fair for Australians regardless of their income level; and
- Showing that superannuation reduces the economic burden of the Age Pension, but means testing is arguably too strict in its application.
The Panel’s final report is due to be provided to Government by June 2020.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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MEDIA RELEASE
LIFE INSURANCE
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Royal Commission Insurance Recommendations
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The Life Insurance Policy Team is working with the relevant Working Groups to respond to the draft legislation on the Royal Commission recommendations relating to insurance by 28 February.
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RC Recommendation 1.15: Enforceability of financial services industry codes
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The FSC is in the process of finalising its submission on the Enforceable Code draft legislation with the support of the Life Code Working Group. The FSC attended a Treasury roundtable on 18 February to discuss the proposed legislation with other stakeholders including industry associations and consumer groups. The key issues include:
- Clarity on the test for significant detriment.
- Tension between the imposition of harsh civil penalties with commitments to set obligations that go above and beyond the existing law.
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Please contact Jamie Kennedy for more information.
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RC Recommendations 3.4 & 4.1: Hawking of financial products and 4.3: Deferred sales model for add-on insurance
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The FSC submission on the above RC recommendations is being finalised with the feedback received from the Life Regulatory Affairs and the Life Distributions Working Groups. The FSC attended a Treasury roundtable on 11 February with other stakeholders including industry associations and consumer groups and have had a follow-up bilateral Treasury meeting on 17 February to discuss the key issues, which relate to:
- Allowing natural conversations between consumers and financial product providers.
- Providing a one-year transition period for the proposed Anti-Hawking legislation.
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Please contact Aidan Nguyen or This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
RC Recommendations 4.5: Duty to take reasonable care not to make a misrepresentation and 4.6: Limiting avoidance of life insurance contracts
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The FSC is also finalising a submission on the above recommendations with the feedback received from the Life Regulatory Affairs and the Life Underwriting and Claims Working Groups. Like above, has met with Treasury twice at the 11 February roundtable and the 17 February bilateral to discuss the proposed legislation.
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Please contact Jamie Kennedy or This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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Enhancements to Unfair Contract Term Protections
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Consultations are currently open for a review of these new protections for small business contracts (UCT Review). Treasury is seeking views on whether any enhanced UCT protections for small business contracts should also be extended to consumer and insurance contracts. The deadline for submission is 16 March 2020.
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Please contact Aidan Nguyen on This email address is being protected from spambots. You need JavaScript enabled to view it. if your company is interested in making a submission.
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FSC LIFE INSURANCE SUMMIT - TUESDAY 5 MAY: The Early Bird ticket period ends in two weeks! Don't miss out REGISTER HERE. See the PROGRAM HERE.
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ADVICE
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Royal Commission legislation: Ongoing fee arrangements, disclosure of a lack of independence breach reporting
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The FSC is developing submissions on Exposure Draft legislation implementing Royal Commission recommendations around breach reporting and ongoing fee arrangements and disclosure of a lack independence. These have been circulated to members for further feedback and have been developed primarily through the Advice Licensing and Compliance Working Group. Following the release of the exposure draft legislation, the FSC also represented members at a Treasury Roundtable.
Financial advice is regulated by a plethora of legislation that has been reformed considerably in recent years. The Royal Commission legislation means further change. As such, the FSC is providing Treasury with technical and minor amendments to ensure the legislation is practical, fit for purpose and sophisticated and meeting the needs of Australian consumers in the long-term. This aligns with the FSC’s priority for ensuring accessible and affordable financial advice.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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TAX
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- Legislation has just been introduced to Parliament to provide permanent CGT relief for merging superannuation funds and expand the definition of Significant Global Entity (SGE) to include investment entities – see the Parliament and Regulation update above.
- The FSC has strongly supported the CGT change but expressed concerns about the SGE change. These issues will be discussed by the FSC tax expert group.
- The High Court has rejected an application for leave to appeal the Burton v Federal Commissioner of Taxation decision - which related to foreign income tax offsets (FITO). This decision potentially has widespread impacts, if applied broadly across all taxpayers for all foreign income. We expect the ATO will release a decision impact statement on this matter.
- The 2019 Tax Expenditure Statement was released (now called the Tax Benchmarks and Variations Statement). The family home is the largest tax expenditure; employer superannuation contributions is second; and superannuation earnings are third.
- The estimates have only changed slightly since last year.
- There are several problems with the superannuation figures, which we have repeatedly noted (including in our submission to the Retirement Incomes Review):
- The benchmark taxation is the taxation of bank accounts which are arguably heavily overtaxed (a better comparator is expenditure taxation; against that benchmark superannuation has a much smaller tax expenditure).
- The figures ignore the impact of superannuation on government spending –superannuation saves the Government significant spending on the Age Pension.
- The figures without behavioural change are very misleading, overestimating the revenue from the removal of the super tax concession.
- Similar points can be made about the CGT tax expenditure.
- The statement is available from here.
- The ATO is consulting the FSC on tax issues relating to the replacement of LIBOR, including the impacts on interest deductable/assessable, whether hedges are ‘highly effective’ for tax purposes; whether amendments might result in TOFA balancing adjustments; and whether amendments might mean withholding tax exemptions are lost.
- The FSC provided the Government with details of some concerns about a Bill currently before the Parliament that purports to remove the tax on rollover of death benefits (Treasury Laws Amendment (2019 Measures No 3) Bill).
- FSC members indicated that the solution would mean superannuation funds would have to track untaxed elements which means most funds would reject rollovers of death benefits, contrary to the original policy intent.
- The FSC provided members of the Tax Expert Group with details of significant decisions in the Korean Supreme Court finding that managed funds from Luxembourg and Germany were eligible for treaty benefits.
- The FSC Tax Expert Group is considering providing the OECD with comments on the Common Reporting Standards.
- The FSC Tax Expert Group is considering whether to support proposals for tax changes in India that would assist foreign portfolio investors.
- A Parliamentary Inquiry has been established into the corporate bond market. The FSC Tax Expert Group is considering whether to make a submission to this inquiry on tax issues relating to bonds.
- A Parliamentary Inquiry has commenced into Employee Share Schemes (ESS). The FSC Tax Expert Group is considering whether to make a submission to this inquiry.
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- The 2019 Tax Expenditure Statement was released (now called the Tax Benchmarks and Variations Statement). The GST input taxation of financial services is the fourth highest GST tax expenditure. For more details, see income tax section above.
- A meeting of the GST expert group has been set for Thursday 5 March. The meeting will discuss a paper on the GST issues relating to remediation and another paper on the GST issues relating to fee rebates required under Protecting Your Super.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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MEDIA RELEASE
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INVESTMENTS
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Background
On 1 January 2019, the Modern Slavery Act 2018 (Cth) commenced, heralding a new statutory modern slavery reporting requirement for larger companies operating in Australia. A Modern Slavery statement must be submitted within six months after the end of the reporting entity’s financial year. The reporting period is the entity’s first full financial year that commences after 1 January 2019.
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Entity’s annual financial reporting period |
First reporting period under the Commonwealth Act |
Due date for statement |
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1 July to 30 June |
1 July 2019 to 30 June 2020 |
31 December 2020 |
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1 January to 31 December |
1 January 2020 to 31 December 2020 |
30 June 2021 |
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1 April to 31 March |
1 April 2019 to 31 March 2020 |
30 September 2020 |
Image courtesy of Norton Rose Fulbright.
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What has the FSC been doing?
Over the last 3 months, the FSC ESG working group has been meeting with the Responsible Investment Association Australasia (RIAA) to work on a Due Diligence Questionnaire (DDQ) designed to provide asset owners comfort that fund managers are investing their funds in line with Modern Slavery reporting requirements. The goal is also to create a consistent approach across the industry for reporting in relation to Modern Slavery requirements and reduce the risk of many different survey’s or DDQ’s being developed across the industry. Fund manager members have also been involved to provide feedback on whether the expectations from asset owners are feasible and practical.
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Member feedback sought
FSC members have been emailed the final draft of the DDQ and have been asked to trial the DDQ in their respective businesses and record any feedback. We then propose members attend the next working group meeting or email feedback for the FSC ESG WG for consideration.
Next steps
Following member feedback the joint FSC and RIAA Modern Slavery working group will reconvene in May 2020 to discuss member feedback and suggested refinement of the document.
If you want to join the ESG WG or would like to provide feedback on the DDQ please contact Vincent So on This email address is being protected from spambots. You need JavaScript enabled to view it..
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Compensation Scheme of Last Resort
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The FSC finalised its submission to the Compensation Scheme of Last Resort (CSLR) consultation. The FSC considers that the CSLR;
- Must be well designed, sustainable and targeted at the sectors where there has been repeated evidence of uncompensated losses;
- Should be sustainable and equitable as far as is possible – claims need to be capped at reasonable levels, sectors which are responsible for the losses should self-fund those losses and there should be no-cross subsidisation across financial services sectors;
- Regulatory weaknesses must be addressed – to protect consumers and reduce the risk of unpaid determinations in advice. This includes introducing capital requirements and greater regulatory oversight of professional indemnity insurance requirements to better place licensees in a position where they can meet consumer compensation obligations.
A copy of the FSC’s submission is available here. The related media release can be viewed here.
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Performance Analytics Expert Group
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The Performance Analytics Expert Group (PEG) is a small group consisting of performance analytics experts which meets approximately 6 times a year to discuss investment performance analytics related matters, GIPS and contributes to the review and evolution of relevant FSC Standards.
The PEG is seeking expressions of interest from individuals interested in joining the PEG. This would suit those:
- Who have day to day involvement in performance measurement and analysis; e.g. this could be an investment performance analyst, a custodian or a GIPS verifier; and
- Who would like to contribute to the evolution of relevant FSC standards and GIPS.
If you are interested in joining the PEG please confirm your expression of interest by coming back to This email address is being protected from spambots. You need JavaScript enabled to view it. by COB Friday 28 of February.
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2020 GIPS Standards – Explanation of the Provisions
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The Global Investment Performance Standards are considered industry best practice for investment performance reporting. The 2020 GIPS edition commenced 1 January 2020.
The CFA Institute has developed a number of explanations to the provisions within the GIPS Standard, with explanations for Provisions in Section 1, 2 and 3 now available on the CFA Institute website:
- Explanation of the Provisions in Section 1 - Fundamentals of Compliance
- Explanation of the Provisions in Section 2 - Input Data and Calculation Methodology
- Explanations of the Provisions in Section 3 - Composite and Pooled Fund Maintenance
As further explanations are completed, they will be available on the relevant website.
Note for Asset Owners – until the guidance for Asset Owners is completed, the CFA Institute has suggested that asset owners may find it helpful to consider the guidance for firms, with many of the concepts being very similar.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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LEGAL
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Financial Accountability Regime (FAR)
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The FSC has previously outlined the potential scope of this regime. On 14 February, the FSC lodged a submission on this topic; which can be found here. At this stage, the FSC anticipate further draft legislation will be released mid-year for consultation together with very high-level, non-binding, regulator guidance. The current intention is to introduce the relevant Bill(s) into Parliament in the Spring Session.
A reminder that this tranche applies to dual-regulated entities only; i.e. entities regulated by both ASIC and APRA. Examples include ADIs, insurers and trustees of RSEs.
The intention is to extend FAR to ASIC-only regulated entities in the second half of calendar year 2021. Examples here include AFSL holders authorising them to provide investment management and advice services.
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RG 97: Fees and Costs Disclosure Superannuation and Collective Investment Vehicles: An Update
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An ASIC roundtable was held on 17 February to discuss the new RG 97 and any issues. The outcomes were as follows:
- Platforms: ASIC is continuing its review of Fee and Cost Disclosure within the platform space. This is ongoing. It is anticipated that a Consultation Paper will be released mid-year. Following consultation and the consideration of responses, it is likely that ASIC will release an updated RG and Instrument;
- The RG 97 review is complete: however, there are some consequential changes to other RGs which reference fees and costs disclosure – these will be updated;
- Further, although the review is complete, four refinements to the regime will be introduced.
(a) One of these of course is the amendment to the Instrument to reflect the correct reference to a PDS "dated" on or after 30 September 2020.
(b) It seems that the disclosure of performance fees for each interposed vehicle is another issue which will be considered –we had suggested to ASIC that to assist consumer understanding and clarity this should be an aggregate figure only, rather than individual disclosure of performance fees for each interposed vehicle.
(c) The impression we have is that a hard date for transition will not be implemented, regardless of the various arguments that have been put to ASIC by the FSC and other organisations and comments that were made at the round table.
(d) The FSC also notes that ASIC expressly stated that it was not the intention to alter the existing treatment of derivatives under the new regime.
- It seems that the FAQs on the ASIC website ultimately will be removed. If necessary, ASIC will look to adding to the Regulations rather than rely on FAQs;
- ASIC mentioned its surveillance program – ASIC will look at PDS in use notices. In this regard, ASIC mentioned that they would have thought 12 months after 30 September 2020 would be enough time for issuers to move to the new PDS disclosure regime;
- A number of questions were asked of ASIC by participants in the round table. Some of these ASIC was unable to answer definitively or indicated that they would need to revert in terms of the question. It was of interest that ASIC appeared to indicate that the essential question as to whether and how to disclose a particular item was whether it would be significant to an investor or member making an investment decision. Curiously, it also was mentioned that difficult or complex issues could be explained by way of a note. This seems to be something of a movement away from what we have previously been told that notes in the PDS itself generally cannot be used. For the moment, our view is that this "concession" should be treated with some degree of caution.
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Financial Sector Reform (Hayne Royal Commission Response — Stronger Regulators (2020 Measures)) Bill 2020: FSRC rec 6.14 (Financial Regulator Assessment Authority): DRAFT FSC Submission
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A draft submission has been prepared on this topic and circulated to various members. Please let us know if you would like a copy and/or contribute to the submission. In order to satisfy our internal processes and to meet the submission deadline of 28 February, we require contributions by close of business, 25 February.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it.or This email address is being protected from spambots. You need JavaScript enabled to view it. for more information.
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