Welcome to Issue 40 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 the pilot initiative to allow life insurers to provide earlier intervention to support customers, revised APRA guidance for insurers and banks capital management and ASIC consultation on Reference Checking protocol.
Blake Briggs, FSC Deputy CEO
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Click on the topic of interest below to read more
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Parliamentary Inquiry into Diversifying Australia’s Trade and Investment Profile
Design and Distribution Obligations (DDO) update
APRA recommences reform priorities
Pilot initiative to allow life insurers to provide earlier intervention to support customers
ASIC Unfair Contract Terms (UCT) Roundtable
FSC advocacy sees ASIC clarify the use of electronic renewals
ASIC to consult on Reference Checking protocol
FASEA Guidance on the Code of Ethics
Scaled advice and Records of Advice (ROAs)
Funds Management events in September
Revised APRA guidance: Insurers and Banks capital management
Litigation Funding and Australian Financial Services Licences (AFSL)
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PARLIAMENT, LEGISLATION AND REGULATION
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Parliament resumes today in unusual circumstances; Victorian MPs and Senators have been asked to isolate for two weeks in the lead up to Parliament, and Queensland MPs and Senators will be required to isolate for two weeks after their return to their home state.
The Government has listed the ‘Your Super, Your Choice’ Bill for debate in the Senate and the FSC continues to support its passage.
There has also been considerable public debate on whether the Government should defer the next increase in the superannuation guarantee rate to 10 per cent, which is currently scheduled for 1 July 2021, given the difficult economic environment. The FSC believes it unlikely the Government would announce any change in policy until the evidence in the Retirement Income Review has been released.
Undoubtedly the appropriate rate of superannuation contributions will remain a contentious issue, and will likely be a recurring feature of Question Time debate over the next two weeks.
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Parliamentary Inquiry into Diversifying Australia’s Trade and Investment Profile
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The FSC made a submission to this inquiry arguing benefits from diversifying Australia’s trade and investment profile could be achieved by implementing many of the FSC’s key policy priorities, including ensuring Australia’s managed funds are competitive.
The submission is available from the Inquiry’s website here.
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Design and Distribution Obligations (DDO) update
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The FSC met with ASIC to discuss ASIC’s proposals for how the DDO regime will apply to Exchange Trade Products (ETPs). Following this meeting, members met and agreed on an FSC submission on this issue and the submission was lodged with ASIC. The final submission has been provided to the members involved and to the DDO funds management working group.
Members have been meeting and continuing to develop:
- Template Target Market Determination (TMD) for superannuation wraps
- Template TMD for retirement products
- Standard definitions of standard terms for the DDO regime
The FSC technology and innovation group discussed the Information Technology (IT) issues relating to the DDO regime. And a new forum is being set up to discuss these issues including the options for standardising the IT systems across the FSC membership.
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SUPERANNUATION
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APRA recommences reform priorities
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On 10 August, APRA announced the recommencement of some of the policy reform priorities which were paused in March.
Several of the projects flagged for consultation in the remainder of this year are relevant to superannuation, including:
- updated guidance on the Sole Purpose Test
- SPS 250 Insurance in Superannuation
- the Superannuation Data Transformation
The FSC will continue to engage with APRA on all relevant reform processes.
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APRA has released an updated FAQ relating to its plans to release an updated MySuper Product Heatmap. The FAQ notes that APRA intends to release the 2020 Heatmap in December. The Heatmap will rely on investment performance data to 30 June 2020 and fee and cost data at 1 October 2020.
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LIFE INSURANCE
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Pilot initiative to allow life insurers to provide earlier intervention to support customers
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The FSC has written to the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, following the Minister’s indication that Government would be open to considering a pilot to examine the benefits that could be delivered for early intervention.
The design for this pilot will be developed by FSC and its members in the coming weeks. The guiding principles will be that all parties should benefit, including Australians getting back to wellness and work sooner, life insurers reducing claims cost and other customers not on claim benefiting through reduced premiums.
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ASIC Unfair Contract Terms (UCT) Roundtable
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The FSC has written to ASIC as a follow-up to its recent roundtable to cover the extension of the UCT regime to life insurance contracts. In summary, the letter:
- Confirms the FSC’s view on examples of potentially unfair terms
- Asks ASIC to set out its position and expectations on premium review clauses
- Asks ASIC to set out its expectations for customer-initiated requests for alterations to contracts originally entered into before 5 April 2021;
- Outlines how the FSC envisages implementation of the regime progressing.
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Please contact any members of your life insurance policy team (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 Aidan Nguyen) for more information.
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ADVICE
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FSC advocacy sees ASIC clarify the use of electronic renewals
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Advocacy by the FSC, the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA) has seen clarification from ASIC about the use of electronic renewals for ongoing fee arrangements (OFAs). In the absence of Regulatory Guidance on the issue, ASIC has published an FAQ here.
Under the law, OFAs must be renewed in writing, but this can be done electronically.
Examples of how clients may renew OFAs electronically include:
- the client sending a renewal notice stating that they wish to renew their OFA with the client’s electronic signature attached
- the client sending an email to the adviser confirming that they wish to renew their OFA
- the client signing a renewal notice that states the client wishes to renew their OFA and attaching a scanned copy of it to an email, and
- the client sending an SMS to an adviser stating they wish to renew their OFA.
Advisers relying on electronic renewal notices need to store and save written renewal notices. For SMS renewals, for example, an adviser could do this by keeping an image of the SMS, the sender’s name and the date of receipt. The adviser could also use software that records this information.
If a client provides a voice recording or verbally confirms that they wish to renew their OFA, this does not constitute a renewal of an OFA in writing. Verbal communications must be followed up with confirmation in writing by the client within the 30-day renewal period for the OFA to be renewed.
This is one of the changes the FSC and the advice associations have advocated for to improve the affordability and access to financial advice.
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ASIC to consult on Reference Checking protocol
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Public consultation on the draft reference checking protocol, applicable to Australian Financial Services (AFS) licensees and credit licensees, will take place before the end of the year. This is pending the introduction of empowering legislation. The intention is to have a final protocol in place ahead of the anticipated commencement of October 2021.
The FSC’s input on the protocol will be developed through the Working Group process.
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FASEA Guidance on the Code of Ethics
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It is expected that FASEA’s revised Guidance on the Code of Ethics for financial advice will be issued this month. Following its release, the FSC will provide feedback developed through the Adviser Competency Working Group.
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Scaled advice and Records of Advice (ROAs)
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The FSC is doing a deep dive into how scaled advice can be made more accessible, along with looking at different ways an ROA can be more comprehensively used to reduce the cost to serve. The FSC welcomes any data or insights from members on any experience with this type of advice and the application of the ROA. Please get in contact for more information.
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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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- Members of the Tax Expert Group (TEG) are discussing the issues with the ATO’s Streamlined Assurance Reviews as part of the top 1000 reviews. TEG members are discussing the deadlines for responses and the appropriateness of the questions being asked in the reviews
- Treasury provided advice to the FSC on the tax issues with the proposed law requiring separation of Registrable Entities (REs) and Registrable Superannuation Entities (RSEs) (Royal Commission recommendation 3.1). Treasury advised that ATO guidance is that this should not raise tax issues. This advice has been provided to members for feedback. A member meeting with the ATO to discuss this issue will be organised if needed.
- Members of the Life Insurance Tax Expert Group are considering a proposal to request the Government to change the tax treatment of permit life insurers to recognise losses earlier for tax purposes.
- The ATO has informed the FSC that it is working on various guidance materials relating to remediation, including the income tax consequences for individuals receiving remediation and the impact of the receipt of remediation on superannuation contribution caps. The FSC has requested the ATO keep the FSC informed and consults on these materials before they are finalised.
- The ATO has provided the FSC with a proposed article on the tax issues relating to remediation. This has been provided to interested members for comment.
- The FSC has provided the ATO with a proposed and optional way to address the retrospective issues relating to the changes.
- The FSC has informed members that both fund managers and life insurers are excluded from the Organisation for Economic Co-operation and Development's draft Pillar 1 proposals for multinational taxation. If the exemption were not provided, then very complex rules could apply to multinational insurers about the allocation of profits between jurisdictions.
- FSC TEG members met with Andrew Mills, former Second Commissioner at the ATO, to discuss various tax administration issues of interest. Follow up meetings with the ATO and Treasury on these issues are being requested.
- FSC members have been requested to complete a survey by the Inspector-General of Taxation on the ATO’s communication of taxpayer rights. The survey is available here.
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GST update
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- Members of the GST Expert Group are considering a paper by the ATO on the proposed GST treatment of remediation payments, and will meet with the ATO to discuss the paper.
- The FSC provided a paper to the ATO on the GST issues that FSC members are facing relating to the Protecting Your Super (PYS) fee cap and the preferred approach as agreed by the GST Expert Group.
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State taxes update
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- The New South Wales (NSW) Productivity Commission released a Green Paper “Continuing the Productivity Conversation”.
- The paper states that insurance taxes have high economic costs, and recommends inefficient state taxes should be replaced by more efficient taxes. The paper focuses however on replacing property stamp duty with land taxes.
- The paper also recommends State Treasurers consider establishing a single interjurisdictional body to coordinate payroll taxes - a proposal broadly in line with the FSC submission.
- The FSC plans to make a submission on the Green Paper along the lines of a submission the FSC recently made to the NSW review of Federal Financial Relations.
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INVESTMENTS
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Funds Management events in September
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The FSC has some great events coming up on funds management topics in September. Carl Bacon, broadcasting out of the United Kingdom, will provide a Global Investment Performance Standards (GIPS) update and cover evolving trends in performance measurements on 3 September. FSC members and guests can register here.
A special member-only event will be happening on 9 September, where FSC CEO, Sally Loane, will be 'In Conversation' with Andrew Landman, Head of Australasia, BlackRock Asset Management Australia Ltd. Newly appointed to the board of the FSC, and a member of the FSC’s newly established Fund Management Board Committee (FMBC), Andrew will discuss a range of topical issues, such as what is ahead for funds management in the COVID era - and the growth of Exchange traded funds (ETFs). FSC members should register here.
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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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Revised APRA guidance: Insurers and Banks capital management
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APRA has revised its capital management guidance for banks and insurers. APRA’s updated guidance replaces its April 2020 recommendation that banks and insurers seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.
APRA says that uncertainty in the economic outlook has reduced somewhat since that time. And APRA has had the opportunity to review banks’ and insurers’ financial projections and stress testing results. APRA has advised banks and insurers that, nevertheless, they should maintain caution in planning capital distributions, including dividend payments.
APRA’s guidance is still to maintain caution surrounding capital distributions: boards should seek to retain at least half of their earnings when making decisions on capital distributions. Other recommendations include:
- Utilisation of dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible;
- The conduct of regular stress testing to inform decision-making and demonstrate ongoing lending capacity;
- Making use of capital buffers to absorb the impacts of stress and
- Continuation of lending to support households and businesses.
APRA has said that its updated guidance balances the need for banks and insurers to keep supporting households and businesses, while also maintaining a prudent approach in the face of a very sharp and severe economic contraction.
It will be interesting to see what impact the recent Stage 4 lockdowns will have on this scenario, (noting that one large bank has refrained from issuing an interim dividend to its shareholders, warning ongoing uncertainty induced by the COVID-19 pandemic continues to plague Australia’s banking industry, with another of the Big 4, paying a dividend).
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Litigation Funding and Australian Financial Services Licences (AFSL)
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Subject to some exceptions, from 22 August, litigation funders will be required to hold AFSLs and to comply with the managed investment scheme regime of the Corporations Act 2001 for each litigation funding scheme including the registration requirements. This follows from the commencement on 24 July 2020 of the Corporations Amendment (Litigation Funding) Regulations 2020.
The legislative history in this context and further information can be found here.
ASIC now has made ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 (Instrument) to manage the transition to the new regulatory regime for litigation funding.
The Instrument commences on 22 August 2020 and includes relief from:
- the obligation to give a Product Disclosure Statement (PDS) to ‘passive’ members of open litigation funding schemes – on the condition the PDS is available on the scheme operator’s website and referred to in advertising material;
- the obligation to regularly value scheme property;
- the statutory withdrawal procedures for members who withdraw from a class action under court rules;
- the requirement to disclose detailed fees and costs information and information about labour standards or environmental, social or ethical considerations.
ASIC has also issued a no-action position in relation to the obligation under Chapter 2C of the Corporations Act to set up and maintain a register of members of a registered litigation funding scheme.
In a Media Release, ASIC Deputy Chair Karen Chester said:
Since the Treasurer’s announcement on 22 May, ASIC has been working with Treasury, industry participants and other stakeholders to implement the new Government regulation of litigation funding.
As was contemplated in the Government’s Explanatory Statement, ASIC has given some relief for litigation funding schemes to manage the transition to the new regime.
We have concentrated on the relief required for Day 1 of the new regime. ASIC may provide additional relief or modify the relief we have made today as we and the litigation funding industry experience the new regulatory regime, and as the industry continues to evolve. ASIC will work to ensure that the Corporations Act operates effectively for litigation funding schemes.
The Media Release also indicates that:
- ASIC will review its Day 1 relief in due course, after considering the final report of the current Parliamentary Joint Committee inquiry into litigation funding and regulation of the class action industry;
- ASIC will consider applications for relief on a case-by-case basis, noting the varying nature of litigation funding schemes in the market that may require a more bespoke regulatory response for some schemes.
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