Welcome to Issue 58 of the FSC Policy Update. Parliament resumes next Monday 22 November for its final sitting fortnight for the year.
Whilst election timing speculation has not kicked off in earnest yet, we will likely get more clarity on the timing of key events over the coming weeks, with the date of the Federal Budget due to be released when a 2022 parliamentary calendar is issued.
The FSC is also expecting the introduction and debate of key pieces of financial services legislation, including the Retirement Income Covenant (RIC), the Compensation Scheme of Last Resort and the Financial Accountability Regime.
The RIC is an important reform to our retirement system that has long been supported by the FSC and will continue to be a focus of our advocacy. The later two bills are the final legislative pieces of the Royal Commission’s recommendation, reflecting the significant progress made by the Government and industry following its inquiry in 2017.
Read more about these reforms and other important FSC initiatives in today’s Policy Update.
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Blake Briggs, FSC Deputy CEO
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Click on the topic of interest below to read more
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Compensation Scheme of Last Resort (CSLR) Bill
Design and Distribution Obligations (DDO) update
Superannuation Portfolio Holdings Disclosure
FSC Standard on Claims Handling by Superannuation Trustees
Member Briefing on the Competition in Funds Management Review – 24 November 9:30am
Product Rationalisation for Managed Investment Scheme (MIS) Legacy Products
Climate Risk and Reporting Guidance Note
The Public Interest Advocacy Centre (PIAC) Report on Mental Health
Claims Transaction Handling Requirement
The Better Advice Act is now law: What does this mean?
ASIC issues guidance on the use of Records of Advice (ROAs)
FASEA consults on Standard 3 of the Code of Ethics
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PARLIAMENT, LEGISLATION AND REGULATION
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Compensation Scheme of Last Resort (CSLR) Bill
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In late October the Government introduced legislation into Parliament to establish the Compensation Scheme of Last Resort (CSLR) and the Financial Accountability Regime (FAR).
Together they represent the final tranche of legislation to implement the Royal Commission's recommendations.
As the Bill is currently drafted the CSLR will cover unpaid determinations relating to personal advice, engaging in credit activities and dealing in securities (other than issuing securities) with payment caps of up to $150,000.
The exclusion of Managed Investment Scheme (MIS) from the coverage of the scheme, which along with the payment cap of $150,000, is consistent with FSC advocacy for a targeted and contained CSLR.
Many features of the scheme will be prescribed in the regulations. The intention is for the scheme to be operated by a subsidiary of AFCA and to start paying claims from 1 July 2022. Aside from the first year where the scheme is funded by the Commonwealth, the scheme will be funded by a levy framework subject to a cap levied on relevant sub-sectors.
Sub-sector shortfalls invokes Ministerial power to enable payments to be made in excess of a sub-sector levy cap or to levy sub-sectors that were not liable for the initial annual levy. As with the annual levy, the sub-sectors that are potentially in scope for the special levy will be derived from the industry sub-sectors specified in the regulations made under the ASIC Supervisory Cost Recovery Levy Act 2017 and will be prescribed in the regulations. Based on the consultation paper issued in August, from an FSC member perspective cross-subsidy of the CSLR could include payment from MIS, superannuation and life insurance sectors.
The Government will continue to consult on the legislation as part of the committee process as it proceeds through Parliament.
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Design and Distribution Obligations (DDO) update
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The FSC has met with the main advice associations to discuss DDO implementation issues, including discussing the FSC’s guidance on significant dealings for managed funds and life insurance.
Following feedback from members, the FSC is developing:
- Guidance for advisers and other distributors on how to conduct a DDO assessment of managed funds that are part of a portfolio. This advice will address two issues that are being raised by members:
- Advisers not taking a portfolio approach towards investments and (for example) assuming a conservative client must only invest in conservative investments, which is not the intention.
- Advisers believing that they must, in every case, stop clients from investing in products when they are outside the target market.
- A standard questionnaire for DDO-related due diligence for distributors. This is being developed so that distributors (including advisers) are not having to answer many sets of different questions from different product issuers.
- A no action letter for businesses that are voluntarily complying with the DDO. There is a legal argument that the exemption from personal advice for asking questions of customers does not work correctly when a business is complying voluntarily with DDO.
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SUPERANNUATION
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Superannuation Portfolio Holdings Disclosure
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The Government has now released the final draft of the Corporations Amendment (Portfolio Holdings Disclosure) Regulations 2021. View the regulations here.
Throughout the consultation process, the FSC had raised concerns about the draft regulations requiring detailed disclosure around individual derivative attributes, and unlisted infrastructure and private equity.
The FSC is pleased to see the proposals put forward for greater transparency were reflected in the final draft. Derivatives and unlisted assets will only be required for disclosure on an aggregate basis. Individual attributes for derivatives, and specific dollar values for individual unlisted infrastructure assets and private equity will not be required.
Superannuation funds will be required to first report by 31 March 2022, with portfolio holdings disclosure to occur every six months thereafter. The Government has stated that they may consider further refinements where necessary.
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FSC Standard on Claims Handling by Superannuation Trustees
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The FSC has started work on a new FSC Standard on Claims Handling for Superannuation Funds, to replace Guidance Note 42 (GN42), which itself replaced the claims handling provisions in the now defunct Superannuation Voluntary Code of Practice. Of note at this stage:
- GN42 was created in conjunction with other Superannuation Voluntary Code of Practice co-owners (AIST and ASFA), in an attempt to capture relevant areas in the rescinded Superannuation Code and replace these with non-enforceable industry guidance.
- A new Standard will enable superannuation trustees to adopt claims handling best practices and to allow industry to provide ASIC with evidence of self-regulation in this area;
The FSC has circulated a draft to members and is progressing discussions.
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INVESTMENTS
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Member Briefing on the Competition in Funds Management Review – 24 November 9:30am
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Deloitte Access Economics (Deloitte) was asked by ASIC to examine competition in the funds management sector, in the context of the investor outcomes for retail managed investment products. REP 702 Competition in funds management, released in late September, presents Deloitte’s findings from the review.
Ben Lodewijks, Director, and Stephen Burgess, Senior Analyst, with Deloitte Access Economics will share key insights from the competition review and Report 702 in a member briefing on the Wednesday 24 November. FSC members can register for the webinar here.
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Product Rationalisation for Managed Investment Scheme (MIS) Legacy Products
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Treasury has set up a small industry co-design working group consisting of industry technical legal, tax, and product experts, including a number from the FSC membership.
This co-design group is meeting with Treasury throughout November to early December to provide Treasury with technical feedback as Treasury develops a consultation paper. The following elements are being considered:
- A legacy product test to determine what constitutes genuine legacy products eligible for rationalisation.
- A no disadvantage test to ensure investors at a group level do not suffer detriment when a product is rationalised, and that any investors who do are properly compensated.
- Taxation arrangements to provide relief from any tax impediments to rationalisation.
- Procedural issues such as who initiates the rationalisation process, how the rationalisation process gets approved, and recourse for investors.
The FSC’s Product Modernisation Working Group has also begun meeting to consider Treasury’s initial thinking in designing a mechanism for the rationalisation of legacy managed investment scheme products.
It is anticipated at the Treasury consultation paper will be released between late December 2021 to early January 2022.
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Climate Risk and Reporting Guidance Note
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The FSC continues the development of a guidance note that will provide the investment management industry with baseline expectations on disclosing of climate risk and net zero targets, helping to provide confidence to regulators and investors.
This comes in the context of the Federal Government now committing to a net zero target by 2050. With this will come the expectation that industry should properly consider and contribute to the mitigation of climate risk, and the related concern by regulators and stakeholders to prevent greenwashing in the reporting of ‘climate friendly’ features in products (such as an achievement of net zero in investment portfolios), and to ensure that climate risk reporting is comparable and consistent.
If you would like to get involved with the ESG Working Group’s ongoing work, please get in touch.
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LIFE INSURANCE.
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The Public Interest Advocacy Centre (PIAC) Report on Mental Health
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PIAC has released a report titled ‘Mental Health Discrimination in Insurance’, which sets out PIAC’s historical and ongoing activities in relation to its Mental Health and Insurance Project. It examines and makes a number of recommendations aimed at improving the way insurers design, price and offer policies and assess claims of people with past or current mental health conditions.
The FSC has looked at the recommendations in the PIAC report and is pleased to note that it supports most of the recommendations made. Those recommendations that are supported will be included in the Life Insurance Code of Practice 2.0.
The FSC notes that industry codes should not be about re-stating the law, but instead cover those areas where the industry goes beyond the law. Indeed, ASIC Regulatory Guidance 183 says that industry codes of practice should do more than merely restate the law. Meetings of the FSC Mental Health Working Group and the FSC Life Code of Practice Working Group have been convened to consider the report in more detail.
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The Australian and New Zealand Institute of Insurance and Finance (ANZIIF), in collaboration with the life insurance industry, has released four competency frameworks for Claims, Underwriting, Product Management and Distribution functions in the life insurance sectors. This initiative represents the first part of the development of an industry-wide Professional Standards Framework. The framework formalises standards for professional excellence by will implement a consistent Foundation Requirement for all Life Insurance claims and underwriting professionals.
Digital copies of the competency frameworks can be accessed here.
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Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. Kirwan for more information.
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Claims Transaction Handling Requirement
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ASIC has issued a no-action position to provide relief to insurers from having to provide a transaction confirmation for the acceptance or settlement of a claim relating to an insurance product. This requirement had come into force on 19 February when Treasury had repealed regulations previously exempting insurers from the transaction confirmation requirement.
The no-action position extends to licensees for the associated breach reporting obligations. This relief will apply until 1 January 2022 in line with the commencement of the other aspects of the claims handling reforms.
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ADVICE
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The Better Advice Act is now law: What does this mean?
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From January 2022 the disciplinary oversight of the advice profession will change with the FASEA be wound up and its responsibilities shared between Treasury and ASIC.
ASIC has issued an outline of how it will assume these responsibilities that can be accessed here.
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ASIC issues guidance on the use of Records of Advice (ROAs)
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ASIC has recently published Information Sheet 266 FAQs: Records of Advice (ROA) (INFO 266) which answers frequently asked questions about ROAs and includes three example ROAs.
In developing INFO 266 and the ROA examples, ASIC considered the input of FSC members recent consultations, including Consultation Paper 332 Promoting access to affordable advice for consumers (CP 332) and the roundtable discussions which followed.
ASIC’s media release detailing its announcement can be found here.
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FASEA consults on Standard 3 of the Code of Ethics
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FASEA has released a consultation paper proposing to revise the language of Standard 3 of the Code of Ethics to better align it with its intent.
The development of the FSC’s submission to FASEA’s consultation will be led by the FSC’s Advice Licensing and Compliance Working Group.
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TAX
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- The FSC made a submission to a Government review of Australia’s tax treaty network. The submission argues the Government should prioritise new treaties with Luxembourg (which the Government has recently supported) and Hong Kong, and amend existing treaties so they work correctly for managed funds and superannuation funds.
- The FSC made a submission to an ATO review of the tax issues relating to the ending of the London Interbank Offer Rate (LIBOR).
- The FSC made a submission to Treasury on how the Organisation for Economic Co-operation and Development (OECD) Pillar 2 reforms (relating to a global minimum tax rate) raise particular issues for Australian life insurers, such as the potential for there to be long-term variations in tax rates for legitimate reasons.
- The FSC met with Treasury to discuss this submission in detail.
- The FSC had a joint meeting with the Australian Custodial Services Association (ACSA) to discuss issues of common interest including governance of third party data; tax treatment of foreign capital gains; and foreign exchange hedges.
- The FSC and ACSA have developed a joint submission to Treasury on proposals for improvements to the tax treatment of foreign exchange hedging.
- The ATO informed the FSC that it will shortly conduct consultation on its draft guidance on the use of third party data.
- The Board of Tax has informed the FSC that it is finalising its review of CGT rollover relief and plans to provide a final report to Government in April 2022.
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