Financial Services Update June 2011

New sheriff in town. Incoming ASIC boss to shake up monitoring and enforcement activity

After taking over as chairman of ASIC in May, Greg Medcraft took the chance to announce a range of new measures to nail corporate crooks, as well as highlight those areas that the watchdog will focus on over the next few months.

Medcraft has suggested that ASIC will be pulling a few new tricks out of its monitoring and enforcement bag, including:

• using  industry contacts to sift out non-compliant entities;
• a greater focus on analysing and monitoring breach reports as a source of intelligence; and
• greater utilisation of the various surveillance powers at ASIC’s disposal with an increased use of telephone/wire taps and email intercepts before they  ‘come after you’.

This is a serious warning to AFSL holders who are paying lip service to areas such as risk management and compliance. Interestingly enough it may, in fact, be a failure to report any compliance breaches that may bring a licensee to ASIC’s attention. Similarly it may just take one telephone call from a disgruntled investor to start an investigation.

Focus on gatekeepers – five new measures to protect consumers

Following ASIC announcements earlier this year with respect to its focus on Managed Discretionary Account services and Hedge Funds Medcraft has added another focus area to the list.  This time its ‘gatekeepers’.

Consumer reliance on these gatekeepers is something that concerns ASIC, particularly as financial advisers, auditors, custodians and credit ratings agencies are involved at all parts of the value chain.

To protect consumers, ASIC has outlined the following five areas of improvement:

1. Enhanced financial resource requirements – ASIC are working to make the financial resource requirements for AFSL holders more robust so as to reduce the risk of financial service providers operating with insufficient resources.
2. Credit Ratings Agencies – There is a proposal that ratings agencies be required to lodge an annual report with ASIC about their compliance with the IOSCO Code requirements, including around the management of conflicts, staff competency, and their ratings methodologies.
3. Future of Financial Advice Reforms – These much publicised reforms focus on areas such as prospective bans on conflicted remuneration structures and national exams for Tier 1 Financial Advisors.
4. Product Approval Process – There will be more scrutiny from ASIC on service providers, such as the lawyers responsible for drafting disclosure documentation, as financial products can not reach retail clients without their support.
5. Adequate compensation for retail investors and consumers – ASIC has thrown its support behind the Government’s recent consultation on the issue of the creation of a statutory compensation fund, designed to pick up where other compensation mechanisms have failed.

There’s more…Indirect Brokers also to face further scrutiny

There have been growing concerns, following some pretty high profile collapses (Sonray and Lift Capital to name a few) that members of Australia’s 650 strong indirect brokers aren’t subject to the same levels of regulation as their ASX Market Participant colleagues and, as such, may not have governance frameworks that provide adequate protection to consumers.

Whilst indirect brokers look and feel like stockbrokers, they can’t use the term “stockbroker” in their name, or in their marketing and sales material.  They avoid the requirement to comply with the ASX Market Rules by acting as an agent for their clients and placing trades through an ASX Market Participant broker.  In this way they avoid the requirement to comply with the ASX Market Rules.

Indirect Brokers have been in ASIC’s sites for quite some time now.  ASIC recently met with 33 of the largest indirect broker firms and the results were fairly average to say the least.  In fact, around 1 in 3 of the largest firms were placed under remediation or further surveillance following this exercise.

Given the bigger firms lack of compliance with basic AFSL requirements our advice to the smaller players is get your house in order.  To put it in risk management terms, the likelihood of getting a knock on the door from ASIC is “almost certain”.  The consequences of non-compliance will range from expensive remedial work to the loss of you licence.

Shorter PDS – Implementation relief announced

With all this focus on increased surveillance and regulation it may come as a bit of relief (or frustration depending on how much work has been done) to many in the funds management industry to see that ASIC has put back the requirement for fund managers to comply with the new “Shorter PDS” regime by 12 months to 22 June 2012.

In short, product issuers subject to this shorter PDS regime may now:

• remain in the old regime until  the 22nd June 2012; and
• issue supplementary PDS documents until 22 June 2012, although they may opt in to the new regime from 22 June 2011 if they wish.

AML/CTF Update

AUSTRAC’s supervisory cost recovery legislation was passed by Parliament in June. These Bills are now awaiting Royal Assent.

The supervisory levy is proposed to be made up of three components:

1. the base component (currently proposed to be around $264 in the first year);

2. large entity component (with the  proposed minimum levy for entities with earnings of more than $100 million being $14k and increasing in earning levels up to $5 billion); and

3. transaction reporting component (with the main proposed cost being a 1 cent for every transaction levy).

This measure is likely to be unpopular with the many who feel that the failure to roll out the second tranche of the AML/CTF regime (extending the requirement to comply to accountants, jewellers, real estate agents etc) leaves a half baked regime serving little or no purpose other than to give Australia a temporary tick of compliance on the world stage.  “Yes Minister” comes to mind.

The Combating the Financing of People Smuggling and Other Measures Bill 2011 has also been passed by the Senate with amendments and returned to the House of Representatives for approval.

The main purpose of the Bill is to reduce the risk of money transfers by remittance dealers being used to fund people smuggling ventures by establishing a more comprehensive AML/CTF regime for the remittance sector.

Autonomous Sanctions Act 2011

Finally, Australia’s new autonomous sanctions regime slipped in slightly under the radar on 27 May 2011 and it is likely that the Act will affect many in the financial services industry.

The Act is designed to enable the Australian Government to enforce autonomous sanctions through the creation of a legislative framework for Australia’s autonomous sanctions measures.

The Act includes a strict liability offence for corporations that contravene the legislation, subject to a defence of demonstrating that reasonable precautions were taken and adequate due diligence was undertaken.

There are two offences under the Act:

1. A strict liability offence of contravening a sanction law, or a condition of an authorisation, which can only be defended if the entity can demonstrate that it took reasonable precautions and exercised due diligence during any dealings. The maximum fine that can be imposed for this offence is the greater of $275,000 or three times the value of the transaction connected with the contravention.

2. A person commits an offence if the person engages in providing false or misleading information in connection with the administration of a sanction law. The offence is punishable by a fine of $275,000, 10 years’ imprisonment, or both.

If you are likely to deal with foreign clients or jurisdictions then you should consider taking immediate steps to monitor Australia’s foreign sanctions policy, which currently includes sanctions against Burma, Fiji, Former Federal Republic of Yugoslavia, Iran, Libya, North Korea, Syria and Zimbabwe.

As part of your AML/CTF Program, for example, consider amendments to assist you to carry out all reasonable due diligence including enhanced customer due diligence for certain clients and ensure that you are aware of the true identity of your client.

If you have any questions, or would like some assistance with any of the topics raised in this blog, please feel free to contact James Cozens on +61 (2) 9299 6105.

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