PFA Regulatory Update August 2021
Internal Dispute Resolution changes due this October – RG 271
How financial services firms respond to complaints will need to change from 5 October 2021 when RG 271 will become effective. Timeframes for managing complaints will be reduced, starting with a requirement to acknowledge receipt of complaints within 24 hours (or as soon as practicable).
There are changes to the ways Internal Dispute Resolution (IDR) outcomes should be disclosed to complainants, and to the ways in which complainants may escalate their complaints. There is also a new resourcing requirement, where reviews must be undertaken to assess whether the IDR process is adequately resourced, and the firm able to deal with complaints fairly and effectively. More information available via ASIC.
ASIC’s COVID-19 liquidity review
ASIC recently reported the results from its COVID-19 review of managed funds’ illiquid-asset valuation practices, with unlisted property funds receiving a big tick for how it has managed liquidity during COVID-19.
ASIC says it will continue to monitor liquidity via responsible entities. Some more information on the review can be found here.
Changes to ASIC’s foreign financial services provider licensing
Following the Budget announcement that the Government intends to consult on options to restore the previous regulatory relief regime for foreign financial services providers, the Treasury published a consultation paper seeking feedback on proposed options.
In response, ASIC has extended its transitional relief for foreign financial services providers from the need to hold an AFS Licence.
These developments about licensing exemptions for raising funds in Australia may be relevant to property funds – PFA is currently monitoring the changes and is in frequent contact with the regulator.
ASIC bans director for disclosure failures
Fund manager Theta Asset Management was handed some heavy penalties for failing to follow compliance plan rules and issuing “defective” PDSs in contravention of the Corporations Act.
Among other things, the Federal Court of Australia found Theta did not effectively disclose information regarding risks and potential conflicts of interest to investors. Theta was fined $2 million.
The former managing director and responsible manager of Theta’s responsible entity was also found to have contravened the Corporations Act by authorising the issue of the defective PDSs and failing to take reasonable steps to ensure the responsible entity complied with its statutory obligations. The managing director was required to pay a pecuniary penalty of $100,000 and was disqualified from managing corporations for a period of four years. ASIC has also banned the former managing director for four years from providing any financial services.
The Theta case is yet another example of ASIC’s intention to pursue compliance failures via the courts, including a willingness to successfully pursue officers for personal liability along with breaching fiduciary and statutory duties.
New breach reporting regime from 1 October 2021
ASIC conducted a relatively short consultation process regarding the new breach reporting regime, which commences from 1 October 2021. This is a new extensive regime in the Corporations Act inspired by the Financial Services Royal Commission and findings from the ASIC Enforcement Review Taskforce.
The new rules apply to all aspects of breach reporting, including what AFSL holders must do when a breach has occurred. Financial services licensees must lodge reports about ‘reportable situations’ to ASIC. Licensees must lodge breach reports to ASIC within 30 calendar days after the licensee first knows, or is reckless with respect to whether there are reasonable grounds to believe, the situation has arisen. Further, financial services licensees need to report serious compliance concerns about financial advisers engaged by another financial services licensee to ASIC and to the other licensee.
In addition, financial services licensees which provide personal advice are subject to a specific obligation to notify clients of misconduct, conduct investigations, and remediate affected clients. Notice to affected clients must be given 30 days of the licensee becoming aware of the breach.
The new breach reporting regime also gives ASIC the potential to “name and shame” firms which have experienced breaches – adding the potential for reputational damage to the already existing regulatory risk associated with breaches.
Big penalties for Dixon Advisory from conflicts in United States property fund
ASIC has further underlined its willingness to pursue penalties, announcing a conditional agreement with Dixon Advisory involving a $7.2 million penalty for breaching the Corporations Act, and a further $1 million to cover ASIC’s costs of investigation and legal proceedings. It’s currently an in-principle resolution which is subject to approval by the Federal Court.
The penalty relates to conflicts where Dixon Advisory clients were advised to invest in its US Masters Residential Fund, which invested in property in the United States. Under the heads of agreement, Dixon Advisory consents to making declarations that it has contravened section 961K(2) of the Corporations Act on 53 occasions relating to personal advice. This included contravention of:
· Section 961B of the Corporations Act, by not acting in the best interests of clients; and/or
· Sections 961G of the Corporations Act, by providing advice where it was not reasonable to conclude the advice was appropriate to the client.