Australian Regulatory Compliance Review

Australia Financial Stability Review

In its latest Review, the Reserve Bank of Australia says:

The Australian financial system remains in good shape. The banking sector, in particular, is continuing to perform strongly, supported by the ongoing expansion of the Australian economy. Banks remain well capitalised, are experiencing historically low levels of bad debts and, despite a pick-up in competition, are continuing to record high rates of return on equity.

It says there are 3 areas of risk:

• the international environment;
• the household sector;
• intensified competition in the banking sector.

Regulation impact

If you've ever looked at the Explanatory Memoranda and the Impact Statements that accompany new laws you have every right to be cynical: they are either a restatement of the new law or a superficial statement of the real impact. They are certainly not in Plain English or a serious attempt at assessing the compliance costs against the benefits of the regulation.

The Office of Regulation Review is a department of the Productivity Commission. One of its functions is to examine Regulation Impact Statements (RISs) prepared by departments and agencies and advise on whether they meet the Government's requirements and whether they provide an adequate level of analysis.

The issue of business over-regulation will become more prominent as business complain about growing compliance costs.

Misleading debentures: Fincorp again

After recently being investigated by ASIC for its misleading ads, Fincorp has now reached an agreement with ASIC over not disclosing investments it was making with the funds being raised in 2004.

The 2004 prospectus said that Fincorp’s funds were invested in a range of residential and commercial mortgages. In fact, the vast majority of the money was invested in property development activities carried on by parties related to Fincorp.

ASIC put a ‘stop order’ on the 2004 prospectus in September 2004, which prevented it from proceeding.

Fincorp Investments Ltd (Fincorp) has been required to offer certain investors who invested with Fincorp in 2004 all of their money back, including accrued interest, following legal proceedings initiated by the Australian Securities and Investments Commission (ASIC).

Fincorp raised approximately $75 million in funds under its 2004 prospectus and could be faced with having to refund many millions of dollars to investors who still hold their investments.

The Supreme Court of New South Wales has made orders by consent requiring Fincorp to make corrective disclosure and offer a full refund to investors who invested under Fincorp’s prospectus between 17 February and 9 September 2004. ASIC estimates that more than 1,000 investors could be affected.  Fincorp says some investors are happy with the investments while others have already matured.

Managing conflicts of interest: stockbrokers

ASIC has announced that it will impose a special condition on the Australian financial services licence of stockbroking firm BBY Ltd (BBY) after finding that BBY did not have in place adequate arrangements for the management of conflicts of interest.

BBY gave advice to a corporate client fighting a takeover bid. At the same time, BBY published positive research about that client.

ASIC found that:

• BBY did not follow its own procedures for the approval of research reports, nor was it able to demonstrate that it had monitored compliance with those procedures.
• BBY did not maintain a robust Chinese wall arrangement, nor was it able to demonstrate that it had monitored the effectiveness of the Chinese wall arrangement.

The licence condition to be imposed by ASIC requires BBY to engage a consultant to review its compliance arrangements and to ensure that any necessary corrective steps are taken to improve those arrangements.

BBY must report to ASIC for the next 18 months on the consultant’s findings and what corrective steps, if any, it is taking to improve its management of its conflicts of interest.

Since 1 January 2005, all Australian financial services licence holders must have adequate arrangements in place to manage any conflicts of interest that arise during the provision of financial services. Read PS 181 and ASIC Guide on research reports.

ING compensates investors for unit pricing errors

Investment funds have a history of problems with unit pricing. ING is the latest to admit its unit pricing practices have been deficient. A matter involving unit pricing errors by National Australia Bank in 2001 resulted in compensation payments to investors of approximately $68 million.

ASIC has accepted an enforceable undertaking from ING Australia Limited, a joint venture between ING Australia Holdings Limited (INGA Holdings) and ANZ Orchard Investments Pty Ltd, and six of ING Australia’s subsidiaries.

The enforceable undertaking follows ING Australia advising ASIC that it had identified unit pricing errors affecting superannuation, life insurance and managed investment products provided by its subsidiaries.

Under the enforceable undertaking, ING Australia will compensate investors an estimated $14 million for unit pricing errors in accordance with a compensation policy and project plan to be agreed with ASIC. Investors will receive the compensation through unit adjustments or cash payments. In addition, an estimated $10.5 million will be paid to investment options within financial products where a unit pricing error has been identified. These compensation figures are estimated as at 31 August 2005.

The enforceable undertaking ensures that:

• investors are appropriately compensated
• appropriate disclosure of the unit pricing errors is made
• deficiencies in ING Australia’s unit pricing practices and processes have been remedied, and
• an external expert reviews the process of compensating investors and provides a report to ASIC.

Spam Act update

Australian Communications and Media Authority (ACMA) has fined two companies a total of $13,200 for contravention of the Spam Act 2003 following complaints received from members of the public.

ACMA found the companies sent out more than fifty thousand commercial SMS messages marketing an investment scheme for software providing horse racing tips.

Global Racing Group Pty Ltd, based in Queensland, has been issued with infringement notices for penalties of $11,000 by ACMA for sending unsolicited commercial SMS messages in breach of the Spam Act.

ACMA found the company arranged for the messages to be sent in a series of campaigns targeting Australian mobile numbers between June and December 2004.

A second company, Australian SMS Pty Ltd, has been fined $2,200 by ACMA for breaching the Spam Act and has given ACMA an enforceable undertaking to abide by the Spam Act and the Australian eMarketing industry code of practice. Australian SMS is a specialist SMS messaging company, also Queensland based, and was contracted by Global Racing Group to send out the messages.

Since the Spam Act came into force in April 2004, ACMA has required 200 businesses to amend their practices to comply with the Act. Fines totalling more than $20,000 have been issued to five businesses; three businesses have provided enforceable undertakings; and court action is being taken against an alleged global spammer in the Federal Court in Perth.

FSR refinement update

ASIC has released a progress report on the eight projects it is undertaking as part of the Australian Government’s Refinements to Financial Services Regulation issued on 2 May 2005. 

 ASIC has completed three of its eight FSR refinement projects. The other five projects have all passed their first stages and are on schedule to be completed by end November 2005.

In the coming months ASIC will release:

• a policy statement on non-cash payment facilities and any accompanying relief (scheduled for September);
• its final position on authorisation requirements for distributors of general insurance products (scheduled for October);
• relief and/or guidance to reduce unnecessary repetition of the general advice warning in an ongoing relationship (scheduled for November); and
• relief and/or guidance for providers of on-line calculators other than superannuation calculators (scheduled for November).

Advertising debentures

ASIC has stopped Fincorp Investments Limited (Fincorp) from issuing potentially misleading advertising promoting the sale of debentures to retail investors.

ASIC was concerned that the use of words like ‘certainty’ and ‘secure’ materially overstated the safety of investing in debentures to vulnerable investors.

ASIC has accepted an Enforceable Undertaking from Fincorp in relation to advertisements that appeared in major metropolitan newspapers and played on radio stations across the country. The advertisements invited consumers to invest with Fincorp and used taglines such as:

• ‘Invest with certainty!’;
• ‘Prudent investors require certainty’;
• ‘They also want a strong measure of security so they can sleep soundly at night’;
• ‘The rate you choose is secured for the term of your Fincorp Investment’; and
• ‘First ranking investors can enjoy peace of mind through a First Ranking Charge’.

ASIC was particularly concerned with these statements, and the overall message of the advertisements, in the absence of any qualifications or disclaimer. ASIC was concerned that the advertisements were misleading given the degree to which they promoted the security of the investment and certainty of return.

 ‘A debenture is simply not a bank deposit and any suggestion in that direction is seriously misleading. There is nothing magic in a debenture and nothing that ensures that a debenture is a secure investment, it depends on a number of factors such as how the investors’ money is used and the quality of the assets over which security is given’, ASIC deputy chair Mr Cooper said.

Anti-money laundering update

The Minister for Justice and Customs, Senator Chris Ellison has issued a Joint Communiqué: Fourth Industry Roundtable on Anti‑Money Laundering and Counter-Terrorist Financing with representatives of the Financial Services Sector.

It announces that he has held a fourth roundtable meeting in Sydney on 9 September with representatives of the Australian financial services sector, to finalise agreement on outstanding high level issues related to proposed anti-money laundering (AML) and counter-terrorist financing (CTF) reforms and prepare for the release of draft exposure legislation. 

Government and industry agreed that standards for customer due diligence would be set in legislation with greater detail to be developed in Rules agreed between AUSTRAC and industry.

The meeting agreed that the framework for reporting of suspicious transactions would be enhanced and consultations with industry would be undertaken to develop appropriate risk triggers to be incorporated in Rules.

It was agreed that transition issues will need to be the subject of further consultation due to the complexity and potential cost to the sector.

It was also agreed that there would be a consultative structure established which would facilitate the development of the details of Rules and Guidelines.

It was agreed that the Government should proceed to release exposure draft legislation that will form the basis of future consultations on more detailed implementation issues.

Transaction fee disclosure

ASIC has released a report on disclosure of transaction fees by banks, building societies and credit unions.

The report, Good transaction fee disclosure – An ASIC report, follows the release of ASIC’s Guide to Good Transaction Fee Disclosure for Bank, Building Society and Credit Union Deposit and Payments Products (Transaction Accounts) issued in June 2002. 

The ASIC guide sets out principles of good disclosure for the five key areas where ASIC believes transaction fee disclosure is particularly important. These are:

• when a consumer is selecting a product or product provider;
• when changes are made to the level of fees or to the details around when, why or how they are charged;
• when a statement is received;
• when a consumer is actively seeking information; and
• immediately prior to making a transaction.

 The ASIC report reveals that improvements have been made to the information on fees in statements to consumers.

It also notes that the circumstances when dishonour fees are payable need better disclosure.