Regulatory Wrap – 2 September 2015. In this update we cover: User Pays funding model proposed for ASIC; ASIC’s focus on bank planners and vertically integrated businesses; independent director changes for super boards & committees; ASICs review of interest-only loans and responsible lending practices has been released; ACNs & TFNs to be a thing of the past.
New User Pays System Proposed for ASIC
The Treasury has released a consultation paper on a ‘Proposed Industry Funding Model for ASIC’. Such a model was suggested by the Financial System Inquiry. The proposed funding model would allow the costs of ASIC’s regulatory activities (including the costs of capital expenditure) to be recovered from industry through:
- Annual supervisory levies that reflect the portion of ASIC’s activities dedicated to each of its regulated sectors; and
- Fees-for-service that reflect ASIC’s actual costs in providing specific on-demand services to individual entities.
Levies would be used to recover costs for:
- Undertaking surveillance;
- Enforcing the law;
- Providing guidance;
- Developing advice for the Government;
- Engaging with stakeholders; and
- Certain activities in relation to educating consumers and investors.
The government is proposing that listed public companies would pay a tiered annual levy based on market capitalisation, whereas other companies would pay flat annual levies equal to the cost of regulation.
While it may be argued that a ‘user pays’ system is fair and reasonable in many senses, imac legal has 3 main concerns with such a model:
- The compliance burden for financial services businesses is already high. Ultimately, higher costs will have to be passed onto consumers, resulting in financial services being more expensive and therefore being attainable by less people. In our opinion, this is not a good policy outcome;
- Additional costs will be an additional barrier to entry for small-to-medium enterprises in the financial services industry. The industry is already dominated by large institutional players. A user pays model will do nothing to change that at a time when there is a demonstrable need for smaller, more agile, less conflicted participants;
- User pays as a concept is proliferating across the economy. ASICs move to user pays needs be viewed through this larger lens as the results, when viewed en masse, are not necessarily conducive to good public policy outcomes. imac legal’s concerns over this aspect of the proposals are that they have come about as a result of a trend of ever-shrinking regulatory budgets from governments. If the proposed user pays model becomes a catalyst for governments to further tighten regulatory budgets, we think this may be an obfuscation of one of the central obligations of government: adequate funding of its instrumentalities to ensure fair, efficient and effective governance and operation of markets.
One example of the proposed cost structure shows that an Australian Credit Licence application for a person/sole trader under $100M would cost $5,700. This compares with the current fees of $484 – $683. Closing date for submissions is Friday 9 October 2015 in case you wish to make a submission.
Bank planners and vertically integrated businesses in ASIC’s sights
ASIC has published its corporate plan for 2015/16 to 2018/19. The plan makes it clear that ASIC will continue to focus heavily on bank planners and conflicts within vertically integrated financial services businesses in the current financial year. The corporate plan is available here.
Superannuation governance – independent director changes one step closer
While superannuation boards are set to get tougher independent director requirements following public consultation by the Treasury, APRA has watered down its proposed independent director requirements for super fund board committees.
The Assistant Treasurer has announced that most proposed changes to superannuation trust governance rules will go ahead following public consultation. As a follow-up to our blog on 25 June, we report that the Assistant Treasurer has announced that, following consultation, most of the main proposed changes remain intact and will form the basis of the draft legislation. In particular, all APRA-regulated superannuation funds will need to have a minimum of one third independent directors on their trustee board and an independent chair. Minor changes to the proposed legislation include:
- more detail on the definition of ‘independent’ in the law, rather than in APRA’s prudential standards, to provide greater certainty around the legal obligations of trustee boards;
- ensuring the new requirements and transition period both commence from Royal Assent so existing funds have a full three-year transition period;
- providing greater flexibility during the transition period by clarifying that neither the current equal representation rules nor the new independence requirements will apply where an APRA compliant transition plan is in place;
- clarifying that the independent chair can be included in the one-third independent directors;
- extending the period for filling a trustee vacancy from 90 days to 120 days; and
- clarifying that the Bill overrides both governing rules and the constitution of a corporate trustee.
The Government will also include in the explanatory materials:
- guidance on how to fulfil the requirement to report on an ‘if not, why not’ basis, consistent with ASX best practice principles, where a majority of directors are not independent; and
- clarification that boards can appoint an independent chair at any time between the date of Royal Assent and the end of the transition period.
APRA’s proposed governance changes for RSEs were contained in a discussion paper. APRA now proposes to amend its standard, SPS 510, to:
- Require at least one third of the members of both the Board Audit Committee and Board Remuneration Committee to be independent directors;
- Require the chair of both the above Boards to be an independent director;
- Prohibit the chairperson of the Board from acting as the chair of the Board Audit Committee.
ASIC Releases Report on Interest-only Home Loans and Responsible Lending
ASIC has released Report 445 which reviewed over 140 individual interest-only home loan files from 11 ADI and non-ADI lenders.
The main findings from the report were:
- Nearly all lenders had a lack of evidence of inquiries into clients’ requirements and objectives
- Lenders did not always ensure consumers had sufficient income above their expenses and loan repayments
- Volatile and irregular incomes were treated very differently by lenders
- Lenders relied too much on expense benchmarks as opposed to actual inquiries re expenses
- Capacity to pay after the interest-only period was not always based on residual-term payments
- Some lenders showed a lack of flexibility for hardship variations for interest-only home loans.
TIP: review your policies and procedures for dealing with interest-only loans. Read Report 445. Make any changes required to your policies and procedures.
ACNs and TFNs to become a thing of the past?
In a red-tape busting move, Treasury has released an exposure draft Bill that, if enacted, will do away with Australian Company Numbers (ACNs) and Tax File Numbers (TFNs) for businesses. The Australian Business Number (ABN) would become the single numerical identifier for companies registered under the Corporations Act 2001. The changes are proposed to come into effect from 1 July 2016 and would apply to new registrations only. They would not affect existing registered companies.