ASIC’s Report 768 Navigating the storm: ASIC’s review of home insurance claims (REP 768) assessed claims handling practices to coincide with the commencement of general insurers’ obligation to manage claims efficiently, honestly and fairly from January 2022. The review looked at data from more than 218,000 claims lodged between January and March 2022 from six insurers that cover 63% of the Australian home insurance market.

Deputy Chair Karen Chester said, ‘An insurance claim doesn’t have to be handled perfectly, but it must be handled well. Our claims handling review found good practices and poor practices across all six insurers. We identified five areas where insurers can and should make immediate claims handling improvements – consumer communications, project management, identifying vulnerable consumers and complaints, resourcing of claims and complaints handling’.

‘Importantly, all five areas we’ve identified for improvement are within the insurers’ control. Improving claims handling practices and resourcing will make an immediate and positive difference to consumers when it matters most – making a claim on their home insurance,’ added Ms Chester

ASIC examined all home insurance claims lodged with the six participating insurers between January and March 2022, and followed those claims through the claim handling life cycle for a further 6 months. 43% of the claims ASIC examined related to severe weather events including the floods in New South Wales and Queensland in February and March 2022 (CAT221). The claims reviewed show that the insurers were unsurprisingly facing pressures due to severe weather events during and prior to this period.

‘We acknowledge that not all factors that impact claims handling are under an insurer’s direct control. But all five areas we’ve identified for improvement are within the insurers’ control. This is especially so for supporting and resourcing claims handling and dispute resolution teams in the regrettably ‘new normal’ of frequent severe weather events. Insurers must prioritise proactive and clear communication with their customers throughout the claim’s life cycle. Insurers need to have proper oversight of third parties and effective project management of building claims, not outsource this to their customers,’ concluded Ms Chester.

REP 768 identified five areas for improvement:

• better communication with consumers about decisions, delays and complications,
• better project management and oversight of third parties,
• better recognition and management of expressions of dissatisfaction and complaints,
• better identification and treatment of vulnerable consumers, and
• better resourcing of claims handling and dispute resolution functions.

ASIC also calls on insurers to further analyse the resourcing of claims handling and immediately address under-resourcing of their complaints handling (dispute resolution) functions.

ASIC will write to the six general insurers to detail individual areas for improvement. ASIC will also continue to monitor claims handling practices and take regulatory action where necessary.

ASIC will conduct further work in 2023/24 on:

• potential unfair contract terms relating to maintenance and ‘wear and tear’ issues, and
• reviewing the performance of insurers dispute resolution functions.

ASIC has also commenced several investigations related to insurance claims handling practices.

Background

ASIC’s REP 768 assessed claims handling practices for home insurance claims lodged across January to March 2022 for six insurers, representing 63% of the home insurance market. The insurers that participated in the review are:

• AAI Limited (Suncorp) (including AAMI, APIA, GIO, Shannons, Suncorp and Vero)
• Allianz Australia Insurance Limited (including Allianz and TIO)
• Auto & General Insurance Company Ltd (including Budget Direct, ING and Virgin)
• Insurance Australia Group, which includes Insurance Australia Limited and Insurance Manufacturers of Australia Pty Limited (including CGU, Coles, NRMA, SGIC, SGIO, WFI and RACV)
• QBE Insurance (Australia) Limited (including QBE, ANZ and Elders), and
• Youi Pty Ltd.

ASIC reviewed quantitative data from participating insurers for 218,256 home insurance claims (building and/or contents) lodged between 1 January and 31 March 2022 and followed those claims through the claim handling life cycle for a further 6 months. ASIC requested 150 claims files (25 files per participating insurer) for a targeted review to gain deeper insights. ASIC also commissioned qualitative consumer research (not limited to participating insurers), involving 40 consumer interviews and 25 case studies across Australia to capture consumers’ attitudes to the claims process.

This review is part of ASIC’s ongoing work in relation to insurance claims handling. In December 2021, ASIC reported findings from a review of the 2019–20 Black Summer bushfires (over 8,800 claims across 12 insurers).

From 1 January 2022, insurers with authorisation to provide claims handling and settling services must comply with the obligation to act efficiently, honestly and fairly under s912A of the Corporations Act 2001. ASIC’s Information Sheet 253 Claims Handling and Settling: How to comply with your AFS licence obligations (INFO 253) provides information on compliance with this obligation.

Insurers involved in handling claims are also obliged to act consistently with the duty of utmost good faith under s13 of the Insurance Contract Act 1984 (Cth).

Insurers that subscribe to the General Insurance Code of Practice (Code) must meet the standards set out in the code, which is monitored and enforced by the General Insurance Code Governance Committee. The Committee recently published a report on claims handling, Thematic Inquiry into Making Better Claims Decisions.

Insurers need to ensure their claims handling and dispute resolution functions are adequately resourced and sufficiently trained in order to meet their regulatory obligations as well as the standards in their voluntary General Insurance Code of Practice. Table 5 in INFO 253 provides information on compliance with this obligation.

The House of Representatives Standing Committee on Economics has established an Inquiry into insurer responses to the 2022 floods.

ASIC’s Moneysmart website provides helpful information for consumers on home insurance and the steps to make a home insurance claim.

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DDO is back in the spotlight with ASIC stepping up its enforcement of DDO compliance.

From a consumer protection perspective, the Design and Distribution Obligations (DDO) regime, which came into effect in October 2021, represents one of the most significant regulatory reforms of recent years.

In the wake of ASIC’s recent review into the first year of the regime’s implementation – resulting in a ‘do better’ directive from the regulator – and with DDO-related recommendations an important plank of Michelle Levy’s QAR report, it is timely to revisit the DDO through an adviser lens.

DDO recap

Assumed by many to be a direct outcome of the Hayne Royal Commission, the origins of DDO can actually be traced as far back as the 2014 Financial Systems Inquiry (FSI).

Among the recommendations of the FSI Final Report was Recommendation 21:

“Government should amend the law to introduce a principles-based product design and distribution obligation. The obligation would require product issuers and distributors to consider a range of factors when designing products and distribution strategies.”^[1]

Although disclosure is generally regarded as one of the key pillars of financial consumer protection, there has for some time been a recognition that an over-reliance on disclosure can actually harm, rather than protect, consumers. This recognition was one of the catalysts for the game-changing DDO regime, which requires firms to take a consumer-centric approach to designing and distributing financial products.

DDO adopts an outcomes-based approach, bringing together product governance with distribution processes, to ensure financial products are fit for purpose and that they reach their intended target audience. Putting positive consumer outcomes at its heart, DDO in simple terms can be thought of as a constant, organic feedback loop, where:

• a product issuer articulates the target market the product is suitable for (via a Target Market Determination, or TMD)
• distributors (including AFSLs and their authorised representatives) provide data to issuers that help them assess whether the product design – or the definition of the target market – needs to change, and
• issuers then provide data to ASIC, for them to assess the appropriateness of products and product categories.

Adviser impacts

Although largely an intervention aimed at product manufacturers/issuers, DDO carried some serious, and potentially onerous, obligations for financial advisers. These centred around:

• the use of TMDs
• dealings outside notional target markets
• reporting of these dealings
• reporting of product related complaints, and
• reporting of other distribution data as required by the product issuer.

Reinforcing the intent of DDO to drive a better match between consumers and products is a ‘reasonable steps’ obligation, under which distributors must take reasonable steps to ensure distribution of that product is in accordance with the TMD.

While personal advice is exempt from this requirement (Best Interests Duty in essence being a proxy for this step), this exemption does not apply in general advice or execution only scenarios. The administrative burden on advisers implicit in these reporting requirements – and the associated impact on the cost to serve – was understandably condemned by many stakeholders. As a result, Michelle Levy made specific recommendations about DDO in her final QAR report. We will cover those recommendations – and the Government response – in more detail later in this article.

ASIC flags the next phase of DDO

Ahead of their 2023 report into DDO^[2], explored below, ASIC were already flagging that their focus on DDO was shifting from the introductory phase (focused largely on TMDs) to the compliance phase.

In November 2022, ASIC Deputy Chair Karen Chester told Company Director magazine:

 “Our regulatory focus has now shifted to compliance. Reducing the risk of harm to consumers — by bringing a DDO compliance lens across our work — is now a whole-of-ASIC priority.”^[3]

Chester went on to make two more points of particular relevance to advisers. The first concerned ASIC’s intention to focus more on the way issuers were monitoring distributors to ensure they were remaining within defined target markets. Her second point was around a heightened focus on data gathered from distributors:

“It is critical that companies get their TMDs and product governance settings right and have robust and meaningful data to test and monitor these settings. Firms must collect and understand data about the outcomes of their product distribution and who their products are getting to.”

2023 ASIC review of DDO implementation

In May 2023, ASIC released Report 762 – Design and distribution obligations: Investment products^[4].

Focusing their initial attention on investment products, where the potential for consumer harm was relatively higher than some other product categories, ASIC observed there was “considerable room for improvement” in issuers’ compliance with the DDO regime.

As a result of the review, ASIC noted it had issued 26 interim stop orders against 18 issuers for breaches of TMD requirements. (A stop order essentially means a product cannot be offered for sale while the order is in place).

Particular areas of concern noted in the report included:

• the use of inappropriate risk profiles in the target market (for example, stating that a high-risk product was suitable for clients with a medium risk profile) – a factor in 21 stop orders
• inappropriate investment timeframes or withdrawal needs – a factor in 18 stop orders
• defining a target market too broadly (15 stop orders)
• inappropriate or no distribution conditions and inappropriate use of a TMD template (13 stop orders), and
• inappropriate levels of portfolio allocation (10 stop orders).

ASIC summarised their findings and actions through three main ‘areas for improvement’:

1. Avoid over-reliance on TMD templates: Some issuers relied on a TMD template to drive the process of determining an appropriate target market for a scheme. A template may be useful as a starting point, if used properly. However, in all cases, issuers still need to critically assess a product.
2. Design products with consumers in mind: ASIC identified products with niche or unusual features where issuers had not given enough attention to designing the product with consumers in mind.
3. Assess product features on ‘absolute’ basis: Some issuers developed their TMD by assessing a scheme’s features relative to peers or a benchmark. ASIC makes it clear the TMD for each scheme should be assessed on its own merits, rather than in comparison with other products or against a benchmark.

FSC revises templates in response

The FSC was specifically called out in ASIC’s report for shortcomings in the TMD templates it had created for the use of its members.

For example, their template for investment products included options for certain types of consumers to be ‘potentially’ included in the target market. ASIC noted:

“‘Potentially’ including consumers in the target market can lead to uncertainty about who is in or outside it and is likely to result in a TMD failing to meet the appropriateness requirements. For example, an issuer that is unlikely to have any funds to pay distributions in the short term should not have consumers seeking income as ‘potentially’ in the target market.”

In response, the FSC announced in June 2023 that it had revised its templates^[5].

DDO and QAR

The operation of the DDO regime and its impact on advisers was an area of considerable focus for Michelle Levy in her QAR Final Report^[6].

From the very first consultations with stakeholders, advisers had made clear the extent to which it had created a burden which they were passing onto consumers:

“Financial advisers have told us that the design and distribution obligation reporting requirements are onerous and add an additional compliance burden and expense to the conduct of their practices.”

Levy had previously noted in her Proposals Paper^[7], issued earlier in the review process, that two reporting requirements in particular were problematic:

• the requirement for distributors to notify the issuer of matters specified in the TMD, which effectively allows issuers to impose legal obligations on financial advisers (and other distributors) ‘at will’, and
• reporting of significant dealings outside the target market, which she felt provided little value to issuers or consumers, given the DDO regime specifically acknowledges and permits a financial adviser to recommend a financial product to a client who is outside the target market for the product.

In the QAR Final Report, Levy went on to make two specific recommendations relating to DDO, shown below.

Recommendation 12.1 – DDO (Distribution Requirements)

Amend the DDO distribution obligations in the Corporations Act to limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers.

Where personal advice is provided by someone who is not a relevant provider, the AFS licensee should, like any other distributor, be required to comply with the distribution obligations and take reasonable steps to ensure the financial product is only recommended in accordance with the target market determination.

The objective of this recommendation is to ensure that, where personal advice is provided by a person who is not a financial adviser, financial products are distributed to consumers within the target market for the product.

Recommendation 12.2 – DDO (Reporting Requirements)

Amend the DDO reporting requirements in the Corporations Act to remove the requirement for relevant providers to:

• report significant dealings outside the target market to the product issuer
• comply with the additional reporting obligations specified by the product issuer in the target market determination, and
• report to the product issuer where there have been no complaints during the specified reporting period. 

These exceptions will not apply to someone who is not a relevant provider.

All providers of personal advice (including relevant providers) will need to report the number of complaints received during a reporting period (if there have been any), as well as a description of the nature of these complaints to the product issuer.

The objective of this recommendation is to ensure that the reporting obligations under the DDO regime are appropriate for relevant providers and do not impose an unwarranted compliance burden.

The government responds with ‘Delivering Better Financial Outcomes’ package

In May 2023, the Federal Government issued its formal response to QAR, in the shape of its ‘Delivering Better Financial Outcomes’ reform package^[8].

While the Government accepted 14 of Levy’s 22 Recommendations in full, or in principle, Recommendations 12.1 and 12.2 were referred for further consultation, along with:

• Introduction of a ‘good advice’ duty to replace the existing best interests duty (Recommendation 4).
• Broadening the definition of personal advice (Recommendation 1).
• Removal of the general advice warning (Recommendation 2).
• Allowing non-relevant providers to provide personal advice (Recommendation 3).

The consultation process, which will operate alongside the review of the FASEA Code of Ethics, is expected to conclude by the end of 2023^[9].

Where does that leave financial advisers?

The deferral of Recommendations 12.1 and 12.2 means the DDO regime will continue to operate in its current form until at least the end of 2023.

The challenge for advisers in this regard is that with ASIC stepping up its enforcement of DDO compliance, product issuers will feel themselves under increased scrutiny and increased pressure to ensure watertight adherence to the obligations. Some of this pressure is likely to be referred onto distributors, including advisers.

Importantly, many experts expect ASIC’s approach to enforcing compliance with the DDO will evolve in the next 12-18 months¹⁰, focussing less on TMDs and more on the adequacy of governance processes around the product design and review process. In terms of products, ASIC has said it will prioritise those where it sees the most chance of consumer harm, including Managed Funds.

To the extent that distributor reporting is an important input into product design processes, advisers should expect issuers to be increasing, and more strictly monitoring, their reporting requirements.  Issues product manufacturers are likely considering at present include:

• How they are collecting and understanding product distribution outcomes.
• What data and metrics are being used, and the timeliness of measurement.
• How they are collecting, assessing, and responding to data relating to consumer outcomes.

It is possible that some issuers may extend their requirements beyond the mandatory complaints and significant dealings data, to other data they deem relevant to their product governance processes.

For advisers offering General Advice and execution only services, extra scrutiny should also be expected in respect of the Reasonable Steps obligations, with ASIC using Report 726 to flag its concerns with the overreliance on Investor Questionnaires.

The widespread inadequacies with TMDs identified by ASIC should also put advisers on alert as to their own reliance on these documents. Although legislation does not mandate that TMDs are given to clients¹¹ (only that they must be available on request), it is likely some advisers may be seeing these as an additional way of supporting their recommendation of a particular product. The increasing issuance of stop orders, and the concerns flagged by ASIC with templates previously issued by a major industry association, suggests advisers should tread with caution.

In conclusion

When it first came into effect in October 2021, the DDO regime represented one of the most significant financial consumer protection reforms in many years. The intent of the DDO regime is to reduce consumer harm by ensuring a better match between financial products and consumers, and whilst largely seen as matter for product manufacturers, product distributors are also central players in this matching process.

The onerous reporting burden on financial advisers associated with DDO – and their consequent impact on the cost of financial advice ­– have been widely condemned, a point recognised by Michelle Levy in the QAR Final Report. The widespread optimism that her recommendations to reduce the DDO burden on advisers – without compromising consumer protections – would be accepted, were dashed when the Government released its formal response.

Whilst Levy’s recommendations have not been rejected outright, but rather are subject to further consultation, the resulting state of limbo actually creates more challenges for advisers, as it comes against a backdrop of ASIC stepping up its enforcement of DDO.

For the time being, this is likely to see product issuers under increased pressure and scrutiny, some of which may well be referred onto advisers in the form of more onerous and more strictly monitored reporting requirements.

———–

References:
[1] https://treasury.gov.au/publication/c2014-fsi-final-report
[2] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[3] https://asic.gov.au/about-asic/news-centre/articles/product-design-and-distribution-the-consumer-is-key
[4] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[5] https://www.moneymanagement.com.au/news/funds-management/fsc-builds-updated-ddo-template-fund-managers
[6] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[7] https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf
[8] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/delivering-better-financial-outcomes-roadmap-financial
[9] Ibid.
[10] https://hsfnotes.com/fsraustralia/2023/05/29/asic-lifts-its-game-on-ddo/
[11] https://www.dwyerharris.com/blog/tmd-available

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ASIC has further staged the implementation for the 8,600 reporting firms, which will result in all financial firms reporting their customer complaints data to ASIC for the first time.

In early 2023, the first group of 97 large financial firms, including banks and some superannuation funds, reported their IDR data to ASIC (see 22-071MR).

By August 2023, a second group of around 260 financial firms will submit their IDR reports for the first time. The firms within these first two tranches account for many of the largest financial firms and we estimate will account for well over 60 percent of consumer and small business complaints made at IDR.

The balance of financial firms, which include many smaller firms, must submit their IDR reports to ASIC for the first time by 29 February 2024.

ASIC Deputy Chair Karen Chester said, ‘We reached a significant milestone early in 2023 when the first group of licensees reported IDR data to ASIC. The staged implementation will see most large financial firms reporting IDR data to ASIC by August 2023.

‘Importantly those firms account for the large majority of consumer complaints made through IDR. The staged implementation will also allow more time for many smaller firms to prepare for the start of their reporting obligations. This is the next step in the implementation of this important reform that will see all licensees reporting IDR data to ASIC by end February 2024.

‘The framework is a culmination of detailed consultation with industry to improve and standardise the quality of IDR data. Collection of IDR data will improve ASIC’s capabilities as a data driven regulator. This data will give greater visibility of where consumers experience problems or where harms may be occurring within firms.

‘It will be an invaluable resource for ASIC, industry, consumer groups and ultimately consumers themselves,’ concluded Ms Chester.

The implementation of the framework is given effect by the following instruments:

• ASIC Corporations (Internal Dispute Resolution Data Reporting) Instrument 2022/205
• ASIC Corporations (Amendment) Instrument 2023/282

Financial firms should check the amending legislative instrument to find out when they are required to start submitting IDR data reports to ASIC.

ASIC has also updated the IDR data reporting handbook (handbook) responding to industry feedback to support firms to consistently report their IDR data. The handbook outlines the requirements for firms to report IDR data under the framework and includes the data dictionary and data glossary. Minor clarifying edits have been made to the data dictionary contained within the handbook (see the ’Overview of changes’ linked below).

ASIC will not publish IDR data until all financial firms have commenced reporting after 29 February 2024. ASIC will be analysing the data as it comes in to inform its final approach to publication and will communicate our final approach well in advance of publication.

Financial firms can get more information on the requirements from ASIC’s IDR data reporting page, which includes frequently asked questions.

Download

• IDR data reporting handbook
• IDR data reporting handbook: Overview of changes between March 2022 and April 2023
• ASIC Corporations (Internal Dispute Resolution Data Reporting) Instrument 2022/205
• ASIC Corporations (Amendment) Instrument 2023/282

Background

Since 5 October 2021, financial firms have been required to record all complaints received and have an effective system for recording information about complaints (see Regulatory Guide 271 Internal dispute resolution (RG 271)).

The release of the IDR reporting requirements was a major milestone in the implementation of Recommendation 8 of the Ramsay Review into financial services dispute resolution, which recommended that financial firms be required to report on their IDR activity to ASIC. The IDR data reporting framework was also enabled by the Treasury Laws Amendment (Putting Consumers First—Establishment of the Australian Financial Complaints Authority) Bill 2017.

In July 2020 new IDR standards and requirements were published in RG 271, which commenced on 5 October 2021. In July 2021 ASIC announced the IDR reporting pilot with seven firms participating and released a draft data dictionary and data glossary. ASIC published the final requirements for the IDR data reporting framework in March 2022 alongside the IDR data reporting handbook (see 22-071MR).

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The DDO, now into its second year, marks a significant shift to outcomes-based regulation. Ultimately, it requires financial products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers and retail investors being targeted.

‘The design and distribution obligations are a ‘game changer’ for consumers and retail investors. Companies need to take a consumer-centric mindset across a financial product’s lifecycle. The DDO interim stop orders have become a ‘go-to regulatory tool’ for ASIC to quickly disrupt and stem poor consumer outcomes,’ ASIC Deputy Chair Karen Chester stated.

ASIC undertook an initial, risk-based review of how investment product issuers are meeting the DDO. Report 762 Design and distribution obligations: Investment products (REP 762), released today, outlines the review findings and actions taken by ASIC in response. The review found that a significant number of the product issuers^[1] made deficient target market determinations (TMDs), with poorly defined target markets and unclear or inadequate product governance arrangements.

‘Investment product issuers have been on notice to meet the design and distribution obligations since October 2021. It is disappointing to see DDO deficiencies across the board, and by large and small product issuers alike.

‘Poor product design or distribution puts retail investors at risk of financial harm, ending up in products that don’t meet their needs. The fact that we have issued 26 stop orders on investment products in just nine months shows that product issuers need to ‘lift their game’ – and now,’ Ms Chester said.

ASIC prioritised the initial review of investment products because of concerns that investors were being inappropriately exposed to high-risk products. The key target market deficiencies ASIC identified across investment product issuers include:

• target markets defined too broadly – a factor in 15 stop orders;
• unsuitable investor risk profiles used – a factor in 21 stop orders;
• inappropriate levels of portfolio allocation used – a factor in 10 stop orders; and
• unsuitable investment timeframes and/or withdrawal features, not reflecting the product’s risks and liquidity profile – a factor in 18 stop orders.

ASIC also identified inappropriate or no distribution conditions – a factor in 13 stop orders.

Many of these deficiencies appeared when issuers relied on TMD templates without customising them appropriately.

As a result, ASIC placed interim stop orders on 26 investment products from 18 issuers since 1 July 2022, representing $6.6 billion in funds invested by retail investors. These actions by ASIC resulted in 12 issuers amending 18 TMDs to address the deficiencies and five issuers withdrawing seven products.

ASIC also reviewed the product design arrangements of 12 issuers of around 640 registered managed investment schemes to check how they met the ‘reasonable steps’ and TMD review obligations. ASIC found a prolific use of investor questionnaires to meet the ‘reasonable steps’ obligation without a clear underlying governance and distribution framework. While all issuers had arrangements to meet their TMD review obligations, they needed to use review triggers more effectively and improve their processes upon a review trigger.

‘Closer scrutiny of DDO is coming,’ Ms Chester said. ‘All investment product issuers should read our report, assess their practices, and address any gaps informed by our findings. In coming months, ASIC will begin to review how product issuers interact with their distributors to ensure they are not straying beyond their target market, how they monitor product governance arrangements and review data to ensure retail investors are receiving suitable products on an ongoing basis.

‘We won’t hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures. We have already commenced civil penalty proceedings for alleged DDO breaches against a distributor of an investment product and an issuer of a credit product.  We have further stop orders under consideration and several other DDO-related investigations underway,’ Ms Chester concluded.

Download

Report 762 Design and distribution obligations: Investment products

The report includes links to all the investment product-related interim stop order media releases.

Background

DDO requires financial product issuers and distributors to ensure products are designed with consumer needs in mind and distributed in a targeted manner. Financial product firms are also required to monitor outcomes and reassess their product governance arrangements over time. A TMD is a mandatory public document (under DDO) that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.

ASIC took stop order action on 11 issuers of managed investment scheme with a total of approximately $6 billion in funds under management and 7 issuers of other investment products who sought to raise $609 million from investors. Issuers that were the subject of ASIC’s interim stop orders for DDO breaches include among others: BT Advance Asset Management, Perpetual Investment Management, MPG Funds Management, and Fawkner Property Limited. See the full list in REP 762.

To date, ASIC has undertaken, or is undertaking, risk-based surveillances in relation to buy now pay later, credit cards, derivatives, investment products, small amount credit and superannuation. ASIC has:

• made additional interim stop orders in relation to credit (23-031MR) and derivatives (bringing the total number of DDO stop orders to 28);
• caused 9 issuers to withdraw 11 products from the market;
• released surveillance findings in relation to small amount credit contracts (22-352MR) and superannuation (22-236MR); and
• commenced civil penalty proceedings for alleged DDO breaches against Firstmac Limited, a distributor of a managed investment scheme (22-361MR), and American Express Australia Limited, an issuer of a credit product (22-338MR).

Regulatory Guide 274: Product design and distribution obligations (RG 274) sets out expectations for compliance and ASIC’s approach to administering the obligations.

———

[1] Issuers of managed investment schemes and other products, such as shares issued by an investment company, preference shares and debentures. https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-115mr-asic-calls-on-investment-product-issuers-to-lift-their-game-on-design-and-distribution-obligations/

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Estelle Parker

With increasing attention on greenwashing in finance, the largest and most comprehensive responsible investment conference in the Southern Hemisphere, RI Australia 2023, will take place in Melbourne and online on 10-11 May 2023. Held by the Responsible Investment Association Australasia (RIAA), the two-day conference will bring together more than 800 sustainability leaders and industry practitioners with 90 expert speakers across more than 30 sessions to demonstrate best practice in the burgeoning sustainable finance sector.

This year’s theme is “Scaling new heights in ESG and impact”, and RIAA’s Executive Manager, Estelle Parker, says it comes at a time when the responsible investment industry is facing a reckoning to deliver on the positive outcomes promised and combat greenwashing. “The industry has been thrust into the sights of governments, regulators, and not least its clients who care about the impacts of their investments. No one can afford to not be paying attention right now,” she says.

The efforts of regulators to address greenwashing will be a significant focus; with Karen Chester, Deputy Chair at the Australian Securities and Investments Commission, delivering a keynote address on ASIC’s direction. Dr. Sean Carmody, Executive Director of the Australian Prudential Regulation Authority, will join the discussion on how Australia’s forthcoming sustainable finance taxonomy will provide much needed definitions of what constitutes a sustainable investment.

A session Estelle predicts will draw significant attention is cheekily titled “ESG: Woke & Broke?”. This session will delve into the current political attack on ESG investing by far right conservative elements in the US, and explore whether this could happen in Australia and elsewhere. Fiona Reynolds, Independent Director and Advisory Board Member who will be speaking during this opening session says, “we need to prevent ESG becoming the political football. How do we as an industry stop ESG from entering the culture wars? This isn’t just a US issue, it impacts all global investors.” Estelle Parker says that, ultimately, ESG is not political, “it constitutes good investment practice and is mainstream now. Investors don’t want governments preventing them from considering certain risks in investment decision making.”

RIAA’s research shows that approximately $726 billion in assets under management in Australia is now managed via a stewardship or corporate engagement approach. Stewardship codes have proliferated around the world. Prominent amongst these is the UK’s, which sets a high bar to entry, and has provided a blueprint for further stewardship codes globally. “This is why we invited Claudia Chapman, Head of Stewardship at UK’s Financial Reporting Council to be one of our international keynote speakers. She will share her experience developing and implementing the UK Stewardship Code and explore where next for stewardship. I would expect the growing focus on collaboration and systems change to achieve positive real-world outcomes will form part of this,” says Estelle.

While undoubtedly a step in the right direction, RIAA research shows a perception that the growth in corporate engagement and stewardship may be flooding corporate boards with a sea of requests from investors. A panel session including corporate leaders such as Patricia Cross from OFX, Dr. Guy Debelle from Fortescue Future Industries, and Mark Rigotti CEO of the Australian Institute of Company Directors (AICD) will provide insights on what corporate engagement looks from the inside and practical advice for investors to work more collaboratively to alleviate the burden on companies and achieve the real-world outcomes desired.

RI Australia 2023 will place a spotlight on First Nations luminaries. Karen Mundine, CEO at Reconciliation Australia, and Phil Usher, CEO at First Nations Foundation, will speak on Voice to Parliament and how investors be a genuine partner in reconciliation and self-determination. Professor Peter Yu AM, Vice President (First Nations) at ANU, Benson Saulo, the first Indigenous person to be appointed an Australian Consul-General, and Leah Armstrong, Managing Director at First Australians Capital, will speak on First Nations investment markets. Ian Hamm, Chair of the Indigenous Land and Sea Corporation and new Board member of the AICD, will speak on Caring for Country and how investors can partner with First Australians.

Russia’s invasion of Ukraine was a wake-up call for investors, and RIAA’s Human Rights Working Group has been busy working on a guide to navigate investing that may be affected by armed conflict-related issues with experts from organisations like the Australian Red Cross. Delegates at the conference will be presented with the exclusive launch of the ‘Investors and Armed Conflict: A Guide’, a toolkit that provides essential frameworks and insights for investors and companies seeking to protect human rights and mitigate risks associated with armed conflict. “This is going to be a vital toolkit for investors to support human rights in conflict-affected regions like Ukraine and Myanmar, and what they can do before, during and after conflict,” says Estelle.

RI Australia 2023 is set to be a jam-packed conference with sessions covering a diverse range of topics, from modern slavery and workplace culture to big tech, human rights and reputation management. There will be interactive workshops on target-setting and promoting ESG within organisations, as well as sessions tailored to financial advisers, including responsible investment for beginners, and advice on how to construct a good responsible investment portfolio. Attendees will also gain insights into consumer research and demand.

With over 500 members representing US$29 trillion in assets under management, RIAA is dedicated to ensuring capital is aligned with achieving a healthy society, environment and economy.

“Not only is the program comprehensive featuring the latest trends and emerging issues, we see this as an unique opportunity for attendees to develop their skills and knowledge, make connections and explore growth opportunities in the sustainable finance space,” says Estelle

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To help financial firms remediate their customers quickly and effectively, ASIC has today published updated and expanded regulatory guidance.

ASIC Deputy Chair Karen Chester said, ‘Our guidance puts the onus on industry to get on with fair and timely remediations – returning the money they owe to wronged consumers.’

Regulatory Guide 277 Consumer remediation (RG 277) applies to both Australian Financial Services (AFS) licensees (including superannuation trustees) and Australian credit licensees (licensees). It is underpinned by licensees’ legal obligation to operate efficiently, honestly and fairly and it embodies ASIC’s practical experience from monitoring remediations. ASIC has responded to industry requests for advice and clear guidance on remediations drawing on six years of oversight experience. The guide has been subject to an extensive two-year public consultation process with consumer and industry stakeholders.

‘To date ASIC has needed to oversee large scale remediations to ensure affected consumers were treated fairly and received the compensation they were entitled to,’ said Ms Chester.

Two large scale remediation programmes ASIC has provided oversight to over the past six years are:

• remediation for fees for no service misconduct or non-compliant advice, which has seen payments or offers of $3.6 billion in compensation to over 1.4 million consumers, and
• remediations in the insurance industry totalling more than $1.3 billion for mis-selling junk insurance, failing to deliver on price discount promises and poor sales practices.

As at June 2022, ASIC was monitoring 36 remediation activities across superannuation, advice, credit and banking and insurance whereby $3.25 billion has been paid or offered to over 3.4 million consumers, and a further estimated $1.6 billion is yet to be returned to around 2.7 million consumers.

‘The release of our expanded guidance, along with the updated Making it right field guide, delivers licensees all they need to achieve the right remediation outcomes on their own. It explicitly allows the use of assumptions, to help firms address knowledge gaps and accelerate remediation programs in a way that does not disadvantage consumers,’ said Ms Chester.

‘Licensees must also do better at identifying and remediating problems earlier to avoid the costly lag and drag of remediation. The common stumbling block we have seen across remediations is underinvestment in systems. This underinvestment has led to a trifecta of failures. First and foremost, in delivering on promises to consumers, second in identifying the failures and third in being able to remediate consumer loss in a timely way,’ added Ms Chester.

‘Going forward, while ASIC may need to intervene in some isolated cases, we cannot and should not oversee remediations in order for consumers to receive fair and timely outcomes,’ concluded Ms Chester.

ASIC expects to see industry applying the updated guidance to all new remediations going forward.

In addition to RG 277, ASIC has released an updated version of Making it right: How to run a consumer centred remediation, a best practice field guide that helps licensees with the day-to-day design and execution of consumer-centred remediations. The updates focus on encouraging licensees to be more transparent about their remediations.

ASIC has also published Report 737 Response to submissions on CP 350 Consumer remediation: Further consultation (REP 737).

RG 277 Consumer remediation

RG 277 is comprehensive and allows licensees to scale and tailor their remediations to fit the circumstances. RG 277 (among other things):

• clarifies the nine principles for conducting a remediation, which will help licensees comply with their obligations and conduct remediations efficiently, honestly and fairly
• provides 28 examples to assist in the practical application of the guide
• introduces guidance on the use of assumptions
• introduces updated product specific guidance on possible monetary and non-monetary remedies
• updates guidance on the use of a low value compensation threshold and payment channels, and
• introduces guidance on what to do if a consumer cannot be contacted or paid.

RG 277 also helps licensees understand how remediation interacts with other obligations (for example, internal dispute resolution and other general licensing obligations).

Download

• Regulatory Guide 277 Consumer remediation (RG 277)
• Report 737 Response to submissions on CP 350 Consumer remediation: Further consultation (REP 737)
• Making it right: How to run a consumer centred remediation

Background

In 2016 ASIC published RG 256, designed primarily to address poor quality advice and fees for no service misconduct. RG 256 will continue to apply to these existing remediation programs.

The first consultation on updates to RG 256 was published in December 2020 through Consultation Paper 335 Consumer remediation: Update to RG 256 (CP 335). Consultation paper 350 Consumer remediation: Further consultation (CP 350) followed in November 2021, which released the draft updated regulatory guide for further consultation.

The development of RG 277 was informed by extensive consultation with industry representatives, licensees, consumer groups, consultants and other regulators. ASIC received 64 submissions over two stages of public consultation and conducted deep dive one-on-one workshops with over 20 external stakeholders.

The guidance is underpinned by the general obligations on AFS licensees and credit licensees to do all things necessary to ensure the financial services or credit activities covered by the licence are provided efficiently, honestly and fairly (civil penalty provision), and the requirements to have compensation arrangements in place.

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A TMD is a mandatory public document that sets out the class of consumers a financial product is likely appropriate for (the target market). It also sets out matters relevant to the product’s distribution and review. The three financial firms did not appropriately identify the consumers they intended to target or did not have a TMD, which meant the products may have otherwise been marketed and sold to retail investors for whom they were not appropriate or too risky.

The interim stop orders prevent Responsible Entity Services Limited (RES) and two companies in the UGC Global Group (UGC) from issuing the relevant managed investment scheme interests or shares to retail investors.

‘The design and distribution obligations were created to deliver better consumer outcomes,’ ASIC Deputy Chair Karen Chester said. ‘Under the law, firms must embed a consumer-centric approach. They need to design financial products that meet the needs of consumers in their intended target market, and distribute those products in a targeted way. Where firms are not doing the right thing and there is potential for consumer harm, ASIC can now take quick action to disrupt poor conduct and prevent harm,’ Ms Chester said.

‘ASIC’s focus has now shifted to compliance. Industry has had sufficient time to bed down its implementation of the DDO regime.  We have targeted surveillances underway to check whether product issuers and distributors are complying with their design and distribution obligations.  We will continue to look at defective TMDs, as well as issuers who have not made TMDs or not made them publicly available. We will review how product issuers interact with their distributors to confirm they are not straying beyond their target market. We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs,’ Ms Chester said.

‘Financial firms need to be consumer-centric in how they design their products. Issuers need to have clearly defined target markets, especially for high-risk products, that take into account the risk that investors could lose some or all of their capital. We expect this to flow through to similarly clear distribution arrangements. Where firms are not meeting their obligations, ASIC can and will respond, from stop orders to court action, to prevent consumer harm and deter non-compliance,’ Ms Chester said.

Responsible Entity Services Limited

ASIC issued an interim stop order preventing RES from issuing interests in PPM Units, giving a product disclosure statement for PPM Units or providing general advice to retail clients recommending investment in PPM Units. The stop order is valid for 21 days unless revoked.

Given the features of the product, ASIC considered that RES’s TMD included two categories of retail investors for whom investment in PPM Units would not have been consistent with their likely objectives, financial situation and needs. These were: investors intending to use an investment in PPM Units as a core component of their investment portfolio and investors with an objective of high capital growth or a mixture of capital growth and income.

ASIC notes that the sole underlying asset of the PPM Unit class is a loan to a company related to RES for development of a sandstone quarry. The product is a high-risk, illiquid, unlisted single asset investment. The return of an investor’s funds and any interest payable under the loan is wholly dependent on the related-party borrower’s ability to repay the loan.

ASIC examined the TMD, product disclosure statements and online advertising for PPM Units as part of a recent surveillance into the marketing of managed funds (22-061MR). ASIC also recently placed an interim stop order on RES in relation to misleading or deceptive statements in an online advertisement for PPM Units (22-188MR).

Companies in the UGC Global Group

ASIC made interim stop orders preventing two companies in the UGC Global Group, UGC Global Alpha Limited and UGC Global Alpha Fund Limited, from dealing in shares in relation to retail investors, providing a disclosure document or providing financial product advice in relation to the shares to retail investors.

In May 2022, the two companies lodged prospectuses seeking to raise $100 million each through the offer of ordinary shares for the purpose of investing in the UGC Alpha Global Fund (a wholesale fund). ASIC extended the exposure period for these prospectuses because of concerns that the disclosure was defective and placed interim stop orders (under s739) on offers made under the prospectuses.

When the prospectuses were made publicly available during the exposure period, they did not have a TMD and said that applications to invest would be processed on a ‘first come, first served’ basis. ASIC was concerned that the UGC Global companies may have engaged in retail product distribution before preparing a TMD for their high risk offers. Therefore, ASIC also made orders for non-compliance with obligations under DDO in relation to the shares of these companies. The first DDO orders lasted for 21 days. On 11 July, further DDO orders were made (for an indefinite period) to give the UGC companies more time to respond to ASIC concerns.

UGC Global Alpha Limited and UGC Global Alpha Fund Limited are corporate authorised representatives of United Global Capital Pty Ltd (AFSL 496 179). The stop orders are available on ASIC’s Offer Notice Board.

Background

The interim orders for all three firms have been made on an urgent basis to protect retail investors and the firms will have an opportunity to make submissions before any final stop order is made by ASIC.

ASIC’s Regulatory Guide 274 Product Design and Distribution Obligations (RG 274) assists issuers and distributors of financial products that must comply with the design and distribution obligations in the Corporations Act. Promoters of managed funds should ensure they are familiar with the principles and guidance set out in RG 274.

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ASIC’s Deputy Chair Karen Chester said, ‘The publication of the Exposure Drafts is a major step towards setting global sustainability and climate-related disclosure standards. The ISSB has worked at pace to meet the urgent demand for transparent and comparable reporting on sustainability and climate-related matters. Consistent, comparable and relevant information is critical for investors to make fully informed decisions here.

‘It’s important that Australian companies and stakeholders more broadly  ̶̶  investors, other reporters, advisors and assurers  ̶̶  participate in the ISSB consultation to establish these standards as ‘a global baseline’. The ISSB offers alternative consultation options, you can complete a survey or submit a comment letter.  Australian stakeholder feedback is essential to ensuring the ISSB’s final standards are appropriate and workable for our market and economy.

‘Should the Exposure Drafts be adopted internationally, they will inevitably impact Australia’s capital markets and participants, as investors continue to demand comparable sustainability and climate-related corporate disclosures,’ said Ms Chester.

ASIC encourages Australian stakeholders to make a submission in response to the ISSB’s Exposure Drafts:

• S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
• S2 Climate-related Disclosures

Stakeholders can submit responses on the Exposure Drafts by participating in a survey or submitting a comment letter by 29 July 2022.

Stakeholders may also make submissions to the Australian Accounting Standards Board (AASB) by 15 July 2022. The AASB is consulting on the ISSB Exposure Drafts, to provide feedback to the ISSB and gather information on how the proposals might operate in the Australian environment.

ASIC’s role

ASIC is engaging with the ISSB Exposure Drafts through its membership of the Council of Financial Regulators Climate Working Group, participation in stakeholder roundtables being conducted by the AASB and engagement with industry stakeholders. As announced on 23 June 2022, CFR agencies will provide a joint submission to the ISSB on the Exposure Drafts.

Internationally, ASIC is a member of the Sustainable Finance Taskforce of the International Organisation of Securities Commission, which provides input to the ISSB and will consider possible IOSCO endorsement of the ISSB standards.

Report 593 Climate risk disclosure by Australia’s listed companies sets out ASIC’s recommendations relating to the consideration and disclosure of climate risk.

ASIC encourages directors and senior management of listed companies and their advisors to continue reporting voluntarily under the Task Force on Climate-Related Financial Disclosures (TCFD) framework as the ISSB climate standard develops.

• Consider climate risk – directors and management of listed companies should understand and continually reassess existing and emerging risks, including climate risk
• Develop and maintain strong and effective corporate governance– strong corporate governance facilitates identifying and managing material risks
• Comply with the law – directors should consider disclosure of material business risks affecting future prospects in an operating and financial review, and
• Disclose useful information to investors –directors of listed companies with material exposure to climate risk should consider reporting voluntarily under the TCFD framework.

Directors of listed companies should also ensure that the Operating and Financial Review provides the information that investors would reasonably require on operations, financial position, business strategies and prospects for future financial years. Also see:

• Regulatory Guide 247 Effective disclosure in an operating and financial review
• ASIC media release 22-124MR ASIC highlights focus areas for 30 June 2022 reporting.

Background

The creation of the ISSB was announced at COP 26 in November 2021, with the objective of developing high-quality global baseline climate and sustainability disclosures to meet investors’ information needs.

On 31 March 2022, the ISSB published the Exposure Drafts.

In December 2021, ASIC welcomed the establishment of the ISSB (see ASIC media release 21-349MR). ASIC recognises the establishment of the ISSB as a major step in setting global sustainability standards and addressing climate risk. ASIC is supportive of the objectives of the ISSB in developing a global baseline to support the information needs of investors.

For further information on the ISSB, see the IFRS Foundation’s website.

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ASIC considers ‘greenwashing’ as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

ASIC undertook a ‘greenwashing’ review of a sample of superannuation and investment products and identified some areas for improvement. In particular, issuers in their disclosure and promotions need to:

• use clear labels
• define the sustainability terminology they use
• clearly explain how sustainability considerations are factored into their investment strategy.

ASIC Deputy Chair Karen Chester said, ‘Managed funds and super funds are responding to the increasing investor demand for sustainability-focused investments. Investors are not only motivated by their values here, but also by long-term financial returns.

‘Transparency and trust are paramount as the market for these products continues to develop and grow. In our region alone, sustainability-labelled investments have more than doubled between 2019 and 2021. While globally, ESG assets are projected to exceed US$53 trillion by 2025 and represent more than a third of total assets under management.

‘Our information sheet is simply about helping issuers comply with their existing regulatory obligations. Labels or headline statements about a product’s green credentials should not be misleading. Being ‘true to label’ is not a nice-to-have, it’s a regulatory must-have. It’s also a must-have for investor confidence and trust. And a must-have for both fair and efficient market outcomes here. Misdirected investment here will inevitably be at great economic cost.

‘We have set out 9 important questions for issuers to ask themselves. We would hope and indeed expect issuers to review their practices against our information sheet,’ Ms Chester said.

ASIC Commissioner Sean Hughes added, ‘This is and will remain a priority area of focus. ASIC is continuing to monitor the market and will be looking for misleading claims about ESG and sustainability.

‘We are also appealing to industry and investors to alert us if you see suspected greenwashing in financial products.’

ASIC has also published new information to help investors assess if their values and goals align with a sustainability-related or ESG product.^[1]

Commissioner Sean Hughes said, ‘In weighing up investment options that suit their values, we encourage consumers to look out for vague or ambiguous language or exaggerated marketing claims that lack a reasonable basis to support them.’

‘This is clearly an evolving area, which is attracting attention from investors, funds and policy-makers alike. ASIC will continue to monitor sustainability disclosure practices and will make changes to INFO 271 to ensure our information remains relevant, contemporaneous and useful.’

Download

Information Sheet 271: How to avoid greenwashing when offering or promoting sustainability-related products^[2]

Background

ASIC regulates the way financial products are sold and distributed and the conduct of issuers offering financial services. Existing regulatory guidance sets out how issuers should meet their related obligations:

Regulatory Guide 65^[3] sets out ASIC’s guidelines on how product issuers can meet their obligations under the PDS requirements to disclose how labour standards or environmental, social or ethical considerations are taken into account in investment decision making.

Regulatory Guide 234^[4] contains good practice guidance when advertising financial products and services.

Regulatory Guide 168^[5] gives policy guidance on preparing a PDS that complies with the PDS requirements.

In the 2020-21 Corporate Plan, ASIC indicated it would undertake a review to assess whether product issuers were engaging in ‘greenwashing’ that results in consumer harms.

Issuers means responsible entities of managed funds, corporate directors of corporate collective investment vehicles (CCIVs), and trustees of registrable superannuation entities.

ASIC is also engaged with international developments in this field and supports^[6] the International Sustainability Standards Board giving priority to a standard on climate-related disclosures.

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[1] https://moneysmart.gov.au/how-to-invest/environmental-social-governance-ESG-investing
[2] https://asic.gov.au/regulatory-resources/financial-services/how-to-avoid-greenwashing-when-offering-or-promoting-sustainability-related-products/
[3] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-65-section-1013da-disclosure-guidelines/
[4] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-234-advertising-financial-products-and-services-including-credit-good-practice-guidance/
[5] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-168-disclosure-product-disclosure-statements-and-other-disclosure-obligations/
[6] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-349mr-asic-welcomes-new-international-sustainability-standards-board-and-updated-climate-related-disclosure-guidance/

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