ASIC’s current focus areas for financial services

ASIC recently released its Corporate Plan for 2022-26, outlining its strategic priorities for the next four years.

ASIC’s priorities are in response to the key emerging challenges in the regulatory and economic landscape in Australia and globally. Even so, the regulator’s top priority remains – protecting people participating in the financial system.

The external strategic priorities over the next four years for ASIC are product design and distribution, sustainable finance, retirement decision making and technology risks.

To help you navigate the current regulatory environment, this blog covers three present focus areas for ASIC that fall within the product design and distribution and retirement decision-making priorities:

1. Breach reporting

2. Internal dispute resolution

3. Target market determinations

Breach reporting

As part of its immediate priorities, ASIC will focus on improving the operation of the reportable situations regime. The new regime was implemented via the updated Regulatory Guide 78 Breach reporting by AFS licensees (read a summary in our previous blog on ASIC’s changes for breach reporting) which commenced on 1 October 2021.

It applies to Australian Financial Services (AFS) licensees and credit licensees, who are required to report the following reportable situations to ASIC in writing:

• Significant breaches or likely significant breaches of ‘core obligations’.

• Investigations into whether there is a significant breach or likely breach of a ‘core obligation’ if the investigation continues for more than 30 days.

• The outcome of such an investigation if it discloses there is no significant breach or likely breach of core obligations.

• Conduct that constitutes gross negligence or serious fraud.

• Reportable situations about other licensees.

By lodging such reports, licensees provide ASIC with the intelligence needed to identify emerging trends of non-compliance and to address significant non-compliant behaviours early.

However, the industry has experienced several implementation challenges to date. To alleviate these challenges, ASIC has communicated it will continue to engage with the industry on reporting practices adopted to understand the issues causing an unnecessary compliance burden for licensees.

To enable the successful implementation of the regime, ASIC will:

• Communicate clear expectations for compliance and design solutions to ensure the consistency and quality of reporting meets the policy objectives and improves the efficiency of ASIC’s data collection and analysis.

• Work with stakeholders to find common-sense solutions.

• Consider enhancing the approved form on the ASIC Regulatory Portal for lodging reports.

• Consider developing further practical guidance to assist licensees with meeting their obligations under the regime.

ASIC’s first public reporting on breaches lodged will be published in October 2022, including high-level insights on trends observed for the period from 1 October 2021 to 30 June 2022. Though licensee level insights and data will not be shared in this first report, ASIC notes that its approach to reporting will evolve over time.

Internal dispute resolution

ASIC has recently urged superannuation trustees to review their internal dispute resolution (IDR) arrangements, following a review that found indicators of significant compliance issues.

Regulatory Guide 271 Internal Dispute Resolution (RG 271) commenced on 5 October 2021, covering updated requirements for how financial institutions deal with consumer complaints under internal dispute resolution procedures. For more detail regarding the key requirements, you can read our previous blog on ASIC’s changes in relation to dispute resolution.

Since RG 271 took effect, ASIC has conducted surveillance activities to examine trustees’ compliance with the requirements. The review included complaints received by a selection of 35 trustees of 38 funds between 5 October 2021 and 28 February 2022. ASIC gathered and analysed data on the status and timeliness of complaints handling (excluding objections to death benefit distributions).

As a result of the review, ASIC shared the following observations:

• Complaints recording – Though RG271 requires trustees to record all member complaints, ASIC observed that 10% of the funds reviewed recorded less than 10 complaints for every 10,000 (compared to the average rate of 30 for every 10,000 members). This low complaint rate may be due to some trustees failing to record all member complaints or using an inappropriately narrow definition of complaint.

• Response timeframes – RG271 generally requires a 45-day maximum timeframe for the sending of IDR responses. However, in its review, ASIC found that 2.7% of IDR responses were sent after this timeframe and of these, 7 funds sent out 10% or more of their IDR responses after 45 days.

• Informing complainants of delays – RG271 requires trustees to notify complainants of delays and their right to go to the Australian Financial Complaints Authority (AFCA) when a written response to a complaint is not sent within 45 days. However, ASIC’s review found that complainants were not notified nearly 50% of the time.

• Process failures – One in three trustees advised ASIC that there were varying degrees of process failures or errors in their IDR systems such as capturing complaints correctly, omitting mandatory content from IDR response letters or failing to send out IDR responses for some complaints.

In its next review, ASIC will check how trustees are addressing the concerns ASIC has highlighted and consider regulatory action where appropriate.

The outcomes of this review provide a guide for other superannuation trustees and relevant financial institutions to continually monitor and update their IDR processes to ensure they remain compliant with the standards. It is also an opportunity to review organisational culture in relation to complaints handling as this may influence responsiveness and diligence in recording complaints.

Target market determinations

The product design and distribution obligations (DDOs) commenced on 5 October 2021 and include a key requirement for product issuers to make a target market determination (TMD) publicly available to reduce the risk of products being sold to consumers that are inconsistent with their objectives, financial situation and needs. A TMD is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market), and settings relevant to the product’s distribution, monitoring and review. For more information on the DDOs and TMDs, read our previous blog – ‘New Product Design and Distribution Obligations. Are you Ready?’

For superannuation trustees, the obligation to develop and publish a TMD applies to choice superannuation products.

ASIC recently performed a sample review of superannuation trustee compliance with the TMD requirement and found some poor practices. The review covered 55 TMDs prepared by 27 trustees and raised concerns about the underlying arrangements that some trustees have in place to ensure their products reach the right consumers.

ASIC highlighted concerns in relation to the following areas:

• Defining target markets – some trustees used target market descriptions that were too broad to be meaningful, such as “those wishing to save for retirement”. ASIC recommends that trustees:

  • clearly define the intended target market against the product and its key attributes,

  • when describing classes of consumers as being ‘potentially in the target market’, sufficiently cover the factors indicating product suitability for the relevant consumers; and

  • clearly articulate the target market for each product and the differences between the products in TMDs that cover multiple products.

• Describing investment sub-markets – some descriptors for investment options included broad objectives and non-numerical timeframes, reducing their effectiveness. ASIC advises that to be effective, investment sub-markets should be specific and comparable, using quantifiable investment objectives or identifiable benchmarks and commonly adopted measures, with the minimum timeframe for each investment option expressed in years.

• Setting review triggers – some review triggers were broad and not specific enough to determine when a review of the TMD would be triggered, e.g. ‘persistent’ level of complaints or ‘significant’ member movement. ASIC recommends trustees consider how insights from complying with their Member Outcomes (MO) obligations (the annual Outcomes Assessment and Business Performance Reviews) are incorporated into their review triggers. To better understand how the MO obligations and DDOs interact, read this blog.

• Setting review periods – many trustees disclose initial TMD review periods but do not specify ongoing review periods, implying a ‘set and forget’ approach. ASIC recommends trustees use annual review periods and use the insights from their MO obligations.

• Distributor complaint reporting – ASIC found 82% of the TMDs required distributors to report complaints in periods of three months or less. The remainder had reporting periods of either six or 12 months. ASIC suggests regular complaint reporting to allow trustees to stay informed about their product and assess whether the TMD remains appropriate.

ASIC’s surveillance observations across breach reporting, internal dispute resolution and target market determinations reveals that there is still room for improvement in the industry’s approach to implementation. Careful consideration of ASIC’s regulatory guides and how ASIC interprets the law is crucial to remaining compliant.

How we can help

To help you remain compliant with ASIC’s regulatory requirements in the areas outlined in this blog, Hall Advisory provides the following services:

• Review of your current breach identification reporting frameworks, including recommended enhancements to your breach identification and reporting processes and procedures and an assessment of your breach reporting culture.

• Review of your current IDR frameworks, including updates to your IDR processes and procedures and an assessment of your complaints management culture.

• Independent assessment and updates of target market determinations across all financial products, including a review of the product design process to ensure consistency.

• Review of ongoing business processes under the DDOs and MO obligations to identify opportunities for added efficiency.

For more information about how we can help you navigate these ongoing regulatory requirements, contact us today for a confidential, no-obligation consultation.