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Part I: Interview with Pip Bell

Tuesday 1 May 2018


Helping financial service providers keep up with changes in the regulatory landscape 

Introduction

With the Royal Commission taking place, the financial services industry is set for some major changes in the areas of consumer powers, the external complaints body, executive liabilities and reporting obligations.

GRC Professional took the opportunity to interview Pip Bell from PMC Legal, who spoke about some of the changes taking place in the regulation of financial services.


Interview

Tell me about PMC Legal
PMC Legal is a boutique specialist financial services law firm, established several years ago by Paula McCabe, a partner of Baker & McKenzie. I worked with Paula at Baker & McKenzie for several years, and in 2016, we re-joined forces as PMC Legal.
 
We work primarily with clients in the investment management space, covering the establishment of both registered and unregistered managed investment schemes, service provider, distribution and other key relationship agreements, offer documents, and a lot of regulatory compliance advice. As well as our more-traditional funds management expertise, these days we also cover some of the issues that arise for start-ups and established clients in the fintech space.
 
We pride ourselves on providing premium-quality advice, superior service levels and flexible, competitive pricing, and we have been able to build and grow a successful business through the strength of our professional reputations, depth of experience, trusted client relationships and extensive industry network.

 
 
With that extensive view, what is your general feeling about the Australian regulatory framework for financial services?
 

Well, it just keeps getting bigger, more complicated, and harder for the regulated population to navigate!
 
I think it is important to bear in mind that, ultimately, the end goal is to make the Australian financial markets a safe and attractive place in which to invest and conduct business. So, I guess there are two competing forces in regulatory drivers and regulatory development at the moment.
 
On the one hand there are a lot of Federal Government initiatives in place that are focused on innovation and attracting foreign capital.
 
Some examples:
 

  • It has been eight years since the Johnson Report was released, and the vision of an Asia Region Funds Passport looks set to become a reality in Australian law this year. This will facilitate cross-border marketing of certain types of retail managed funds across participating Asia-Pacific jurisdictions;
 
  • There is also legislation being designed to facilitate corporate collective investment vehicle and limited partnership structures alongside unit trusts in the managed funds space—importantly, with the same tax treatment. Foreign investors are more familiar with those sorts of structures than they are with unit trusts, so it is hoped this will drive more capital inflows into Australia;
 
  • And then of course there is the ‘f’ word—by which I mean fintech, which keeps popping up. You’ve got ASIC and other regulators providing assistance to start-up businesses operating in or hoping to operate in the fintech space and engaging in cross-border collaboration to share ideas and help fintech businesses enter overseas markets. Perhaps the London Bridge, announced at the ASIC forum, is one of the most prominent things ASIC is doing in that regard.
 
 
On the other hand, we are of course seeing plenty of measures to regulate and improve behaviour.
 
To name a few examples:
 

  • Four years on from the Financial System Inquiry report, we are still seeing various legislative changes, recommended in that report, being rolled out. For example:

  1. The Australian Financial Complaints Authority to replace the three existing external dispute resolution schemes;
  2. Product design and distribution legislation; and
  3. The ASIC enforcement review.
 
  • Then, we have the Banking Royal Commission under way, and the ‘big four’ banks—and AMP—on the cover of the Financial Review copping heat from multiple regulatory directions for a range of issues. This is not just a result of the Banking Royal Commission but includes BBSW manipulation, non-compliant financial advice, money laundering breaches, unfair contract terms in small business loans, and, from APRA, enhanced regulatory capital requirements. So, it is definitely a busy time for banks’ regulatory departments.
 
  • It feels like the way our superannuation system works is being readjusted, constantly.
 
  • And then we have the notifiable data breaches regime, which just kicked off in February, with the commencement of amendments to the Privacy Act. Meanwhile we continue to see data breaches and information security compromises coming to light—the most prominent recent example being with Facebook.
 
 
With regards to privacy, have you seen a lot around the General Data Protection Regulation (GDPR) as well?
 
Yes, that’s the European Union privacy legislation reforms which will be coming through in May. If you are an Australian business collecting personal information from someone from Europe, then that is potentially relevant.
 
I think with globalisation, technology and different service providers being used in different countries, Australian service providers have a much more global footprint, which can mean an added regulatory burden.

 
 
One of the things you see mentioned together often is fintech and the open banking regime.
 
Open banking is part of a broader concept of the “consumer data right”. Data is going to be, ideally securely, transferred. Conceptually, open banking will make it a lot easier for consumers to change banks, and with all the data available, banks will be able to use that to tailor products that will be more appropriate for individual needs. With data accessible to multiple providers, that should drive competition as well.
 

 

I think another interesting thing that came up at the recent Thomson Reuters Australian Regulatory Summit is that Anna Bligh is hoping there will be a reciprocal relationship, if banks can be directed to share consumer data with a third party—that the same could be made true in the other direction.
 
I can see why the banks would want that, but with the current lie of the land consumer protection will be the paramount policy consideration. One proposed reform is comprehensive credit reporting (CCR) that will also enable banks to have more information about borrowers to better assess their ability to repay loans. With this, they should be able to offer better deals to people who have better credit records, while also looking at other factors for people who do not have good credit records.
 

I suppose there will be less excuses for some of the things that have gone on in the past—where you have had loans being given to people who, on proper assessment, clearly weren’t capable of repaying them. That’s one of the many issues the Royal Commission and regulators have been trying to understand and looking at how to address.
 
 
In the March presentation to the Independent Compliance Committee Members Forum, you and Paula listed a few things that would be an enforcement priority for ASIC. You also mentioned the banking executive and accountability regime (BEAR), which obviously impacts registered ADIs and their subsidiaries. Do you think we will see a situation where BEAR really does reach beyond banks?
 
The BEAR passed Parliament in February, and it is going give APRA additional oversight and powers over authorised deposit-taking institutions. For the larger institutions, it will come into effect on 1 July. Smaller or medium-sized institutions have been given a little more time. That said, the larger institutions are so much more complicated and have many more affected individuals.
 
The BEAR is something of a game-changer because it brings a heightened focus on the accountability of individuals in senior executive and management roles. The definition of ‘accountable person’ covers board members and senior executives who have significant roles in an ‘ADI group’, and the ‘ADI group’ includes subsidiaries of the ADI.
 

APRA will now be monitoring the behaviour of individuals who might be part of businesses over which APRA has never previously had any remit, like wealth management and funds management businesses.
 
The logic there is that, when things go wrong with the ADI group, it affects the public reputation and standing of a bank. We have seen that with poor financial advice within a bank-owned business and how it can negatively impact the public reputation and standing of a bank, with the big four banks and AMP clearly demonstrating this. The ASIC wealth management project is still dealing with advisers who have done the wrong thing by their clients.
 
So, it poses an interesting question about the future of banking conglomerate businesses. Pre-FOFA, there was lot of vertical integration with banks acquiring wealth and funds management businesses, the combination of FOFA, the APRA capital requirements and BEAR is more of an environment and incentives for those businesses to be divested, and we have already seen that,.
 
Now, BEAR could create an interesting divide between bank-owned and non-bank-owned businesses in the funds and wealth management space. We have already seen some reverse vertical integration—banks selling off subsidiaries that don’t conduct banking activities—and it’s possible that the combination of FOFA, the tighter APRA capital requirements and now BEAR may serve to further this trend.  A recent example is the initial public offering of the Commonwealth Bank-owned funds management business Colonial First State.
 

 
Recently, there was a question around ASIC not having any oversight over the BEAR; however, there is a conduct element to BEAR. Shouldn’t ASIC be a part of that?
 
ASIC and APRA have a close dialogue, and ASIC already regulates the advice and funds management businesses. I suppose bringing it within APRA’s remit is due to the nexus with banking business (an APRA regulated activity); however, given the existing dialogue that takes place between the two regulators, including cross-referrals, I envisage the BEAR will drive even more cooperation between ASIC and APRA. 
 
This interview has been broken up into two parts. Please go to Part II to continue reading.