Turbulent times: ASIC’s Corporate Plan and likely regulatory actions

In a speech given to the Committee for Economic Development of Australia, ASIC Chair Joseph Longo elaborated on ASIC’s recently-released Corporate Plan for 2022-2026. He described the not-quite-post-pandemic world as one full of change and disruption driven by megatrends which include climate change, geopolitical shifts, the digital and data economy, AI and an ageing population.

This Insight describes ASIC’s four key priorities, how each came to be a focus, and their likely impact on the regulatory landscape.

Four key priorities

An atmosphere of change and disruption has informed ASIC’s four core priorities for the coming years.   

These priorities are captured in the table and elaborated further below:

ASIC regulatory priority	Issues facing Australians	Likely regulatory action
1. Product design and distribution obligations	Distribution of inappropriate financial products to retail clients.	ASIC to continue increasing investigations into proper construction of target market determinations and compliance with them.
2. Sustainable finance	Greenwashing – a fund or product misrepresenting its ESG credentials.	ASIC to push for greater disclosure of ESG decisions, and investigate claims of misleading or deceptive conduct.
3. Technology risks Crypto-assets Cyber and operational resilience	Volatile and risky crypto assets marketed without the protections which are available for other asset classes. Increasing scam prevalence and sophistication.	ASIC to continue investigating claims of misleading or deceptive conduct, and work with industry and push for greater disclosure and enforcement powers. ASIC to continue working with industry and other regulators to protect consumers.
4. Retirement decision making	Numerous	ASIC to increasingly monitor superannuation products, managed investments and financial products.

Product design and distribution

The financial product Design and Distribution Obligation (DDO) for retail clients commenced in October 2021. In the explanatory memorandum to the Bill which introduced DDO, the government explained that DDO aimed to ensure that financial services providers be ‘customer-centric’ in offering financial products to retail clients.  

DDO requires providers to take active steps to make sure that financial products do not end up in the hands of retail clients for whom they are unsuitable. To accomplish this, DDO requires persons issuing financial products to retail clients to produce a target market determination (TMD) which describes the class of retail clients that appropriately comprise their target market. They are then obliged to take reasonable steps throughout the lifetime of the product to ensure that distribution of the financial product is consistent with the TMD.  

ASIC has launched investigations into non-compliance with DDO, most notably in relation to Responsible Entity Services Limited, which offered a high-risk, single asset investment to retail investors. Chair Longo indicated in his speech that ASIC has been investigating other high risk products, including OTC derivatives, crypto-assets, and buy-now-pay-later products (BNPL). He also warned that ASIC would be closely examining the basis on which firms describe a class of retail clients as their target markets.  

ASIC foreshadows in it Corporate Plan that it will increase surveillance of managed funds and superannuation TMDs and distribution practices. This is likely to see more providers asked to explain the basis on which they have assessed a financial product as suitable for retail clients, and enforcement action being taken against providers who have failed to keep the distribution of their product within the confines of their target market.  

ASIC will also continue surveillance of marketing of managed funds to both retail and ‘unsophisticated’ wholesale investors.

Sustainable finance

In the drive towards net-zero and the push for more ‘socially-responsible’ finance, the proliferation of funds and products that are marketed on the basis of their environmental, social and governance (ESG) impact has led many to be concerned about ‘greenwashing’ – where a fund or product’s ESG credentials are misrepresented.  

This area has seen several notable international developments, including the International Financial Reporting Standards Foundation proposing International Sustainability Standards which will operate alongside the International Accounting Standards to harmonise global reporting on environmental impact.

Domestically, ASIC has warned funds that greenwashing may constitute misleading or deceptive conduct, and reminded funds of their obligation to include the degree to which certain ESG considerations are taken into account in their investment decisions in a PDS. It has encouraged funds to take further steps to ensure that they are not greenwashing, including through greater disclosure of the ESG decision-making process than is currently required by law.  

ASIC’s focus on sustainable finance is likely to see it push for more powerful tools to fight greenwashing. These tools might include requiring funds or financial services providers to disclose the basis on which they describe a product as ESG-friendly and how they weigh up ESG considerations against return on investment.  They are likely to also include greater disclosure requirements in disclosure documents, including PDSs, FSGs and TMDs.

Technology

Crypto

ASIC’s focus on crypto-assets and scams is the product of the rapid uptake and spread of each among Australian retail clients.  

Noting that a recent ASIC survey indicated that crypto-assets were held by 44% of retail clients surveyed, the second-most of any product type held by Australian retail clients, Chair Longo reiterated ASIC’s view that crypto-assets’ volatility, complexity and risk is not understood by many of the retail clients who hold them.  

However, not only consumers, but also Government has struggled to appropriately classify crypto-assets. To this end Chair Longo welcomed the Treasurer’s recent announcement that the new Government will progress the token-mapping exercise suggested by the Treasury Consultation Paper (which we have previously discussed), which will go some way to ensuring that crypto-assets are appropriately described and classified, facilitating their better regulation.

ASIC’s focus on crypto-assets is likely to see it push for crypto-assets to be regulated as financial products, or under a similar regime (as proposed in the Treasury Consultation Paper). ASIC has already taken steps of its own accord in recent months, charging an Australian crypto lender with making false claims that it had an Australian Credit Licence, and warning ‘finfluencers’ that they may be providing financial product advice without an ACL.  

However, ASIC’s hands are in part bound by the fact that government is still consulting on the issue of crypto-asset regulation.

Scams

Chair Longo has noted recent progress in the fight against scams, including Google’s announcement that advertisers promoting financial products will need to demonstrate that they are authorised to provide do so by an AFS Licence or exemption.  He also noted a recent collaboration with the ACCC to trial a service that would take down fraudulent websites. ASIC’s focus on scams is likely to see greater enforcement actions taken, and greater encouragement of key industry figures to collaborate with ASIC in its efforts.

Retirement decision making

ASIC’s Corporate Plan, and Chair Longo’s speech have identified retirement decision-making as a priority for ASIC. Australia’s ageing population, and the crucial role of superannuation in providing for this ageing population, makes each of the priorities discussed in this insight relevant to the question of Australians’ long-term financial security and stability in retirement.  

While ASIC’s priorities will assist it to protect retirement decision making, reform directed specifically at improving ASIC’s regulatory and enforcement capacity in relation to retirement decision making does not appear to be currently contemplated. It is likely that ASIC’s focus on retirement decision making will lead to increased enforcement in existing areas, rather than legislative or regulatory reform.

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^{This article was originally co-authored by Felicity Healy.}