Greg Kilminster
Head of Product - Content
APRA chair outlines 2024 priorities
John Lonsdale, chair of the Australian Prudential Regulation Authority, has written to all APRA-regulated firms to outline the regulator’s priorities for the first half of 2024.
The letter stresses APRA’s commitment to ensuring that prudential standards and guidance are proportionate, with simpler requirements for smaller entities that are not considered significant financial institutions (non-SFIs).
The letter states that APRA’s overarching focus in the coming months remains on safeguarding the safety and resilience of regulated entities, promoting confidence and stability in the financial system, and supporting positive financial outcomes for the community. Key priorities for the next six months include:
- Operational and cyber resilience: APRA emphasises the importance of enhancing operational and cyber resilience for all regulated entities, recognizing the increasing reliance on digital technologies.
- Prudential framework for deposit-taking institutions: APRA plans targeted changes to the prudential framework for authorised deposit-taking institutions, drawing lessons from the global banking turmoil in 2023.
- Superannuation trustees’ practices: APRA aims to elevate superannuation trustees’ practices on retirement incomes, implementing recommendations from the Financial Regulator Assessment Authority (FRAA) review and aligning APRA’s heatmaps with the performance test.
- Insurance sector balancing act: across the insurance sector, APRA seeks to balance financial sustainability with the need to enhance affordability and availability.
Firms are urged to review these industry-level priorities alongside their specific supervisory programs, tailored to their tier and stage. While the update covers the next six months, many initiatives are expected to extend beyond this period up to and including the 2024-25 Corporate Plan, which is due by the end of August.
This interim update reinforces APRA’s commitment to proactive supervision and regulation, acknowledging the evolving financial landscape and the need for resilient and well-prepared entities in the face of potential challenges. Firms are encouraged to stay informed and collaborate with APRA to navigate these priorities effectively.
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ASIC chair on AI risks and opportunities
In a speech at the at the UTS Human Technology Institute Shaping Our Future Symposium, Australian Securities & Investments Commission (ASIC) chair Joe Longo discussed the ongoing efforts to regulate AI and raised questions about the adequacy of current regulations in addressing the challenges posed by rapidly evolving AI technologies.
Current regulatory landscape
Longo began by dispelling the notion that AI operates in a regulatory vacuum, countering the perception that the field is a “Wild West.” He highlighted the existing Australian laws that already apply to businesses and individuals involved in AI development and use. and which encompass privacy, online safety, corporations, intellectual property, and anti-discrimination laws. He added that: “the responsibility towards good governance is not changed just because the technology is new.”
Longo highlighted ASIC’s proactive role in testing regulatory parameters and reviewing AI usage in the banking, credit, insurance, and advice sectors and noted an ongoing review which aims to understand AI use cases, assess associated risks, and ensure consumer protection.
Challenges and questions
Nevertheless, despite the existing regulatory framework, Longo questioned whether it is sufficient to deal with the rapid progress and challenges posed by AI. He raised concerns about transparency, explainability, and the ability of current regulations to prevent harm to consumers effectively. He also posed hypothetical scenarios related to credit scoring bias, denial of services based on AI decisions, and potential manipulation of markets through AI investment managers.
Longo pointed out additional challenges which had been highlighted by the Australian Signals Directorate, including data poisoning, input manipulation, AI “hallucinations,” and privacy and intellectual property concerns.
In concluding, Longo reiterated ASIC’s unwavering commitment to the safety and integrity of the financial system and positive outcomes for consumers and investors. The speech acknowledged AI’s potential benefits but emphasised the lack of a clear consensus on the best regulatory approach. Bridging the governance gap, according to Longo, involves strengthening the existing regulatory framework, asking the right questions, and continually evaluating whether current measures are sufficient in the ever-evolving landscape of AI technology.
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Westpac bank fined for unconscionable conduct
The Federal Court in Australia has ruled that Westpac Banking Corporation engaged in unconscionable conduct during a $12 billion interest rate swap transaction in October 2016 – the largest of its kind in Australian financial market history. The court imposed the maximum penalty of $1.8 million on Westpac, along with an additional $8 million for ASIC’s litigation and investigation costs.
The unconscionable conduct occurred as Westpac engaged in pre-hedging ahead of an interest rate swap transaction with a Consortium involving AustralianSuper and IFM entities.
The Court declared Westpac’s conduct unconscionable, noting that the bank was aware of its client’s concerns about pre-hedging impacting the swap transaction’s price adversely. Despite this awareness, Westpac executed an internal plan to pre-hedge up to 50% of the interest rate risk without obtaining client consent or providing clear disclosure. The court highlighted Westpac’s failure to manage conflicts of interest adequately.
While imposing the penalty, the Court reserved its decision on whether to order Westpac to complete a compliance program, including an independent review of its pre-hedging practices and controls related to conflicts of interest management and client communications.
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EBA speech: EBA’s thematic priorities in the area of digital finance
In a speech at the AFORE Consulting 8th annual FinTech and Regulation Conference, European Banking Authority chair José Manuel Campa spoke on digital finance: Confidence and resilience as foundation of well-functioning financial markets, addressing competitiveness, the role of the financial sector in enhancing EU competitiveness, and the EBA’s thematic priorities in digital finance for 2024/25.
Competitiveness and Its measurement
Campa began by discussing the notion of competitiveness, emphasising its measurement at the country or supranational level. He referred to the World Economic Forum’s definition, highlighting the importance of institutions, policies, and factors that determine a country’s productivity. EU Lex’s definition was also mentioned, tying competitiveness to sustained productivity for growth, income, and welfare. Campa stressed the role of open markets, particularly the single market, in enhancing productivity and contributing to the EU’s long-term competitiveness.
Role of the EU financial sector
The speech highlighted the pivotal role of the EU financial sector in supporting the single market and contributing to the competitiveness of the EU. Campa underscored the need for the financial sector to be sound, resilient, and adhere to high consumer protection standards to maintain confidence, a crucial element for a well-functioning financial market. He provided positive indicators of the EU banks’ robustness, citing capitalisation levels, profitability, liquidity ratios, and asset quality.
Financial regulation and reforms
Campa acknowledged the importance of financial regulation in maintaining a sound financial sector. He highlighted recent regulatory reforms, including the single rule book, supervisory convergence, and the approval of the banking package. He reiterated the EBA’s commitment to executing regulatory standards and guidelines from the package but acknowledged the need for further progress, particularly in cross-border banking activity and completing the banking and capital markets union.
Innovation in the EU financial sector
Campa identified various innovative technologies being leveraged by financial institutions, such as cloud data storage, automated credit scoring, and digital platforms. He stressed the importance of common supervisory and regulatory approaches to harness the full potential of innovative technologies. Notable EU financial regulations supporting innovation were mentioned, including the Digital Operational Resilience Act (DORA) Markets in Crypto-assets Regulation (MiCA), Consumer Credit Directive, AI Act, and the new AML package.
EBA’s focus in 2024 on digital finance
Campa outlined the EBA’s focus in digital finance for 2024. He emphasised the EBA’s statutory duty to monitor and assess market developments, with a specific focus on innovation. Key areas of thematic work in 2024 include: tokenisation, crypto, and DeFi; artificial intelligence/machine learning; and value chain evolutions. So far as progress is concerned, the EBA plans to conduct a stock take of potential models for deposit tokenisation, report on crypto-assets and decentralised finance, and assess the impact of the AI Act on the banking sector.
In concluding, Campa expressed optimism about the EU’s proactive stance towards digital finance, can ensure that the financial sector responsibly leverages new technologies to support citizens, businesses, and contribute to the EU’s competitiveness.
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US Justice Department charges individuals in $2 billion cryptocurrency fraud
The US Justice Department has pressed charges against three individuals for their role in a $1.89 billion cryptocurrency fraud scheme that took place through a company called HyperFund (also known as HyperTech, HyperCapital, HyperVerse, and HyperNation). The defendants allegedly duped investors by providing false information about their investment platform.
The co-conspirators of HyperFund are accused of selling investment contracts to the general public from June 2020 to November 2022, by making several false promises and claims to investors. One of the claims was that the company would double or triple the investors’ initial investment. To convince investors that HyperFund could make such payments, the company claimed that its payments would be disbursed in part from its revenues from large-scale crypto mining operations, when in reality, the company did not have any such operations.
The defendants are charged with conspiracy to commit securities fraud and wire fraud, conspiracy to operate an unlicensed money transmitting business, and operating an unlicensed money transmitting business. If found guilty, the defendants could face up to five years in prison.
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Australian Treasury proposes new legislation on financial advisers qualifications
The Australian Treasury has recently released a draft legislation proposal for consultation, which aims to provide financial advisers with greater flexibility in demonstrating that they meet the requirements of an approved degree. The proposed changes to the Corporations (Relevant Providers Degrees, Education and Training Standards) Determination 2021 would enable financial advisers to more easily show that they meet the necessary conditions of an approved degree or qualification.
According to the current education and training standards, financial advisers are required to hold an approved bachelor’s or higher degree or an equivalent or foreign qualification that has been approved by the Minister. Additionally, section 921BB empowers the Minister to specify further requirements for relevant providers who provide tax (financial) advice services. This involves taking courses in commercial law and taxation law, as laid out in Division 3 of Part 3 of the Corporations (Relevant Providers—Education and Training Standards) Determination 2021 (the Education and Training Standards Determination).
Under the proposed amendments, a person may now satisfy the conditions for an approved degree/qualification:
- Via academic transcript(s) issued by the provider of the approved degree/qualification, which demonstrates that the person has met each of the approved conditions for that approved degree/qualification; and/or
- Via statement(s) issued by the provider of the approved degree/qualification, confirming that the person has met each of the approved conditions for that approved degree/qualification.
The consultation period ends on 27 February 2024.
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Gary Gensler on market plumbing and settlement cycle changes
In a speech to the European Commission, SEC chairman Gary Gensler, chair of the Securities and Exchange Commission (SEC), addressed the importance of “market plumbing” and announced upcoming changes to the settlement cycle.
GameStop events and market plumbing
Gensler began by reminding the audience of the GameStop stock saga and its impact on market plumbing, especially in clearing and settling, which were discussed as critical for the functioning of capital markets.
Clearinghouses, Gensler noted, are central to market plumbing, reducing risks among counterparties. Gensler stressed the role of shortening the settlement cycle in saving money, lowering risk, and increasing market efficiency, and noting that, from a practical perspective, an investor selling stock on Monday should get paid Tuesday.
Historical context
Gensler provided a historical perspective on settlement cycles in the US, noting the move from T+5 to T+3 following different crises. Similar moves to shorten settlement cycles were highlighted in global markets, including Europe, Israel, India, and others.
Upcoming changes – US Memorial Day 28 May 2024
The SEC, through rules adopted last year, will shorten the settlement cycle to T+1 after the US Memorial Day weekend in 2024. This move is expected to benefit investors, increase market unity, and reduce margin requirements.
In addition, the same date will see changes related to initial public offerings (IPOs) settlement from T+4 to T+2. Brokers, registered advisers, and clearing agencies will also have new requirements for same-day transaction activities.
International alignment and challenges
Gensler acknowledged challenges in aligning settlement cycles globally, particularly with Europe having different market structures. Then, looking to the future, he covered four additional areas for policy discussion.
- Mismatched settlement cycles: whilst not ideal, Gensler noted that whilst there are costs with settlement mismatches, the markets have been able to handle them. Nevertheless, the benefits of moving to consistent settlement cycles across international markets are very real he added.
- Central clearing for the US Treasury market: rules coming into force over the next two years which “will help to make the Treasury market more efficient, competitive, and resilient”.
- Shortening the settlement cycle for currency trading: Gensler suggested Europe and the UK should move to T+1 and that those conversations should happen soon.
- Moving to T+0: introducing settlement cycles on the day of the transaction. Would further shortening to settling on the day of trade, as has been introduced in one or two markets, be appropriate?
Having started with a plumbing metaphor, Gensler concluded with one, comparing the upgrade of market plumbing to upgrading pipes from bronze to copper, emphasising resilience, timeliness, orderliness, and efficiency.
Click here to read the full RegInsight on CUBE’s RegPlatform