ASIC Chair Joseph Longo revealed last week what we can expect from the regulator in the coming year – and it is going to be busy.
ASIC released its Corporate Plan for 2022-26 on 22 August 2022 followed by Mr Longo’s speech to the Committee for Economic Development of Australia (CEDA) where he revealed his vision for ASIC to be an “ambitious and confident regulator”, focused on the future.
Resonating throughout the discussion was ASIC’s desire to prioritise areas of greatest harm and take action to protect vulnerable consumers. For Mr Longo, this means squarely dealing with “hot topic” issues like greenwashing, climate-risk disclosures, crypto-assets (or cryptocurrencies), scams and more.
We set out below some key take-homes from the Corporate Plan and comments from Mr Longo during his discussion at the CEDA event.
Strategic priorities and projects
ASIC has identified four external strategic priorities for the next 4 years:
- Product design and distribution;
- Sustainable finance;
- Retirement decision making; and
Mr Longo focused on ASIC’s approach to four of its eight core strategic projects to advance the strategic priorities:
- improving sustainable finance practices and disclosure of climate risks;
- supervising and enforcing the design and distribution obligations (DDO);
- addressing market integrity issues and investor harms in relation to crypto-assets (or cryptocurrency); and
- disrupting and combatting financial scams to protect consumers.
Sustainable finance practices
As one of ASIC’s four external strategic priorities, we can expect a multi-pronged approach to ASIC’s focus on sustainable finance in the coming year.
Mr Longo emphasised two issues arising from sustainable finance on the regulator’s radar and that ASIC enforcement action should be expected:
ASIC is focused on ensuring entities comply with their disclosure requirements and do not mislead customers. It will seek to support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards in relation to sustainable finance.
ASIC strongly supports the development of globally comparable standards. However, Mr Longo noted that this was a medium- to long-term priority for ASIC. While ASIC is encouraged by the proposed standards recently published by the International Sustainability Standards Board, he recognises that the implementation of standards in Australia will take time. Meanwhile, companies are encouraged to continue to be proactive in their climate-risk reporting and disclosure with reference to the Task Force on Climate-related Financial Disclosures framework.
There has been considerable recent focus by ASIC on how financial products are marketed, and the need for products to remain "true to label". ASIC has continuously warned issuers (particularly those in the managed funds industry) about the risk of making misleading statements or misrepresentations, and has sought to taken action against issuers who ASIC believe have made misleading or deceptive representations in advertising.
It is no surprise then that ASIC is now shifting its focus on how issuers are representing their "green credentials". Mr Longo reiterated that ASIC is undertaking active surveillance of the market, testing “green” investment offerings and monitoring for misleading and deceptive claims. This is a short-term priority focus for ASIC and will supplement its work already in this space through the recent release of ASIC’s Information Sheet (INFO 271) “How to avoid greenwashing when offering or promoting sustainability-related products” in June 2022. This information sheet focuses on sustainability-related products issued by funds, but ASIC has stated that its principles may apply to other entities that offer or promote financial products that take into account sustainability-related considerations.
Mr Longo revealed that enforcement action against greenwashing should be expected and it has been reported that ASIC has at least two current greenwashing investigations on foot (and is currently undertaking inquiries into several super funds, managed funds and listed companies). In addition, this month Market Forces made a formal complaint to ASIC about potentially misleading statements by the Santos chairman and managing director during Santos’ annual meeting. ASIC has not publicly commented on this investigation other to say that any reports of misconduct were received in confidence. We can expect to hear more from ASIC about the outcomes of its greenwashing investigations over the coming months.
Product design and distribution
ASIC has signalled on several occasions that the grace period given to the industry to bed down its implementation of design and distribution obligations (DDO) is over. Mr Longo made clear that ASIC's focus has now shifted to active supervision and enforcement of the DDO regime. Even as recent as 29 August, ASIC released its findings following a sample review of superannuation trustees' compliance found some poor practices.
Under the DDO regime, ASIC can take swift action to issue interim stop orders in respect of financial products where ASIC considers that obligations relating to making and reviewing a target market determination (TMD) or taking reasonable steps to ensure distribution is consistent with a TMD have been contravened. ASIC used its stop order powers for the first time recently to prevent three companies from issuing the relevant managed investment scheme interests or shares to retain investors. Mr Longo singled out the enforcement action against Responsible Entity Services (RES), noting that it would take action where products don’t meet the needs of the investors in the target market.
Mr Longo also made clear ASIC’s expectation that firms are proactive, noting that DDO is not a case of “set and forget”. Product issuers are expected to collect, assess, and respond to data about consumer outcomes from their products, and to the extent ASIC identifies poor consumer outcomes, it will step in to disrupt the sale of the products using stop orders or court-based enforcement action. The notion that issuers must regularly review and take corrective action in respect of TMDs was repeated by ASIC in its recent media release.
We can expect ASIC to take further enforcement action if it identifies poor conduct in relation to high risk and complex products it is targeting for surveillance, including over the counter derivatives and crypto. The same can be said for the small amount credit and buy now pay later sectors for which ASIC is currently reviewing product governance arrangements to see how TMDs were developed and the data, metrics and other considerations underpinning them.
Technology risks for consumers arising from crypto and scams
In line with ASIC’s desire to prioritise areas of greatest harm and take action to protect vulnerable consumers, ASIC is focused on becoming a "digital savvy regulator" to tackle the regulatory challenges associated with technological developments to ensure consumer protection, particularly with reference to crypto assets and investment scams.
While promising that regulation was on its way for crypto assets, Mr Longo acknowledged that crypto would be very hard to regulate. The ASIC Chair warned that crypto-assets are "highly volatile, inherently risky and complex" and expressed concerns with the increasing popularity of crypto-assets in circumstances where the research demonstrated that 80% of investors in crypto assets did not consider it to be a risky product.
ASIC is expected to continue to prioritise cryptocurrency surveillance and take enforcement action to disrupt and deter harmful products. Mr Longo also noted that ASIC was collaborating with domestic and international peers as part of its surveillance and development of an effective regulatory framework. This follows the federal government's announcement that it will shortly commence an industry consultation as part of a review of the crypto sector.
ASIC is also expected to continue disrupting scams using innovative and data-driven approaches in response to the increasing prevalence of scams and digitally enabled fraud. Mr Longo referred to another of initiatives underway to combat scams, including a trial with the ACCC to take down fraudulent websites.