Mackay Chapman January & February 2024 ASIC Update

In this month’s ASIC update:

• ASIC extends product intervention orders for short term credit and continuing credit contracts;
• Federal Court finds Zurich did not breach duty of utmost good faith;
• ASIC temporarily extends relief from disclosure and reporting consistency obligations for super trustees;
• ASIC’s annual corporate insolvency statistics shows COVID-19 impact on small business; and
• Federal Court declares Westpac engaged in unconscionable conduct in relation to interest rate swap.

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‍ASIC extends product intervention orders for short term credit and continuing credit contracts

ASIC has extended its product intervention orders related to short-term credit and continuing credit contracts until either they are revoked or they expire on October 1, 2032. 

These orders, effective since July 15, 2022, target short-term credit and continuing credit contracts that impose unreasonably high fees, exceeding caps set by the National Credit Code. 

The extension aims to continue shielding vulnerable consumers from high-cost lending practices, preventing significant harm resulting from these products. 

ASIC deputy Chair Sarah Court emphasised the ongoing commitment to addressing predatory lending practices targeting vulnerable consumers. The extension follows previous consultations and actions by ASIC in response to concerns about these products.

‍Federal Court finds Zurich did not breach duty of utmost good faith

The Federal Court has ruled that Zurich Australia Limited did not breach its duty of utmost good faith when it upheld OnePath Life Limited's decision to void an income protection policy. 

OnePath rejected a claim in 2018, asserting fraudulent non-disclosure by the insured regarding prior hospitalisation for mental health issues. 

ASIC had argued that Zurich, which succeeded OnePath, violated its duty by avoiding the policy without consulting the financial adviser, inadequately notifying the customer, and failing to inform her of dispute rights. 

However, the Federal Court, on December 21, 2023, ruled against ASIC on all counts. This legal action marks ASIC's first attempt to impose a civil penalty for a breach of section 13 of the Insurance Contracts Act.

‍ASIC temporarily extends relief from disclosure and reporting consistency obligations for super trustees

ASIC is extending the exemption for superannuation trustees from disclosure and reporting consistency obligations. 

The exemption, provided under ASIC Superannuation (Disclosure and Reporting Consistency Obligations) Instrument 2023/941, allows relief from complying with subsection 29QC(1) of the Superannuation Industry (Supervision) Act 1993. 

This exemption, continuing for two years until January 1, 2026, replaces the previous relief granted under ASIC Class Order [CO 14/541], set to expire on January 1, 2024. 

Section 29QC(1) mandates that public information aligns with data reported to the Australian Prudential Regulation Authority (APRA). The extension addresses uncertainties related to achieving disclosure requirements amid ongoing changes in APRA's reporting standards. 

The relief has been in place since June 13, 2014.

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‍ASIC’s annual corporate insolvency statistics show COVID-19 impact on small business

ASIC's latest annual statistics on reports submitted by registered liquidators reveal the continued impact of the COVID-19 pandemic on small businesses. 

From 1 July 2022 to 30 June 2023, small to medium-sized corporate insolvencies predominated, with 83% of reported entities having assets of $100,000 or less. The construction industry saw the highest number of insolvency reports (28%), followed by the accommodation and food services sector (15%). 

The analysis shows that the pandemic was identified as a contributing cause in 19% of cases categorised under 'other' reasons for failure. 

In terms of geographical distribution, New South Wales had the most reports (41%), followed by Victoria (27%) and Queensland (18%). The statistics also indicate that registered liquidators are improving timeliness, with 77% of reports now lodged within six months of appointment. 

Common causes of failure cited include inadequate cash flow, high cash use, and trading losses. 

For more detailed information, refer to Series 3 statistics published by ASIC.

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‍Court Declares Westpac Engaged in Unconscionable Conduct for Interest Rate Swap, Maximum Penalty Applied

The Federal Court has found Westpac Banking Corporation engaged in unconscionable conduct in a $12 billion interest rate swap transaction in 2016, the largest in Australian financial history. 

The Federal Court has ordered Westpac to pay a penalty of $1.8 million and cover ASIC's litigation costs of $8 million. The misconduct involved pre-hedging, where Westpac traded significant volumes of interest rate derivatives before the swap transaction, impacting the Consortium's purchase of a stake in Ausgrid. Westpac's derivatives trading desk made a profit of $20.7 million on the day of the swap, with the Court noting Westpac's failure to manage conflicts of interest. 

The penalty imposed was the maximum available for statutory unconscionable conduct at the time of the misconduct in 2016.  Maximum available civil penalties have increased significantly since then. The global issue of pre-hedging is actively addressed by ASIC at the International Organisation of Securities Commissions (IOSCO).

You can read more about this decision in our January 2024 Enforcement Wrap.

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‍The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only. You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.