Mackay Chapman November 2024 ASIC Update

In this month’s ASIC update:

• ASIC highlights governance concerns amid AI adoption;
• Court rules against Harvey Norman and Latitude for misleading advertising;
• New OTC derivative transaction reporting rules are now in effect;
• A rise in stolen shares due to identity theft;
• The Federal Court dismisses ANZ's appeal against ASIC case;
• ASIC publishes updated regulatory guidance for registered liquidators; and
• ASIC releases FY2023–24 financial reporting and audit report.

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ASIC Highlights Governance Concerns Amid AI Adoption

The Australian Securities and Investments Commission (ASIC) has warned financial services and credit licensees about potential governance gaps as they increasingly adopt artificial intelligence (AI). Following its first market review of AI use among 23 licensees, ASIC found that while current AI applications are cautious, around 60% of licensees plan to significantly increase usage, which may impact consumers in new ways.

ASIC Chair Joe Longo emphasised the need for updated governance frameworks to tackle challenges posed by AI. The review revealed that nearly half of licensees lacked policies on consumer fairness or bias, and even fewer had guidelines for disclosing AI use. Mr Longo highlighted the urgency of enhancing governance, warning that inadequate oversight could lead to misinformation, bias, and data security issues, ultimately harming consumers and undermining market confidence.

He urged licensees to proactively fulfil their responsibilities rather than wait for formal regulations. Existing consumer protection laws require institutions to implement effective governance and compliance measures, including thorough due diligence on third-party AI suppliers.

ASIC confirmed its commitment to monitoring AI usage by financial firms, recognising its potential to affect consumer outcomes and the safety of the financial system, and to take enforcement action where misconduct is identified.

For further details, refer to Report 798: "Beware the Gap: Governance Arrangements in the Face of AI Innovation."

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Court Rules Against Harvey Norman and Latitude for Misleading Advertising

The Federal Court has found that Latitude Finance Australia and Harvey Norman Holdings Ltd engaged in misleading conduct and made false or misleading representations in an advertising campaign for a no deposit 60-month interest-free payment method. 

The advertisements failed to disclose the fact that consumers were required to take out a credit card through Latitude to purchase the goods on those terms.  

The advertising campaign was extensive running from January 2020 to August 2021.

ASIC alleged that Latitude and Harvey Norman violated the ASIC Act by launching the national advertising campaign across various media, and failed to properly disclose the actual costs and terms of the advertised payment method.

The Court concluded that the ads presented an incomplete view of the payment arrangements.  Justice Yates highlighted that consumers intending to make a purchase were required to enter a different financial agreement than what was promoted, involving a credit card linked to a continuing credit contract, complete with associated fees.

ASIC Deputy Chair Sarah Court, responding to the judgment, noted ASIC pursued the case because many consumers may not have fully understood the financial implications of their purchases at Harvey Norman.   Ms Court noted the financial obligations associated with a credit card differed significantly from what was promoted. A continuing credit contract could involve multiple credit advances, monthly account fees, and high interest rates, which cumulatively add to the cost for consumers. Ms Court emphasised that consumers deserve complete information to assess their financial situation and determine if a credit card is suitable for them.

ASIC intends to seek penalties against both Latitude and Harvey Norman as a result of this ruling.

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New OTC Derivative Transaction Reporting Rules Now in Effect

The ASIC Derivative Transaction Rules (Reporting) 2024 have come into effect, replacing the previous 2022 rules. These new rules aim to:

• Align with international reporting standards;
• Consolidate transitional provisions and exemptions;
• Ensure that reporting requirements are fit for purpose.

The 2024 Reporting Rules were established following two public consultation rounds in November 2020 and May 2022. Additional consultations in November 2023 and February 2024 led to further amendments.

In September 2024, ASIC published guidance for these new rules and announced a flexible compliance approach until March 2025 for reporting entities making reasonable efforts to comply.

These changes are expected to significantly enhance the consistency and quality of OTC derivative transaction data, ultimately improving its usability for regulatory purposes.

For more information, please visit the ASIC derivative transaction reporting webpage.

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Investor Alert: Rise in Stolen Shares Due to Identity Theft

ASIC is warning investors to remain vigilant following a significant surge in reports of stolen shares since August 2024, attributed to identity theft. Fraudsters impersonate individuals and unlawfully transfer or sell their shares, often without the victims’ knowledge until they receive unexpected confirmation from a share registry or CHESS.

Individuals previously affected by data breaches should be particularly cautious, as their personal information may be readily available online. The methods employed by fraudsters are increasingly sophisticated, making it essential for investors to carefully scrutinise any unexpected notifications.

Fraudsters can create fake share trading accounts using stolen identities, such as “Jane Citizen,” to sell shares that belong to the real person. They may also open fraudulent bank accounts to receive the proceeds of these sales. Personal information can be gathered from various sources, including online data and stolen mail.

ASIC advises all investors to be alert for suspicious activity concerning their share registries, trading accounts, and bank accounts, and to act promptly if anything appears amiss. Below are more tips for staying vigilant:

• Regularly review your share portfolios, including issuer-sponsored holdings and stockbroker accounts, to quickly detect any unauthorised activity;
• Use passphrases instead of simple passwords for added security;
• Enable multi-factor authentication on online accounts when available;
• Lock your letterbox to prevent mail theft and check it frequently;
• Keep your contact details updated with stockbrokers and financial services providers.
• Don’t ignore unexpected correspondence, such as new bank cards or notifications regarding your shares;
• Act swiftly if something feels off: contact your stockbroker, share registry, or bank, and change your passwords;
• Verify the authenticity of correspondence by contacting the organisation directly through their official website; and
• Report incidents to Scamwatch.

If your identity has been compromised, contact IDCARE for assistance in developing a response plan. For more information and tips to protect yourself from identity fraud, visit the ASIC Moneysmart website or the Government’s IDMatch site.  And of course, seek expert advice.

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Full Federal Court Dismisses ANZ's Appeal Against ASIC Case

The Full Federal Court has dismissed an appeal by Australia and New Zealand Banking Group Limited (ANZ) for findings that it breached continuous disclosure laws during a $2.5 billion institutional share placement in 2015. The Court upheld the Federal Court’s decision , in proceedings brought by ASIC.  

The Federal Court found that ANZ failed to notify the Australian Securities Exchange (ASX) that between approximately $754 million and $791 million of the shares in the placement were being acquired by underwriters rather than investors, constituting a breach of its continuous disclosure obligations.  A $900,000 penalty was imposed on ANZ for its contravention.

The case had a long history.  The placement occurred in 2015.  In June 2019, ASIC’s proceedings were stayed pending the outcome of separate criminal charges against ANZ, which were later dropped, allowing ASIC's case to proceed in February 2022. Justice Moshinsky delivered a liability ruling in October 2023, followed by the $900,000 penalty in December. ANZ's appeal was heard in May 2024.

Responding to the appeal result, ASIC Chair Joe Longo affirmed the importance of the case, stating, "ASIC will always defend the integrity of Australia’s markets," and highlighting the critical role of continuous disclosure in maintaining market integrity. 

ANZ has also been ordered to pay ASIC's legal costs.

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ASIC Publishes Updated Regulatory Guidance for Registered Liquidators

ASIC has released updated regulatory guidance for individuals seeking to become registered liquidators, reflecting various developments since the original publication in March 2017. 

The revised Regulatory Guide 258 (RG 258) encompasses updates based on reforms to the corporate insolvency framework introduced in 2021, insights from administering the regime, Administrative Appeals Tribunal decisions, and industry feedback.

Key changes include:

• Separate guidance on registration applications for different categories of liquidators, including small business restructuring practitioners introduced by the 2021 reforms;
• Guidance on how a registration committee may exercise discretion for applicants who do not meet the 4,000 hours of experience requirement, potentially addressing gender imbalance in the profession; and
• Additional advice for registered liquidators on maintaining their qualifications, experience, and fitness to practise.

In March 2024, ASIC released Consultation Paper 376 (CP 376) detailing proposed updates, which were well-received by industry respondents. Following feedback, ASIC also provided guidance on the process for liquidators who suspend or cancel their registration and later seek to re-register.

For further information, download the revised RG 258 and Report 796, which outlines responses to submissions on CP 376.

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ASIC Releases FY2023–24 Financial Reporting and Audit Report, Launches Auditor Independence Surveillance

ASIC has released its findings from the financial reporting and audit surveillance for the year ending 30 June 2024 and announced a new initiative focused on auditor compliance with independence and conflicts of interest requirements.

The report, ASIC’s Oversight of Financial Reporting and Audit 2023–24 (REP 799), includes:

• Review of 188 financial reports and 15 audit files from 11 firms;
• Adjustments of $1,886 million identified in 25 financial reports, with 16 entities modifying disclosures;
• One entity restricted from issuing a prospectus until May 2025 due to non-compliance with AASB 136; and
• Findings in 12 audit surveillances, prompting notifications to auditors and companies for better practices.

ASIC’s enforcement actions included:

• Infringement notices for breaches of audit rotation requirements;
• A court-enforceable undertaking related to independence breaches;
• CADB proceedings resulting in a one-year suspension for an auditor.

For more details, download Report 799 and related letters.

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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.