In this Funds Update for 28 March 2024:
- Inquiry into the wholesale investor and wholesale client tests
- ASIC wins first greenwashing civil penalty action
- ASIC remakes five 'sunsetting' class orders for managed funds, including [CO 13/1409] and [CO 13/1410]
- First ASIC action for failing to have a director identification number
- Federal Court rejects ASIC's first case over unfair contract terms in an insurance contract
Inquiry into the wholesale investor and wholesale client tests
On 21 March 2024, the Parliamentary Joint Committee on Corporations and Financial Services announced an inquiry into the wholesale investor test for offers of securities (section 708 of Chapter 6D of the Corporations Act 2001 (Cth) (Act)) and the wholesale client test for financial products and services (sections 761G and 761GA of Chapter 7 of the Act) (the tests). The committee has called for written submissions by 15 May 2024.
The terms of reference of the inquiry are:
- review of the current tests, including legal requirements, identification of all contexts in which the tests are relevant, the consequences of an investor/client meeting the relevant test, and the application of the tests in practice;
- the historical development in Australia of the tests and consideration of any previous reviews and inquiries;
- comparison with comparable overseas jurisdictions, including any proposed or recent changes to tests used in similar contexts;
- consideration of any proposals to change the tests, including any evidence to support such proposals, the possible consequences (both intended and unintended) of any change to the tests, the costs and benefits of any change, the impact of any change on different cohorts of investor/client and other stakeholders;
- any potential adjustments to proposals to change the wholesale investor/client tests to address the concerns of stakeholders;
- the process to be adopted prior to settling any change to the wholesale investor/client tests, including any additional Government consultation process necessary to ensure full and proper consultation prior to implementing any change; and
- any related matters.
This announcement follows Treasury's managed investment schemes (MIS) review in August 2023, which considered the thresholds that determine whether an investor is a wholesale client and whether these remain appropriate.
ASIC wins first greenwashing civil penalty action
On 28 March 2024, the Federal Court found that the responsible entity of a registered scheme (RE) had contravened the ASIC Act by making false or misleading representations about the ESG exclusionary screens applied to an index fund.
The Court noted that the RE had admitted that a significant proportion of securities in the relevant index were from issuers that were not screened against applicable ESG criteria, and to engaging in misleading conduct and making false or misleading representations, at a prior hearing on 8 March 2024.
The penalty will be determined at a further hearing on 1 August 2024. The full judgment is available here.
ASIC remakes five 'sunsetting' class orders for managed funds, including [CO 13/1409] and [CO 13/1410]
On 27 March 2024, ASIC announced that it has remade five class orders that were due to expire on 1 April 2024. The class orders are:
- [CO 13/1200]– Periodic statements relief for AQUA quoted and listed managed investment scheme managed investment scheme issuer;
- [CO 13/1406]– Land holding for primary production schemes;
- [CO 13/1409]– Holding assets: Standards for responsible entities;
- [CO 13/1410]– Holding assets: Standards for providers of custodial and depository services; and
- [CO 13/1621]– Exemption and declaration for the operation of mFund.
The new legislative instruments that replace these class orders will expire on 1 April 2029, apart from ASIC Corporations (Land Holding for Primary Production Schemes) Instrument 2024/15 (replacing [CO 13/1406]), which expires on 1 October 2024. ASIC had announced a consultation for these class orders on 19 January 2024, as reported in a previous Funds Update.
First ASIC action for failing to have a director identification number
On 19 March 2024, ASIC commenced its first prosecution of a director for contravening section 1272C(1) of the Act by failing to hold a director identification number (DIN). Since 5 April 2022, all intending new directors have been required to apply for a DIN before being appointed. DINs were introduced to prevent the use of fraudulent director identities and illegal phoenixing activity, and help regulators follow directors' relationships with companies over time.
Federal Court rejects ASIC's first case over unfair contract terms in an insurance contract
On 22 March 2024, the Federal Court handed down its decision in the first court proceedings alleging unfair contract terms in an insurance contract, which were commenced in April 2023 and which we have previously reported on.
ASIC had claimed that a term in product disclosure statements requiring policy holders to notify of changes to their home and contents was unfair, because it:
- imposed an unclear obligation on customers to notify if 'anything' changed about their home or contents;
- suggested that the insurer had a broader right to refuse or reduce claims than available under the Insurance Contracts Act; and
- could mislead or confuse customers.
The court found that the word 'anything' should not be interpreted literally, and the term only required customers to notify if information they previously provided had changed.
The full judgment is available here.
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