Financial Ombudsman Service records a decline in financial disputes

In this edition:

  • the Financial Ombudsman Service records a decline in financial disputes;
  • AUSTRAC seeks feedback on AML/CTF compliance reporting regime; and
  • AUSTRAC extends suspension of remittance provider due to terrorist risk.

Financial Ombudsman Service records a decline in financial disputes

Under the Corporations Act 2001 (Cth), if you are the holder of an Australian Financial Services Licence (AFSL) servicing retail clients, you must be a member of an ASIC-approved External Dispute Resolution (EDR) scheme. The Financial Ombudsman Service (FOS) is a product of this need, and is a ‘one-stop shop’ for many consumers to have their complaints dealt with.

The 2013-2014 Annual Review of the FOS has shown that, overall, disputes in the financial services sector are decreasing. The FOS believes that this is because:

  • financial service providers have improved their handling of financial hardship requests; and
  • there is an awareness of, and increase in the prevalence of cover for flood in insurance policies.

The Annual Review

The Annual Review provides some key statistics which gives an insight into the operation of the financial services industry.

Credit disputes

  • 50% (12,605) of all disputes accepted by the FOS were related to credit;
  • 89% of these disputes related to consumer credit (the remainder were made up of disputes in business finance, guarantees, margin loans and other); and
  • 41% of credit disputes related to financial hardship.

Investment disputes

  • 1,174 investment disputes were accepted, a decrease of 3% from 2013-2014;
  • most related to managed investments; and
  • the FOS believes that the number of disputes is returning to a lower level from a spike created by the Global Financial Crisis.

Financial difficulty disputes

  • 4,705 disputes relating to financial difficulty were accepted, a 9% reduction from 2013-2014;
  • 99% of these were related to credit; and
  • the FOS believes that the reduction in such disputes is related to improvements in Financial Services Providers managing hardship requests and consistently low interest rates.

Code Compliance and Monitoring

In addition to its functions of resolving disputes, the FOS also continues to monitor the compliance of members with the various Codes of Practice, namely:

  • Code of Banking Practice;
  • Customer Owned Banking Code of Practice;
  • General Insurance Code of Practice; and
  • Customer Owned Banking Code of Practice.

This monitoring is not insignificant. In one case, a failure to follow the Code of Banking Practice lead to a decision by the FOS to release a guarantor from an obligation to repay the remainder of a $627,000 loan.

The FOS will continue to aim for efficient and effective dispute resolution under its 2012-2015 strategic plan.

AUSTRAC seeks feedback on AML/CTF compliance reporting regime

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has issued a Consultation Paper on proposed changes to the annual compliance reporting process under section 47 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). 

The annual compliance report (ACR) is a key tool for AUSTRAC to obtain information to analyse and input into its risk-based approach to supervision. AUSTRAC commenced a review of its compliance reporting framework in 2012 and according to the Paper, this review identified a need for change to the ACR to reflect the maturity of the AML/CTF regime and facilitate improved regulatory supervision.

Issues with the current ACR

The Paper lists several key problems with the current ACR, including the:

  • increasing irrelevance of the questions;
  • regulatory burden is disproportionate to the level of money-laundering/terrorism-financing (ML/TF) risk exposure; and
  • lack of value to reporting entities (REs).

According to AUSTRAC, many of these problems are because the current ACR was designed at the time of the implementation of the AML/CTF regulatory regime as a census tool to gather reporting entity data and help industry understand their obligations.

Proposed changes

Now that the AML/CTF regime is well-established, AUSTRAC is proposing the following changes to the ACR:

  • an enhanced compliance report (ECR) that would be completed by reporting entities in both the higher and medium-risk categories; and
  • an annual return (AR) for REs that represent a higher level of ML/TF risk.
  • The AR will require a reporting entity to provide a comprehensive report on its business environment, ML/TF risk and the effectiveness of its AML/CTF program.

The ECR is similar in structure and format to the existing compliance report. The questions reflect the maturation of the AML/CTF environment and reporting entities’ increased familiarity and understanding of their obligations under the AML/CTF Act. The information collected in the ECR is aimed at helping AUSTRAC better understand levels of ML/TF risk and the effectiveness of a reporting entity’s compliance approach.

Which entities are affected by the changes?

AUSTRAC sets out criteria for who will be required to lodge an AR and ECR. A reporting entity must lodge an AR and an ECR if it is:

  • part of a corporate group (where a corporate group is defined by reference to section 50 of the Corporations Act 2001) that has finalised group annual earnings of $100 million or more (as at 1 July of the compliance report period),
  • not part of a group and has total annual earnings of $100 million or more (as at 1 July of the compliance report period),
  • part of a corporate group that has provided 25 million or more transaction reports or provided transaction reports with a total value of $5 billion or more (in the calendar year prior to the compliance report period), or
  • not part of a group and has provided 25 million or more transaction reports or provided transaction reports with a total value of $5 billion or more (in the calendar year prior to the compliance report period).

A reporting entity must lodge an ECR only where it is not in one of the segments described above.

Certain entities will be exempted from lodging either an AR or an ECR, including those entities that are exempt from the AML/CTF programs under Part 7 of the AML/CTF Act.

Public consultation period

AUSTRAC is seeking feedback from reporting entities that may be affected by the proposed changes on the challenges, impacts and benefits of AUSTRAC’s preferred regulatory option. The closing date for submissions is 31 October 2014.

A Regulatory Impact Statement explaining the proposed changes in more detail is also available on the AUSTRAC website.

2014 Compliance Reports

In the meantime, it may be timely to start planning your 2015 Compliance Report, which is due for submission in Qtr 1 next year for the period 1 January 2014 – 31 December 2014. As part of this annual compliance report REs are still required to attest whether an Independent Review of the RE’s AML/CTF Program was undertaken by either an internal or external party.

An external Independent Review is a good way of seeking assurance that your AML/CTF Program is compliant with the AML/CTF Act as well as the ever expanding AML/CTF Rules – now up to Chapter 70. It may also be a good opportunity to undertake a wider review of your compliance with the comprehensive new Customer Due Diligence (CDD) requirements which were introduced in June this year.

CompliSpace undertakes numerous Independent Reviews each year, providing REs with practical advice and recommendations across an increasingly complex area. The cost of completing an Independent Review of your AML/CTF Program will depend on the size, nature and complexity of your business. Please contact us to request a detailed proposal, or if you have any questions in relation to the compliance reporting process

AUSTRAC extends suspension of remittance provider due to terrorist risk

It has been impossible to ignore the recent anti-terrorism measures undertaken by the Australian Government since the National Terrorism Public Alert Level was raised to High on 12 September 2014. The anti-terror raids carried out in Sydney and Brisbane on 18 September signified the reality of threats to national security that may exist internally.

At the same time, AUSTRAC acted to prevent alleged threats to national security in the form of funds being sent overseas for terrorism financing. On 17 September AUSTRAC:

  • suspended Bisotel Rieh Pty Ltd (Bisotel), a Lakemba money-transfer business, from the Remittance Sector Registrar (RSR); and
  •  issued Bisotel with a notice of commencement to cancel its registration (Cancellation Notice). 
       
    Bisotel’s suspension has since been extended twice, with the latest extension period due to expire on 10 November 2014.

Under section 75G of the AML/CTF Act, AUSTRAC has the power to cancel an entity’s RSR registration if the AUSTRAC CEO is satisfied that it is ‘appropriate to do so’, having regard to various factors, including whether the continued registration of the entity involves, or may involve, terrorism financing.

AUSTRAC relied upon listed certain facts and circumstances to support its decision to issue the Cancellation Notice, including that Bisotel:

  • arranged for bulk cash to be smuggled from Turkey into Lebanon;
  • routinely failed to provide the full beneficiary details in international funds transfer instruction that are sent to high risk jurisdictions, including Lebanon; and
  • can’t explain a $9 million discrepancy between reports that it filed showing it had sent $12.3 million overseas and reports that other entities filed with AUSTRAC showing that Bisotel (as the ordering customer) had actually sent $21.3 million.

The extended suspension period means that up until 10 November, Bisotel will have been unable to provide remittance services for around 55 days. If Bisotel provides a remittance service during its suspension, it and its officers could face criminal or financial penalties, or both.

What does this mean for your business?

Bisotel’s case is unique in that, on the surface, its operations seem to have been designed to service illegitimate aims, including by sending funds to high-risk overseas jurisdictions. However many financial services entities send funds overseas for legitimate purposes e.g. not-for-profits supporting an overseas charity.

So although the Bisotel case can be distinguished from the significant volume of legitimate transactions that occur everyday, it nevertheless provides a good reminder to AML/CTF entities to review their systems and controls to ensure they are compliant with the Customer Due Diligence obligations under the AML/CTF Act (see our previous blogs), which, along with other laws, are part of a comprehensive legal framework designed to strengthen Australia’s financial system against money laundering and terrorism financing.

How CompliSpace can help
Australian Financial Services Licence holders are inundated with a raft of corporate governance obligations and an ever-growing compliance burden, that can distract focus away from core business activities.

CompliSpace provides industry-specific policies, programs and procedures to ease the burden of compliance.

Our compliance and corporate governance solutions include Whistleblower, AFSL, AML/CTF and other industry-specific compliance programs.

Contact Details
P: 1300 132 090
E: contactus@complispace.com.au
W: http://www.complispace.com.au

This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on 1300 132 090 and we will be happy to assist.