Compliance Review : Highlights of Regulatory Events in 2014

Posted On: 17 February, 2015 Xiaoshu Liu

2014 is an eventful year when it comes to compliance. This article outlines the most significant regulatory events and updates of 2014 from the perspective of CFDs and FX providers. It should be noted that these events are relevant to a lot of other Australian Financial Services Licensees and Reporting Entities (REs) under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

1. Compliance with the OTC Derivative Transaction Reporting Requirements                   

The ASIC Derivative Transaction Rules (Reporting) 2013 (Rules) was signed off on 9 July 2013. ASIC announced the latest amendments to the Rules in a media release on 13 February 2015.

The first repository, DTCC Data Repository (Singapore) Pte Ltd, was licensed on 15 September 2014.   

Rule 1.2.4 defines an OTC Derivative and carves out the instruments are not OTC Derivatives. The newly inserted subrule 1.2.4(2A) provides clarifications on the meaning of Regulated Foreign Markets.

The Rules apply to 5 Prescribed Classes of OTC Derivatives: interest rate derivatives, credit derivatives, equity derivatives, foreign exchange derivatives and commodity derivatives that are not electricity derivatives.

Foreign Reporting Entities (REs) may rely on the Alternative Reporting Requirements and ‘tag’ reported information under the amended subrule 2.2.1(3) to satisfy their reporting obligations in Australia.

The implementation of the Rules have been divided into 3 phases. As most CFDs and FX providers fall under the category of Phase 3B REs, the key provisions applicable to Phase 3B REs are summarised below:

  • Transaction reporting commences on 12 October 2015 for all Prescribed Classes on a T+1 basis in general.
  • The entries into a position, any associated amendments, corrections and exists are reportable.
  • Information on valuations (e.g. mark-to-market and mark-to-model) and any changes to collaterals are also reportable.
  • “Snapshot reporting” is a reporting option under the newly inserted Rule 2.2.8.
  • Position reporting will start 6 months from the commencement of transaction reporting;
  • A breakdown of the reportable details can be found in Schedule 2 of the Rules;
  • Delegation of reporting is permitted under the Rules. ‘Safe harbour’ about delegated reporting is now available under the amended Rule 2.2.7;
  • Reporting Entities must be able to demonstrate their compliance with the Rules to ASIC. Records are to be kept for a minimum of 5 years from the generation or amendments of the records. Exceptions may apply.

A breach of a rule may attract a maximum fine of $170,000 (1000 penalty units at $170 per unit).

2. Updated AML/CTF Rules

The amended AML/CTF Rules became effective on 1 June 2014. The most important changes are surrounding beneficial ownership and politically exposed persons (PEPs), which are summarised below:

Beneficial Ownership

  • Direct or indirect ownership or control of exactly 25% is now captured by the new definition of beneficial owner.
  • Reporting Entities (RE) are required to identify and verify the individuals that ultimately own or control a customer. There is no requirement to identify or verify middle layers of the ownership structure.
  • REs are allowed to assume that a customer is the same as the beneficial owner unless there are reasonable grounds to consider otherwise.
  • “Control” is very broadly defined and provides flexibility to capture “novel” arrangements to avoid identification.
  • Exceptions to the identification requirements may apply.


  • A PEP refers to an individual with a prominent public position, either domestically or internationally. The definition also includes immediate family members and close associates.
  • The definition provides a non-exclusive list of the positions, family members and close associates. REs may decide to treat other persons as PEPs after considering the associated ML/TF risks.
  • Reporting entities are allowed to rely on “publically and readily available” information when conducting PEP screenings to avoid excessive burden.
  • Treatment of PEPs is to be risk-based and enhanced due diligence should be conducted on higher risk PEPs.

Another notable change is the requirement to identify and verify the settlors of a trust. Exceptions apply.

3. Compliance with the Updated Privacy Requirements

The amendments to the Privacy Act 1988 saw the Australian Privacy Principles (APPs) come into force on 12 March 2014. The APPs replaced the National Privacy Principles (NPPs) and the Information Privacy Principles (IPPs) and now apply to both private and public sectors.

The APPs govern the handling of ‘personal information’, which is defined in the Privacy Act 1988 to include any information or opinion about an identified individual or an individual that can be reasonably identified, regardless whether such information or opinion is true or has been recorded in a material form.

CFDs and FX providers are required to abide by the new APPs as they are REs under the AML/CTF laws.

The key changes and requirements are summarised below:

  • The definition of ‘sensitive information’ has been extended to include biometric information and biometric templates.
  • An organisation needs to take reasonable steps to notify an individual how they can access or make corrections of their personal information, how to make a complaint, how the organisation handles such complaints, and disclose overseas recipients (see below).
  • Unsolicited personal information: an organisation must assess whether such information could have been collected as solicited information under APP 3, if not the information is to be destroyed or de-identified as soon as practicable.
  • Direct marketing: it is possible to use personal information (other than sensitive information) for direct marketing purposes where a consent from the individual has not to be obtained or it is impractical to do so, provided that there is a prominent statement in each marketing material that the individual may request not to receive future direct marketing material, there is a simple way for them to opt-out, and they have not opted out.
  • Overseas recipients: an organisation is required to inform individuals if it is likely for their personal information to be disclosed to overseas recipients, and the countries where the recipients are likely to be located if practicable to do so. The organisation is also required to take reasonable steps to ensure the overseas recipients are subject to similar requirements to those imposed by the APPs, and methods are available to individuals to enforce that protection.

4.  Misleading Representations

ASIC took actions against more than 10 entities about misleading representations in the first 3 quarters of 2014.

The most relevant case to CFDs and FX providers is the infringement notices issued to Invast Financial Services. The key details are summarised below:

  • Invest sent an email to prospective clients in April 2014 which used languages such as ‘low risk, high reward trading opportunities’.
  • Its video tutorial and the ebook were inconsistent with the disclaimers in the email.
  • In May its website contained an invitation link that led to a demonstration of ‘risk-free trading’ of FX CFDs.
  • The website further stated that ‘Forex CFDs allow you to buy one currency whilst simultaneously selling another’. CFDs, being OTC derivatives do not give an investor any entitlements to the underlying assets.

Some of the other entities that ASIC took actions against include Westpac, NAB, GE Capital, Esuperfund, and Virgin Money.

Key points to keep in mind:

  • A balanced message (returns, potential rewards v.s. risks and potential losses) is essential.
  • Warmings and disclaimers should be consistent with the content of the website, the disclosure documents and promotional materials.
  • Care needs to be taken when using certain terms such as ‘risk-free’, ‘low risk’ and ‘secure’.

5. A Final Note – AUSTRAC Compliance Report

The 2014 Compliance Report for the reporting period 1 January to 31 December 2014 will be due on 31 March 2015.

Key regulatory compliance events that occurred in the past year have been outlined above. While the article has been written with the CFDs and FX industry in mind, these events may have their relevance to a much wider range of organizations. Not all details of the regulatory events and updated legislations have been included due to limited space. Please contact the author if you need assistance. Thank you for your time. I would be grateful if you could please help like and share this article if you think this article has helped you with one thing or two.


NoteXiaoshu is not a legal practitioner. This article has been provided for general purposes only and cannot be construed as legal advice.