Welcome to our Financial Lines Update, where we bring you our insights into recent events that are relevant to the financial lines insurance market.
The pandemic has caused our country at times to be thrown into lockdown and our day to day routines ground to a stop. Despite this, Australia has seen several key developments in the financial lines space recently, notably:
- In May 2020, the Myer shareholder class action settled after shareholders reportedly were unable to prove their loss following the Federal Court’s judgment in 2019, the first ever for an Australian shareholder class action;
- Also last May, the Federal Government announced that litigation funders would be required to hold an Australian Financial Services Licence;
- In October 2020, the Federal Court delivered Australia’s second shareholder class action judgment in Crowley v Worley Limited [2020] FCA 1522;
- In December 2020, the report by the Parliamentary Inquiry into Litigation Funding and the Regulation of the Class Action Industry was released;
- In late 2020, the Federal Government introduced the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which saw ‘claims handling and settling services’ regulated as financial services going forward and made amendments to the anti-money laundering laws; and
- Two weeks ago, the Federal Government announced the temporary changes to the continuous disclosure obligations would become permanent (see below).
To take a closer look at the changes to the continuous disclosure laws, see below.
Easing of Continuous Disclosure Laws: What was temporary will be permanent
In the early days of the COVID-19 pandemic, the Federal Government introduced temporary changes to the continuous disclosure laws to “shield boards from opportunistic class actions” arising from the pandemic. In essence, the temporary changes were designed to ease the disclosure rules by modifying the threshold test for when disclosure is required. Instead of disclosure being required when “a reasonable person would expect” information to materially affect the price or value of securities, such disclosure was now only necessary if the entity “knows or is reckless or negligent” with respect to whether the information is so material.
While the temporary changes received mixed responses from litigation funders, regulators and insurers, significantly, the Parliamentary Joint Committee’s Report on Litigation Funding and the Regulation of the Class Action Industry released before Christmas recommended they be made permanent. On 17 February 2021, Treasurer Josh Frydenberg announced the Government would follow the Committee’s recommendation by making the temporary changes to the continuous disclosure laws permanent via the Treasury Laws Amendment (2021 Measures No. 1) Bill, which will amend the relevant sections of the Corporations Act 2001 (Cth).
There is a question as to whether the new disclosure ‘test’ is substantially different from the old version when a form of “reasonable person” test underlies them both given negligence may form the basis for the required disclosure under the new test. The Bill also limits the circumstances in which a contravention of the continuous disclosure obligations will constitute misleading and deceptive conduct, to only where the requisite “mental” element is proven. The precise wording of the proposed permanent legislation will need to be carefully considered when it is enacted to see whether there is a true easing of the disclosure laws. The Government hopes this reform will encourage companies to publish forecasts despite the ongoing economic uncertainty expected to continue in 2021. It also anticipates the reform will lead to “significant savings on the cost of directors and officers insurance“. The D&O market will be watching the progress of this Bill particularly closely no doubt.
Please contact Jason Symons at jsymons@hwle.com.au to discuss further.
This article was written by Jason Symons, Partner and Claudia George, Solicitor.