Corporations Amendment Regulations 2001 (No. 4) 2001 No. 319
EXPLANATORY STATEMENT
Statutory Rules 2001 No. 319
Issued by the authority of the Minister for Financial Services and
Regulation
Corporations Act 2001
Corporations Amendment Regulations 2001 (No. 4)
Section 1364 of the Corporations Act 2001 (the Corporations Act) empowers the
Governor-General to make regulations prescribing matters required or permitted
by the Corporations Act to be prescribed by regulations or necessary or
convenient to be prescribed by such regulations for carrying out or giving
effect to that Act.
The purpose of the regulations is to support the reforms to the regulation of
the financial services industry which are included in the Financial Services
Reform Act 2001 and associated legislation, and to make certain
miscellaneous amendments.
The Corporations Agreement, reached by State, Northern Territory and
Commonwealth Ministers who had responsibilities in relation to corporate
regulation, formed the political compact on which the national companies and
securities scheme, which operated from 1 January 1991 to 14 July 2001, was
based. That scheme was superseded by a new legislative scheme which commenced
on 15 July 2001. The new scheme is based on Commonwealth legislation enacted
with the assistance of relevant power referred by the States. It is envisaged
that a new Agreement, reflecting the changed constitutional basis of the
relevant law, will be signed but meanwhile the Commonwealth, States and the
Northern Territory consider themselves bound by the proposed new agreement.
The responsible Ministers of the States and the Northern Territory on the
Ministerial Council for Corporations have been consulted about the draft
regulations and the Council has agreed with them, to the extent required by the
proposed new agreement.
The Financial Services Reform Act 2001 amends the Corporations Act and
other relevant legislation, and will provide:
• a single licensing regime for financial sales,
advice and dealings in relation to financial products;
• consistent and comparable financial product
disclosure; and
• a single authorisation procedure for financial
exchanges and clearing and settlement facilities.
The regulations will:
• provide detailed requirements - for example, the
procedure for transferring securities, the matters which must be addressed in
an application for a licence and the requirements for disclosure by the issuer
of a superannuation product;
• provide for exemptions from the requirements of the
Act (or for modified application) where the impact is inappropriate - for
example, where an exchange which facilitates settlement of transactions between
brokers through its operating rules would otherwise be regulated as operating a
clearing and settlement facility, as well as being regulated as the operator of
a financial market;
• assist in the transition to the new regime; and
• make consequential and miscellaneous amendments.
Details of the proposed regulations are set out in the Attachment.
The proposed regulations will commence at the same time as Item 1 of Schedule 1
of the Financial Services Reform Act 2001 commences that is, on 11 March
2002.
ATTACHMENT
INDEX
| Part
|
Subject
|
|
Introduction
|
| 1
|
Definitions
of general relevance
|
| 2.
|
Licensing
of financial markets
|
| 3.
|
Licensing
of clearing and settlement facilities
|
| 4.
|
Limits
on involvement with markets and clearing and settlement facility licensees
|
| 5.
|
Compensation
regimes for financial markets
|
| 6.
|
Licensing
of providers of financial services
|
| 7.
|
Financial
services disclosure
|
| 8.
|
Other
provisions relating to conduct connected with financial products and financial
services
|
| 9.
|
Financial
product disclosure
|
| 10.
|
Market
misconduct and other prohibited conduct relating to financial products and
financial services
|
| 11.
|
Title
and transfer
|
| 12.
|
Consequential
|
| 13.
|
Transitional
|
| 14.
|
Miscellaneous
|
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Abbreviations
| ABN
|
Australian
Business Number
|
| ASIC
|
Australian
Securities and Investments Commission
|
| ASIC
Act
|
Australian
Securities and Investments Commission Act 2001
|
| Consequential
Provisions Act
|
Financial
Services Reform (Consequential Provisions) Act 2001
|
| Corporations
Act
|
Corporations
Act 2001
|
| FSR
Act
|
Financial
Services Reform Act 2001
|
| I(AB)
Act
|
Insurance
(Agents and Brokers) Act 1984
|
| Insurance
Contracts Act
|
Insurance
Contracts Act 1984
|
1. INTRODUCTION
Overview
The Financial Services Reform Act 2001 (the FSR Act) is the culmination
of an extensive reform program examining current regulatory requirements
applying to the financial services industry. In particular, the FSR Act
provides the legislative response to a number of recommendations of the
Financial System Inquiry (the Wallis Committee).
The Financial System Inquiry was a comprehensive stocktake of Australia's
financial system structure and regulation. The broad policy direction for what
were known as the CLERP 6 reforms, now contained in the FSR Act, is consistent
with the findings of the Financial System Inquiry.
The Financial System Inquiry found that financial system regulation was
piecemeal and varied, and was determined according to the particular industry
and the product being provided. This was seen as inefficient, as giving rise to
opportunities for regulatory arbitrage, and in some cases leading to regulatory
overlap and confusion.
To address these deficiencies, the Financial System Inquiry proposed that there
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be a single licensing regime for financial sales, advice and dealings in
relation to financial products, consistent and comparable financial product
disclosure, and a single authorisation procedure for financial exchanges and
clearing and settlement facilities.
The FSR Act implements these proposals, and puts in place a competitively
neutral regulatory system which benefits participants in the industry by
providing more uniform regulation, reducing administrative and compliance
costs, and removing unnecessary distinctions between products. In addition, it
will give consumers a more consistent framework of consumer protection in which
to make their financial decisions. The FSR Act will therefore facilitate
innovation and promote business, while at the same time ensuring adequate
levels of consumer protection and market integrity.
The regulatory framework covers a wide range of financial products including
securities, derivatives, general and life insurance, superannuation, deposit
accounts and means of payment facilities. The requirements will apply to the
activities of existing financial intermediaries such as insurance agents and
brokers, securities advisers and dealers, and futures brokers, as well as any
other person carrying on a financial services business.
The FSR Act will also put in place a simplified authorisation process for the
operators of financial markets and clearing and settlement facilities. The new
regulatory regime provides a flexible and adaptable framework that encourages
innovation and competition in markets and clearing and settlement facilities.
Consultation
An extensive public consultation process was engaged in to produce the FSR Act,
involving the release of a position paper in December 1997, a consultation
paper in March 1999 and an exposure draft of the Bill in February 2000.
This consultation provided valuable feedback on the reform proposals, and was
integral to the development of the Financial Services Reform Bill.
In a similar vein, the draft regulations were subject to public consultation,
being released in tranches during August and September 2001. An informal body,
the Financial Services Reform Implementation Consultative Committee, was
established to provide industry feed-back on the draft regulations. The
Committee met three times in person to consider the first three tranches of
draft regulations, relating to markets/clearing and settlement facilities, the
licensing of financial services providers and product disclosure. It also met
Treasury officers through a video-link to discuss the transitional arrangements
for financial services licensees and financial products.
In addition, the draft regulations were put on the Treasury website for public
comment.
About 49 submissions on the draft regulations were received from members of the
Committee and the general public and taken into account in the formulation of
the currently regulations. The submissions were important in bringing forward
concerns about policy issues, inadvertent application of the provisions and
technical problems.
Title, Format and commencement of the Regulations (Regulations 1-2)
The regulations are entitled the Corporations Amendment Regulations 2001 (No.
4) (regulation 1).
As indicated above, they are to commence on the day on which Item 1 of Schedule
1 to the Financial Services Reform Act 2001 commences (Regulation 2).
Format of the Explanatory Memorandum
The balance of this attachment provides further details of the amendments to
the Corporations Regulations (Schedule 1 of the Regulations).
It does not reflect the order of the regulations, instead grouping them by
subject.
References to provisions in the Corporations Act 2001
The FSR Act omits Chapters 7 and 8 of the Corporations Act and inserts a new
Chapter 7 in their place.
There are therefore a number of occasions in this Explanatory Memorandum when
references are made to the relevant provision of the current Corporations Act
and to the comparable provision in that Act after the FSR has commenced.
To avoid confusion, when comparing such provisions, a reference to a provision
in the current Corporations Act is phrased 'section x of the old Corporations
Act', and a reference to the Corporations Act as amended by the FSR Act as
'section y of the new Corporations Act'.
However, where neither 'the old Corporations Act' nor 'the new Corporations
Act' is used, the section referred to is from the 'new Corporations Act'.
1. DEFINITIONS OF GENERAL RELEVANCE
The definition of financial product - regulations 7.1.04 to 7.1.08
Definition of derivatives - regulation 7.1.04
The word 'derivative' is defined in section 761D of the new Corporations Act.
The definition requires that three conditions be fulfilled. The second
condition requires that consideration is or may be required to be provided at a
future time that is not less than the number of days prescribed by regulations
after the day on which the arrangement is entered into.
Subregulation 7.1.04(1) prescribes the period as two business days in the case
of spot foreign exchange transactions, and one business day in other cases.
The definition in section 76 1 D also empowers the making of regulations under
subsection 761D(2) to declare a relevant arrangement to be a derivative. This
power is used in subregulation 7.1.04(2) to exclude spot foreign exchange
contracts. Subregulation 7.1.04(2) also declares an arrangement to be a
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derivative where the future time at which consideration may be provided under
the arrangement may be less than 1 day after the arrangement is entered into.
What is not a financial Product? - regulations 7.1.05 to 7.1.08
The term 'financial product' is defined in general terms in section 763A of the
new Corporations Act. Each limb of the general definition is then further
examined in sections 763B to 763D. Section 764A provides a list of things which
are financial products and 765A a list of specific things that are not
financial products.
This list of exclusions is extended by the regulations to include:
• exempt public sector superannuation schemes within
the meaning of the Superannuation Industry (Supervision) Act 1993
(regulation 7.1.05);
• credit facilities (regulation 7.1.06);
• surety bonds (regulation 7.1.07); and
• bank drafts (regulation 7.1.08).
Meaning of retail client and wholesale client - regulations 7.1.11 to 7.1.28
Introduction
A key definition in the FSR reforms is that of 'retail client' (section 761G).
In Chapter 7 of the new Corporations Act there is a clear distinction between
retail and wholesale clients. Generally, the consumer protection provisions
will apply only to retail clients, as it is recognised that wholesale clients
do not require the same level of protection, being better informed and better
able to assess the risks involved in financial transactions. The new definition
of 'retail client' has several limbs.
The first limb (subsection 761G(5)) applies only to general insurance, and is
product based. An individual or small business that purchases or receives
advice on one of the listed general insurance policies will be considered a
retail client.
The second limb (subsection 761G(6)) provides that a person will always be
considered a retail client where the relevant financial product is a
superannuation product or a retirement savings account.
The third provision (subsection 761G(7)) relates to all financial products
except general insurance, superannuation and retirement savings accounts, and
comprises four tests. The product-value test provides that a person is not a
retail client where they purchase a financial product, or a financial service
related to a financial product, and the value of the product is above the
prescribed threshold (to be set initially at $500,000). Regulations may modify
the application of the test where appropriate. The second test ensures that
small businesses receive protection as retail clients under the regime. The
third test considers individual wealth and provides power to make regulations
specifying the net assets or gross income that will be required for a person to
be a 'wholesale client'. Finally, professional investors are always considered
wholesale clients.
The purpose of regulations 7.1.11 to 7.1.28 is to flesh out the definition
included in section 761G. A number of definitions related to these regulations
are contained in subregulation 1.02(1), for example definitions of concepts
such as income stream or investment-based financial product.
Definitions of general insurance - retail client test (section 761G(5)(b)) -
regulations 7.1.11-7.1.17
As foreshadowed in the Explanatory Memorandum to the Bill, the definitions of
the classes of general insurance which will mean that an individual is a retail
client under paragraph 761G(5)(b) have been based on the 'standard cover'
definitions appearing in the regulations to the Insurance Contracts Act 1984
(the Insurance Contracts Act).
There are a number of differences between the definitions adopted in the
regulations and 'standard cover'. These include:
• an allowance for the owner of the insurance to be a
person other than an individual (since small businesses may also be retail
clients); and
• expanding the events and items covered to take into
account the fact that such contracts of insurance (for example, travel
insurance) can generally be broader in coverage than those reflected in the
definitions of standard cover.
In addition, the exclusions (some of which were based on section 9 of the
Insurance Contracts Act) have generally been limited to marine insurance,
workers' compensation insurance, compulsory third party insurance and, in the
case of home building insurance, cover required under statute in respect of
residential building works. This is generally because the other types of cover
named in section 9 if the Insurance Contracts Act are otherwise not 'financial
products' under the new Corporations Act, in which case no exclusion from being
a product under subsection 761G(5) is required.
A new concept of 'personal and domestic property insurance' has been included
(regulation 7.1.17). This includes any property that:
• the insured, or those who live with or are related
to the insured, intend to use for personal, domestic or household purposes;
and
• is ordinarily used for such purposes.
Whilst the regulations specify examples of the types of property, insurance of
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which falls within this category (subregulation 7.1.17(3)), this is not meant
to be an exhaustive list. It is likely that, because of the requirement that
the property be used by the insured or certain natural persons related to the
insured wholly or predominantly for personal, domestic or household purposes,
small business will have only a very limited ability, if any, to purchase
personal and domestic property insurance.
If there is any doubt about the use to which property will be. put in this
context, the provider of financial services can have the client sign a
statement to the effect that the insurance is insurance covered by this
regulation.
Section 761G(7) and related provisions on the pricelvalue test
- the Price/Value Test
Paragraph 761G(7)(a) of the new Corporations Act provides one of the means for
determining whether a client is wholesale for financial products other than
general insurance, superannuation and retirement savings account products.
If either:
• the price for the provision of the financial
product; or
• the value of the financial product to which the
financial service relates
equals or exceeds the amount specified in regulations, then the client will be
a retail client.
- Individual Wealth Test
Subsection 761G(10) of the new Corporations Act provides the way in which
paragraph 761G(7)(a) operates to allow regulations to do either or both of.
• deal with how a price or value is to be calculated,
either generally or in relation to a specified class of financial products,
or
• modify the way in which paragraph 761G(7)(a)
applies in particular circumstances.
- How Price/Value Test works
Where they both apply to a particular class of products, the tests for price
and value are expected to operate as alternative means of assessing a client's
status - a client may hold a product the value of which is below specified
limits, but ultimately be wholesale because the price that they initially paid
for it is above the specified limits for price.
- Price
The price test can be applied to assess the status of a client as either retail
or wholesale when the client intends to acquire or be issued with, or actually
does acquire or is issued with, a product. The price that the client pays for
the issue or acquisition of the product will be the amount that is assessed.
After that, a client who is a wholesale client in respect of a particular
product due to the price that they paid for that financial product will be a
wholesale client in relation to that product because the original price
determined their status.
Where ongoing contributions are received for an existing financial product
(such as deposits to a deposit account), these are not to be regarded as the
"price" paid for the product, unless the issue or acquisition depended on those
later amounts being, or undertaken to be, paid.
The price test for most products covered under this paragraph is $500,000 (as
foreshadowed in the Explanatory Memorandum of the FSR Bill). This will not
apply to derivatives or life risk insurance products, the treatment for which
are explained in further detail below.
Rules for calculating the price of products have generally been outlined in the
regulations (for example, regulations 7.1.18, 7.1.20 and 7.1.23). Where
specified, they will not include amounts that are paid or payable out of money
lent by the issuer or an associate, or fees or charges due to the issuer or
another person relating to the issue of the product. However, any amount paid
by the client for advice and related services will not be included in the price
for the product.
- Value
The value test can be applied to assess the status of a client as either retail
or wholesale while they hold the financial product.
The value test allows a client who might not have been a wholesale client at
the time that they acquired the product to become wholesale. For example, if
the client paid a price of $400,000 for units in a managed fund (making them a
retail client), and then later contributions and investment earnings bring the
value of the fund up to $ 5 00,000, the client maybe wholesale.
The value test for most products covered under this paragraph is generally
$500,000 (as foreshadowed in the Explanatory Memorandum of the FSR Bill). This
will not apply to derivatives or life risk insurance products, the treatment
for which are explained in further detail below.
Rules for calculating the value of products have generally been outlined in the
regulations (for example, regulations 7.1.19, 7.1.21, 7.1.22 and 7.1.24). Where
specified, they will not include amounts of fees or charges that are due to or
have accrued to the product issuer. For example, where the product issuer has
the right to deduct fees or charges at specified intervals (eg monthly), the
fees or charges that would have accrued at a particular date toward that amount
are not to be included in determining the value of the financial product (even
though the fees may not yet have been deducted from the client's product). Any
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amount that stands to the client's credit that is to be paid, or was paid, out
of money lent by the issuer or their associate is also to be disregarded.
- Cumulative value - services relating to
investment and income stream products
Where a person either provides financial product advice in relation to, or
arranges for a person to (for example) acquire or dispose of a number of
financial products, the provider of that service can accumulate the value of
those products where they relate to investment-based financial products and/or
income stream financial products before applying the test in paragraph
761G(7)(a).
For example, where a client approaches a financial services provider to obtain
advice or have the provider arrange for them to apply for a number of
investment or income stream financial products, and the amount they intend to
invest across those products is over $500,000, the provider will be able to
treat that client as wholesale for the purpose of providing them with advice.
It is important to note, however, that the requirement for a Product Disclosure
Statement when the
client is retail in respect of a particular product is not affected, and where
the price for the provision
of the product (for example) is less than $500,000, the client will need to be
provided with a Product Disclosure Statement in accordance with Part 7.9 of the
new Corporations Act.
Treatment for specific products
Income strewn financial products - regulation 7.1.21
Whilst the price test of $500,000 will be the same as for other investment
products, due to the nature of income streams, the method for valuation of
income stream products such as annuities needs to be different. Accordingly, a
number of different tests may apply depending on the type of income stream
product in question. Where contracted commutation values apply, this will be
the appropriate amount. However, if no such values exist, the amounts
determined by applying ordinarily acceptable actuarial standards will be used,
or the amount that stands to the client's credit where relevant (for example in
an allocated annuity product where an account balance is held).
In the event that none of these tests are appropriate for the product, a
general calculation based on the price less amounts such as payments and fees,
and taking into account inflation, will apply.
Derivatives - regulation 7.1.22
Formulating a value in respect of derivatives is difficult because derivatives
as a class of financial products includes products of different types. There
appears to be no simple formula for the determination of value that has wide
application that can be quickly applied. The value in the regulation is the
face value or "notional amount" (in dollar terms) of the derivative as at the
date the arrangement is entered into by the parties. If the value of a single
derivative is being assessed, the &mount is $100,000. If the derivative is
included in 2 or more related financial products, the amount applicable is
$500,000 in relation to all of those products.
Life Risk Insurance and other risk management products - regulation
7.1.25
Paragraph 761G(7)(a) of the new Corporations Act will not apply to life risk
insurance and other risk management products because they are not appropriate
to be subject to the price/value test. There are a number of reasons for this.
First, life insurance is considered to be a particularly "personal" type of
insurance for which advice and appropriate disclosure will usually be
required.
Second, it is not possible to set a price amount for life risk products, as
higher premiums do not necessarily correlate to higher sums insured or more
sophisticated clients. They also relate to the levels of risk determined by
matters including the insured's health status, occupation, pastimes, age, and
whether or not they smoke. Premiums also differ between insurers depending on
their particular underwriting guidelines and rates applicable at given times.
Similarly, it was not possible to set amounts based on sums insured, as these
amounts vary substantially depending on factors going beyond just their income,
and include the type of cover sought, the age of the proposed insured, and
their dependents and other financial obligations.
Even for disability income insurance where the sum insured is based upon the
income of the insured, determining whether the price/value test should, for
example, be based on the sum insured was difficult. While much of the market
bases cover on 75% of income, there are variations on this, and it is not
uncommon to find some levels of cover reaching 100% of income and/or taking
into account additional amounts such as superannuation contributions. In
addition, as a matter of policy, the complexity of disability products indicate
that appropriate advice will be required by the majority of purchasers of such
cover.
However, although the price/value test in paragraph 761G(7)(a) will not apply,
the remaining tests in subsection 761G(7) will apply to ascertain whether a
life risk insurance client is wholesale.
For any other risk management products that are not general insurance, life
risk insurance or derivatives, provision has been made for ASIC to declare that
the price/value test applies to such types of financial products if
appropriate. ASIC will also have the ability to determine how the test
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applies.
Other regulations
Group Products
Section 1012H of the new Corporations Act contemplates that different
disclosure rules apply to clients who elect or may elect to be covered by a
group product. The price or value test is to be applied in respect of each such
person, regardless of whether the ultimate owner of the product is retail or
wholesale.
Superannuation-sourced money - not to be counted in price/value test -
regulation 7.1.26
Where a person is being given advice or is being provided with a financial
product in circumstances where a Product Disclosure Statement would be required
for a retail client, and is using funds to invest that have been sourced from a
superannuation fund, the amount of those funds will not be counted in the price
of the product under paragraph 761G(7)(a). This will be determined by a test
related to whether the adviser or issuer actually knows, or reasonably ought to
know, that the money used to purchase the income stream product is sourced from
superannuation.
This will catch payments made both to members of superannuation funds (eg a
payment on the retirement of the member), and to beneficiaries (eg death
benefit payments). Since it is restricted to pay-outs from funds where the
holder of the superannuation product would have been a retail client, it is not
intended to apply to those people who would be wholesale clients for the
purposes outlined in paragraph 761G(6).
Once wholesale, always wholesale - subregulation 7.1.27(1)
Subregulation 7.1.27(1) ensures that practical problems of a client appearing
to move between retail and wholesale status due to (for example) fluctuations
in the value of the product are resolved.
For example, if a client becomes a wholesale client in respect of a product,
then they will remain a wholesale client at all times after that in relation to
that product as between themselves and the product issuer. This will ensure
that issuers do not need to continually monitor a client's status once they are
wholesale under paragraph 761G(7)(a). This relief is limited, and where that
person seeks advice in relation to the product from someone other than the
product issuer, they may be a retail client for that adviser if the value of
the product is not the specified amount at the time the advice is provided.
Subsequent acquisitions from wholesale holders - subregulation
7.1.27(2)
If a wholesale holder of a financial product under paragraph 761G(7)(a)
disposes of the product, or it otherwise changes hands, the issuer will not be
liable under the new Corporations Act merely because the holder is a retail
client if the issuer did not actually know, and it was not reasonable for them
to know, that the client was retail.
Individual Wealth Test
The relevant dollar amounts for the assessment of the assets and income under
paragraph 761G(7)(c) of the Act have been set at $2.5 million for net assets,
and $250,000 per annum for the income test.
An amendment to section 708 (offers that do not need disclosure) was included
in the FSR Act so that the test for net assets or gross income necessary to
qualify as a sophisticated investor was prescribed in the regulations, rather
than in section 708.
Therefore, equivalent regulations have been made under sections 708(8)(c)(i)
and (ii) in Chapter 6D (regulation 6D.2.03), and 648J(4)(a) (regulation 6.5.01)
in relation to wholesale holders for the purpose of telephone taping during
takeovers.
Under subsection 761G(10A), the regulations can specify the way in which net
assets and gross income is determined, valued or calculated for the purposes of
the wholesale client test in paragraph 761G(7)(c)(i) and (ii). An equivalent
provision exists in section 708(9A). At this stage, it is not intended to make
a regulation specifying this.
Other definitions
Definitions of more specific relevance are included in the section of this
Explanatory Memorandum to which they relate even though they may be located in
Part 7.1 of the regulations.
2. LICENSING OF FINANCIAL MARKETS
Applications for an Australian market licence
Introduction
A body corporate may apply for an Australian market licence by lodging an
application with ASIC) that includes the information and is accompanied by the
documents (if any) required by regulations (paragraphs 795A(1)(a) and (b) of
the new Corporations Act).
Under section 795B, two kinds of application are catered for:
• 'general applications' (subsection 795B(1)); and
• 'foreign applications' (subsection 795B(2)) where a
body corporate wishes to operate the same financial market in Australia as it
is authorised to operate in the foreign country in which its principal place of
business is located.
The requirements for the two types of application are different and this is
reflected in the regulations.
The information and documents specified in the regulations are intended to
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enable the Minister, when considering an application, to be satisfied that the
criteria for general or foreign applications, under whichever of subsection
795B(1) or (2) applies have been met. These criteria are designed to ensure
that the granting of an Australian market licence will not compromise standards
of market integrity or consumer protection in Australian financial markets.
The material sought in the regulations will generally be the same as that
currently sought by ASIC for applications lodged under the repealed provisions
relating to approvals of stock exchanges and futures exchanges (sections 769
and 1126 of the old Corporations Act). The exception is that to be required of
foreign applicants, which are currently not separately addressed.
The regulations for foreign applications will set out the material needed to
qualify for approval to operate the same financial market in Australia as the
foreign applicant operates in the foreign country in which its principal place
of business is located. For approval purposes, it will be important for foreign
applicants to demonstrate that their home country market is subject to at least
equivalent regulatory standards as those in Australia.
Regulations 7.2.10 to 7.2.12 in Division 4 will deal with general applications.
Regulations 7.2.13 to 7.2.15 in Division 5 will deal with foreign
applications.
General applications - regulations 7.2.10 to 7.2.12
Regulation 7.2.10 provides that Division 4 (ie regulations 7.2.10 to 7.2.12)
applies in relation to general applications submitted under subsection
795B(1).
Regulations 7.2.11 and 7.2.12 set out the information and documents
respectively to be submitted in general applications. The requirements are
intended to provide the Minister with enough information about the applicant,
its organisation, proposed modus operandi, staffing, expertise, and
technological and financial resources to enable the Minister to determine
whether or not the application should be granted.
Foreign applications - regulations 7.2.13 to 7.2.15
Regulation 7.2.13 provides that Division 5 (ie regulations 7.2.13 to 7.2.15)
applies in relation to foreign applications submitted under subsection 795B(2)
of the new Corporations Act.
Regulations 7.2.14 and 7.2.15 set out the information and documents
respectively to be submitted in foreign applications. The requirements for
foreign applications are intended to provide the Minister with enough
information about the applicant's existing and proposed financial markets to
enable the Minister to determine whether or not the application should be
granted.
The application will need to provide details of the financial market to be
extended into the Australian jurisdiction, the standard of regulation
applicable to the home country market, and the organisation and structure of
the applicant. The applicant will also have to establish that it is authorised
to operate a financial market in its home country.
Obligations On Licensees
Provision of information to ASIC - regulations 7.2.01 to 7.2.05
Among other things, regulations in Part 7.2 require market licensees to give
certain information to ASIC:
• Regulation 7.2.01, in conjunction with subsection
792B(3), requires market licensees to inform ASIC of matters relating to
participants who are financial services licensees - for example a contravention
of a condition on a licence or an accounting requirement of the Corporations
Act.
- It seeks to replicate the effect of section 862 of
the old Corporations Act.
• Regulations 7.2.02 and 7.2.03 specify information
that will allow ASIC to keep track of those persons who are associated with the
management of market licensees.
• Regulation 7.2.04 specifies information that will
enable ASIC to keep track of those persons who hold 15 per cent or more of the
voting power in a market licensee.
Other regulations relating to the provision of information to ASIC are:
• Regulations 7.2.01 and 7.2.05 which provide an
exemption from subsection 792C(2) of the new Corporations Act where information
is provided via the stock exchange automated trading system notification
message or an Australian Stock Exchange voiceline announcement. In these
circumstances the market licensee is not required, in addition, to lodge the
information with ASIC, as would otherwise be required by subsection 792C(2).
Preparation of an annual report - regulation 7.2.06
Section 792F of the new Corporations Act requires market licensees to provide
ASIC with an annual report on the extent to which the licensee complied with
its obligations as a market licensee under new Chapter 7.
Subsection 792F(2) provides that the licensee must ensure that the annual
report is accompanied by any information and statements prescribed by
regulations made for the purpose of this subsection.
Regulation 7.2.06 specifies information that a market licensee must supply to
ASIC if the annual report of such a body does not include this information. The
regulation refers to, among other things, a description of the activities of
the market licensee and its resources.
Content of licensed market's operating rules - regulation 7.2.07
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Subsection 793A(1) of the new Corporations Act provides that the operating
rules of a licensed market must deal with the matters described by the
regulations made for the purposes of this subsection.
Regulation 7.2.07 sets out the matters which must be addressed in a licensed
market's operating rules. The matters referred to include access, the ongoing
requirements for participants, the execution of orders, the listing of entities
and the products to be traded.
The regulation draws on the lists in sections 769 and 1126 of the old
Corporations Act, but is framed so that it can apply to both a derivatives and
a securities market.
Content of licensed market's written procedures - regulation 7.2.08
Subsection 793A(2) of the new Corporations Act provides that the regulations
may prescribe matters in respect of which a licensed market must have written
procedures.
Regulation 7.2.08 sets out the matters which must be addressed in a licensed
market's written procedures. The matters referred to include exchange of
appropriate information with clearing and settlement facilities, arrangements
to ensure the integrity and security of systems (including computer systems)
and arrangements for supervising the market.
The rationale for this provision is that there are matters within the control
of the market operator which are of legitimate regulatory concern but which are
not suitable for inclusion in the operating rules (which are public documents
forming the contracts between the market operator and the participants, and
between the market operator and listed entities (in the case of a securities
market)).
Powers of the Minister and ASIC
Provision of compliance assessment to other agencies - regulation
7.2.09
Section 794C of the new Corporations Act empowers ASIC to assess how well a
market licensee is complying with any or all of its obligations as a market
licensee under new Chapter 7.
Subsection 794C(5) provides that if an assessment, or part of an assessment,
relates to a serious contravention of a law of the Commonwealth or of a State
or Territory, ASIC may give a copy of the written report, or the relevant part
of the report to the Australian Federal Police, certain other nominated
agencies and those agencies prescribed by regulations for the purpose of
paragraph 794C(5)(d).
Regulation 7.2.09 prescribes further agencies for this purpose. They include
the Australian Competition and Consumer Commission, the Australian Prudential
Regulation Authority, as well as a number of State and Territory fair trading
agencies.
Participant - regulation 7.1.02
Section 761A of the new Corporations Act defines the term 'participant' to
include a recognised affiliate (in the case of the Australian Stock Exchange,
natural persons are affiliates, rather than 'members' or direct participants)
in relation to the market for the purpose of certain nominated sections.
Regulation 7.1.02 will add one further section - section 792A - to that list.
This has the effect of extending the market licensee's obligation to supervise
the market to the conduct of recognised affiliates.
3. LICENSING OF CLEARING AND SETTLEMENT
FACILITIES
What is a clearing and settlement facility?
Obligations related to clearing and settlement facility - regulation
7.1.09
The term 'clearing and settlement facility is defined in section 768A of the
new Corporations Act to mean a facility which provides a regular mechanism for
the parties to transactions relating to financial products to meet obligations
to each other that arise from entering into the transactions and are of a kind
prescribed by the regulations.
Regulation 7.1.09 prescribes the obligations for the purpose of this provision.
The regulations refer, for example, to each obligation arising from a contract
to transfer securities or derivatives.
Conduct that does not constitute operating a clearing and settlement
facility - regulation 7.1.10
Subsection 768A(2) of the new Corporations Act specifies conduct that does not
constitute operating a clearing and settlement facility for the purpose of the
new Chapter 7. This subsection refers, for example, to the conduct of an
authorised deposit-taking institution acting in the ordinary course of its
banking business.
Subsection 768A(2) also empowers the making of regulations to take other
conduct out of the concept of operating a clearing and settlement facility.
Regulation 7.1.10 omits the following conduct from the concept of operating a
clearing and settlement facility:
• the conduct of TNS Clearing Pty Limited innovating
transactions entered into on the Australian Stock Exchange (subregulation
7.1.10(1));
- TNS Clearing Pty Limited is a subsidiary of the
Australian Stock Exchange Limited. It is interposed in the course of novation
but is not otherwise involved in conducting a
clearing and settlement facility;
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- subregulation 7.1.10( 1) does not affect the
regulation of the Australian Stock Exchange's two clearing houses as clearing
and settlement facilities;
• the conduct of the Stock Exchange of Newcastle
Limited, the Bendigo Stock Exchange Limited and their participants in
facilitating direct broker-broker settlement of transactions which are entered
into on these exchanges and where the settlement is regulated by the market's
operating rules (subregulations 7.1.10(2) and (3));
- the exchanges are already regulated as financial
markets.
In both these situations, regulation of these entities as clearing and
settlement facilities is considered inappropriate.
Applications for the Australian CS facility licence
Introduction
A body corporate may apply for an Australian CS (clearing and settlement)
facility licence by lodging an application with ASIC that includes the
information and is accompanied by the documents (if any) required by
regulations (paragraphs 824A(1)(a) and (b) of the new Corporations Act).
Application
Under section 824B of the new Corporations Act, two kinds of application are
catered for:
• subsection 824B(1) applies to 'general
applications'; and
• subsection 824B (2) applies to 'foreign
applications', where a body corporate wishes to operate the same clearing and
settlement facility in the Australian jurisdiction as it is authorised to
operate in the foreign country in which its principal place of business is
located.
The requirements for the two types of application are different and this is
reflected in the regulations.
The information and documents specified in the regulations are intended to
enable the Minister to consider whether an application has satisfied the
criteria for general or foreign applications (subsection 824B(1) or (2)) have
been met. These criteria are designed to ensure that the granting of an
Australian CS facility licence will not compromise standards of market
integrity or consumer protection in Australian financial markets.
Material sought in the regulations will generally be similar to that sought by
ASIC for applications lodged under section 1131 of the old Corporations Act for
approval to operate a clearing house facility for a futures exchange. The
exception is foreign applicants who are currently not separately addressed.
The regulations will enable foreign applicants to obtain approval to operate
the same clearing and settlement facility in Australia as they operate in the
foreign country in which their principal place of business is located. For
approval purposes, it is important for foreign applicants to demonstrate that
their home country clearing and settlement facility is subject to at least
equivalent regulatory standards as those in Australia.
Regulations 7.3.09 to 7.3.11 of Division 4 will deal with general applications.
Regulations 7.3.12 to 7.3.14 of Division 5 will deal with foreign
applications.
General applications - regulations 7.3.09 to 7.3.11
Regulation 7.3.09 provides that Division 4 (regulations 7.3.09 to 7.3.11)
applies in relation to general applications submitted under new subsection
824B(l).
Regulations 7.3.10 and 7.3.11 set out the information and documents
respectively to be submitted in general applications. The requirements are
intended to provide the Minister with enough information about the applicant,
its organisation, proposed modus operandi, staffing, expertise, risk management
arrangements, and technological and financial resources to enable the Minister
to determine whether or not the application should be granted.
Foreign applications - regulations 7.3.12 to 7.3.14
Regulation 7.3.12 provides that Division 5 (regulations 7.3.12 to 7.3.14)
applies in relation to applications by foreign applicants submitted under
subsection 824B(2) of the new Corporations Act.
Regulations 7.3.13 and 7.3.14 in Division 5 set out the information and
documents respectively to be submitted by foreign applicants. The requirements
for foreign applications are intended to provide the Minister with enough
information about the applicant's existing and proposed clearing and settlement
facilities to enable the Minister to determine whether or not the application
should be granted.
The application will need to provide details of the clearing and settlement
facility to be extended into the Australian jurisdiction, the standard of
regulation applicable to facility in the home country, and the organisation and
structure of the applicant. The applicant will also have to establish that it
is authorised to operate a clearing and settlement facility in its home
country.
Obligations On Licensees
Provision of information to ASIC - regulations 7.3.01 to 7.3.03
Section 821B of the new Corporations Act requires that CS facility licensees
(that is, clearing and settlement facilities which are licensed under Part 7.3
of the new Corporations Act) provide certain information to ASIC.
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Subsection 821B(4) provides that the licensee must give written notice to ASIC
when a person becomes or ceases to be a director, secretary or executive
officer of a CS facility licensee or its holding company (paragraph 821B(4)(a))
or when a CS facility licensee becomes aware that a person has come to have or
ceased to have more than 15% of the voting power in the licensee or holding
company (paragraph 821B(4)(b)).
The notice must include such other information about the matter as is
prescribed by regulations made for the purpose.
Regulations 7.3.01 to 7.3.03 specify this information.
Annual report of CS facility licensee - regulation 7.3.04
Section 821E of the new Corporations Act requires CS facility licensees to
provide ASIC with an annual report on the extent to which the licensee complied
with its obligations as a CS facility licensee under new Chapter 7.
Subsection 821E(2) provides that the licensee must ensure that the annual
report is accompanied by any information and statements prescribed by
regulations made for the purpose of this subsection.
Regulation 7.3.04 specifies information that a CS facility licensee must supply
to ASIC if the annual report of such a body does not include this information.
The regulation refers to, among other things, a description of the activities
of the licensee and its resources.
Content of the licensed CS facility's operating rules - regulation
7.3.05
Subsection 822A(1) of the new Corporations Act provides that the operating
rules of a licensed CS facility must deal with the matters prescribed by
regulations made for the purposes of this subsection.
Regulation 7.3.05 lists those matters. It includes the regulated services
provided, access, matters relating to risk and the handling of defaults.
This list draws on those in sections 779B and 1131 of the old Corporations Act
but is more comprehensive, since the new Corporations Act no longer includes
the assumption inherent in current Chapter 7 that the clearing house will be
operated by a body related to the exchange.
Content of the licensed CS facility's written procedures - regulation
7.3.06
Subsection 822A(2) of the new Corporations Act provides that the regulations
may prescribe matters in respect of which a licensed CS facility must have
written procedures.
Regulation 7.3.06 sets out the matters which must be addressed in a licensed
facility's written procedures. The matters referred to include exchange of
appropriate information with other clearing and settlement facilities, markets,
ASIC and the RBA, and arrangements to ensure the integrity and security of
systems (including computer systems).
The rationale for this provision is that there are matters within the control
of the facility operator which are of legitimate regulatory concern but which
are not suitable for inclusion in the operating rules.
Powers of the Minister and ASIC
Provision of compliance report to other agencies - regulations 7.3.07 and
7.3.08
Section 823CA of the new Corporations Act empowers the Reserve Bank to assess
how well a CS facility licensee is complying with its obligation to comply with
the financial stability standards applying to it and to do all other things
necessary to reduce systemic risk.
Similarly, section 823C of the new Corporations Act will empower ASIC to assess
how well a CS facility licensee is complying with any or all of its other
obligations as a CS facility licensee under the new Chapter 7.
Subsections 823C(5) and 823CA(4) provide that if an assessment, or part of an
assessment, relates to a serious contravention of a law of the Commonwealth or
of a State or Territory, ASIC or the Reserve Bank, as appropriate, may give a
copy of the written report, or the relevant part of the report to the
Australian Federal Police, certain other nominated agencies and those agencies
prescribed by regulations for the purpose of new paragraph 823C(5)(d) or
823CA(4)(d), as appropriate.
Regulations 7.3.07 and 7.3.08 each prescribes further agencies for these
purposes. The lists are the same and include the Australian Competition and
Consumer Commission, the Australian Prudential Regulation Authority, as well as
a number of State and Territory fair trading agencies.
4. LIMITS ON INVOLVEMENT WITH MARKETS AND CLEARING
AND SETTLEMENT FACILITY LICENSEES
Introduction
Divisions 1 and 2 of Part 7.4 of the new Corporations Act separately address:
• limits on voting power in prescribed licensees (or
their holding companies) (Division 1); and
• the need for individuals involved in all market and
CS (clearing and settlement) facility licensees to be fit and proper (Division
2).
A prescribed licensee (or its holding company) which is prescribed for the
purpose of Division 1 is defined as a 'widely held market body' (new subsection
850A(2)).
Widely held market body - regulation 7.4.01
Regulation 7.4.01 prescribes particular market and CS facility licensees as
widely held market bodies.
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The bodies specified in regulation 7.4.01 are those that have been assessed as
being of national significance in accordance with the guidelines provided in
paragraph 9.9 of the Explanatory Memorandum to the Financial Services Reform
Bill 2001.
In general terms they are the Australian Stock Exchange Limited, its securities
clearing house, the SFE
Corporation Limited and its clearing house.
Record-keeping - regulations 7.4.02 to 7.4.04
Section 854A of the new Corporations Act empowers the making of regulations
relating to record-keeping and the giving of information in connection with
obligations found in Divisions 1 and 2 of new Part 7.4.
Regulations 7.4.02 and 7.4.03 require a market licensee and CS facility
licensee to keep records that detail the people involved in the management of
the market licensee or CS facility licensee and the people who hold more than
15 per cent of the voting power in these bodies.
Regulation 7.4.04 requires a person who has a substantial holding and voting
power in a widely held market body (see section 850A and regulation 7.4.01) to
give this information to the widely held market body.
5. COMPENSATION REGIMES FOR FINANCIAL
MARKETS
Introduction
Part 7.5 of the new Corporations Act addresses:
• the National Guarantee Fund and its administration
(which is regulated under Part 7.10 of the old Corporations Act); and
• requirements for compensation arrangements which
certain other markets will be required to make (that is, cover accessible by a
retail client for specified losses of property entrusted to a participant in a
financial market).
The regulations under Part 7.5 of the new Corporations Act are divided into 5
Divisions:
1. preliminary (regulations 7.5.01 to 7.5.13);
2. where there must be a compensation regime
(regulation 7.5.14);
3. approved compensation arrangements (regulations
7.5.15 to 7.5.17);
4. National Guarantee Fund compensation regime
(regulations 7.5.18 to 7.5.85);
5. provisions common to both kinds of compensation
arrangements (regulations 7.5.86 to 7.5.93).
Each of these Divisions is examined separately below.
(1) Preliminary - regulations 7.5.01 to 7.5.13
Division 1 of Part 7.5 of the regulations contains the definitions and other
preliminary matters required for the regulations.
These definitions are derived from sections 9, 93, 761, 920, 924, 924A, 948,
954, 954A, 954B, 954L, 954W, 955, 956, 961C, 962 and 1113A of the old
Corporations Act.
(2) Where there must be a compensation regime - regulation 7.5.14
Section 881B of the new Corporations Act provides the matters which a person
who is applying for an Australian market licence must state in their
application in relation to compensation arrangements and, in addition, provides
that the regulations may specify the information required where the applicant
must have approved compensation arrangements (other than the National Guarantee
Fund).
Regulation 7.5.14 specifies the information required for this purpose. The
information includes the services and products provided by the market, the
source of funds for the compensation and the proposed minimum amount of the
cover.
The regulation outlines the information required to be provided by the
applicant to enable the Minister to decide whether the proposed compensation
arrangements should be approved.
(3) Approved compensation arrangements - regulations 7.5.15 to 7.5.17
Application for approval of compensation arrangements after grant of
Australian market licence regulation 7.5.15
Section 882B of the new Corporations Act relates to getting compensation
arrangements approved after a licence has been granted. It is relevant where,
for example, a financial market initially has participants who are only trading
on behalf of wholesale clients or on their own behalf and the participants
fulfil the criteria for 'wholesale'. If the market activity subsequently
changes so that participants are trading on behalf of retail clients, then
approved compensation arrangements would be required.
Subsection 882B(2) provides that the application must contain the information,
in relation to the proposed compensation arrangements, required by regulations
made for the purpose.
Regulation 7.5.15 specifies information required for this purpose in terms
comparable to that which would be required if the approval had been sought at
the time of obtaining the licence. The information includes the services and
products provided by the market, the source of funds for the compensation and
the proposed minimum amount of the cover.
This regulation outlines the information required to enable the Minister to
decide whether the compensation arrangement should be approved.
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Notification of payment of levies - regulation 7.5.16
Section 883D of the new Corporations Act provides the mechanism for the payment
of levies to support 'Division 3 compensation arrangements' (that is,
compensation arrangements other than the National Guarantee Fund).
Since the levies are imposed with the assistance of the law, the levy is paid
to the market operator as an agent for the Commonwealth. While the Financial
Management and Accountability Act 1997 does not generally apply, the
operator is required, in accordance with the regulations, to notify the
Commonwealth of payments of levy it receives as agent for the Commonwealth.
Regulation 7.5.16 sets out the requirements for this notification - to whom it
must be given, when and what it must contain.
Comparable requirements in relation to levies in connection with the National
Guarantee Fund are found in regulations 7.5.74 and 7.5.75.
Amount of compensation - regulation 7.5.17
Subsection 885E of the new Corporations Act provides in effect that 'Division 3
compensation arrangements' (that is, other than the National Guarantee Fund)
must pay interest on the amount of the loss at the rate prescribed by the
regulations.
Regulation 7.5.17 specifies the rate of interest as 5%.
(4) National Guarantee Fund compensation regime - regulations 7.5.18 to
7.5.85
Purpose
The regulations made under sections 888A - 888E of the new Corporations Act
contain the details of the heads of claim available against the National
Guarantee Fund, the compensation available under these heads of claim and the
procedure for making and determining these claims which have been moved from
Divisions 6-8 of Part 7.10 of the old Corporations Act into the regulations.
Moving these matters into the regulations will provide flexibility to adjust
the heads of claim in line with changes in the procedure of the members of the
Securities Exchanges Guarantee Corporation (currently only the Australian Stock
Exchange) and to reflect changes in the products that may be traded on their
markets.
The Securities Exchanges Guarantee Corporation Limited is the administrator of
the National Guarantee Fund.
Details of the regulations
To a large extent the regulations made under sections 888A - 888E of the new
Corporations Act are intended to replicate the provisions in the old
Corporations Act. While the regulations incorporate some changes (for example
to take account of definitional changes), the regulations generally reflect the
scope of the provisions in the old Corporations Act.
The nine Subdivisions of Division 4 are summarised below.
Subdivision 4.1 - application of Division 4 - regulation 7.5.18
Subdivision 4.2 - clearing arrangements - regulation 7.5.19
Subdivisions 4.1 and 4.2 contain preliminary matters. In particular, the
regulations in these subdivisions outline the relevant power under which the
regulations will be made and detail how third party clearing arrangements will
apply in relation to the regulations in Subdivision 4.3 and 4.9.
Subdivision 4.3 - contract guarantees - regulations 7.5.20 to 7.5.32
The regulations in Subdivision 4.3 replicate the provisions in Division 6 of
old Part 7.10 of the old Corporations Act.
The regulations:
• relate to claims arising as a result of a failure
of one party to fulfil a contract for the transfer of securities within a
specified time; and
• provide that the compensation available for
successful claims under this Subdivision will be the supply of securities of
the same kind and number that were the subject of the failed contract, or if
that is not possible, the payment of the amount of the actual pecuniary loss
suffered by the claimant.
Subdivision 4.4 - securities loans guarantees - regulations 7.5.33 to
7.5.39
The regulations in Subdivision 4.4 replicate the provisions in Division 6A of
old Part 7.10 of the old Corporations Act.
The regulations detail the circumstances in which a lender will be able to
claim in respect of a borrower's failure to discharge an obligation under a
guaranteed securities loan.
Claims in Subdivision 4.4 will be required to be made within 6 months after the
day on which the lender became entitled to make the claim.
The regulations provide that the compensation available for successful claims
will be the transfer of securities or security benefits of the same kind and
number or the payment of an amount equal to the pecuniary loss suffered by the
lender.
Subdivision 4.5 - claims in respect of net obligations regulations 7.5.40 to
7.5.47
The regulations in Subdivision 4.5 replicate the provisions in Division 6B of
Part 7.10 of the old Corporations Act.
The regulations detail the circumstances in which claims will be able to be
made in respect of failures to pay net amounts and to transfer net numbers of
securities in respect of transactions.
Claims made under Subdivision 4.5 will need to be made within 6 months after
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the day on which the claimant became entitled to make the claim.
The regulations provide that the compensation available for successful claims
will be:
• payment of an amount equal to the amount that
remains undischarged;
• payment of an amount equal to the actual pecuniary
loss; or
• a transfer of securities of the same kind and
number as the outstanding securities.
Subdivision 4.6 - transfer delivery service guarantees - regulations 7.5.48
to 7.5.52
The regulations in Subdivision 4.6 replicate the provisions in Division 6C of
Part 7.10 of the old Corporations Act.
The regulations will allow a person to make a claim in respect of default by a
transfer delivery service nominee.
Claims under this Subdivision will be required to be made within 6 months after
the day on which the claimant became entitled to make the claim.
The regulations provide that the compensation available for successful claims
will be the transfer of securities of the same kind and number as the default
securities to the claimant, or the payment of an amount equal to the actual
pecuniary loss suffered to the claimant.
Subdivision 4.7 - unauthorised transfer - regulations 7.5.53 to 7.5.59
The regulations in Subdivision 4.7 apply if a dealer executes a document of
transfer of securities on behalf of a person but the person did not authorise
the dealer to execute the document. Equivalent provisions are in Division 7 of
Part 7.10 of the old Corporations Act.
The regulations:
• provide that the compensation available for
successful claims will be either the transfer of securities of the same kind
and amount as those of the transferred securities that the claimant has ceased
to hold, or the payment to the claimant of the amount that is the actual
pecuniary loss suffered by the claimant;
• enable further compensation to be paid to the
claimant if the supply of securities or the payment of money will not
adequately compensate the claimant for a pecuniary or other gain that the
claimant might, if the claimant had continued to hold the transferred
securities, have made but did not in fact make.
Subdivision 4.8 - contraventions of ASTC certificate cancellation provisions
- regulations 7.5.60 to 7.5.63
The regulations in Subdivision 4.8 replicate the provisions in Division 7A of
Part 7.10 of the old Corporations Act. This Subdivision will relate to a
contravention by a dealer of the ASTC certificate cancellation provisions (this
is a defined term in regulation 7.5.01).
The regulations provide that the compensation available for successful claims
will be the payment to the claimant of an amount that is the actual pecuniary
loss suffered by the claimant. This Subdivision also includes a regulation that
allows further compensation to be paid to the claimant if the payment of money
will not adequately compensate the claimant.
Subdivision 4.9 - claims in respect of insolvent participants - regulations
7.5.64 to 7.5.71
The regulations in Subdivision 4.9 replicate the provisions in Division 8 of
Part 7.10 of the old Corporations Act.
This Subdivision provides that claims can be made in respect of property that
have been entrusted to, or received by, dealers before these dealers became
insolvent.
The regulations provide that the compensation available for successful claims
will be the transfer of property of the same kind that was entrusted to the
dealer or if this is not obtainable the payment of an amount equal to the
actual pecuniary loss suffered by the claimant.
The total amounts paid out of the National Guarantee Fund in connection with
claims under this Subdivision will not exceed an amount equal to 14 per cent of
the minimum amount of the National Guarantee Fund as at the end of the day when
the claim is satisfied. This limit is contained in the old Corporations Act.
Subdivision 4.10 - general - regulations 7.5.72 to 7.5.84
Subdivision 4.10 includes regulations that will:
• enable claims to be settled and partially allowed
(regulation 7.5.72);
• provide that financial products purchased to
provide compensation form part of the Fund (regulation 7.5.73);
• provide a discretion to pay amounts (such as
dividends) not received because of a failure to transfer securities (regulation
7.5.74);
• enable the compensation payable to be reduced by
reference to a right of set-off available to the claimant, to the extent to
which the claimant was responsible for causing the loss, or to the extent the
claimant has adversely affected the Securities Exchanges Guarantee
Corporation's right to be subrogated to any of the claimant's right and
remedies in relation to the loss to which the claim relates (regulation 7.5.75
to 7.5.77);
• enable a claimant to be paid an amount that
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represents the reasonable costs and disbursements incidental to the proof and
making of the claim and attempting to recover the loss (regulation 7.5.78);
• require interest to be paid to the claimant
(regulation 7.5.79);
• require the SEGC to notify the claimant if a claim
is disallowed (regulation 7.5.80);
• provide for arbitration for the cash settlement of
certain claims (regulation 7.5.8 1);
• provide for compensation payments to be made in
instalments (regulation 7.5.82); and
• provides for notification to the Commonwealth of
the receipt of levies for the benefit of the National Guarantee Fund
(regulations 7.5.83 and 7.5.84).
Subdivision 4.11 - other provisions relating to compensation - regulation
7.5.85
Section 891A of the new Corporations Act empowers the Minister to authorise the
payment out of the National Guarantee Fund of that amount attributable to
clearing house support to a body corporate specified in the regulations which
has made adequate arrangements covering all or part of the clearing and
settlement system support that Division 4 of Part 7.5 of the new Corporations
Act provides for and if he or she is satisfied that the remaining funds are
appropriate for the risks remaining with the fund.
Subdivision 11 consists of regulation 7.5.85 which nominates the ASX Settlement
and Transfer Corporation Limited (ASTC) for the purposes of new subsection
891A(1). This will enable the Minister to direct the Securities Exchanges
Guarantee Corporation Limited to pay a specified amount to this body corporate
out of the National Guarantee Fund.
ASTC is a subsidiary of the Australian Stock Exchange Limited which operates
the securities clearing house of the Exchange.
Forms
Forms 719A, 719B, 720 and 721 are included in Schedule 2. They provide:
• a notice calling for claims in relation to
unauthorised transfer (Form 719A);
• a notice calling for claims in relation to
certificate cancellation provisions (Form 719B);
• a notice calling for claims in relation to an
insolvent broker (Form 720); and
• a notice of disallowance of a claim (Form 721).
(5) Provisions common to both kinds of compensation arrangements -
regulations 7.5.86 to 7.5.93
Excess money in regulated funds - regulations 7.5.86 and 7.5.87
Subsection 892G(1) of the new Corporations Act provides that the regulations
may determine, or provide a method for determining, when there is excess money
in a regulated fund (that is, the National Guarantee Fund or a fidelity fund
which forms part of a market's compensation arrangements).
Regulation 7.5.86 provides such a mechanism for the National Guarantee Fund,
while regulation 7.5.87 provides it in the case of other fidelity funds.
Approval of financial industry development purposes - regulations 7.5.88 to
7.5.92
Subsection 892G(2) of the new Corporations Act provides that the regulations
may make provision in relation to how excess money in a regulated fund may be,
or is to be dealt with.
Regulation 7.5.88 to 7.5.92 make such provision, including
• provision for the Minister to approve a matter as
an approved purpose if it meets particular criteria relating to the development
of the financial industry (regulation 7.5.88); and
• provision for the payment and use of such excess
funds from the National Guarantee Fund and other fidelity funds (regulations
7.5.89 to 7.5.92).
Regulations 7.5.90(4) and 7.5.92(4) require the market licensee receiving such
funds to account to ASIC for their use by lodging Form 719 not later than 3
months after the end of each relevant financial year.
Qualified privilege - regulation 7.5.93
Section 892J provides that regulations may provide for specified persons to
have qualified privilege in respect of specified things done under compensation
rules forming part of Division 3 arrangements or under regulations made for the
purposes of a provision of Subdivision B of Division 4.
Regulation 7.5.93 provides qualified privilege for the market licensee, its
employees and board, and an agent of the board in connection with giving notice
seeking claims and any statement that a contract of insurance does or does not
cover a particular participant. While this regulation relates only to Division
3 arrangements, qualified privilege is provided to a comparable extent in
relation to the National Guarantee Fund arrangements through other means.
6. LICENSING OF PROVIDERS OF FINANCIAL
SERVICES
Activities conducted by accountants - regulation 7.1.29
Section 766A of the new Corporations Act describes when a person provides a
financial service, a key concept in the reforms.
Paragraph 766A(2)(b) provides that the regulations may set out the
circumstances in which persons are taken to provide, or taken not to provide, a
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financial service.
To clarify the operation of the requirement to be licensed as a financial
services provider in the case of accountants, regulation 7.1.29 provides that a
qualified accountant when engaging in the activities listed in subregulation
7.1.29(1) will not be taken to be providing financial product advice in the
circumstances referred to in subregulation 7.1.29(2).
In general terms, this means that, for example, an accountant who is advising
in relation to the preparation or auditing of financial statements is not
providing financial product advice provided that the accountant does not make a
recommendation or provide an opinion, or a report of either of those things,
that is intended to influence a person in making a decision in relation to a
class of financial products or could reasonably be regarded as being intended
have such an influence.
Need for an Australian financial services licence - regulation 7.6.01
Paragraph 911A(2)(k) provides that a person is exempt from the requirement to
hold an Australian financial services licence for a financial service where the
provision of the service is covered by an exemption prescribed in regulations
made for the purposes of this paragraph.
Regulation 7.6.01 provides various exemptions from the need to hold an
Australian financial services licence.
Superannuation entities
Paragraphs 7.6.01 (1)(a)-(d) provide an exemption for trustees of non-public
offer superannuation entities, and trustees of pooled superannuation trusts,
provided the pooled superannuation trust does not invest the assets of a
regulated superannuation fund below a certain asset size. Subregulation
7.6.01(2) sets out certain consequences where the requirements of paragraph
7.6.01 (c) are not fulfilled.
Referral to a financial services licensee
Paragraph 7.6.01 (1)(e) provides an exemption from a requirement to hold a
financial services licence in relation to the provision of a financial service
that consists solely of the referral of a person to a financial services
licensee. This exemption will only be available where a person provides
referrals as an incidental part of their ordinary activities. It would not
therefore be available to a person whose business consists of the promotion of
services made available by financial services licensees. The exemption will
also be conditional on the provision of written disclosure, at the time the
referral is made, of any benefits (including commission) that the person making
the referral (or an associate) is to receive in respect of, or that are
attributable to, the referral.
Arranging payment into a superannuation fund or retirement savings
account
Paragraphs 7.6.01(1)(h) and (i) provide an exemption for arranging for
contributions to be paid into a superannuation fund or retirement savings
account, and for the provision of factual information to members or prospective
members of superannuation funds, or holders or prospective holders of
retirement savings accounts. These exemptions would apply, for example, to an
employer who arranges for employee contributions to be paid into a
superannuation fund, or who gives information to employees about the fund.
Handling insurance claims
Paragraph 7.6.01(1)(j) provides an exemption for persons involved solely in
insurance claims handling on behalf of insurers.
Alternative dispute resolution systems - regulation 7.6.02
Among the general obligations imposed on a financial services licensee by
subsection 912A(1) of the new Corporations Act is the requirement to have a
dispute resolution system complying with subsection 912A(2) if it provides
financial services to retail clients.
Subsection 912A(2) sets out the requirements for both internal and external
dispute resolution procedures and empowers the making of regulations to flesh
out the requirements.
Regulation 7.6.02 include the matters that ASIC is to take into account when
considering whether to make or approve standards or requirements relating to
internal dispute resolution. The regulation also sets out the matters ASIC is
to take into account when considering whether to approve an external dispute
resolution scheme.
Applying for Australian financial services licence - regulation 7.6.03
Section 913A of the new Corporations Act provides that a person may apply for
an Australian financial services licence by lodging an application with ASIC
that includes the information required by the regulations and is accompanied by
the documents (if any) required by the regulations.
Regulation 7.6.03 sets out a range of information that is required as part of
an application for an Australian financial services licence. This information
includes the person's name, principal business address, ABN (Australian
Business Number) (if any), a description of the financial services the person
proposes to provide and information relating to how the person will comply with
their general obligations contained in section 912A of the new Corporations
Act. The regulation also requires any other information that is required by
ASIC for the purpose of considering the application.
Conditions on Australian financial services licence - regulation
7.6.04
Subsection 914A(8) provides that a financial services licence is subject to
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such conditions as are prescribed by regulations made for the purpose of this
subsection, as well as those envisaged by earlier subsections.
Regulation 7.6.04 imposes a range of conditions on Australian financial
services licences. These include conditions relating to:
• notification to ASIC in relation to events that may
make a material adverse change to the financial position of the licensee (this
condition will not apply to licensees that are bodies regulated by Australian
Prudential Regulation Authority);
• notification to ASIC in relation to certain changes
in details entered in the register of financial services licensees and the
register of authorised representatives of financial services licensees;
• the maintenance of a record of training undertaken
by representatives; and
• the supply of copies of authorisations of
authorised representatives.
It should be noted that ASIC is empowered to impose conditions on a financial
services licence. Accordingly, the range of conditions dealt with in the
regulations should not be regarded as an exhaustive list of conditions which
may be imposed on licensees. It is envisaged that ASIC may use this power both
in applying various conditions in relation to licensees generally and also in
relation to particular classes of licensees.
Register of financial services licensees and register of authorised
representatives of financial services licensees - regulation 7.6.05 ASIC
register relating to persons against whom banning order or disqualification
order is made - regulation 7.6.06
Relevant provisions
Subsection 922A(1) of the new Corporations Act provides that ASIC must
establish and maintain one or more registers relating to financial services.
Subsection 922A(2) empowers the making of regulations to prescribe the way in
which the register or registers must be established or maintained, including
the details that ASIC must enter.
Register of financial services licensees and authorised
representatives
Regulation 7.6.05 sets out a range of information that is to be included in the
register of financial services licensees. This information includes the
licensee's name, ABN (if any), licence number, the date on which the licence
was granted, details relating to conditions on the licence and any other
information that ASIC believes should be included in the register.
The regulation also sets out a range of information to be included in the
register of authorised representatives of financial services licensees. This
information includes the authorised representative's name, ABN (if any), the
number allocated to the authorised representative by ASIC, the name of each
licensee for which the authorised representative is an authorised
representative, the date of the authorisation and any other information that
ASIC believes should be included in the register.
Register of persons banned or disqualified
Regulation 7.6.06 sets out the range of information that is to be included in
the register referred to in subsection 922A(2) relating to persons against whom
a banning order or a disqualification order under Division 8 has been made.
The information required in relation to persons against whom a banning order is
made includes the person's name, the day the banning order took effect, the
terms of the banning order and any other information that ASIC believes should
be included in the register.
The information required in relation to each person against whom a
disqualification order is made includes the person's name, the day on which the
disqualification order took effect, the terms of the disqualification order and
any other information that ASIC believes should be included in the register.
Restriction on use of certain words or expressions - regulation 7.6.07
Section 923A of the new Corporations Act restricts the use of certain words and
expressions (for example, 'independent').
Use of a restricted word or expression is prohibited by subsection 923A(1).
However, subsection 923A(2) provides that it is not a contravention of
subsection 923A(1) for a person to assume or use a restricted word or
expression if certain criteria are fulfilled. These criteria include that:
• the person does not receive a commission or certain
other forms of remuneration; and
• none of the persons listed in paragraph 923A(2)(b)
receive such remuneration.
- The persons listed in paragraph 923A(2)(b) include,
in subparagraph 923A(2)(b)(iii), any other person identified in regulations
made for the purposes of this subparagraph.
For the purposes of subparagraph 923A(2)(b)(iii) of the Act, regulation 7.6.07
prescribes 'any other persons' to include those persons identified in sections
942B or 942C of the Act (relating to Financial Services Guides) who may receive
remuneration or other benefits that are required to be disclosed in the
Guide.
7. FINANCIAL SERVICES DISCLOSURE
How documents, information and statements etc are to be given - regulation
7.7.01
Section 940C of the new Corporations Act sets out requirements for the
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provision of documents, statements and information. Subsection 940C(3) requires
the providing entity to give the client certain information (essentially on
remuneration, associations and interests of the providing entity) in the manner
required by regulation in the following situations:
• where general financial product advice is given in
a public forum (an exception to the requirement to provide a Financial Services
Guide: subsection 941C(5)); and
• where the providing entity provides
execution-related telephone advice (an exception to the requirement to provide
a Statement of Advice: subsection 946B(3)).
Regulation 7.7.01 sets out the manner for providing the required information in
these situations. It is modeled on paragraphs 849(2)(a) and (b) of the old
Corporations Act. Under this approach, disclosure is to be provided in the same
manner that the advice is provided. Therefore:
• where advice is given orally, disclosure must be
given orally;
• where advice is given in printed or electronic
form, disclosure must be given in that form; and
• where advice is given in any other form, disclosure
must also be given in that form.
(1) Financial Services Guide - regulations 7.7.02
to 7.7.08
Situations in which Financial Services Guide is not required - regulation
7.7.02
Section 941C provides the situations in which a Financial Services Guide is not
required.
Subsection 941C(6) provides that a providing entity does not have to give the
client a Financial Services Guide if the financial service is a dealing in, or
otherwise relates to, among other things, a financial product of a kind
prescribed by regulations made for the purpose of paragraph 941C(6)(c).
Regulation 7.7.02 prescribes travellers' cheques for this purpose.
Special rules apply in a number of areas of the new Corporations Act to reduce
the intensity of regulation in relation to 'basic deposit products' (as defined
in section 761A) and related non-cash payment facilities on the basis that
those product are capital guaranteed and well understood by consumers.
There are regulation-making powers to extend those special rules to other
products. Those powers are to be used to prescribe travellers' cheques as a
product to which these special rules apply. As well as regulation 7.7.02, which
is described above, this means that:
• A Statement of Advice is not required in relation
to travellers' cheques, but certain information must be given (subregulation
7.7.10); and
• A Product Disclosure Statement may be given after
the cheques are issued (regulation 7.9.80).
Financial Services Guide given by financial services licensee: description
of documents - regulation 7.7.03
Financial Services Guide given by financial services licensee: remuneration,
commission and benefits -regulation 7.7.04
Record-of advice given by financial services licensee - regulation
7.7.05
Section 942B sets out the main requirements of a Financial Services Guide.
Paragraph 942B(2)(k) provides that the Financial Services Guide must include
any other statement or information required by the regulations.
- additional requirements - regulation
7.7.03
Regulation 7.7.03 sets out requirements in relation to the additional
information that must be contained in a Financial Services Guide given by a
financial services licensee.
it requires the Financial Services Guide to include a statement explaining the
purpose and content of the document to the client, as well as explaining, if
appropriate, the circumstances in which the client may also receive a Statement
of Advice or a Product Disclosure Statement.
Certain aspects of the content of the Financial Services Guide must, at a
minimum, be drawn to the client's attention by the statement. This does not
preclude other matters being drawn to the client's attention, so long as the
statement is presented in a way that is easy for the client to understand.
- remuneration - regulation 7.7.04
Regulation 7.7.04 requires that the Financial Services Guide contains
information relating to remuneration paid to persons who refer clients to the
licensee.
The regulation also sets out the level of detail of the information required to
be disclosed in relation to remuneration paid to certain persons, but does not
limit the generality of subsection 942B(3), which requires that the level of
information should be such as a person would reasonably require for the purpose
of making a decision about whether to acquire financial services from the
providing entity as a retail client. The regulation contains guidance on the
type of disclosure that will satisfy the requirements of the regulation.
- period for requesting record of
execution-related telephone advice - regulation 7.7.05
Regulation 7.7.05 sets out requirements of the statement in the Financial
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Services Guide relating to the time in which a client can request a record of
execution-related telephone advice provided by a financial services licensee
(the request period). Where the licensee is required to provide periodic
reports to the client, the request period is linked to the timing of those
reports. In all other cases, the minimum request period is 90 days.
Financial Services Guide given by authorised representative of financial
services licensee: description of documents - regulation 7.7.06
Financial Services Guide given by authorised representative of financial
services licensee: remuneration, commission and benefits - regulation 7.7.07
Records of advice given by authorised representative of financial services
licensee - regulation 7.7.08
Section 942C of the new Corporations Act sets out the main requirements for the
Financial Services Guide which is given by an authorised representative.
Paragraph 942C(2)(m) requires that the Financial Services Guide must include
any other statement or information required by the regulations.
- additional requirements - regulation
7.7.06
Regulation 7.7.06 contains requirements equivalent to those set out in
regulation 7.7.03 in relation to Financial Services Guides given by financial
services licensees.
- remuneration - regulation 7.7.07
Regulation 7.7.07 contains requirements in relation to the disclosure of
information regarding remuneration in Financial Services Guides given by
authorised representatives which are equivalent to those in regulation 7.7.04
relating to Financial Services Guides given by financial services licensees.
- Record of advice given by authorised
representative of financial services licensee - regulation
7.7.08
Regulation 7.7.08 sets out requirements of the statement in the Financial
Services Guide relating to the time in which a client can request a record of
execution-related telephone advice provided by an authorised representative.
They are equivalent to the requirements in regulation 7.7.05 relating to
financial services licensees.
(2) Statement of advice - regulation 7.7.09 to
7.7.12
Situations in which a Statement of Advice is not required: record of
execution-related telephone advice -regulation 7.7.09
Situations in which Statement of Advice is not required: travellers' cheques
- regulation 7.7.02
Section 946B of the new Corporations Act sets out the circumstances in which a
Statement of Advice is not required.
- execution related telephone advice - regulation
7.7.09
Subsections 946B(1) to (3A) relate to execution-related telephone advice.
Subsection 946B(3A) provides that the providing entity must keep a record of
the advice and, in doing so, must comply with any applicable requirements of
regulations made for the purposes of this subsection.
Regulation 7.7.09 sets out these requirements, including the time for which the
record must be kept. The time is linked to the period in which a client may
request a copy of the record.
- travellers' cheques - regulation 7.7.10
Regulation 7.7.10 provides that travellers' cheques are prescribed, and thus no
Statement of Advice is required in relation to their provision.
Statement of Advice given by financial services licensee - regulation
7.7.11
Section 947B sets out the main requirements for a Statement of Advice given by
a financial services licensee. It includes regulation-making powers which have
been exercised in regulation 7.7.11.
Regulation 7.7.11 sets out further requirements in relation to information that
must be contained in a Statement of Advice given by a financial services
licensee.
The regulation provides that the Statement of Advice must contain information
relating to remuneration received by a person who makes referrals to the
licensee. This is similar to the requirement relating to Financial Services
Guides.
The regulation also sets out the level of detail of the information required to
be disclosed in relation to remuneration paid to certain persons, but does not
limit the generality of subsection 947B(3), which requires that the level of
information should be such as a person would reasonably require for the purpose
of making a decision whether to act on the advice as a retail client.
The information regarding remuneration required to be disclosed in the
Statement of Advice is necessarily more specific than that required under the
Financial Services Guide. Generally, remuneration will need to be disclosed as
a dollar amount, but where this is not possible, a description of how the
remuneration is to be calculated, including, where appropriate, worked dollar
examples and percentage amounts, should be provided.
The regulation makes no specific reference to 'back office' functions. However,
this should not be taken to imply that remuneration, commission or other
benefits received for the performance of such functions is not required to be
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disclosed. It is recognised that the concept of 'back office' functions varies
depending on the nature of the financial services business. Nevertheless,
remuneration received for performing such functions should be treated the same
as any other remuneration received, and should be disclosed if it might
reasonably be expected to be or have been capable of influencing the providing
entity in providing the advice (see paragraph 947B(2)(d) relating to a
Statement of Advice given by a financial services licensee, and paragraph
947C(2)(e) relating to a Statement of Advice given by an authorised
representative).
It is not practicable, or indeed appropriate, for the regulation to be
prescriptive about the level of detail that should be disclosed. It will depend
to a degree on the circumstances of each particular case, and will call for
some judgement on the part of the financial services licensee (or authorised
representative).
If an explanation of the activities or functions for which the remuneration is
received would assist the client to compare similar products or services
offered by other providers, it would be acceptable to disclose this. For
example, it would be acceptable to disclose whether part of the remuneration
was used to pay for administrative costs, or the costs of running an office.
A balance needs to be struck between providing the client with sufficient
information with which to make comparisons with products and services of other
providers, while not overwhelming or confusing the client by providing too much
information.
Statement of Advice given by authorised representative of financial services
licensee - regulation 7.7.12
Section 947C provides the main requirements for a Statement of Advice given by
an authorised representative. It includes regulation-making powers which have
been exercised in regulation 7.7.12.
Regulation 7.7.12 contains requirements in relation to the information to be
contained in a Statement of Advice given by an authorised representative
equivalent to those in regulation 7.7.11 relating to Statements of Advice given
by financial services licensees.
8. OTHER PROVISIONS RELATING TO CONDUCT CONNECTED
WITH FINANCIAL PRODUCTS AND FINANCIAL SERVICES
Obligation to pay money into an account - regulation 7.8.01
Section 981B relates to the obligation on a financial services licensee to pay
money into an appropriate account.
Regulation 7.8.01 contains various requirements for accounts maintained under
section 981B of the Act. For subparagraph 981(1)(a)(ii) an account may be held
with an approved foreign bank or as a cash management trust (subregulation
7.8.01(2)).
The term 'approved foreign bank' is defined in subregulation 1.0.02(1).
Subregulation 7.8.01(5) states that an account maintained for the purposes of
Division 2 of Part 7.8 must be designated as a trust account and financial
services licensees must hold all moneys paid into the account on trust for the
benefit of the person entitled to the moneys.
Accounts maintained for section 981B of the Act - regulation 7.8.02
Section 981C provides that the regulations may deal with all or any of a number
of matters in relation to accounts maintained for the purposes of section
981B.
This power is exercised in regulation 7.8.02 which deals with the circumstances
in which payments may be made out of an account (including the circumstances in
which money may be withdrawn and invested, and the kinds of investment that may
be made), the minimum balance to be maintained in an account, how interest on
an account is to be dealt with, and how interest or other earnings on an
investment of money withdrawn from an account, or the proceeds of the
realisation of such an investment, are to be dealt with.
How money to be dealt with if licensee ceases to be licensed etc. -
regulation 7.8.03
Section 981F provides that the regulations may include provisions dealing with
how money in an account maintained for the purposes of section. 981B, or an
investment of such money, is to be dealt with if, among other things, the
licensee ceases to be licensed.
This power is exercised in regulation 7.8.03 which sets out how money in an
account maintained for section 98 1 B is to be dealt with if the financial
services licensee ceases to be a financial services licensee, becomes insolvent
or ceases to carry on some or all of the activities authorised by their
licence.
Money to which Subdivision A of Division 2 of Part 7.8 of the Act applies
taken to be held in trust: breach of financial services law - regulation
7.8.04
Subsection 981H(1) provides that, generally, money to which Subdivision A of
Division 2 of Part 7.8 applies is held in trust for the licensee for the
benefit of the client.
Subsection 981H(3) provides that the regulations may, among other things,
provide for matters relating to the taking of money to be held in trust.
Regulation 7.8.04 provides that if client money is held by a financial services
licensee or held in an investment mentioned in subregulation 7.8.02(5)
following a breach of a financial services law, then the money, the investment
and the proceeds of the investment are subject to a trust in favour of the
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client to the extent that the client is entitled to the money, investment or
proceeds as the case may be.
Money to which Subdivision A of Division 2 of Part 7.8 of the Act applies
taken to be held in trust: risk accepted by insurer - regulation 7.8.05
Subsection 981H(1) provides that, generally, money to which Subdivision A of
Division 2 of Part 7.8 applies is held in trust for the licensee for the
benefit of the client.
Subsection 981H(3) provides that the regulations may, among other things,
provide for matters relating to the taking of money to be held in trust.
Regulation 7.8.05 provides for the money held by a financial services licensee
in relation to an insurance product where the risk in relation to the insurance
product has been accepted by an insurer to be held in trust for the insurer
(rather than the insured).
Statement setting out terms of loan etc. - regulation 7.8.06
Subsection 982C(1) provides that the licensee must, in accordance with the
regulations, give the client a statement setting out the terms and conditions
on which the loan is made and accepted and the purpose for which and the manner
in which the licensee is to use the money.
Regulation 7.8.06 states that the financial services licensee must give a
client a disclosure document that contains, as far as practicable, the matters
required by Division 2 of Part 7.9.
How property to which Division 3 of Part 7.8 of the Act applies is to be
dealt with - regulation 7.8.07
Subsection 984B(1) provides that, with certain exceptions, a licensee must
ensure that property to which Division 3 of Part 7.8 applies is only dealt with
in accordance with the requirements specified in regulations made for the
purpose of paragraph 984B(1)(a).
Regulation 7.8.07 provides that the financial services licensee must hold the
property on trust for the benefit of the person who is entitled to the money.
It also includes provision for deposit of the property in safe custody with an
authorised deposit-taking institution and for a number of other possible
requests by clients.
Subregulations 7.8.07(8) and (9) specifically address deposit of property for a
loan or advance to the financial services licensee.
Debts of financial services licensee in relation to premiums etc. -
regulation 7.8.08
Subsection 985C(1) provides that the regulations may impose requirements to be
complied by a financial services licensee in relation to, or make other
provision dealing with, a situation specified in subsection (2) that arises in
relation to a contract or proposed contract of insurance under which the
licensee is not the insurer. The situations specified in subsection 985C(2)
include where the licensee receives an amount as a premium.
Regulation 7.8.08 enables the effect of the current section 27 of the
Insurance (Agents and Brokers) Act 1984 (the I(AB) Act) to be carried
across to the new regime (Explanatory Memorandum to the FSR Bill, paragraph
13.26).
The regulation provides for limits on a financial services licensee holding a
client's money in relation to the placement of insurance business and makes a
licensee accountable for the payment of moneys to those entitled to receive
them.
Reporting in relation to money to which Subdivision A or B of Division 2 of
Part 7.8 of the Act applies or property to which Division 3 of Part 7.8 applies
- regulation 7.8.09
Section 986A provides that the regulations may impose reporting requirements to
be complied with by a financial services licensee in relation to money to which
Subdivision A or B of Division 2 of Part 7.8 applies or property to which
Division 3 of Part 7.8 applies.
This power is used in regulation 7.8.09 which outlines the reporting
requirements in relation to clients' money and property. Where a financial
services licensee has held money or property to which Part 7.8 applies, the
licensee must within 14 days of the end of the relevant quarter day, as defined
in s 9 of the Corporations Act, give the client a written statement setting out
the information contained in subregulations 7.8.08(2) and 7.8.08(3)
Reporting in relation to derivatives - regulation 7.8.10
Section 986B provides that the regulations may impose reporting requirements to
be complied with by a financial services licensee in relation to dealings in
derivatives on behalf of other people.
Regulation 7.8.10 outlines the reporting requirements in relation to
derivatives in relation to retail clients. A wholesale client may request a
financial services licensee in writing to apply the reporting requirements to
money received from the client.
Particular categories of information to be shown in records - regulation
7.8.11
Section 98SE relates to the records which a financial services licensee must
keep.
Paragraph 988E(g) requires the licensee to keep records in sufficient detail to
show particulars of such other matters (if any) as are specified in regulations
made for the purposes of this paragraph.
This power is used in regulation 7.8.11 to specify the following additional
matters:
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• all underwriting transaction entered into by the
licensee;
• all derivatives dealt with by the licensee under
instructions from another person;
• each person who gave instructions to deal with
derivatives;
• all property that is not the property of the
financial services licensee and for which the licensee, or any nominee
controlled by the licensee is accountable, showing by whom, and for whom, the
property is held and the extent to which the property is either held for safe
custody or deposited with a third party as security for loans or advances made
to the broker; and
• all transaction in relation to insurance products
entered into with, or on behalf of, foreign insurers.
Requirements in relation to financial records of financial services
licensees - regulation 7.8.12
Section 988F provides that the regulations may impose additional requirements
to be complied with in relation to financial records of financial services
licensees including, for example, requirements for filings to be contained in
the records, and requirements relating to the level of detail to be shown in
the records.
Regulation 7.8.12 provides such additional requirements in relation to basic
deposit products and other financial products. It also addresses the situation
where the financial services licensee is a partner in a firm.
Auditor's report with annual profit and loss statement and balance sheet -
regulation 7.8.13
Subsection 989B(1) requires that a financial services licensee prepare a true
and fair profit and loss statement and balance sheet in respect of each
financial year.
Subsection 989B(3) provides that the licensee must lodge an auditor's report
with ASIC containing the information and matters required by the regulations.
Regulation 7.8.13 states for the purposes of preparing an auditor's report
under subsection 989B(3), the auditor must check or examine:
• internal procedures applied to ensure compliance
with Part 7.8; and
• the operation and control of accounts required to
be maintained under sections 981B and 982B; and
• other ledgers or records as the auditor considers
it necessary to examine.
Contents of annual profit and loss statement and balance sheet and
applicable accounting procedures -regulation 7.8.14
Section 989C provides that the profit and loss statement and the balance sheet
must contain the information that is required by the regulations and be
prepared in accordance with any requirements in the regulations as to the
accounting principles to be used.
Regulation 7.8.14 requires that the profit and loss statement and balance sheet
contain a declaration by the licensee:
• that the profit and loss statement and balance
sheet give a true and fair view; and
• that the auditor's report attached to the profit
and loss statement and balance sheet is a true copy of the auditor's report on
the audited accounts.
Appointment of auditor by financial services licensee - regulation
7.8.15
Section 990B relates to the appointment of an auditor by the financial services
licensee.
Regulation 7.8.15 deals with matters related to the appointment of a firm as
auditor of the financial statements of a financial services licensee - for
example, reconstitution of the firm because of a death and the admission of new
partners. The regulation carries over the effect of some parts of sections 857
and 1215 of the old Corporations Act.
When person is ineligible to act as auditor of financial services licensee -
regulation 7.8.16
Section 990C provides that a person or firm is ineligible to act as auditor of
the licensee if regulations made for the purposes of this section provide that
the person or firm is ineligible so to act.
Regulation 7.8.16 sets out the circumstances when a person is ineligible to act
as auditor of a financial services licensee. They include indebtedness to the
financial services licensee and not being a registered company auditor. This
regulation carries over the effect of subsections 857(2) and 1215(2) of the old
Corporations Act.
Priority to clients' orders - regulation 7.8.17
Section 991B relates to the priority to be given to clients' orders.
Paragraph 991B(3)(b) provides that the prohibition in subsection 991B(2) on
entering into a transaction on the licensee's own behalf in priority to a
client's outstanding order does not apply if the transaction, or the giving of
the instructions, is permitted by regulations made for the purposes of this
paragraph.
Regulation 7.8.17 provides that the general rule does not apply in relation to
transactions entered into by a participant in a licensed market in accordance
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with the operating rules of the market. It essentially replicates existing
Corporations Regulation 7.4.05, but is extended in its application from a stock
exchange to all licensed markets.
Instructions to deal through licensed markets - regulation 7.8.18
Section 991C provides that regulations may deal with various matters relating
to instructions to deal through licensed markets.
Regulation 7.8.18 carries over the requirements set out in subsections 1266(2),
(4) and (6) of the old Corporations Act relating to futures, which will now
apply in respect of instructions received by financial services licensees to
deal in financial products through licensed markets.
However, it is recognised that the current requirements for futures markets may
not be appropriate for other licensed markets, which may have their own rules
in relation to these matters. The requirements in the regulation therefore
apply except to the extent that the operating rules of a licensed market of
which the financial services licensee is a participant otherwise provide.
Records of instructions to deal on licensed markets and foreign markets -
regulation 7.8.19
Section 991D provides that regulations may require records to be kept in
relation to instructions to deal on licensed and foreign markets.
Regulation 7.8.19 sets out record-keeping requirements in relation to the
receipt, transmission and execution of instructions received by financial
services licensees to deal in financial products through licensed markets or
through other financial markets, whether inside or outside Australia.
Dealings with non-licensees - regulation 7.8.20
Section 991E relates to the obligations on financial services licensees in
relation to dealings with non-licensees. This includes, for example, disclosing
that the licensee is acting on its own behalf.
Regulation 7.8.20 sets out a number of requirements relating to situations
where financial services licensees deal on their own account.
The regulation sets out exceptions to the requirement that the licensee must
notify the non-licensee that the licensee is acting on its own behalf. This
replicates an existing exception for the sale or purchase of certain securities
and interests in managed investment schemes.
The regulation provides exceptions to the prohibition against the licensee
charging a brokerage, commission or fee to the non-licensee in relation to
transactions in which the licensee acts on its own behalf, subject to certain
conditions being met.
The regulation also imposes record-keeping requirements in relation to
transactions entered into by financial services licensees on their own
behalf.
Dealings involving employees of financial services licensees - regulation
7.8.21
Section 991F relates to dealings involving the employees of financial services
licensees.
The terms of subsection 991F(2), which relates to the provision of credit to
employees of the licensee to enable them to provide financial products, are
subject to the regulations.
Regulation 7.8.21 sets out exceptions to the prohibition on financial services
licensees providing credit to their own employees (or the associates of
employees) to acquire financial products. The exceptions include if the
licensee is a bank and, in certain circumstances, loans to buy shares in the
licensee. These exceptions in general terms carry forward the existing
exceptions in Corporations Regulations.
However, they extend the current requirements in one respect. That is, a body
corporate related to the financial services licensee may act as the agent of
the licensee's employee in the acquisition of a financial product, subject to
certain conditions.
9. FINANCIAL PRODUCT DISCLOSURE
Introduction
Part 7,9 of the new Corporations Act establishes a harmonised disclosure
framework that applies consistent disclosure requirements to financial
products, based upon point of sale disclosure through a Product Disclosure
Statement, ongoing disclosure of material matters and periodic reporting
requirements. A central objective of the disclosure obligations is to enhance
consumer protection, including by providing better comparability and
consistency in the information available to consumers about various financial
products, including superannuation.
Preliminary - Division 1
Interpretation: regulation 7.9.01
Regulation 7.9.01 provides various definitions, primarily relating to
superannuation and retirement savings account products.
Sub-plans: regulation 7.9.02 and Part 1 of Schedule 10A
Regulation 7.9.02 includes the concept of sub-plans used in the
Superannuation Industry (Supervision) Regulations, 1994 and provides
that the changes of membership of superannuation funds in relation to interests
in different sub-plans are to be regarded as the issue of superannuation
interests for the purposes of the product disclosure provisions. The effect of
this is that generally a Product Disclosure Statement will be required to be
given where a person moves from one sub-plan to another. Part 1 of Schedule 10A
clarifies this point, as interests in different sub-plans will not constitute
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the same superannuation product for the purposes of determining a person's
obligation to provide a Product Disclosure Statement.
Similarly, application forms will generally be required in the event of a
product holder acquiring an interest in a different sub-plan from that already
held.
Arrangements for Product Disclosure Statements in relation to superannuation
products and retirement savings account products - Division 2
Provision of Product Disclosure Statements: regulations 7.9.03 to 7.9.07;
Parts 2 to 4 of Schedule 10A
Division 2 provides various modifications to the obligation to provide Product
Disclosure Statements in relation to superannuation and retirement savings
account products. These modifications reflect the nature of existing
legislative arrangements under the Superannuation Industry (Supervision)
Regulations 1994.
Where the holder of the superannuation product or retirement savings account
does not initiate the issue of the product, the requirement to provide a
Product Disclosure Statement has been modified.
Regulation 7.9.04 allows a Product Disclosure Statement for superannuation
products to be provided later in certain circumstances, including the provision
of a Product Disclosure Statement for standard employer sponsored members and
members of non-public offer superannuation funds.
Regulation 7.9.05 and Part 2 of Schedule 10A varies the requirement to provide
a Product Disclosure Statement for retirement savings account products where
the retirement savings account provider is subject to a takeover or merger, or
operating at the direction of a regulatory agency.
In some instances where the prospective product holder does not instigate the
issue of a superannuation product it may be necessary for another person to
receive a Product Disclosure Statement. Regulation 7.9.06 and Part 3 of
Schedule 10A require a Product Disclosure Statement to be provided by the
trustee of an eligible rollover fund to certain persons to give sufficient
information for a transfer of product holder benefits.
Division 2 also relates to the provision of a Product Disclosure Statement to a
product holder in conjunction with other disclosure requirements. Regulation
7.9.07 and Part 4 of Schedule 10A provide that the provision of a Product
Disclosure Statement is not required when a superannuation or retirement
savings account product holder seeks to vary the condition of an associated
insurance product where the product holder has already been supplied with
sufficient information through the satisfaction of other disclosure
requirements to make an informed decision.
Dealing with money received for a financial product before the product is
issued - Division 3
Accounts - regulation 7.9.08
Section 1017E of the new Corporations Act imposes an obligation on product
issuers and sellers who are required to prepare a Product Disclosure Statement
to hold any application money in an account for the applicant until the product
is issued or transferred or the money returned. Subsection 1017E(2) provides
that the money must be paid into an account with an Australian authorised
deposit-taking institution, or of a kind prescribed by regulation under
subparagraph 1017E(2)(a)(iii).
Subregulation T9.08(1) allows application money to be paid into foreign bank
accounts and cash management trusts, as well as into Australian authorised
deposit-taking institutions.
Paragraph 1017E(2)(c) provides that additional requirements may be imposed by
regulations in relation to such accounts. Following the approach taken in Part
7.8, subregulation 7.9.08(2) requires the account to be a trust account.
Content of Product Disclosure Statements - Division 4
Product Disclosure Statements - content requirements for superannuation and
retirement savings account products: regulations 7.9.09 to 7.9.11; Schedule 10,
Part 5 of Schedule 10A; Schedules 10B and 10C
The reforms included in the FSR Act contain the general principles of
disclosure that are capable of application across the full range of financial
products. The main content requirements for Product Disclosure Statements are
outlined in section 1013D of the new Corporations Act. The explanatory
memorandum to the FSR Bill foreshadowed that while for many products the
general principles would be sufficient, some products, such as superannuation
and retirement savings account products, would require further detail on the
application of the general principles.
The prescription in more detail of the general information requirements for
superannuation and retirement savings account products reflects the long term
nature and legislated requirements for the acquisition of those products as a
means to provide retirement income. It is not intended that such prescription
should influence of the interpretation of section 1013D for other financial
products.
For superannuation and retirement savings account products, regulations 7.9.09
to 7.9.11 and Schedules 10B and 10C generally set out a, more detailed
statement of the information content requirements in section 1013D.
The regulations recognise that variation in the type of superannuation products
and retirement savings account products will necessitate the provision of
different forms of information. Accordingly, capital guaranteed superannuation
products and retirement savings account products are subject to differing
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requirements from other regulated superannuation products due to their lower
risk-return nature. Whereas, due to the proximity of members and trustees in
self managed superannuation funds, no further prescription of the general
Product Disclosure Statements information content requirements has been made.
The more detailed information prescribed in Schedules 10 and 10B includes a
standardised expense measure to aid in the comparison of costs across certain
financial products.
Subregulation 7.9.11(2) and Part 5 of Schedule 10A allows for limited
prescription of the format of a Product Disclosure Statement to aid the
awareness of superannuation and retirement savings account product holders to
certain material information due to the nature of the products.
Application forms for superannuation and retirement savings account
products: regulation 7.9.12, 7.9.13; Part 6 of Schedule 10A
Subdivision 4.3 recognises practical difficulties in compliance with
obligations for applications to acquire interests in superannuation and
retirement savings account products. Regulations 7.9.12, 7.9.13 and Part 6 of
Schedule 10A remove the requirement to provide an eligible application in
relation to certain transfers of benefits of superannuation and retirement
savings account product holders and standard employer sponsored arrangements.
These regulations include suitable defence and offence provisions relating to
the issue of products without an eligible application in relation to standard
employer sponsored members.
Remedies for person acquiring financial product under defective Product
Disclosure Statement: regulation 7.9.14
Regulation 7.9.14 requires a person exercising their right of return under
section 1016F in relation to superannuation and retirement savings account
products to nominate where certain monies are to be repaid within a 1 month
period. The nomination requirement is intended to prevent persons from removing
benefits subject to preservation rules and cashing restrictions from the
superannuation system.
Unauthorised foreign insurers - regulation 7.9.15
Section 34 of the I(AB) Act requires an insurance intermediary to disclose to
an insured (where relevant) that the insurer is an unauthorised foreign
insurer. Rather than placing this obligation on the financial services
provider, regulations have been made to require it to be included in the
Product Disclosure Statement for the particular product.
Regulation 7.9.15 has been made for the purposes of paragraph 1013D(4)(c) of
the new Corporations Act, which allows regulations to provide a more detailed
statement of the information than is required by a provision of subsection (1),
either in a particular situation or generally. It provides a more detailed
elaboration of the matters contained in paragraph 1013D(1)(c), which requires
disclosure of information about any significant risks associated with holding
the relevant product.
Generally, the regulation requires similar disclosure to that currently
contained in the acknowledgement required to be signed by an intending insured
under section 34 of I(AB) Act. The expression 'unauthorised foreign insurer' is
to be defined in the same way that it is currently defined in section 9 of
I(AB) Act.
Consumer credit insurance - regulation 7.9.16
The Insurance Contracts Act provides for disclosure to consumers of information
in relation to consumer credit insurance. Some aspects of the Insurance
Contracts Act disclosure obligations are not covered by the Product Disclosure
Statement requirements in section 1013D of the new Corporations Act. Those
aspects are covered by regulation 7.9.12B.
This regulation has been made for the purposes of paragraph 1013D(4)(c) of the
new Corporations Act and will apply only to consumer credit insurance. The
regulation adopts the definition of consumer credit insurance used in the
Insurance Contracts Act (see subregulation 7.9.16(2)).
Ongoing requirements for product disclosure - Division 5
Division 5 prescribes the information content requirements for periodic
statements and fund information to be provided to superannuation and retirement
savings account product holders.
Periodic statements: regulations 7.9.18 to 7.9.28; Parts 7 and 8 of Schedule
10A
The periodic statements for superannuation and retirement savings account
products are subject to further prescription of the information content
requirements. Similar to the more detailed prescription of the information
content requirements of Product Disclosure Statements, this reflects the nature
of the products and their importance to retirement incomes. Regulation 7.9.17
restricts application of the Division to superannuation entities and retirement
savings accounts.
Regulations 7.9.19 to 7.9.22 and regulation 7.9.26 prescribe the information
content requirements for periodic reports. The regulations take into account
the different types of superannuation and retirement savings account products
on offer and vary the information required accordingly.
Regulations also require the inclusion of certain information in periodic
statements upon certain events. Regulations 7.9.23 and 7.9.28 require
information to be provided members of capital guaranteed funds and retirement
savings account when the amount Of benefits reaches a prescribed limit to
ensure that the risk/return nature of the products are suitable to the product
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holders circumstances.
Regulations 7.9.24 and 7.9.27, and Parts 7 and 8 of Schedule 10A also vary
periodic statement information requirements for superannuation and retirement
savings account products to account for other circumstances where the product
holders benefits are subject to compulsory protection or the holder of a
pension product.
Modification of section 1017D - information already given: Division 8,
regulation 7.9.72
Regulation 7.9.72 ensures that superannuation and retirement savings account
providers are not subject to a duplication of reporting obligations by the
interaction of information content requirements for periodic statements under
paragraphs 1017D(5)(a) to, (e) and the regulations under paragraph 1017D(5)(g)
in Division 5 of these Regulations.
Fund information - information for change to choices: regulations 7.9.29 and
7.9.30; Part 9 of Schedule 10A
Regulations 7.9.29, 7.9.30 and Part 9 of Schedule 10A act to ensure that
product holders receive adequate disclosure to make an informed decision to
vary the nature of a product under facilities available through an existing
contract or legal relationship in relation to a superannuation or retirement
savings account product. Where information is not supplied on an ongoing basis
the issuer may provide the relevant information either in a specific response
or by providing a relevant Product Disclosure Statement.
Fund information - general: regulations 7.9.31 to 7.9.42
The disclosure regime under the new Corporations Act has replaced existing
disclosure requirements for superannuation interests under the
Superannuation Industry (Supervision) Act 1993 (and Superannuation
Industry (Supervision) Regulations 1994), including the provision of fund
information.
The regulations address when the required information about the fund is to be
provided. Regulations 7.9.31 and 7.9.32 replicate the reporting period
requirements for periodic statements for the provision of fund information for
superannuation entities. However, fund information is not required to be given
where a person does not hold the superannuation product on the last day of
period and superannuation entities may provide fund information in respect of
periods of various lengths.
Regulation 7.9.33 allows fund information to be provided in a similar manner to
Product Disclosure Statements and periodic statements.
Regulations 7.9.34 to 7.9.42 prescribe the information to be supplied as part
of fund information requirements and are generally consistent with existing
requirements under the Superannuation Industry (Supervision) Regulations
1994.
Ongoing disclosure of material changes and significant events -
superannuation entities and retirement savings accounts: regulations 7.9.43 and
7.9.44; Part 10 of Schedule 10A
Regulation 7.9.43 and Part 10 of Schedule 10A prescribe a number of events that
are considered to be significant for ongoing disclosure purposes for
superannuation entities and retirement savings accounts, and modify the time to
provide information in certain circumstances. These events are prescribed as
significant events to ensure appropriate disclosure. The regulations include a
requirement to advise product holders of certain decisions of the responsible
person before an event occurs.
Regulation 7.9.44 requires the provision of a notice to a product holder whose
interests are to be transferred to an eligible rollover fund in order to permit
the product holder to make an informed decision.
Information on request: regulations 7.9.45, 7.9.46 and 7.9.47; Part 11 of
Schedule 10A
Regulations 7.9.45 and 7.9.46 define prescribed documents for the purposes of
section 1017C in relation to certain superannuation entities and retirement
savings accounts.
Regulation 7.9.47 and Part 11 of Schedule 10A permit a responsible person to
charge for information requested under the operation of section 1017C of the
new Corporations Act. This is consistent with the ability to charge for
information under section 1017A and an existing ability to charge for
information on request in relation to superannuation products under the
Superannuation Industry (Supervision) Regulations 1994.
Information about complaints: regulation 7.9.48
Regulation 7.9.48 requires the responsible person of a superannuation or
retirement savings account product to provide information on external dispute
resolution mechanisms in the event of a decision on a complaint by an internal
dispute resolution mechanism.
Periodic report when product holder ceases to hold product - superannuation
products and retirement savings account products: regulation 7.9.49 to 7.9.60,
Parts 12 and 13 of Schedule 10A
Regulations 7.9.49 to 7.9.60 recognise that the periodic statement required to
be provided to a person who has ceased to hold a superannuation or retirement
savings account product should not be the same as the content and other
requirements provided to a person who remains a product holder.
Regulation 7.9.50 defines the periodic report referred to in paragraph
1017D(2)(d) of the new Corporations Act as the exit reporting period.
Regulation 7.9.51 and Part 12 of Schedule 10A reduce the time for compliance
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with the requirement to provide a periodic report for the exit reporting period
in relation to superannuation and retirement savings account products, to
account for the needs of former product holders. For administrative purposes,
superannuation and retirement savings account product providers are provided
with the option of supplying a combined periodic report in relation to a prior
reporting period and the exit reporting period.
For superannuation products and retirement savings accounts regulations 7.9.52
and 7.9.53 address the issue whether the product holder has ceased to hold the
product through death of otherwise. In particular, they clarify to whom and
what level of information is to be provided in the event that the holder of
such a product dies.
Regulations 7.9.54, 7.9.55, 7.9.58 and 7.9.59 prescribe information to be
included in the periodic report for the exit reporting period for
superannuation products and retirement savings account products in terms of the
general periodic statements information requirements for those products.
Further or varied information required due to the person ceasing to hold the
product are detailed.
Regulations 7.9.56, 7.9.60 and Part 13 of Schedule 10A provide an exception to
exit reporting periods removing the obligation for superannuation and
retirement savings account providers for the supply of a periodic statement in
order to prevent a possible duplication of information. Specifically this
relates to an event where the benefits of former product holder are transferred
to another entity, and that entity supplies the required information.
Regulation 7.9.57 provides a further exception to periodic reporting
requirements for the exit reporting period in certain circumstances for
superannuation products and retirement savings accounts related to product
holders benefits that are subject to compulsory protection.
Ongoing disclosure - all financial products: regulation 7.9.61, Part 14 of
Schedule 10A
Regulation 7.9.69 and Part 14 of Schedule 10A modify various parts of Division
7.9 in order to remove various product disclosure obligations that could not
reasonably be expected to be satisfied. Where a responsible person does not
have an address for a product holder, or is reasonably satisfied that the
address is incorrect, and has taken reasonable steps to locate the product
holder they will not be subject to product disclosure and other associated
obligations.
Confirmation of transactions - Division 6
Confirmation of transaction - superannuation products and retirement savings
accounts: regulation 7.9.62
Regulation 7.9.62 exempts superannuation entities and retirement savings
accounts from having to confirm a transaction to a product holder where they
have already provided effective confirmation as part of their periodic
reporting obligations.
Confirmation of transactions - precise costs of transaction not known:
regulation 7.9.63; Part 15 of Schedule 10A
Regulation 7.9.63 allows responsible persons to confirmation a transaction to
the extent known at the time of confirmation, where information on amounts or
taxes payable is not known at that time. Part 15 of Schedule 10A provides the
subsequent confirmation procedures, including a number of options for the
supply of the information to the product holder when that information becomes
known.
Cooling off periods - Division 7
Cooling-off periods not to apply: regulation 7.9.64
Regulation 7.9.64 details circumstances where cooling-off provisions of die new
Corporations Act are not to apply. The circumstances reflect, in part,
limitations on product disclosure provisions in the new Corporations Act and
practical difficulties in applying cooling-off provisions to certain financial
products.
Return of financial product: regulation 7.9.65
Regulation 7.9.65 limits a person's right of return in relation to short-term
risk insurance products to ensure that the cooling-off provisions are not
inappropriately utilised to obtain a refund of monies when the product has
effectively been used (for example, travel insurance).
Return of financial product - transfer between superannuation entities or
retirement savings accounts: regulation 7.9.66:
Regulation 7.9.66 operates to prevent persons using cooling-off provisions to
access superannuation related monies that are subject preservation requirements
- under the Superannuation Industry (Supervision) Act 1993 and the
Retirements Savings Account Act 1997 and associated provisions in the
event of a transfer of between superannuation entities or retirement savings
accounts.
Variation of amount to be repaid: regulation 7.9.67
Regulation 7.9.67 varies the amount of monies to be repaid in the event a
person exercises their right of return of a financial product under Division 5
of Part 7.9 of the new Corporations Act. These variations account for the
different nature of various types of products and certain liabilities or costs
incurred in relation to the issue and subsequent return of the financial
product.
Investment-linked product
In particular, sub-regulations 7.9.67(2)-(3) act to make the product holder
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subject to market risk where the value of the financial product is linked to
the market. Thereby preventing the use of cooling-off provisions by a product
holder to avoid market losses.
Tax
Similarly, subregulation 7.9.67(6) ensures that a product holder meets any
non-recoverable taxation or duty liabilities associated with their acquisition
of the product.
Other reasonable costs
Subregulation 7.9.67(7) allows a product issuer to recover certain reasonable
costs associated with the product holders acquisition and subsequent exercise
of a right of return. These costs may otherwise have been borne by remaining
product holders.
Risk insurance products
Subregulation 7.9.67(8) allows the issuer of a risk insurance product to reduce
the amount of monies to be repaid to account for contingent liabilities that
may arise because of the effective operation of the financial product prior to
its termination upon the exercise of the right of return.
Superannuation and retirement savings account products
Subregulation 7.9.67(9) provides a default mechanism for superannuation and
retirement savings account product providers in the event that a product
holder's nomination of superannuation entity or retirement savings account for
the return of monies is not effective.
Client includes standard employer-sponsor: regulation 7.9.68
Regulation 7.9.68 acts to permit standard employer sponsors of public offer
superannuation entities and retirement savings accounts to exercise rights of
return under cooling off provisions due to their legal relationship with the
product provider.
Subregulations 7.9.68(2) and (3) require a product issuer to return monies in
accordance with the direction of employer sponsors. Similar to regulation
7.9.66 this is to prevent inappropriate access to superannuation monies through
the use of the cooling-off provisions.
Modification of provisions of Division 5, Part 7.9 and regulations - terms
of contract: regulation 7.9.69
The purpose of regulation 7.9.69 is to ensure that product issuers acting under
the operation of the new Corporations Act cooling-off provisions do not
contravene the terms of any existing contract or legal relationship governing
the issue and redemption of a financial product.
Modification of provisions of Division 5, Part 7.9 and regulations -
distributions: regulation 7.9.70
Regulation 7.9.70 clarifies that the exercise of a right or power by a product
holder under an investment-linked financial product does not include the
receipt of distribution from the product issuer. Accordingly, in the event a
product holder receives a distribution from the issuer, the product holder
still exercises a right of return under the cooling-off provisions. However,
the receipt of the distribution may affect the amount of monies repaid as it
may affect the price of the product.
Other requirements - Division 8
Periodic Statements - use of more than 1 document: regulation 7.9.71
Regulation 7.9.71 clarifies that periodic statements may be provided in a
manner similar to Product Disclosure Statements, being comprised of more than
one document and requiring that publication dates be specified.
Reporting periods - general: regulation 7.9.73, Part 16 of Schedule
10A
Subregulation 7.9.73 and Part 16 of Schedule 10A permit reporting periods for
periodic statements to be in excess of 12 months (following an application made
by a product issuer to ASIC) to allow for unforeseen circumstances.
Form of application: regulation 7.9.74
Regulation 7.9.74 prescribes information to be included on an application for
the acquisition of a financial product.
Content of periodic statements - costs of transactions: regulation
7.9.75
Subregulation 7.9.75(1) provides that if a transaction has been confirmed where
the costs of the transaction were not provided (see regulation 7.9.63) that the
information may be provided in the periodic statement.
Subregulation 7.9.75(2) requires periodic reports in relation to all financial
products to include advice on the ongoing costs of the products and advice on
how to obtain further information, in particular in relation to dispute
resolution mechanisms.
Consents to certain statements: regulation 7.9.76
Regulation 7.9.76 aligns the requirements for the holding of consents and their
form with Product Disclosure Statement obligations.
Additional statement - trustee required to provide benefits: regulation
7.9.78
Regulation 7.9.78 requires superannuation product providers to give information
in association with a periodic statement in the event of the death of the
product holder. The requirement relates to the payment of benefits in
accordance with obligations under the Superannuation Industry (Supervision)
Regulations 1994.
Alternative dispute resolution requirement where the product issuer is not a
financial services licensee -regulation 7.9.77
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Section 1017G requires that certain product issuers and regulated persons must
meet appropriate alternative dispute resolution requirements.
The requirements in subsection 1017G(2) relate to internal and external dispute
resolution and provide for the making of regulations.
Regulation 7.9.77 specifies the matters which ASIC is to take into account in
approving such procedures and schemes.
Travellers' cheques - regulation 7.9.80
A Product Disclosure Statement may be given after travellers' cheques are
issued. This is one aspect of the special treatment of travellers' cheques -
see above.
Short selling - regulation 7.9.79
Section 1020B of the new Corporations Act deals with the short selling of the
financial products listed in subsection (l):
• securities;
• managed investment products;
• financial products referred to in paragraph
764A(1)(j) (authorised deposit-taking institutions' deposit-taking facilities);
and
• financial products prescribed by regulation
(paragraph (1)(d)).
Subsection 1020B(2) provides that - subject to section 1020B and the
regulations - a person must only sell the above-listed products if, at the time
of sale:
• the person has a presently exercisable and
unconditional right to vest the products in the buyer; or
• reasonably believes that he/she has such a right.
Section 846 of the old Corporations Act currently deals with short selling of
securities. Section 1020B new Corporations Act is modeled on section 846 (but
is expanded to apply to financial products other than securities). Existing
Corporations regulations 7.4.07 and 7.4.08 have been made under section 846.
Regulation 7.9.79 carries over the effect of existing Corporations regulations
7.4.07 and 7.4.08 as a regulation made under section 1020B of the new
Corporations Act.
10. MARKET MISCONDUCT AND OTHER PROHIBITED
CONDUCT RELATING TO FINANCIAL PRODUCTS AND FINANCIAL SERVICES
While the FSR Act includes a Part 7.10 with this title, there are no
regulations made pursuant to these provisions.
This page of the Explanatory Memorandum is therefore included solely so that
the following sections correspond with the numbering in the regulations and the
Act.
11. TITLE AND TRANSFER
Introduction
Purpose
The FSR Act will:
• repeal Part 7.13 of the old Corporations Act which
currently addresses title to securities and their transfer; and
• insert Part 7.11 and regulations made under this
part.
Many of the procedural provisions relating to transfer of title that are set
out in Part 7.13 of the old Corporations Act are included in the regulations.
By placing the mechanical and procedural provisions in the regulations, they
can be amended more readily to accommodate changes within the industry.
Prescribed CS facility licensee - regulation 7.1.03
The FSR Act will remove the statutory monopoly of the Australian Stock
Exchange's securities clearing house and thereby facilitate competition in this
area. Any appropriately qualified CS facility licensee can be prescribed to
enable it to gain access to those provisions of the new Corporations Act and
which will facilitate electronic transfer of legal title.
This is achieved through the definition of 'prescribed CS facility' in section
761A.
Regulation 7.1.03 will prescribe the ASX Settlement and Transfer Corporation
Pty Limited (the Australian Stock Exchange's securities clearing house) for the
purpose of this Division.
However, other suitably qualified CS facility licensees may be prescribed for
this purpose at a later date.
Application
The regulations will be based on the provisions of the old Corporations Act.
The regulations will provide:
(a) pursuant to new section 1073D, a form-based
system for the transfer of legal title to securities as defined in the FSR Act
(Division 3 transfers);
(b) pursuant to new section 1074E, an electronic
system for the transfer of legal title to financial products by a prescribed CS
facility (Division 4 transfers). The prescribed CS facility to which the
regulations will apply is that owned and operated by the ASTC. New section
1014A also provides for the specification in the regulations of the financial
products to which Division 4 applies in relation to each prescribed CS
facility.
Regulations made under subsection 1071B(3) and section 1073C will specify
additional requirements for proper instruments of transfer and expand the
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meaning of company for the purposes of Division 3 transfers respectively.
Division 3 transfers
The transfer system set up by the regulations in Part 7.11 Division 3 will
apply to "securities" defined in section 1073A of the new Corporations Act.
The regulations in this Division will replicate the transfer regime currently
operating in the Corporations Act and will require:
• "due completion" entailing the completion of Forms
1 to 10 in new Schedule 2A;
• "sufficient transfers" which will require "due
completion" of Forms 1 to 10 in specified combinations according to the
interest involved and the nature of the transfer; and
• "proper instruments of transfer" which will require
an instrument to be a "sufficient transfer". other requirements for a "proper
instrument of transfer" are set out in subsection 1071B(3) and in Regulation
7.11.21.
Division 4 transfers
The regulations will replicate a number of provisions of the old Corporations
Act to provide legislative support to the electronic transfer system operated
by the ASTC. The regulations will apply to the transfer of "Division 4
financial products defined in regulation 7.11.03.
The regulations will adopt the concept of the "proper ASTC transfer" which, in
combination with the sections in the new Corporations Act, replicates the
features of the "proper SCH transfer". Under the regulations, a transfer of a
financial product will have to be a "proper ASTC transfer" to attract the
application of subsection 1074D(1). This subsection provides that such a
transfer is valid and effective for the purposes of any law or instrument
governing or relating to the way in which the financial product may be
transferred.
DETAILS
Preliminary - Division 1
Definitions - regulation 7.11.01
Regulation 7.11.01 defines words and terms used in the regulations for Part
7.11. The regulation adapts several of the definitions contained in subsection
1097(1) of the old Corporations Act and adds new ones to accommodate the new
regulatory framework introduced by the FSR Act.
Authorised trustee corporation - regulation 7.11.02
Regulation 7.11.02 defines "authorised trustee corporation" and refers to a
list of such corporations in Schedule 9 of the regulations. An amendment to the
numbering of the relevant regulation has been made.
Arrangements about Division 4 financial products - regulation 7.11.03
Regulation 7.11.03 is based on sections 1097A and 1097B of the old Corporations
Act and:
• defines a Division 4 financial product; and
• sets out the status of Division 4 financial
products that have been admitted to quotation or suspended in various
circumstances.
Arrangements for forms - regulation 7.11.04
Regulation 7.11.04 is based on subsections 1097(2) and (3) of the old
Corporations Act and refers to forms in Schedule 2A of the regulations.
Document duly completed in accordance with a particular form - regulation
7.11.05
Regulation 7.11.05 describes what constitutes due completion of Forms 1 to 8
based on old section 1098 of the old Corporations Act. Forms 9 and 10 relate to
transfers by authorised trustee corporations and are covered by Regulations
7.11.11 and 7.11.12 based on section 1102 of the old Corporations Act.
Stamping of documents - regulation 7.11.06
Regulation 7.11.06 describes what constitutes the stamping of documents and is
based on section 1099 of the old Corporations Act.
Application of Part 7.11 - Division 2
Application - regulation 7.11.09
Regulation 7.11.09 applies new Part 7.11 to conduct engaged in this
jurisdiction and otherwise.
Transfer of Division 3 securities effected otherwise than through a
prescribed CS facility Division 3
Application of Division 3 - regulation 7.11.10
Regulation 7.11.10 provides that the Division applies to Division 3
transfers.
Sufficient transfers - regulations 7.11.11, 7.11.12 and 7.11.13
Regulations 7.11.11 to 7.11.13 are based on sections 110 1 and 1102 of the old
Corporations Act, and describe what constitutes a "sufficient transfer" of
"Division 3 assets" and "Division 3 rights" in general circumstances and by
authorised trustee corporations.
Sufficient transfer - regulation 7.11.14
Regulation 7.11.14 is based on section 1100 of the old Corporations Act and
provides that a sufficient transfer of Division 3 assets may be used as a
proper instrument of transfer under section 1071B of the new Corporations Act.
It also confers validity on sufficient transfers of Division 3 assets and
Division 3 rights.
Transferee's execution of transfer of Division 3 assets or rights -
regulations 7.11.15 and 7.11.16
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Regulations 7.11.15 to 7.11.16 are based on sections 1103 and 1104 of the old
Corporations Act respectively. They deem a transferee of Division 3 assets or
rights to have agreed to the transfer upon certain terms and conditions upon
the affixing of the transferee's broker's stamp to the transfer document. The
use of the stamp obviates the need for the transferee's execution of the
document.
Brokers' stamps - regulations 7.11.17, 7.11.18 and 7.11.19
Regulations 7.11.17 to 7.11.19:
• deem certain warranties about the propriety of a
transfer to have been made by a transferor's broker or a market licensee where
the transfer bears or purports to bear the stamp of the transferor's broker or
a market licensee;
• impose liability on the transferor's broker or a
market licensee to indemnify certain identified parties where they have
suffered loss or damage arising from unauthorised transfers and also provide
for the transferor's broker to indemnify the market licensee.
Joint and several warranties and liabilities - regulation 7.11.20
Regulation 7.11.20 is based on section 1108 of the old Corporations Act. It
provides for joint and several warranties and liabilities where 2 or more
persons are involved.
Registration of certain instruments - regulation 7.11.21
Regulation 7.11.21 is based on section 1109 of the old Corporations Act and
enables a company to register a sufficient transfer or issue without having to
"look behind" the prima facie validity of a sufficient transfer.
Details to be included in instrument of transfer - regulation 7.11.22
Regulation 7.11.22 provides that transfers should show the deemed State or
Territory of registration of the company whose securities (as defined in
section 1071A of the new Corporations Act) are being transferred.
Transfer of Division 4 financial products effected through prescribed CS
facility - Division 4
Application of Division 4 - regulation 7.11.23
Regulation 7.11.23 provides that the Division applies to Division 4
transfers.
Application of ASTC operating rules - regulation 7.11.24
Regulation 7.11.24 is based on subsection 1097(4) of the old Corporations Act
and provides for the ASTC operating rules to determine when a participant has
effected a proper ASTC transfer or when it takes effect.
Participant's authority to enter into transaction continues despite client's
death - regulation 7.11.25
Regulation 7.11.25 is based on section 1109A of the old Corporations Act and
deems a person's authorisation to a participant to dispose of a financial
product to continue despite that person's death. Only the person's legal
representative may revoke the authority in certain circumstances.
Authority to enter into transaction gives authority to transfer - regulation
7.11.26
Regulation 7.11.26 is based on section 1109B of the old Corporations Act and
deems a person's authorisation to a participant to dispose of a financial
product to be an authority to effect any proper ASTC transfer. The
authorisation can only be revoked before entry into the transaction and
otherwise continues in force.
Effect of proper ASTC transfer on transferee - regulations 7.11.27 and
7.11.28
Regulations 7.11.27 and 7.11.28 are based on section 1109D of the old
Corporations Act provide that, if a proper ASTC transfer of a Division 4
financial product takes effect at a particular time, the transferee is taken to
have agreed at that time to the transfer upon certain terms and conditions.
Indemnities and Warranties - regulations 7.11.29, 7.11.30, 7.11.31 and
7.11.32
Regulations 7.11.29 to 7.11.32:
• deem certain warranties about the propriety of a
transfer to have been made by a participant acting or purportedly acting for a
transferor where that participant's identification code appears in the transfer
document; and
• impose liability on the participant acting or
purportedly acting for the transferor to indemnify certain specified person
where they have suffered loss or damage arising from unauthorised transfers.
Where the transferor had no legal entitlement or authorisation to transfer, the
warranties and indemnities will not apply for the benefit of the transferor.
Joint and several warranties and liabilities - regulation 7.11.33
Regulation 7.11.33 is based on section 1109G of the old Corporations Act and
applies for the purposes of Regulations 7.11.29 to 7.11.32. It provides for
joint and several warranties and liabilities where 2 or more persons are
involved.
ASTC entitled to assume its operating rules complied with - regulation
7.11.34
Regulation 7.11.34 is based on section 1109J of the old Corporations Act and
provides that the ASTC on its own account or if acting for an issuer is
entitled to assume, without inquiry or knowledge to the contrary, that ASTC
transfers have been effected in compliance with ASTC operating rules.
ASTC-regulated transfer not to be registered unless proper ASTC transfer -
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regulation 7.11.35
Regulation 7.11.35 is based on section 1109K of the old Corporations Act and
provides that the issuer and the ASTC (when acting on behalf of the issuer)
must not register an ASTC-regulated transfer unless it is a proper ASTC
transfer.
Issuer not to refuse to register proper ASTC transfer - regulation
7.11.36
Regulation 7.11.36 is based on section 11 09L of the old Corporations Act and
provides that the issuer of a Division 4 financial product must not refuse to
register a proper ASTC transfer.
Determinations of who holds Division 4 financial products - regulations
7.11.37 and 7.11.38
Regulations 7.11.37 and 7.11.38 are based on section 1109N of the old
Corporations Act and apply to Division 4 financial products that are securities
or securities in a class of securities respectively. The regulations enable
convenors of a meeting to determine the holders of securities for the purposes
of the meeting.
Determination of who holds Division 4 financial products for the purposes of
conferring security benefits -regulation 7.11.39
Regulation 7.11.39 is based on section 1109P of the old Corporations Act and
will provide for the determination of who holds or is taken to hold ASTC
financial products at a particular time for the purpose of conferring a
security benefit (e.g. a dividend, the issue of bonus shares, the conferral of
options, etc).
Offences - Division 5
Offences - regulations 7.11.40, 7.11.41 and 7.11.42
Regulations 7.11.40 to 7.11.42 are based on sections 1112, 1112A and 1112B of
the old Corporations Act, and provide for offences in the event of.
• improper or unauthorised use of a broker's or
market licensee's stamp
• unauthorised use of a participant's identification
code
• intentional or reckless contravention of the ASTC
certificate cancellation provisions.
Civil liability - Division 6
Contravention by participant of the ASTC certificate cancellation provisions
- regulation 7.11.43
Regulation 7.11.43 is based on section 1112C of the old Corporations Act and
provides that a participant will be liable to compensate a person who suffers
loss or damage arising from the participant's contravention of the ASTC
certificate cancellation provisions. The action must be brought within 6 years
and cannot be brought by a person involved in the contravention.
Forms of transfer of Division 3 securities - Schedule 2A
Schedule 2A contains new Forms 1 to 10 which are to be used for the transfer of
Division 3 securities.
12. CONSEQUENTIAL
Subregulation 1.0.02(1), definition of approved form
Subregulation 1.0.05(1)
Paragraph 1.0.05(2)(a)
Paragraph 1.0.18(b)
Regulation 12.8.08 - Member shares
Schedule 4, Item 6
These current regulations have been amended to correct cross-references to
provisions in the Corporations Act which have been amended by the FSR Act.
Interpretation - omission of Part 1.2
Part 1.2 is omitted because the provisions which empower the making of these
regulations are omitted by the FSR Act. They relate to financial products which
are not clearly securities or futures contracts under the old Corporations Act
(for example, share ratio contracts) and are no longer needed under the new
Corporations Act, which introduces the new concept of financial product.
Lodgment with ASIC - regulation 1.0.05A
Regulation 1.0.05A provides that for the definition of lodge with ASIC
in section 761A of the new Corporations Act, the definition relates to each
provision of Chapter 7 that includes the expression lodge with ASIC.
The purpose of this provision is to attract the operation of section 350 (which
deals with forms for documents to be lodged with ASIC), in relation to relevant
provisions of Chapter 7.
The regulation also contains a number of specific provisions which are designed
to attract the operation of section 350 to particular provisions of the Act.
General requirements for documents - amendment to regulation 1.0.07(f)
A minor amendment has been made to this regulation so that it does not imply
that all who lodge forms with ASIC have an ACN (Australian Company Number),
ABN, ARBN (Australian Registered Body Number) or ARSN (Australian Registered
Scheme Number). The amendment is necessary to make the form consistent with
draft Corporations Regulation 7.6.03(1)(e) and the possibility that not all
persons regulated under the new Chapter 7 will have such a number.
Territorial Application of the Act - regulation 1.0.22
Regulation 1.0.22 deals with the application of Chapter 7 of the new
Corporations Act and associated provisions to the external Territories. It
provides that Chapter 7 of the Act (other than Parts 7.2 to 7.5 and 7.11)
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applies in relation to a financial product that is, or a financial service that
relates to, a superannuation product or an retirement savings account product
as if this jurisdiction included all of the external Territories.
It therefore applies Commonwealth legislation on these issues to the external
Territories to the same extent as currently.
Prescribed financial market (Act s 170(3)) - amendment to regulation
2C.1.01
Current Regulation 2C.1.01 defines 'securities exchange' for the purpose of
subsection 170(3) (which relates to registers of option holders).
The term 'securities exchange' will no longer be appropriate following the
commencement of the FSR Act which will insert one set of provisions regulating
financial markets, whether derivatives or securities are traded on them.
The FSR Act amends the term 'securities exchange' in subsection 170(3) to read
'prescribed financial market.
The same change has been made to the term when used in Regulation 2C.1.01.
At the same time the reference to Ballarat Stock Exchange has been omitted
because it has not been operational for some years and is being wound up.
'securities exchange' for the purpose of section 205G - amendment to
regulation 2D.1.02
Current Regulation 2D.1.02 defines 'securities exchange' for the purpose of
section 205G (which requires directors of listed companies to notify the
securities exchange of shareholdings etc).
The phrase 'relevant securities exchange' in this section is amended to read
'relevant market operator' by the FSR Act which also includes a definition of
the phrase 'relevant market operator' in section 9.
There is therefore no reason to retain Regulation 2D.1.02 since its operation
is achieved by other means, and it has therefore been repealed.
Variation of offers, acceptances, compulsory acquisitions and buy-outs after
a takeover bid amendments to regulations 6.6.01 to 6.6.02, 6.8.02,
6A.1.01
Regulations 6.6.01, 6.8.01, 6.8.02 and 6A.1.01 generally replicate the effect
of subsection 650E(3), and paragraphs 650E(4)(a) and (b), 650E(5)(a), 653A(b),
653B(4)(a) and 661C(4)(a) of the old Corporations Act.
The regulations have been amended to accommodate the removal of the concept of
the 'Securities Clearing House' by the amendments in the FSR Act and instead
insert references to 'prescribed CS facilities'.
Prescribed financial market operators - regulation 7.1.01
The old Corporations Act refers in many provisions outside Chapter 7 to
'securities exchange'. An example is section 253F which relates to how to value
an interest in a registered scheme for the purpose of voting at meetings.
The FSR Act omits the concept of 'securities exchange' and in many of the
provisions which used this term, substitutes the phrase 'prescribed financial
market'.
Regulation 7.1.01 prescribes the financial markets for the purpose of this
definition. It prescribes the Australian Stock Exchange Limited, the Bendigo
Stock Exchange Limited and the Stock Exchange of Newcastle Limited.
The aim of the amendment is to maintain the effect of the current provisions.
Destruction of records by ASIC - regulation 7.12.01
Section 1101D of the new Corporations Act provides that ASIC may destroy or
otherwise dispose of any document that is lodged under, or for the purposes of,
a provision in Chapter 7 if ASIC is of the opinion that it is no longer
necessary or desirable to retain it and it has been in the possession of ASIC
for such period as is specified in the regulations, either generally or in
relation to a particular document or class of documents.
Regulation 7.12.01 provides that the period of possession is 7 years.
Prescribed Registers - amendment to regulation 9.1.01
Current regulation 9.1.01 prescribes a series of registers for subsections
1274A(2) to (4) (which relate to obtaining information from certain
registers).
The amendment to regulation 9.1.01 adds three new registers - of financial
services licensees, authorised representatives and persons who are banned or
disqualified.
Prescribed information - amendment to regulation 9.1.02
Current regulation 9.1.02 prescribes information for subsections 1274A(3) and
(4) (which relate to provision of prescribed information by ASIC).
The amendment to regulation 9.1.02 adds relevant information from the registers
referred to in the amendments to regulation 9.1.01.
Definitions for Part 9.4A - Regulation 9.4A.01
Regulation 9.4A.02(1) and (2)
These regulations have been amended to change a reference to 'issuing body
(which was defined in a section which is omitted by the FSR Act) to refer
instead to 'issuer', a term which is defined in section 761A of the new
Corporations Act.
Schedules 1 and 2 - omission of forms
Items 110 to 146 of Schedule 1 (the list of forms) have been omitted, as have
forms 702 to 812 (inclusive) of Schedule 2 (the actual prescribed forms).
Schedule 2, Form 902 - information supplementary to a form or document
lodged previously omission
This form would need amendment to expand the list of categories of person who
may be lodging it.
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The Form has instead been omitted and section 350 allowed to operate so that
the new form will be that approved by ASIC.
Schedule 3 Items 6-7 - amendment
The offices listed in Schedule 3 are regarded as not having relevant interests
in the securities held by virtue of that office. The concept of 'relevant
interest' is used particularly in the provisions dictating the circumstances in
which a takeover offer must be made.
The references to the President and Members of the Corporations and Securities
Panel have been amended to refer to the President and Members of the Takeovers
Panel (the body's new name).
Schedule 11 - recognised futures exchanges - omission
Schedule 11 provides a list of recognised futures exchanges for the purposes of
provisions of Chapter 8 of the old Corporations Act.
Chapter 8 is repealed by the FSR Act and this list has no role in the new
Corporations Act.
Schedule 11 has therefore been repealed.
13. TRANSITIONAL
Introduction
Part 10.2 of the regulations contains regulations made pursuant to section 1444
(which is to be inserted in the Corporations Act by the Consequential
Provisions Act). Part 10.2 is divided into 28 Divisions.
The term 'FSR commencement' is used in this section as defined in subsection
1410(1) - that is, commencement of Item 1 of Schedule 1 of the FSR Act.
Preliminary - Division 1 - regulations 10.2.01 to 10.2.02
Division 1 of Part 10.2 of the regulations contains an application provision
and definition that are required for the Part.
Transitional arrangements relating to business rules or listing rules -
Division 2 - regulations 10.2.03 to 10.2.07
Division 2 of Part 10.2 of the regulations deals with transitional arrangements
relating to business rules or listing rules. The regulations in this Division
provide transitional arrangements for circumstances where bodies, including
securities and futures exchanges, have lodged with ASIC amendments to business
or listing rules prior to the commencement of the FSR Act reforms but as at
that time the period of disallowance has not expired. The regulations deem the
lodgment of amendments as having been in accordance with the provisions of the
new Chapter 7 and the 28 days continues to run.
Status of directions and notices - Division 3 - regulations 10.2.08 to
10.2.11
Division 3 of Part 10.2 of the regulations provides transitional arrangements
for directions and notices given under the Corporations Act prior to the
commencement of the FSR Act reforms. The regulations provide that compliance
with such directions and notices must be fulfilled after that date in
accordance with the new provisions in the new Chapter 7.
Assistance to ASIC - Division 4 - regulations 10.2.12 to 10.2.18 Special
Reports - Division 5 -regulations 10.2.19 to 10.2.20
Divisions 4 and 5 of Part 10.2 of the regulations provide transitional
arrangements relating to certain obligations of securities exchanges, the
securities clearing house, and futures exchanges. The regulations provide that
these obligations must be met in accordance with the new Chapter 7.
Self-listing - Division 6 - regulation 10.2.21 to 10.2.22
Division 6 of Part 10.2 of the regulations provides that arrangements,
including exemptions, in relation to selflisting continue to have effect after
the commencement of the FSR Act reforms and they are taken to have been entered
into in accordance with the new provisions of the new Chapter 7.
Currently, the Australian Stock Exchange Limited is the only self-listed
exchange.
Decisions about membership of futures exchange - Division 7 - regulations
10.2.23 to 10.2.24
Division 7 of Part 10.2 of the regulations preserves the obligation placed on a
futures exchange to give an applicant for membership to the exchange or ASIC a
notice under subsection 1135(1) of the old Corporations Act.
This enables a person who has been notified that they are refused status of
membership or suspended from membership to appeal to a Court regarding this
decision.
Claims against the National Guarantee Fund - Division 8 - regulations
10.2.25 to 10.2.27
Division 8 of Part 10.2 of the regulations provides that if circumstances
giving rise to a claim against the National Guarantee Fund occur before the
commencement of the provisions in the FSR Act then Divisions 6 -8 of Part 7.10
of the old Corporations Act will continue to govern these claims against the
National Guarantee Fund.
Claims against Fidelity Funds - Division 9 - regulations 10.2.28 to
10.2.30
Division 9 of Part 10.2 of the regulations provides that if circumstances
giving rise to a claim against a fidelity fund occur before the end of the
transition period (as outlined in subsection 1414(2) of the Consequential
Provisions Act) then Parts 7.9 and 8.6 of the old Corporations Act continue to
govern these claims.
Status of netting markets - Division 10 - regulations 10.2.31 to
10.2.32
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Division 10 of Part 10.2 of the regulations relates to the status of netting
market approvals within the meaning of the
Payment Systems and Netting Act
1998. These regulations will provide that netting market approvals given
before the FSR Act commencement will continue to have effect after the FSR Act
commencement and that certain bodies will be able to apply for netting market
approvals during the transitional period.
Status of listed securities - Division 11 - regulation 10.2.33
Division 11 of Part 10.2 of the regulations provides that the definition of
'listed security' in the Superannuation Industry (Supervision) Act 1993
continues, during the transitional period, to include securities listed for
quotation in the official list of an exempt stock market.
Miscellaneous - Division 12 - regulation 10.2.34
Regulation 10.2.34 will preserve the nomination of the Securities Exchanges
Guarantee Corporation that currently has effect by virtue of section 1390 of
the Corporations Act.
Regulated Principals - Division 13 - regulations 10.2.35 to 10.2.47
People excluded from Streamlining - regulations 10.2.35-10.2.36
Certain people will be excluded from streamlining under section 1433. These
people are dealt with in regulation 10.2.36 and are listed in Schedule 10D.
Some of those excluded from streamlining are excluded for a period of time that
is expressed in Schedule 10D. Those people to whom legal streamlining will not
be available include people who have been insolvent or bankrupt, have been or
may be convicted of criminal fraud, people against whom a regulator has
successfully taken action or has a pending action in respect of conduct
relating to their provision of financial services, and certain associates of
such people.
Where a person is deemed to be an insurance broker under section 24(2) of the
I(AB) Act they will not be able to streamline under section 1433. However,
where a person conducts other financial services activities to which
streamlining may apply, they are not precluded from streamlining in respect of
those other activities other than the insurance broking activities in
question.
The preclusion from streamlining will not mean that ASIC is not able to issue a
licence to that person. Instead, its effect is to ensure that ASIC is able to
fully consider that person's licence application and circumstances generally
when considering whether to grant them an Australian financial services
licence.
However, even if a person is someone to whom section 1433 does not apply under
this regulation, it is possible for them to be eligible for "administrative"
streamlining under section 1435.
Variation on conditions of licence g-ranted under subsection 1433 -
regulations 10.2.37
This regulation deals with the situation where a person lodges an application
for a 'streamlined' licence but also wants to obtain a licence for other
activities for which they are not eligible for a streamlined licence. The
regulation allows the person to lodge the application for the licence and the
variation of the conditions at the same time and ASIC to grant the licence
subject to those conditions rather than having to grant the licence and
subsequently vary the conditions.
Incidental advice - regulation 10.2.38
Due to the repeal of the "incidental advice" exemption for solicitors and
accountants in section 77(5) of the current Corporations Act, it is possible
that there will be an amount of uncertainty for such people during the
transition period. Solicitors and accountants who are providing incidental
advice prior to FSR commencement will receive the transition period under
sections 1430 and 143 1.
Under regulation 10.2.38, those solicitors and accountants who first provide
such advice during transition will now receive the full transition period to
obtain their licence by being one of the group of people included in item 9 of
section 1430. This will ensure that situations for example, where new partners
or staff of such partnerships first give incidental advice during the
transition period, they will receive the transition period so that they can
obtain or be covered under an appropriate licence at the same time as others in
the practice.
In addition, a number of people operate under exemptions in the old
Corporations Act or another law are expressed specifically to receive the
transition period. Examples include those operating exempt futures and stock
markets. Where this was the case, there is now a clarification that such people
will receive the benefit of a transition period.
References to financial services licensees - regulations 10.2.39 to
10.2.42
Regulations 10.2.39 -10.2.42 effectively modify the application of Part 7.6 so
that it can operate correctly during the transition period when people who have
not yet obtained a financial services licence are 'regulated principals'. For
example, certain references to 'financial services licensee' need to include
regulated principals during their transition period (regulation 10.2.40).
Insurance agents - regulation 10.2.43
Regulation 10.2.43 provides that a person who is an insurance agent and who is
not subject to the new Chapter 7 because of section 1436A is not a
representative of their insurer for the purposes of section 910A. This is
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merely a clarification which is consistent with the intent of section 1436A
that agents should not necessarily be subject to the FSR regime when their
insurers obtain a financial services licence.
Compensation Arrangements - regulations 10.2.44-10.2.45
Regulations 10.2.44-10.2.45 deal with the compensation arrangements during the
transitional period. Generally, section 912B will not apply during the
transitional period. Current arrangements for contracts of professional
indemnity insurance for insurance agents under for I(AB) Act will be preserved
during this period and will continue to apply to both existing and new
participants. Similar arrangements will apply to securities imposed as
conditions on licences under subsection 786(9) of the old Corporations Act.
However, this is not intended to limit or restrict ASIC's ability to impose any
other conditions on a financial services licence.
Granting of licence - regulation 10.2.46
Regulation 10.2.46 will allow ASIC to specify that a financial services licence
takes effect from a date after it was granted. This will simplify the
transitional arrangements for existing participants who will be able to know in
advance at what date they begin to be subject to the new Chapter 7.
Dispute resolution.- regulation 10.2.47
Regulation 10.2.47 provides that a financial services licensee does not have to
be a member of an external dispute resolution scheme where there is no such
relevant scheme during the transitional period. This recognises that the
establishment and approval of such schemes will take a period of time and,
therefore, they may not be available for licensees immediately when they obtain
a financial services licence.
Financial Product disclosure and other provisions relating to issue and sale
of financial products -Division 14 - regulations 10.2.48 to 10.2.50
Obligation to provide Financial Services Guide - regulation 10.2.48
A Financial Services Guide does not have to be given for a service where the
provision of that service was agreed to between a client and a person prior to
the application of Part 7.7 of the new Corporations Act to that person.
Financial Services Guides for Existing clients - regulation 10.2.49
Also, a financial service provider has greater flexibility in the time required
to provide a Financial Services Guide where the service is provided in the
period 6 months after Part 7.7 of the new Corporations Act first begins to
apply to that person and the service is to an existing client.
Content of Financial Services Guide - regulation 10.2.50
This regulation details the information that must accompany a Financial
Services Guide where a financial services licensee or an authorised
representative is also able to provide financial services as a regulated
principal or a representative of a regulated principal. Generally, they must
disclose the fact that they are able to provide financial services in this
capacity as well as in their capacity as a licensee or authorised
representative. Although this statement is not part of the Financial Services
Guide for the purposes of Part 7.7 it could be provided in the same document as
an Financial Services Guide or separately.
Other provisions relating to conduct etc. - Division 15 - regulations
10.2.51 to 10.2.73
Sale offers that need disclosure - regulation 10.2.51
Regulation 10.2.51 deals with the application of sections 707 and 1012C of the
Corporations Act in relation to managed investment products and other financial
products.
Section 707 of the old Corporations Act:
• will continue to apply to a sale of a managed
investment product that was issued prior to the FSR commencement, where the
sale occurs before the end of the transition period that applies to that
product;
• will apply to a sale of a managed investment
product that was issued after the FSR commencement where the sale occurs before
the end of the transition period that applies to that product.
Section 1012C will apply to all sales of managed investment products that occur
after the end of the transition period for that product (regardless of when the
product was issued). Finally, section 1012C will only apply to the sale of
financial products (other than securities or managed investment products) that
were issued after the end of the transition period for the financial product.
Offers that do not need disclosure: small scale offerings - regulation
10.2.52
Regulation 10.2.52 will provide that, in counting issues and sales of managed
investment products for the purposes of section 1012E of the Corporations Act,
it is necessary to include issues or sales of managed investment products that
were made before the end of the transition period that applied to that product
(other than issues or sales for which a disclosure document was not required
(other than because of subsection 708(1)) and issues and sales that were made
pursuant to a disclosure document that was lodged with ASIC under Chapter 6D of
the old Corporations Act).
Money other than loans: financial services licensee who formerly held
dealer's licence - regulation 10.2.53
Regulation 10.2.53 deals with money to which old subsection 867(1) applied that
was received by a financial services licensee before transitioning to the FSR
regime. It provides that old sections 866 to 871 and any associated provisions,
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continue to apply to the financial services licensee in relation to this
money.
Money other than loans: financial services licensee who formerly held
futures broker's licence regulation 10.2.54
Regulation 10.2.54 deals with money to which old section 1209 applied that was
received by a financial services licensee before transitioning to the new
regime. It provides that old section 1209 continues to apply to the financial
services licensee in relation to this money. This money must continue to be
dealt with under the relevant provisions of the old Corporations Act. It also
ensures that old section 1209 will continue to apply to money received from the
investment of this money (including realisation of an investment of this money)
as well as money that is transferred to a licensee under subsection 1209(5A).
Part 7.8 of the Act will only apply to this money in a situation where the
licensee ceases to hold a licence.
Money other than loans: financial services licensee who was formerly
registered insurance broker regulation 10.2.55
Regulation 10.2.55 deals with money that was received by a registered insurance
broker before the end of the transition period that applied to the person in
their capacity of a regulated principal of this kind. It provides that section
26 of the I(AB) Act and any associated provisions, will continue to apply to
the financial services licensee in relation to this money. This money must be
dealt with under the relevant provisions of the I(AB) Act. It also provides
that section 26 of that Act, and any associated provisions, will apply in
relation to money received by a financial services licensee from the investment
of this money. Part 7.8 of the Act will only apply to this money in a situation
where the licensee ceases to hold a licence.
Money other than loans: financial services licensee who ceases to be
licensed - regulation 10.2.56
Regulation 10.2.56 provides that if a financial services licensee holds money
in an account maintained under old sections 866 or 1209 or section 26 of the
I(AB) Act, the money is to be dealt with under new paragraphs 981F(a) to (d) as
if the money was held by the licensee in an account maintained for the purposes
of section 981B.
Loan money: financial services licensee who formerly held dealer's licence -
regulation 10.2.57
Regulation 10.2.57 deals with loan money to which old section 872 applied that
was received by a financial services licensee before transitioning to the new
licensing regime. It provides that this money must continue to be dealt with by
the licensee in accordance with old section 872.
Other property of clients: financial services licensee who formerly held
dealer's licence - regulation 10.2.58
Regulation 10.2.58 deals with scrip to which section 873 of the old
Corporations Act applied that was received by a financial services licensee
before transitioning to the new licensing regime. It provides that this scrip
must continue to be dealt with by the licensee in accordance with section 873
of the old Corporations Act.
Other property of clients: financial services licensee who formerly held
futures broker's licence regulation 10.2.59
Regulation 10.2.59 deals with client property as defined in sections 1209 and
1214 of the old Corporations Act that was received by a financial services
licensee before transitioning to the new regime. It will provide that licensee
must continue to deal with this property in accordance with sections 1209 and
1214 of the old Corporations Act.
Special provisions relating to insurance: financial services licensee who
was formerly registered insurance broker - regulation 10.2.60
Regulation 10.2.60 deals with licensees who were formerly insurance brokers. It
provides that section 27 (other than subsections 27(3) and 27(5)) of the I(AB)
Act will continue to apply in relation to money that was received by the
licensee prior to transitioning to the FSR licensing regime. This regulation
also provides that the notification requirements in subsections 27(3) and 27(5)
of the I(A & B) Act will continue to apply in relation to contracts of
insurance, or proposed contracts of insurance that were arranged or effected by
a financial services licensee before becoming a licensee.
Obligation to report: financial services licensee who formerly held futures
broker's licence regulation 10.2.61
Reporting in relation to dealings in derivatives: financial services
licensee who formerly held dealer's licence -regulation 10.2.62
Regulations 10.2.61 and 10.2.62 deal with the reporting obligations of a
financial services licensee who was formerly the holder of a futures brokers
licence. It provides that the monthly reporting requirements contained in
section 1207 of the old Corporations Act will continue to apply in relation to:
client money or property that is held by the licensee under section 1209 or
1214 of the old Corporations Act; futures contracts that were acquired by the
licensee on behalf of a client before becoming a licensee and that have not
been disposed on by the end of a particular month and discretionary accounts
for which authority was provided before the licensee transitioned to the new
regime and this authority has not been revoked.
Financial statements of financial services licensee: general - regulation
10.2.63
Subdivision C of Division 6 of Part 7.8 of the Act requires financial services
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licensees to prepare and lodge with ASIC audited profit and loss statements and
balance sheets in respect of each financial year.
Regulation 10.2.63 will provide financial services licensees who did not
formerly hold either a securities dealers or futures brokers licence and were
not formerly registered insurance brokers or registered foreign insurance
agents with the option, in relating to the financial year in which they first
transitioned into the new licensing regime, of preparing and lodging financial
statements covering either the entire financial year or the period of that
financial year that began on the day they first became a financial services
licensee.
Financial statements of financial services licensees who were certain
regulated principals regulation 10.2.64
Regulation 10.2.64 applies to financial services licensees who formerly held a
securities dealers or futures brokers licence or were either registered
insurance brokers or registered foreign insurance agents. The reporting
obligations contained in the old Corporations Act or the I(AB) Act will
continue to apply to these licensees in relation to financial years or
accounting periods that were completed before the licensee first transitions to
the new regime.
However, these obligations will not apply in relation to the financial year in
which the licensee first transitions to the FSR licensing regime. This is
because the obligation to prepare and lodge an audited annual profit and loss
statement and balance sheet will apply in relation to the entire financial year
in which the licensee transitioned to the new regime.
This new requirement will apply in place of pre-existing reporting obligations
in relation to the financial year in which the licensee first transitions into
the new regime.
Auditors: certain financial services licensee who formerly held dealer's
licence - regulation 10.2.65
Auditors: certain financial services licensees who held futures broker's
licence - regulation 10.2.66
Regulations 10.2.65 and 10.2.66 deal with transitional arrangements concerning
the auditors of financial services licensees who were formerly securities
dealers or futures brokers and are not bodies corporate (other than proprietary
companies) to which section 327 of the Act applies. As a general rule, auditors
of a securities dealer or futures broker that are in office when these
regulated persons transition to the new regime will be deemed to be appointed
as auditor of the financial services licensee under the new regime.
If there is a vacancy in the office of auditor of a securities dealer or
futures broker when the person transitions to the new regime, the licensee will
have to appoint a new auditor under Part 7.8 of the Act within 14 days of the
vacancy occurring.
The only exception to this rule would be where before transition, a licensee
that was both a securities dealer and a futures broker had an auditor in its
capacity as a securities dealer, but no auditor in its capacity as a futures
broker at the time of transition (or vice versa). In these circumstances it
will not be necessary for the licensee to fill the second vacancy within 14
days.
Auditor's report in certain matters: - regulations 10.2.67 to 10.2.69
Section 990K of the Corporations Act requires the auditor of a financial
services licensee to report to ASIC within 7 days if it becomes aware of
certain matters listed in subsection 990K(2). Regulations 10.2.67 to 10.2.69
will place additional obligations on an auditor of a financial services
licensee who formerly held a securities dealers licence or a futures brokers
licence, or who were formerly registered insurance brokers, to report to ASIC
within 7 days if the auditor becomes aware of other specified matters.
An auditor of a licensee who formerly held a securities dealers licence or a
futures brokers licence will be required to report to ASIC if it becomes aware
of any matter that, in the opinion of the auditor, have adversely affected the
capacity of the licensee to meet its obligations as a licensee under the old
Corporations Act or that constitute or may constitute a contraventions of the
conditions that applied to a securities dealers or futures broker licence that
was formerly held by the licensee.
An auditor of a licensee who formerly held a securities dealers licence or a
futures brokers licence or was formerly a registered insurance broker will also
be required to report on any matters that constitute or may constitute a
contravention of specified provisions of the old regulatory framework.
Priority to clients' orders: financial services licensee who held dealers
licence - regulation 10.2.70
Regulation 10.2.70 deals with client instructions to buy or sell securities of
a particular class that were received by a financial services licensee before
it transitioned to the new licensing regime. It provides that section 844 of
the old Corporations Act will continue to apply in relation to these
instructions until the licensee has complied with the instructions.
Sequencing of instructions to deal through licensed markets: financial
services licensee who formerly held futures brokers licence - regulation
10.2.71
Records relating to instructions to deal through licensed markets: financial
services licensee who held futures brokers licence - regulation 10.2.72
Regulations 10.2.71 and 10.2.72 deal with instructions to deal in a class of
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futures contracts that were received by a licensee before it transitioned to
the new licensing regime. It provides that section 1266 of the old Corporations
Act will continue to apply in relation to these instructions.
Dealing with non-licensees: financial services licensee who held dealers
licence - regulation 10.2.73
Regulation 10.2.73 provides that section 843 of the Corporations Act will
continue to apply to transactions of sale or purchase of securities that were
entered into by a licensee before the licensee transitioned to the new
licensing regime.
Product disclosure provisions for existing products during transition period
- Division 16 regulations 10.2.74 to 10.2.87
Definition of 'class' - regulation 10.2.74
This regulation defines what a 'class' of financial products is for the
purposes of subsection 1438(1). This effectively determines what is a 'new'
financial product to which the new Chapter 7 applies immediately and what is an
existing product which is subject to the two year transitional arrangements.
For a range of common financial products, this regulation sets out the
circumstances when they will be in the same class as other financial products.
For financial products that are not specifically dealt with, it is intended
that this regulation will act as a guide in setting out the types of factors
that should be considered in determining whether or not that product is in the
same class as another financial product.
This definition of 'class' is intended only for subsection 1438(1) and is not
intended to influence the meaning of the expression 'class' where it is used in
other provisions of the new Chapter 7.
References to 'Financial services licensee' - regulation 10.2.75
This regulation provides that references to 'financial services licensee' in
Part 7.9 and section 761E include references to regulated principals for the
duration of their transition period. This is necessary as Part 7.9 may begin to
apply to some financial products while people who will eventually be financial
services licensees are still in their transition period, therefore certain
references to licensees need to include people who are regulated principals for
the duration of their transition period.
References to retail client - regulation 10.2.76
This regulation sets out how to determine whether a product that was acquired
prior to FSR commencement was acquired by a person as a retail client. Such a
product is acquired by a person as a retail client unless they either would
have acquired it as a wholesale client if the new regulatory regime had applied
at the time they acquired it or if they would have acquired it as a wholesale
client if they acquired it at FSR commencement. This will simplify the process
of determining whether such a product was acquired by a person as a retail or
wholesale client as in some cases information about the person necessary to
determine whether they were retail or wholesale at the time they actually
acquired the product may now not be available.
References to issue of product - regulation 10.2.77
This regulation provides that the reference to first issue of a product in
subsection 1438(1) includes a reference to the first making of an offer to
issue a financial product. This will remove uncertainty about the operation of
subsection 1438(1).
Product Disclosure Statements - regulations 10.2.78-10.2.81
Where a person makes an offer to an issuer or seller or accepts an offer from
an issuer or seller to acquire product prior to Part 7.9 applying to that
product, then any existing regime continues to. apply to that acquisition and
Part 7.9 does not apply (regulation 10.2.78). Product Disclosure Statements can
be lodged early to facilitate the seamless transition into the new regime
(regulation 10.2.80). Certain references to a Product Disclosure Statement in
Part 7.9 are taken to include references to disclosure documents prepared under
Chapter 6D (regulation 10.2.79). This is necessary to ensure that certain
provisions in Part 7.9 that contain references to a Product Disclosure
Statement operate satisfactorily in the transitional period when some products
will still have disclosure documents prepared under Chapter 6D. Regulation
10.2.81 provides for the meaning of 'responsible person' in the context of a
product issued prior to commencement.
Money received before product is issued - regulations 10.2.82-10.2.83
Regulation 10.2.82 deals with the situation where money is paid to a person to
acquire a product before Division 2 of Part 7.9 begins to apply to that product
but the money is retained after that point in time. The regulation provides
that such money continues to be held in accordance with any requirements of the
regime that applied when it was received and the FSR regime only applies to
money received after Part 7.9 begins to apply to that product.
Section 37 of the I(AB) Act (other than subsection (2)) does not apply to money
when section 1017E applies to that money (regulation 10.2.83). This is
necessary as the obligations imposed by section 1017E and section are not
consistent. Section 37 may apply at the same time as section 1017E due to the
transitional arrangements for licensing which in certain circumstances preserve
the effect of the I(AB) Act despite its repeal.
Confirmation - regulation 10.2.84
Subsection 37(2) of the I(AB) Act does not apply in relation to a financial
product when section 1017F also applies to that product (regulation 10.2.84).
This avoids two substantially similar obligations applying at the same time.
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Dispute Resolution - regulation 10.2.85-10.2.87
Regulation 10.2.85 clarifies that an obligation on a product issuer to have
dispute resolution systems available does not apply to financial products that
were not available at a time when Division 2 of Part 7.9 applied to them.
Regulation 10.2.86 provides that section 1017G does not apply to a regulated
principal during their transition period if the issue or sale of the products
is within that regulated principal's regulated activities. Therefore, where an
issuer of a product (whose regulated activities include the issue of the
product) elects to have Part 7.9 apply to that product but has not yet obtained
a financial services licence, the requirement in section 1017G will not apply
to them.
Finally, regulation 10.2.87 provides that during the period of two years after
FSR commencement a person does not have to be a member of an external dispute
resolution scheme where no relevant scheme is in existence. In addition, a
person will during this two year period have three months from the time when
such a scheme comes into existence to become a member of a relevant scheme.
Arrangements relating to enforcement of matters by ASIC - Division 17 -
regulations 10.2.88 to 10.2.91
Definition of "financial services laws" - clarification - regulation
10.2.88-10.2.89
During transition, the relevant old legislation will be preserved so that it
applies to people who are regulated principals under section 1430 until their
transition into the new regulatory regime, as well as to holders of Australian
financial services licences who are subject to the I(AB) Act until all people
who act as their insurance agents transition into the new regulatory regime
under section 1436A (see section 1432).
Due to the possible width of the definition of "financial services law" in
section 761A(d), Regulation 10.2.53 is intended to clarify that the tern "any
other Commonwealth, State or Territory legislation that covers conduct relating
to the provision of financial services (whether or not it also covers other
conduct), but only in so far as it covers conduct relating to the provision of
financial services" does not include the "relevant old legislation". This is
required to ensure that a person's conduct which is not subject to the new
regime is not taken to be a breach of their licence requirements under the new
regulatory regime, or otherwise has unintended consequences (see sections
912A(c), 912E(1), 920A(1)(e) and 920A(1)(f).
This will not have the effect of preventing ASIC from taking into account the
conduct of a person under relevant old legislation, as such conduct may form
part of ASIC's decision-making under a number of provisions. Instead, it will
ensure that there is not an anomalous result in respect of other legal regimes
that the person may be subject to at the same time as they are caught by the
new financial services regulatory regime.
ASIC - consideration of prior conduct - regulation 10.2.90
ASIC must be able to take into account prior conduct in exercising certain of
its enforcement powers. This conduct includes conduct occurring prior to FSR
commencement, and after FSR commencement but that is regulated by a law other
than the new Chapter 7.
In particular, under regulation 10.2.90, ASIC may take into account any matter,
breach of law or non-financial services conduct that arose before FSR
commencement, or under any relevant old legislation in exercising any power to
do a number of things, including determining whether to grant an Australian
financial services licence, or whether a person will not comply with their
general obligations.
Administration of old regimes during transition - regulation 10.2.91
For clarification, because the relevant old legislation continues in effect
during the transition period under section 1432, this regulation clarifies that
ASIC's powers to administer the old regulatory regimes remain effective. This
will include the ability to alter licence conditions, revoke licences, suspend
people, cancel registrations and execute new instruments.
Specific kinds of documents in existence before FSR commencement - Division
18 regulations 10.2.92 to 10.2.98
Banning orders - regulations 10.2.92 - 10.2.94
Regulations 10.2.92 to 10.2.94 will ensure that ASIC may conduct effective
enforcement under a number of concurrent legal regimes which will exist in the
transitional period. In particular, both existing and new banning orders can be
amended to cover the equivalent activities under all legislation regarding
financial services that operates at a particular time, and apply for the period
of time they were originally intended to apply for.
However, banning orders cannot be extended to apply to conduct or products
outside those to which the primary legislation they are made under enable the
banning order to be made.
Enforceable Undertakings - regulation 10.2.95
A number of enforceable undertakings have been entered into with ASIC under
sections 93AA and 93A of the ASIC Act. Where the undertaking was entered into
prior to FSR commencement, regulation 10.2.95 provides that ASIC may amend it
to ensure that it will have an equivalent effect after FSR commencement. This
can be achieved by ASIC issuing a notice to a person. The regulation also
ensures that the undertaking continues in force to ensure that it has effect
regardless of which legal regime a person's conduct is regulated under.
Old registers, documents, etc - regulations 10.2.96-10.2.98
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Under regulation 10.2.97, ASIC must enter the relevant details from any old
register into certain equivalent new registers under the new regulatory
regime.
Also, where a person had an obligation to keep a register, document or other
thing under a law that is being repealed, the obligation to keep that
information is retained for the same period by regulations 10.2.96 and
10.2.98.
Extension of limitation periods - Division 19 - regulation 10.2.99
Due to the increase in the limitation periods under the ASIC Act in items 111
and 121 of the Consequential Provisions Act, there may be confusion about
conduct to which this extension applies. Accordingly, regulation 10.2.99
clarifies that the amendments apply to conduct engaged in after commencement of
those items, and also to prior conduct provided that the relevant old
limitation period has not yet expired at that time.
Rules for dealing with liability during transition period - Division 20 -
regulations 10.2.100 to 10.2.104
Key issues
During the transition period, a number of liability regimes will apply to the
various principals and representatives who provide financial services.
The liability regime in the new regulatory regime is not drafted to operate in
a regime where financial services providers are providing financial services
under legal regimes outside that framework. In particular, Division 6 of Part
7.6 contemplates that all representatives operate under new Chapter 7.
Accordingly, some clarification and modification is needed to ensure that
liability as between a provider of financial services and a client is equitable
during the transition period.
Key policy objectives
In determining the appropriate approach, the following key policy objectives
were taken into account:
• generally, neither holders of Australian financial
services licences nor other principals or providers of financial services
should have their exposure to liability increased beyond what would otherwise
apply under the law regulating their conduct that would apply either before or
after the transition period
• the regime should ensure that consumers can
relatively easily understand who they are able to recover against
• principals should always be liable for their own
conduct
• any person who has committed an offence should not
be relieved from any liability in respect of the offence
• generally, holders of Australian financial services
licences should not take on liability that those operating under other legal
regimes should otherwise be responsible for (this would otherwise operate as a
de facto cross-endorsement, which may discourage people from obtaining their
new Australian financial services licence at an early stage during the
transition period)
In general, it is expected that liability for particular conduct may fall to
more than one person, and that such persons may be regulated under different
legal regimes. It is expected, while those persons will be jointly and
severally liable to the extent that the remedies are the same, that Courts and
dispute resolution bodies will ensure that a person who suffers loss or damage
does not become unjustly enriched by being able to recover for a particular
loss to a greater extent than would otherwise be appropriate.
In a similar way, where a person may be guilty of more than one offence under
various laws in relation to particular conduct, general law is expected to
operate to limit that criminal liability in appropriate circumstances.
Regulations
In accordance with the above, the liability provisions in regulations
10.2.100-10.2.1-04 that will apply during transition will have the following
effect:
• Sections 917B and 917C(4) will have unintended
results if they operate in their full sense during the transition period. This
will result in those principals who have an Australian financial services
licence being responsible for all financial services conduct, even if a
particular representative acts for principals who have their Australian
financial services licence, as well as other principals who are still operating
under relevant old legislation during the transition period. Accordingly,
sections 917B and 917C(4) are modified during the transition period so that, if
a particular representative has one or more principals who have an Australian
financial services licence, and one or more principals that do not, the
Australian financial services licence principals will only be liable to the
client for activities that are within the class of services they have
authorised. This is to ensure that a person who transitions into the FSR regime
early is not disadvantaged by being liable for the full range of financial
services conducted by a particular representative unless the representative is
fully regulated by the amended Corporations Act.
• Where more than one person is, as a result of
different regulatory regimes applying to a particular situation during
transition, liable for the conduct of a representative, they will be jointly
and severally liable to the client.
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• The client can choose to exercise recovery rights
against any or all of the people who are liable to them, including where
different remedies are available in respect of that conduct.
• A person will always be liable for their own
conduct
ASIC may deal with unintended consequences
It is expected that, where unintended consequences result from the various
liability regimes applying at the same time, ASIC will use its modification and
exemption powers to ensure that this is corrected.
Title and transfer - Division 21 - regulations 10.2.105 to 10.2.115
The provisions of Part 7.13 of the old Corporations Act will be replaced by
Part 7.11 of the new Corporations Act. They relate to title and the transfer of
securities, in the case of Part 7.13, and certain financial products, in the
case of Part 7.11.
Many of the repealed provisions involve processes which may be incomplete at
the time of the FSR Act commences. the transitional regulations will ensure
that processes commenced but incomplete before the commencement of the FSR Act
can be completed and their legal validity preserved after that date.
Thus, for example, regulation 10.2.109 continues the operation of section 1093
of the old Corporations Act to preserve a company's obligations arising upon
its refusal to register a transfer of shares in, debentures of or interests
made available by the company.
Transitional matters under relevant old legislation: Financial
Transactions Reports Act 1988 -Division 22 - regulation
10.2.116 to 10.2.117
Division 22 of Part 10.2 of the regulations provides that the definition of a
cash dealer in subsection 3(1) of the Financial Transactions Reports Act 1988
will continue to include securities dealers and futures brokers throughout the
transition period for each of these regulated principals. It also provides that
a transaction between a futures broker and a clearing and settlement facility
associated with a licensed market in which the broker is a participant will
continue to be an 'exempt cash transaction' throughout the transition period
for each of these regulated principals.
Transitional matters under relevant old legislation: Income Tax
Assessment Act 1936 -Division 23 - regulation 10.2.118
Division 23 of Part 10.2 of the regulations will ensure that commercial funds
management companies that hold a dealers licence or an investment advisers
licence may still be declared to be offshore banking units during the
transition period for each of these regulated principals.
Transitional matters under relevant old legislation: Insurance Act 1973
- Division 24 -regulation 10.2.119
Division 25 of Part 10.2 of the regulations will ensure that persons who carry
on a class of general insurance business that was prescribed for the purposes
of section 113 of the Insurance Act 1973 will continue to required to be an
party to an agreement to comply with a code of practice that has been approved
by ASIC in relation to these classes of insurance business during the
transition period for each of these regulated principals.
Transitional matters under relevant old legislation: Marine Insurance Act
1909 - Division 25 - regulation 10.2.120
Division 26 of Part 10.2 of the regulations will provide that section 59 and 60
of the Marine Insurance Act 1909 will continue to apply in relation to marine
policies that were effected prior to the FSR commencement.
Transitional matters under relevant old legislation: Superannuation
(Resolution of Complaints) Act 1993 - Division 26 - regulation
10.2.121
Division 29 of Part 10.2 of the regulations will provide that the definition of
a life insurance broker in subsection 3(2) of the Superannuation (Resolution of
Complaints) Act 1993 will continue to include a regulated principal registered
under Part III of the I(AB) Act during the transition period for each of these
regulated principals.
Transitional matters under the Act (other than Chapter 7) - Division 27 -
regulation 10.2.122 to 10.2.135
References to professional investor - regulation 10.2.122
Regulation 10.2.122 will provide that the definition of a professional investor
in section 9 of the Corporations Act will include securities dealers and
investment advisers as well as exempt dealers and exempt investment advisers
during the transition period for each of these regulated principals.
Managed investment products held by 100 or more persons - regulation
10.2.123
Regulation 10.2.123 will provide that managed investment products in a class of
managed investment products issued by a body are ED securities if 100 or more
persons hold managed investment products in that class as a result of either
offers that gave rise to an obligation to lodge a disclosure document with ASIC
under Chapter 6D of the old Corporations Act or offers that gave rise to
obligations to give Product Disclosure Statement (whether or not all in the
same terms) under Chapter 7.
When a managed investment scheme must be registered - regulation
10.2.124
Regulation 10.2.124 will ensure that a managed investment scheme will only be
exempt from registration under subsection 601ED(2) of the Corporations Act if
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none of the issues of interests in the scheme that were made under Chapter 6D
of the old Corporations Act would have needed disclosure to investors if the
scheme had been registered at the time the issues were made and none of the
issues of interests in the scheme that have been made under Chapter 7 of the
amended Corporations Act have required the giving of a Product Disclosure
Statement under Division 2 of Part 7.9 if the scheme had been registered when
the issues were made.
Responsible entity to be public company and hold Australian financial
services licence - regulation 10.2.125
Regulation 10.2.125 will provide that a public company that holds a dealers
licence will continue to be able to be the responsible entity of a registered
managed investment scheme during its transition period.
Duties of officers of responsible entity - regulation 10.2.126
Regulation 10.2.126 provides that an officer of a public company that is the
responsible entity of a registered managed investment scheme will continue to
be required to comply with any condition imposed on the responsible entity's
dealers licence during the transition period for the regulated principal.
Voidable contracts - regulation 10.2.127
Regulation 10.2.127 will provide that section 601MB will continue to operate in
relation to an offer of interests in registered managed investment schemes for
subscription or invitations to subscribe for an interest in a managed
investment scheme that are made during the transition period that applies to
the relevant managed investment product.
Situations not giving rise to relevant interests - regulation 10.2.128
Regulation 10.2.128 will provide that a securities dealer will not be deemed to
have a relevant interest in securities held on behalf of someone else in the
ordinary course of their securities business during the transition period
during its transition period.
Bidder's statement content - regulation 10.2.129
Regulation 10.2.129 will provide that, if a bidder offers securities as
consideration in a takeover bid, and the bidder is the body that has or will
issue the securities or a person who controls that body, and the securities are
managed investment products that have not transitioned to the new product
disclosure regime at the time the bidder's statement is lodged with ASIC, the
bidder's statement will be required to contain all material that would be
required for a prospectus for an offer of those securities by the bidder under
section 710 to 713 of the Corporations Act.
Continuous disclosure - other disclosing entities - regulation
10.2.130
Regulation 10.2.130 will provide that a disclosing entity will not be required
to disclose information under section 675 of the Corporations Act if the
information has been included in a supplementary disclosure document or a
replacement disclosure document lodged with ASIC under Chapter 6D of the old
Corporations Act.
Sale offers that need disclosure: securities issued before FSR commencement
- regulation 10.2.131
Regulation 10.2.131 (second mentioned) deals with the application of the
amended section 707 of the Corporations Act to the sale of securities (other
than managed investment products). It provides that section 707 of the
Corporations Act applies only in relation to the sale of a security issued
after the FSR commencement. Section 707 of the old Corporations Act will
continue to apply in relation to a. security that was issued prior to the FSR
commencement.
Offers that do not need disclosure: offer to sophisticated investor through
licensed dealer regulation 10.2.132
Regulation 10.2.132 will provide that an offer of a body's securities after the
FSR commencement will not need disclosure under Chapter 6D of the Corporations
Act if the offer is made through a securities dealer during its transition
period. This will ensure that subsection 708(10) of the Corporations Act
maintains its current effect in relation to securities after the FSR
commencement.
Prospectus content- general disclosure test - regulation 10.2.133
Regulation 10.2.133 will ensure that a securities dealer's knowledge will be
relevant for the purposes of section 710 of the Corporations Act if the
securities dealer is named in the prospectus as being involved in anyway in the
issue or sale of the securities to which the prospectus applies.
Prospectus content - specific disclosure - regulation 10.2.134
Regulation 10.2.134 will ensure that disclosures will need to be made under
subsections 711(2) or (3) of the Corporations Act in relation to a securities
dealer named in the prospectus as a person involved in anyway in the issue or
sale.
Registers - regulation 10.2.135
Regulation 10.2.135 will provide that a document that is lodged with ASIC under
Chapters 7 (other than subsection 776(2B), section 1011B or Part 7.13) or 8 of
the old Corporations Act will continue to be exempt from public inspection
under subsection 1274(2). This will apply regardless of whether the document
was lodged before or after the FSR commencement.
Retail clients and wholesale clients - Division 28 - regulation 10.2.136 to
10.2.138
Preservation of status under old Corporations Act - regulation 10.2.136 -
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10.2.137
Where certain people were not retail investors under the old Corporations Act
for disclosure purposes, they are deemed to be wholesale clients in relation to
that product as between themselves and the issuer.
Similarly, if a person who was not a retail investor under the old Corporations
Act or the relevant old legislation is being provided with advice in relation
to securities immediately before the adviser becomes regulated under FSR for
those activities, the services may continue until completion (provided it takes
no longer than 4 weeks after FSR applies to that activity) under the old
Corporations Act. Accordingly, the client will not require a Financial Services
Guide or a Statement of Advice. However, the client will need a Product
Disclosure Statement if they are not otherwise a wholesale client for
disclosure purposes.
Professional Investors - regulation 10.2.138
During the transition period, certain regulated principals should be included
in the category of "professional investor" under section 9 of the Act. This
applies to those holding dealers licences, investment advisers licences,
futures advisers or brokers licences, and exempt dealers or investment advisers
working as principals. This ceases to apply at the end of that principal's
transition period.
14. MISCELLANEOUS
Notices - amendment to regulation 5B.3.04
This amendment corrects an errant reference to 'Corporations Law' so that it
refers instead to the Act.
The legislation referred to as the Corporations Law was superseded on 15 July
2001.
Olympic Games protection - omission of Schedule 6 Part 2 - rules 6201, 6202,
6206, 6207 and 6208
These rules have been repealed because they have done the work intended for
them and were expressed to cease to have effect at the end of 31 December
2000.
Schedule 8 paragraph 8203(b) - correction
This amendment omit 'ASC' and inserts 'ASIC'.
The name of the regulator was changed from the Australian Securities Commission
(ASC) to the Australian Securities and Investments Commission (ASIC) in 1998,
at the same time as its role was extended.
Continuous Disclosure - Regulation 6CA.1.01
Section 675 of the new Corporations Act provides for continuous disclosure in
relation to unlisted disclosing entities and, in limited circumstances, for
listed disclosing entities.
Regulation 6CA.1.01 specifies when disclosure to ASIC will not be required of
such entities. The exceptions in this regulation generally reflect those that
apply to listed disclosing entities bound by the Listing Rules of the
Australian Stock Exchange.
Thus information which is confidential, for example, will not be required to be
disclosed.
REGULATION IMPACT STATEMENT - ALTERNATIVE DISPUTE RESOLUTION SYSTEMS
(Regulation 7.6.02)
Background
The Financial Services Reform Act 2001 (FSR Act) is supplemented by
regulations that outline some of the detail provided for in the Act. Section
912A of the Act describes a range of general obligations that financial service
provides must satisfy in order to apply for and hold a financial services
license.
In sub-section 912A (1)(g), the Act requires financial service licensees to
have in place complying dispute resolution system, when they provide services
to retail clients. The Act elaborates on the compliance requirements in
sub-section 912A (2), and makes provision for regulations to outline the issues
ASIC needs to consider in:
• making or approving standards or requirements for
internal dispute resolution (IDR) procedures (see paragraph 912A(2)(a)(i));
and
• approving external dispute resolution (EDR)
schemes. (see paragraphs 912A(2)(b)(i))
These issues are addressed in Regulation 7.6.02 of the FSR Act.
The Problem
The general problem to which this regulation relates, is that where financial
service providers fail to establish appropriate alternative dispute resolution
systems themselves, consumers would need to devise their own strategies for
seeking redress, in circumstances where they felt that they had been unfairly
treated by a financial services provider. In these circumstances, the only
formal channel through which consumers could seek resolution of their
complaint, would be to proceed with legal action against the provider through
the court system. This is a high cost process, which does not provide the
requisite flexibility in dealing with complaints and issues, that could be more
appropriately and efficiently handled outside of the court system.
This general problem is resolved in the FSR Act, by requiring license holders
to have alternative dispute resolution systems in place. Given that this
requirement would be implemented by ASIC, as an independent statutory body, the
Government wanted to avoid any uncertainty about its intentions in relation to
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the application of this requirement. Uncertainty could lead to difficulties in
implementing the requirement (ie. the approval process could be made too
lenient or too onerous) in keeping with the Government's intent.
The Objective
To avoid any uncertainty about the Government's intentions in relation to
ASIC's powers to approve internal and external dispute resolution systems,
guidance needs to be given to ASIC, and clarity to potential license holders,
about the matters the Government considers are relevant in the approval
process.
The Options
One option (option 1) that could achieve the objective of providing
guidance to ASIC and clarity to license holders, would be to prescribe in
detail, all the matters that the Government considered were necessary for
license holders to meet their requirement of having appropriate internal and
external dispute resolution systems.
Another option (option 2) would be to require ASIC to consider (rather than
adopt) a range of matters the Government considered relevant to the approval
processes, but to also provide ASIC with the flexibility to consider other
matters as appropriate. Such an option would have the regulation list a range
of matters that must be considered by ASIC when it approved external dispute
resolution systems (EDRs), or approved various standards or requirements in
relation to internal dispute resolution systems (IDRs).
in relation to IDRs, such a regulation would implicitly provide for a range of
possible options in meeting the regulatory objectives behind IDR procedures.
That is, ASIC would need to take into account (but not strictly adopt) the
Australian Standard AS 4269-1995 (known as Complaints Handling), but would also
have the flexibility to consider other matters it considered relevant.
In relation to EDRs, such a regulation would require ASIC (when considering
whether to approve
an EDR scheme) to take into account issues such as the: accessibility;
independence; fairness;
accountability; efficiency; and effectiveness of the scheme. However, again,
they would also be
able to consider other matters that they considered relevant.
These specific matters already form part of ASIC's checklist when it approves
EDR schemes under Policy Statement 139. Under this policy statement, ASIC has
already approved three EDR schemes with financial sector members. The three
schemes (ABIO, IEC and FICS) cover the banking, general insurance, life
insurance, funds management and advisory services sectors of the financial
services industry. Therefore, by making a regulation under the FSR Act which
requires ASIC to take into account the matters that it has already been using
for approving EDRs under the existing Corporations Laws, with the added
flexibility to consider other matters as relevant, ASIC would not be subject to
new obligations from such a regulation under FSR.
Costs and Benefits
Option 1
Option 1 would appear to carry with it significant costs to both ASIC and
financial service provider licensees, due to its overly prescriptive nature.
Explicit and inflexible approval conditions in a regulation will impose costs
on financial service providers to the extent that such requirements cannot
adequately address the wide range of businesses and business sizes that will be
licensed under the FSR Act.
A small life insurance provider for example, may only receive a relatively
small number of complaints which are of a simple and straightforward nature.
However, a large stockbroking firm or derivatives dealer may potentially
receive a large number of complaints (given the number of transactions they
handle) which could relate to relatively complex advice that their clients
receive. By requiring ASIC to impose a "one size fits all" approval condition
on a licensee's internal dispute resolution system, would impose unnecessary
costs on those licensees for whom the requirement was not appropriate.
However, Option 1 would have benefits in terms of providing explicit clarity to
ASIC and licensees in relation to the Government's intentions behind the
requirement for all license holders to have alternative dispute resolutions
systems in place. Explicit requirements would potentially remove one element of
uncertainty in relation to ASIC's application of its approval conditions.
Although, uncertainty would still remain in relation to the practical
application of such strict standards on the approval of dispute resolution
systems across the wide range of potential financial service providers under
the FSR Act.
Option 2
Option 2 may carry some short-term costs in relation to a greater degree of
uncertainty about how ASIC might apply its discretion in relation to the
approval of alternative dispute resolution systems. However, some of this
uncertainty can be reduced through ASIC's consultation process in the
development of its policy papers that relate to its approval of alternative
dispute resolution systems. Further, the costs of any uncertainty would also be
minimised because of the guidance and references to certain standards and
factors that the Government wanted ASIC to take into account in their
application of the approval powers.
Option 2 will carry significant benefits though, because of the greater
flexibility and discretion provided to ASIC in its approval process. That said,
ASIC and license holders will still benefit from the presence of references to
appropriate standards that the Government expects ASIC to take into account in
their approval process.
The major benefit of option 2 is that it does not force ASIC to adopt the
standards referred to in the regulation. ASIC need only take account of these
issues in their approval processes. ASIC would have the flexibility (through
the authority to consider other matters as relevant) to tailor the approval
process/requirements to the size of the businesses and the nature of the
business being conducted. This will benefit license holders by enabling ASIC to
apply conditions on the approval of their alternative dispute resolution
systems that are consistent with the size and nature of their business
activities.
In this context, it is worth noting that option 2 would be less prescriptive
than that which already applies to various license holders under the existing
corporations regulations (7.3.02B5), Such license holders must have internal
complaints handling processes which are in accordance with the Complaints
Handling standard AS 4269-1995.
Consultations
The FSR Regulations in general, have been subject to a thorough and open
process of public consultation, which is the culmination of extensive
consultation on the reforms since 1997. The regulations were released in draft
form for public comment, and to facilitate focussed industry and consumer input
a formal consultation body, the Implementation Consultative Committee (ICC) was
established by the Treasury.
This body includes a wide range of practitioners from 40 key interest groups
representing the financial services industry and consumers and has assisted in
the development of the regulations to support the FSR regulatory regime both at
a general and at an operational level. Industry and consumer input has been
invaluable to this process and four ICC meetings have been held to consider the
draft regulations.
A regulation in relation to Alternative Dispute Resolution Systems (along the
lines of option 2 referred to earlier) was released as part of the general
consultation process. No specific problems were raised by industry or consumer
groups in relation to the regulation.
ASIC's specific role in this area is also the subject of their policy proposal
papers on the Financial Services Reform Bill. ASIC has issued a policy proposal
paper (FSRB PPP no. 7) on its approval role in relation to external and
internal dispute resolution schemes for licensees and other entities under the
FSR Act. Consultations have been conducted and it is expected to be issued as a
final Policy Statement in December 2001.
Conclusion
Option 1 has the potential to provide benefits to licensee holders to the
extent that they are in no doubt as to how ASIC will impose conditions on the
approval of their alternative dispute resolution systems. However, these
benefits will come at the cost of an inflexible approval regime that will not
be able to cater to the wide range of business activities and business sizes
that will be licensed under the FSR Act. In these circumstances it is hard to
conceive of a scenario where the benefits of option 1 would outweigh the costs
for the vast majority of businesses (license holders).
Option 2 has the benefit of providing ASIC and license holders with some
guidance on the Government's intentions in relation to ASIC's approval powers
for alternative dispute resolution systems, but with the flexibility of
tailoring conditions on approvals to the nature and size of the businesses in
question. This is a crucial consideration in the recommendation of option 2
over option 1.
The entire thrust of the FSR Act is to provide overall guidance on appropriate
regulatory standards across the financial services industry, but with the
critical caveat that the regulation should be appropriate to the nature and
extent of the business being undertaken. The flexibility in option 2 is
consistent with this theme, as it accommodates and takes account of the
expanded range of financial service providers that will be licensed under the
FSR regime. Option 2 appears to have the better cost/benefit trade-off of the
two options, and is fully consistent with the overall objectives of the FSR
Act. It did not receive any unfavourable commentary from industry in
consultations on the regulation.
Implementation and Review
The reforms contained in the FSR Act and its Regulations will be reviewed after
the two-year transitional period for their implementation, which is expected to
commence on 11 March 2002.