Statutory Rules 2003 No. 85

Issued by the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulations 2003 (No. 3)

Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

The Financial Services Reform Act 2001 (FSRA), which commenced on 11 March 2002, introduced a uniform licensing, conduct and disclosure regime for financial service providers. A two-year transition period was established under the FSRA to allow time for existing industry participants to enter the new regime.

If a person provides a financial service as defined in the Act, then that person needs to become licensed to operate under the FSRA. Regulations made under the Act may also set out the circumstances in which persons are taken to provide, or not to provide a financial service.

The purpose of the Regulations is to set out the circumstances in which a person is taken not to provide a financial service and therefore does not need to be licensed when performing the services described in the Regulations. These circumstances relate to:

•       Administrative tasks such as the registration of companies;

•       Advice on shelf companies and trusts;

•       Audit advice;

•       Business advice;

•       Risk management advice;

•       Superannuation advice; and

•       Taxation advice.

The Regulations correct and/or clarify various provisions made under the FSRA and hence promote certainty and facilitate transition to the licensing regime.

The Regulations support the reforms to the regulation of the financial services industry, which were included in the FSRA and associated legislation, by clarifying and/or correcting various perceived deficiencies in the operation of the FSRA.

Details of the Regulations are set out in the Attachment.

The Regulations commence upon Gazettal.

ATTACHMENT

SCHEDULE 1 - AMENDMENTS COMMENCING ON GAZETTAL

1.       Amendment of Regulation 2A.1.01

A minor correction.

2.       Circumstances in which a person is taken not to provide a financial service - Substituted regulation 7.1.29

Section 766A of the Act describes when a person provides a financial service. 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 financial service.

The regulation is intended to clarify that when a person performs an activity (or an exempt service) listed in subregulations 7.1.29(3), (4) and (5), a person will not be providing a financial service (or eligible service), provided that person also meets the requirements of subregulation 7.1.29(1).

Purposive approach in the regulation

The activities listed in subregulations 7.1.29(3), (4) and (5) are considered to be activities that should not be regulated as a financial service under the Act and therefore not subject to the relevant licensing, disclosure and conduct obligations of the FSR regime. This approach is consistent with the functional regulatory basis that underpins the Act, which focuses on the nature of the activities performed.

The regulation is not intended to be an exhaustive list of every task that a person can perform without licensing. Therefore, certain activities are described in broad terms using words such as 'administration', 'establishment' and 'structuring'. It is intended that reasonable tasks would be covered by this exemption from FSR licensing. For example, providing advice on compliance with legislation is part of 'administration' tasks.

Exclusion from exemption where material is for inclusion in an exempt document

The exemptions in 7.1.29(2)(b), (2)(c) and (5) are intended to exempt from licensing requirements where the advice is provided to those actually operating a business or superannuation fund. For consumer protection purposes, it is not intended that advice provided under an exemption from licensing will be republished in an exempt document to a wider audience. An example is if a person provides a valuation of a company to its directors and that valuation is reproduced in a prospectus.

That said, this restriction does not apply to advice about a company's financial statements or taxation that is included in an exempt document (such as Investigating Accountant's Reports).

Specific Provisions

7.1.29(1)

7.1.29(2)

An 'eligible service' has the same definition as a financial service under subsection 766A(1) of the Act.

7.1.29(3)(a)

This activity concerns activities such as the preparation of financial reports and the conducting of audit functions as required by law.

7.1.29(3)(b)

The exemption in paragraph (3)(b) clarifies that a person may advise on the risk that a business faces and identify a financial product that could mitigate that risk. Therefore, a person could recommend that a particular business requires certain types of insurance in their circumstances, such as contents insurance and public liability insurance.

However, that person would not receive the benefit of the exemption if they recommended products of, for example, ABC Ltd Insurance to meet those requirements. This information cannot be included in an exempt document for wider consumption.

7.1.29 (3)(c)

This activity concerns advice to an incorporated entity or unincorporated entity on administrative and operational issues. The most common use of this provision is likely to be a person advising the management of a company.

The advice must only be in relation to the actual entity carrying on the business or related entities such as subsidiaries. It will not apply to any financial products that the company acquires or disposes of, such as investments that the company holds. This exemption cannot be relied upon if the information is included in an exempt document.

7.1.29(3)(d)

Paragraph (3)(d) concerns advice to be provided in relation to a shelf company or shelf trust that has never carried on a business.

7.1.29(3)(e)

In this activity, advice on transferring financial products among related body corporates could be provided without licensing. This is because there is largely limited or no change in beneficial ownership of the financial products involved, such as insurance.

7.1.29(3)(f)

This activity applies to arranging activities to assist trustees in operating a self managed superannuation fund (SMSF).

This allows a person to undertake tasks such as rolling over funds into a SMSF, such as where the decision to roll over the funds has already been made. However, this arranging exemption will only apply to a SMSF given the need to assist member-trustees operate their own funds. Arranging can only be provided to persons mentioned in paragraph (5)(b) and must not be inconsistent with the limitation in paragraph (5)(c).

7.1.29(3)(g)

This provision concerns the preparation of documents to complete administrative tasks such as share transfers, transferring superannuation funds and establishing structures without licensing. This exemption can only be used provided the administrative tasks are due to a direct instruction from the client. This activity will usually involve completing relevant documentation for signature of the client.

The provision of 'arranging' activities needs to be distinguished from the 'financial product advice' that recommends the registration or transfer of a financial product. That advice must fall within an exemption (either under this regulation or elsewhere under the Act) or require licensing. Once the client makes a decision, then the provisions of this exemption may be used to bring effect to the client's instructions.

7.1.29(3)(h)

Paragraph (3)(h) clarifies that providers of advice on financial products that are used as security upon purchasing assets other than financial products do not require licensing. For example, this could involve advice to a company that it should raise money by securing a floating charge over assets in the company, which could include shares held by the company.

The exemption cannot be used as a means to provide unlicensed advice when the security is used to purchase other financial products, such as margin loans.

7.1.29(4)

This activity provides an exemption from FSR licensing when providing taxation advice.

It does not, however, provide an exemption from a requirement to comply with relevant tax legislation that may apply. For example, section 251L of the Income Tax Assessment Act 1936 makes it an offence for anyone other than a registered tax agent or an exempted person (such as a legal practitioner) to give advice about a tax law for a fee.

A person that receives a benefit from the client or its associate (such as a fee for taxation advice) will be able to use this provision. However, this exemption cannot be used as a means to market or sell financial products

Taxation advice should not be the only consideration in making an investment decision. Therefore, if taxation advice includes financial product advice provided to a retail client, a written statement disclosure must be provided to the client.

7.1.29(5)

This subregulation provides that unlicensed advice may be provided to the management or controllers of a superannuation fund in relation to running a superannuation fund. This would include advising a trustee on administration and operational issues. Therefore, a person can advise a superannuation trustee on operational issues such as:

•       how to establish a fund after the trustee has made that decision;

•       the addition of new trustees and members; and

•       providing a valuation of the superannuation fund.

A person is able to advise on compliance with legal requirements. This would include advice on what are the legal requirements and whether there has been a breach of these requirements. In limited circumstances, a person may also give advice that would normally contravene paragraph (5)(c) if the advice were for the sole purpose and only to the extent reasonably necessary to ensure compliance with specified legislation. This legislation is the Superannuation Industry (Supervision) Act 1993 (SIS Act), SIS regulations and the Superannuation Guarantee (Administration) Act 1992. Note that while a person can advise on the need for an investment strategy that meets certain requirements under section 52(2)(f) of the SIS Act and regulation 4.09 of the SIS regulations, no advice can be given that contravenes the requirements of paragraph (5)(c).

Advice that may breach paragraph (5)(c) cannot go beyond what is required by the specified legislation. For example, recommending a trustee purchase a financial product to comply with the need to act in the best interests of the beneficiaries under section 52(2)(c) of the SIS Act would not satisfy the requirement that is 'for the sole purpose and only to the extent reasonably necessary'.

Only advice relating to certain legislation may breach paragraph (5)(c). This is due to certain provisions of the specified legislation virtually requiring advice being provided on how to remedy breaches of the legislation. This would include advice on:

•       the sale of financial products to correct a breach under section 129 of SIS;

•       meeting in-house asset rules; and

•       modifying the contribution level due to changes in the superannuation guarantee level.

It is not envisaged that a normal retail client holding employer-sponsored superannuation would require advice on issues such as establishment and structuring.

Superannuation is a financial product under section 764A(1)(g) of the Act and a financial service in relation to superannuation ordinarily requires licensing. Financial product advice (or a recommendation) that influences a client's investment or retirement planning decisions will have a significant impact upon that person's economic future. An example is a recommendation on which superannuation structure, vehicle or fund type the person advised should enter.

In that light, advice a consumer receives in these circumstances should be subject to consumer protection offered by the FSR Act. Therefore, financial product advice on investment decisions cannot be given without licensing in circumstances such as:

•       a person becoming a member of a superannuation fund;

•       an existing member of the superannuation fund joining another subplan in that same fund;

•       a superannuation product changing from the growth phase to the pension phase;

•       transferring benefits between investment options;

•       making additional and voluntary contributions to a superannuation fund; and

•       deciding what financial products should be held by a superannuation fund.

This provision will not provide an exemption for advice recommending a SMSF structure in isolation or as a preferred structure to other alternative investment vehicles. Under the FSR, recommending a person establish a SMSF structure is a superannuation investment decision as it is equivalent to recommending a person becomes a member of a SMSF. Further, when a person accepts a recommendation to establish a SMSF, that client will probably not consider seeking further advice from a licensed person on what other investment alternatives may be suitable in their circumstances.

If unlicensed advice is provided under this provision, which includes financial product advice to retail clients, the person advised must also receive additional written disclosure. This exemption cannot be relied upon if the information is included in an exempt document.

3.       Investment-linked life insurance products - regulation 7.1.33D

Unit-linked life insurance products share a number of common features with superannuation products and managed investment schemes, which are listed under an exemption from the definition of 'making a market' in subsection 766D(2) of the Act. The regulation will ensure that simply calculating unit prices in relation to their redemption value will not of itself constitute making a market. This will result in a comparable treatment with the exemption currently available to superannuation products and managed investment schemes.

4 and 5. Arranging non-cash payments

Regulation 7.6.01(1)(1a) extends the relief from licensing provided by 7.6.01(1) to financial service providers. That is, relief from licensing is provided for financial service providers who, as part of their business, advise their customers or clients on the options available for making payments for goods or services supplied, or make arrangements to put a payment facility in place.

The consequential issue of a Financial Services Guide (FSG) is addressed through regulation 7.7.02(3A), which removes the requirement to provide an FSG in the circumstances outlined above.

6, 7 and 8.       Financial Services Guide - Disclosure (General Advice) - amendment of regulation 7.7.05A and regulation 7.7.05B

The regulations allow a greater ability to provide a 'generic' form of FSG where the identity and remuneration of the particular person providing the advice is not material to a person's decision to acquire a financial service.

An individual authorised by a licensee selling another licensee's products or an individual authorised by authorised representative can use this exemption when dealing, providing general advice or both. For example, this might apply when employees such as bank tellers or call centre staff provide general advice to clients in a scripted form.

9.       Warrants or options to acquire issued securities - regulation 10.2.213

Currently, warrants and options to acquire issued securities by way of transfer, are not subject to Chapter 6D or Part 7.9 disclosure requirements during the transition period.

This regulation continues the application of the Act during the transition period, by applying Chapter 6D disclosure requirements to warrants and options to acquire issued securities (except where exemptions have been granted via Australian Securities and Investments Commission class orders, for example Class Order 00/1068).

Warrants and options to acquire issued securities, were subject to disclosure provisions pre-FSRA and will be subject to disclosure provisions post-FSRA. To maintain consistency, it is appropriate that disclosure requirements apply to warrants and options to acquire issued securities, during the transition period. (The transition period for the relevant product issuer and product is the product's transition period within the meaning of s1438).

10.       Certain provisions of the Friendly Societies Code cease to apply to FSRA licensee regulation 12.7.06

This regulation is intended to ensure that a Friendly Society transitioning into the FSR Act's disclosure regime does not have to comply with multiple disclosure requirements.

Schedule 4 of the Act concerns the Transfer of Financial Institutions and Friendly Societies. If a body to which this schedule applies transitions to the FSR's disclosure regime, the application of paragraph 36 of Schedule 4 of the Act could mean that two separate disclosure regimes might apply to such products.

Therefore, the Schedule 4 disclosure provisions will apply the sooner of 11 March 2004 or opting in to the Part 7.9 disclosure regime.