Corporations Amendment Regulations 2003 (No. 8) 2003 No. 282
EXPLANATORY STATEMENT
Statutory Rules 2003 No. 282
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2003 (No. 8)
Section 1364 of the Corporations Act 2001 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) commenced on 11 March
2002. It amended the Act to introduce a uniform licensing, conduct and
disclosure regime for financial service providers. Under the FSRA, a two-year
transition period was established to allow time for existing industry
participants to enter the new regime.
Amongst other things, the FSRA requires the disclosure of relevant information
in the form of a product disclosure statement (PDS), before a person purchases
a financial product. In addition financial investment product holders are to
receive ongoing information regarding their product in the form of periodic
statements. Both statements are intended to promote informed investment
decisions and understanding of financial products.
The purpose of the Regulations is to support the reforms to the regulation of
the financial services industry which were implemented in the FSRA and
associated legislation. The Regulations will facilitate transition to the new
licensing, conduct and disclosure arrangements and promote certainty,
clarifying, where necessary, various provisions under the FSRA.
The Regulations make amendments that:
• close a potential loophole which may have allowed
for the circumvention of point-of-sale disclosure obligations;
• remove impractical point-of-sale disclosure
obligations related to declined offers of financial products and situations
where clients are uncontactable;
• address practical concerns regarding the disclosure
of amounts paid within periodic statements for investment financial products;
• ensure that a prospective member of a self-managed
superannuation fund receives information necessary to make an informed
investment decision through the timely provision of a PDS;
• aid consumer comprehension by requiring disclosure
in dollar terms in the first instance and where practicable in a range of
disclosure documents; and
• enhance the disclosure of superannuation benefits
within periodic statements.
Details of the Regulations are set out in the Attachment.
Regulations 1 to 3 and Schedule 1 commences on gazettal, Schedule 2 commences
on 11 March 2004 and Regulation 4 and Schedule 3 commences on 1 July 2004. To
address varying degrees of necessity for transitional arrangements, the
deferred commencement of Schedules 2 and 3 allow sufficient time for industry
to address any systems or administrative changes required to effect the
operation of the new arrangements.
ATTACHMENT
CORPORATIONS ACT AMENDMENT REGULATION
Regulation 1 provides that the name of the Regulations is the Corporations
Amendment Regulations 2003 (No. 8).
Regulation 2 provides that regulations 1 to 3 and Schedule 1 commence on
gazettal, Schedule 2 commences on 11 March 2004 and Regulation 4 and Schedule 3
commence on 1 July 2004.
Regulation 3 provides that Schedules 1 and 3 amend the Corporations
Regulations 2001 and Schedule 2 amends the Corporations Regulations 2001
as amended by the Corporations Amendment Regulations 2003 (No. 7).
Regulation 4 provides that the amendments made by Schedule 3 only apply in
relation to Statements of Advice, Product Disclosure Statements and periodic
statements prepared on or after 1 July 2004.
SCHEDULE 1
Item 1 Specific things that are not financial
products - rights of the holder of a debenture and money orders - regulations
7.1.07E&F
Rights of the holder of a debenture
Regulation 7.1.07E specifies that a facility which consists of the rights of
the holder of a debenture against a trustee under a trust deed entered into
under the debenture provisions of the current legislation, or under equivalent
provisions of the former Corporations Act (the Act), is not a financial
product.
Australia Post Money Orders
Regulation 7.1.07F provides a specific exemption from the Financial Services
Reform Act 2001 (FSRA) regime for Australia Post money orders on the basis
that these money orders are provided by the national postal authority, that is,
Australia Post which is a substantial and wholly government owned entity.
Item 2 Advice about the existence of a custodial
or depository service - regulation 7.1.33E
Advice about a custodial or depository service
Regulation 7.1.33E provides that a person is taken not to provide a financial
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service where advice is provided that relates to the existence of a custodial
or depository service, but does not relate to financial products that may be
held as part of that service.
It is arguable that statements given by the provider of a custodial or
depository service, for example, to attract clients to use those services, may
constitute the provision of financial product advice. The reasoning behind this
is as follows - the holding of financial products by a custodian may give rise
to the issue of a financial product to the client, being an equitable interest
in the financial products held on the client's behalf - in particular,
equitable interests in a share, debenture or interest in a registered scheme.
Thus, advice concerning the services offered by the custodian may come within
the definition of financial product advice, as far as it concerns those
equitable interests.
The regulation provides that advice of this nature does not constitute the
provision of a financial service (ie. it does not constitute financial product
advice). However, the regulation does not exempt advice that relates to
financial products held as part of the custodial or depository service, as
opposed to advice about the service itself.
A note to the new regulation explains that paragraph (c) of the regulation is
intended to apply only to equitable rights or interests in shares or debentures
of a body that are defined as financial products under paragraph (c) of the
definition of "security" in section 761A, or equitable rights or interests in
an interest in a registered scheme that are defined to be financial products
under subparagraph 764A(1)(b)(ii) of the Act.
Item 3 Conduct that does not constitute dealing in
a financial product - substituted regulation 7.1.34
This item substitutes existing regulation 7.1.34 with a new regulation to
provide an exemption from dealing in a financial product for certain conduct
relating to financial products that are subject to a mortgage. The new
regulation combines the existing paragraphs (a) and (b) of regulation 7.1.34
into a new paragraph (a) and adds a new paragraph (b) applying to situations
where financial products are disposed of, or transferred to the mortgagor,
whether at the direction of the mortgagor, or by the mortgagee fulfilling its
obligations under the mortgage (eg. where the mortgage is discharged and the
financial products are 'redeemed').
A mortgagee exercising powers of sale under a mortgage is provided as an
example of a situation in which paragraph (a) applies.
Item 4 Need for Australian financial services
licence - Exemption for certain non-cash payment facilities - paragraphs
7.6.01(1)(lb) and (lc)
Limited use facilities
New paragraph 7.6.01(lb) provides an exemption from licensing for the provision
of a non-cash payment facility which may only be used to make payments to the
issuer of the product or a related body corporate. This would cover, for
example, the issue of a store voucher by a department store which may be used
in that store or other stores within the same corporate group.
The range of persons to whom payments can be made under the facility will
depend on the terms of the facility and how it is able to be used in practice
(eg, to whom is it generally understood payments can be made under the
facility).
Australia Post bill payment facilities
Regulation 7.6.01(lc) provides an exemption from licensing for the bill
presentment and payment processing facilities of Australia Post known as
POSTbillpay and billmanager. Australia Post, which is a substantial and wholly
government owned entity, provides the bill presentment and payment processing
facilities pursuant to Agency Agreements entered into between Australia Post
and each billing entity.
While these amendments provide exemptions from licensing in regard to the
services outlined in the new paragraphs, the disclosure obligations under part
7.9 would continue to apply as would the general consumer protection provisions
of the Australian Securities and Investments Commission Act 2001 (ASIC
Act).
Item 5 and 6 Need for an Australian financial
services licence (AFSL): general - paragraphs 7.6.01(1)(w)
This paragraph provides an exemption to the Export Finance and Insurance
Corporation (EFIC), established by the EFIC Act 1991, from the
requirement to hold an Australian financial services license for the provision
of wholesale financial services.
The exemption acknowledges the unique nature of EFIC with respect to its own
legislative regulatory framework under the EFIC Act 1991, and its
resulting exemption from the authorisation, reporting and prudential regulation
requirements of the Insurance Act 1973. It should be noted that the
exemption only relates to services provided to wholesale clients.
Item 7 Australian financial services licence -
requirements for a foreign entity to appoint a local agent - regulations
7.6.03A and 7.6.03B
Part 5B.2 Division 2 of the Act provides a registration regime for foreign
bodies corporate carrying on business in Australia. It provides for, amongst
other things, appointment of a local agent, which is able to accept effective
service of court documents, and is liable for any penalty imposed under the Act
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on the foreign body corporate.
Most (if not all) Australian financial services licensees which are foreign
bodies corporate, will need to register with the Australian Securities and
Investments Commission (ASIC) under Part 5B.2 Division 2 of the Act. Other
foreign entities (eg natural persons, trusts and partnerships) do not have a
similar obligation.
This local agent requirement provides consumers and ASIC with important
practical assistance in enforcing the Act and contractual rights in relation to
foreign bodies corporate.
Regulation 7.6.03A requires foreign entities, that do not need to register with
ASIC under Part 5B.2 Division 2, to appoint a local agent before applying for
an AFSL. The local agent must be a natural person or a company, a resident in
this jurisdiction and authorised to accept, on the foreign entity's behalf,
service of process and notices. Evidence of the appointment is to be provided
to ASIC with the application for the AFSL.
Regulation 7.6.03B requires all foreign entities (that are not foreign
companies) to continue to have a local agent as a condition to holding an AFSL.
Foreign entities are also obliged to notify ASIC of any changes to their local
agent or changes to the contact details of the appointed local agent.
Regulation 7.6.03B also ensures that ASIC may treat a document as being served
on the foreign entity by providing that document to the local agent of the
entity.
Items 8 & 10 Make available - subregulations
7.7.01(2) and 7.9.02A(1)
The obligation for a person to provide disclosure documents, such as the
Product Disclosure Statement (PDS), is a positive obligation that was not
intended to be reduced or removed through the operation of the 'make available'
provisions. The make available provisions are to allow for alternate means of
distribution of disclosure documents and are not to place the onus on the
client to obtain the information. As stated in the explanatory memorandum to
the Financial Services Reform Bill 2001 (with reference to section 940C of the
Act):
"...to be effective disclosure, the client must actually receive the prescribed
disclosure documents, information or statements".
The amendments ensure that the operation of the 'make available' provisions are
not circumvented, in particular for situations related to the time critical
issue provision of disclosure documents under the Act.
Item 9 Dealings involving employees of licensees -
subregulation 7.8.21(4)
Subsection 991F(3) of the Act requires that employees of a licensee who wish to
acquire, on their own behalf, financial products traded on a licensed market in
which the licensee/employer is a participant, must have their employer act as
agent in the acquisition. This applies whether or not the employee's duties
relate to the employer's involvement in the trading of financial products on
that licensed market.
New subregulation 7.8.21(4) provides that subsection 991F(3) will not apply to
a person whose employment is not directly connected with the licensee's
business of dealing in financial products on the licensed market on which the
financial products sought to be acquired by the employee are traded.
Persons whose employment is directly connected with a licensee's
business of dealing in financial products on a licensed market would include
persons employed as dealers/traders on the market, employees in the 'back
office' (eg. settling and recording trades) and employees with management
responsibility for the licensee's activities on that licensed market. The
requirements of subsection 991F(3) will continue to apply to such employees.
Items 11 & 12 Product Disclosure Statements -
declined offers for financial products - regulations 7.9.07D &
7.9.07E
The amendments address a practical issue of a product issuer's obligation to
satisfy disclosure obligations in the event an offer of a general insurance
product is declined in the course of the contact in which the offer was made. A
typical example is a telephone sales situation where a consumer is offered a
financial product but immediately declines the offer and ceases the phone call.
In such situations, it is self-evident that the consumer has no interest in
acquiring the product. The amendments remove the obligation on a regulated
person to provide a PDS in such circumstances.
Item 12 Product Disclosure Statements - delayed
provision and uncontactable product holders - regulation 7.9.07F
The amendment removes the obligation for a responsible person to provide a PDS
(at a later time) where it 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 required to provide a
PDS.
These measures are consistent with exemptions from ongoing disclosure
obligations under regulation 7.9.69 and Part 14 of Schedule 10A.
Item 13 Money held in trust for a superannuation
product or Retirement Savings Account (RSA) product - regulation 7.9.08C
Subsection 1017E(2A) of the Act provides that money received by a product
provider for a financial product before the product is issued is taken to be
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held in trust by the product provider for the benefit of the person who paid
the money. Subsection 1017E(2C) states that the regulations may provide that
subsection (2A) does not apply in specified circumstances, or provide for
matters relating to the taking of money to be held in trust.
In situations involving superannuation or RSA products the person paying money
to a product provider may not necessarily be the person who is entitled to the
money. For example, an employer may make contributions to a superannuation fund
for the benefit of employees. In these cases, it is appropriate that the
product provider should hold the money in trust for the person who is entitled
to the money, rather than the person who paid it.
Regulation 7.9.08C therefore provides that, in the case of a superannuation
product or RSA product, the money to which section 1017E relates is taken to be
held in trust by the product provider for the benefit of the person who is
entitled to the money.
Item 14 & Schedule 3, Item 9 Periodic
statements - disclosure of amounts paid - regulation 7.9.75
Item 14 of Schedule 1 omits subregulation 7.9.75(1), which relates to the
disclosure of transactions not previously confirmed, due to the ambiguity of
its operation. The ambiguity relates to what transactions were required to be
disclosed and whether the provision required the itemisation of transactions
within a periodic statement.
Similarly, the requirement to disclose the times at which amounts were paid
directly by a product holder under existing paragraph 7.9.75(2)(a) have been
removed by subregulation 7.9.75(1)(a) to enable further regulations to be
developed which will be more effective and certain in their operation.
Item 14 also amends the existing requirement to provide a statement about the
relevant dispute resolution mechanisms. The amended disclosure will inform the
product holder that such a mechanism exists and how to access further
information.
ASIC has to date provided class order relief in relation to the disclosure of
amounts paid from common funds within periodic statements. This relief allows
for the provision of an alternate statement, which is in the same terms as the
amendments in subparagraph 7.9.75(1)(b)(ii) where it is not reasonably
practicable to disclose a proportion. Subregulation 7.9.75(2) under Item 14,
Schedule 1 provides transitional relief consistent with the ASIC class order
through until commencement of the Schedule 3 items amending the regulation. The
amendments recognise that the ability for product providers to disclose an
estimate at the individual level may require significant administrative and
system changes, particularly for financial products with bundled fee
structures, including closed products or existing products based on older
systems.
Subregulations 7.9.75(1) and (2) contained in item 9 of Schedule 3 replace
requirements currently referred to in subregulation 7.9.75(2).
The requirement to disclose amounts paid by a product holder during a period is
retained (see paragraph 7.9.75(1)(a)) but is clarified by the inclusion of
subregulation 7.9.75(2) to be consistent with definitions of amounts payable
contained in section 1013D of the Act. The intention of this requirement is for
product holders to be given specific information about the fees that they are
directly or indirectly bearing, to the extent that those fees impact their
investment.
The requirement to disclose amounts paid in respect of a financial product from
a common fund is retained but has been amended to address practical concerns
with the operation of the provision.
The requirement to disclose amounts paid from a common fund under the existing
paragraph 7.9.75(2)(b) has been interpreted by some industry members as
requiring disclosure of the total amount applicable to a common fund rather
than an amount related to a product holder's interest. The amendments contained
in paragraph 7.9.75(1)(b) require the disclosure of common fund amounts in a
form that can be related to the product holder.
The ability to disclose a proportion rather than an actual amount is consistent
with nature of pooled investment products. In particular the amendments are not
prescriptive as to the methodology by which this disclosure occurs. This will
allow flexibility for industry to determine a reasonable methodology consistent
with the intention of the regulation. Further, if it is possible to attribute
an actual amount to the product holder, the regulation does not prevent this
disclosure. The amendments recognise that the ability for product providers to
disclose an estimate at the individual level may require significant
administrative and system changes, particularly for older existing financial
products. In circumstances where it is not reasonably practicable to provide an
estimate where amounts are paid from a common fund, an issuer must still
disclose if such amounts have been deducted, and indicate that they affect
returns on a product holder's investment. This disclosure statement is
consistent with current transitional relief afforded by ASIC Class Order and
the operation of proposed subregulation 7.9.75(2) within Schedule 1.
Subregulations 7.9.75(3), (4) and (5) explicitly require items that can be
disclosed as amounts under the FSRA to be displayed in dollar terms, in the
first instance. If it is not reasonably practicable to provide the amount in
dollar terms the regulations require the disclosure of items in percentage
terms. Again if presentation as a percentage is not reasonably practicable,
then a description (as appropriate) of how the item is determined must be
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provided. However, to account for the nature of periodic statements where an
item is unable to be described in dollar terms or as a percentage, product
holders are directed to other channels for obtaining background information on
request in order to avoid unduly complicating the periodic statement.
The inclusion of 'reasonably practicable' criterion provides a means to address
any practical difficulties in the application of these disclosure obligations.
This may include consideration of a regulated person's ability to determine and
disclose amounts due to administrative, systems or resource concerns. The
extent of such concerns may vary depending on the nature and age of a financial
product.
It is anticipated that generally industry's capacity to disclose information in
dollar terms will increase over time as systems are developed and products
evolve. Consequently, the disclosure of amounts in dollar terms is expected to
become more widespread over time.
To allow sufficient time for transition, the Schedule 3 amendments will only
apply in relation to documents prepared on or after 1 July 2004. The operation
'reasonably practicable' criterion will provide the flexibility to address any
remaining transitional aspects thereafter.
In addition, there will be a requirement to advise a product holder that they
may access further information and indicate the nature of the material that is
available on request.
Item 15 Short selling of certain warrants -
regulation 7.9.80B
Prior to the FSRA, short selling of all warrants was prohibited as they were
classified under section 92 as 'securities'. The new definition of 'security'
means that some warrants no longer fall under the definition but, instead, fall
under the definition of 'derivative' in section 761D (that is, a sale where the
product is not currently owned by the seller).
Section 1020B currently prohibits short selling of warrants that are securities
and warrants over registered managed investment schemes (which come within the
definition of 'managed investment product' in section 761A). Proposed
regulation 7.9.80B will prescribe warrants that are derivatives, and warrants
over unregistered managed investment schemes, as financial products that cannot
be short sold. This will ensure that short selling of all warrants continues to
be prohibited.
Item 16 Transitional relief for warrants -
paragraph 10.2.51(c)
To prevent avoidance of the obligation to provide a PDS, section 1012C of the
Act introduces resale restriction for financial products (including warrants)
that were not issued pursuant to a PDS. That is, if the issuer or purchaser has
the intent that the product be resold within 12 months, a PDS must be issued.
Transitional regulation 10.2.51 (c) removes financial products (except for
securities and managed investments) from the application of section 1012C,
where those products were issued before the end of the transitional period.
That is, the issue of a PDS is not required prior to these products being
resold/transferred, where the products were issued before 11 March 2004, unless
that product issuer has opted into the FSRA regime.
Warrants, by definition, can be a derivative, security or managed investment.
Therefore, warrants that are derivatives receive the transitional relief
provided by regulation 10.2.51(c), however warrants that are securities and
managed investments do not.
Section 1012C(6) will prevent the reselling of warrants that are securities and
warrants that are managed investments under an offering circular, after 11
March 2004. Alternatively, section 1012C(6) would force issuers of security and
managed investment warrants to issue a PDS, before' they have opted into the
FSRA regime, if the warrant is to be resold after 11 March 2004.
Security warrants are currently exempted from the on-selling provisions of
Chapter 6D (which section 1012C serves to replicate) due to ASIC class order
00/1068.
As re-sale restrictions are essentially a new regime for warrants, and as
derivative warrants receive the benefit of the transition period, it is
appropriate that all warrants issued before 11 March 2004 receive transitional
relief from the need to issue a PDS.
Section 1012C(6) will apply to all warrants issued after 11 March 2004.
SCHEDULE 2
Items 1 and 2 Product Disclosure Statements -
self-managed superannuation funds - subparagraph 7.9.04(1)(a)(iv)
The amendment to regulation 7.9.04 requires the provision of a PDS to a
prospective member/trustee of an existing self-managed superannuation fund
(SMSF) to enable them to make an informed investment decision. Provision of a
PDS prior to a person becoming a SMSF member is consistent with the intent of
the FSRA disclosure regime, which is to ensure that consumers are provided with
the information they require at or before the time that they make an investment
decision.
Where a person has not previously received, or does not have access to the
necessary information, the provision of a PDS prior to the acquisition of an
interest in a SMSF provides an effective avenue for disclosure. This may
facilitate disclosure of the trustee obligations placed on SMSF members under
the operation of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
In particular, prospective members (other than a member under a legal
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disability) need to consider material matters affecting them in their role as
trustee, such as the terms of the trust instrument governing the SMSF, before
giving consent to their appointment under section 118 of the SIS Act.
The amendment brings forward the timing of the provision of a PDS rather than
necessarily the obligation to provide a PDS. The delay in commencement of the
amendment to 11 March 2004 is sufficient to allow for any SMSF currently
subject to a 3-month period for the later provision of a PDS.
SCHEDULE 3
Items 1 to 4 Disclosure of dollar amounts -
regulations 7.7.11; 7.7.12, 7.7.13, & 7.9.15A
The regulations clarify existing disclosure obligations under the FSRA, where
parties are required to provide 'information about' particular items, to ensure
that clients are provided with information in the most readily comprehensible
form.
The amendments require the disclosure of the amounts paid in terms of the
disclosure of amounts on a similar basis to that referred to for subregulations
7.9.75(3), (4) and (5).
The regulations explicitly require items that can be disclosed as amounts under
the FSRA to be displayed in dollar terms, in the first instance. If it is not
reasonably practicable to provide the amount in dollar terms the regulations
require the disclosure to be provided in percentage terms. If presentation as a
percentage is not reasonably practicable, then a description (as appropriate)
of how the item is determined must be provided. Worked examples - an existing
requirement under regulations 7.7.11 and 7.7.12 - provided in conjunction with
disclosure of items as percentages or via other descriptions, if appropriate,
may also aid an investors' comprehension.
The amendments also provide for consistency in terminology across provisions of
the Corporations Regulations and are not intended to reduce the effect of any
existing requirements to disclose items in dollar terms. For example, the
disclosure requirements for Statements of Advice (SoA) in relation to
remuneration, commissions and other benefits provided in regulations 7.7.11 and
7.7.12 is maintained.
The regulations do not impede financial services and product providers from
disclosing items in terms of one or more forms, if relevant, subject to the
'clear, concise and effective' requirement and prohibitions on false,
misleading or deceptive statements.
To allow sufficient time for transition to these amended requirements will only
apply in relation to disclosure documents prepared on or after 1 July 2004. The
'reasonably practicable' criterion referred to above will address any remaining
transitional aspects thereafter.
Items 5 to 8 Periodic statements - superannuation
products - amendments to regulations 7.9.19,7.9.19A&7.9.20
The amendments to regulations 7.9.19 and 7.9.20, and the introduction of
regulation 7.9.19A will enhance the existing requirement to disclose
information about the amount of a 'withdrawal benefit' or other significant
benefits. (A withdrawal benefit is the amount a fund would provide to a member
for the voluntary cessation of their interest in the superannuation fund at the
end of a period).
The amendments would require further disclosure of the nature of any withdrawal
or significant benefits, including informing the product holder:
• that the withdrawal benefit is an indicative
estimate that may vary from the actual benefit provided; and
• how to access further information.
Presentation for the disclosure amounts will also apply, as outlined above in
relation to amendments to regulation 7.9.75.
To allow sufficient time for transition to these amended requirements, the new
disclosure requirements will only apply in relation to documents relating to
reporting periods commencing on or after 1 July 2004. This has required
consequential amendments to retain the operation of the existing provisions
(ie, regulation 7.9.19 and paragraph 7.9.20(1)(k)) during the interim.
REGULATION IMPACT STATEMENT
CLARIFYING DISCLOSURE OF AMOUNTS - PROPOSED CORPORATIONS REGULATIONS 7.7.11,
7.7.12, 7.7.13, 7.9.15A AND 7.9.75
Issue
The Financial Services Reform Act 2001 (FSR Act), which commenced on 11
March 2002, introduced a uniform disclosure and licensing regime to the
financial services industry. The FSR Act is intended to provide a broad
regulatory disclosure regime that promotes an informed consumer market place.
The FSR Act requires a range of disclosure documents, including Statements of
Advice, Product Disclosure Statements and periodic statements to include
details of benefits, fees and charges, and other payments - information
necessary for retail investors to make informed investment decisions and
understand their holdings of financial products.
Various provisions of, and regulations under, the FSR Act require parties to
present 'information about' the above mentioned items within disclosure
documents. The lack of clarity in this requirement may potentially result in
details of these items being provided in a form that may be considered
sub-optimal from a consumer comprehension viewpoint.
Objective
To enhance consumer comprehension of financial services and products under the
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FSR Act disclosure regime, through clarification of existing disclosure
requirements to provide 'information about' certain items.
Options
The following options have been considered:
a) Do nothing
This option would leave the existing 'information about' requirements to
industry to interpret and implement the FSR Act's requirements.
b) Guidance from Australian Securities and Investments Commission
(ASIC)
The ASIC could provide guidance requiring industry to disclose items in dollar
terms (in the first instance) or alternate forms in given circumstances under
the existing requirements of the Act, through ASIC publications such as Policy
Statements and Frequently asked questions.
c) Amend Corporations Regulations
Regulations could be made under the provisions of the Act to require industry
to disclose items in dollar terms (in the first instance) or other alternate
forms, as appropriate, therein prescribing the Government's expectations for
what constitutes meaningful disclosure .
d) Alternate form of prescription
Parties could be required to provide information only in a single form (for
example, dollar amounts) or alternate forms, in the first instance, under
options (b) or (c).
Impact analysis
The financial services and product disclosure regimes under the FSR Act affect
a broad range of businesses within the financial services sector and their
associated consumers. The financial services sector includes:
• depository corporations (such as banks, building
societies and credit co-operatives);
• insurance companies and pension funds (that is,
life insurance, general insurance, superannuation funds); and
• other financial corporations, including financial
intermediaries (such as financial unit trusts and investment companies) and
financial auxiliaries (such as financial advisers).
a) Do nothing
This option would leave the requirements up to industry to best see how they
interpret and implement the FSR Act's requirements. This approach would be
consistent with the intent of the FSR Act to provide a flexible disclosure
framework that would not stifle innovation.
However, this option leaves open the potential for parties not to provide the
most straightforward and effective information in the first instance due to the
ambiguity of the 'information about' requirement. This option may result in
inconsistent application between providers of similar financial products and
services, as it may allow for a reduced comparability of information between
financial products.
Further, to leave the existing requirements in place would be inconsistent with
other requirements with the FSR Act and Regulations that already require the
disclosure of 'amounts'.
Cost
Consumers may require additional financial services (at a cost) to fully
comprehend and compare the information provided to make an informed investment
decision. Otherwise a consumer may make a choice which is inappropriate to
their needs, which would represent an inefficient allocation of financial
resources.
b) Guidance from ASIC
This option would express the regulator's interpretation of the Act on what is
considered the most readily comprehensible form of disclosure. This would be
more flexible in operation than legislative instruments, however policy
guidance is not binding or enforceable in a court of law.
Cost
This option may impose costs on industry participants who followed ASIC's
guidance through any associated system changes, to the extent the financial
services or product provider did not already provide disclosure in the most
readily comprehensible form. Any costs would be limited as disclosure
provisions affect only the form in which certain information is to be provided
rather than the requirement to disclose the information.
c) Amend Corporations Regulations
The option to amend the Corporations Regulations clearly sets out the
Government's disclosure requirements to ensure consumers receive effective
disclosure. By putting these requirements into law, there is also greater
certainty and provides ASIC with a firmer basis on which to provide guidance
and enforce the provisions through reliance on the regulations, instead of
relying on its interpretation of the policy position.
The regulations explicitly require items that can be disclosed as amounts under
the FSRA to be displayed in dollar terms in the first instance. If it is not
'reasonably practicable' to provide the amount in dollar terms then items
should be disclosed in percentage terms. If presentation as a percentage is not
reasonably practicable, then a description (as appropriate) of how the item is
determined must be provided. Worked examples (where appropriate) may aid
consumer comprehension in relation to presentation of percentages and other
descriptive forms.
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The above mentioned concept of 'reasonably practicable' is intended to provide
an avenue to address any practical concerns in the application of these
disclosure obligations. This flexibility includes consideration of a party's
ability to determine and disclose amounts due to administrative, systems or
resource concerns. The extent of these concerns would be expected to vary
depending on the nature and age of a financial product. However, it is
anticipated that such restrictions will decline over time. Consequently,
parties not initially disclosing amounts in dollar terms for particular
products might be expected to become increasingly able to do so over time.
The proposed regulations do not impede financial services and product providers
from disclosing items in terms of one or more forms, if relevant.
This measure will clearly define how business is expected to comply with the
provisions in the Act and therefore may impose additional burdens on providers
of financial services, if amendments are required to existing documents and
systems.
Corporations Regulations 7.7.11 and 7.7.12 already provide for the disclosure
of dollar amounts in the first instance. The proposed amendments to those
regulations are to ensure a consistency in terminology across provisions within
the FSR Act.
Costs
As for Option (b), the disclosure provisions affect only the form in which
certain information is to be provided rather than the disclosure of the
information itself. Accordingly, the impact will primarily affect parties which
have chosen not to disclose items in dollar figures (or even potentially as a
percentage) when such a form of disclosure was a practical alternative
available to the regulated person.
In addition, the 'reasonably practicable' constraint involves consideration of
a regulated person's ability to provide the information for existing products.
The requirements would not necessarily impose a requirement for business to
immediately effect system changes for existing products. However, as systems
evolve over time .it would be expected that there would be greater (if not a
total) incidence of disclosure in dollar terms for all items.
The potential burden associated with any amendments to existing industry
systems has been further moderated through the delayed commencement of the
provisions and exclusion for documents prepared prior to commencement.
d) Alternate form of prescription
Instead of the presentation requirements referred to under Option (c), parties
could be required to provide information only in relation to single form (for
example, dollar amounts) or based on a different sequencing.
Allowing only one form of presentation of information may not be conducive to
effective presentation of information. The FSR Act affects a large variety of
information, which does not lend itself to representation in a single form and,
at worst, may result in information being provided in a manner that is
misleading.
Submissions received throughout the development of the FSR Act and Regulations
from a broad range of industry and consumer groups suggest that consumers have
a better understanding of fixed amounts (such as dollars) than other forms of
presentation such as percentages and other descriptive methods. Accordingly,
the presentation of amounts other than as described under Option (c) is not
considered appropriate.
Costs
This option would hold similar costs to those described for either of Options
(b) and (c).
Consultation
Draft amendment regulations related to the disclosure of dollar amounts were
released for public consultation on the Treasury website on two occasions, 12
March 2003 and 27 August 2003. The Ministerial Council for Corporations has on
both occasions been provided with copies of the proposed amendments.
The Association of Superannuation Funds of Australia (ASFA) support the
proposed introduction of dollar-based disclosure as proposed in the draft
regulations. ASFA noted that consumer testing they had undertaken has found
consumers better understand dollar-based disclosure as compared to
percentages.
Conclusion and recommended option
Option (c) is recommended. The amending of the Corporations Regulations is
considered an effective and appropriate means of addressing concerns related to
the potential ambiguity of disclosure requirements under the FSR Act. The
stipulated sequence allows flexibility for the disclosure of information to be
provided in an appropriate form, while ensuring that the disclosure of items
occurs in a manner that is understood to be most readily comprehended by
investors.
Other forms of prescription have been considered, however various consumer and
industry groups indicate that dollar based amounts are more effective for
consumer comprehension. Inclusion of these changes within the regulatory
amendments is appropriate given that the issue has arisen due to the operation
of legislative requirements.
Implementation & review
To allow sufficient time for transition, and in addition to the operation of
the 'reasonably practicable' criterion for disclosure, it is proposed that
these requirements will only apply in relation to disclosure documents prepared
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on or after 1 July 2004.
The regulation provides clarity on the operation of provisions existing in the
FSR Act, accordingly no specific review of the regulation is intended.
DISCLOSING INFORMATION ON SUPERANNUATION BENEFITS - AMENDED CORPORATIONS
REGULATIONS 7.9.19,7.9.19A & 7.9.20
Issue
The Financial Services Reform Act 2001 (FSR Act), which commenced on 11
March 2002, introduced a uniform disclosure and licensing regime to the
financial services industry.
Periodic statements for financial products that contain an investment component
(such as superannuation and managed funds) provide holders of financial
products with regular information on details, such as, a summary of
transactions during the period and the termination of the investment at the end
of the period. This information is the only regular information received by the
holder of the financial product and is vital to keeping the holder informed of
the position of the investment.
Under Corporations Regulations 7.9.19 and 7.9.20, periodic statements for
superannuation fund members are specifically required to inform members of the
amount of a 'withdrawal benefit' and details of other significant benefits for
their interest. Such information is necessary for a superannuation fund member
making a decision whether or not to retain their interest in the fund. However,
superannuation funds are not specifically required by existing Corporations
Regulations to disclose material that would aid a member's comprehension of the
nature and composition of such benefits.
The FSR Act is intended to provide a broad regulatory disclosure regime to
promote better informed consumers and hence a more competitive market place.
Objectives
To enhance existing disclosure obligations within periodic statements relating
to the superannuation fund benefits. In particular, through disclosure of what
withdrawal benefits and any other significant benefits comprise (rather than
just stipulating an amount).
Options
a) Do nothing
Under this option, regulations 7.9.19 and 7.9.20 would be maintained as they
already require some disclosure of the amount of withdrawal benefits and other
significant termination benefits.
b) Guidance from Australian Securities and Investments Commission
(ASIC)
This option would involve ASIC providing greater guidance on the operation of
the existing regulations through ASIC publications such as Policy Statements
and Frequently Asked Questions.
c) Amend Corporations Regulations
Corporations regulations 7.9.19 and 7.9.20 provide the existing requirements to
disclose information about the amount of termination benefits from the holding
of superannuation and retirement savings account products. The termination
benefits include such items as 'withdrawal benefits' - being the amount a fund
would provide to a member for the voluntary cessation of their interest in the
superannuation fund at the end of a period - or disability benefits.
Those regulations could be amended to reflect the Government's expectation of
what constitutes relevant information and ensure that it is disclosed in a
manner that is meaningful and which promotes consumer understanding.
Impact analysis
Consistent with the Government's general approach to the regulation of
self-managed superannuation funds (SMSF), SMSF will not be subject to the
proposed increase in specification of periodic statement reporting
requirements. Corporations regulations 7.9.19 and 7.9.20 currently exclude
SMSF.
Accordingly, those sectors of the superannuation industry potentially affected
by any proposed greater specification of periodic statement reporting
requirements, would incorporate approximately 2472 superannuation funds with
assets of approximately $415 billion and 24.7 million accounts1.
a) Do nothing
The Government has determined that the current information requirements
prescribed by Corporations regulations 7.9.19 and 7.9.20 are not optimal, as
they do not provide sufficient information to investors. Accordingly, the
option not to alter the current regulations 7.9.19 and 7.9.20 would not be
considered consistent with the requirements of subsection 1017D(4) of the Act
which requires the provision of information that is reasonably believed for the
holder of the product to understand their investment.
Costs
This option would incur nil costs to industry, however consumers may require
additional financial services (potentially at a cost) in order to fully
understand the nature of any superannuation benefits.
b) Guidance from ASIC
This option would be more flexible in operation than other legislative
instruments, however policy guidance is not binding or enforceable in a court
of law.
Costs
The proposed specification of additional information may require system changes
and modification of periodic statement templates by industry participants who
followed ASIC's guidance to supply the required information.
c) Amend Corporations Regulations
The proposed regulations reflect the Government's expectation that the relevant
information is disclosed in a manner that is meaningful and which promotes
consumer understanding. By putting these requirements into law, there is also
greater certainty and provides ASIC with a firmer basis on which to provide
guidance and enforce the provisions through reliance on the regulations.
Proposed amendments to regulations 7.9.19A and 7.9.20 are intended to enhance
the existing requirement to disclose information about the amount of
termination benefits from the holding of superannuation and retirement savings
account products. In particular, they require:
• an indication of the amount of any fees and charges
payable that would be associated with estimated termination benefits at the end
of the reporting period; and
• informing the product holder that the amount of
benefits described is a notional amount and may be subject to change; and
• the advising of the product holder of the
availability of further information.
The regulation amendments proposed increase consumer protection in relation to
the superannuation industry, through clarifying what is believed to be
necessary for a product holder to understand their investment. There is general
support for the principle of providing members with information on fees and
penalties upon exiting a fund. This information will assist in the quality of
member decision-making.
It is intended that clarifying the disclosure requirements for costs associated
with leaving a superannuation fund will present holders with a more accurate
indication of their account and provide an easier comparison if they wish to
consider changing fends. In addition, the inclusion of further descriptive
statements will ensure that product holders have a better understanding of the
nature of the amounts presented in the periodic statement.
Requiring the presentation of this information is consistent with the purpose
of periodic statements which is to provide investors with regular information
to enable them to understand their investment and its performance.
Costs
As per Option (b), this proposal may affect industry system requirements and
existing statement templates.
However, information regarding applicable fees and charges may already be
calculated in determining a figure for any end benefits. Further, the
disclosure of those components is subject to a reasonably practicable
criterion, which may permit alternate arrangements to access information where
a regulated person is not able to supply the necessary details.
Consultation
Draft regulations were released for public consultation on the Treasury website
on two occasions, 12 March 2003 and 27 August 2003. The Ministerial Council for
Corporations has been provided with draft copies of the regulations.
The draft of 12 March 2003 was widely criticised by industry in relation to
their ability to implement and the vagueness of its operation.
In contrast, the August draft has not been subject to such criticism by
industry bodies. Further, the Association of Superannuation Funds of Australia
(ASFA) support providing superannuation fund members with information that will
assist the quality of decision making. In particular, ASFA indicated that
superannuation fund members should be alerted to the impact of exit and
withdrawal fees on received benefits through the periodic statement.
Conclusion and recommended option
The preferred option is option c), amend the Corporations Regulations to
provide for increased disclosure, which will result in more effective
information being provided in relation to the impact of fees and
charges when a person leaves a fund and the nature of disclosed termination
values. The provision of the information within a periodic statement is
considered to be timely to any possible decision to dispose of an interest.
It is considered that the current regulations do not provide sufficient clarity
as to the content required within a periodic statement for the requirements in
the Act pertaining to a product holder's knowledge of their investment to be
satisfied.
Implementation & review
To allow sufficient time for transition to these amended requirements, it is
proposed that these requirements apply in relation to periodic statements
related to reporting periods commencing on or after 1 July 2004.
The amending regulations enhance the operation of provisions existing in the
FSR Act, accordingly, no specific review of the regulations is intended.
1 Australian Prudential Regulation Authority, Superannuation
Market Statistics, December 2002