EXPLANATORY STATEMENT

Select Legislative Instrument 2007 No. 259

Issued by the authority of the Parliamentary Secretary to the Treasurer

Corporations Act 2001

                        Corporations Amendment Regulations 2007 (No. 10)

Subsection 1364(1) 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 Corporations Amendment Regulations 2007 (No. 10) (the Regulations) specify that:

• if a general insurer, in providing a Product Disclosure Statement (PDS) in relation to a general insurance product, needs to comply with the dollar disclosure requirements, and this dollar amount can only be determined after the responsible person assesses the risk of the insured or after the insured has nominated desired levels of insurance cover, they can do so by a number of alternative prescribed methods;
• a transitional period for complying with these dollar disclosure requirements is provided from the day after the Regulations are registered, until 30 June 2008;
• under certain circumstances, the provision of financial product advice by an actuary is added to the list of exemptions from the requirement to hold an Australian financial services licence (AFSL); and
• incorporation by reference for two types of documents, the Statement of Advice (SOA) and the PDS, is permitted under certain circumstances.

Details of the Regulations are set out in the Attachment.

Under the Corporations Agreement 2002, the State and Territory Governments referred their constitutional powers with respect to corporate regulation to the Commonwealth.  Under subclauses 506(1) and 507(1) of the Corporations Agreement, the Commonwealth is required to consult with State and Territory Ministers of the Ministerial Council for Corporations (the Council) before making a regulation under the national law.  The Commonwealth has consulted the Council regarding the Regulations and no adverse comments were made.

The Act specifies no other conditions that need to be met before the power to make the Regulations may be exercised.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commence on the day after they are registered on the Federal Register of Legislative Instruments.

Attachment

Details of the Corporations Amendment Regulations 2007 (No. 10)

Regulation 1 – Name of Regulations

This regulation provides that the title of the Regulations is the Corporations Amendment Regulations 2007 (No. 10).

Regulation 2 – Commencement

This regulation provides for the Regulations to commence on the day after they are registered.

Regulation 3 – Amendment of Corporations Regulations 2001

This regulation provides that the Corporations Regulations 2001 (the Principal Regulations) are amended as set out in Schedule 1.

Schedule 1 – Amendments

Item [1] – Paragraph 7.6.01(1)(oa)

Subregulation 7.6.01(1) of the Principal Regulations grants that the provision of certain financial services does not give rise to the requirement to hold an AFSL.

This item applies the exemption under a new paragraph to the provision of financial product advice by an actuary, but only if the advice is provided by an actuary as part of its ongoing business, could not reasonably be expected to be included in a document that is to be given to a retail client, or is provided to a wholesale client, the Commonwealth or other exempt public authorities as defined in the Act.

This item reflects the decision to transfer the temporary relief for an actuary from holding an AFSL, currently provided by Australian Securities and Investments Commission (ASIC) Class Order 03/1096 Actuaries, into regulation in anticipation of the expiration of this Class Order on 31 August 2007.

Item [2] – Regulations 7.7.09B and 7.7.09C

Item 2 prescribes conditions under which information ordinarily included in an SOA does not have to be included.  This reflects the decision to streamline the contents of disclosure documents.

Regulation 7.7.09B allows providing entities to incorporate information (that is ordinarily contained within the SOA) by reference to a statement or information that has been previously provided to the client.

The regulation specifies that a providing entity is not required to include a statement or information mentioned in Part 7.7 of the Act in an SOA to a client if the SOA refers to the statement or information, provides sufficient details about the statement or information to enable the client to uniquely identify and locate the statement or information, decide whether they should read or obtain it, and states that the financial adviser must provide the statement or information to the client free of charge and as soon as practicable.

However, information required under sections 945B and 947D of Part 7.7 of the Act cannot be incorporated by reference. Section 945B requires the financial adviser to provide warning to the client if the advice is based on incomplete or inaccurate information.  Where a financial adviser provides advice that recommends the replacement of one product with another, section 947D requires information regarding the charges and benefits that a client may incur or lose to be provided.

This regulation clarifies that a providing entity is only eligible to incorporate information by reference if they have given the document or part of the document to the client.  If they have not given the document or part of the document previously, they must do so at the time the SOA is given to the client.

If, in compliance with these conditions, a statement or information is not included in an SOA, the statement or information is taken to have been included in the SOA.  This provision clarifies that the liability provisions of the Act apply to the information included by reference in the same manner as they apply to the SOA itself.

The regulation further sets out that if the providing entity is an authorised representative of a financial services licensee, the SOA may incorporate information previously provided by another authorised representative appointed by and acting on behalf of the same licensee, or by the licensee itself.

Regulation 7.7.09C requires the providing entity that gave the SOA to retain the SOA, and the document or part of the document mentioned in the SOA, for a period of seven years after the day on which the SOA is provided to the client.  A similar obligation is currently required under licensing conditions imposed by ASIC.

Item [3] – Subregulation 7.9.15C(4) and 7.9.15C(5)

Item 3 provides relief from the dollar disclosure provisions for general insurers, reflecting the practical problems experienced by the general insurance industry to disclose all the costs and benefits of general insurance products, in dollar amounts, in the Product Disclosure Statement (PDS).

This item incorporates amendments that allow general insurers providing a PDS in relation to a general insurance product to comply with the requirement to state amounts in dollars if the dollar amount can only be determined after the responsible person assesses the risk of the insured or after the insured has nominated desired levels of insurance cover.

General insurers are allowed to comply with the requirement to state amounts in dollars in the PDS by giving to the insured a document containing the information as soon as practicable, but at the latest within five days after the product is issued, and including in the PDS a statement that provides the information in a range of dollar amounts, as a percentage or in a description.

In general, where a cost or benefit is specific to a particular insured, a general insurer is able to satisfy the dollar disclosure provisions if such costs and benefits are disclosed, in dollar amounts, in the policy schedule.

Where dollar disclosure occurs in the policy schedule, general insurers are still required to disclose the relevant cost or benefit in the PDS by providing a range, a percentage or a description.

Where a general insurer concludes that they cannot disclose a cost or benefit in dollar amounts in the PDS or the policy schedule, then they have to apply to ASIC for relief.  ASIC retains its ability to determine that certain costs and benefits do not need to be disclosed in dollar amounts in the PDS where, for a compelling reason, dollar disclosure is not possible, would be unreasonably burdensome or is contrary to client interests.

Item [4] – Regulations 7.9.15DA, 7.9.15DB and 7.9.15DC

Item 4 prescribes amendments that allow a responsible person to decide not to include a statement or information mentioned in Part 7.9 of the Act in a Product Disclosure Statement (PDS) under certain circumstances.  This reflects the decision to streamline the contents of disclosure documents.

The effect of regulation 7.9.15DA is that if the statement or information is in writing and publicly available in a document other than the PDS, including electronic sources such as the internet, and the statement or information is not a statement or information that is in a Short-Form PDS (since this is already an abbreviated document), a responsible person can decide not to include a statement or information mentioned in Part 7.9 of the Act in a PDS.  For example, a financial planner may incorporate information about other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product if the information is already publicly available on a website.

The PDS does however have to refer to the statement or information, state that a copy of the statement or information may be obtained from the responsible person on request, at no charge, and give sufficient details about the statement or information to enable a person to uniquely identify and locate the statement or information, as well as decide whether or not to read or obtain a copy of the statement or information.

If a statement or information is not included in a PDS because the responsible person has satisfied the above conditions, the statement or information is taken to be included in the PDS.  This provision clarifies that the liability provisions of the Act apply to the information included by reference in the same manner as they apply to the PDS itself.

While all other information in Part 7.9 of the Act may be incorporated by reference, this item prescribes a set of core information that is required to be included in the PDS.

Core information includes:

• a summary description of the purpose and key features of the product, if certain prescribed information was incorporated by reference;
• a summary description of the key risks of the product, if certain prescribed information was incorporated by reference;
• a statement setting out the name and contact details of the issuer of the financial product and, if the statement is a sale statement, the seller;
• most of the fees and costs template as prescribed in Part 2 of Schedule 10 of the Principal Regulations (known as the enhanced dollar disclosure requirements);
• the Consumer Advisory Warning prescribed in Part 2 of Schedule 10 of the Principal Regulations;
• information about the dispute resolution system that covers complaints by holders of the product and about how that system may be accessed; and

·        information about any cooling-off regime that applies in respect of acquisitions of the product.

Regulation 7.9.15DB applies a record keeping requirement, such that any PDS not required to be lodged with ASIC, as well as documents containing information incorporated by reference, must be kept for a period of seven years by the responsible person. 

Regulation 7.9.15DC clarifies that if a document that is required to be lodged with ASIC contains information incorporated by reference to another document, that other document must also be lodged with ASIC.

Item [5] – Regulation 7.9.15FA

Item 5 provides a transitional period for complying with the dollar disclosure requirements in relation to general insurance products as set out in item [3] of the Regulations from the day after the Regulations are registered on the Federal Register of Legislative Instruments, until 30 June 2008.

Regulatory impact analysis – Items [2] and [4]

Problem

Under the Act, licensees, authorised representatives and product issuers are required to provide various disclosure documents when dealing with retail clients.  The Act prescribes content requirements for each of these disclosure documents.  To comply with the Act, a regulated entity must ensure that each disclosure document they produce includes information that satisfies the content requirements of the Act (subject to certain exemptions).

However, these requirements sometimes mean that information is repeated in the various documents and a client may receive the same information on more than one occasion.

For example, a financial planner may produce a number of SOAs for one client over the course of their relationship.  Certain information may be repeated in several of the SOAs to ensure that each SOA meets the content requirements of the Act.  In addition, a client may receive information from a source other then a disclosure document.  Yet the strict requirements of the Act may still require a regulated entity to provide information in a disclosure document, even though the client has already received the information in another form.

Objective

The Government’s objective in addressing this problem was to reduce repetitive disclosure in SOAs and PDSs in order to reduce costs to business and to provide clearer disclosure to consumers.

Policy options

The Government considered the following three options for addressing this problem:

• limited incorporation by reference;
• no action; and
• wide ranging incorporation by reference.

The impact of the industry wide cost reduction of items [2] and [4] was assessed against the relevant business costs for the three proposed options.  It was considered that there were no start-up costs associated with any of the proposed options.

Estimates were determined regarding the number of AFSL holders producing SOAs and/or PDSs. It was considered to be a reasonable assumption that all licensees will be producing at least one of the two relevant disclosure documents. Therefore, it was considered an appropriate assumption that the regulations will affect all 4,500 licence holders to varying extents.

An estimate was determined for the cost of complying with the proposed options. For the provision of both SOAs and PDSs, the following costs were estimated:

On the basis of the limited, estimated cost data available, it was demonstrated that both limited and wide ranging incorporation by reference reduced regulatory compliance costs.

Limited incorporation by reference demonstrated an estimated 9 per cent industry wide reduction in compliance costs and wide ranging incorporation demonstrated an estimated 18 per cent.

It was determined that wide ranging incorporation by reference was the most appropriate regulatory measure for both items [2] and [4].

Consultation

Significant consultation was undertaken regarding the Regulations.

Initial proposals for items [2] and [4] were consulted on as part of the Corporate and Financial Services Regulation Review Consultation Paper, released by the Parliamentary Secretary to the Treasurer in April 2006.

Following this consultation, draft regulations were developed. These draft regulations were released for public consultation in March 2007. This consultation resulted in the draft regulations being refined and circulated for targeted consultation in August 2007. Further refinements were then made to develop the Regulations.