EXPLANATORY STATEMENT

Select Legislative Instrument 2008 No. 194

Issued by the authority of the Minister for Superannuation and Corporate Law

Corporations Act 2001

Corporations Amendment Regulations 2008 (No. 5)

The Corporations Act 2001 (the Act) and the Corporations Regulations 2001 (the Principal Regulations) provide for the regulation of corporations, financial markets, products and services, including in relation to licensing, conduct, financial product advice and disclosure. 

Part 7.9 of the Act establishes a general disclosure regime for financial products.  Under Part 7.9, financial service providers must provide retail clients with a Product Disclosure Statement (PDS) before the consumer purchases the financial product.  The PDS is designed to inform the consumer about important features of the product and can be used to aid the consumer make a decision as to whether to purchase the product or not. 

Subsection 1364(1) of 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.  Section 1020G of the Act provides that the regulations may modify the effect of Part 7.9 of the Act.  These powers have been used previously to create disclosure rules for superannuation and other financial products, as well as rules for short form PDSs and fee disclosure. 

The proposed Regulations would amend the Principal Regulations to correct a number of technical problems and potentially misleading statements relating to the form and content of the PDS prescribed for First Home Saver Accounts (FHSAs).

The First Home Saver Accounts Act 2008 (the FHSA Act), and related legislation to implement and regulate FHSAs, received the Royal Assent on 25 June 2008.  The legislation came into force from 26 June 2008; however, to enable providers to develop products and systems, it will not be possible to open an FHSA until 1 October 2008.  FHSAs are a ‘financial product’ for the purposes of the Act. 

On 17 July 2008, the Corporations Amendment Regulations 2008 (No. 4) (the Amendment Regulations) were made, prescribing in detail among other things the form and content of the FHSA PDS. 

After the Amendment Regulations were made, further analysis and submissions received from stakeholders revealed that there are a small number of technical problems and potentially misleading statements that need to be addressed in order to ensure that the policy intent of the Government with respect to the form and content of the FHSA PDS is fully achieved. 

These Regulations accordingly deal with these problems and misleading statements.  They specify that:

·                     the right to return the FHSA product in certain situations is restricted to reflect the payment restrictions applying to FHSAs;

·                     funds from an inactive FHSA account can be transferred to a default superannuation fund without the need for an application form to be completed;

·                     the requirement for the FHSA PDS to be the first document given or sent to the client only applies to those documents directly related to the FHSA;

·                     certain statements in the prescribed text are amended to provide for clarity and consistency; and

·                     the fee disclosure provisions are amended to clearly define what indirect costs and management costs are and how they are to be disclosed.

Details of the Regulations are set out in Attachment A.

The Explanatory Statement for the Amendment Regulations contained two prototype examples of FHSA PDSs.  These have been amended to account for the above changes, and also to correct a number of inconsistencies and errors in the original versions.  The new prototype examples are attached to this Explanatory Statement in Attachment B.

Under the Corporations Agreement 2002 (the Corporations Agreement), 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 Council has been consulted about the proposed Regulations as required by the Corporations Agreement.  Paragraph 507(1)(f) and subclause 511(2) of the Corporations Agreement provide that approval of the Council and the usual public exposure period are not required for amendments to regulations relating to financial products and services.

The Act specifies no conditions that need to be satisfied before the power to make the proposed 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 A

Details of the Corporations Amendment Regulations 2008 (No. 5)

Regulation 1 – Name of Regulations

This regulation provides that the title of the Regulations is the Corporations Amendment Regulations 2008 (No. 5). 

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 below.

Schedule 1 – Amendments

Item [1] – Regulation 7.8.22A

Section 992A of the Corporations Act 2001 (the Act) prohibits unsolicited offers of financial products except in specified circumstances.  Where a person acquires a financial product as a consequence of an unsolicited offer made under circumstances which breach the Act, the person has the right to return the product and receive a refund of the money paid.  This provision may in certain situations lead to a conflict with the payment restrictions applying to FHSAs, which set out that the funds in an existing FHSA can only be used to buy a first home or else be transferred to another FHSA or a superannuation account.  This item restricts the right to return a FHSA product acquired as a result of an unsolicited offer in situations where the person already holds a FHSA.  In such situations, the money paid for the returned product can only be transferred to another FHSA.  If, however, the person has never held a FHSA before, they can either ask for a refund of the money or instruct the provider to transfer the funds to another, newly opened FHSA.

Item [2] – Part 7.9, Division 3A, Regulation 7.9.08E

If a FHSA account becomes inactive, according to the FHSA Act the product provider must nominate a default superannuation fund to take the FHSA balance.  The product provider must transfer the savings to that fund within 14 days of the “trigger day” under section 22 of the FHSA Act.  However, a superannuation fund cannot accept a person as a member without an “eligible application” under section 1016A of the Act.  It may not be possible for an eligible application to be supplied within the required timeframe.  This item accordingly exempts FHSA holders from the obligation to provide an eligible application in circumstances as set out above.  This would facilitate the transfer of funds in inactive FHSA accounts to superannuation funds where they are held for the benefit of the account holders.

Item [3] - Regulation 7.9.10D

Subregulation 7.9.10D(2) as worded in the Amendment Regulations states that the FHSA PDS must be "the first or only document given to the person at that time".  However, section 941D of the Act requires a Financial Services Guide (FSG) containing basic information on the product provider and its services to be provided to a retail client "as soon as practicable after it becomes apparent to the providing entity that the financial service will be, or is likely to be, provided to the client, and must in any event be given to the client before the financial service is provided."  This may create an automatic compliance failure in certain situations where advice or execution is provided for a FHSA product.  Similar issues may arise in relation to other documents required to be provided under the Act.  This item therefore states that, among those documents that relate to an FHSA, the PDS must be the first or only document given or sent to the person.  This will clarify that the regulation does not apply to non-FHSA documents such as an FSG.

Item [4] - Subregulation 7.9.10E(2)

Subregulation 7.9.10E(2) as drafted in the Amendment Regulations states that certain actions must be taken if compliance with the requirements relating to the content of an FHSA PDS would lead to the PDS being “materially misleading”.  It has been suggested that it would be better to say “misleading” only, as this is a well-understood concept elsewhere in the Act.  The degree of harm would be relevant for ASIC's enforcement decisions or considered by a court in awarding damages, but there is no need to set a materiality test in the legislation.  Accordingly, this item removes the word “materially” from the expression quoted above.

Item [5] – Regulation 7.9.13A

Section 1016F in the Act provides that a person acquiring a financial product under a defective PDS has the right to return the product and have the money repaid.  This provision may in certain situations lead to a conflict with the payment restrictions applying to FHSAs, which set out that the funds in an existing FHSA can only be used to buy a first home or else be transferred to another FHSA or a superannuation account.  This item restricts the right to return a FHSA product acquired under a defective PDS in situations where the person already holds a FHSA.  In such situations, the money paid for the returned product can only be transferred to another FHSA.  If, however, the person has never held a FHSA before, they can either ask for a refund of the money or instruct the provider to transfer the funds to another, newly opened FHSA.

Item [6] – Regulation 7.9.14

This item amends the heading of this regulation to take account of the insertion of regulation 7.9.13A.

Item [7] – Regulation 7.9.65

This item amends the heading of this regulation to take account of the insertion of regulation 7.9.65A (see below).

Item [8] – Regulation 7.9.65A

Sections 1019A and 1019B in the Act provide that a person acquiring certain financial products has the right to return the products within a certain time period (generally known as a cooling-off period).  FHSAs are subject to the cooling-off period provisions.  However, these provisions may in certain situations lead to a conflict with the payment restrictions applying to FHSAs, which set out that the funds in an existing FHSA can only be used to buy a first home or else be transferred to another FHSA or a superannuation account.  This item restricts the right to return a FHSA product under the cooling-off period provisions in situations where the person already holds a FHSA.  In such situations, the money paid for the returned product can only be transferred to another FHSA.  If, however, the person has never held a FHSA before, they can either ask for a refund of the money or instruct the provider to transfer the funds to another, newly opened FHSA.

Item [9] – Regulation 7.9.66

This item amends the heading of this regulation to take account of the insertion of regulation 7.9.65.

Item [10] – Schedule 10B, subitem 5(1)

In subitem 5(1) as drafted in the Amendment Regulations, the word "deposit" and the phrase "normal bank account" (noting, however, the item below regarding the phrase “normal bank account” being inappropriate for certain financial institutions which are not banks) may suggest that the FHSA is available for withdrawal on demand when it is in fact highly restricted.  These words are in the mandatory text for section 2 of the FHSA PDS.  They are used in relation to the entry of moneys into the account, not withdrawals.  These words closely follow mandatory text expressly saying "You can only use your savings in three ways".  Later in section 6 of the PDS more information is given and uses the term "withdraw". 

The juxtaposition of ideas in section 2 appears potentially misleading.  This item accordingly amends the mandatory text to state: "You can only withdraw your savings for three purposes".  This removes the potential for confusion by reinforcing that the expressions "deposit" and "normal bank account" (or their equivalent for financial institutions other than banks) only relate to the entry of moneys to the account.

Item [11] – Schedule 10B, subitem 5(1)

In the prescribed text in this subitem as drafted in the Amendment Regulations, under the heading “How to save with a First Home Saver Account”, there is the following text string: “You put money into your account the same way you would make deposits into a normal bank account”.

However, credit unions and building societies, for example, may not wish to use the terms “deposit” or “normal bank account” in the context of their products.  Providers need sufficient flexibility to use the appropriate wording in this specific regard.  This item amends the above wording to provide the flexibility required for financial institutions offering FHSA accounts to substitute the terms appropriate for their circumstances.

Item [12] – Schedule 10B, subitem 6(1)

A sentence at the bottom of this subitem as drafted in the Amendment Regulations states “There is a low rate of tax on the interest your savings earn”.  This wording is appropriate for a FHSA structured as a bank account, but may not be appropriate for FHSAs structured as investment products.  This item amends the above wording to provide the required flexibility for FHSA providers to choose the wording appropriate to the nature of their FHSAs.

Further, at the bottom of this subitem, there is also a section of prescribed text which previously read: “Any income that your investment earns will be taxed at a low rate of 15%. This tax will be deducted from your investment earnings and paid to the Tax Office”.

It has been suggested that this wording may be confusing, as there may not be an explicit deduction on the account statement, and not sufficiently precise with respect to how the payment would be made.  The prescribed text is therefore amended as follows: “Earnings on First Home Saver Accounts are taxed at 15% but this is paid to the Tax Office by the account provider”.

Item [13] – Schedule 10B, paragraph 7 (2) (b)

Paragraph 7(2)(b) currently states that section 4 of the PDS must contain “the nature of the return the product may generate”.  In the context of item 7 in Schedule 10B, "the product" is the FHSA product.  However, the examples given in the brackets in paragraph 7(2)(b) appear to be examples of the nature of the return on the investments that were described in paragraph 7(2)(a).  This is confirmed by the Explanatory Statement to the Amendment Regulations which states:

            “Section 4 must contain summary information about: The nature of the return      that the investment may generate.”

To address this issue, this item provides for paragraph 7(2)(b) to refer to "the nature of the return the investments may generate".

Item [14] – Schedule 10B, paragraph 8 (d)

This paragraph currently requires product providers to include information in section 5 of the FHSA PDS about the consequences of a decision by the account holder not to acquire a home after withdrawing the money in the FHSA.  It has been suggested that the information required by this paragraph is unnecessary and is not relevant to the decision whether to open an FHSA.  Furthermore, the example PDS does not contain the information required by this paragraph.  This item accordingly provides that paragraph 8(d) is removed.

Item [15] – Schedule 10B, item 11

Paragraph 11(c) currently requires that section 8 of the FHSA PDS contain information on “how money from the product can be transferred to another FHSA product”.  It has been suggested that this information is unnecessary and does not serve any useful purpose.  Furthermore, the example PDS does not contain any information on “how” the money is transferred.  This item accordingly amends paragraph 11(c) so that it no longer requires disclosure of “how” the money is transferred, but instead requires a statement that money from the product can be transferred to another FHSA product.

Item [16] – Schedule 10B, subparagraphs 15 (2) (c) (i) and (ii)

Subparagraph 15(2)(c)(i) currently requires that the disclosure of management costs must include "a summary and description of the services or functions the costs relate to”; and subparagraph 15(2)(c)(ii) “when the costs are charged".  It has been suggested that these requirements are unnecessary and do not serve any useful purpose.  Furthermore, the PDS example simply lists and quantifies the costs.  This item accordingly amends the provisions so that they allow disclosure to be limited to the services or functions to which the costs relate, as well as the costs themselves.

Item [17] – Schedule 10B, subparagraph 15 (2) (f) (v)

This item corrects a punctuation error by removing a semi-colon and inserting a full stop.

Disclosure of fees and costs – Schedule 10B, items 15 and 16

Background

The use of the terms “indirect cost” and “indirect cost ratio (ICR)” in items 15 and 16 of Schedule 10B is inconsistent and confusing.  This is because:

·                     subitem 16(4) of Schedule 10B relates to "indirect costs";

·                     "indirect costs" is defined in paragraph 15(2)(g) of Schedule 10B.  That definition appears to capture as "indirect costs" any costs other than the range of other costs listed in paragraphs 15(2)(a) to (f), and "management costs" in 15(1)(c) appear part of the other costs that are not to be counted towards "indirect costs"; and

·                     subitem 16(4) of Schedule 10B applies the notion of "ICR" with express incorporation of the ideas in clause 104 of Schedule 10.  The ICR notion in clause 104 of Schedule 10 expressly applies to "management costs"

This results in a direct contradiction in that subitem 16(4) of Schedule 10B requires the ICR notion (with its inherent application via clause 104 of Schedule 10 to management costs) to be applied to "indirect costs" (which appear defined in Schedule 10B to not include management costs).

Also, the use of ICR in subitem 16(4) of Schedule 10B appears to set up differing ideas of “indirect” inside Schedule 10B.  That is:

·                     there is the “indirect” via paragraph 15(2)(g) of Schedule 10B, by virtue of being a cost other than the range of other listed costs in subitem 15(2) of Schedule 10B; and

·                     there is the “indirect” idea incorporated from clause 104 of Schedule 10, which turns on how any particular management cost is applied, that is whether it is directly deducted from an account or affects the value of the investment in some other way.

Schedule 10B uses “indirect” to exclude certain types of costs, while Schedule 10 uses “indirect” to separate different methods of charging any type of cost.

Without further clarification it is not clear whether the calculation in subitem 16(4) requires those costs identified as “indirect” for Schedule 10B in paragraph 15(2)(g) to then be further sifted according to the ICR/indirect test in Schedule 10, that is whether both tests are to be applied.  The following three items provide the required clarification.

Item [18] – Schedule 10B, paragraph 15 (2) (g)

Paragraph 15(2)(g) currently requires disclosure of “any other fee or cost (indirect costs)” by capturing any costs which are not deducted directly from the account, but are instead taken out of the fund's balance.  Therefore, paragraph 15(2)(g) is not appropriate, because these costs are not "charged" and cannot be itemised for each account.  The intent is to capture the proportion of all amounts which are indirectly taken from the fund that is attributable to each account.  This is worked out by taking the total indirect costs divided by the fund balance multiplied by the account balance which equals the dollar value of indirect costs which are attributable to an account.

This item contributes to achieving this outcome by removing paragraph 15(2)(g).  This eliminates the confusion about "type of cost" or "method of charging cost".  Indirect costs are captured through the definition provided in item [20].

Item [19] – Schedule 10B, paragraph 16 (2) (c)

The current requirement under current paragraph 16(2)(c) to include all management costs in the overall cost calculation is too wide and may lead to double-counting with costs included in the ICR as defined in subitem 16(4).  Therefore, the current wording in paragraph 16(2)(c) is replaced with the following words: “management costs that are deducted directly from the account holder’s account”.  This would remove the possibility of any double-counting, as subitem 16(4) only relates to costs that are not deducted directly from the account.

Item [20] – Schedule 10B, subitem 16 (4), definition of ICR

The current definition of ICR in subitem 16(4) is not wide enough because it only applies to management costs and does not include costs deducted directly from an account that are not management costs.  Accordingly, the current definition of ICR is replaced with a new definition stating that the ICR for a fund is the ratio of the fund’s management costs that are not deducted directly from an account holder’s account, plus any other costs listed in subitem 16(2)(a)-(f) that are not deducted directly from the account holder’s account, to the fund’s total average net assets.

ATTACHMENT B

Prototype example PDSs

The Government has prepared two prototype examples of PDSs – one for a FHSA deposit account and one for a FHSA trust product. As FHSA is a new type of financial product, and the disclosure requirements that apply to FHSAs are different from those applying to other financial products, the prototypes are intended to demonstrate a way that providers can make disclosure which is consistent with the 4-page limit and the other disclosure requirements. The prototypes are not intended to represent the only way that providers may make disclosure, and (apart from the prescribed text) providers are free to innovate to make disclosure in a way that best assists their customers understand the product.

The prototypes have been prepared on the basis of a hypothetical product.  Real products may have features that are simpler or more complex.  For example, the hypothetical bank product charges no fees.  The hypothetical fund product has three investment options, whereas a real product may have five options or just one. The prototype has also been developed without reliance upon incorporation of additional material by reference.

The attached prototypes update the prototypes attached to the Explanatory Statement for the Amendment Regulations to include the amendments made in these Regulations, as well as changes to address a number of errors and oversights in the previous prototypes.