EXPLANATORY STATEMENT

 

Select Legislative Instrument 2010 No. 135

 

Issued by the Authority of the Minister for Financial Services, Superannuation and Corporate Law

Corporations Act 2001

 

Corporations Amendment Regulations 2010 (No. 5)

The Corporations Act 2001 (the Act) makes provision in relation to corporations and financial products and services.

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 regulations for the carrying out or giving effect to the Act. 

Managed investment schemes, margin loans and a superannuation interest are prescribed as financial products in the Act and are therefore subject to the general disclosure rules of the Act.  In a range of circumstances, for example when issuing a financial product to a retail client, a Product Disclosure Statement (PDS) must be provided disclosing a range of key information so that consumers can make an informed decision about whether that particular product suits their investment needs.  The Act (Part 7.9), together with the Corporations Regulations 2001 (the Principal Regulations) sets out the requirements for and information that needs to be included in a PDS. 

While subsection 1013C(3) of Part 7.9 of the Act states that ‘the information included in the PDS must be worded in a clear, concise and effective manner’, there is currently no limit on the length of a PDS. 

These Regulations amend the Principal Regulations to provide for PDSs for these financial products that are substantially shorter and simpler than current PDSs.  The Regulations prescribe a maximum length of eight (A4) pages for superannuation and managed investment scheme PDSs, and four pages for margin loan PDSs (not including title and contents sections), together with a minimum font size, depending on the nature of the content.

For the purposes of the Regulations for managed investment schemes, only schemes investing predominantly in assets that are easily realisable (for example assets that can be sold for market value within 10 days) are included within the shorter PDS regime.

The Regulations prescribe the section headings and contents of the shorter PDSs, to ensure that consumers are provided with the key information they need to make an investment decision.  Additional information can also be included provided the prescribed length is not exceeded.  The prescribed content covers key information such as product features and benefits, risks, taxation and investment options and fees and costs.  For margin loans, certain additional information specific to these products is prescribed, including an explanation of what a margin call is and how investors can manage the risk and consequences of receiving a margin call.

The Regulations also provide for exclusions for products which do not readily fit within the shorter PDS regime.  For other products, the existing provisions in the Act allowing a person to apply to the Australian Securities and Investments Commission (ASIC) for relief from the regime on a case by case basis where justified continue to apply.

The Regulations also provide for other material to be located outside the PDS document itself.  This information may either be:

•                incorporated by reference (IBR) – referred to in the Regulations as being information that is ‘applied, adopted or incorporated’.  IBR material is deemed to be part of the shorter PDS and the full range of PDS liability and enforcement provisions of the Act apply to it; or

•                otherwise referred to – this referred material does not form part of the PDS but is still subject to other provisions of the Act and the Australian Securities and Investments Act 2001 (ASIC Act), such as the general prohibitions on misleading and deceptive conduct.

The provisions for superannuation and managed investment scheme PDSs provide for a transitional period of 24 months for implementation.  After the initial 12 months, parties have to comply with the new regime if they amend an existing PDS or offer new products requiring a new PDS.  After 24 months, all PDSs need to comply with the new regime.  The margin loan PDS provisions apply from 1 January 2011, coinciding with the date when margin loans come under Commonwealth regulation as prescribed in the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009.

Full details of the Regulations are set out in Attachment A.  The Regulation Impact Statement is a separate attachment.

 

The Government consulted extensively throughout the development of the shorter, simpler and more readable PDSs through a number of public information sessions, a margin lending industry consultation group and an Advisory Panel of key financial services industry and consumer representatives.  Consumer testing sessions were also undertaken in the early stages.  

 

Public release of draft regulations occurred for margin loans in late 2009 and for superannuation and simple managed investment schemes for 2 months from late December 2009 to February 2010, helping to inform the final regulations.  Further details on the consultations undertaken are set out in the Regulation Impact Statement.

 

The Act specifies no conditions that need to be satisfied 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 A

 

Details of the Corporations Amendment Regulations 2010 (No. 5)

 

Regulation 1 – Name of Regulations

 

This regulation provides that the name of the Regulations is the Corporations Amendment Regulations 2010 (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 Schedule 1 amends the Corporations Regulations 2001 (the Principal Regulations).

Regulation 4 – Transitional

 

This regulation provides details for the transitional periods that apply before the Regulations commence.  For simple management investment schemes and superannuation (but not for margin loans), for the first year after commencement, these regulations are not in force.  From 12 months after commencement, the Regulations apply to any new product requiring a PDS and any amendments, changes or updates of an existing or supplementary PDS.  The Regulations apply to all PDSs two years from the date of commencement.  This regime and transitional period means that no supplementary PDSs are permitted under the simplified PDS regime after the first 12 months from commencement of these regulations for both superannuation and simple managed investment schemes.

Aligning with the commencement of the Commonwealth credit law regime, the Regulations for a standard margin loan apply from 1 January 2011, as prescribed in the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009.

Schedule 1 – Amendments

 

Item [1] – Subregulation 1.0.02(1), after definition of Lloyds

 

This item inserts a definition of margin loan or margin lending as a standard margin lending facility as defined in section 761EA of the Act.  This means that the relevant amendments in the Regulations do not apply to non-standard margin lending facilities (as also defined in section 761EA of the Act), which remain subject to the existing PDS requirements in the Act.

Item [2] – Subregulation 1.0.02(1), after definition of medical indemnity insurance product

 

This item inserts a definition of minor fee, a concept which is used in prescribing certain contents of the margin loan PDS.  The definition specifies that these are fees which are not applied in the ordinary course of operating a margin loan and are less than $10.

Item [3] – Subregulation 1.0.02(1), after definition of settlement documents

This item inserts a definition of a ‘simple managed investment scheme’, being a scheme which must meet certain requirements.  The definition captures a scheme which is, or was, offered on the basis that it invests at least 80 per cent of its assets in an account with a bank, or on deposit with a bank where that money is available for withdrawal either immediately or at the end of a fixed term period not exceeding three months, or alternatively, in investments that can reasonably be expected to be sold at market value within 10 days. 

This amendment provides that the Regulations apply to those managed investment schemes which have high levels of liquidity.  A range of managed investment schemes that invest in less liquid assets are therefore not be covered by the definition, such as schemes investing directly in real estate or mortgages. 

Item [4] – After subregulation 7.7.08A (1A)

 

Existing regulation 7.7.08A specifies the circumstances in which a PDS may be combined with a Financial Services Guide (FSG).  This item clarifies that this regulation does not apply to a margin loan, a superannuation product or a simple managed investment scheme to which these simplified requirements apply.  The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS, and combining the PDS with other documents is not consistent with this objective.

Item [5] – Paragraph 7.9.09(1)(d)

 

This item applies the relevant Subdivisions in existing Division 4 – ‘Content of Product Disclosure Statements’ of Part 7.9 of the Principal Regulations to a margin loan, a superannuation product and a simple managed investment scheme, making them subject to the new simplified PDS requirements. 

Item [6] – Part 7.9, Division 4, after Subdivision 4.2

 

Subdivision 4.2A

This item inserts a new Subdivision 4.2A, Form and content of Product Disclosure Statement for margin loan into Division 4 of Part 7.9 of the Principal Regulations which sets out the content requirements for margin loans.

Regulation 7.9.11 - Application of Subdivision 4.2A

 

This regulation clarifies that the new Subdivision applies to a person who is required to give a margin loan PDS to a client, and to the margin loan PDS itself.

Regulation 7.9.11A – Provisions of Part 7.7 of Act do not apply in relation to margin loan

 

Section 942DA in the Act states that an FSG may be combined with a PDS.  This regulation clarifies that this provision does not apply to a margin loan.  The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS, and combining the PDS with other documents is not consistent with this objective.

Regulation 7.9.11B – Definitions for Subdivision 4.2A

 

This regulation provides a number of definitions for the purposes of Subdivision 4.2A of Part 7.9 as well as Schedule 10C to the Principal Regulations.  Details on the contents of Schedule 10C are provided further below.  The definitions provided are for Approved Securities List and the term modified as applied to a provision of the Act which is varied in the Regulations.  It is noted that the Approved Securities List must contain a list of the approved properties, and also the amount of credit the margin loan provider will lend against each property, that is, the loan-to-value ratio for each property. 

Regulation 7.9.11C - Modification of Act – margin loan

 

This regulation states that Part 7.9 of the Act, which mainly contains the PDS requirements, is modified with respect to a margin loan as prescribed in the new Part 5A of Schedule 10A to the Principal Regulations.  New Part 5A of Schedule 10A is prescribed later on in the Regulations.

Regulation 7.9.11D - Form and content of Product Disclosure Statement for margin loan

 

Paragraphs 1013C(1)(a) and (b) as modified in item 5A.2(1) of Schedule 10A to the Regulations allow the form and content requirements for a standard margin loan PDS to be prescribed by regulation.  This regulation states that the content and form requirements for the margin loan PDS are contained in the regulations in new Schedule 10C to the Principal Regulations.  Schedule 10C is prescribed later on in the Regulations.

Regulation 7.9.11E - Requirements for references to incorporated information for margin loan

 

Subregulation 7.9.11E(1) states that this regulation sets out a number of high-level requirements applying to information in a margin loan PDS that is incorporated by reference (referred to as applying, adopting or incorporating), as permitted under the new section 1013C(1B) contained in sub-item 5A.2 of Part 5A in Schedule 10A to the Regulations. 

Subregulation 7.9.11E (2) states that incorporation by reference may only be used when expressly allowed under the Regulations.

Subregulation 7.9.11E (3) requires that if a matter is incorporated by reference it must be in writing, be clearly distinguishable from other matters and must also be publicly available.  It is noted that the ability to request and receive a hard copy of the PDS and incorporated material (as prescribed later in the Regulations) satisfies the requirement for incorporated matter to be publicly available.

The requirement to make the incorporated material publicly available reflects the requirement of existing paragraph 7.9.15DA(1)(a).

The reason for the requirement to distinguish incorporated information from other information is to clearly separate incorporated and non-incorporated information, as the two are subject to different liability and enforcement regimes.  It is considered that mixing the two types of information could lead to confusion and disputes, especially if some of the information is defective.

Incorporated material must be identified by providing a concise description of what is contained in the material.  The issuer must also ensure that the reference is clearly distinguishable from the other information in the PDS.

This regulation also requires each version of the incorporated information to be separately identified by including the date on which it was prepared in a prominent position at or near the front of the document.  It is noted that the PDS document itself also has to be dated as required by existing section 1013G of the Act.

If material is incorporated by reference, it, and any version of the document, has to be reasonably easily and quickly accessible to a person relying on the PDS.  This means that a person must be able to access the material without difficulty.  The ability for a consumer to obtain a hard copy of the document upon request satisfies this requirement.  It is also expected that the incorporated material is, to the extent practical, consistent with the PDS in terms of its headings and content for comparability and ease of reading.  This reduces the risk of claims of misleading or deceptive conduct based on variations in content between the shorter PDS and incorporated information.

If a website link is provided, this should link to the material with as few steps as possible.  For example, linking directly to the material or via a prominent link on a splash page is one way to achieve this and would be seen to be reasonably accessible.  If a website link leads only to the home page of a provider’s website, and a person needs to navigate a number of links on the site to locate the material, this is not considered to be reasonably quickly and easily accessible.  (A separate regulation requires that a contact telephone number for requesting hard copies of information must be provided in the PDS (refer Schedule 10C) to further assist accessibility.)

Subregulation 7.9.11E(4) provides that where matters are incorporated, the PDS must include prominent warnings at each place the matter has been incorporated, as prescribed and to the effect:

1.             that the reader should read this additional information before making a final investment decision.  This warning also has to direct readers to the location of that information;

2.             that the information may change between the time of reading the statement and when the reader signs an application form for that product.

 

Subregulation 7.9.11E(5) requires that a statement needs to be included in each incorporated document confirming that it forms part of the relevant PDS and identifying the PDS by name, date and version.

Subregulation 7.9.11E(6) confirms that whenever the physical PDS is given to a client, all the incorporated information is deemed to have been given at the same time.  This addresses concerns that parties may otherwise be liable to claims that important information had not been provided.  Where an incorporated document is publicly available but separate from the PDS and applies to more than one PDS, the provision requires that a statement must also be included in the relevant document noting that the document forms part of the PDS, but it is not required to name each PDS it applies to.  The reason for this provision is that some documents may be incorporated in a large number of PDSs, and it is not helpful for the reader if all the PDSs were separately identified.

Subregulation 7.9.11E (7) confirms that where information is incorporated that that information is deemed to have been given to the person on the day they sign the application form for the product. 

Regulation 7.9.11F - Retention of copies of Product Disclosure Statement for margin loan

 

This regulation sets out some record-keeping requirements for the simplified margin loan PDS by requiring that each PDS version must be retained by the responsible person for a period of seven years.  This is consistent with existing record-keeping requirements for PDSs.  The regulation also applies this requirement to incorporated information located outside the PDS document and provides guidance on how to determine the start of the seven year period in various situations.

 

Regulation 7.9.11G - Requirement to provide copy of Product Disclosure Statement for margin loan free of charge

 

Not all persons may have access to a computer or the internet.  This regulation therefore requires that responsible persons must provide, when requested, a free hard copy of the PDS and any incorporated information within eight business days.  Emailing of the PDS or related material is not considered to be acceptable in these circumstances.

 

Regulation 7.9.11H - Notification about change to Approved Securities List or current interest rate for margin loan

 

Section 1017B of the Act requires certain important changes and events to be notified to clients.  This requirement will apply to margin loans from 1 January 2011.  This regulation prescribes that changes to the Approved Securities List and the current interest rate may be notified by sending a notice to the loan holder or by placing a notice on an appropriate webpage for the margin loan facility which is likely to come to the attention of clients as they monitor their loans.  For example, the notice could be placed so that it shows up when the consumer logs in to their online account.

Changes to the Approved Securities List may occur up to several times a day and it is not practicable to require borrowers to be notified individually each time.  While changes to the interest rate will occur less frequently, borrowers have been warned in the PDS to regularly monitor their loan.  Interest rate changes are also required to be notified in the periodic statements required to be sent to borrowers through regulations made for purposes of implementing the Act.  It is therefore considered that notification through a webpage is sufficient to inform borrowers of these changes.

Subdivision 4.2B

 

Item [6] inserts a new subdivision 4.2B, Content of Product Disclosure Statement for superannuation products, into Part 7.9, Division 4 of the Principal Regulations which sets out the content requirements for superannuation products subject to the simplified PDS requirements.

 

7.9.11K - Application of Subdivision 4.2B

Subregulation 7.9.11K (1) clarifies that the new Subdivision applies to a person who is required to prepare a superannuation product PDS and to the superannuation product PDS itself. 

Subregulation 7.9.11K (2) provides for exclusions from the simplified PDS regime for interests that are solely in a defined benefits fund and pension products.  This means that combined accumulation/pension products and combined accumulation/defined benefits products, as well as pure risk products, are still included in the regime.  However, a person is able to apply to ASIC, on a case-by-case basis or on a product-wide basis, for relevant relief from these requirements, where appropriate.

Regulation 7.9.11L – Provisions of Part 7.7 of Act that do not apply in relation to superannuation products

Section 942DA in the Act states that a Financial Services Guide may be combined with a PDS.  This regulation clarifies that this provision does not apply to a superannuation PDS.  The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS, and combining the PDS with other documents is not consistent with this objective.

Regulation 7.9.11M - Provisions of Part 7.9 of Act that do not apply in relation to superannuation products

The superannuation PDS has been designed in a manner that allows information that changes frequently or regularly to be incorporated by reference.  It is therefore considered that superannuation PDSs will only have to be amended rarely and only if there are major changes to the product.  Given that the simplified PDS is a very short document, in such cases it is considered appropriate that a new PDS should be issued, instead of a Supplementary PDS.  This regulation therefore amends the Supplementary PDS provisions of the Act, which are contained in Subdivision D of Division 2 of Part 7.9 of the Act, so that they do not apply to superannuation PDSs.

Regulation 7.9.11N - Modification of Act – superannuation products

This regulation states that Part 7.9 of the Act, which principally sets out disclosure and other provisions relating to the issue, sale and purchase of financial products, is modified with respect to a superannuation product by the new Part 5B of Schedule 10A to the Principal Regulations.  New Part 5B of Schedule 10A is prescribed later in the Regulations.

Regulation 7.9.11O - Form and content of Product Disclosure Statement for superannuation products

Paragraphs 1013C(1)(a) and (b) as modified (refer item 5B.2(1) of Part 5B, Schedule 10A of the Regulations) allows the form and content requirements for a relevant superannuation product PDS to be prescribed by regulation.  This regulation states that the content and form requirements for the relevant superannuation product PDS are contained in the regulations in new Schedule 10D to the Principal Regulations.  Schedule 10D is prescribed later in the Regulations.

Regulation 7.9.11P - Requirements for references to incorporated information for superannuation products

Subregulation 7.9.11P (1) sets out a number of high-level requirements applying to information in a superannuation product PDS that is incorporated by reference (referred to as applying, adopting or incorporating), as permitted under the new subsection 1013C(1B) contained in sub-item 5B.2 of Part 5B in Schedule 10A to the Regulations. 

Subregulation 7.9.11P (2) states that incorporation by reference may only be used when expressly allowed under the Principal Regulations.

Subregulation 7.9.11P (3) requires that if a matter is incorporated by reference it must be in writing, be clearly distinguishable from other matters that are not, and be publicly available, unless the product is issued by a corporate superannuation fund (this exclusion applies because of special arrangements bodies may have with their members which means the information is not made public).  It is noted that the ability to request and receive a hard copy of the PDS and incorporated material (as prescribed later in these Regulations) satisfies the requirement for incorporated matter to be publicly available.

The requirement to make the incorporated material publicly available reflects the requirement of existing paragraph 7.9.15DA(1)(a).

The reason for the requirement to distinguish incorporated information from other information is to clearly separate incorporated and non-incorporated information, as the two are subject to different liability and enforcement regimes.  It is considered that mixing the two types of information could lead to confusion and disputes, especially if some of the information is defective.

Incorporated material has to be identified by providing a concise description of what is contained in the material.  The issuer must also ensure that the reference is clearly distinguishable from the other information in the PDS.

This regulation also requires each version of the incorporated information to be separately identified by including the date on which it was prepared in a prominent position at or near the front of the document.  It is noted that the PDS document itself also has to be dated as required by existing section 1013G of the Act.

If material is incorporated by reference, it, and any version of the document, has to be reasonably easily and quickly accessible to a person relying on the PDS.  This means that a person must be able to access the material without difficulty.  The ability for a consumer to obtain a hard copy of the document upon request satisfies this requirement.  It is also expected that the incorporated material will, to the extent practical, be consistent with the PDS in terms of its headings and content for comparability and ease of reading.  This will, at the same time, reduce the risk of claims of misleading or deceptive conduct based on variations in content between the shorter PDS and incorporated information.

If a website link is provided, this needs to link to the material with as few steps as possible.  For example, linking directly to the material or via a prominent link on a splash page could be a way to achieve this and would be considered to be reasonably quickly and easily accessible.  If a website link leads only to the home page of a provider’s website, and a person needs to navigate a number of links on the site to locate the material, this is not considered to be reasonably quickly and easily accessible.  (A separate regulation requires that a contact telephone number for requesting hard copies of information must be provided in the PDS (refer schedule 10D) to further assist accessibility.)

Subregulation 7.9.11P (4) provides that where matters are incorporated, the PDS must include prominent warnings at each place a matter has been incorporated, as prescribed and to the effect that:

1.      the reader should read this additional information before making a final investment decision.  This warning also needs to direct readers to the location of that information;

2.      the information may change between the time of reading the statement and when the reader signs an application form for that product.

 

Subregulation 7.9.11P (5) also requires that a statement needs to be included in each incorporated document confirming that it forms part of the relevant PDS and identifying the PDS by name, date and version.

Subregulation 7.9.11P (6) confirms that whenever the physical PDS is given to a client, all the incorporated information is deemed to have been given at the same time.  This addresses concerns that parties may otherwise be liable to claims that important information had not been provided. 

Subregulation 7.9.11P (7) confirms that where information is incorporated that that information is deemed to have been given to the person on the day they sign the application form for the product. 

Regulation 7.9.11Q - Retention of copies of Product Disclosure Statement for superannuation product

This regulation requires that each PDS version must be retained by the responsible person for a period of seven years.  This is consistent with existing record-keeping requirements for PDSs.  The regulation also applies this requirement to incorporated information located outside the PDS document and provides guidance on determining the start of the seven year period in different situations.

Regulation 7.9.11R - Requirement to provide copy of Product Disclosure Statement for superannuation product free of charge

Not all persons may have access to a computer or the internet.  This regulation therefore requires that responsible persons must provide, on request, a free hard copy of the PDS and any incorporated information within eight business days.  Emailing of the PDS or incorporated material is not considered acceptable in these circumstances.

Subdivision 4.2C

 

Item [6] inserts a new Subdivision 4.2C, Content of Product Disclosure Statement for simple managed investment scheme, into Part 7.9, Division 4 of the Principal Regulations which sets out the PDS content requirements for simple managed investment schemes which are subject to the new requirements.

 

Regulation 7.9.11S - Application of Subdivision 4.2C

 

Subregulation 7.9.11S (1) clarifies that subdivision 4.2C applies to a person who is required to prepare a simple managed investment scheme PDS, and to the managed investment scheme PDS itself.

 

Subregulations 7.9.11S (2)-(4) provide for a number of exclusions from the simplified disclosure regime for a managed investment scheme, being a quoted product or one that is intended to be traded on a prescribed financial market, as well as stapled securities and platforms as defined in the regulation.

 

While not expressly excluded, the definition of a simple managed investment scheme means that real property schemes and non-unitised schemes are not caught within this regime.

 

Regulation 7.9.11T – Provisions of Part 7.7 of Act that do not apply in relation to simple managed investment scheme

 

Section 942DA in the Act states that a Financial Services Guide may be combined with a PDS.  This regulation clarifies that this provision does not apply to a simple managed investment scheme PDS.  The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS, and combining the PDS with other documents is not consistent with this objective.

 

Regulation 7.9.11U - Provisions of Part 7.9 of Act that do not apply in relation to simple managed investment scheme

 

The simplified managed investment scheme PDS has been designed in a manner that allows information that changes frequently or regularly to be incorporated by reference.  It is therefore considered that simple managed investment scheme PDSs only have to be amended rarely and only if there are major changes to the scheme.  Given that the simplified PDS is a very short document, in such cases it is considered appropriate that a new PDS be issued, instead of a Supplementary PDS.  This item therefore amends the Supplementary PDS provisions of the Act, which are contained in Subdivision D of Division 2 of Part 7.9 of the Act, so that they do not apply to simple managed investment scheme PDSs.

 

Regulation 7.9.11V - Modification of Act - simple managed investment scheme

 

This regulation states that Part 7.9 of the Act, which principally sets out disclosure and other provisions relating to the issue, sale and purchase of financial products, is modified with respect to a simple managed investment scheme as prescribed in the new Part 5C of Schedule 10A of the these Regulations.  New Part 5C of Schedule 10A is prescribed later in these Regulations.

 

Regulation 7.9.11W - Form and content of Product Disclosure Statement for simple managed investment scheme

 

Paragraphs 1013C(1)(a) and (b) as modified in item 5C.2(1) of the Regulations allows the form and content requirements for a relevant simple managed investment scheme PDS to be prescribed by regulation.  This regulation states that the content and form requirements for the relevant product PDS are contained in the regulations in new Schedule 10E of the Principal Regulations.  Schedule 10E is prescribed later in these Regulations.

 

Regulation 7.9.11X - Requirements for references to incorporated information for simple managed investment scheme

 

Subregulation 7.9.11X (1) sets out a number of high-level requirements applying to information in a simple managed investment scheme PDS that is incorporated by reference (referred to as applying, adopting or incorporating), as permitted under the new section 1013C(1B) contained in sub-item 5C.1 of Part 5C in Schedule 10A of the Regulations. 

 

Subregulation 7.9.11X (2) states that incorporation by reference may only be used when expressly allowed under the Regulations.

Subregulation 7.9.11X (3) requires that if a matter is incorporated by reference it must be in writing, be clearly distinguishable from other matters that are not and must also be publicly available.  It is noted that the ability to request and receive a hard copy of the PDS and incorporated material (as prescribed later in the Regulations) satisfies the requirement for incorporated matter to be publicly available.

The requirement to make the incorporated material publicly available reflects the requirement of existing subregulation 7.9.15DA(1)(a).

The reason for the requirement to distinguish incorporated information from other information is to clearly separate incorporated and non-incorporated information, as the two are subject to different liability and enforcement regimes.  It is considered that mixing the two types of information can lead to confusion and disputes, especially if some of the information is defective.

Incorporated material must be identified by providing a concise description of what is contained in the material.  The issuer must also ensure that the reference is clearly distinguishable from the other information in the PDS.

This regulation also requires each version of the incorporated information to be separately identified by including the date on which it was prepared in a prominent position at or near the front of the document.  It is noted that the PDS document itself also has to be dated as required by existing section 1013G of the Act.

If material is incorporated by reference, it, and any version of the document, has to be reasonably easily and quickly accessible to a person relying on the PDS.  This means that a person must be able to access the material without difficulty.  The ability for a consumer to obtain a hard copy of the document upon request satisfies this requirement.  It is also expected that the incorporated material is, to the extent practical, consistent with the PDS in terms of its headings and content for comparability and ease of reading.  This will at the same time reduce the risk of claims of misleading or deceptive conduct based on variations in content between the shorter PDS and incorporated information.

If a website link is provided, this should link to the material with as few steps as possible.  For example, linking directly to the material, or via a prominent link on a splash page is one way to achieve this and would be seen to be reasonably accessible.  If a website link leads only to the home page of a provider’s website, and a person needs to navigate a number of links on the site to locate the material, this is not considered to be reasonably quickly and easily accessible.  (A separate regulation requires that a contact telephone number for requesting hard copies of information must be provided in the PDS (refer schedule 10D) to further assist accessibility.)

Subregulation 7.9.11X (4) provides that where matters are incorporated, the PDS must include prominent warnings at each place the matter has been incorporated, as prescribed and to the effect:

1.      that the reader should read this additional information before making a final investment decision.  This warning also needs to direct readers to the location of that information;

2.      that the information may change between the time of reading the statement and when the reader signs an application form for that product.

 

Subregulation 7.9.11X (5) also requires that a statement needs to be included in each incorporated document confirming that it forms part of the relevant PDS and identifying the PDS by name, date and version.

Subregulation 7.9.11X (6) confirms that whenever the physical PDS is given to a client, all the incorporated information is deemed to have been given at the same time.  This addresses concerns that parties may otherwise be liable to claims that important information has not been provided.  Where an incorporated document is publicly available but separate from the PDS and applies to more than one PDS, this provision requires that a statement must also be included in the relevant document noting that the document forms part of the PDS, but it is not required to name each PDS it applies to.  The reason for this provision is that some documents may be incorporated in a large number of PDSs, and it is not be helpful for the reader if all the PDSs were separately identified.

Subregulation 7.9.11X (7) confirms that where information is incorporated that that information is deemed to have been given to the person on the day they sign the application form for the product. 

Regulation 7.9.11Y - Retention of copies of Product Disclosure Statement for simple managed investment scheme

 

This regulation sets out some record-keeping requirements for the simplified PDS by requiring that each PDS version must be retained by the responsible person for a period of seven years.  This is consistent with existing record-keeping requirements for PDSs.  The regulation also applies this requirement to incorporated information located outside the PDS document and provides guidance on how to determine the start of the seven year period in various situations.

 

Regulation 7.9.11Z - Requirement to provide copy of Product Disclosure Statement for simple managed investment scheme free of charge

 

Not all persons may have access to a computer or the internet.  This regulation therefore requires that responsible persons must provide, when requested, a free hard copy of the PDS and any incorporated information within eight business days.  Emailing of the PDS or related material is not considered to be acceptable in these circumstances.

 

Items [7] and [8]– Subregulation 7.9.15DA(1) and (1A)

 

Regulation 7.9.15DA in the Principal Regulations contains the existing incorporation by reference provisions that apply to a PDS.  Since the Regulations introduce a separate incorporation by reference regime for margin loan, superannuation product and simple managed investment scheme PDSs, there is no need for these existing requirements to still apply.  These items ensure that the existing requirements in regulation 7.9.15DA do not apply, as those PDSs are subject to the new incorporation by reference regime.

 

Items [9] and [10] – Subregulation 7.9.15DB(1) and (2)

 

Regulation 7.9.15DB in the Principal Regulations contains the existing record-keeping requirements for the incorporation by reference provisions in regulation 7.9.15DA.  Given that there are specific record-keeping requirements that apply to information incorporated by reference in margin loan, superannuation product and simple managed investment scheme PDSs, there is no further need for this requirement.  These items therefore ensure that subregulation 7.9.15DB(2) do not apply, as those PDSs are subject to the new incorporation by reference regime.

 

Items [11] and [12] - subregulation 7.9.15DC(1) and (2)

 

Regulation 7.9.15DC in the Principal Regulations clarifies how the lodgement requirements in section 1015B of the Act apply to PDSs containing information incorporated by reference.  These items clarify that this regulation does not apply to the products covered by the new regime, as they are subject to the new incorporation by reference regime.

 

Items [13] and [14] - Regulation 7.9.16L

 

Regulation 7.9.16L states that a PDS must disclose fees and costs in a manner prescribed in detail in Part 2 of Schedule 10 of the Corporations Regulations (these provisions are generally known as the ‘enhanced fee disclosure’ requirements).  These items ensure that the enhanced fee disclosure requirements do not apply to a margin loan, superannuation or simple managed investment scheme PDS.  The reason is that a specific fees and costs disclosure regime is prescribed for these PDSs in these Regulations.

Item [15] Schedule 10A, heading

 

This item makes some minor adjustments to the heading of Schedule 10A of the Principal Regulations to facilitate the insertion of new Parts 5A, 5B and 5C dealing with margin loan, superannuation and simple managed investment scheme PDSs.

Item [16] Schedule 10A, after Part 5A

 

Part 5A – Modifications for margin loan

 

This item introduces a new Part 5A into Schedule 10A to the Corporations Regulations.  The new Part contains a number of amendments to the Act relating to margin loan PDSs.

Regulation 5A.1 - Section 1011B

 

This regulation inserts a definition of Regulations as referring to the Corporations Regulations 2001.

Regulation 5A.2 - Subsection 1013C(1)

 

This regulation modifies subsection 1013C(1) of the Act by replacing the existing subsection with a number of new subsections. 

Subregulation 5A.2(1) states that the contents and form of a margin loan PDS are prescribed in regulations.  The detailed provisions are provided in Schedule 10C to the Principal Regulations (see below), as provided in regulation 7.9.11D (see above). 

Subregulations (1A), (1B), (1C) and (1D) prescribe certain matters in relation to the simplified margin loan PDS regime.  They state that a margin loan PDS may incorporate information by reference (in the regulations this is generally referred to as ‘applying, adopting or incorporating a matter in writing’), including a matter that is required to be included by another law, that all information incorporated by reference is considered to be part of the PDS, that the incorporated material does not need to be given at the same time as the PDS unless requested, and that the regulations may prescribe further requirements applying to incorporating information by reference into a margin loan PDS.

Information incorporated by reference into a margin loan PDS is therefore subject to the legal regime that applies to PDSs.  This is important as it decides the extent and nature of the legal liability attaching to the incorporated information.  Therefore, the PDS enforcement provisions apply to this information, allowing among other things, for consumers to claim for losses or damages if the information proves to be defective.

Subregulations (1E) and (1F) allow the PDS to refer to other information that is available in another separate document (known as referencing).  This allows other information to be referred to without being formally incorporated.  The PDS liability regime does not attach to referenced information which is not formally part of the PDS.  This information is still subject to requirements such as those against misleading and deceptive conduct in the Act and the ASIC Act.

Regulations 5A.3 and 5A.4 Sections 1013D and 1013E

 

These regulations ensure that sections 1013D and 1013E do not apply to a margin loan PDS.  They are superfluous because the provisions in Schedule 10C (see below) prescribe the form and contents of a margin loan PDS.

Regulation 5A.5 Section 1013L

 

Section 1013L allows a PDS to consist of two or more documents.  This item amends this section to state that a margin loan PDS may consist of more than one document, but only if the documents consist of the prescribed PDS document and copies of incorporated information that form part of the PDS.

Regulation 5A.6 - Part 7.9, Subdivision D, Division 2

 

The margin loan PDS has been designed in a manner that allows all information that changes frequently or regularly to be incorporated by reference.  It is therefore considered that margin loan PDSs will only have to be amended rarely, and only if there are major changes to the product.  Given that the PDS is a very short document, in such cases it is considered appropriate that a new PDS should be issued, instead of a Supplementary PDS.  This item therefore amends the Supplementary PDS provisions of the Act, contained in Subdivision D of Division 2 of Part 7.9 of the Act, so that they do not apply to margin loans. 

Regulation 5A.7- Subsection 1015D(3)

 

This subsection states that a PDS must be kept for seven years.  This subsection is superfluous because the Regulations contain detailed record-keeping provisions (see regulation 7.9.11F).  This provision therefore disapplies subsection 1015D(3) in relation to a standard margin loan PDS.

 

Part 5B - Modifications for superannuation products to which Subdivision 4.2B of Division 4 of Part 7.9 relates

 

Item [16] also introduces a new Part 5B - Modifications for superannuation products to which Subdivision 4.2B of Division 4 of Part 7.9 relates - into Schedule 10A to the Principal Regulations.  The new Part contains a number of amendments to the Act relating to superannuation product PDSs.

Regulation 5B.1 - Section 1011B

This regulation inserts a definition of Regulations as referring to the Corporations Regulations 2001.

Regulation 5B.2 - Subsection 1013C (1)

This regulation modifies subsection 1013C (1) of the Act by replacing the existing subsection with a number of new subsections. 

Subregulation (1) states that the contents and form of a superannuation PDS are prescribed in regulations.  The detailed provisions are provided in Schedule 10D to the Principal Regulations (see below), as provided in regulation 7.9.11O (see above). 

Subregulations (1A), (1B), (1C) and (1D) prescribe certain matters in relation to the simplified superannuation product PDS regime.  They state that a superannuation PDS may incorporate information by reference (in the regulations this is generally referred to as ‘applying, adopting or incorporating a matter in writing’), including a matter that is required to be included by another law, that all information incorporated by reference is considered to be part of the PDS, that the incorporated material does not need to be given at the same time as the PDS unless requested, and that the regulations may prescribe further requirements applying to incorporating information by reference into a superannuation product PDS.

Information incorporated by reference into a superannuation product PDS are therefore subject to the legal regime that applies to PDSs.  This is important as it decides the extent and nature of the legal liability attaching to the incorporated information.  Therefore, the PDS enforcement provisions apply to this information, allowing among other things, for consumers to claim for losses or damages if the information proves to be defective.

Subregulations (1E) and (1F) allow the PDS to refer to other information that is available in another separate document (known as referencing).  This allows other information to be referred to without being formally incorporated.  The PDS liability regime does not attach to referenced information which is not formally part of the PDS.  This information is still subject to requirements such as those against misleading and deceptive conduct in the Act and the ASIC Act.

Regulations 5B.3 and 5B.4 - Sections 1013D and 1013E

These regulations ensure that sections 1013D and 1013E (which prescribe the general content requirements for PDSs) do not apply to a superannuation product PDS.  They are superfluous because the regulations in Schedule 10D (see below) prescribe the specific form and contents of a superannuation product PDS.

Regulation 5B.5 - Section 1013L

Section 1013L allows a PDS to consist of two or more documents.  This regulation amends this subsection to state that a simplified superannuation product PDS may consist of more than one document, but only if the documents consist of the prescribed PDS document and any incorporated information that forms part of the PDS.

Regulation 5B.6 - Subsection 1015D(3)

Subsection 1015D(3) states that a PDS must be kept for seven years.  It is superfluous because these Regulations contain detailed record-keeping provisions (see regulation 7.9.11Q).  This provision therefore disapplies subsection 1015D(3) in relation to a superannuation product PDS.

Part 5C - Modifications for simple managed investment scheme

 

This item introduces a new Part 5C - Modifications for simple managed investment scheme - to Schedule 10A of the Principal Regulations.  The new Part contains a number of amendments to the Act relating to simple managed investment scheme PDSs.

 

Regulation 5C.1 - Section 1011B

This regulation inserts a definition of Regulations as referring to the Corporations Regulations 2001.

Regulation 5C.2 - Subsection 1013C (1)

This regulation modifies subsection 1013C (1) of the Act by replacing the current content of the subsection with a number of new subsections. 

New subsection 5C.2 (1) states that the contents and form of a simple managed investment scheme PDS are prescribed in regulations.  It also prescribes that each PDS must relate only to one simple managed investment scheme.  

The detailed regulations are provided in Schedule 10E of the Principal Regulations (see below), as provided in regulation 7.9.11W (see above). 

Subregulations 5C.2 (1A), (1B), (1C) and (1D) prescribe certain matters in relation to the new incorporation by reference regime.  They state that a simple managed investment scheme PDS may incorporate information by reference, including a matter that is required to be included by another law, that all information incorporated by reference is considered to be part of the PDS, that the incorporated material does not need to be given at the same time as the PDS unless requested, and that the regulations may prescribe further requirements applying to incorporating information by reference into a simple managed investment scheme PDS.

Information incorporated by reference into a simple managed investment scheme PDS is therefore subject to the legal regime that applies to PDSs.  This is important as it decides the extent and nature of the legal liability attaching to the incorporated information.  Therefore, the PDS enforcement provisions apply to this information, allowing among other things, for consumers to claim for losses or damages if the information proves to be defective.

A further subregulation 5.C.2 (1E) allows the PDS to also refer to other information that is available in another separate document (known as referencing).  This allows other information to be referred to without being formally incorporated.  While the PDS liability regime does not attach to referenced information which is not formally part of the PDS, this information is still subject to requirements such as those against misleading and deceptive conduct in the Act and the ASIC Act.

Regulations 5C.2 and 5C.3 - Sections 1013D and 1013E

These regulations ensure that sections 1013D and 1013E (which prescribe the general content requirements for PDSs) do not apply to a simple managed investment scheme PDS.  They are superfluous because the provisions in Schedule 10E (see below) prescribe the specific form and contents of a simple managed investment scheme PDS.

Regulation 5C.4 - Section 1013L

Section 1013L allows a PDS to consist of one or more documents.  This regulation amends this section to state that a simple managed investment scheme PDS may consist of more than one document, but only if the documents consist of the prescribed PDS document and any incorporated information that forms part of the PDS.

Regulation 5C.5 - Subsection 1015D(3)

This existing subsection states that a PDS must be kept for seven years.  It is superfluous because the Regulations contain detailed record-keeping provisions (see regulation 7.9.11Y).  This provision therefore disapplies subsection 1015D(3) in relation to a simple managed investment scheme PDS.

Item [17] - After Schedule 10BA

 

Schedule 10C

 

This Item inserts a new Schedule 10C,  Form and content of Product Disclosure Statement – margin loan, into the Principal Regulations containing the detailed regulations prescribing the form and content of a margin loan PDS.

Clause 1 - Length and font size for Product Disclosure Statement for margin loan

 

This clause ensures that the PDS does not exceed a maximum page limit, while providing for alternative formats which deliver the equivalent content.  Requirements relating to font sizes are also included to ensure that the PDS is readable.

The total length of the PDS (not including any information incorporated by reference and excluding title and content pages) must not exceed:

(a)        4 A4 pages of content; or

(b)        8 A5 pages of content; or

(c)        12 DL pages of content; or

(d)        if in any other format, as long as it fits into 4 A4 pages. 

 

The font size must not be less than:

(a)        for the company’s name, address, ABN, ACN and AFSL—8 points;

(b)        for body text—9 points.

 

Further, the standard requirements under subsection 1013C(3) of the Act still applies requiring that the PDS must be worded and presented in a clear, concise and effective manner.

 

Clause 2 – Minimum content of Product Disclosure Statement for margin loan

 

This clause states that the margin loan PDS must be made up of a number of sections which must be numbered, ordered and titled as prescribed.

It further prescribes that the PDS must include a table of contents using the headings provided.  The main reason for prescribing headings is to ensure comparability.  Allowing issuers to vary the headings may unnecessarily confuse consumers.

Given that not all potential customers may have access to the internet, simply providing a website link means that the incorporated material is not considered to be reasonably accessible.  Therefore, subclause (2) also requires the inclusion of a telephone number in the PDS which can be used to request a hard copy of the PDS and any incorporated information.

A prominent warning has to be included informing consumers that the short PDS document is only a summary of key information, that certain important information may be located outside the PDS document itself, and that persons considering a margin loan should read all of that information before making a final decision.  Consumers are also advised to obtain qualified advice before taking out a margin loan.

Subclause (4) also allows the PDS to include other sections and information at the discretion of the lender, after the final prescribed sections, but these must fit within the prescribed page length.

Subclause (5) allows information that is required to be included in a PDS, to be included where it is applicable only and that no reference needs to be made if a particular requirement is not applicable.

Clause 3 - Contents of section 1 (About [name of provider of the margin loan] and [name of margin loan product])

 

This section needs to provide an overview of the lender, a short summary of what margin lending is and an initial overview of some key threshold factors that potential borrowers should consider and be comfortable with before taking out a margin loan.

This item accordingly prescribes that section 1 must contain the following content:

•                a short summary of what margin lending is;

•                a statement setting out the possible consequences of borrowing to invest, including the effect of magnifying both gains and losses;

•                a statement that borrowers need to regularly monitor their portfolios in order to be able to take timely action to prevent potential losses and become aware of changes to the terms of their loan;

•                a statement that borrowers may need at short notice to pay an additional amount into the margin loan or sell some of the investments.  The warning should also state that the lender has the right to sell part or all of the portfolio in certain circumstances;

•                a statement that borrowers may need to access other funds to repay the margin loan if the value of the portfolio does not cover repayment of the loan, and that other assets provided as security for the loan, in particular residential property, may have to be sold to repay the loan in such circumstances; and

•                a statement that the law requires lenders to assess whether a margin loan is unsuitable for a borrower, and that borrowers may request a copy of that assessment from the lender. 

–               The same note is included as in the Act, stating that the assessment does not have to be provided if no margin loan is provided.

 

In relation to the last dot point, it is noted that the lender’s obligation to assess whether the facility is unsuitable for the client is a new legal obligation included in the Act (sections 985E and following).  Section 985J specifically says that the borrower has the right to request a copy of the assessment under certain conditions, noting however that this does not apply if no margin loan is provided or an existing loan limit is increased.

Clause 4 - Contents of section 2 (Benefits of [name of margin loan product])

 

This section has to set out the key benefits available from a margin loan. 

Subclause (1) requires that section 2 of the PDS includes a description of key benefits to the borrower.

Subclause (2) allows for this section to also include a description about other benefits not already mentioned.  This additional information can be incorporated by reference.

Clause 5 - Contents of section 3 (How [name of margin loan product] works)

 

Section 3 has to provide a basic overview of how a margin loan operates.  This section has to provide an explanation of, or include:

•                how margin lending works, including information on the maximum loan amount and the loan-to-value (LVR) ratios.  These explanations must be illustrated with one or more examples;

•                what financial products (or types of financial product) that the client can purchase with the borrowed funds;

•                who owns the investments;

•                a statement noting the importance of the loan agreement in setting out the detailed rights and obligations of the borrower and recommending that it be read and explaining how a copy can be obtained;

•                any other significant features of the margin loan not covered already or are sufficiently important for a borrower to make a decision about the product; and

•                a reference to the margin loan calculator available on ASIC’s consumer or other relevant website, and its usefulness.  If the lender itself provides a calculator to the public, they may include a reference to it and its usefulness.

The PDS may include the approved securities list and an explanation of other features of the margin loan (as set out in paragraph 5(1)(f)), by incorporating the information by reference.

Clause 6 - Contents of section 4 (What is a margin call?)

 

A margin call occurs whenever the current loan to value ratio (LVR) ratio exceeds a level determined in the terms and conditions of the facility (the ‘current LVR’ is defined and explained in paragraph 761EA(2)(e) and subsection 761EA(3) of the Act.  A ‘margin call’ is defined in subsection 761EA(4)).

Margin calls are the main risk that may affect margin loan borrowers, as they trigger calls for additional cash or other contributions to adjust the LVR, failing which investments held by the borrower may be sold off.  In cases of rapidly falling markets or other extreme circumstances borrowers may even fall into negative equity, where the value of the investments is insufficient to pay off the loan.  In such cases investors may have to find additional funds to pay off the loan, and in a worst case scenario may lose any security they have provided for the loan.  In some recent cases borrowers are at risk of losing their homes because of such events.  It is therefore considered appropriate to apply specific disclosure requirements in relation to margin calls and how they operate, including disclosure of the specific level beyond which a margin call is triggered. 

Accordingly, this section has to explain how margin calls work, and must provide one or more examples to illustrate this. 

The explanation has to state under what circumstances a margin call is triggered, including:

•                in response to changes in the market (e.g. if the value of the investments fall by a certain amount, or an index falls by a given amount); or

•                otherwise at the lender’s discretion (e.g. if the lender decides to remove a product from the Approved Product List or reduces the LVR).

The explanation must also set out how borrowers can deal with a margin call.

The example(s) has to illustrate how a margin call works and address key matters such as the impact of breaching the LVR, how to adjust the LVR back to the required level and how the buffer operates, if one is provided.

It also has to state that the lender will notify the margin call to the borrower or their financial adviser.  Notification requirements are prescribed in section 985M of the Act.  A statement also has to be included that the borrower should remain contactable at all times in case of a margin call.

If the margin loan does not include a margin call, a statement to that effect also has to be included.

Clause 7 - Contents of section 5 (The risk of losing money)

 

Section 5 has to contain a description of the risks with margin lending to a borrower, including, where relevant:

•                the risk that the value of the client’s investments might fall, and the possible consequences, in particular of a margin call occurring;

•                the risk that lenders may change the LVR of any given investment and the possible consequences, in particular of a margin call occurring;

•                the risk that the lender may remove any given investment from the Approved Securities List and the possible consequences, in particular of a margin call occurring;

•                the risk that the interest rate may rise and the consequences, in particular the possibility that interest payments may exceed the returns available from the investment portfolio;

•                the risk that the borrower may lose any property that has been mortgaged as security for the margin loan;

•                the risk and consequences of a default event as defined in the loan agreement occurring; and

•                the risk that tax laws can change, and possibly have a negative impact on the borrower’s tax position.

If there are any other significant risks that a reasonable person would consider relevant to the particular margin loan product, they also need to be included in this section.

The issuer may use the incorporation by reference mechanism to include other risk-related information.

A website link also has to be included to the relevant webpage on a website operated by or on behalf of the Commonwealth containing further information about margin loans, including ways to manage margin loan risks.

Clause 8 - Contents of section 6 (The costs)

 

Section 6 has to contain:

•                a description of the interest rate for the margin loan, including how it is calculated and any default interest rate that may apply.  The actual interest rate may be incorporated by reference;

•                a description of the fees and costs charged, but excluding minor fees and costs such as small transaction fees.  A list of matters for which minor fees will be charged must be included, but the description and amounts of these fees may be incorporated by reference;

•                a statement as to whether any fees or costs can be changed unilaterally under the loan agreement; and

•                whether any commission is, or may be, payable to a financial adviser or third party, under what circumstances the payments are made, and where more detailed information on the payments can be found.

Clause 9 – Contents of section 7 (How to apply)

 

This section has to provide information about how to apply for a margin loan and a summary of the dispute resolution system provided by the lender.  Additional details about the dispute resolution system may be incorporated by reference.

 

Schedule 10D

 

Item [17] also inserts a new Schedule 10D, Form and content of Product Disclosure Statement - superannuation product, to which Subdivision 4.2B of Division 4 of Part 7.9 applies, into the Principal Regulations containing the detailed regulations prescribing the form and content of a simplified superannuation product PDS.

Clause 1 - Length and font size for Product Disclosure Statement for superannuation product

This clause ensures that the superannuation product PDS does not exceed a maximum page limit, while providing for alternative formats which deliver the equivalent content.  Requirements relating to font sizes also are included to ensure that the PDS is readable.

The total length of the PDS (not including any information incorporated by reference) must not exceed:

(a)        8 A4 pages of content; or

(b)        16 A5 pages of content; or

(c)        24 DL pages of content; or

(d)        if in any other format, as long as it fits into 8 A4 pages. 

 

The font size must not be less than:

(a)        for the name, address, ABN and/or ACN and AFSL—8 points;

(b)        for body text—9 points.

 

Further, the standard requirements under subsection 1013C(3) of the Act still apply requiring that the PDS must be worded and presented in a clear, concise and effective manner.

 

Clause 2 – Minimum content of Product Disclosure Statement for superannuation product

This clause states that the superannuation product PDS must be made up of a number of sections which must be numbered, ordered and titled as prescribed.

The reason for prescribing headings is to ensure comparability.  Allowing issuers to vary the headings may unnecessarily confuse consumers.

The section relating to insurance cover provided through the superannuation product can be omitted if the product does not offer such cover and relevant sections can be renumbered accordingly.

Subclause (3) prescribes that the sections as numbered and titled in subclause (1) must be set out in a table of contents.  Given that not all potential customers may have access to the internet, simply providing a website link means that the incorporated material is not considered to be reasonably accessible.  Therefore, subclause (3) also requires the inclusion of a telephone number in the PDS which can be used to request a hard copy of the PDS and any incorporated information.

Subclause (4) also provides that the PDS must advise the reader that it contains references to important information, and that consumers should consider that information before making a final decision to invest in the product.  The warning also states that the information provided is general information only and does not take account of the client’s personal financial situation or needs, and that the reader should obtain financial advice tailored to their own personal circumstances.  This statement must be displayed in a prominent style and position at or near the beginning of the document.

Subclause (5) allows the PDS to also include other sections and information at the discretion of the responsible person, but these must fit within the prescribed page length.  Any additional sections need to be located at the end of the prescribed sections.

Subclause (6) allows information that is required to be included in a PDS, to be included where it is applicable only.  Further, no reference needs to be made if a particular requirement is not applicable.

Clause 3 - Contents of section 1 (About [name of superannuation product])

This section provides a short summary of the superannuation fund and the products it is offering.

Clause 4 - Contents of section 2 (How super works)

This section provides important prescribed statements summarising key elements of how superannuation works, as follows:

•                that superannuation is in part compulsory and is a way of building savings for retirement;

•                that there are different types of contributions that can be made by an investor (e.g. employer contributions, voluntary contributions, government co-contributions);

•                that there are limitations on contributions and withdrawals;

•                that tax savings are provided by Government; and

•                that investors have a choice into which fund to direct their superannuation guarantee contributions.

Further detailed information on each of these matters may be provided by incorporating information by reference or by including a reference to a website operated by or on behalf of the Commonwealth.  It is expected that the PDS refer to ASIC’s consumer website, FIDO, or equivalent.

Clause 5 - Contents of section 3 (Benefits of investing with [name of superannuation product]

This provision prescribes what should be included in section 3.  It needs to start with a summary of the relevant superannuation product and include a summary of its significant features and benefits.  Further information on the features and benefits of the super fund or superannuation in general can be provided through incorporation by reference. 

Clause 6 - Contents of section 4 (Risks of super)

This item prescribes the content in section 4 of the PDS.  Section 4 needs to include a number of statements addressing certain general risks of investing, including that all investments carry risk; that different strategies carry different levels of risk; and that higher long-term returns often carry the highest short-term risks.

Clause (2) states that section 4 is also required to include a summary setting out the significant risks of the particular superannuation product to which the PDS applies.

Section 4 has to contain a number of statements addressing the key risks of investing in super generally (provided these risks have not already been addressed in clause (2) above), including the risk that:

•                the value of investments will vary;

•                the level of returns will vary, and that future returns may differ from past returns;

•                returns are not guaranteed and members may lose some of their money;

•                superannuation laws may change;

•                a person’s superannuation savings may not adequately provide for their retirement; and

•                the relevant level of risk for each member will vary depending on a range of factors including their age, investment time frame, the member's other investments and their individual risk tolerance.

 

Additional information about significant risks can be provided by incorporation by reference.

Clause 7 - Contents of section 5 (How we invest your money)

This provision provides the content requirements for section 5.  Section 5 must contain a summary description of the investment options offered by the fund, and what happens if the member does not make a choice of where to invest, i.e. whether there is a default option.  There must also be a warning to the member to consider the likely investment return, risk and their investment timeframe when choosing which option to invest in.

Under subclause (3) prescribed information needs to be set out for at least one investment option, as follows:

•                the name and a short description of the option, including which type of investor it is best suitable for;

•                its asset mix and the strategic allocation of the asset classes - this may be done in the form of a range;

•                the investment return objective of the fund.  A short explanation of this measure should be provided;

•                the minimum timeframe for holding the investment - this can be done in the form of a range; and

•                a summary description of the risk level of the option.  This could, for instance, be done in the form of a risk meter.

 

If the fund has a default option this section requires that this information must be provided for that default option, regardless of what other information has already been provided for any other investment option.  If there is more than one default option, the information must be provided for the default option which has the most funds invested.

If the product has no default option, it must disclose the required information for a balanced investment option (the definition of a balanced option is taken from the enhanced fee regulations in the Principal Regulations - refer item 101 of Schedule 10).  If neither a default option or a balanced investment option exist, the information must be provided for the investment option under which the superannuation trustee has the most funds invested. 

The information prescribed in subclause (3) must be provided for all other investment options as well, but may be included by using the incorporation by reference mechanism. 

Under subclause (9), the superannuation trustee is also required to provide information about switching investments and the extent to which investment options can be changed and how.  Information about the extent to which labour standards or environmental, social or ethical considerations are taken into account in the investment activity relating to the product are also prescribed.  Where labour standards or environmental, social or ethical considerations are not taken into account, this must be stated.

The information prescribed under subclause (9), as well as further information about investment options, can be incorporated by reference.

Clause 8 - Contents of section 6 (Fees and costs)

The provisions in section 6 regulate the disclosure of information relating to the fees and costs of the product.  In general, these provisions are modelled as closely as possible on the enhanced fee disclosure regulations in Schedule 10 of the Principal Regulations.  This is intended to minimise the compliance cost for industry, as they are already providing this information in their current PDSs.

Section 6 needs to set out summary fees and cost information in a prescribed format.  The format is essentially taken from the enhanced fee disclosure regulations in Schedule 10 to the Principal Regulations.  It has to be provided for each investment option presented in detail in section 5.

The section also has to start with a consumer warning regarding the potential impact of fees and costs on the final balance for a member, illustrated with a concise example.  The format for the warning and example is taken from Schedule 10 of the Principal Regulations.

This must be followed by a table summarising the prescribed main fees and costs information for the option(s) disclosed in Section 5.  The rules in completing the table are taken from Schedule 10 to the Principal Regulations, with some minor amendments to ensure that the information provided is clear and simple.  Certain information relating to fee changes also has to be provided as prescribed in Schedule 10 to the Principal Regulations.

A statement has also to be provided that the information in the table can be used to compare fees and costs between different funds.  A further short general statement explaining that fees and costs can be paid directly out of the member’s account or deducted from investment earnings also needs to be included.

Section 6 also has to provide a worked example for one investment option, which must be the default option in the product.  If there is no default option, the worked example must cover the balanced option, and if no balanced option exists, then the option with the most funds under management.  The rules for providing the worked example are taken from Schedule 10 to the Principal Regulations.

A reference to ASIC’s calculator on ASIC’s consumer website, FIDO, (or its equivalent) has to be provided, with an explanation that these can be used to calculate the impact of fees and costs on account balances.  A reference to the fund trustee’s own calculator on its website (if available) may also be provided.

The section must contain a warning that additional fees may be paid to a financial adviser if applicable, and a reference to the Statement of Advice must be provided where details of these fees can be obtained.

The superannuation trustee must incorporate information on fees and costs for all investment options calculated and presented as prescribed in Schedule 10 to the Principal Regulations and may use the incorporation by reference mechanism to do so.

If the trustee wishes to provide further information in relation to fees and costs, this information may be incorporated by reference.

Clause 9 - Contents of section 7 (How super is taxed)

This provision provides for the content requirements of section 7.  Section 7 must contain a summary of tax information relating to superannuation funds, including how tax amounts are paid and the main taxes payable for contributions, fund earnings and withdrawals.

Subclause (2) requires that section 7 include a warning that the member’s tax file number (TFN) needs to be provided and a statement of the consequences if it is not, as well as a warning of the tax consequences of exceeding the contribution caps, where this is relevant.

Additional information about taxation matters relating to superannuation can be incorporated by reference.

Clause 10 – Contents of section 8 (Insurance in your super)

This item in subclause (1) provides for the inclusion of information in section 8 of the PDS on any insurance cover included in a superannuation product.  If no insurance is included this section can be omitted.

Subclause (2) says that if insurance cover is provided, section 8 needs to summarise the main types of insurance cover available and how members can apply.  There also needs to be a statement that there are costs associated with the insurance cover and describe in summary who is responsible for paying the costs and how they have been calculated.  

If default insurance cover is provided, subclause (3) requires that a summary description must be provided of the type and level of cover, the cost expressed in actual dollars or as a range, who is responsible for paying the costs, whether members can decline or cancel the cover, and how they can do this; and whether the insurance cover can be changed and how. 

A further warning needs to be included to the effect that unless members cancel their default cover, the cost thereof will be deducted from their account or from their contributions (whichever is applicable).

Further information has to be provided about eligibility for and cancellation of the insurance cover and any conditions and exclusions.

Subclause (4) requires that if insurance cover is an option rather than a default, the section must include information about the level and type of cover available, the cost expressed in actual dollars or as a range, eligibility rules, cancellation of cover and any conditions and exclusions applicable.  Other significant matters in relation to the insurance cover also need to be included - for example, how a person can apply or cancel the insurance.

Under subclause (5), the issuer may incorporate by reference information about eligibility for and cancellation of insurance and any conditions and exclusions where the insurance cover is provided by default.  If this information is provided by incorporation by reference, the PDS must include a warning in section 8 that the matter may affect a person’s entitlement to cover and that the information should be read before deciding whether the insurance is appropriate.

If information about the level and type of insurance cover available, the cost or the range of costs or any other significant matter is provided by incorporation by reference, the PDS in Section 8 must include a warning that the information needs to be read before deciding whether the insurance is appropriate.

Clause 11 - Contents of section 9 (How to open an account)

This clause prescribes information for inclusion in section 9.  Section 9 must provide information, where applicable, on how to open an account with the superannuation provider, explain the cooling-off period that applies and how to make a complaint.

Subclause (2) provides that further detailed information may be provided about cooling offer periods, complaints and dispute resolution and that this may be done by incorporation by reference.

Where the previous section is not applicable, that is insurance is not offered in the superannuation product, this section can be presented as section 8 (refer Schedule 10D, Item 2(2)).

 

Schedule 10E

 

Item [17] inserts a new Schedule 10E, Form and content of Product Disclosure Statement - simple managed investment scheme, to the Principal Regulations containing the detailed regulations prescribing the form and content of a simplified superannuation product PDS.

Clause 1 - Length and font size for Product Disclosure Statement for simple managed investment scheme

 

This clause ensures that the managed investment scheme PDS does not exceed a maximum page limit, while providing for alternative formats which deliver the equivalent content.  Requirements relating to font sizes are also included to ensure that the PDS is readable.

The total length of the PDS (not including any information incorporated by reference) must not exceed:

(a)        8 A4 pages of content; or

(b)        16 A5 pages of content; or

(c)        24 DL pages of content; or

(d)        if in any other format, as long as it fits into 8 A4 pages. 

 

The font size must not be less than:

(a)        for the name, address, and, if applicable, the ABN, ACN, ARSN and   AFSL — 8 points; and

(b)        for the body text — 9 points.

 

Further, the standard requirements under subsection 1013C(3) of the Act still apply requiring that the PDS must be worded and presented in a clear, concise and effective manner.

Clause 2 – Minimum content of Product Disclosure Statement for simple managed investment scheme

 

This clause states that the simple managed investment scheme PDS must be made up of a number of sections which must be numbered, ordered and titled as prescribed.

Subclause (1) prescribes that the PDS must include a table of contents using the headings provided.  The main reason for prescribing headings is to ensure comparability and avoid confusing consumers.

Subclause (2) prescribes that the sections as numbered and titled in subclause (1) must be set out in a table of contents.

Given that not all potential customers may have access to the internet, simply providing a website link means that the incorporated material is not considered to be reasonably accessible.  Therefore, subclause (2) also requires the inclusion of a telephone number in the PDS which can be used to request a hard copy of the PDS and any incorporated information.

Subclause (3) requires the PDS to also contain a statement telling the reader that it contains important information, and that consumers should consider that information before making a final decision to invest in the product, that the information provided is general information only and does not take account of the client’s personal financial situation or needs and that the person should obtain financial advice tailored to their personal circumstances.  It further prescribes that this statement must be displayed in a prominent style and position at or near the beginning of the document.

Subclause (4) allows the PDS to also include other sections and information at the discretion of the responsible person, but these must fit within the prescribed page length.  Any additional sections need to be located at the end of the prescribed sections.

Subclause (5) allows information that is required to be included in a PDS, to be included where it is applicable only.  Further, no reference needs to be made if a particular requirement is not applicable.

Clause 3 - Contents of section 1 (About [name of responsible entity])

 

This clause sets out the content of section 1 of the simple managed investment scheme PDS.  Subclause (1) requires the provision of a brief summary of the responsible entity and its role, and, where the investment manager is different from the responsible entity, the same information in relation to the investment manager. 

Subclause (2) provides that should there be more than one investment manager, the information may be provided by incorporation by reference.

Clause 4 - Contents of section 2 (How [name of simple managed investment scheme] works)

 

This clause prescribes the information to be included in section 2 on how the simple managed investment scheme works.  Subclause (1) provides that the text must include summary information on how the managed investment scheme works and the interests that members acquire.

Section 2 must also:

1.            include a summary of minimum investment amounts, if applicable;

2.            provide information on the structure of the scheme;

3.            state in general terms that the price of interests will vary as the market value of assets in the managed investment scheme rise or fall;

4.            describe in summary, how members can increase or decrease their investment levels;

5.            state that in some circumstances, such as when there is a freeze on withdrawals, members may not be able to withdraw their funds on request; and

6.            describe the frequency of distributions and how they are calculated.

 

More detailed information on the buying and selling of interests may also be provided by incorporation by reference.

Clause 5 - Contents of section 3 (Benefits of investing in [name of simple managed investment scheme])

 

This clause provides for the content of section 3 by prescribing information on the benefits of investing in a simple managed investment scheme.  Firstly, for this section, the PDS must describe in summary, significant features and benefits of the scheme.

The issuer may use the incorporation by reference mechanism to include additional information on the features and benefits of the particular scheme or of simple managed investment schemes in general.

Clause 6 - Contents of section 4 (Risks of simple managed investment schemes)

 

This clause provides for the contents of section 4 to address the risks of investing generally, as well as in managed investment schemes. 

Specific statements need to be included noting that all investments carry risk, that different strategies may carry different levels of risk, and that assets with the highest long-term returns may have the highest level of short-term risks.

Subclause (2) states that section 4 is required to include a summary setting out the significant risks of the particular simple managed investment scheme to which the PDS applies. 

Section 4 has to contain a number of statements addressing the key risks of investing in managed investment schemes generally (provided these risks have not already been addressed in subclause (2) above), including the risk that:

•                the value of investments will vary;

•                the level of returns will vary, and that future returns may differ from past returns;

•                returns are not guaranteed and members may lose some of their money;

•                laws affecting managed investment schemes may change; and

•                the relevant level of risk for each member will vary depending on a range of factors including their age, investment time frame, the member's other investments and their individual risk tolerance.

 

The issuer may also incorporate by reference any further information it wishes to provide about significant risks or do so by including a reference to a website operated by or on behalf of the Commonwealth containing relevant information.  It is expected that the PDS would refer to ASIC’s FIDO website or equivalent.

Clause 7 - Contents of section 5 (How we invest your money)

 

This clause provides prescribed content for section 5, being a summary of the investment options offered by the fund.  It must include a warning that the member must consider the likely investment return, risk and their investment timeframe when choosing an option to invest in.

Prescribed information needs to be set out for at least one investment option, as follows:

1.      the name and a short description of the option, and which type of investor it is best suited for;

2.      the asset mix it invests in and the strategic allocation of the asset classes - this may be done in the form of a range;

3.      the investment return objective of the fund.  A short explanation of this measure should also be provided;

4.      the minimum suggested time frame for holding the investment – this can be done in the form of a range; and

5.      a summary of the risk level of the option.  This can, for instance, be done in the form of a risk meter.

 

The required information must be disclosed for a balanced option, or if that does not exist, the option which has the most funds invested (the definition of a balanced option is taken from the enhanced fee regulations in the Principal Regulations - refer item 101 of Schedule 10).  If neither a default nor a balanced investment option exist, information must be provided for the investment option which has the most funds invested.

The information prescribed in subclause (3) must be provided for all other investment options as well, but may be included by using the incorporation by reference mechanism. 

Under subclause (7), the responsible entity is required to provide information about switching investments and the extent to which investment options can be changed and how.  Information about the extent to which labour standards or environmental, social or ethical considerations are taken into account in the investment activity relating to the product are also prescribed.  Where labour standards or environmental, social or ethical considerations are not taken into account, this must be stated.

The information prescribed under subclause (7), as well as further information about investment options, can be incorporated by reference.

Clause 8 - Contents of section 6 (Fees and costs)

 

The provisions in section 6 regulate the disclosure of information relating to the fees and costs of the product.  In general, these provisions are modelled as closely as possible on the enhanced fee disclosure regulations in Schedule 10 to the Principal Regulations.  This is intended to minimise the compliance cost for industry, as they are already providing this information in their current PDSs.

Section 6 has to set out summary fees and cost information in a prescribed format.  The format is essentially taken from the enhanced fee disclosure regulations in Schedule 10 to the Principal Regulations.  It has to be provided for each investment option presented in detail in section 5.

The section has to start with a consumer warning regarding the potential impact of fees and costs on the final balance for a member, illustrated with a concise example.  The format for the warning and example is taken from Schedule 10 to the Principal Regulations. 

This must be followed by a table summarising the prescribed main fees and costs information for the option(s) disclosed in section 5.  The rules in completing the table are taken from Schedule 10 to the Principal Regulations, with some minor amendments to ensure that the information provided is clear and simple.  Certain information relating to fee changes also has to be provided as prescribed in Schedule 10 to the Principal Regulations.

A statement will have to be provided that the information in the table can be used to compare fees and costs between different schemes.  A further short general statement is required explaining that fees and costs can be paid directly out of the member’s account or deducted from investment earnings.

Section 6 requires a worked example for one investment option, which must be the default option in the product.  If there is no default option, the worked example must cover the balanced option, and if no balanced option exists, then the option with the most funds under management.  The rules for providing the worked example are taken from Schedule 10 to the Principal Regulations.

A reference to ASIC’s calculator on its consumer website, FIDO (or its equivalent) has to be provided, with an explanation that this can be used to calculate the impact of fees and costs on account balances.  A reference to the responsible entity’s own calculator on its website (if available) may also be provided.

The section must contain a warning that additional fees may be paid to a financial adviser if applicable, and a reference to the Statement of Advice must be provided where details of these fees can be obtained.

The responsible entity must incorporate information on fees and costs for all investment options calculated and presented as prescribed in Schedule 10 to the Principal Regulations and may use the incorporation by reference mechanism to do so.

If the responsible entity wishes to provide further information in relation to fees and costs, this information may be incorporated by reference.

Clause 9 - Contents of section 7 (How managed investment schemes are taxed)

 

Clause 9 provides for the prescribed content of section 7.  Section 7 must include a warning that investing in a managed investment scheme is likely to have tax consequences and that consumers are strongly advised to seek professional tax advice.

Section 7 must also include a statement as prescribed to the effect that schemes do not pay tax on behalf of members, and that members must pay tax on any income and capital gains generated by the scheme.

Additional information can be incorporated by reference about the taxation rules applying to managed investment schemes. 

Clause 10 Contents of section 8 (How to apply)

 

This clause prescribes information for inclusion in section 8.  Section 8 must provide information, where applicable, on how to invest in the simple managed investment scheme, explain the cooling-off period that applies and how to make a complaint.

Subclause (2) provides that further detailed information may be provided about cooling offer periods, complaints and dispute resolution and that this may be done by incorporation by reference.