Bills Digest No. 39 2003-04
Financial Services Reform Amendment Bill
2003
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Financial Services Reform Amendment
Bill 2003
Date Introduced:
26 June 2003
House: House of Representatives
Portfolio: Treasury
Commencement:
The items in this Bill
commence on a number of dates. Schedule 1 commences on the
28th day after the Act receives Royal Assent. All of
schedule 2 (apart from item 88) commences on the day after the Act
receives Royal Assent. Item 88 of schedule 2 commences on 1 July
2004. With the exception of item 1 of schedule 3, schedule 3 and
schedule 4 commence on the day after the Act receives Royal
Assent.
This Bill makes a series of amendments to the
Corporations Act 2001 as amended by the Financial
Services Reform Act 2001 (FSRA). The amendments are designed
to assist industry participants transition across to the new FSRA
regime.
Background
In 2001 the Corporations Act was amended by
the FSRA to put in place revised regulatory arrangements for the
financial services sector. The FSRA consolidated into one piece of
legislation rules for consumer protection and market integrity in
the financial services sector.(1) The regime, brought in
by the FSRA, is contained in Chapter 7 of the Corporations Act.
Prior to FSRA, the regulations governing
conduct in the financial services industry were scattered across a
number of Acts and were based upon the institutional form of the
service provider. For example, the Corporations Act 2001
set out the regulatory arrangements for securities and futures
contracts and securities and futures markets. The regulatory
arrangements for deposit products were contained within the
Banking Act 1959; for general and life insurance in the
Insurance Act 1973, Insurance (Agents and Brokers) Act
1984, Insurance Contracts Act 1984 and the
Life Insurance Act 1995; and for superannuation
in the Retirement Savings Accounts Act 1997 and the
Superannuation Industry (Supervision) Act 1993.
In 1997, the Financial System
Inquiry(2) examined the regulatory arrangements. It
found that there was a lack of consistent regulation for financial
products and services that were similar in nature. It considered
that inconsistent regulation caused confusion for consumers and
limited their ability to compare different products. It also found
that the inconsistent and outdated nature of the legislation
restricted competition, innovation and the ability to make
efficiency gains in the financial services sector. It recommended
substantial changes be made to the regulatory environment.
In March 1997 the Treasurer announced the
Corporate Law Economic Reform Program (CLERP). CLERP aimed to pick
up the recommendations of the Financial System Inquiry. Following
this announcement a series of consultation papers were released
including the CLERP 6 consultation paper which examined financial
markets and investment products.(3)
The policy proposals contained in the CLERP 6
paper were implemented through FSRA. FSRA repealed Chapter 7
(Securities) and Chapter 8 (The Futures Industry) of the
Corporations Act. It consolidated the regulatory arrangements for
securities and futures market and incorporated the consumer
protection regulatory arrangements for other parts of the financial
services sector (such as banking, insurance and superannuation)
into the new Chapter 7 (Financial Services and Markets) of the
Corporations Act. FSRA also made a number of consequential
amendments to repeal the provisions in those parts of the Acts
(mentioned above) that had put in place consumer protection and
market integrity regulatory arrangements in the financial services
sector.
In summary, FSRA has put in place the
following:
-
a single licensing, disclosure and conduct framework for all
financial service providers
-
a uniform disclosure regime for financial products, and
-
a revised
regulatory regime for financial markets (such as the Australian
Stock Exchange and the Sydney Futures Exchange) and clearing and
settlement facilities.
FSRA has been augmented by a vast number of
regulations. ASIC has also released a number of policy statements
to assist in interpreting and applying FSRA.
FSRA commenced operation on 11 March 2002 and
is subject to a two year transition period ending on 10 March
2004.
It has been found that some parts of the FSRA
have produced unintended and unworkable consequences. A number of
regulations have been made since 11 March 2002 to remedy some of
these deficiencies. The amendments to FSRA contained within this
Bill are also designed to remedy some of the problems with the
operation of FSRA. They are not intended to bring about any
significant policy changes.
The Explanatory Memorandum to the Bill states
that:
The Financial Services Reform Amendment Bill 2003
(FSR Amendment Bill) will clarify and amend various aspects of the
regulatory framework governing the licensing, conduct and
disclosure of providers of financial services, and the licensing of
financial markets and clearing and settlement facilities, contained
in Chapter 7 and related provisions in the Corporations Act
2001 (Corporations Act). The FSR Amendment Bill will also make
minor amendments to the Income Tax Assessment Act 1997 and
the Retirement Savings Accounts Act 1997 ..
During the transition period, the Government has
continued a consultation process with industry and consumer
representatives that began during the development of the FSR Act,
with a view to ensuring that the implementation of the new
arrangements occurs as smoothly as possible.
As a result of this consultation process, a number
of issues have been identified which require clarification or
amendment to enable industry participants to transition to the new
regulatory arrangements prior to the end of the transition
period.(4)
Key provisions in the Bill, as introduced,
cover the following issues:
-
regulation of
unsolicited offers to purchase financial products, off market
-
definition of basic deposit product
-
licensing
exemptions for foreign financial services providers
-
combining a Financial Services Guide and a Product Disclosure
Statement into a single document, and
-
ASIC exemption and modification powers.
In a letter to the Senate Economics
Legislation Committee, dated 19 August 2003, the Parliamentary
Secretary to the Treasurer, Senator the Hon Ian Campbell flagged a
number of amendments proposed to be moved by the Government when
the Bill is debated in Parliament. The letter from Senator Campbell
sets out the detail of these further amendments.(5)
Schedule 1 of the Bill
regulates unsolicited offers to purchase financial products off
market. It is a legislative response to the conduct of Mr David
Tweed and his company, National Exchange Corporation Pty Ltd. Mr
Tweed offered to purchase shares from small shareholders well below
the market price of the shares. He did not disclose to shareholders
that the offer price was below market price. As a result
shareholders lost a large amount of money in agreeing to sell
shares to Mr Tweed.
Mr Tweed relied upon the self dealing
provisions in the Corporations Act(6) to avoid having to
hold an Australian Financial Services Licence and hence having to
comply with the product disclosure obligations in the Act.
Regulations were made in April 2003 which
provided that unsolicited offers in the nature of Mr Tweeds, needed
to be accompanied by information regarding the market price of the
product. However since that time Mr Tweed has continued to offer to
purchase shares below market price without disclosing this fact due
to loopholes in the regulations.(7)
Schedule 1 of the Bill puts in place
arrangements to regulate off market bids such as those made by Mr
Tweed. Key provisions are as follows:
-
Clause 1019E which specifies the way in which
off market offers are to be made (that is the offer must be
personally addressed to the offeree).
-
Clause 1019F which sets out the maximum period
of time that an offer can stand (twelve months).
- Clause 1019G which specifies what must be
included in an offer document (for example, that the offer document
must contain the price for the financial product, the market value
of the product and if it cannot be traded on a financial market, an
estimate of the value of product as at the date of the offer).
-
Clause 1019H which states that if the
requirements in 1019E, 1019F or
1019G are not complied with or the offer document
is misleading or deceptive, the offeree can refuse to transfer the
financial product to the offeror or if the transfer has already
taken place, seek to have the financial product returned to the
offeree.
Enforcement provisions are contained within
items 8 -26. In particular, item
8 specifies that ASIC may use its stop order
powers(8) where the offer document either fails to
contain the information required by clause 1019G
or is misleading or deceptive. In addition, criminal penalties will
apply for failure to comply with the requirements in 1019E -1019G
(item 12) and civil penalties will apply for
failure to provide relevant information as required by section
1019G (item 13). A person may take civil action to
recover loss or damage incurred if they were not sent an offer
document that complied with proposed clause 1019E (item
15).
In his letter to the Senate Economics
Legislation Committee, (referred to above) Senator Campbell flagged
that the Government proposes to make two amendments to the off
market bid provisions in the Bill, to strengthen its
operation.(9)
Schedule 2 makes other amendments to the
Corporations Act.
When introduced into the House of
Representatives in 2001, the Financial Services Reform Bill
contained provisions in Part 7.6, Division 7 that exempted certain
groups (known as declared professional bodies) from the financial
licensing requirements. The Senate rejected this proposal and
Division 7 of Part 7.6 was removed from the Bill. Many references
to declared professional body still remain in the Corporations Act,
and this Bill in items 1, 8, 29-31, 41,
43,44, 52, 53, 57-60, 75, 76, 99, 100, 103, 110,111
removes these references.
Financial service providers and their
authorised representatives are under a number of disclosure and
training obligations under the Corporations Act. In particular the
financial services providers and their authorised representatives
must give their retail clients(10) a Financial Services
Guide (FSG)(11) and a Statement of Advice
(SOA).(12) In addition, where personal financial advice
is provided to a client, the provider of the financial advice must
give the client a Product Disclosure Statement
(PDS).(13) The person providing the financial service
must have received appropriate training so that they are qualified
to provide the service.(14)
The Corporations Act sets out circumstances
where financial service providers are exempt from the requirements
to provide an FSG, SOA or PDS and have to meet lower training
requirements. In particular the Act, as amended by the FSRA states
that where the financial service relates to basic deposit products
the financial service provider is not required to provide an FSG,
SOA or a PDS. In addition, the level of training for basic deposit
products is lower than for other financial products.
The definition for a basic deposit product is
contained within section 761A of the Corporations Act. Part of the
definition states that a financial product will qualify as a basic
deposit product where the product has a fixed term of two years or
less and is at call . As a result of this limitation, deposit
products that are, for example, held for five years or which are
not at call , do not receive the exemption and financial service
providers are required to meet the disclosure and training
obligations. Providers of these products argue that this
distinction is an anomaly and imposes unnecessary costs on their
business. The Bill in item 6 and item 7 amends the
definition of basic deposit product so that it applies to a product
that has a maximum withdrawal period of 5 years and is not at call
.
Section 766A of the Corporations Act defines
when a person provides a financial service. A person provides a
financial service if they deal in a financial product. Dealing is
defined in section 766C of the Act and the regulations may
prescribe conduct that is not taken to be dealing . Items
14 and 15 amend the legislation so that regulations can
prescribe circumstances that are taken to be dealing . It is
proposed, for example, that the regulations will deal with
financial products that are subject to a
mortgage.(15)
Under the existing Part 7.6 of the
Corporations Act, ASIC can exempt a provider of financial services
from the Australian Financial Service Licensing requirements if the
following conditions are met:
-
the provider is regulated by an overseas regulatory
authority
-
the regulatory authority is approved by ASIC
-
the service is
provided in the course of carrying on the business that is the
subject of the overseas authorities regulation, and
-
the service is provided to wholesale clients.(16)
Essentially this provision ensures that
foreign based financial service providers (providing services to
wholesale clients)(17) may obtain relief from the
licensing requirements in the Corporations Act, if the foreign
regulator has been approved by ASIC. This provision as currently
drafted is problematic for two reasons:
-
assessment of an overseas regulator will be, on many occasions,
a lengthy and convoluted process, due to the scope of many foreign
regulators powers, and
-
ASIC s approval relates only to the regulator and not to the
conduct of particular individuals. This would appear to leave a gap
in ASIC s power to regulate activities in the financial services
sectors in Australia.
The Bill in item 25 amends
the existing provision and substitutes ASIC approval of the foreign
regulator with a requirement that ASIC approve the particular
financial service offered by the individual. The Bill states that
ASIC will be required to publish its approval in the Commonwealth
Gazette.
Sections 912A and 912B of the Corporations Act
impose a number of obligations on persons who hold a financial
services licence. Section 912D of the Act states that a financial
services licensee must report to ASIC as soon as it becomes aware
that it has breached its licence obligations. Strictly followed,
this requirement is unnecessarily onerous on financial services
licensees. The Bill amends the Act so that:
-
licensees will only have to report significant breaches of their
financial service licensee obligations (under section 912A and
912B) (item 35)
-
licensees will only need to report significant breaches of
financial services laws . Financial services laws are defined as
relevant provisions in the Corporations Act 2001, the
Australian Securities and Investment Commission Act 2001
and other laws as specified in the regulations (item
35)
-
-
the reporting period for these breaches is to be increased from
three to five days (item 35).
The Bill also amends the Corporations Act so
that a Financial Services Guide (FSG) and a Product Disclosure
Statement (PDS) may be combined into one document. As discussed
above, a provider of a financial service and their authorised
representatives are under an obligation to provide retail clients
with an FSG, Statement of Advice (SOA) and a PDS. The Bill provides
that a Financial Services Guide (FSG) and a Product Disclosure
Statement (PDS) may be combined into a single document in
circumstances set out in the regulations (clause
942DA). Essentially this amendment will mean that the
disclosure process can be streamlined in appropriate circumstances.
The Bill also states that a SOA must not be combined with either a
FSG or a PDS (clause 947E).
At the time of writing, the regulations
setting out the circumstances where the two documents may be
combined were not publicly available.
The Bill also clarifies the situations where a
product disclosure statement is not required. Item
70 states that a PDS will not be required where the
financial product is an interest in a self-managed superannuation
fund and the trustee of the fund believes on reasonable grounds
that the client has the information available to them. Essentially
this amendment will reduce the administrative burden on trustees of
self-managed superannuation funds.
Various provisions in the Corporations Act put
in place delegated rule-making arrangements by providing:
-
ASIC with exemption and modification powers, and
-
regulation making powers in the Corporations Act itself.
The Bill proposes to amend those provisions in
Chapter 7 and Part 10.2 (which contains the transitional
arrangements for Chapter 7) of the Corporations Act that deal with
delegation of rule-making powers.
ASIC has various powers to exempt or modify
the Corporations Act in relation to conduct or people. ASIC s
exemption and modification powers are scattered throughout the
Corporations Act. The exemption and modification powers in Chapter
7 and Part 10.2 of the Act(19) contain an express
limitation which states that:
ASIC cannot declare that provisions of this part
are modified so that they apply in relation to persons or financial
products to which they would not otherwise apply.
Other Chapters in the Corporations Act that
contain ASIC exemption and modification powers are not subject to
the same limitation.(20)
The Bill in items 48, 49, 66, 67, 92,
93, 106-109 proposes to amend ASIC s exemption and
modification powers in Chapter 7 and Part 10.2 to remove this
limitation, thereby making these parts consistent with other
provisions in the Corporations Act. The Bill (in item
42) also inserts a new section (926A) giving ASIC
exemption and modification powers in relation to Part 7.6 of the
Corporations Act (Licensing of Providers of Financial
Services).
The expansion of ASIC s exemption and
modification powers was considered by the Senate Economics
Legislation Committee which stated that:
The committee believes that any delegation of
power from the Parliament should be subject to thorough
consideration and scrutiny, and notes that the Senate Standing
Committee for Scrutiny of Bills is awaiting advice from the
Minister as to why such power should be not be exercised by
regulation rather than by ASIC.(21)
In regard to the amendments to Part 7.6
proposed in item 42 of the Bill, the minority
report to the Senate Economics Legislation Committee stated
that:
The Labor members share the Committee for the
Scrutiny of Bills concern and recommend that consideration be given
as to whether to remove the proposed power provided to ASIC under
section 926A.(22)
In appears that the Committee s main concern
with the proposed amendments to ASIC exemption and modification
powers is that they constitute an inappropriate delegation of
legislative power.
The High Court held in Victorian
Stevedoring Co Pty Ltd and Meakes v Dignan(23)
(Victorian Stevedoring) that Parliament can, through legislation,
validly delegate legislative power. By way of rationale, in
Victorian Stevedoring, the High Court noted that Parliament
retained ultimate control of an exercise of delegated legislative
power through its ability to repeal the enabling
statute.(24)
Any delegation of legislative power will need
to be constitutionally valid. The Bill appears to satisfy two key
constitutional law considerations, namely that:
-
Parliament does not abdicate its legislative power and hence
retains the ability to control the delegation of power (through its
ability to repeal the enabling provisions in the Corporations Act),
and
-
the scope of the power delegated falls within a head of
Commonwealth constitutional power.(25)
One of the primary advantages of delegated
rule-making is that it offers flexibility and
responsiveness.(26) In arguing for the proposed
amendment, the Explanatory Memorandum to the Bill stated that:
The [exemption and modification] powers are
invariably used to provide some form of concessional treatment,
rather than to impose additional obligations.
The Explanatory Memorandum went on to state
that:
ASIC uses its exemption and modification powers to
provide administrative relief from the operation of various
provisions of the legislation in circumstances where it judges that
application of those provisions is not warranted, or that they
should apply in a modified way. In most situations, the exemption
and modification powers are exercised in response to requests for
relief from parties who are experiencing difficulties complying
with a particular provision of the legislation or where the
application of the provisions is not appropriate in particular
circumstances.
Depending on the circumstances, the strict
operation of the legislation may produce unintended or unreasonable
results. Moreover, exemptions and modifications will often be
necessary to facilitate innovative products that were not
contemplated at the time the legislation was drafted, while
maintaining an appropriate degree of investor protection.
The limitation mentioned above which prevents ASIC
from declaring that a provision is modified such that it applies in
relation to a person and/or financial product to which it would not
otherwise apply presents a substantial impediment to the effective
use of the exemption and modification powers.(27)
Concerns regarding the use of delegated
rule-making are well documented and include the following
considerations:
-
that there is a loss of ready public scrutiny (ie through
Parliament) of rule-making, and
-
the difficult and fractured way in which those rules can be
accessed once they have been made.(28)
In relation to the amendments proposed in the
Bill, it is important to note that where ASIC uses its exemption or
modification powers, this must be notified in the Gazette. However
use of these powers will not be subject to any form of
parliamentary scrutiny (either through committee or tabling in
parliament).
Treasury has argued that the changes to ASIC s
exemption and modification powers that remove the limitation on
these power brings them into line with ASIC s powers in other
Chapters of the Corporations Act and therefore should be
permitted.(29) Similarly Treasury argues that the
inclusion of an exemption and modification power in Part 7.6 is
consistent with ASIC s exemption and modification powers in other
parts of the Corporations Act.(30)
Regulation making powers are included in a
number of Chapters in the Corporations Act. Sections 854B and 1020G
state that regulations may be made to exempt or modify the
application of Chapter 7. These sections include the following
words:
regulations made for the purposes of this section
may declare that provisions of this part are modified so that they
apply (with or without further modifications) in relation to
persons, bodies or situations to which they would not otherwise
apply
The Bill (items 18 and 95)
removes these words from both sections. This removes any
uncertainty in regard to the use of the ASIC exemption and
modification powers.
The Explanatory Memorandum to the Bill
states
Given that it is proposed to remove from ASIC s
exemption and modification powers the current limitation which
prevents ASIC declaring that a provision is modified so that it
applies to a person and or financial product to which it would not
otherwise apply, subsection 854B(2) and paragraph 1020G(2)(a) will
serve no useful purpose. Therefore, they will be repealed.
If subsection 854B(2) and paragraph 1020G(2)(a)
were not repealed, this might suggest that the ASIC exemption and
modification powers still do not permit ASIC to declare that a
provision is modified so that is applies to a person and/or
financial product to which it would not otherwise apply (that is
because they do not contain a similar positive statement to this
effect like those in subsection 854B(2) and paragraph
1020G(2)(a).(31)
The Bill (item 42) also
inserts a power to make regulations exempting or modifying the
operation of Part 7.6 of the Act.
Schedule 3 contains minor
amendments to the Income Tax Assessment Act 1997 and the
Retirement Savings Accounts Act 1997.
Schedule 4 sets out the
transitional arrangements for the amendments in Schedule 2.
This Bill
contains a number of amendments to the Corporations Act to
enable industry to transition across to the new regulatory regime
put in place by the FSRA. The amendments do not raise new policy
considerations.
The Bill also
amends ASIC s exemption and modification powers in Chapter 7 of the
Corporations Act. These amendments raise issues regarding the
appropriate delegation of parliament s rule-making powers and in
particular achieving the balance between rule-making arrangements
that are flexible and responsive and having rule making processes
in place that can be scrutinised by the Parliament and the
public.
-
FSRA did not address any prudential regulatory issues.
-
Otherwise known as the Wallis Inquiry after its Chairman Stan
Wallis.
-
Corporation Law Economic Reform Program Proposals for
Reform: Paper No 6, AGPS, 1997 [http://www.treasury.gov.au/contentitem.asp?pageId=&ContentID=286],
17 September 2003.
-
Explanatory Memorandum, Financial Services Reform
Amendment Bill (2003), p.1.
-
Parliamentary Secretary to the Treasurer, Senator the Hon Ian
Campbell, Correspondence to the Chair, Senate Economics Legislation
Committee
[http://www.aph.gov.au/senate/committee/economics_ctte/reform_bill_03/report/appendix_3.pdf].
-
Corporations Act, section 766C(3).
-
Loophole allows buy-on-the-cheap trader to stay in business ,
The Age, May 5 2003.
-
ASIC stop order powers are contained in section 1020E
Corporations Act.
-
As a footnote to this discussion, on 10 September 2003, the
Federal Court ruled that National Exchange had engaged in
misleading and deceptive conduct when it offered to purchase shares
from OneSteel shareholders for $2 per share, without disclosing
that the purchase price would be paid in fifteen annual instalments
of 13 cents per share, commencing on 3 September 2004.
-
Retail client is defined in section 761G Corporations Act.
-
Corporations Act, section 941.
-
Corporations Act, section 946A.
-
Corporations Act, section 1011A.
-
Corporations Act, section 912A.
-
The Treasury, Corporations Amendment Regulations Commentaries,
p. 4 [http://www.treasury.gov.au/documents/642/RTF/Reg%20Commentaries.rtf]
17 September 2003.
-
Corporations Act, section 911A(2)(h).
-
Wholesale client is defined in section 761G Corporations
Act.
-
Australian Association of Permanent Building Societies,
Submission to the Senate Economics Legislation Committee
[http://www.aph.gov.au/senate/committee/economics_ctte/reform_bill_03/submissions/sub01.doc].
-
Corporations Act, section 951B, 992B, 1020F, 1075A, 1437,
1442.
-
see for example Corporations Act section 601QA and section
673.
-
Senate Economics Legislation Committee, Provisions of the
Financial Services Reform Amendment Bill 2003, August 2003, p.
14
[http://www.aph.gov.au/senate/committee/economics_ctte/reform_bill_03/report/report.pdf],
17 September 2003.
-
ibid., p. 27.
-
(1931) 46 CLR 73.
-
Administrative Review Council, Report to the Attorney
General, Rule Making By Commonwealth Agencies, Report No 35,
AGPS, Canberra, 1992, p. 5.
-
ibid., p. 5.
-
Stephen Bottomley, Where did the law go? The delegation of
Australian corporate regulation , Australian Journal of
Corporate Law, May 2003, p. 118.
-
Explanatory Memorandum Financial Services Reform
Amendment Bill (2003), p. 9 10.
-
Stephen Bottomley, Op cit, p. 118.
-
Explanatory Memorandum Financial Services Reform
Amendment Bill (2003), p. 12.
-
ibid., p. 17.
-
ibid., p. 12.
Susan Dudley
7 October 2003
Bills Digest Service
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