Bills Digest no. 31, 2007-08 - Corporations (National Guarantee Fund Levies) Amendment Bill 2007

Corporations (National Guarantee Fund Levies) Amendment Bill 2007

Date introduced: 21 June 2007

House: House of Representatives

Portfolio: Treasury

Commencement: 28 days after royal assent.

Links: The relevant links to the Bill, Explanatory Memorandum and second reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.

Purpose

The amendment in this Bill proposes to impose a cap on levies for the benefit of the National Guarantee Fund (the NGF), which are payable in a financial year.

This amendment is supported by an amendment in the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007, which proposes to direct readers to the cap on levies.

Background

Under the Corporations Act 2001 (Corporations Act), financial market operators such as the Australian Stock Exchange (ASX), must have compensation arrangements, which are adequate to protect retail clients (defined in sections 761G and 761GA of the Corporations Act). [1]

The NGF is administered by the Securities Exchanges Guarantee Corporation (the SEGC), [2] which is a subsidiary of the ASX, and provides this compensation for ASX. [3]

The SEGC may impose levies on the market operator and participants if the amount in the NGF is less than the minimum amount provided in section 889I of the Corporations Act. [4] Currently, these levy requirements are uncapped.

The Corporations (National Guarantee Fund Levies) Act 2001 contains provisions for the imposition and amounts of these levies.

The Bill

On 21 June 2007, the Bill was introduced into the House of Representatives by the Parliamentary Secretary to the Treasurer, the Hon. Mr Chris Pearce, MP and was referred to the Senate Standing Committee on Economics (the Committee) for inquiry and report. [5]

Stakeholder reactions to the Bill

Submissions to the Committee s inquiry were made by: [6]

Both organisations supported the proposed amendments in the Bill. [7]

However, it is noted that there are no submissions from consumer groups.

Pros and cons

Capping liabilities for levies in relation to the NGF ensures that market participants would no longer have unlimited exposure to pay levies into the NGF.

There is also the suggestion that placing a cap on these levies may remove obstacles on institutions, such as banks, participating directly in ASX markets (these institutions currently participate through subsidiaries).

In addition, protection for investors is said to remain largely unaffected. [8]

However, this begs the question of what happens in the event that the total amount payable in relation to claims exceeds the minimum amount available in the NGF at the time.

Would capping liabilities for levies have the potential to result in a situation where there are inadequate funds available as compensation?

Main provisions

Item 1 of Schedule 1 of this Bill proposes to insert a new provision into section 5 of the Corporations (National Guarantee Fund Levies) Act subsection 5(4).

Subsection 5(4) proposes that levy amounts (and methods of determining levy amounts) that are specified in determinations referred to in subsection 889J(1) of the Corporations Act are capped to the extent that the total amount of levies payable to the SEGC in a financial year does not exceed the NGF s minimum amount (pursuant to section 889I of the Corporations Act), which is in force at the time the determinations are made.

Conclusion

This amendment would allow for greater clarity in relation to market participants liability to pay levies for the purposes of the NGF and it is argued that it does not appear to derogate from investor protection in the short term.

However, capping liability to pay levies does create a situation where the NGF may only be at the minimum amount provided by legislation, which may not allow for sufficient funds in the event of a particularly large claim or series of large claims.

Endnotes