In short, margin lending is the borrowing of money to invest in
the stock market. According to FIDO , the consumer website of the
Australian Securities and Investments Commission (ASIC), a margin
loan:
FIDO goes on to explain the risk of borrowing money to invest in
shares. For example, when an investor takes out a loan to invest in
shares, a margin lender usually takes a mortgage over the shares,
so that if the value of the shares falls below the value of the
loan, the lender can sell the shares to realise the value of the
loan. To protect himself or herself against any possible shortfall
between the amount owing on the loan and the value of the shares, a
margin lender will usually limit the amount of gearing (or
borrowing) to a set percentage of the shares. The percentage is
known as the Loan-to-Value Ratio (or LVR) and is usually set at a
maximum of 70 per cent. A borrower must usually fund the remaining
30 per cent of the purchase price of the shares from other sources.
This 30 per cent shortfall is known as the margin . If the value of
the shares falls below the LVR level that applies to those shares,
then the lender may make a margin call , meaning that the borrower
has to top up the loan to the LVR in order to keep the loan
viable.[3]
Margin lending grew from less than $5 billion in 1999 to $32.6
billion in March 2008.[4]
At present, margin lending is largely unregulated in Australia
both at Commonwealth and State level.
The Uniform Consumer Credit Code (the UCCC or the Code) which
currently forms the basis of a scheme of state-based consumer
credit legislation does not apply to credit provided for
investment purposes. Paragraph 6(1)(b) of the UCCC
states that the Code applies where the credit is provided or
intended to be provided wholly or predominantly for personal,
domestic or household purposes . It therefore does not apply to
margin loans, which are by their nature used to finance
investment.
Chapter 7 of the Corporations Act, which deals with financial
services and markets, does not cover credit. Further, regulation
7.1.06 of the Corporations Regulations 2001 makes it clear that
credit facilities are not financial
products for the purposes of subparagraph 765A(1)(h)(i) of the
Corporations Act.[5] Although they are not mentioned by
name, margin loans would meet the definition of credit facility in
regulation 7.1.06 and thus are not covered by Chapter 7 of the
Corporations Act.
Currently each state has enacted its individual (but similar)
consumer credit Act as part of an agreement to provide uniformity
across the various jurisdictions.[7] The Consumer Credit
(Queensland) Act 1994 (Qld) (the Queensland Act), or more
specifically, the Consumer Credit Code annexed to it (being the
UCCC mentioned above) has been adopted by all Australian states
(except WA, which has enacted its own legislation in similar terms
to the other states legislation but without reference to the
UCCC).[8] As mentioned earlier,
paragraph 6(1)(b) of the UCCC states that the Code
applies where the credit is provided or intended to be provided
wholly or predominantly for personal, domestic or household
purposes . Thus, none of the state Acts applies to margin loans
which are by their nature used to finance
investment.
Apart from the UCCC, the states have other legislation dealing
with related matters such as contracts, which may be relevant to
margin loans (even though they do not deal with margin lending
per se). Industry regulations, such as the Australian
Bankers Association s Code of Banking Practice and the
Australian Stock Exchange (ASX) Market Rules, may also apply,
depending on who is making the loan (for example, these would apply
if a banker or stockbroker provided advice in relation to a margin
loan, but not if another financial service provider gave the
advice).[9]
It is therefore unhelpful to detail the various state Acts here,
primarily because they really do not apply to margin loans.
Further, the various state Acts are only relevant to the extent
that there is no inconsistent Commonwealth law dealing with the
same subject matter. In some instances, the states have referred
their powers to the Commonwealth, meaning that to the extent a
Commonwealth law deals with a subject referred to it by the state
parliament, the state has no residual power to make law on that
subject. For example, under the Corporations (Commonwealth
Powers) Act 2001 (Qld), the Queensland Parliament has referred
to the Commonwealth Parliament its powers to make laws dealing
with:
This description includes the regulation of financial products
and services and yet margin loans are specifically excluded from
the Corporations Act (Cth) albeit for the present (see further
below).
The main aim of the Green Paper was to work out how best to
transfer responsibility for credit control from the states to the
Commonwealth. State premiers had given their in-principle support
for the transferring responsibility to the Commonwealth in March
2008 although the premiers had not agreed at that time about issues
surrounding consumer debt products, such as credit cards.[15]
Among other things, the Treasury posed three options in relation
to the future of margin lending. In relation to Option 2, which
involves the amendment of Chapter 7 of the Corporations Act (and
has basically found expression in the Bill), it said:
Submissions from the public on the Green Paper closed on 1 July
2008. One commentator queried the efficacy of licensing everyone
involved in providing credit, including the issuers of debentures
and trustees, saying: Just by watching ASIC s daily list of
corporate crooks who lose their licences (some of whom get them
back through an appeal), the Government and the community must
realise that having a licence is not the entire solution .[16]
Writing immediately after the release of the Green Paper in June
2008, financial journalist Elizabeth Knight emphasised the fact
that under-regulated mortgage brokers and margin loan sellers make
up a very, very small section of the community .[17] She said that the potential to
better regulate this part of the market is wonderful but it won t
stop stupid or desperate punters from borrowing more than they can
repay at inflated interest rates, with extortionate fees . In
Knight s opinion:
When the dust settles on the current financial
crisis investment promoters will return, offering enormous yields
on property, equities, debentures or ostrich eggs and a portion of
the population will take the bait.
All the regulatory housekeeping in the world
cannot clean up the mess made by the combination of greed and
stupidity.[18]
Back to top
Council of Australian Governments (COAG)
At its meeting on 3 July 2008 (although the issue had earlier
been raised at its meeting in March 2008), COAG formally agreed to
transfer responsibility for the regulation of margin lending (and
trustee companies) to the Commonwealth (as recommended by the
Treasury in its Green Paper in June 2008):
COAG has agreed to measures that will result in better
protections for financial consumers across Australia with the
Commonwealth to take over responsibility for the regulation of
trustee companies, mortgage broking, margin lending and non-deposit
lending institutions as well as remaining areas of consumer credit.
Against this background in regard to the regulation and provision
of financial counselling COAG agreed that the Business Regulation
and Competition Working Group would examine this matter and report
back in October 2008.
National regulation through the Commonwealth of consumer credit
will provide for a consistent regime that extinguishes the gaps and
conflicts that may exist in the current regime. The new regime is
anticipated to introduce licensing, conduct, advice and disclosure
requirements that meet the needs of both consumers and businesses
alike. A seamless national regime will assist in ensuring that
consumers are better protected in their dealings with credit
products and credit providers, including brokers and
advisers.[19]
Basis of
policy commitment: the Financial Services and Consumer Credit
Protection Bill
To give effect to the COAG agreement, the Rudd Government
proposed to introduce the Financial Services and Consumer Credit
Protection Bill in the 2009 Autumn sittings of Parliament.[20]
However, the Bill was not in fact introduced at that time.
On 13 March 2009, in delivering the Keynote Address to the
National Consumer Congress in Adelaide, Senator Nick Sherry, then
Minister for Superannuation and Corporate Law, provided an update
on the situation, saying that the Bill, as originally proposed,
would now be split into two distinct subjects: consumer credit and
financial services.[21]
Under the two related Bills, the UCCC will become Commonwealth
law, and margin lending will be covered by Chapter 7 of the
Corporations Act.
Trustee companies offering traditional trustee company services
are currently subject to diverse, state-based regulation. As
mentioned above in the context of margin lending, COAG formally
agreed at its meeting on 3 July 2008 to transfer responsibility for
the regulation of trustee companies to the Commonwealth. Under the
Bill, trustee companies offering traditional trustee company
services will become subject to a range of licensing, conduct and
disclosure requirements through the inclusion of a proposed new
chapter (proposed Chapter 5D) in the Corporations
Act.
Currently promissory notes with a value of less than
$50 000 are regulated as debentures , whereas those with a
value of more than $50 000 are treated as financial products
and are not subject to the stricter debenture regulation.
Apparently some financial advisers, lenders and/or investors have
manipulated the current distinction between promissory notes of
differing values so that they do not need to comply with consumer
protection requirements under trustee arrangements. The Government
is keen to close this loophole and protect mum and dad investors
.[22]
Essentially a debenture is a document that creates or
acknowledges a debt. Usually an investor purchases a debenture in
order to raise funds. In return for the funds, the investor pays
interest to the debenture holder (lender). The debenture is subject
to a trust deed.
The term debenture is defined in section 9 of the
Corporations Act as a chose in action [or personal property right]
that includes an undertaking by the body to repay as a debt money
deposited with or lent to the body . The definition also sets out
what the term excludes, including (at paragraph (d)) an undertaking
to pay money under a promissory note that has a face value of at
least $50,000 . The term promissory note is not defined in
the Corporations Act, but means an unconditional promise in writing
made by one person to another, signed by the maker , agreeing to
pay a certain sum of money to, or to the order of, the
bearer.[23]
Under the Bill, all promissory notes with a face value of at
least $50 000 will be included in the definition of
debenture . This means that all promissory notes
(and other debentures) will be subject to a trust deed and a
trustee must be appointed to protect the investor.
Further, the Bill provides for the establishment of a public
register of debenture trustees. ASIC will be responsible for the
creation and maintenance of the register.
On 25 June 2009, the Bill was referred to the Senate Economics
Legislation Committee as part of its inquiry into the National
Consumer Credit Protection Bill 2009 and related bills. The
committee was originally to inquire and report by 7 August
2009.[24] However,
on 27 July 2009, the committee presented its interim report to the
President of the Senate, saying it needed more time to finalise its
report, which it expects to be ready by 7 September 2009.[25] Details of the inquiry
are at
http://www.aph.gov.au/Senate/committee/economics_ctte/consumer_credit_09/index.htm,
viewed 3 August 2009.
It should also be noted that in February 2009, the Parliamentary
Joint Committee on Corporations and Financial Services resolved to
inquire into the issues associated with the collapse of financial
product and service providers, such as Storm Financial and Opes
Prime.[26] It is
looking at many issues connected with (or covered by) the current
Bill, including the role and licensing of financial advisers, and
the regulation of financial products and services (including
disclosure, marketing and consumer protection). Among other issues,
oral and written submissions to the committee are highlighting the
enormous problems that exist at present as a result of the lack of
regulation of margin lending. Particularly, they are revealing an
unusual relationship between Storm Financial and the Commonwealth
Bank.[27] The
committee is not due to report before 23 November 2009, and it is
not entirely clear why the current Bill was introduced into
Parliament before that Committee has considered and reported on its
brief.
Back to top
The Government will provide $70.2 million over four years to
implement the COAG decision to transfer to the Commonwealth
responsibility for regulating consumer credit (including margin
loans).[28] The
funding will support the national licensing system that will apply
to all credit providers and will also support the regulation by
ASIC of mortgages, margin lending and similar financial
arrangements. The funding will be partially offset by licensing
fees, payable from 2009 10.[29]
In relation to trustee companies, the financial impact of the
changes contained in the Bill is expected to be absorbed in ASIC s
current budget .[30] Similarly, the amendments affecting debentures are said
to have no significant impact on Commonwealth expenditure or
revenue.[31]
Items 2 7 amend section 761A, which is the
definitions section in Chapter 7 of the Corporations Act (which
deals with financial services and markets). They insert definitions
of the terms current LVR , limit , margin call , margin lending
facility , non-standard margin lending facility and standard margin
lending facility . These terms are defined by reference to
proposed section 761EA, which is inserted by
item 9.
Item 9 inserts proposed section
761EA which defines the terms margin lending facility ,
margin call and associated expressions. Specifically, the term
margin lending facility is defined in proposed
subsection 761EA(1) to be either a standard margin lending
facility , a non-standard margin lending facility or a facility of
a kind declared by ASIC to be a margin lending facility.[32] However, ASIC can also
declare that any of these facilities is a kind of facility that is
not to be a margin lending facility.[33]
Proposed subsections 761EA(2), (3), (5) and (6)
go on to define the terms standard margin lending facility
and non-standard margin lending facility and the
current LVR (that is, the loan-to-value ratio, discussed
in the Background section above) of such facilities. The main
difference between a standard margin lending facility and a
non-standard one is that under a standard margin lending facility,
the borrower must use the loan (in whole or in part) to acquire
shares or other financial products or to refinance another margin
lending facility. By comparison, in a non-standard margin lending
facility, the client (borrower) receives transferred property
(which is the equivalent to credit or cash in a standard margin
lending facility). The client must use the transferred property to
acquire financial products. In both cases, credit must be provided
to a natural person (as opposed to a corporate entity).[34] The term
limit is defined in proposed subsection
761EA(11) to mean the maximum amount of credit (or
property) that may be provided (or transferred) by the provider to
the client under the margin lending facility. If the facility is
one in relation to which an ASIC declaration has been made, the
limit of that margin lending facility has the meaning given in the
declaration.
In making a declaration under proposed section
761EA, ASIC must give the meanings of margin call
and limit in relation to that kind of facility.[35] Any declaration made
under proposed section 761EA must be in writing
and is a legislative instrument for the purposes of the
Legislative Instruments Act 2003 (Cth).[36] This means that every
declaration made by ASIC under proposed section
761EA will be subject to the parliamentary disallowance
procedures in Part 5 of that Act. However, there is no criterion
specified in either proposed subsection 761EA(8)
or (9) setting out the matters which the ASIC must
take into account in declaring if a particular kind of facility is
or is not a margin lending facility.[37] It is also not clear how long any
declaration lasts and/or if it can be revoked or varied.[38] Apart from matters of
constitutionality, it is therefore difficult to see the basis upon
which Parliament might disallow a declaration.[39] There might also be possible
confusion in the public mind about whether a kind of facility is or
is not a margin lending facility, particularly if ASIC does not
keep a comprehensive list but only issues declarations on an
individual basis. Further, the subtle difference between the
expressions person and natural person may be lost on a lay user of
the Corporations Act although this is not something that is
peculiar to the current Bill.
Item 10 amends section 764A of the Corporations
Act to provide that a margin lending facility is a financial
product for the purposes of Chapter 7 of the Act. This means that
the provider of the margin lending facility must hold an Australian
financial services licence (AFSL) under Part 7.6 of the
Corporations Act.[40]
Item 12 inserts proposed Division
4A of Part 7.8 of the Corporations Act. The proposed
division contains special provisions relating to margin lending
facilities. Particularly it introduces the concept of responsible
lending conduct. In other words, a provider must not issue a margin
lending facility to a retail client or increase the limit of an
existing margin lending facility unless in the last 90 days the
provider has made an assessment about whether the margin lending
facility will be unsuitable for that retail client in a specified
period.[41] The
provider must also make reasonable inquiries about the client s
financial situation and take reasonable steps to verify that
situation. The provider must also make any inquiries or take any
steps prescribed by the regulations.[42]
A margin lending facility must be assessed as unsuitable if a
retail client would be unable to comply with a margin call if one
were made in the period covered by the assessment, or if the client
could only comply with substantial hardship , or if the regulations
prescribe circumstances in which a margin lending facility is
unsuitable.[43] The
phrase substantial hardship is not defined in the Bill.
Proposed sections 985E, 985H, 985J, 985K, 985L
and 985M are civil penalty provisions for the
purposes of existing section 1317E of the Corporations Act. If a
court is satisfied that a person has contravened a civil penalty
provision in the Act, then under section 1317E, the Court must make
a declaration of contravention. Once a declaration has been made,
ASIC can then seek a pecuniary penalty order against the person
named in the declaration (section 1317G) or (in the case of a
corporation/scheme civil penalty provision) ASIC can seek a
disqualification order (section 206C).[44]
It may assist at this point to set out a table of the proposed
civil penalty provisions and the issues they cover:
|
Proposed section number
|
Issue/subject matter
|
|
Proposed section 985E
|
A financial services licensee (the provider of a margin lending
facility) must not issue a margin lending facility to a retail
client, or increase the limit of an existing margin lending
facility, unless the provider has made an assessment (under
proposed section 985F) of the unsuitability of the
margin lending facility for the client on a particular day. The
provider must also make the inquiries and verification required by
proposed section 985G (unless a financial services
licensee has prepared a statement of advice for the retail client
90 days or less before the critical day etc see proposed
subsection 985G(3)).
|
|
Proposed section 985H
|
The provider of a margin loan must assess that the margin
lending facility is unsuitable for a retail client if it is likely
that the facility will be unsuitable having regard to the matters
set out in proposed subsection 985H(2).
|
|
Proposed section 985J
|
The provider of a margin lending facility must give a copy of
the assessment (under proposed section 985H) to
the retail client on request. It may, however, be better public
policy for the legislation to require the client to be provided
with the assessment as a matter of course.
|
|
Proposed section 985K
|
The provider of a margin lending facility must not issue an
unsuitable margin lending facility to a retail client or increase
the limit on a margin lending facility that was issued to the
client.
|
|
Proposed section 985L
|
The provider of a margin lending facility must not require, as a
condition of issuing the facility, that the retail client agrees to
receive communications through an agent. (See proposed
subsection 985M(2).)
|
| Proposed section 985M |
The provider must take reasonable steps to notify a retail
client of a margin call. If there is an agreement between the
provider, the retail client and another financial services licensee
(an agent) that the agent will receive communications from the
provider in relation to the margin lending facility on behalf of
the retail client, then the provider must take reasonable steps to
notify the agent (instead of the retail client) of the margin
call. However, the agent must also take reasonable steps to
notify the retail client of the margin call too.
ASIC may determine when the notice must be given, but if ASIC
does not determine any time frame, then the notice must be given as
soon as practicable. The notice must be given in the manner
agreed between the provider and the agent and/or retail
client. If no manner is agreed, then the notice must be given
in the manner determined by ASIC. In the absence of any such
determination by ASIC, then the notice must be given in a
reasonable manner. Any determination made by ASIC under this
section must be made in writing and is a legislative instrument for
the purposes of the Legislative Instruments Act 2003
(Cth). It will thus be subject to the parliamentary
disallowance procedures in Part 5 of that Act.
|
Back to top
Item 13 amends existing subsection 1016A(1) of
the Corporations Act to include a margin lending facility in the
list of relevant financial products to which the section applies.
The section deals with the use of application forms in the context
of product disclosure statements. Similarly, item
14 amends existing subsection 1017D(1) to include a margin
lending facility in the list of financial products (having an
investment component) for which the issuer of the product must
provide the retail client with a periodic statement (showing the
opening and closing balance and any transactions made in relation
to the investment during the relevant period).
Item 15 amends existing subsection 1317E(1) to
include the relevant parts of proposed sections 985E, 985H,
985J, 985K, 985L and 985M as civil
penalty provisions. (See table above for a summary of these
proposed sections.)
Item 16 amends Schedule 3 to the Corporations
Act to set the maximum penalty for contravening proposed
subsections 985J(1), (2) or (4) at 50
penalty units.[45]
It also sets the penalty for contravening proposed
subsection 985K(1) at 100 penalty units, or imprisonment
for 2 years, or both.[46]
Schedule 2 to the Bill deals with trustee
companies. Among other things, it inserts proposed Chapter
5D into the Corporations Act, dealing with licensed
trustee companies. It contains numerous complex provisions.
However, instead of discussing them all, the Digest will provide a
summary and/or brief comment on the most significant aspects of the
chapter.
Items 1 and 2 of Schedule 2 to the Bill amend
existing subsection 12BA(1) of the ASIC Act to insert definitions
for the terms traditional trustee company services and trustee
company . These terms are defined by cross-reference to the
meanings of these terms in Chapter 5D of the Corporations Act. That
chapter does not exist at present but is to be inserted by
item 9 of Schedule 2 to the Bill. It will deal
with licensed trustee companies.
Item 6 amends existing section 283AC of the
Corporations Act to provide that a licensed trustee company (within
the meaning of proposed Chapter 5D) can be a
trustee for the purpose of the issuing of debentures.
Items 7 and 8 amend section 490, which provides
that except with the leave of the Court, a company cannot resolve
that it be wound up voluntarily if an application for the company
to be wound up in insolvency has been filed, or the Court has
ordered that the company be wound up in insolvency (whether or not
the order was made on such an application). The Bill proposes to
add the stipulation that a company cannot resolve to be wound up
voluntarily if the company is a trustee company (as defined in
proposed section 601RAB) that is in the course of
administering or managing one or more estates. Further, any person
with a proper interest (as defined in proposed section
601RAD) in a relevant estate is entitled to be heard in a
proceeding before the Court for leave under subsection 490(1).
Item 9 inserts proposed Chapter
5D, dealing with licensed trustee companies. It comprises
proposed sections 601RAA to 601YAB.
Proposed Part 5D.1 sets out preliminary issues
in proposed Chapter 5D.
For example, proposed section 601RAB defines
the terms trustee company and client [of a trustee company]. A
trustee company is a corporation to which paragraph 51(xx)
of the Constitution applies and that is prescribed by the
regulations as a trustee company for the purposes of the
Corporations Act.[47] Proposed subsection 601RAB(2) states
that companies may be prescribed by setting out a list of companies
in the regulations or by providing a mechanism in the regulations
for the determination of a list of companies . While the first
method has the advantage of attracting the disallowance procedures
in Part 5 of the Legislative Instruments Act 2003,
the second method may not. The term client is defined as a
person to whom a financial service (being a traditional trustee
company service ) is provided by the trustee company (within the
meaning of Chapter 7 of the Corporations Act).
The terms traditional trustee company service and estate
management functions are defined in proposed section
601RAC. The following are traditional trustee company
services :
- performing estate management functions (see subsection
(2));
- preparing a will, a trust instrument, a power of attorney or an
agency arrangement;
- applying for probate of a will, applying for grant of letters
of administration, or electing to administer a deceased
estate;
- establishing and operating common funds;
- any other services prescribed by the regulations for the
purpose of this paragraph.
The term estate management functions includes acting as
a trustee; acting as an executor or administrator of a deceased
estate; and acting as a receiver, controller or custodian of
property. However, proposed subsection 601RAC(3)
then sets out what is not a traditional trustee company
service or estate management function , including operating a
registered scheme; providing a custodial or depository service;
acting as a trustee for debenture holders; and acting as trustee of
a superannuation fund (within the meaning of the Superannuation
Industry (Supervision) Act 1993).
Proposed section 601RAD defines the term
person with a proper interest (in relation to an estate)
to include the following:
- ASIC
- a settlor of a charitable trust; a person who has power under
the terms of the trust to appoint or remove a trustee; or a state
or territory Minister who has responsibilities relating to
charitable trusts; a person named in the trust instrument as being
able to receive payments on behalf of the trust; a person who under
the terms of the trust must be consulted before the trustee
distributes money or other property under the trust; or a person of
a class whom the trust is intended to benefit
- a beneficiary under the deceased person s will (or if the
person died intestate, a person who has an interest in the deceased
s estate under state or territory law)
- a settlor of a trust other than a charitable trust; a person
who has power under the terms of the trust to appoint or remove a
trustee; or a beneficiary of the trust
- any person prescribed by the regulations as having a proper
interest in the estate, and
- an agent of any person mentioned above who is under a legal
disability.
Proposed section 601RAE deals with the
interaction between trustee company provisions in the Corporations
Act and state and territory laws.[48] Essentially the trustee company provisions are
intended to apply to the exclusion of state or territory laws that
do the following things:
- authorise or license companies to provide traditional trustee
company services generally
- regulate the fees that companies may charge for the provision
of traditional trustee company services
- deal with the provision of accounts by companies in relation to
traditional trustee company services they provide
- deal with the duties of officer or employees of companies that
provide traditional trustee company services
- regulate the voting power that people may hold in companies
that provide traditional trustee company services, or that impose
restrictions on the ownership or control of companies that provide
such services, or
- deal with the disposal of the assets and liabilities held by a
company that ceases to be licensed or authorised to provide
traditional trustee company services.
The trustee company provisions are not intended to apply to the
exclusion of state or territory laws that require a company to have
particular qualifications or experience if the company is to
provide traditional trustee company services of a particular kind.
However, proposed subsection 601RAE(4) states that
the regulations may provide that the trustee company provisions
are, or are not, intended to apply to the exclusion of
prescribed state or territory laws (or prescribed provisions
thereof). For the avoidance of doubt, proposed subsection
601RAE(6) states that Part 1.1A of the Corporations Act
does not apply in relation to the trustee company
provisions.[49]
Proposed Part 5D.2 deals with the powers and
functions (etc) of licensed trustee companies, and related issues
such as the jurisdiction of courts.
Proposed section 601SAA states that any
inherent power or jurisdiction of courts in relation to the
supervision of the performance of traditional trustee company
services is not affected by anything in proposed Chapter
5D.
Proposed section 601SAB states that the
regulations may prescribe powers, functions, liabilities,
obligations, privileges and immunities that a licensed trustee
company has in relation to the provision of traditional trustee
company services.
Proposed section 601SAC states that the powers,
functions (etc) conferred by or under proposed Chapter
5D are in addition to any powers, functions (etc)
conferred or imposed by any other law on trustee companies or
persons who perform estate management functions or other
traditional trustee company services.
Proposed subsection 601SBA(1) states that a
licensed trustee company, acting alone in relation to the estate of
a deceased person, is not required to file (or file and pass)
accounts relating to the estate unless ordered to do so by a court.
However, under proposed subsection 601SBA(2), if
the licensed trustee company acts jointly with another person in
relation to the estate of a deceased person, then the trustee
company and that other person are not required to file (or file and
pass) accounts relating to the estate unless the other person
intends to charge fees for acting in relation to the estate or the
Court orders it to do so.
Proposed section 601SBB provides that the
licensed trustee company must provide, on application by a person
with a proper interest in an estate administered on managed by the
company, an account of the following matters:
- the assets and liabilities of the estate
- the trustee company s administration and management of the
estate
- any investment made from the estate
- any distribution made from the estate, and
- any other expenditure (including fees and commissions) from the
estate.
Failure to provide the account is an offence.[50] However, the trustee company
does not need to provide any such accounts at less than three
monthly intervals.[51] It may charge a reasonable fee for providing the
account.[52] If the
trustee company fails to provide a proper account, the person who
sought the account (or another person with a proper interest in the
estate) may apply to the Court for any order that the Court
considers appropriate, including an order requiring the preparation
and delivery of proper accounts .[53] However, apart from stipulating the matters
referred to in proposed subsection 601SBB(1), it
is not clear what level of detail is required for an account to be
considered to be proper . In addition to, or in substitution for
any account that it may order under proposed section
601SBB, the Court may also order an audit of the trustee
company s accounts that relate to the relevant estate.[54]
Proposed section 601SCA states that a licensed
trustee company may, for investment purposes, pool money from two
or more estates under its administration. The fund into which the
money is pooled is called a common fund .[55] The common fund may also include
other money,[56]
however, the trustee company cannot put estate money into a common
fund if it is expressly prohibited by the conditions on which the
estate money is held on trust by the company.[57] Where a trustee company holds
more than one common fund, each common fund must be allocated a
distinguishing number.[58] The trustee company must keep accounts showing at all
times the current amount at credit in the fund on account of each
estate.[59]
Proposed Part 5D.3 deals with the regulation of
fees charged by licensed trustee companies and related issues.
For example, under proposed section 601TAA, a
licensed trustee company must ensure that an up-to-date schedule of
the fees it generally charges for providing traditional trustee
company services is published at all times on its website and
available free-of-charge at the company s office during usual
opening hours.
If, while providing a service to a particular client, the
company changes the fees it will charge for the provision of the
service, the company must (if requested) send the client a copy of
the revised fees within 21 days of the change taking effect, or (in
any other case) it must notify the client directly in writing that
the changed fees are available on the internet at a specific
website maintained by or on behalf of the company.[60]
A licensed trustee company may charge fees for providing
traditional trustee company services,[61] including any fees that a testator in
his or her will has directed to be paid, or any fees that have been
agreed between the trustee company and any person having the
authority to deal with the company.[62] If the licensed trustee company
performs an estate management function, then ordinarily any fees
payable to the trustee company are to be paid out of the capital or
income of the relevant estate.[63]
If the licensed trustee company becomes the trustee or manager
of a charitable trust after the commencement of proposed
section 601TDA, then the trustee company must only charge
either a capital commission and an income commission, or an annual
management fee.[64]
However, the company can also charge common fund administration
fees and any fees permitted under the Corporations Act for the
preparation of returns, if applicable in the circumstances.[65]
If the Court is of the opinion that fees charged by a licensed
trustee company are excessive, it may review the fees and may also
reduce them.[66] In
considering if the fees are excessive, the Court may consider
matters such as:
- the extent to which the work performed by the trustee company
was or is likely to be reasonably necessary
- the period during which the work was, or is likely to be,
performed, and
- the quality and complexity of the work.
An employee of a licensed trustee company must not make use of
information acquired through his or her position for the purpose of
gaining an improper advantage for himself or herself or another
person. The employee must also not use the information it to cause
detriment to the clients of the trustee company.[67]
Proposed Part 5D.4 (that is, proposed
sections 601UAA and 601UAB) sets out the duties of
officers and employees of licensed trustee companies. They are the
usual sorts of duties expected from officers in other arenas, such
as acting honestly, exercising due care and diligence, and not
making use of information gained from the position for improper
personal purposes. Failure to comply with the relevant provision is
an offence.[68] Any
person who contravenes or is involved in the contravention of the
relevant duties contravenes proposed subsection
601UAA(2) or proposed subsection
601UAB(2). These are designated as civil penalty
provisions for the purposes of section 1317E of the
Corporations Act.[69]
Proposed Part 5D.5 sets a 15 per cent voting
limit on the control of licensed trustee companies.
An unacceptable control situation exists where any
person (or two or more persons acting under an arrangement) holds
more than 15 per cent of voting power in the company.[70] If an unacceptable
control situation comes into existence (or already exists) in
relation to the trustee company and the particular person, then the
person (or persons) contravene proposed section
601VAB. Such contravention is an offence under existing
section 1311 of the Corporations Act (see above). If an
unacceptable control situation exists, the Court may make
appropriate orders to end the situation.[71] Only a limited range of persons has
standing to apply to the Court for such orders:
- the Minister
- ASIC
- the trustee company
- a person who has voting power in the company, or
- a client of the trustee company.
A person who wishes to have more than 15 per cent of voting
power in a particular licensed trustee company may apply to ASIC
for approval to exceed the 15 per cent limit.[72] ASIC must give the application
to the Minister, who may grant the application if he or she is
satisfied that it would be in the interests of the licensed trustee
company and its clients for the application to be granted. If the
Minister grants the application, he or she must specify in writing
the percentage of voting power the Minister approves (which need
not be the percentage specified in the application).[73] A copy of the notice
of approval must be published in the Gazette and given to
the licensed trustee company.[74]
Any approval of an application to exceed the 15 per cent voting
power limit remains in force for the period specified in the notice
of approval (or if the Minister extends the approval, then for any
extended period). If the notice of approval does not specify a time
limit, the approval remains in force indefinitely.[75] Any approval is subject to such
conditions as are specified in the notice of approval.[76] Any condition may be
varied or revoked either on the Minister s own initiative or on
application by the person who holds the approval.[77]
The Minister may revoke an approval if he or she is satisfied
that:
- it would be in the interests of the trustee company and its
clients for the approval to be revoked
- an unacceptable control situation exists in relation to the
trustee company and in relation to the person, or
- there has been a contravention of a condition
The Minister must make a decision on an application under
proposed Division 2 of proposed Part
5D.5 within 30 days of receiving the application. Within
that period, the Minister may decide to extend the period to 60
days. If the Minister does not make a decision within the relevant
time period, the Minister is taken to have granted whatever was
applied for.[78]
If one or more persons enter into, begin to carry out or in fact
successfully carry out a scheme and the sole or dominant purpose of
the scheme was to avoid the application of the 15 per cent voting
limit rule, then the Minister may give the scheme s controller a
written direction to cease having that voting power within a
specified time: proposed section 601VCC. The
direction is not a legislative instrument, and therefore cannot be
subject to parliamentary disallowance. It could, however, be
challenged under the Administrative Decisions (Judicial Review)
Act 1977.
Part 5D.6 sets out the consequences of
cancelling an Australian financial services licence.
Proposed section 601WAA contains definitions of
terms used elsewhere in the proposed Part, including asset ,
authorised ASIC officer , certificate of transfer and compulsory
transfer determination . The term cancel is defined to
mean cancelling the licence under Part 7.6 of the Corporations Act
or varying the conditions of the licence under that part (so that
the licence ceases to cover traditional trustee company
services).
If ASIC cancels the licence of a trustee company, then ASIC may
also determine in writing that the company s estate assets and
liabilities are to be transferred to another licensed trustee
company.[79] Before
ASIC makes the determination:
- the Minister must usually consent to the transfer,[80] or
- ASIC must be satisfied that the transfer is in the interests of
the clients of the transferring company (when viewed as a group)
and in the interests of the clients of the receiving company (when
viewed as a group).
Also, the board of the receiving company must consent to the
transfer, and relevant legislation to facilitate the transfer must
be enacted by the state or territory in which the transferring and
receiving companies are registered.[81]
A compulsory transfer determination may impose conditions that
are to be complied with by the transferring or receiving company
before ASIC issues a certificate of transfer. It may also impose
conditions that are to be complied with by the transferring or
receiving company after the certificate has been issued or come
into force.[82] The
conditions may be varied or revoked at a later time, and any
receiving company that is complying with a condition that would
otherwise breach the Corporations Act does not commit an
offence.[83] ASIC
must give a copy of the determination to the transferring company
and the receiving company.[84] If ASIC has made a compulsory transfer declaration and
it considers the transfer should go ahead, and the relevant consent
has not been withdrawn, then ASIC must issue a written certificate
of transfer stating that the transfer is to take effect.[85]
The transferring company must (on request) give the receiving
company access to all books in its possession that relate to the
assets or liabilities transferred to the receiving company.[86] If the transferring
company receives any income or other distribution from assets
transferred to the receiving company after the certificate of
transfer comes into force, it must promptly account to the
receiving company for the income.[87]
If the licence of a trustee company is cancelled, the trustee
company must as soon as practicable contact:
- all persons who the trustee company is aware have executed and
lodged instruments (such as wills) that have not yet come into
effect but may cause the company to hold estate assets and
liabilities
- all persons who the trustee company is aware have appointed it
as trustee (or some other capacity).[88]
The trustee company must also publish notice of the cancellation
of the licence.[89]
Proposed Part 5D.7 sets out the effect of
contravening proposed Chapter 5D.
If a person suffers loss or damage because of conduct by the
licensed trustee company that contravenes proposed Chapter
5D, then he or she may recover the amount of the loss or
damage by bringing a civil action against the trustee company. The
trustee company does not need to have been convicted of an offence
or have had a civil penalty order made against it in respect of the
contravention.[90]
Finally, proposed Part 5D.8 provides for
exemptions and modifications in the operation of proposed
Chapter 5D.
For example, ASIC may exempt a person or class of persons, or an
estate or class of estate from all of specified provisions of
proposed Chapter 5D.[91] The exemption may apply
unconditionally or subject to specified conditions. ASIC may also
declare that proposed Chapter 5D applies to a
person or class of person, or an estate or class of estates, as if
specified provisions were omitted, modified or varied as specified
in the declaration.[92]
Any declaration or exemption made under proposed section
601YAA is a legislative instrument if it is expressed to
apply in relation to a class of persons or a class of estates.
Otherwise the declaration or exemption is not a legislative
instrument but must be published in the Gazette.
If conduct (including an omission) would constitute an offence
if a particular declaration has not been made, that conduct does
not constitute an offence unless, before the conduct occurred, the
text of the declaration was made available by ASIC on the internet
or ASOC gave written notice setting out the text of the declaration
to the person whose conduct would otherwise constitute an
offence.[93]
Further, proposed section 601YAB provides that
the regulations may also exempt a person or class of persons, or an
estate or class of estates, from all or specified provisions of
proposed Chapter 5D. They may also provide that
proposed Chapter 5D applies to a person or class
or persons, or an estate or class of estates, as if the specified
provisions were omitted, modified or varied as specified in the
declaration.
Items 10 to 14 of Schedule 2
amend or insert definitions into existing section 761A, which as
mentioned above is the definitions section in Chapter 7 of the
Corporations Act. They make clear that proposed Chapter
5D (see item 9 above) is part of the
definition of the term financial services law . They also
state that the terms licensed trustee company ,
traditional trustee company services and trustee
company have the same meaning in Chapter 7 as they do in
proposed Chapter 5D.
Items 15 to 25 make consequential amendments to
existing provisions in the Corporations Law to make it clear
whether or not those existing provisions apply following the
enactment of the amendments contained in
Schedule 2 to the Bill, particularly
proposed Chapter 5D of the Corporations Act.
Item 26 inserts reference to proposed
Chapter 5D in existing paragraph 1311(1A)(d) of the
Corporations Act. As mentioned above, that section deals with
general penalty provisions in the Act. If a person does an act or
thing that the person is forbidden to do by or under a provision of
the Act, or does not do an act or thing that the person is required
or directed to do by or under a provision of the Act, or otherwise
contravenes a provision of the Act, then the person is only guilty
of an offence under section 1311 unless another provision of the
Act says that he or she is guilty (or not guilty) of an offence
under that other provision. However, in order to be guilty of an
offence under section 1311, the penalty ( pecuniary or otherwise )
for a provision listed in section 1311(1A) must be set out in
Schedule 3 to the Corporations Act. To this end, item
26 inserts reference to proposed Chapter
5D in existing subsection 1311(1A), and item
28 amends Schedule 3 to the Corporations Act to include
penalties for 18 offences contained in proposed Chapter
5D. The penalties range from 50 penalty units (for
offences like failing to provide proper accounts) to 300 penalty
units or imprisonment for 5 years or both (for breach of duties
owed by employees or officers of licensed trustee companies).
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Item 1 of Schedule 3 to the
Bill repeals paragraph (d) of the definition of the term
debenture in section 9 of the Corporations Act in order to
remove the current distinction between promissory notes worth less
than $50 000 (which are currently regulated as debentures) and
those worth at least $50 000 (which fall outside the current
definition of debenture ).
Item 2 repeals existing section 283BC and
replaces it with a revised provision setting out the duty of a
borrower to notify ASIC of certain information related to the
trustee.[94]
Item 3 inserts proposed section
283BCA to provide that ASIC must establish and maintain a
register relating to trustees for debenture holders. The
regulations may prescribe the way in which the register is to be
established or maintained, including the details that ASIC must
enter in the register. A person may inspect and make copies of the
register, subject to the payment of any fee prescribed by the
regulations.
Schedule 4 only contains one item which amends
existing subsection 1338B(8) to insert reference to the Capital
Territory .[95] The
existing omission is clearly an oversight, given the reference in
other parts of section 1338B not only to a court of a State or the
Northern Territory but also the Capital Territory .
Schedule 5 only contains one item too.
Item 1 inserts proposed Part
10.12 into Chapter 10 of the Corporations Act, which
contains transitional provisions for the Act. The proposed part
sets out transitional provisions relating to the current Bill once
enacted.
For example, the amendments made by Schedule 1
to the Bill will apply in relation to a margin lending financial
service that is provided on or after the day that is 12 months
after the commencement of the schedule.[96] However, before that day, a person
may apply to ASIC for an Australian financial services licence that
authorises the person to provide a margin lending financial
service.[97] A
person may also apply to ASIC for a variation of a condition of an
Australian financial services licence to authorise the person to
provide a margin lending financial service.[98]
In effect this means that a person may apply for an Australian
financial services licence (or a condition or a variation)
immediately after the commencement of Schedule 1, and ASIC may
grant the licence, but the licence (or condition or variation) will
not take effect until 12 months after the commencement of Schedule
1.[99] After that
date, it will be mandatory to apply for and hold an Australian
financial services licence in order to provide a margin lending
financial service in Australia.
Concluding comments
The Bill contains many complex and technical provisions that are
necessary to enable the Commonwealth to regulate the providers of
margin lending and traditional trustee company services as
effectively as other parts of the financial services sector.
The Bill gives effect not only to the recommendation of the
Productivity Commission for better regulation of credit providers
but also to the COAG decision to transfer the regulation of margin
lending and trustee companies from the states to the Commonwealth.
It also gives effect to the option preferred by the Treasury
(following extensive public consultation on its Green Paper on
Financial Services and Credit Reform) to include margin
lending as a financial product for the purposes of Chapter 7 of the
Corporations Act.
It is not entirely clear why the current Bill was introduced
into Parliament before the Parliamentary Joint Committee on
Corporations and Financial Services inquires into and reports on
the issues associated with the collapse of financial product and
service providers, such as Storm Financial and Opes Prime. It is,
however, noted that the committee s report is not (at this stage)
due before 23 November 2009 (some five months after the Bill was
introduced).
On the other hand, the fact that the parliamentary committee is
yet to report should not of itself be a reason to delay the proper
regulation of the providers of margin lending financial services
and trustee companies providing traditional trustee company
services, particularly as the relevant provisions in the Bill do
not commence on Royal Assent. It is always open to the committee to
recommend further changes to the Corporations Act and/or the ASIC
Act.
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Morag Donaldson
7 September 2009
Bills Digest Service
Parliamentary Library
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