Bills Digest no. 62, 2017–18
PDF version [337KB]
Phillip Hawkins
Economics Section
4 January 2018
Contents
Purpose of the Bills
Structure of the Bills
Background
Manipulation of financial benchmarks
IOSCO principals for financial
benchmarks
Supervisory cost recovery Levies
Committee consideration
Senate Standing Committee for the
Scrutiny of Bills
Treasury Laws Amendment Bill
ASIC Levy Bill
Senate Selection of Bills Committee
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Treasury Laws Amendment Bill
Treasury Laws Amendment Bill
Key Provisions
Financial Benchmarks
Licensing Regime
Financial benchmark rules and
compelled financial benchmark rules
Civil Penalty Regime
Table 1: offences under the proposed
Part 7.5B of the Corporations Act
Emergency powers
Key Issues
Identifying significant financial
benchmarks
ASIC’s powers to suspend or cancel
licences
Issues dealt with in delegated
legislation
Civil penalties
Other provisions
Schedule 1 – Financial benchmarks
Division 1 – Preliminary
Division 2 – Licensing of financial
benchmarks
Division 3 – Financial Benchmark
rules and compelled financial benchmark rules
Division 4 – Offences and civil
penalties relating to manipulation of financial benchmarks
Division 5 – Other provisions
Schedule 2 – Productivity Commission
Act
ASIC Levy Bill
Key Provisions
Date introduced: 7 September 2017
House: House of Representatives
Portfolio: Treasury
Commencement: For the Treasury Laws Amendment Bill, Schedule 1, Parts 1 and 2, and Schedule 2, the day after Royal Assent. Schedule 1, Part 3 commences on 4 April 2018, immediately after the commencement of Schedule 5 to the Treasury Laws Amendment (2016 Measures No. 1) Act 2017. For the ASIC Levy Bill, Schedule 1 will commence at the same time as Part 1 of Schedule 1 to the Treasury Laws Amendment (2017 Measures No. 5) Act 2017. The remaining sections commence on Royal Assent.
Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the homepages for the Treasury Laws Amendment (2017 Measures No. 5 ) Bill 2017 and the ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 can be found on the Bill’s homepage, or through the Australian Parliament website.
When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.
All hyperlinks in this Bills Digest are correct as at January 2018.
Purpose of
the Bills
The purpose of the Treasury
Laws Amendment (2017 Measures No. 5) Bill 2017 (the Treasury Laws Amendment
Bill) is to introduce a new regulatory regime for administrators of financial
benchmarks. This includes providing ASIC with new supervisory powers,
introducing a licensing regime for financial benchmark administrators and
making manipulation of financial benchmarks an offence subject to civil
penalties.
The Treasury Laws Amendment Bill also facilitates the
Productivity Commission (PC) appointing an additional Commissioner with
extensive experience in dealing with Indigenous policy areas and in Indigenous
communities to oversee the PC’s work in evaluating indigenous policy and
programs.
The purpose of the ASIC
Supervisory Cost Recovery Levy Amendment Bill 2017 (the ASIC Levy Bill) is
to extend ASIC’s supervisory cost recovery levies to licensed benchmark
administrators under the supervisory and licensing regime introduced by the Treasury
Laws Amendment Bill.
These Bills are related as the ASIC Levy Bill extends
existing supervisory cost recovery levies to entities covered by the regulatory
regime established by the Treasury Laws Amendment Bill.
Structure
of the Bills
The Treasury Laws Amendment Bill contains two schedules. Schedule
1 amends the Corporations
Act 2001 to introduce the new regulatory regime for administrators of
financial benchmarks and Schedule 2 amends the Productivity
Commission Act 1998 to add an additional PC Commissioner with Indigenous
policy responsibility. Schedule 1 of the Treasury Laws Amendment Bill contains
three parts:
- Part
1 contains the main amendments which add a new Part 7.5B – Regulation of
financial benchmarks to the Corporations Act
- Part
2 makes a number of consequential amendments to other sections of the Corporations
Act
- Part
3 makes a number of consequential amendments to the Treasury Laws
Amendment (2016 Measures No. 1) Act 2017 (the TLA 2017 Act).
The ASIC Levy Bill contains one schedule which amends the ASIC Supervisory
Cost Recovery Levy Act 2017 (ASIC Levy Act) to apply ASIC’s cost
recovery levies to the new licensed benchmark administrators.
Background
Manipulation
of financial benchmarks
Financial benchmarks are indicators that are used as
reference prices for financial instruments or financial contracts and for
measuring the performance of investment funds. They are critical to a
wide-range of economic and financial market functions including the pricing of
financial products.[1]
There have been a number of scandals and allegations in recent
years around the manipulation of financial benchmarks by financial
institutions. Most notable of these was the widespread manipulation of the
London-Inter-bank Offer Rate (LIBOR), the reference rate for $300 trillion of
loans worldwide, which implicated a number of major international banks and led
to regulators in the United States, United Kingdom and the European Union
applying fines of more than $9 billion across a number of significant global
banks.[2]
A number of traders and managers have been prosecuted overseas for manipulating
the LIBOR.[3]
In Australia, the Australian Securities and Investments
Commission (ASIC) has commenced legal proceedings against the Australia and New
Zealand Bank (ANZ), Westpac and the National Australia Bank (NAB) over allegations
that they manipulated the Bank Bill Swap Rate (BBSW) between 2010 and 2012. ANZ
and NAB have reached a settlement with ASIC.[4]
The proceedings against Westpac are ongoing.
The manipulation of financial benchmarks can increase the
costs of banking for consumers and businesses and reduce confidence in
financial markets[5].
LIBOR is a benchmark rate that banks use to price their lending to each other
and is the base rate for setting interest rates on hundreds of trillions of
dollars of consumer and corporate loans worldwide.[6]
The BBSW is a short-term lending benchmark rate which is used in Australia as
the base rate for interest rates on some business loans, bonds and financial
derivatives and also impacts banks’ costs of funding[7].
On 4 October 2016 the Treasurer, Scott Morrison, announced
that following the advice of the Council of
Financial Regulators (CFR) the Government would introduce legislation to
require administrators of significant financial benchmarks to be licenced,
strengthen ASIC’s regulatory powers and make the manipulation of financial
benchmarks an offence.[8]
IOSCO
principals for financial benchmarks
In response to the ongoing scandals regarding the
attempted manipulation of financial benchmarks, the International Organisation
of Securities Commissions (IOSCO) established a task force to establish ‘global
policy guidance’ and a set of principles regarding the governance, calculation
and administration of financial benchmarks.[9]
IOSCO published its principles
for financial benchmarks on 17 July 2013.
The reforms recommended by the CFR are designed to comply
with the IOSCO Principles and the Treasury Laws Amendment Bill seeks to
implement the IOSCO Principles in Australia.[10]
ASIC has also stated that it intends to develop rules which are consistent with
the IOSCO Principles in order to harmonise with key overseas regimes[11]
Supervisory
cost recovery Levies
From 1 July 2017, the ASIC Supervisory
Cost Recovery Levy Act 2017 imposed
a cost recovery levy on the entities that ASIC regulates.[12]
The amount of the levy is set in the ASIC Supervisory Cost
Recovery Levy Regulations 2017 and is intended to be equal to ASIC’s
regulatory costs relating to the sectors it regulates.
The ASIC Levy Bill would apply these current levy
arrangements to the new benchmark administrator licensees.
Committee
consideration
Senate
Standing Committee for the Scrutiny of Bills
Treasury
Laws Amendment Bill
The Treasury Laws Amendment Bill was considered by the
Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee)
and addressed in its Scrutiny
Digest of 13 September 2017.
The Scrutiny Committee raised concerns about the degree to
which details of the new regulatory regime, particularly the licencing regime
and the imposition of civil penalties, would be addressed through delegated
legislation, stating:
The committee's view is that significant matters, such as key
details about how the financial benchmark administrator licensee scheme is to
operate and the imposition of civil penalties, should be included in primary
legislation unless a sound justification for the use of delegated legislation
is provided. In this instance, the explanatory memorandum provides no
justification as to why such matters are proposed to be included in delegated
legislation.[13]
The Scrutiny Committee also raised concerns that if details
of the regulatory regime are to be addressed through delegated legislation then
it should be through regulations rather than through ASIC’s rule-making powers,
stating:
The committee also notes that these significant matters are
to be included in 'rules' rather than in 'regulations'. The issue of the
appropriateness of providing for significant matters in legislative rules (as
distinct from regulations) is discussed in the committee's First Report of
2015. In relation to this matter, the committee has noted that regulations are
subject to a higher level of executive scrutiny than other instruments as
regulations must be approved by the Federal Executive Council and must also be
drafted by the Office of Parliamentary Counsel (OPC). Therefore, if significant
matters are to be provided for in delegated legislation (rather than primary
legislation) the committee considers they should at least be provided for in
regulations, rather than other forms of delegated legislation which are subject
to a lower level of executive scrutiny. The committee further notes that OPC's
Drafting Direction 3.8 states that material covering civil penalties should be
included in regulations unless there is a strong justification for prescribing
it in another type of legislative instrument.[14]
In his response to the Scrutiny Committee, the Treasurer
stated that the primary reason for dealing with matters through delegated
legislation was to provide the flexibility to respond to international
developments and maintain equivalency with regulatory regimes in other
countries.[15]
The Treasurer advised that the use of rules, rather than regulations allows a
more timely response to rapid shifts or developments in the market, ensuring that
the Australian regime maintains equivalence with key overseas regimes. The
Committee asked for the additional information provided by the Treasurer to be
included in the Explanatory Memorandum to the Bill.[16]
The Scrutiny Committee also raised concerns about procedural
fairness given the powers that the Treasury Laws Amendment Bill gives to ASIC
to suspend or cancel a benchmark administrator licence without providing
affected licensees a hearing in certain circumstances, notably where the
licence holder becomes insolvent, or where they fail to pay an ASIC supervisory
cost recovery levy.
Proposed section 908BI provides that ASIC may, by giving
written notice to a benchmark administrator licensee, suspend or cancel the
licensee's licence in certain listed circumstances. Unlike the process for
suspension or cancellation under proposed section 908BJ, there is no
requirement that ASIC give the licensee an opportunity to show cause why the
licence should not be suspended or cancelled. The committee notes that
procedural fairness generally requires that a person should be given an
opportunity to present their case, before a decision is made by a statutory or administration
body that could affect their rights or interests. The explanatory memorandum
does not explain why proposed section 908BI does not require ASIC to give
affected licensees the right to be heard before their licence is cancelled.[17]
The Treasurer’s response notes that the grounds under
which ASIC may immediately revoke a license in proposed section 908BI are
relatively narrow and would be within the knowledge of the licensee. The
response notes that proposed section 908BJ deals with other circumstances where
a licence may be revoked by ASIC—in these circumstances the licensee is
entitled to a hearing before ASIC makes a decision.[18]
The Scrutiny Committee also raised concerns that the
justification in the Explanatory Memorandum for the legislation providing
criminal and civil immunity to individuals operating in good faith under the
financial benchmark rules, is insufficient:
The committee expects that if a Bill seeks to provide
immunity from civil or criminal liability, particularly where such immunity
could affect individual rights, this should be soundly justified. In this
instance, the explanatory memorandum provides no explanation for this
provision, merely restating the terms of the provision.[19]
The Treasurer’s response clarifies that this only applies
to acts done in complying with a compelled financial benchmark rule. This would
be an act that is necessary to maintain the operation of a significant
financial benchmark and prevent possible financial market or economic contagion.[20]
ASIC Levy
Bill
The Scrutiny Committee considered the ASIC Levy Bill in its
Scrutiny Digest of 13 September 2017 and made no comment.[21]
Senate Selection
of Bills Committee
The Senate Selection of Bills Committee decided that the
Bills should not be referred to a committee for inquiry.[22]
Policy
position of non-government parties/independents
At the time of writing, the specific views of
non-government parties and independents on this legislation are not known.
Position of
major interest groups
The Australian Financial Market Association (AFMA)
indicated as part of ASIC’s consultation process that it broadly supports the
proposed rules and considers that they are broadly consistent with ASIC’s other
licencing regimes.[23]
However, AFMA raised a number of specific concerns with ASIC’s proposed regime,
most notably concerns about ASIC’s proposed approach to rulemaking:
The proposal is worded in such a way as to indicate that ASIC
would use regulatory guidance to supplement rules. AFMA has on many occasions
voiced the view that regulatory guidance should not be used to impose
additional requirements, its role is merely to act as an illuminating
commentary. In this case ASIC has extensive administration discretion and the
rules should be drafted with sufficient clarity and precision that the law is
understandable on its face without extensive further exposition.[24]
Financial
implications
The Explanatory
Memorandum to the Bills states that the ASIC Levy Bill and Schedule 1 of
the Treasury Laws Amendment Bill have no financial implications.[25]
Schedule 2 of the Treasury Laws Amendment Bill is
estimated to have a financial impact of $2.9 million over the forward estimates
period, which will be offset from unspecified savings from the within the Prime
Minister and Cabinet Portfolio.[26]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bills’ compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act.
The Government considers that the Bills are compatible.[27]
However, the Explanatory
Memorandum acknowledges that Schedule 1 of the Treasury Laws Amendment Bill
may limit human rights, but to the extent it does the Government considers that
the limitations are ‘reasonable, necessary and proportionate’.[28]
Parliamentary
Joint Committee on Human Rights
Treasury
Laws Amendment Bill
The Parliamentary Joint Committee on Human Rights (PJCHR) considered
the Treasury Laws Amendment Bill in its Scrutiny Report of 17 October 2017 and
did not raise any human rights concerns.[29]
ASIC Levy Bill
The PJCHR considered the ASIC Levy Bill in its Scrutiny
Report of 12 September 2017 and concluded that the Bill does not raise any
human rights concerns.[30]
Treasury
Laws Amendment Bill
Key
Provisions
Item 1 of Schedule 1 of the Bill inserts a new
Part 7.5B into the Corporations Act, which deals with the regulation of
financial benchmarks. New Part 7.5B contains proposed sections 908AA to 908EB.
The key parts of the new regulatory regime established by
the proposed Part 7.5B of the Corporations Act are:
- the
designation of ‘significant financial benchmarks’ (proposed Division 1)
- administrators
of significant financial benchmarks will need to be licensed by ASIC, and
satisfy the obligations under those licences (proposed Division 2)
- ASIC
will be able to make rules in relation to financial benchmarks including
‘compelled’ financial benchmark rules which deal with the failure of critical
benchmarks (proposed Division 3) and
- a
new criminal and civil penalties regime will be introduced dealing with the
manipulation of financial benchmarks (proposed Division 4).
ASIC has consulted on its proposed implementation on parts
of this regime in its consultation paper implementing
the financial benchmark regulatory regime.[31]
Financial
Benchmarks
Proposed section 908AB of the Corporations Act
defines a financial benchmark as a price, estimate rate, index or value that is
made available to users, is calculated periodically and is used for the purpose
of calculating interest, price or, value, or measuring the performance of, a
financial product. Under proposed section 908AC, ASIC can declare that a
financial benchmark is significant if it is systemically important to the Australian
financial system, or if there is a risk of financial contagion if the benchmark
were disrupted, or if there would be a material impact on investors if the
integrity of the benchmark were disrupted. This declaration is generally
subject to Ministerial consent (proposed subsection 908AC(3)) except in
certain emergency circumstances (proposed section 908AD). Administrators
of significant financial benchmarks would be subject to the licensing regime
under the proposed Division 2 and associated rules under proposed
Division 3.
Licensing
Regime
Division 2 of proposed Part 7.5B requires
administrators of significant financial benchmarks to apply for and obtain a
benchmark administrator licence (licence) from ASIC. Administering a financial
benchmark without a licence or falsely holding out that a person holds a
licence is an offence with a penalty of up to 500 penalty units, five years
imprisonment or both (proposed section 908BA and 908BB) (see table 1
below for further details).[32]
The Bill would allow ASIC to immediately suspend or cancel
a licence in certain circumstances, including if a licensee stops administering
a benchmark specified by their licence, the licensee becomes insolvent or if
the licensee fails to pay any payable ASIC supervisory cost-recovery levy, late
payment penalty, or shortfall penalty within 12 months of it becoming due (proposed
subsection 908BI).
It will also allow ASIC to suspend or cancel a licence if
a licensee breaches any of its obligations under the conditions of the licence
or under ASIC’s financial benchmark rules (see below). In these circumstances,
licensees would have the opportunity to show cause at a hearing before a
‘specified person’ as to why their licence should not be cancelled (proposed
subsection 908BJ).
Financial
benchmark rules and compelled financial benchmark rules
Proposed Division 3 allows ASIC to make financial
benchmark rules (administration rules) and compelled financial benchmark rules
(compelled rules) in relation to financial benchmarks and licences.
ASIC’s power to make administration rules is provided
under proposed section 908CA. The matters which can be dealt with under
the administration rules are listed under proposed sections 908CB and 908CC.
They are broad and include the making of rules relating to:
- the
responsibilities of licensees, including in their oversight of internal and
external parties involved in administration of the benchmark (proposed paragraph
908CB(a))
- how
the financial benchmarks are to be designed and calculated (proposed paragraph
908CB(b))
- the
manner in which benchmark administrators may or must provide their services,
including the manner and conditions under which they provide access to those
benchmarks (including fees) (proposed paragraph 908CB(c))
- for
example, requiring benchmark administrators to provide open and free access to
financial benchmarks
- the
handling and use of financial benchmark data by licensees and their employees (proposed
paragraph 908CB(g)) and
- the
responsibilities of entities whose activities result in the provision of data
or information to the licensee (proposed paragraph 908CB(h))
- this
would include responsibilities of financial institutions which provide
information for the purpose of calculating financial benchmarks – as is the
case with the BBSW.
In addition, the proposed legislation allows for
regulations to specify additional matters which ASIC can address through its
administration rules (proposed paragraph 908CB(j)).
ASIC also has powers to develop compelled rules under proposed
section 908CD. The matters that can be dealt with in compelled rules are
listed at section 908CE. Compelled rules are rules that ASIC can apply
in certain exceptional circumstances to ensure that the provision of a
significant financial benchmark is not disrupted in a way that may cause
financial contagion (if, for example, a licensee became unable or unwilling to
generate or administer the benchmark). The compelled rules may compel:
- an
entity that provides information used in the generation or administration of a significant
financial benchmark to provide the licensee and ASIC with the relevant
information or data (proposed paragraph 908CE(1)(a))
- a
licensee to continue to generate or administer a significant financial
benchmark or generate or administer such a benchmark in a particular way (proposed
paragraph 908CE(1)(b)).
ASIC may only apply these powers if it reasonably believes
that it is in the public interest to do so (proposed section 908CE(2)).
Proposed section 908CF obliges licensees and other
relevant persons to comply with the administration and compelled rules and
applies penalties to contraventions of these rules (see table 1 below for
further details).
ASIC must consult publicly (proposed section 908CL)
and obtain Ministerial consent (proposed subsection 908CM) in order to
make, vary or revoke an administration rule or compelled rule, except in
limited emergency situations (proposed subsection 908CN). A decision by
ASIC to make, vary or revoke an administration or compelled rule is excluded
from review by the Administrative Appeals Tribunal (AAT) (proposed paragraph
1317C(gdi) of the Corporations Act).
Civil
Penalty Regime
The Treasury Laws Amendment Bill creates a number of new
offences and civil penalties relating to the licensing regime and the financial
benchmark rules, creates new offences related to the manipulation of financial
benchmarks and expands the scope of some existing penalty regimes. The new
offences and penalties created by the Bill are detailed in Table 1.
However, proposed section 908CJ provides protection
from civil or criminal action to a person who takes actions, in good faith,
that they are compelled to take in complying with a compelled rule.
Table 1: offences
under the proposed Part 7.5B of the Corporations Act
Offence/ Civil penalty provision |
Penalty |
Legislative reference (proposed provision) |
Administering a significant financial benchmark without
holding a benchmark administrator licence, or holding out that the person
administers a significant financial benchmark when they do not hold a licence |
500 penalty units ($105,000), or 5 years imprisonment or
both 500 penalty units, or 5 years imprisonment or both |
908BA(1) |
Holding out by a person that they hold a benchmark
administrator licence or are authorised to administer a financial benchmark
when it is not the case |
908BB(a)(i-ii) |
Holding out that a financial benchmark is specified in a
benchmark administrator licence when that is not the case |
908BB(a)(iii) |
Holding out that a financial benchmark is significant or
not significant when it is not the case |
908BB(a)(iv-v) |
A licensed benchmark administrator fails to notify ASIC
that they can no longer comply with an obligation of their licence or have
already failed to satisfy an obligation of their licence |
100 penalty units ($210,000) |
908BQ(1) |
A licensee fails to comply with a reasonable request from
ASIC, APRA or the Reserve Bank of Australia to: • access
the books relating to their capacity as a licensee; or • give
other assistance to the regulator in performance of their regulatory
functions |
908BR(2) |
Licensed benchmark administrator fails to gives ASIC
reasonable access to their facilities |
908BS |
Licensee fails to provide ASIC a report on request |
908BV |
A person fails to comply with the administration rules or
compelled rules |
Maximum 5,550 penalty units ($1,165,500); or as an alternative to civil proceedings: • pay
a penalty to the Commonwealth (not exceeding one-fifth of the penalty specified
under the rules); • undertake
remedial measures (such as education programs); or • apply
sanctions other than the payment of a penalty. |
908CF and 908CO 908CG |
Minor infringements of the administration or compelled
rules – ASIC may issue infringement notices under Part 5 of the Regulatory Powers
(Standard Provisions) Act 2014 (Regulatory Powers Act) |
Maximum of 60 penalty units ($12,600) for a body corporate
or 12 penalty units ($2,520) for an individual |
908CH; subsection
104(2) of the Regulatory Powers Act |
Manipulating a financial benchmark, either by acts or by
omissions |
For an individual: 10 years imprisonment and/or 4,500 penalty units ($945,000)
or three times the value of total benefits obtained from committing the
offence For a body corporate: 45,000 penalty units ($9,450,000) or three times the
benefit obtained or 10 per cent of turnover for the preceding 12 months |
908DA 908DC |
Making false or misleading statements that could affect a
financial benchmark |
908DB 908DC |
Source: Proposed Treasury Laws Amendment (2017 Measures No. 5)
Bill 2017
Note: As of 1 July 2017, 1 penalty unit equals $210.[33]
From 1 July 2020 penalty units will be automatically indexed to the CPI.[34]
Emergency
powers
Generally the Bill requires ASIC to obtain the written
consent of the Minister in order to declare a significant financial benchmark
and requires ASIC to consult and obtain written ministerial consent when making
new administration and compelled rules.
However, in certain emergency situations ASIC may declare
a significant financial benchmark without the consent of the Minister if ASIC
is of the opinion that it is necessary to do so in the public interest (proposed
subsection 908AD(1)) but must provide written notification to the Minister
by the following day (proposed subsection 908AD(2)). The Minister may direct
ASIC to revoke such a declaration (proposed subsection 908AD(3)).
ASIC may also make an administrative or benchmark rule
without public consultation and without consent of the Minister if it considers
that it is in the public interest to do so in order to protect the Australian
economy, the financial system, or the security or confidentiality of financial
benchmark data (proposed subsection 908CN(1)). ASIC must notify the
Minister on the following day with an explanation for the rule (proposed
subsection 908CN(2)). The Minister may direct ASIC to vary or revoke the
rule (proposed subsection 908CN(3)).
Key Issues
Identifying
significant financial benchmarks
In its consultation ASIC indicated a number of benchmarks
that it might consider significant,[35]
including:
- BBSW
- Standard & Poor’s
ASX 200 stock market index – an index based on the top 200 shares (by
market capitalisation) trading on the Australian Stock Exchange, used by
investors as a benchmark for measuring share portfolio performance, and as the
basis for pricing derivatives
- the
ASX Bond futures settlement price – a benchmark rate for long-term bonds and
interest rate derivatives
- the
Reserve Bank of Australia’s cash-rate and
- the
Consumer Price Index (CPI).
Of these, the BBSW, ASX200 and ASX Bond future settlement
price are administered by market participants, while the cash rate and the CPI
are administered by public sector entities, the RBA and the Australian Bureau
of Statistics (ABS) respectively.
AFMA raised some questions in its submission to ASIC,
including whether some of the benchmarks identified should be considered
‘significant’ and whether public sector entities would be covered by the regime,
as AFMA considered that this may raise some ‘administrative law issues’[36]
(presumably, ASIC having regulatory oversight of another financial sector
authority). However, ASIC has indicated that it would consider exempting public
sector entities from the licensing regime.[37]
ASIC’s
powers to suspend or cancel licences
The Scrutiny Committee raised concern about procedural
fairness under ASIC’s powers to suspend or cancel a licence without a hearing
or opportunity to show cause under proposed section 908BI.[38]
It is worth noting that the circumstances that ASIC can
immediately suspend or cancel a licence under section 908BI are similar to the
circumstances under which ASIC can immediately suspend or cancel other licences
it administers under the Corporations Act. These include:
- an
Australian Financial Services Licence (AFSL) (under section 915B of the Corporations
Act) and
- a
licence for administering a derivative trade repository (under section 905H of
the Corporations Act).
Under these sections insolvency of the licensee and
failure to pay cost recovery levies are grounds where ASIC can suspend or
cancel the respective licence immediately.
Notwithstanding the Scrutiny Committee’s concerns around
procedural fairness, it appears that the arrangements in the proposed Bill are
broadly consistent with existing arrangements under the Corporations Act.
Issues dealt
with in delegated legislation
The Scrutiny Committee drew attention to the extent to which
significant matters in this new regulatory regime are addressed through regulations
rather than the primary legislation.
Further, to the extent that issues are dealt with in
delegated legislation the Committee raised specific concerns about issues being
dealt with through ASIC’s rules rather than in regulations.[39]
As discussed, the Treasurer has noted that a level of
flexibility is required to ensure that obligations placed on licensees maintain
consistency with comparable international regimes.[40]
The Scrutiny Committee raised specific concerns about proposed
paragraph 908CB(j) which allows for additional matters that rules can deal
with to be specified in regulations, rather than in the legislation. [41]
As the Scrutiny Committee noted:
... it is unusual for primary legislation to provide for the
making of a regulation which, in turn, provides a power to set out what matters
are to be set out in rules.[42]
In this regard, It is also worth noting that the proposed
legislation exempts ASIC’s ability to make or vary rules from appeal to the AAT
(proposed paragraph 1317C(ge) at item 23 of Schedule 1 to
the Bill).
AFMA also raised concerns about the extent that ASIC
proposes to use its regulatory guidance to supplement its rules and to impose
additional requirements on licensees.[43]
ASIC released draft administration rules[44],
compelled rules[45]
and administration guidance[46] for consultation. The administration
guidance documents how ASIC intends to administer the rules and compelled rules.[47]
ASIC has stated that it intends to ‘take a principles-based approach to the
administration rules, with detailed expectations set out in regulatory guidance’,[48]
which it says is to ‘ensure that it can make administration rules that can be
applied in a way that reflects the nature, complexity, and intended use of a
licensed benchmark.’[49]
ASIC does not intend to write specific rules for each regulated benchmark.[50]
Civil
penalties
The Explanatory
Memorandum to the Bill acknowledges that the proposed penalties in the
Treasury Laws Amendment Bill are severe, however, it notes that the primary
objective of these penalties is to act as a deterrent.[51]
The Treasurer has stated that, ‘in practice, if a monetary penalty was to be
sought that it would be proportionate to the seriousness of the breach’.[52]
Other provisions
Schedule 1 –
Financial benchmarks
Division 1 –
Preliminary
Division 1 of proposed Part 7.5B of the Corporations
Act introduces a definition of financial benchmarks (section 908AB)
and provides ASIC’s powers to declare a financial benchmark as significant
(section 908AC). A declaration requires the written consent of the
Minister (proposed subsection 908AC(4)).
ASIC is required to supervise significant financial
benchmarks that are specified in licenses (proposed section 908AF). This
includes financial benchmarks wholly or partly generated or administered in a
foreign country (subsection 908AF(2)). ASIC can rely on foreign
regulators and regulatory regimes if ASIC is satisfied that the financial
benchmark is adequately supervised or if it has cooperative arrangements in
place with the relevant foreign authority (proposed subsection
908AF(2)).
Division 2
– Licensing of financial benchmarks
Division 2 of the new Part 7.5B outlines the
details of the proposed licensing arrangements for administrators of
significant financial benchmarks.
Proposed Subdivision A establishes the requirement
that administrators of significant financial benchmarks be licensed by ASIC. Administering
a significant financial benchmark without a licence is an offence with a maximum
penalty of 500 penalty units, or imprisonment for five years, or both (proposed
subsection 908BA(1)). The administrator has 90 days after a financial
benchmark is declared to apply and obtain a licence before an offence is
committed (proposed subsections 908BA(2) to 908BA(4)).
Proposed Subdivision B of Division 2 establishes
ASIC’s powers to grant licenses. A body corporate may apply for a benchmark
administrator licence for a particular financial benchmark (proposed section
908BD) or multiple financial benchmarks (proposed section 908BE).
ASIC may grant a licence under proposed section 908BC if ASIC is
satisfied:
- the
applicant has made a valid application and provided sufficient information to
support their application (requirements proposed under proposed section
908BD)
- the
applicant will comply with the obligations of the licence (proposed paragraph
908BC(1)(b)) and
- no
disqualified individual is involved with the applicant (proposed paragraph 908BC(1)(c)).
ASIC must publish the details of licenses it grants (proposed
section 908BF).
Proposed Subdivision C establishes that ASIC can
impose, vary and revoke conditions on licences (proposed subsection 908BG(1)).
ASIC may vary and revoke conditions at the request of the licensee or on its
own initiative (proposed subsection 908BG(2)). ASIC may only do so on
its own initiative if it gives written notice of the proposed action and
provides the licensee with an opportunity to make a submission before it takes
effect (proposed subsection 908BG(3)).
Proposed Subdivision D allows ASIC to vary licences
and suspend or cancel licences in certain circumstances.
- ASIC
may immediately suspend or cancel a licence in certain circumstances,
including if the licensee becomes insolvent (proposed paragraph 908BI(1)(b))
or fails to pay a supervisory cost recovery levy (or related late/under payment
penalty) within 12 months of it becoming due (proposed paragraph 908BI(1)(d))
- ASIC
may also suspend or cancel a licence if ASIC considers that the licensee has
failed to satisfy the conditions of its licence or any of its obligations under
proposed Part 7.5B or the administration or compelled rules. The licensee must
be provided with an opportunity to show cause, at a hearing before a ‘specified
person’, as to why their licence should not be suspended or cancelled (proposed
subsection 908BJ(1)).
- the
person conducting the hearing must report to ASIC with a recommendation on the
grounds for suspending or cancelling the licence (proposed subsection
908BJ(3)), ASIC may suspend or cancel the licence after considering
the recommendation (proposed subsection 908BJ(4))
- ASIC
may revoke a suspension at any time (proposed subsection 908BL) and
- ASIC
must publish the details of any variations, suspensions or cancellations (proposed
section 908BM).
Proposed Subdivision E requires ASIC to have regard
to a number of matters in determining whether to grant a licence, vary or
revoke licence conditions or suspend or cancel a licence. These matters are
specified in proposed section 908BO and include whether or not taking
the particular action is in the public interest (proposed paragraph 908BO(2)(f)).
Proposed Subdivision F outlines a number of
obligations of licensees and penalties that apply if these obligations are not
met. These obligations include:
- complying
with the conditions of the licence (proposed paragraph 908BP(a))
- if
the licensee is a foreign body corporate, registering with ASIC (proposed paragraph
908BP(b))
- taking
all reasonable steps to ensure that a disqualified individual does not become
or remain involved in administering a financial benchmark (proposed paragraph
908BP(c))
- notifying
ASIC that it can no longer comply or has failed to comply with an obligation
under section 908BP, or that a person has become, or has ceased to be, a
director or senior manager of the licensee (proposed paragraph 908BQ(1)(b))
- providing
ASIC, the Australian Prudential Regulatory Authority and the RBA with access to
information or assistance in relation to its regulatory functions (proposed
section 908BR) and
- providing
ASIC with access to the licensee’s facilities related to its capacity as a
licensee (proposed section 908BS).
Proposed Subdivision G gives ASIC powers to give
directions to licensees. ASIC may give a direction to a licensee to do
specified things that ASIC believes will promote its compliance with its
licence obligations. The licensee must comply with these obligations (proposed
section 908BT). The Minister may disallow all or part of an ASIC direction
within 30 days of receiving notice of the direction (proposed section 908BU).
Proposed Subdivision H relates to ‘other
matters’. Proposed section 908BW establishes that ASIC may undertake an
assessment and prepare a report on a licensee’s compliance with its
obligations. ASIC must provide a written copy of the report to the Minister. Proposed
section 908BX establishes that no compensation is payable to a licensee if
a licence is varied, suspended or cancelled under any provisions of proposed Division
2 or any later legislation.
Division 3 –
Financial Benchmark rules and compelled financial benchmark rules
Division 3 of proposed Part 7.5B establishes
ASIC’s powers to make administration rules and compelled rules and the matters
to which these rules may pertain (Subdivision A and B) and establishes
licensees’ obligations to comply with these rules (Subdivision C). Under
Subdivision D, ASIC must consult before making rules and obtain Ministerial
consent except in certain ‘emergency’ situations.
Proposed Subdivision A provides that ASIC may make administration
rules by legislative instrument relating to the matters specified at proposed
section 908CB and 908CC. (See Key provisions, above for further
details).
Proposed Subdivision B provides for ASIC to make
compelled rules and specifies the matters which ASIC can address through compelled
rules under proposed section 908CE. (See Key provisions, above).
Proposed Subdivision C obliges licensees to comply
with the administration and compelled rules and applies penalties for
non-compliance under subsection 908CF and 908CG (see Key provisions,
above).
Proposed section 908CH also allows ASIC to issue the
licensee with an infringement notice under the Regulatory Powers
(Standard Provisions) Act 2014 (the Regulatory Powers Act),
intended as a way of dealing with minor rule breaches. The maximum penalty that
can be imposed in an infringement notice under the Regulatory Powers Act
is 60 penalty units for a corporation and 12 penalty units for an individual.[53]
Proposed section 908CI allows for breaches of rules
to be addressed through enforceable undertakings. Enforceable undertakings are
a written representation that the licensee will comply with a specific rule by
taking or not taking a particular action. Undertakings can be enforced by a relevant
court.
Subdivision D outlines the matters that ASIC must
have regard to and the steps that ASIC must take in making administration and
compelled rules.
Proposed section 908CK requires ASIC to have regard
to the IOSCO principles, the likely effect of the rule on the Australian
economy and financial system, the likely regulatory impact of the proposed rule
and may have regard to any other matter which ASIC considers relevant. ASIC
must consult with the public, which may include providing opportunity to comment,
on proposed rules (proposed section 908CL). However, a failure to
consult does not make a rule invalid (proposed subsection 908CL(3)). ASIC
must also receive the written consent of the Minister to make a rule (proposed
section 908CM). As explained under Key provisions, above, the
consultation and Ministerial approval requirements do not apply in emergency
situations where ASIC considers that it is in the public interest to make the
rule to protect: the Australian economy; the efficiency, integrity or stability
of the Australian financial system; or the security or confidentiality of
financial benchmark data (proposed subsection 908CN(1)). However, ASIC
must comply with any direction from the Minister to vary or revoke such a rule (proposed
subsections 908CN(2) and (3)).
Division 4
– Offences and civil penalties relating to manipulation of financial benchmarks
Proposed Division 4 of new Part 7.5B creates new offences
and civil penalties in relation to the manipulation of a financial benchmark. These
penalties are summarised in Table 1 under ‘Key Provisions’.
Proposed section 908DD details the geographical
scope of the offences and penalty provisions in Division 4. These provisions only
apply to conduct:
- that
occurs wholly or partly in Australia
- that
occurs wholly outside Australia that has a resultant impact partly or wholly in
Australia or
- that
occurs wholly outside Australia and is committed by an Australian entity.[54]
However, if the conduct occurred outside Australia there
is a defence available if there is no corresponding offence in the domestic
jurisdiction where the conduct occurred.[55]
This defence does not apply to an Australian citizen or Australian corporation.
Division 5
– Other provisions
Division 5 of new Part 7.5B provides for the
regulations or ASIC to provide an exemption from any of the provisions in Part7.5B
or any regulations made under Part7.5B to a person, class of person, financial
benchmark or class of financial benchmarks.
Part 2 of Schedule 1 of the Treasury Laws Amendment
Bill includes consequential amendments to other sections of the Corporations
Act to add reference to the benchmark administration licensing regime as
required. Notably:
- Item
14 inserts proposed section 1040B into Part 7.10 of the Corporations
Act making bank accepted bills and negotiable certificates of deposit
financial products for the purposes of that Part. This extends offence
provisions under Part 7.10 relating to market misconduct and insider trading to
conduct relating to those types of product.
- Item
23 inserts proposed paragraphs 1317C(gdf) to (gdl) to exclude
from review by the AAT ASIC’s decisions to make, vary or revoke declarations
about significant financial benchmarks and administration rules, or to decide
whether or not to pursue an alternative to civil proceedings. The Minister’s decisions
to consent, vary or revoke rules are also excluded from AAT review.
- Item
26 adds additional subsections 1DC to 1DF to section 1317G of the Corporations
Act, which allow a court to order a person to pay a pecuniary penalty if
they contravene an administration or compelled rule or if they are found to
manipulate a financial benchmark.
- Item
27 inserts proposed section 1317HC into the Corporations Act,
which allows a Court to order a person to compensate another person for damages
suffered as a result of the first person contravening an administration rule or
compelled rule.
Schedule 2 –
Productivity Commission Act
Schedule 2 of the Bill amends the Productivity
Commission Act 1998 (the PC Act) to provide for the PC to
appoint an additional Commissioner to oversee the work of the PC in relation to
the evaluation of policies that impact on Indigenous people.
Item 2 expands the maximum number of Commissioners
(in addition to the Chair) in the PC from 11 to 12.
Item 4 adds a requirement that at least one
Commissioner of the PC has extensive skills and experience in dealing with
policies and programs that impact Indigenous persons and has experience dealing
with Indigenous communities.
Item 5 removes the requirements that at least one
member of the Commission must have:
- experience
or expertise in matters relating to ecologically sustainable development and
environmental conservation (subsection 26(3))
- experience
or expertise in matters relating to the social effects of economic adjustment
and social welfare service delivery (subsection 26(4)) and
- extensive
skills and experience acquired from working in Australian industry (subsection
26(5)).
This removes duplication in the PC Act as section
24 already requires Commissioners with these skills to be appointed.[56]
ASIC Levy
Bill
Key
Provisions
The ASIC Levy Bill amends the ASIC Supervisory
Cost Recovery Levy Act 2017 (the ASIC Levy Act) to apply ASIC’s
cost recovery levies to benchmark administrator licensees.
Item 1 adds a ‘benchmark administrator
licensee’ to the definition of ‘market infrastructure entity’ under section 7
of the ASIC Levy Act, making licensees a type of regulated entity that
are liable to pay ASIC’s supervisory cost recovery levy.
Item 2 also adds to the definition of market
infrastructure entity, a person who administers a significant financial
benchmark, but who contravenes the requirement under the amended Corporations
Act to hold a benchmark administrator licence. This applies the cost recovery
levy to individuals who administer a financial benchmark that are required to
be licenced, even if they are not licenced.
[1]. Council
of Financial Regulators (CFR), Financial
benchmarks regulatory reform, Consultation paper, March 2016, p.
1.
[2]. J
McBride, ‘Understanding
the Libor scandal’, Council on Foreign Relations, 12 October
2016.
[3]. Ibid.
Financial benchmarks regulatory reform.
[4]. B
Butler, ‘Westpac going it alone on
rate case’, The
Australian, 26 October 2017, p. 21; Australian Securities and Investments
Commission (ASIC), ASIC
accepts enforceable undertakings from ANZ and NAB to address conduct relating
to BBSW, media release, 20 November 2017.
[5]. CFR,
Financial
benchmarks regulatory reform, op. cit., p. 1.
[6]. McBride,
‘Understanding
the Libor scandal’, op. cit.
[7]. E
Moran (FIIG research), ‘What is the bank bill
swap rate (BBSW)?’,
FIIG, 12 December 2012.
[8]. S
Morrison (Treasurer), Clamping
down on market manipulation of financial benchmarks, media
release, 4 October 2016.
[9]. International
Organisation of Securities Commissions (IOSCO), Principles
for financial benchmarks, final report, July 2013.
[10]. CFR,
Financial
benchmarks regulatory reform, op. cit., p. 6.
[11]. ASIC,
Implementing the financial benchmark regulatory regime, Consultation
paper, 292, July 2017, p. 10.
[12]. For
more information see: Parliament of Australia, ‘ASIC
Supervisory Cost Recovery Levy Bill 2017 homepage’, Australian Parliament
website.
[13]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 11, 2017, The Senate, 13 September 2017, p. 18.
[14]. Ibid.,
p. 18.
[15]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 12, 2017, The Senate Canberra, 18 October 2017, p. 143.
[16]. Ibid.,
p. 144.
[17]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 11, op. cit., p. 19.
[18]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 12, op. cit., p. 145.
[19]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 11, op. cit., p. 20.
[20]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 12, op. cit., p. 147.
[21]. Senate Standing
Committee for the Scrutiny of Bills, Scrutiny
digest, 11, op. cit., p. 3.
[22]. Senate
Selection of Bills Committee, Report,
12, 2017, The Senate, Canberra, 19 October 2017, p. 3.
[23]. Australian
Financial Markets Authority (AFMA), Implementing
the financial benchmark regulatory regime, AFMA, 25 August 2017, p. 1.
[24]. Ibid.,
p. 3.
[25]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, p. 3.
[26]. Ibid.,
p. 5.
[27]. The
Statement of Compatibility with Human Rights for the Treasury Laws Amendment
Bill can be found at pages 51 to 63 and 92 of the Explanatory
Memorandum to the Bill and for the ASIC Levy Bill at page 87 of the Explanatory
Memorandum.
[28]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, p. 63.
[29]. Parliamentary
Joint Committee on Human Rights, Eleventh
report of the 45th Parliament, 17 October 2017, p. 1.
[30]. Parliamentary
Joint Committee on Human Rights, Tenth
report of the 45th Parliament, 12 September 2017, p. 33.
[31]. ASIC,
ASIC
consults on proposed financial benchmark regulatory regime, ASIC
website, 17 July 2017.
[32]. Section
4AA of the Crimes
Act 1914 provides that a penalty unit is currently equal to $210. As a
result the maximum pecuniary penalty is currently $105,000.
[33]. Section
4AA of the Crimes
Act 1914 (Cth).
[34]. Explanatory
Memorandum, Crimes Amendment (Penalty Unit) Bill 2017, p. 2.
[35]. ASIC, Implementing the
financial benchmark regulatory regime, op. cit., p. 13.
[36]. AFMA,
Implementing
the financial benchmark regulatory regime, op. cit., pp. 4–5.
[37]. ASIC, Implementing the
financial benchmark regulatory regime, op. cit., p. 14.
[38]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 11, op. cit., p. 19.
[39]. Ibid.,
p. 18.
[40]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 12, 2017, op. cit., pp. 142–143.
[41]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 27.
[42]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 11, 2017, op. cit., p. 18.
[43]. AFMA,
op. cit., p. 3.
[44]. ASIC,
ASIC
Financial Benchmark (Administration) Rules, Consultation paper, 292,
Regulatory guidance, July 2017.
[45]. ASIC,
ASIC
Financial Benchmark (Compelled) Rules, Consultation paper 292,
Regulatory guidance, July 2017.
[46]. ASIC,
Financial Benchmarks: Licensing and other obligations, Regulatory guidance, July 2017.
[47]. Ibid., p. 7.
[48]. ASIC,
Implementing the financial benchmark regulatory regime, op. cit., p.
10.
[49]. Ibid.,
p. 11.
[50]. Ibid.
[51]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 55.
[52]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 12, op. cit., p. 143.
[53]. Subsection
104(2) of the Regulatory
Powers (Standard Provisions) Act 2014.
[54]. The
Bill applies extended geographical jurisdiction category B to Division 4 of
Part 7.5B. See section 15.2 of the Criminal Code Act
1995 for details.
[55]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 57.
[56]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and]
ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 91.
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