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A Bill for an Act to amend the law relating to financial services and markets, and for other purposes
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Introduced HR 26 Jun 2003

Financial Services Reform Amendment Bill 2003

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2002-03

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

FINANCIAL SERVICES REFORM AMENDMENT BILL 2003

EXPLANATORY MEMORANDUM

(Circulated by authority of the Parliamentary Secretary to the Treasurer,

Senator the Hon Ian Campbell)

Table of Contents

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Outline

1.1       The Financial Services Reform Amendment Bill 2003 (FSR Amendment Bill) will clarify and amend various aspects of the regulatory framework governing the licensing, conduct and disclosure of providers of financial services, and the licensing of financial markets and clearing and settlement facilities, contained in Chapter 7 and related provisions of the Corporations Act 2001 (Corporations Act). The FSR Amendment Bill will also make minor amendments to the Income Tax Assessment Act 1997 and the Retirement Savings Accounts Act 1997.

1.2       The Financial Services Reform Act 2001 (FSR Act) commenced on 11 March 2002. It amended the Corporations Act and related legislation, introducing a new regulatory framework governing the licensing, conduct and disclosure of providers of financial services, along with a licensing regime for financial markets and clearing and settlement facilities.

1.3       The amendments to the Corporations Act made by the FSR Act are subject to a two-year transition period, such that they come into full effect on 11 March 2004.

1.4       During the transition period, the Government has continued a consultation process with industry and consumer representatives that began during the development of the FSR Act, with a view to ensuring that the implementation of the new arrangements occurs as smoothly as possible.

1.5       As a result of this consultation process, a number of issues have been identified which require clarification or amendment to enable industry participants to transition to the new regulatory arrangements prior to the end of the transition period.

1.6       Many of these issues have been capable of resolution through the making of regulations or the provision of policy guidance by the Australian Securities and Investments Commission.

1.7       However, some issues require amendment to the legislation itself, and the FSR Amendment Bill is directed to this end. The amendments contained in the FSR Amendment Bill will provide industry participants with the necessary certainty to transition to the new licensing, conduct and disclosure framework introduced by the FSR Act.

Financial impact statement

1.8       The financial impact of the new regulatory framework introduced by the FSR Act was set out in the Explanatory Memorandum to the Financial Services Reform Bill. The FSR Amendment Bill will not involve any additional costs. Rather, it will assist in achieving the compliance cost reductions outlined in the financial impact statement for the Financial Services Reform Bill.

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Abbreviations

2.1        The following abbreviations are used in this Explanatory Memorandum:

AFSL       Australian Financial Services Licence

APRA       Australian Prudential Regulation Authority

ASIC       Australian Securities and Investments Commission

ASIC Act       Australian Securities and Investments Commission Act 2001

ASX       Australian Stock Exchange

Corporations Act       Corporations Act 2001

FSG       Financial Services Guide

FSR Act       Financial Services Reform Act 2001

PDS       Product Disclosure Statement

RSA       Retirement Savings Account

SoA       Statement of Advice

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Notes on clauses

Clause 1: Short Title

3.64       Clause 1 is a formal provision specifying the short title of the Bill.

Clause 2: Commencement

3.65       Clause 2 contains a table setting out when each of the items in the Bill commences.

Clause 3: Schedule

3.66       Clause 3 provides that the Acts specified in the Schedules are amended as set out.

Schedule 1 -- Amendments of the Corporations Act 2001 relating to unsolicited offers to purchase financial products off-market

Items 1 and 2 -- amendment of section 760B and Part 7.9 of Chapter 7 (heading)

3.4       The heading of Part 7.9 and a citation of that heading will be amended to reflect that the Part 7.9 disclosure provisions are to apply to the purchase of financial products in addition to sales.

Items 3 to 5 -- Division 5A of Part 7.9 is to apply to securities

3.5       Section 1010A is not to apply to Division 5A. The amendments ensure that Division 5A operates in relation to all financial products including securities.

Item 6 -- Division 5A of Part 7.9 is to apply to financial products not issued in the course of a business

3.6       Section 1010B is not to apply to Division 5A. It is intended that Division 5A operates in relation to financial products issued in the course of a business, as well as financial products not issued in the course of a business.

Item 7 -- unsolicited offers to purchase financial products off-market

3.7       This item establishes a disclosure regime for unsolicited off-market offers to purchase financial products.

3.8       This new disclosure regime applies when a person (the offeror) makes an unsolicited offer to purchase a financial product from another person (the offeree) and that offer was made other than on a licensed financial market.

3.9       In addition, the regime shall only apply where that unsolicited offer is made in the course of a business of purchasing financial products or the unsolicited offer is made where the offeror is not in a personal or business relationship with the offeree. Regulations can specify additional circumstances that would constitute an offer to which these provisions are to apply.

3.10       The offeror will be required to disclose the current market value of financial products they make off-market offers to purchase, in the offer document. In the event that the current market value is not available, for example where a financial product is not traded on a licensed financial market, then the offeror must provide a `fair estimate' of the value of the product. Where such an estimate is given, the offer document must explain how it was derived.

3.11       The relevant offers need to be made in printed or electronic form. Unsolicited offers in any other form, for example via telephone, are prohibited. The provisions introduce a timeframe for which such offers are to remain open (at least one month but not more than 12 months). In addition, the provisions specify the way in which an offer could be withdrawn.

3.12       Regulation-making powers will be available to specify other disclosure requirements to be included in the offer document or alternatively to clarify existing requirements.

3.13       If a person (the offeror) invites someone (the offeree) to make them an offer to sell a financial product, that is, an `invitation to treat,' then the disclosure provisions will not apply to such invitations. However, if after receiving an offer the offeree responds and receives a counter offer from the offeror, this would be considered an offer for the purpose of the new provisions.

3.14       In the event of a defective offer, the offeree

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has the right to terminate the contract and as such, refuse to transfer the financial product to the offeror, or if that transfer has already taken place, the right to have the financial product returned. Such a right would be available for up to 30 days after the contract was entered into.

Items 8 to 11 -- ASIC stop orders

3.15       ASIC will have stop order powers in relation to the new provisions under Division 5A of Part 7.9, particularly where an offer document is defective. For example, an ASIC Stop Order may be required where an offer document contained a misleading or deceptive statement.

Item 12 -- offences relating to offers to which Division 5A applies

3.16       This item specifies what would constitute an offence under Division 5A.

Items 13 to 24 -- civil liability

3.17       Where an offer document is found to be defective, but the offeror no longer holds the financial product, civil recourse is available to the offeree.

Item 25 -- Division 5A applies during the transition period

3.18       The new disclosure provisions commence upon Royal Assent, rather than at the end of the transition period.

Item 26 -- amendment of Schedule 3 (after table item 309A)

3.19       This item specifies the penalties for Division 5A.

Schedule 2 -- Other Amendments of the Corporations Act 2001

Items 1, 8, 29 to 31, 41, 43 & 44, 52 & 53, 57 to 60, 75 & 76, 99 & 100, 103, 110 & 111 -- removal of references to `declared professional body'

3.20       The concept of a declared professional body (DPB) was contained in the Financial Services Reform Bill (FSR Bill) when it was introduced into the Parliament in 2001. However, the concept was removed during the FSR Bill's debate and passage. Not all references to DPBs were removed at that time. These items therefore remove references to DPBs where they remain, and also remove redundant references to sections relating to DPBs that were removed from the FSR Bill prior to its enactment.

Item 2 -- section 9 - definitions of `dispose'

3.21       Currently there are two definitions of dispose in section 9. This item consolidates those definitions, and removes references to repealed provisions.

Items 3 to 5 -- section 9 -- definitions of `licence', `licensee' and `responsible officer'

3.22       These items remove redundant definitions of licence and licensee from section 9, and amend the definition of responsible officer to clarify that the reference to `licence' in that definition is a reference to an AFSL.

Items 6 and 7 -- section 761A -- definition of `basic deposit product'

3.23       These items amend the definition of basic deposit product in section 761A. The amendment to subparagraph (c)(ii) expands the definition of `basic deposit product' to include deposit products with a term of five years or less. The second amendment (item 7) is to paragraph (d). This amendment ensures that term deposits with the terms and conditions contemplated by subparagraph (c)(ii) of the definition will not be required to meet the `at call' requirement set out in subparagraph (d)(i). That is, term deposits with a maturity of five years or less will not need to be `at call' in order to be included in the definition of basic deposit product.

Item 12 -- subsection 761E(3A) -- a situation that is not an issue of a financial product

3.24       Section 761E provides the definition of what is an `issue' in relation to financial products. Without limiting the operation of subsections 761E(2) and (3), subsection 761E(3A) lists examples that do not constitute an issue of a financial product. As it is not intended that contributions made by an employer would be treated as being a new issue, this situation is provided as a further example in subsection (3A).


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Item 13 -- subsection 766B(1) -- expert's statement in an exempt document

3.25       The provision of an exempt document, as defined in subsection 766B(9), is not financial product advice. This means that a person does not need to be licensed in preparing an exempt document, including experts whose reports may be included in these documents that provide financial product advice. These reports did not receive an exemption under the law prior to the introduction of the FSR Act and it was not intended that merely providing the information in an exempt document should avoid the licensing requirement. This is especially due to the wide circulation amongst retail clients of exempt documents such as PDSs.

Items 14 & 15 -- section 766C -- definition of `dealing'

3.26       Dealing is defined under section 766C. The regulation-making power in the section allows the creation of regulations that determine conduct that is taken `not to be dealing.'

3.27       These items amend the regulation-making power in the section to allow the creation of regulations that, in addition to determining conduct that is taken `not to be dealing,' would allow regulations that determine what is dealing.

Item 16 -- section 766E -- exceptions to the provision of a custodial or depository service

3.28       Section 766E defines when a custodial or depository service is provided. Subsection 766E(3) lists exceptions to this definition. The current exception in paragraph 766E(3)(c) relates to the operation of certain superannuation entities. This item makes an amendment to the exception in paragraph 766E(3)(c), to clarify that it only applies to the operation of those superannuation entities by the trustees of those entities. Thus, the exception will not apply in respect of conduct engaged in by parties other than the trustees (such as third party service providers).

Item 17 -- section 766E -- exceptions to the provision of a custodial or depository service

3.29       This item inserts a new paragraph (ca) into subsection 766E(3) to provide an exception to the provision of a custodial or depository service for conduct that is the operation of a statutory fund by a life office within the meaning of the Life Insurance Act 1995, which also includes the operation of a benefit fund by a friendly society under the Life Insurance Act 1995.

Items 18, 48 & 49, 66 & 67, 92 & 93, 95, 106 to 109 -- exemption and modification powers

(a) ASIC's exemption and modification powers

3.30       Under various provisions of Chapter 7 and Part 10.2, powers to provide exemptions from, or make modifications to, the application of certain provisions of the Act (referred to hereafter as `exemption and modification powers') are given to ASIC (sections 951B, 992B, 1020F, 1075A in Chapter 7 and sections 1437 and 1442 in Part 10.2).

3.64       The exemption and modification powers provided to ASIC generally contain the limitation that they may not be exercised by ASIC to declare that provisions are modified such that they apply in relation to persons and/or financial products to which they would not otherwise apply (subsections 951B(2), 992B(2), 1020F(3) and paragraphs 1437(3)(b) and 1442(3)(b)).

3.65       ASIC uses its exemption and modification powers to provide administrative `relief' from the operation of various provisions of the legislation in circumstances where it judges that application of those provisions is not warranted, or that they should apply in a modified way. In most situations, the exemption and modification powers are exercised in response to requests for relief from parties who are experiencing difficulties complying with a particular provision of the legislation or where the application of the provisions is not appropriate to particular circumstances.

3.66       Depending on the circumstances, the strict operation of the legislation may produce unintended or unreasonable results. Moreover, exemptions and modifications will often be necessary to facilitate innovative products that were not contemplated at the time the legislation was drafted, while maintaining an appropriate degree of investor protection.

3.67       The limitation mentioned above which prevents ASIC from declaring that a provision is modified such that it applies in relation to a person and/or financial product to which it would not otherwise apply presents a substantial impediment to the effective use of the exemption and modification powers.

3.68       ASIC's experience to date has been that it has occasionally been impossible for ASIC to give industry the relief that it seeks in circumstances where its provision would be entirely appropriate. In other cases, the limitations have made the provision of relief much more difficult and complex.


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3.69       For example, a number of insurance brokers have been effectively denied the benefit of the 2-year transition period to the new licensing regime introduced by the FSR Act. The brokers concerned failed to lodge the renewal of their registration in accordance with the rigid time limits of the Insurance (Agents and Brokers) Act 1984 (IABA). This lapse of registration meant that the brokers in question had to immediately obtain a licence under the new licensing regime introduced by the FSR Act (ie. the transition period was immediately terminated), or cease carrying on business. This was considered a harsh, undesirable and unintended outcome.

3.70       The limitations on ASIC's modification powers preventing it from declaring provisions to be modified so that they applied in relation to persons to whom they didn't otherwise apply meant ASIC was not able to provide the relief requested of it. That is, ASIC was unable to reinstate the IABA regime for those brokers who had failed lodge the application for renewal of their registration on time (as this would have been literally to apply the IABA provisions to persons to whom they did not, at the time the relief instrument was executed, apply). This was the case regardless of whether the delay was inadvertent or slight, or whether the renewal would have been granted but for the delay.

3.71       The relief instrument ASIC executed in this context was only able to assist those brokers whose registration hadn't lapsed at the time of the instrument but may at some future time lapse.

3.72       Additionally, under the existing law, ASIC could be precluded from granting industry concessions, for example, for the issue of a single PDS in some situations where there is doubt, because of the way the investment is structured, that a party within the corporate group is issuing a product to a retail client. This could produce anomalous outcomes for industry. In one matter, ASIC was asked to permit the offer of a combined product, namely installment receipts and units in a managed investment scheme, through a single PDS by joint issuers within a conglomerate group.

3.73       Under the arrangement, person A was the technical issuer of the installment receipts to the retail sector. Persons B and C, however, were to be substantively responsible to retail investors for the investment. Person A applied for relief from being an issuer of the product and therefore from the obligation to prepare the PDS as required under subsection 1013A(1).

3.74       In this matter, ASIC had no policy objection to providing relief to person A, who in substance played a minor role in the investment transaction, on the basis that persons B and C, who were playing the substantive roles, assumed responsibility for the obligations under Part 7.9 in respect of the installment receipts (including the preparation of a PDS). In ASIC's view the legislation fixed the applicant with obligations that were disproportionate to acting as a bare custodian, essentially as a technical consequence of the way in which the offer was structured.

3.75       Whilst ASIC did not have a policy objection to granting the relief applied for, subsection 1020F(3) had the effect that any obligation that person A is relieved of in relation to the installment receipts can only be shifted to another person who already has an obligation under the relevant provision in the context of this transaction.

3.76       Another effect of the limitations to the modification powers has been to complicate the instrument-drafting process. For example, to provide clarification of the operation of Corporations Regulation 10.2.74 (which identifies what is a "class of financial product") required ASIC to produce a six-page class order ([CO 02/1071] issued on 9 October 2002). ASIC considers that, without the limitation on its exemption and modification power in subsection 1020F(3), this class order relief could have been provided in a single paragraph. It is not helpful to industry, or indeed anyone else, to require ASIC instruments to be much longer and more complex than they would otherwise need to be.

3.77       The exemption and modification powers provided to ASIC under other chapters of the Act do not contain the limitation imposed under Chapter 7 and Part 10.2 (see section 283GS in Chapter 2L; section 601QA in Chapter 5C; section 655A in Chapter 6; section 669 in Chapter 6A; section 673 in Chapter 6C and section 741 in Chapter 6D).

3.78       Items 49, 67, 93, 107 and 109 therefore respectively repeal subsections 951B(2), 992B(2), 1020F(3) and amend subsections 1437(3) and 1442(3) to remove the existing limitation which presently prevents ASIC from declaring that a provision is modified such that it applies to a person and/or financial product to which it would not otherwise apply.

3.79       This will achieve consistency throughout the Act and enable ASIC to more effectively and efficiently exercise its exemption and modification powers, and in so doing enhance industry certainty about the regulator's powers. The exemption and modification powers given to ASIC in parts of the Act outside of Chapter 7 and Part 10.2 which do not contain the limitation have been in place for some time, and there is no evidence that ASIC has ever used those powers inappropriately. The powers are invariably used in order to provide some form of concessional treatment, rather than to impose additional obligations. In addition, ASIC's use of its exemption and modification powers is subject to a number of safeguards to ensure that the

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powers are not abused, including administrative review by the Administrative Appeals Tribunal, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman.

(b) Regulation-making exemption and modification powers

3.80       Sections 854A, 893B and 1020G in Chapter 7 provide exemption and modification powers that may be exercised through the making of regulations. Subsection 854A(2) and paragraph 1020G(2)(a) specifically provide that the regulations may modify a provision so that it applies to a person, body (in the case of subsection 854B(2)), financial product (in the case of paragraph 1020G(2)(a)) or situation to which it would not otherwise apply. Section 893B makes no such provision. Subsections 854B(2) and paragraph 1020G(2)(a) do not add to the scope of the exemption and modification power which is established by subsections 854B(1) and 1020G(1). Rather, they merely serve to highlight the distinction between the exemption and modification powers granted to ASIC discussed above, and the regulation-making exemption and modification powers.

3.81       Given that it is proposed to remove from ASIC's exemption and modification powers the current limitation which prevents ASIC declaring that a provision is modified so that it applies to a person and/or financial product to which it would not otherwise apply, subsection 854B(2) and paragraph 1020G(2)(a) will serve no useful purpose. Therefore, they will be repealed.

3.82       If subsection 854B(2) and paragraph 1020G(2)(a) were not repealed, this might suggest that the ASIC exemption and modification powers still do not permit ASIC to declare that a provision is modified so that it applies to a person and/or financial product to which it would not otherwise apply (that is, because they do not contain a similar `positive' statement to this effect like those in subsection 854B(2) and paragraph 1020G(2)(a)). To prevent this misinterpretation arising, items 18 and 95 respectively repeal subsections 854B(2) and paragraph 1020G(2)(a).

3.83       The repeal of these provisions does not mean that regulations made under sections 854B and 1020G may not modify a provision so that is applies to a person, body, financial product or situation (as the case requires) to which it would not otherwise apply. The power to make such modification is within the scope of the relevant exemption and modification power provided in subsections 854B(1) and 1020G(1) (indeed, it is within the scope of all of the regulation-making exemption and modification powers, and will be within the scope of the exemption and modification powers available to ASIC, following removal of the limitation discussed above).

3.84       Item 95 repeals not only paragraph 1020G(2)(a), but also paragraph 1020G(2)(b), which provides that regulations may declare that provisions of Part 7.9 are modified so that they apply in a way that changes the person by whom or to whom a document or information is required to be given. Again, the inclusion of this provision does not add to the basic exemption and modification power set out in subsection 1020G(1). This is made clear by the opening words of subsection 1020G(2) which provides `Without limiting subsection (1)...'.

3.85       Paragraph 1020G(2)(b) is therefore redundant and does not add to the power to exempt and modify granted under section 1020G. Its retention could lead to interpretational problems. For example, it might be implied that exemption and modification provisions that do not contain the equivalent of paragraph 1020G(2)(b) do not permit a modification that changes the person to whom or by whom a document is to be given. Item 95 therefore repeals the whole of subsection 1020G(2), including paragraph 1020G(2)(b). For the same reasons, item 93 similarly repeals an equivalent provision in subsection 1020F(2).

Items 19 to 24 -- sections 889J and 889K -- the National Guarantee Fund

3.86       The National Guarantee Fund provides clearing support and investor protection functions in relation to transactions on the ASX. The Fund is administered by the Securities Exchanges Guarantee Corporation Limited (SEGC). When the Fund drops below the minimum, the SEGC may impose a levy on the ASX or on its participants (section 889J). If the ASX is levied, it can pass on the levy to participants (section 889K).

3.87       It is proposed that minor amendments be made to sections 889J and 889K to take account of changes to the arrangements for `membership' or participation of the ASX and associated clearing and settlement facilities which came into effect in December 2002. The changes mean that a participant in the market is not necessarily a participant in the related clearing and settlement facility. Consistent with this, the amendments will allow the SEGC to levy the relevant clearing and settlement facility (and for the facility to levy its participants) or the SEGC to levy the participants directly.

Items 25, 27 and 28 -- subsection 911A(2)(h) and 911A(5) -- licensing exemption for services regulated by overseas regulatory authorities

3.88       Paragraph 911A(2)(h) provides an exemption from licensing
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for a person regulated by an overseas regulatory body. Instead of ASIC exempting a person from FSR licensing based on approving their relevant overseas regulatory body, ASIC will exempt a person from FSR licensing based upon the financial service they will provide.

3.89       The associated amendment to subsection 911A(5) allows any relief provided by ASIC from the licensing conditions for services regulated by an overseas body to be either unconditional or subject to conditions.

3.90       It is not intended that ASIC's powers under the amended paragraph 911A(2)(h) will limit the operation of the powers under paragraphs 911A(2)(k) or (l).

Items 32 to 34 -- subsections 912C(1A) and (2) and new section 912CA -- collection of information by ASIC

3.91       ASIC may direct a licensee in writing to provide it with specific information under section 912C. In order to improve the effectiveness and flexibility of this information gathering provision, these provisions will enable an increase in the range of information that ASIC can request from licensees.

3.92       ASIC will be able to seek information on a periodic basis in amendments to subsections 912C(1A) and (2). A regulation-making power is also provided in 912CA to allow other forms of information to be specified.

Item 35 -- subsection 912D(1) - reporting of breaches to ASIC

3.93       This item substitutes subsection 912D(1) and inserts a new subsection 912D(1A). It makes a number of changes to the requirement for AFSL holders to report to ASIC breaches, or likely breaches, of obligations set out in sections 912A and 912B.

3.94       First, the current wording in subsection 912D(1) referring to an AFSL holder that "becomes aware that it can no longer meet, or has breached", the relevant obligations is replaced by reference to an AFSL holder that "has breached, or is likely to breach" the relevant obligations. New subsection 912D(1A) defines the expression "likely to breach". This change in terminology is to make the provision more understandable, and does not change its basic requirements.

3.95       Second, the basic reporting period is extended from 3 days to 5 business days.

3.96       Third, the concept of a `significant' breach or likely breach is introduced in paragraph 912D(1)(b). It is only significant breaches or likely breaches that require reporting to ASIC. Factors to which regard must be had in determining the significance of a breach or likely breach are listed in subparagraphs 912D(1)(b)(i)-(v). Included in this list is a power for further factors to be prescribed in the regulations. Although no regulations are presently contemplated, the reporting to ASIC of breaches or likely breaches will be monitored, and the results of this monitoring will be taken into account in deciding whether any additional factors need to be prescribed in regulations.

3.97       Finally, the requirement to report breaches or likely breaches of the obligation in paragraph 912A(1)(c) (which requires AFSL holders to comply with the financial services laws - defined in section 761A) is limited to those laws set out in paragraphs (a) to (c) of the definition (which specify various parts of the Corporations Act and the ASIC Act), and laws of the Commonwealth that are specified in the regulations.

3.98       It is intended that the regulations will specify legislation under which ASIC or APRA are given powers and/or functions. While not pre-empting any proposed regulations, an indicative list of the relevant legislation would include the following Acts:

Banking Act 1959

Financial Sector (Collection of Data) Act 2001

Financial Sector (Shareholdings) Act 1998

Financial Sector (Transfer of Business) Act 1999

Insurance Act 1973

Insurance Acquisitions and Takeovers Act 1991

Insurance (Agents and Brokers) Act 1984

Insurance Contracts Act 1984

Life Insurance Act 1995

Retirement Savings Accounts Act 1997

Superannuation Industry (Supervision) Act 1993

Superannuation (Resolution of Complaints) Act 1993

Item 36 -- subsection 912F(1) -- AFSL number on specified documents

3.99       Section 912F creates a strict liability offence for failure to include a person's AFSL number on documents connected with providing financial services under the licence. To ensure there is certainty over which documents must include an AFSL number, a regulation making power is provided that will be used to specify which documents will be subject to this requirement.


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Items 37 to 40 & 105 -- section 916F -- notification of the appointment of authorised representatives

3.100       Items 37 and 39 make amendments to subsections 916F(1) and (1A) respectively to extend the time period within which the appointment of authorised representatives must be notified under those provisions from 10 to 15 business days. Item 105 makes a consequential amendment to a transitional provision, paragraph 1431(2)(d) in Part 10.2.

3.101       Item 38 inserts a new subsection 916F(1AA) the effect of which is to provide that the appointment of certain individual authorised representatives (IARs) by a corporate authorised representative (CAR) does not have to be notified to ASIC if certain conditions are met. These conditions are that the IARs are members of a specified class of individuals, the appointment of which by the CAR has the consent of the licensee under section 916B; the IARs are employees of the CAR; and the IARs are only authorised to provide general advice in relation to, and/or deal in, financial products specified in the regulations. It is envisaged that general insurance products will be specified.

3.102       Item 40 makes a consequential amendment to paragraph 916F(3)(b) to clarify that where the obligation to notify the appointment of an authorised representative does not apply, neither is it necessary to notify of the revocation of such an appointment.

Item 42 -- new sections 926A and 926B -- exemption and modification powers

3.103       This item inserts two new provisions, sections 926A and 926B, which respectively provide for exemptions and modifications to be made by ASIC and the regulations, in respect of the provisions of Part 7.6. These new exemption and modification powers will provide flexibility for either ASIC or the regulations to grant relief or concessions through exemption from, or modification to, the provisions in Part 7.6. New section 926A is similar to the exemption and modification powers provided to ASIC under other Parts of Chapter 7 (as those provisions are amended by this Bill), with the difference that the exemption and modification power granted to ASIC under Part 7.6 does not apply to provisions in Divisions 4 and 8 of that Part.

3.104       New section 926B is equivalent to the existing regulation-making exemption and modification power in section 1020G (as that section is amended by this Bill). Similar regulation-making exemption and modification powers are also being inserted into Parts 7.7, 7.8 and 7.10 (see discussion under items 51, 69 & 97).

Item 45 -- subsection 941C(6) -- exemption from the requirement to provide a FSG for certain basic deposit and other products

3.105       Section 941C lists situations in which a FSG is not required. Subsection 941C(6) provides an exemption from the requirement to provide a FSG for certain basic deposit and other products. The proposed amendment clarifies the scope of the exemption by specifying dealing and the provision of product advice as activities that are covered by the exemption.

Items 46, 47, 54, 55, 56, 74 & 96 -- sections 942DA, 947E and 1013M, paragraphs 952I(1)(b), 952I(2)(b) and 952J(1)(b) and subparagraph 1021H(1)(b)(i) -- ability to combine disclosure documents (FSGs, PDSs and SoAs).

3.106       The amendments contained in these items will allow a FSG and a PDS to be combined into a single document in certain circumstances. These circumstances will be specified by the regulations and will be aimed at ensuring that the effectiveness of the information contained in the document is preserved.

3.107       Combining a FSG and PDS contrary to the conditions set out in the regulations will result in a minor penalty being applicable under paragraphs 952I(1)(b) and 952I(2)(b), and subparagraph 1021H(1)(b)(i). The combined document will also be subject to the offence provisions for being `defective' and will be required to be presented in a `clear, concise and effective' manner as stipulated in subsections 942B(6A) and 1013C(3).

3.108       ASIC may also facilitate combined documents in specified circumstances by the use of a declaration under section 951B.

3.109       Item 47 will also clarify that a SoA cannot be combined with a FSG or PDS. This reflects the personal nature of the advice offered in a SoA.

Items 50, 68, 94 & 98 -- new notes - exemption and modification powers

3.110       These items respectively add notes to the end of provisions in Chapter 7 which give ASIC exemption and modification powers (sections 951B, 992B, 1020F and 1075A), the effect of which is to draw attention to the fact that references in those provisions to the respective parts of Chapter 7 or Part 10.2 include references to regulations or other instruments, due to section 761H. In short, this clarifies that the exemption and modification powers in those provisions extend to apply to regulations and other instruments made under provisions in those parts of Chapter 7 or Part 10.2 (which deals with transitional matters).


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Items 51, 69 & 97 -- regulation making exemption and modification powers

3.111       The FSR Act was intended to form a general regulatory umbrella that covered the financial services industry. The intent of the FSR Act was to replace industry-specific financial services regulation, with a consolidated and single licensing, conduct and disclosure regime.

3.112       The regime introduced by the FSR Act applies across a range of financial services and in particular applies to new areas such as banking, insurance and superannuation.

3.113       While the FSR Act provides a broad framework for financial services regulation, the diverse and complex nature of the financial services industry means that the general legislation does not always appropriately `fit' in relation to all segments of the industry and situations.

3.114       As such, the legislation was designed to make use of regulations to provide greater detail and specificity in relation to particular products and situations as appropriate. This two-tiered approach was a fundamental structural element of the FSR Act. To this end a range of specific regulation making powers were included in those areas expected to require further detail or clarification through the regulations.

3.115       The FSR Act allows a period of two years for existing industry participants to transition to the new regime. After the implementation of the FSR Act on 11 March 2002, industry participants and ASIC have raised a number of instances where the legislative intent has not been fully achieved and refinements have been required.

3.116       While many of the issues raised have required relatively minor adjustments to remedy, on a number of occasions problems have been experienced trying to resolve these issues using the limited regulation making powers contained in areas other then Part 7.9. This has in all cases resulted in a delay or less than satisfactory remedy being adopted and in a number of cases led to a requirement to make further minor amendments to the Act through this Bill. These problems can be directly attributed to weaknesses in the nature and extent of regulation making powers under the Act.

3.117       To ensure that such issues raised can be resolved through regulations, the Bill proposes to include further regulation making powers in Parts 7.6 (see item 42), 7.7, 7.8 and 7.10 of Chapter 7.

3.118       These regulation-making powers are consistent with other regulation making powers in the Act, for example section 1020G.

3.119       The new powers will enable exemptions and modifications via regulations, to provisions under the relevant parts.

3.120       For example, the regulation-making power proposed for Part 7.6 will permit modifications to section 923A in relation to restrictions on the use of certain words, including `independent', `unbiased' and `impartial', to address practical concerns with the operation of the section.

Item 61 -- subparagraph 981B(1)(b)(i)

3.121       This item corrects an error in subparagraph 981B(1)(b)(i) by replacing the word `or' with `of'.

Items 62 & 63 and 89 & 90 -- subsections 981H(2) and 1017E(2B) -- money held on trust

3.122       Items 63 and 90 respectively repeal subsections 981H(2) and 1017E(2B). Items 62 and 89 make consequential amendments to subsections 981H(1) and 1017E(2A).

3.123       Subsection 981H(1) provides that client moneys paid to a licensee are taken to be held on trust by the licensee. Subsection 1017E(2A) contains a similar requirement in the situation where a product provider (who may or may not be a licensee) receives money before a product is issued.

3.124       Subsection 981H(2) provides that subsection 981H(1) does not apply where the licensee and client agree in writing that the money shall not be held on trust. Similarly, subsection 1017E(2B) provides that subsection 1017E(2A) does not apply where the product provider and the person who paid the money agree in writing that the money shall not be held on trust.

3.125       The rationale behind the insertion of subsections 981H(2) and 1017E(2B) was that the statutory trust imposed by subsections 981H(1) and 1017E(2A) should not override any agreement reached by the parties which created an express trust applying to the money. It was not intended that subsections 981H(2) and 1017E(2B) should allow the parties to agree in writing that the money is not subject to a trust at all, as this would have the potential to undermine the protection that is intended to be afforded to such moneys. However, the current drafting does not reflect this intention.

3.126       The effect of the repeal of subsections 981H(2) and 1017E(2B) is that the parties to whom those provisions refer will not be permitted to agree in writing that moneys are not held on trust. However, paragraphs 981H(3)(a) and 1017E(2C)(a) state that the regulations may

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provide that the statutory trusts respectively created by subsections 981H(1) and 1017E (2A) do not apply to money in specified circumstances. Thus it will be possible to cater for situations, if any, in which there is a genuine need to exclude the statutory trust through the making of regulations.

Items 64 & 65 -- sections 992A and 992AA -- anti-hawking provisions

3.127       The amendments to the anti-hawking provisions will ensure that references to offers for issue or sale are interpreted consistently with definitions provided in subsections 700(2) and 1010C(2).

Items 10, 26, 70 & 72 -- section 1012D -- situations where a PDS not required

3.128       The exemption provided by the proposed insertion of subsection 1012D(2A) recognises the trustee/member relationship in determining when a PDS is to be provided for the acquisition of an interest in a self-managed superannuation fund.

3.129       The proposed exemption provides that the obligation to give a PDS does not apply in circumstances where prospective members have the information available to make an informed decision. For example, a PDS would not be required to be provided in circumstances where all the prospective members/ trustees of a fund have, or have available to them, the relevant information or where the fund has only one member.

3.130       In determining whether a PDS should be provided, the responsible person(s) would need to have regard to the information that would be contained in a PDS and the persons to whom they would be providing the information. The term self-managed superannuation fund is also defined for the purposes of Chapter 7.

Items 70, 71 & 73 -- sections 1012D and 1013F -- information in a PDS

3.131       Item 73 amends section 1013F (which relates to limitations on the information required in a PDS) to clarify that it applies in relation to all the content requirements established by the Act and regulations for PDS.

3.132       Item 70 amends section 1012D to exempt a regulated person from the need to provide a PDS in circumstances where section 1013F results in there being no obligation to provide any information.

3.133       The operation of section 1013F is subject to a `reasonableness' test which applies in relation to information required by a person as a retail client to determine whether to acquire a product. Accordingly, section 1013F would not generally remove the obligation to provide a PDS in relation to financial products offered to the public.

Item 77 -- subsection 1015D(2) -- removing the requirement for self-managed superannuation funds (SMSF) to lodge an 'in use' notice

3.134       Section 1015B does not require trustees of SMSFs to issue or lodge PDSs or Supplementary PDSs with ASIC. Instead, subsection 1015D(2) stipulates that the responsible person for the statement must lodge a notice with ASIC advising that a statement is `in use'.

3.135       The primary purpose of an `in use' notice is to provide information to assist ASIC in conducting surveillance. In the case of SMSFs however, the information which would be provided via an `in use' notice is already generally available to ASIC from the Register of Complying Super Funds database, maintained by the Australian Taxation Office.

3.136       The proposed amendment to subsection 1015D(2) will remove the obligation on trustees of SMSFs to lodge an `in use' notice.

Items 79 & 80 -- section 1017B -- disclosure of material changes and significant events

3.137       Item 79 amends section 1017B to remove the current reliance on the obligation imposed on a responsible person to provide a PDS acting as a trigger for the later provision of information regarding `significant events'. Instead the obligation to disclosure a significant event relies on whether the occurrence would have affected material that is required to be included in a PDS.

3.138       The person on whom the obligation falls is the product issuer rather than the `responsible person' as defined in section 1013A. This is consistent with other ongoing disclosure obligations, which fall on the entity providing the product, and reflects the involvement of the issuer (as required by section 1013C) in the preparation of the PDS for a sale situation and the knowledge of the issuer regarding ongoing matters affecting the product.

3.139       A regulation-making power is included to enable modification of the types of information to be provided.

Items 9, 11, 78, 81 to 87, 112 & 113 -- section 1017C -- information for existing holders of superannuation and RSA products

3.140       Item 82 modifies the operation of section 1017C to remedy drafting errors. Some of these errors are currently addressed by the operation of Corporations Regulation 7.9.83.


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3.141       Terminology for section 1017C is also modified by referring to the product issuer rather than the responsible person for the purposes of applying the obligation to provide information on request. Items 112 and 113 make consequential amendments to the table of penalties in Schedule 3, and items 9, 11 and 78 relate to associated definitions.

Item 88 -- section 1017D -- periodic statements for retail clients

3.142       This item amends paragraph 1017D(5)(c) to insert a regulation-making power, which will enable specification of the requirements in relation to the disclosure of information for transactions.

Item 91 -- subparagraph 1020E(1)(a)(i) -- stop order for breach of the clear, concise and effective presentational requirement

3.143       Section 1020E allows ASIC to issue a stop order for breach of the `clear, concise and effective' requirement under subsection 1013C(3). There is currently no specific remedy available to ASIC for a breach of the `clear, concise and effective' requirement. A breach of this provision will not be an offence, but rather will enable ASIC to issue a stop order.

Items 101 & 102 -- section 1274 -- inspection of registers

3.144       Subsection 1274(2) lists documents lodged with ASIC that are not open to inspection by the public. Subparagraph 1274(2)(a)(ia) includes in this list documents lodged under Chapter 7.

3.145       It is important that documents lodged with ASIC under certain provisions of Chapter 7, namely sections 1015B (PDSs) and 1015D (`in use' notices where s1015B does not apply) should be open to public inspection. To prevent inspection of such documents would defeat one of the major purposes of section 1016B, which seeks to subject a PDS to scrutiny by the market and the regulator before it is used to effect sales. Item 101 therefore amends subparagraph 1274(2)(a)(ia) to provide that the public may inspect documents lodged with ASIC under sections 1015B and 1015D. The item also removes an erroneous reference to section 675, which is not in Chapter 7.

3.146       Item 102 removes a redundant reference to section 452 (which no longer exists) from subparagraph 1274(2)(a)(iv).

Item 104 -- section 1416 -- transitional

3.147       Section 1416 provides power to make regulations which change how the provisions of old and new Chapters 7 apply to financial markets during the transitional period.

3.148       This item will add subsection 1416(3) which would clarify that the power provided in subsection 1416(1) may be used to achieve such changes even though the reason is not to transition into the new regime. This will, for example, facilitate the transfer of a fidelity fund of a market which is not operational.

Schedule 3 -- Amendment of Other Acts

Income Tax Assessment Act 1997

Item 1 -- subsection 995-1(1) -- substitution of note

3.149       This item makes a minor amendment consequential to the amendment to paragraph 911A(2)(h) of the Corporations Act in item 25 of Schedule 2.

Retirement Savings Accounts Act 1997

Item 2 -- subsection 182(1A) -- definition of `regulatory provision'

3.150       This item makes an amendment consequential to the amendments to the `information on request' disclosure requirements in section 1017C of the Corporations Act in items 81 to 87 of Schedule 2.

Schedule 4 -- Transitional Provisions

Item 1 -- new Part 10.4 of the Corporations Act 2001 (sections 1449 to 1452)

3.151       New Part 10.4 sets out transitional arrangements for the application of the amendments to Chapter 7 of the Corporations Act (the Act) contained in the Bill. The transitional provisions have three functions:

(i)       They ensure that the current `phase-in' regime (under Division 1 of Part 10.2 of the Act) applies to Chapter 7 (as

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introduced by the FSR Act), as amended by this Bill, in the same way as it does to the provisions of Chapter 7 prior to its amendment by this Bill. This is dealt with in new subsections 1450(1) and (2);

(ii)       They deal with how people transition from the old Chapters 7 and 8 of the Act (ie. Chapters 7 and 8 prior to the amendments introduced by the FSR Act) to the Chapter 7 regime, as amended by this Bill. This is dealt with in new subsection 1450(3); and

(iii)       They clarify how various provisions of Chapter 7 of the Act that may already apply to a person or product (ie. a `phase-in' under Division 1 of Part 10.2 of the Act has already occurred) are affected by the amendments in this Bill. This is dealt with in new section 1451.

3.152       New section 1452 provides transitional arrangements in relation to the amendments to section 1274 of the Act contained in items 101 and 102 of Schedule 2.