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Corporations Amendment Regulations 2003 (No. 7)

Authoritative Version
  • - F2003B00212
  • No longer in force
SR 2003 No. 202 Regulations as made
These Regulations amend the Corporations Regulations 2001.
Administered by: Treasury
General Comments: This instrument was backcaptured in accordance with Section 36 of the Legislative Instruments Act 2003
Made 30 Jul 2003
Registered 01 Jan 2005
Tabled HR 11 Aug 2003
Tabled Senate 11 Aug 2003
Gazetted 06 Aug 2003
Date of repeal 09 Aug 2013
Repealed by Treasury (Spent and Redundant Instruments) Repeal Regulation 2013

Corporations Amendment Regulations 2003 (No. 7) 2003 No. 202

EXPLANATORY STATEMENT

Statutory Rules 2003 No 202

Issued by the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulations 2003 (No. 7)

Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

The Financial Services Reform Act 2001 (FSRA) commenced on 11 March 2002. It amended the Corporations Act 2001 to introduce a uniform licensing, conduct and disclosure regime for financial service providers. Under the FSRA, a two-year transition period was established to allow time for existing industry participants to enter the new regime.

The purpose of the regulations is to support the reforms to the regulation of the financial services industry which were implemented in the FSRA and associated legislation. The regulations facilitate transition to the new licensing, conduct and disclosure arrangements and promote certainty, clarifying, where necessary, various provisions under the FSRA.

The regulations in Schedule 2 implement new measures to promote uniformity by applying the consumer protection measures of the FSRA to all pension products, with effect from 11 March 2004, the end of the transition period.

Details of the regulations are set out in the Attachment.

The regulations and Schedule 1 commences on gazettal. Schedule 2 commences on 11 March 2004.

ATTACHMENT

SCHEDULE 1 - AMENDMENTS COMMENCING ON GAZETTAL

Item 1       Clarification of surety bonds - amendment of paragraph 7.1.07(1)(d)

Regulation 7.1.07 provides that a 'surety bond' is not a financial product.

However, this exemption does not apply in the case of a ' surety bond' that constitutes a financial product as defined under section 764A, which includes a derivative. A surety bond in fact constitutes a derivative under section 761D. An example would be a personal guarantee triggered when a borrower has failed to repay to the lender. It meets the derivative definition as it is an arrangement under which the guarantor may in the future be required to provide consideration and the amount of that consideration is determined according the value of the outstanding loan.

The regulation aims to ensure that personal guarantees are not inadvertently caught as a financial product by allowing a derivative to be classed as a surety bond. Given the need to satisfy other requirements for being a surety bond under regulation 7.1.07(1)(a) to (c), it is not expected this change will allow ordinary derivatives to avoid regulation.

Item 2       Value test for Foreign Exchange Contracts - regulation 7.1.22A

The price value test is one of the tests under section 761G(7) to determine if a client should be treated as a 'retail client' or 'wholesale client'. The existing price value tests are based upon certain generic areas, such as 'investment based financial products' and 'income stream financial products'. This takes account for the different nature of financial products and that a universal price value test should not apply across all products as the 'value' of a product cannot be calculated in the same way.

A Foreign Exchange Contract (FX Contract) is to buy, sell or exchange currency. A FX Contract does not fall under any of the existing tests used for the value test. Therefore, in order to ensure consistency with other financial products that have access to a value test, a value test will be inserted for FX Contracts. Like derivatives, given the nature of FX Contracts, a price test would not be relevant.

The value of the FX Contract is the amount paid or payable under the FX Contract.

A FX Contract may be settled on a 'net basis', which means the contract is subject to the exchange rate at settlement. Even though the parties to the FX Contract may settle the difference between the exchange rate at execution and settlement of the contract, the amount payable for the purpose of this test is the amount agreed to be exchanged under the contract, not merely the 'net' amount paid. That said, there must be certainty that the amount payable under the contract will exceed the threshold amount. It would be inappropriate to describe a client as 'wholesale' if there is potential for the amount payable under the FX Contract to fall under $500,000 in Australian dollars.

Items 3 and 4       A report by an expert is not financial product advice paragraph 7.6.01(1)(u)

Experts' reports contained in disclosure documents such as a Product Disclosure Statement (PDS) provide prospective investors with an expert opinion on matters relevant to making an investment decision. This could include, for example, a geologist report for a mining company or a botanist's report for a forestry company.

Given the definition of 'financial product advice' under the Financial Services Reform Act 2001 (FSRA), it could be argued that where a person is providing an expert's report for inclusion in such a disclosure document, they would require an Australian Financial Services Licence. This is because an

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expert's report might contain opinions intended or reasonably likely to influence consumers to make decisions about financial products, even if the report is not specifically about a financial product.

It is not the intention to require experts providing advice not specifically about financial products to be licensed under the FSRA. Therefore, a geologist that provides a report about a mine that is included in a PDS does not need to be licensed. That said, an expert's report that concerns a financial product would require licensing, such as a banker providing a valuation of shares.

Licensing exemption for certain nominee companies - paragraph 7.6.01(1)(v)

This new paragraph provides an exemption from licensing for certain nominee company subsidiaries of participants on licensed markets (such as the Australian Stock Exchange), where those nominee companies provide a custodial or depository service to clients of the participant. Such nominee companies are generally required by the Operating Rules of the licensed market to hold financial products on behalf of clients of the participant.

To qualify for the exemption, certain criteria must be met:

•       The nominee must hold a financial product or a beneficial interest in a financial product on trust for, or on behalf of, a client of the participant. The participant must itself be the holder of an Australian financial services licence;

•       The financial product held by the nominee must have been acquired on the licensed market by the participant on behalf of the client, or must be going to be disposed of on the licensed market by the participant on behalf of the client;

•       The participant's licence must authorise it to provide a custodial or depository service;

•       The nominee must be a wholly-owned subsidiary of the participant; and

•       The participant's licence must contain a condition requiring it to assume full responsibility for the conduct of the nominee in relation to the provision of the financial services described in the paragraph.

A licence condition as mentioned above could be imposed either by regulation under subsection 914A(8) of the Act, or by ASIC under subsection 914A(1). It is not considered that participants should be forced to have the licence condition, thus it is likely that the condition will be imposed by ASIC pursuant to a request by the licensee under paragraph 914A(2)(b). Naturally, nominee company subsidiaries of licensees that do not seek and obtain the licence condition will not be able to take advantage of the exemption.

Without pre-empting the final form of any licence condition that may be determined, the following is provided as an example:

"A participant referred to in paragraph 7.6.01(1)(v) of the Corporations Regulations must:

(a) comply with the Act as if any subsidiary nominee company relying on the licensing exemption in paragraph 7.6.01(1)(v) is a representative of the participant within the meaning of Chapter 7 of the Act; and

(b) without limiting (a), have arrangements in place under which the participant accepts liability, as between the participant and clients, for any acts or omissions of the subsidiary nominee company in relation to the provision of the financial services mentioned in paragraph 7.6.01(1)(v), as if they were acts or omissions of a representative of the participant under section 917E of the Act."

Item 5       Situations in which FSG is not required - amendment of subregulation 7.7.02(1)

The amendment provides an exemption from the requirement to provide an FSG to deposit accounts of two years or less. This would extend the FSG exemption that currently applies to basic deposit products to term deposits of two years or less.

The current definition of "basic deposit product" at section 761A includes term deposits with a maturity of up to 2 years, provided the funds are able to be withdrawn from the account "at call". In practice, the "at call" requirement means that very few term deposits will fall within the basic deposit products definition.

The amendment will ensure that all term deposits of up to two years will benefit from the FSG exemption that applies to basic deposit products, regardless of whether funds are able to be withdrawn at call.

Item 6       Circumstances where a FSG does not need to be provided - amendment of subregulation 7.7.02(4)

This regulation provides an exemption from providing a FSG in circumstances where providing a FSG would serve a limited benefit to investors. A FSG sets out the terms and conditions when a financial service is provided to retail clients.

The regulation extends the exemption from providing a FSG when general advice is provided in a 'public forum', such as on a billboard, in radio broadcast or through a newspaper advertisement. There is a FSG exemption as the benefit from an investor receiving a FSG in such situations is limited and is logistically difficult.

The regulation extends the FSG exemption to general advice provided through avenues such as:


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•       mail and e-mail promotional campaigns; and

•       telephone calls that made to investors that hold similar products of the providing entity or where there has been no issue or sale of a financial product during the call.

The rationale behind this exemption is that providing a FSG in these limited circumstances would not add to consumer protection.

The mail and e-mail context is analogous to the circumstances where general advice is provided in a 'public forum' but these situations do not fall within the "public forum' definition. For example, if a brochure containing general advice is displayed in a bank branch, it meets the public forum exemption and does not require a FSG. However, if that same brochure is mailed to a person or included on an Internet site, it may require a FSG.

Normally, a FSG must be provided in a meeting or telephone call situation given the potential for undue influence in a one-on-one discussion, even if only general advice is given.

In relation to telephone calls to existing product holders, if a person already holds a financial product of the provider, that a person is likely to already hold the information contained in the FSG.

This would be either from previously receiving a FSG for their existing product or similar information. Therefore, there would be limited benefit in receiving another FSG.

In practice, it is intended this exemption would apply when an investor holds a managed investment product, the providing entity will be able to give that investor general advice about managed investment products provided by that entity without a FSG. However, it is not intended a providing entity will be able to provide the holder of a managed investment product general advice without a FSG when the advice relates to other financial products such as superannuation or general insurance.

When there has been no issue or sale of a financial product, even though general advice has been provided, an investor would not require the information contained in a FSG if they did not acquire the financial product.

The exemption from providing a FSG is subject to several conditions:

•       the providing entity must only give general advice (ie it cannot be advice that considers a person's personal objectives and financial situation);

•       the general advice:

-       must be provided by a person with a strong connection to the product, such as a product issuer - independent persons who provide advice about the financial product are still subject to the FSG requirements;

-       the general advice cannot be provided during a meeting or telephone call except when the advice is given to an existing holder of the providing entity's products and where there has been no issue or sale; and

-       must be accompanied by certain information contained in a FSG that provides the investor with key information namely, the provider's name and contact details, information about the provider's remuneration or benefits and information about the provider's associations and relationships.

Even if this provision does not require the provision of a FSG, if an investor ultimately seeks to acquire a financial product, the obligations to provide disclosure documents, such as a FSG and a PDS would be triggered.

Items 7, 8, 10 and 11       Level of information that needs to be provided - amendments of regulations 7.7.04, 7.7.07, 7.7.11 and 7.7.12

Supplementing provisions in the Act, these regulations prescribe information that must be included in a FSG and a Statement of Advice (SoA). The regulations also contain the phrase 'without limiting the generality...', which has caused uncertainty of what must be provided in a FSG or SoA. To ensure certainty and improve clarity of what information must be included in a FSG or SoA, this phrase has been removed.

The information contained in these regulations must be included in the FSG and SoA. However, the level of information that needs to be provided in these disclosure documents is not intended to be excessive or prescriptive. Practical guidance on what level of information is expected in these documents has been provided through an ASIC Policy Statement.

Item 9       Products for which SoA is not required - amendment of regulation 7.7.10

The amendment provides an exemption from the requirement to provide a SoA to deposit accounts of two years or less. This would extend the SoA exemption that currently applies to basic deposit products to term deposits of two years or less.

The current definition of "basic deposit product" at section 761A includes term deposits with a maturity of up to 2 years, provided the funds are able to be withdrawn from the account "at call". In practice, the "at call" requirement means that very few term deposits will fall within the basic deposit product definition.

The amendment will ensure that all term deposits of up to two years will benefit from the SoA exemption that applies to basic deposit products, regardless of whether funds are able to be withdrawn at call.


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Item 12       Auditor's report - amendment to regulation 7.8.13

The requirement for an Australian Financial Services Licensee (AFSL) holder to have an annual audit promotes the FSR's objective of market integrity. Subregulation 7.8.13(2) relates to an AFSL's requirement to lodge an audit report with ASIC. The amendments improve the practical application of this requirement whilst still ensuring that a person holding an AFSL is subject to appropriate audit controls.

Under the existing regulation, an auditor is required to 'check and examine' . . .. 'the internal procedures used by an [AFSL] to comply with Part 7.8 of the Act'. This opens up a broad spectrum of areas that requires examination by a licensee's auditors that may prove difficult to comply with, including the unconscionable conduct and anti-hawking provisions. It has created concern that complying with these audit provisions will be too onerous.

The amendments reduce the potential scope of the audit and give it a more financial focus by excluding provisions relating to unconscionable conduct and anti-hawking. In addition, instead of requiring an auditor to 'check and examine' internal procedures, the auditor will state an 'opinion' which is consistent with principles established for similar control audits in the Act.

It should be noted that as there are no immediate plans for the inclusion of regulations relating to Divisions 4 and 5 of Part 7.8, no reporting obligations are presently required. However, the reference to them has been included to account for potential future obligations. Further, ASIC may include other matters in the prescribed form, including statements by the auditor that the licensee has complied with any licence conditions ASIC has imposed under s914A of the Act.

Item 13       Dealings involving employees of financial services licensees - amendment to regulation 7.8.21

Subsection 991F(3) of the Act places restrictions on employees of financial services licensees that are participants on a licensed market acquiring, on their own behalf, financial products of a kind able to be traded on the licensed market. Such acquisitions may only be made if the licensee acts as agent for the employee in the acquisition. However, the restriction in the subsection is expressed to be subject to the regulations.

Subregulation 7.8.21(2) currently provides a limited exception from the restriction in subsection 991F(3) where a financial product is acquired by a body corporate related to the licensee, as agent for the licensee's employee.

The new subregulation 7.8.21(3) will allow bodies corporate unrelated to a licensee to acquire financial products as agent for employees of the licensee, provided certain conditions are met. Those conditions are:

•       The body corporate acting as agent is a participant on the same licensed market as the licensee (ie. the employer);

•       The body corporate acting as agent holds an Australian financial services licence;

•       The licensee has given its consent in writing to the particular acquisition by its employee - thus, consent must be given each time an acquisition is made; and

•       The employee provides a copy of the transaction confirmation to the licensee, once the acquisition is made.

Item 14       Exemption for trustees of self-managed superannuation funds lodging an 'in use' notice - new regulation 7.9.02C

Section 1015B of the Act does not require trustees of self-managed superannuation funds (SMSFs) to lodge PDS's or Supplementary PDS's with ASIC. Instead, subsection 1015D(2) stipulates that trustees of SMSFs are required to lodge an 'in use' notice with ASIC.

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 that would be provided via an 'in use' notice is already generally available to ASIC from the Register of Complying Super Funds (ROCS) database maintained by the Australian Taxation Office.

The new regulation will remove the obligation on trustees of SMSFs to lodge an 'in use' notice. Removing this requirement recognises that the same information is generally available to ASIC through the ROCS database. Therefore it is unlikely there will be a loss of information available to ASIC while reducing its administrative workload. Further, it will help reduce compliance costs for SMSFs.

Item 15, 16, 17, 18 and 19       Amendments of paragraph 7.9.04(2)(a) and (b), subparagraph 7.9.15(1)(c)(ii), subregulation 7.9.20(2), 7.9.611)(1) and paragraph 7.9.61D(1)(e)

Minor drafting corrections.

Item 20       Transactions involving superannuation products - new subregulation 7.9.61D(3)

The new subregulation provides that, for the products listed in regulation 7.9.61D(1), confirmation may be provided by means of a facility that is able to be accessed by the holder by phone, writing or another method the responsible person knows, or reasonably believes, that the product holder is able to use.

This addresses an inconsistency that existed between the means of confirmation listed under section 1017F(6) of the Act and those set out in regulation 7.9.61D(2) of the Regulations.

Items 21 and 22       Confirmation of transactions:

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superannuation products and RSAs - new subparagraph 7.9.62(4)(g)(ii)

Regulation 7.9.62 details various transactions which are not required to be confirmed by the trustee of a superannuation fund, an approved deposit fund or a pooled superannuation trust under section 1017F. Regulation 7.9.62(4)(g)(ii) exempts a transaction consisting of "the payment to that holder of that return or other benefit, if the holder has agreed to the method by which the payment will be made".

The amendment to the regulation clarifies that the transactions that are not required to be confirmed include transactions consisting of both positive and negative returns.

Item 23       Periodic Statements: exemption for passbook accounts - new regulation 7.9.71A

The new regulation provides an exemption from the periodic statement requirements of section 1017D of the Act for passbook statement accounts. This exemption is provided on the basis that the holder of a passbook account can access all information that would normally be included in a periodic statement by presenting the passbook to be updated at a bank free of charge.

Item 24       Disclosure of death benefit nomination - amendment of regulation 7.9.78

The amendment responds to concerns that regulation 7.9.78 as currently drafted may not deliver on its objective of replicating the provisions under 2.24C in the Superannuation (Supervision) (SIS) Act 1993.

The amendment will ensure that regulation 7.9.78 is consistent with 2.24C in SIS.

Items 25 and 26       Provision of an AFSL number - amendment of regulation 10.2.44A

Section 912F is a strict liability offence for a licensee to identify themselves by including their Australian Financial Services Licence (AFSL) number on documents connected with the provision of financial services. To assist transition to the FSRA by minimising logistical difficulties with placing the AFSL number on all documents as soon as a person moves to the FSRA regime and reducing waste, this regulation provides transitional relief.

For any document that a person prepares before they transition into the FSRA, the section 912F requirement does not apply until 11 March 2004. This will assist in an orderly transition to the FSRA by allowing a person to 'run down' stocks of existing pre-FSRA documents and time to undertake software changes.

This relief is limited until 11 March 2004 given the transitional purpose of the regulation and it is not expected many documents required under pre-FSRA regimes will be used under the FSRA.

That said, it is recognised a pre-FSRA document under many regimes that is required under FSRA is a 'periodic statement'. It is expected that many licensees will use pre-FSRA supplies and systems that are updated for FSRA purposes to produce periodic statements. To assist transition by allowing licensees to use pre-FSRA stocks and systems, the relief for periodic statements alone is extended to 11 March 2005. This measure should not reduce overall requirement under section 912F, as all other documents must contain the AFSL number from 11 March 2004.

SCHEDULE 2 - AMENDMENTS COMMENCING ON 11 MARCH 2004

Item 1       Issue of a new interest in a superannuation fund - regulation 7.1.04E

Under section 761A of the Corporations Act (the Act), a superannuation product is issued when a person becomes a member of the fund or when an existing member of the fund joins another subplan.

Should a fund member move from the growth phase of a superannuation product to a pension product (due to retirement) without this causing the fund member to move from one subplan to another, then this would currently not be considered the issue of a new interest in a superannuation product.

The new regulation ensures that an interest in a superannuation product is issued when a fund member moves from the growth phase to a pension product in an existing superannuation fund subplan.

This regulation would serve as a trigger for consumer protection obligations under the FSRA. Superannuation funds would be required to provide the fund member with a PDS, ensure fund members complete an application form and make available cooling off provisions in relation to pension products.

This regulation would serve to promote an important objective of the FSRA, that being uniform disclosure for the financial services industry. The regulation will increase consistency in the legislation. That is, adequate consumer protection provisions will support all pension products issued by superannuation funds (whether the pension product is issued in the same subplan as that of the growth phase, or a different subplan).

Item 2 and 3       Disclosure requirements for pensions - amendment of regulations 7.9.04 and 7.9.64A

The FSRA disclosure regime was implemented to assist individuals make informed financial decisions. One of the most important financial decisions a consumer makes, is the form in which they receive the money they have accumulated through superannuation.

Regulation 7.1.04E prescribes that a new financial product is issued (thus triggering consumer protection obligations) when the nature of a superannuation product changes from the growth phase to a pension.

This regulation ensures that the decision to receive a pension product is

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supported by the relevant FSRA protections. That is, the fund member will receive a PDS, fill out an application form and receive the benefit of a cooling-off period.

Currently, regulation 7.9.04 would defeat the intention of regulation 7.1.04E in relation to non-public offer superannuation funds, as 7.9.04 allows those funds to provide the client with a PDS within 3 months after the product is issued. (Note: on-public offer superannuation funds include self-managed superannuation funds.)

Further, regulation 7.9.64 removes the obligations for cooling-off provisions for the issue of financial products by a number of specified superannuation funds (including non-public offer superannuation funds).

The amendments ensure that these delayed PDS and cooling off provisions will not apply when the nature of a superannuation product changes from the growth phase to a pension. This exception would ensure that the intention of draft regulation 7.1.04E is maintained.

In addition, regulations 7.9.04 and 7.9.64 currently apply to regulation 7.9.02 (which prescribes that a superannuation interest is issued when a member changes sub-plans). The amendments will ensure consistent regulatory treatment of the decision to receive a pension. Regulations 7.9.04 and 7.9.64 will not apply in circumstances where the nature of a superannuation product changes from the growth phase to a pension (including under regulation 7.9.02).

Where the rules of a superannuation fund only allow that fund to provide a member with a pension product from the fund in retirement (that is, the fund member can not receive money accumulated in a lump sum, nor role their money into a pension product from a different fund), the exemptions provided for by regulation 7.9.04 and 7.9.64 will remain in force.

Regulation Impact Statement

Regulations under paragraph 761E(7)(a), section 1012F and paragraph 1019A(2)(a) of the Corporations Act 2001 (the Act).

A. The Problem

B. Discussion of Government Objectives

C. Identification of Options

D. Impact Analysis

E. Consultation

F. Conclusion

G. Implementation and Review

A.       The Problem

The Financial Services Reform Act 2001 (FSRA), which commenced on 11 March 2002, introduced a uniform disclosure and licensing regime for the financial services industry. A goal of the new regime is to promote consumer awareness, through increased financial product disclosure.

The broad objective of point of sale disclosure obligations under the FSRA is to provide consumers with sufficient information to make informed decisions in relation to the acquisition of financial products, including the ability to compare a range of products.

Without appropriate disclosure, information asymmetry may exist whereby large companies hold information advantages over consumers. The lack of available information could force consumers into uninformed or inappropriate decisions. For example, consumers might purchase financial products without carefully considering the performance of that product compared to other products in the market.

Superannuation is one of the largest investments most Australians will make in their lifetime. As such, it is likely to be the most important financial product in which a consumer shall invest.

In the current superannuation environment, employers often decide which superannuation fund their employees shall pay contributions made under the Superannuation Industry (Supervision) Act 1993, towards (that is, a 9 per cent contribution made by employers on behalf of their employees). As such the first real opportunity many consumers have to make choices in relation to their superannuation product occurs at retirement, when a superannuation product holder is faced with the choice of receiving a pension or a lump sum payment.

Upon retirement there are, in very general terms, three options available to superannuation product holders. The superannuation product holder can withdraw their funds from the superannuation system by taking a lump sum payment (which may or may not later be invested in the superannuation system) upon retirement. Or, the superannuation product holder may choose to roll their investment into a pension product, but from a different superannuation fund. Or, the superannuation product holder may retain their investment with the existing superannuation fund in the form of a pension product it provides.

It is with this third option that FSRA disclosure obligations do not operate.

Should a fund member move from the growth phase of a superannuation product to a pension product in their existing fund (due to retirement) without this causing the fund member to move from one subplan to another, then this does not currently trigger disclosure obligations under the FSRA.

In contrast, FSRA disclosure is required if movement from the growth phase causes the fund member to move into a different subplan to that which they were in during the growth phase of their investment (reflecting the change in the nature of the interest held by the member).

This anomaly may effectively allow disclosure obligations under the FSRA to be

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thwarted by superannuation funds that structure their business to ensure that fund members remain in the same subplan when moving from the growth phase of a superannuation product to a pension product.

In addition, the timing for FSRA consumer protection measures available to retail clients may not be appropriate for members that elect to receive a pension from a non-public offer superannuation fund.

FSRA regulations allow non-public offer superannuation funds to provide the client with a PDS within 3 months after the product is issued. (Non-public offer superannuation funds include self-managed superannuation funds).

Regulations also allow a number of specified superannuation funds (including non-public offer superannuation funds) an exemption from the need to provide fund members with a cooling off period when issuing financial products.

These exemptions are provided, on the basis that non-public offer funds do not issue financial products to individuals that require the protection of the FSRA. Rather non-public offer funds typically issue superannuation products through an employer-sponsored arrangement and thus deal with representatives who make decisions on behalf of a large body of individuals (for example, employers that act on behalf of their employees).

While the initial issue of a superannuation product is made through an employer-sponsored arrangement, non-public offer funds can issue superannuation products to individuals when an individual member seeks a pension product from the fund. The exemptions allow non-public offer superannuation funds to issue a pension product to individual fund members without providing timely disclosure or allowing a cooling-off period.

B.        Discussion of Government Objectives

The FSRA is intended to provide a broad regulatory disclosure regime that should lead to more informed consumers and markets.

The reforms benefit consumers of financial services through the introduction of a consistent framework of consumer protection.

In particular, the FSRA significantly enhances the level and quality of information available to consumers at the time they make the decision to purchase a financial product. This information will facilitate more informed decision-making and promote further competition between product providers and financial advisers.

As such, should the issue of certain financial products (or the methods of providing those products) circumvent the need for disclosure, this is clearly contrary to the intent of the FSRA.

These regulations are consistent with the intention of the FSRA by ensuring that all decisions regarding pension products are included under the disclosure regime.

C.        Identification of Options

Possible options are:

1.       Do nothing.

Superannuation funds would be able to continue the existing practice of providing pension products without FSRA disclosure, by establishing a single subplan structure for fund members.

2.       Make a regulation that obliges superannuation funds to provide a Product Disclosure Statement (PDS) to fund members, when they elect to receive a pension product from the fund. Further consumer protection measures afforded under Part 7.9 of the Act would not be provided to fund members under this option.

Fund members would receive a PDS, before receiving a pension product from their superannuation fund.

3.       Make a regulation under paragraph 961E(7)(a) of the Act to ensure that a superannuation product is issued when a fund member moves from the growth phase to a pension product in an existing superannuation fund subplan.

Make amendments to regulation 7.9.04 and regulation 7.9.64 to ensure that non-public offer superannuation funds provide timely disclosure and allow individuals a cooling-off period in relation to a decision to acquire a pension product. Regulation 7.9.04 and 7.9.64 should continue to apply where the rules of the fund do not allow a fund member to take their superannuation monies in any form other then a pension from that fund.

Implementation of the amendments would be delayed until 11 March 2004.

Superannuation fund members would receive a PDS, be obliged to fill out an application form and receive the benefit of cooling off provisions when deciding to take a pension product in retirement.

D.        Impact Analysis

Impact Group

Any attempts to solve the outlined problem have a direct impact upon the superannuation industry and consumers/superannuation fund members.

Regulations in this area would have the potential to effect all superannuation funds.

Australian Prudential Regulation Authority (APRA) superannuation market statistics indicate that in December 2002 there were around 254,228 separate superannuation funds in Australia. Of these funds, 2472 were public offer or employer sponsored funds that represent over 98 per cent of all member accounts.

The majority of superannuation funds, 251,756 or 99 per cent, are small funds that contain fewer than five members. Overall, small funds represent a total

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of only 439,000 members, or less than 2 per cent of individual Australians who have superannuation.

Regulations in this area would also effect consumers, who are the beneficiaries of superannuation funds.

1.       Do Nothing

Costs

This option is inconsistent with the intention of the FSRA regime.

Under this option, consumers would not benefit from any disclosure or other consumer protection measures provided by the FSRA. Without appropriate disclosure, a fund member would not be able to compare the benefits of the pension product offered by their fund, with competitor pension products. This lack of information makes it difficult for a fund member to make an informed decision on the way to receive their superannuation funds in retirement.

Therefore, the direct cost involved with this option is a lack of available information and hence lack of consumer awareness for pension related decisions.

Benefits

This option would convenience the superannuation industry by limiting compliance costs associated with providing pension products under the FSRA.

2.        Minimum Disclosure

Costs

There are compliance costs for financial product providers under the FSRA.

When issuing a financial product a superannuation fund is obliged to provide the consumer with a Product Disclosure Statement (PDS). A PDS must include all relevant information that a consumer would be able to use to decide upon the merits of a financial product. For example, a PDS is to include information regarding significant benefits that the holder of the product would be entitled too, information regarding significant risks associated with the product and the costs associated with the product (section 1013C of the Corporations Act prescribes the content requirements of a PDS).

The costs involved with the preparation of a PDS may differ depending on the nature of the financial product, which has an effect on PDS content.

If a consumer is then interested in purchasing the financial product the fund must have the consumer fill out an application form (provided by the fund).

When a consumer completes an application form, thereby indicating an intention to purchase the product, the superannuation fund is obliged to allow the consumer a cooling off period in which that consumer has time to change their mind regarding the purchase of the financial product.

All of these measures involve direct costs for the providing entity.

The implementation of option 2 includes compliance costs for superannuation funds. Superannuation funds would be obliged to provide members with a PDS when a fund member elects to receive a pension product. However, superannuation funds would not be required to seek the completion of an application form or provide fund members with a cooling off period.

If a superannuation fund offers a pension product to both non-fund members and members, then it is likely that it would need to compile a PDS for that pension under the FSRA. Such superannuation funds would be able to satisfy the requirements of option 2 by providing members with the existing PDS, hence limiting the compliance cost of this option.

The impact on Self Managed Superannuation Funds (SMSF) of the proposed option 2 will be mitigated by two changes proposed within the Financial Services Reform Bill 2003.

The first amendment is the proposed insertion of subsection 1012D(2A), which exempts SFSF's from providing a PDS in certain circumstances. The proposed exemption recognises the trustee/member relationship in determining when a PDS is to be provided for the acquisition of an interest in a SMSF.

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 relation to a pension product 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.

Further, the Bill also includes a proposed amendment to subsection 1015D(2) which would remove the obligation on trustees of SMSFs to lodge an `in use' notice, including for a potential PDS related to pension product. This would further ease the compliance costs of SMSF's in relation to option 2.

Option 2 involves a number of opportunity costs for consumers. Without receiving a completed application form, a fund will be unable to determine that the fund member has received the PDS.

Further, without cooling off provisions, consumers do not have an available mechanism by which they may change their mind. Deciding how to maintain an income in retirement is an important decision. Cooling off provisions give fund members a grace period to further consider the appropriateness of a decision and thereby reduce the effectiveness of potential aggressive sales techniques.

Fund members of non-public offer superannuation funds that elect to receive a pension product may not receive timely disclosure due to delayed disclosure obligations for such funds.

Benefits


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This option has the benefit of limiting the impositions and hence compliance costs, incurred by the superannuation industry.

Option 2 would provide information regarding the pension product to fund members. In this regard, fund members would be able to compare the pension product of their existing fund to other products. This increase in consumer information would satisfy one of the purposes of the FSRA.

3.       Full Disclosure under the FSRA

Costs

This regulation would increase superannuation compliance costs under the FSRA when compared to the existing format. As with option 2, superannuation funds would be obliged to issue a PDS under option 3. However, as outlined under option 2, the Government has introduced proposed amendments to the Corporations Act that would serve to generally ease compliance costs associated with disclosure obligations for SMSF's.

In addition, funds would need a member to complete an application form and would have to provide a cooling off period to members that decide to invest in a pension product from the fund.

There is a compliance cost for superannuation funds that are required to provide these FSRA protections, however, the benefits of such protections to consumers are considered to outweigh the costs imposed on industry.

There are no foreseeable costs for consumers under option 3.

Benefits

As the decision consumers make regarding how to receive their superannuation investment in retirement is a very important one off decision involving a large sum of money, it is warranted that consumers should benefit from the full consumer protection measures of the FSRA.

FSRA disclosure obligations were intended to apply uniformly to similar investment decisions. In this regard, it is logical that full consumer protection measures be made available in all cases where a fund member moves from the growth phase to a pension.

Further, a similar requirement already exists under section 153 of the SIS Act (and the s153 determination). The trustee of a public offer entity (other then a pooled superannuation trust or a capital guarantee fund) that offers a superannuation interest which is a single premium product and has an investment component, is to provide an applicant with a Key Feature Statement when issuing an allocated pension product. The determination also indicates that allocated pensions must have their own application form.

To maintain the status quo (at least for allocated income streams) and to promote consistency for similar investment decisions in the FSRA environment, this approach should be applied to all pensions which can be chosen from the product range of any superannuation funds.

In addition, this option would afford all individuals with appropriate consumer protection when deciding to receive a pension, including those individuals that elect to receive a pension from a non-public offer superannuation fund.

E.        Consultation

Comments and submissions on the content of the regulations have been sought from the Ministerial Council for Corporations, affected participants in the financial services industry and the public.

Regulations proposed under the Act serve to increase consumer protection in relation to the superannuation industry. The regulations have the support of the Australian Securities and Investments Commission and a number of participants in the financial services industry.

However, the proposed regulations increase the disclosure requirements imposed upon the superannuation industry in comparison with the existing framework, and as such, have not been welcomed by participants in the superannuation industry during consultation.

In particular, the Association of Superannuation Funds of Australia Limited (ASFA) expressed concerns with proposals to increase the disclosure obligations for the superannuation industry.

ASFA indicated that increased disclosure obligations should not be pursued at this time. While they agreed disclosure was a key objective of the FSRA, ASFA thought PDS disclosure might be inappropriate in this instance.

Treasury did not accept ASFA's view on the desirability of the general application of PDS requirements in such circumstances.

ASFA also indicated that some superannuation funds might only make available to its fund members, a pension product from that fund in retirement (ASFA indicated some small defined benefit funds would fit into this category). As these funds do not allow the fund members a choice regarding the receipt of superannuation monies, it was decided that it was appropriate that regulation 7.9.04 and regulation 7.9.64 continue to apply to such funds.

F.        Conclusion

Option 3 is the preferred solution.

Currently, a gap exists in consumer protection obligations for the superannuation industry. The same transaction (a fund member moving from the growth phase to a pension product in the same fund) currently incurs different consumer protection requirements. This includes complete disclosure available to consumers if the subplan changes when a fund member moves from the growth phase to a pension compared to no regulated disclosure if the fund plan remains the same when a fund member moves from the growth phase to a pension.

While the implementation of option 2 would increase consumer awareness through the issue of a PDS with a minimal cost to industry, this option does not provide an appropriate level of consumer protection for fund members deciding to invest in such an important financial product.

Government policy is to treat all financial products in a consistent manner. The FSRA regime not only seeks to provide consumers with adequate information to make informed decisions regarding financial products, but also allows consumers a period of time in which they may change that decision. A cooling off period allows members to change their mind, especially where consumers are pressured into a hasty decision.

To maintain consistent Government policy, it is therefore appropriate that the disclosure and cooling-off obligations apply where the nature of a superannuation product changes from the growth phase to a pension. Appropriate exceptions would be available for interests in superannuation funds that only allow members to take superannuation monies in the form of a pension product from that fund.

As such, while regulations as set out in option 3 will increase the disclosure burden on the superannuation industry, it ensures consistency in that all funds provide members with full disclosure, when a member (of public and non-public offer funds) moves into a pension product upon retirement.

G.        Implementation and Review

The regulations are to commence operation on 11 March 2004, the end of the FSRA transition period. The delay in commencement is to give the superannuation industry adequate time to prepare for the increased disclosure obligations. As such, this delay should ease the cost of compliance for the superannuation industry.

The Australian Securities and Investments Commission shall administer and enforce the regulations.

The regulations are part of the broader FSRA regime, as it fills a gap in existing consumer protection measures under the FSRA for superannuation funds. In view of this, no specific review of the regulations is currently planned.