Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
corporations legislation amendment (financial services modernisation) bill
2009
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments Moved on Behalf of the Government
(Circulated by the authority of the
Minister for Human Services, Minister for Financial Services,
Superannuation and Corporate Law, the Hon Chris Bowen, MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Margin loans 5
Chapter 2 Trustee companies 9
Do not remove section break.
The following abbreviations and acronyms are used throughout this
supplementary explanatory memorandum.
|Abbreviation |Definition |
|ASIC |Australian Securities and |
| |Investments Commission |
|ASIC Act |Australian Securities and |
| |Investments Commission Act |
| |2001 |
|the Bill |Corporations Legislation |
| |Amendment (Financial Services|
| |Modernisation) Bill 2009 |
|Corporations Act |Corporations Act 2001 |
General outline and financial impact
Parliamentary amendments to Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009
The parliamentary amendments to the Corporations Legislation
Amendment (Financial Services Modernisation) Bill 2009 (the Bill)
to which this supplementary explanatory memorandum relates are
amendments to the margin loans and trustee companies provisions.
The amendments to the Corporations Act 2001 (Corporations Act)
ensure that an issuer of a margin lending facility retains their
obligations to undertake the new responsible lending conduct and
margin call notification requirements.
The amendments to the Australian Securities and Investments
Commission Act 2001 (ASIC Act) ensure that certain existing ASIC
powers are available to it in relation to trust property held by
trustee companies.
Date of effect: The date of effect of these amendments is the
date the Bill takes effect. These dates are specified in the
explanatory memorandum to the Bill.
Financial impact: There is no separate financial impact for these
amendments. The amendments give effect to policy for which
the financial impact statements are included in the explanatory
memorandum to the Bill.
Compliance cost impact: There is no separate compliance cost
impact for these amendments. The amendments give effect to policy
for which the compliance costs statements are included in the
explanatory memorandum to the Bill.
A regulatory impact statement is included in the explanatory
memorandum to the Bill.
Do not remove section break.
Outline of chapter
1. The amendments ensure that the issuer of a margin lending facility
will be licensed and is responsible for undertaking responsible
lending conduct and margin call notification requirements.
Context of amendments
2. Currently under the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009 (the Bill), where an issuer of a
margin lending facility relies on a licensing exemption in
paragraph 911A(2)(b) of the Corporations Act 2001 (Corporations
Act), neither they nor the intermediary (who is authorised to
arrange for the issue of the product) will be required to meet the
new responsible lending and margin call notification obligations.
3. Paragraph 911A(2)(b) of the Corporations Act provides an exemption
for product issuers (a lender) from holding an Australian Financial
Services Licence (AFSL) where they have arrangements for another
AFSL holder to issue, vary or dispose of a product.
4. In the margin lending context, this exemption could be relied on by
issuers of a margin lending facility (the lender) that badge or
'white-label' the facility for another provider (the intermediary).
5. The responsible lending obligation in subsection 985E(1) of the
Bill states that a financial services licensee (the provider) must
not issue a margin lending facility to a retail client or increase
the limit of a margin lending facility unless the provider has,
among other things, made an assessment of unsuitability.
6. In these situations the intermediary will not be issuing the margin
lending facility but merely arranging to issue the facility. The
consequence of this is that the intermediary will not need to
satisfy the responsible lending obligations.
7. Given that the original issuer of the margin lending facility can
rely on the licensing exemption, the issuer will also not be
required to comply with the responsible lending obligation where it
has chosen to rely on the exemption. The same issue occurs in the
context of the notification of a margin call obligation given that
the drafting of this provision is similar to subsection 985E(1).
8. This creates a regulatory 'gap' where no party is required to
comply with the conduct requirements. This poses a potential risk
to achieving the policy objective of regulating margin lending
facilities.
9. It is an important policy objective that the obligations of
responsible lending and margin call notification for a margin
lending facility should affix to the lender (issuer) as they are
best placed to determine these matters. For example, a lender has
access to credit reporting information and makes the ultimate
decision as to whether and how much credit is advanced.
10. Currently under the Bill, where an issuer of a margin lending
facility relies on a licensing exemption in paragraph 911A(2)(b) of
the Corporations Act, neither they nor the intermediary (who is
authorised to arrange for the issue of the product) would be
required to meet the new responsible lending and margin call
notification obligations. This creates a 'gap' where no party is
required to comply with the conduct requirements.
11. This regulatory gap is a potential avoidance mechanism which poses
a potential risk to achieving the policy objective of responsible
lending conduct for margin loans.
Summary of new law
12. The amendments create a regulation making power in section 911A of
the Corporations Act to address the regulatory gap in licensing
issuers of a margin lending facility. Additional technical
amendments clarify the use of the term 'provider' in relation to
the margin lending facility.
Comparison of key features of new law and current law
|New law |Current law |
|Through a regulation |Lenders of a margin |
|mechanism, enable issuers|lending facility can be |
|of a margin lending |exempt from obtaining an |
|facility to be removed |Australian Financial |
|from the exemption, |Services License (AFSL) |
|closing a potential |if they rely on another |
|avoidance loophole. |AFSL holder to meet their|
| |legal requirements. If |
| |so, they can avoid |
| |responsible lending and |
| |other conduct |
| |obligations. |
Detailed explanation of new law
13. The amendments insert a general regulation making power in section
911A of the Corporations Act that enables:
. a particular financial product or a particular kind of
financial product; or
. a particular financial product or a particular kind of
financial product that can be issued, varied or disposed
by a particular person or class of persons to be removed
from the licensing exemption for a financial product
provider under paragraph 911A(2)(b) of the Corporations
Act. [Item 11A, paragraph 911A(5A)]
14. This power will enable financial product providers, including
issuers of margin lending facilities, to be removed from the
licensing exemption.
15. The broader regulation making power provides the flexibility to
address complex and different corporate structures (such as the use
of special purpose vehicles and master trusts) in the margin
lending context, and potentially other lending arrangements or
products at a later stage.
16. The consequence of this regulation-making power will be that the
issuer (lender) of a margin lending facility will be required to be
licensed, rather than relying on the exemption.
17. This is important in a margin lending context to ensure relevant
conduct requirements such as responsible lending and margin call
notification requirements are affixed to the appropriate party;
that is the lender.
Clarification of the term 'provider'
18. The term 'provider' in various sections of Schedule 1 of the Bill
has been clarified to ensure that it is intended to be interpreted
as a 'financial services licensee (the provider)' similar to its
initial operation in section 985E. [Items 2, 3, 4 and 5]
19. In particular, clarification is given to Schedule 1, item 12 of the
Bill to note that the Subdivision applies to a financial services
licensee. [Item 2]
20. Other minor consequential changes are made to give effect to the
amendments. [Items 3, 4, and 5]
Do not remove section break.
Outline of chapter
21. The amendments ensure that certain existing Australian Securities
and Investments Commission (ASIC) powers are available to it in
relation to trust property held by trustee companies.
Context of amendments
22. ASIC has existing powers under the Australian Securities and
Investments Commission Act 2001 (ASIC Act) that can be used in
relation to financial services and/ or financial products. A
trustee company may provide services (which are deemed to be
financial services under the Bill) that do not relate to a
financial product. In those circumstances, ASIC is unable to use
the powers that only apply in relation to financial products in
regulating trustee companies.
23. The amendments ensure that ASIC can use certain existing powers in
relation to trustee companies.
Summary of new law
24. The amendments replicate or amend, as appropriate, certain existing
ASIC powers that apply to financial products, so that they can be
used in relation to trust property held by a trustee company.
25. In essence, the amendments allow ASIC to obtain information about
trust property outside of a formal investigation under Part 3,
Divisions 1 and 2 of the ASIC Act, and certain information
gathering powers under Part 3 of the ASIC Act. Further, the
amendments allow ASIC to make certain orders in relation to trust
property in certain circumstances.
26. An anomaly in the ASIC Act in relation to unconscionable conduct in
business transactions is also corrected.
Comparison of key features of new law and current law
|New law |Current law |
|ASIC's existing |In some instances, the |
|information gathering |exercise of ASIC's |
|powers under sections 40,|information gathering |
|41 and 43 of the ASIC Act|powers under sections 40,|
|are amended or |41 and 43 are limited to |
|replicated, as |financial products. |
|appropriate, so that they| |
|are available to ASIC in | |
|relation to trust | |
|property held by a | |
|trustee company. | |
|ASIC is able to use its |In some instances, ASIC's|
|powers where there is |powers under sections 71 |
|non-compliance with its |and 73 are limited to |
|investigation and |financial products. |
|information-gathering | |
|powers in Part 3 of the | |
|ASIC Act. Existing | |
|sections 71 and 73 of the| |
|ASIC Act are amended or | |
|replicated, as needed, to| |
|apply to trust property | |
|held by a trustee | |
|company. | |
|In relation to |Subsection 12CC(1) of the|
|unconscionable conduct in|ASIC Act is based on a |
|business transactions, |prohibition of |
|subsection 12CC(5) of the|unconscionable conduct in|
|ASIC Act includes a |relation to financial |
|reference to financial |services. However, |
|services, in addition to |subsection 12CC(5), which|
|the existing reference to|relates to what a court |
|a financial product. |may consider in |
| |determining whether |
| |subsection 12CC(1) is |
| |contravened, does not |
| |refer to financial |
| |services. |
Detailed explanation of new law
Key definitions
27. The amendments insert a definition of 'trust property' in the
general interpretation provisions in subsection 5(1) of the ASIC
Act. [Item 2A] Trust property means property that is or was held
by the trustee company as trustee.
28. ASIC may only use its powers to gather information or make orders
in relation to trust property.
Requirements to disclose information
29. Existing section 40 of the ASIC Act allows ASIC to exercise its
power under section 41 in certain circumstances. One of the limbs
of paragraph 40(c)(ii)) is that it only applies to alleged or
suspected contraventions of Commonwealth or State/Territory laws
that involves fraud and dishonesty and relates to a body corporate
or financial products. Trustee companies may provide services that
do not relate to financial products. The amendment allows ASIC to
exercise its powers in relation to alleged or suspected
contraventions of Commonwealth or State/Territory laws by trustee
companies that involves fraud and dishonesty and that relates to
trust property. [Item 3D]
30. Existing section 41 of the ASIC Act allows it to gather certain
information from a person who carries on a financial services
business about the acquisition and disposal of financial products.
It is designed to assist ASIC in determining the details of people
involved in a financial product transaction.
31. The amendment inserts section 42 which allows ASIC to gather
information from a trustee company about the acquisition and
disposal of trust property. [Item 3E] While sections 41 and 42
contain similar powers, section 42 is tailored to focus on the
information required in relation to trust property.
32. Under subsection 42(1), ASIC may require a trustee company to
disclose to it, in relation to the acquisition or disposal of trust
property by a trustee company:
. the name of:
- the person from or through whom the trust property was
acquired;
- the person to or through whom the trust property was
disposed; and
. whether the acquisition or disposal was effected on the
instructions of another person, and the nature of any such
instructions;
. the name of the beneficiaries of the trust. [Item 3E]
33. Consistent with existing subsection 41(5), information only needs
to be disclosed to the extent that it is known to the person
required to make the disclosure. A defendant bears the evidential
burden in relation to this matter, as these matters are peculiarly
within their knowledge. [Item 3E, subsection 42(2)]
34. Consistent with existing subsection 41(6), failure to disclose
under subsection 42(1) is an offence of strict liability, which
carries a maximum penalty of 50 penalty units or imprisonment for
12 months, or both. [Item 3E, subsection 42(3)] A strict liability
offence is appropriate as it enhances the effectiveness of the
regulatory regime dealing with ASIC's enforcement powers and
recognises the public interest in ASIC being able to conduct
preliminary inquiries in relation to these matters.
35. Existing section 43 of the ASIC Act relates to certain powers of
ASIC in relation to financial products, and allows ASIC to obtain
information from certain persons. Existing paragraph 43(1)(d)
applies to possible contraventions of Commonwealth or
State/Territory laws that involves fraud and dishonesty and relates
to financial products issued by a body corporate. Trustee
companies may provide services that do not relate to financial
products. The amendment allows ASIC to exercise its powers in
relation to possible contraventions by a trustee company of
Commonwealth or State/Territory laws that involves fraud and
dishonesty and relates to trust property. [Item 3F, section 44]
36. While sections 43 and 44 contain similar powers, section 44 is
tailored to focus on the information required in relation to trust
property.
37. Under subsection 44(2), ASIC may require a director, secretary or
senior manager of the trustee company to disclose to it,
information of which they are aware and that may have affected an
acquisition or disposal of trust property by the trustee company
[Item 3F, subsection 44(2)].
38. Under subsection 44(3), if ASIC believes on reasonable grounds that
a person can give information relating to:
. an acquisition or disposal of trust property by the
trustee company;
. the financial position of the trustee company; and
. an audit of, or a report of an auditor about, accounts or
records of the trustee company,
then ASIC may require the person to disclose to it the information
the person has about those particular matters. [Item 3F, section
44]
39. Consistent with existing subsection 43(3A), failure to disclose the
information under subsections 44(2) and (3) are offences of strict
liability, which carry a maximum penalty of 50 penalty units or
imprisonment for 12 months, or both. Strict liability offences are
appropriate as they enhance the effectiveness of the regulatory
regime dealing with ASIC's enforcement powers and recognise the
public interest in ASIC being able to conduct preliminary inquiries
in relation to these matters.
40. The information gathering powers under sections 42 and 44 generally
allow ASIC to obtain underlying facts about the acquisition and
disposal of trust property, in the absence of a more formal ASIC
investigation.
Orders by ASIC
41. ASIC may make certain orders in response to non-compliance with its
investigation and information-gathering powers under Division 8 of
Part 3. However, the authority to exercise these powers in
existing paragraph 71(b) only applies to information relating to
financial products. Trustee companies may provide services that do
not relate to financial products. The amendment allows ASIC to use
its powers under Division 8 if information needs to be found about
the acquisition or disposal of trust property but a person has
failed to comply with a requirement under Part 3. [Item 3H]
42. While sections 73 and 73(1)(A) contain similar powers, paragraph 1A
is tailored to focus on the orders required in relation to trust
property.
43. If paragraph 71(c) applies, ASIC may make various orders, which
are:
. an order restraining a specified person from disposing of
any interest in specified trust property;
. an order restraining a specified person from acquiring any
interest in specified trust property;
. an order directing a body corporate not to pay, expect in
course of winding up, a sum due from the body corporate in
respect of specified trust property; and
. an order directing a body corporate not to register the
transfer or transmission of specified trust property.
[Item 3J, subsection 73(1A)]
Unconscionable conduct in business transactions
44. A minor amendment is also made to correct an anomaly in the ASIC
Act. Subsection 12CC(1) applies in relation to financial services.
Subsection 12CC(5), which relates to what a court may consider in
determining whether subsection 12CC(1) is contravened, only refers
to financial products. The term financial services is added to
subsection 12CC(5), in addition to the existing reference to a
financial product. [Item 3A].
Consequential amendments
45. The amendments include definitions of traditional trustee company
services and trustee company in the general interpretation
provisions in subsection 5(1) of the ASIC Act [items 1 and 2]. The
definitions have the same meaning as those being inserted into
Chapter 5D of the Corporations Act.
46. Previously, under the Bill, the definitions were to be inserted in
section 12 of the ASIC Act, which related to the interpretation of
Division 2 of Part 2 of the ASIC Act. As these parliamentary
amendments are being included in Part 3 of the ASIC Act, the
definitions are more appropriately included in the general
interpretative provisions of the ASIC Act.
47. Other minor consequential changes are made to give effect to the
amendments [items 3B, 3C, 3G, 3K].
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