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CORPORATIONS AMENDMENT REGULATIONS 2001 (NO. 4) 2001 NO. 319
EXPLANATORY STATEMENTStatutory Rules 2001 No. 319
Issued by the authority of the Minister for Financial Services and Regulation
Corporations Act 2001
Corporations Amendment Regulations 2001 (No. 4)
Section 1364 of the Corporations Act 2001 (the Corporations Act) empowers the Governor-General to make regulations prescribing matters required or permitted by the Corporations Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to that Act.
The purpose of the regulations is to support the reforms to the regulation of the financial services industry which are included in the Financial Services Reform Act 2001 and associated legislation, and to make certain miscellaneous amendments.
The Corporations Agreement, reached by State, Northern Territory and Commonwealth Ministers who had responsibilities in relation to corporate regulation, formed the political compact on which the national companies and securities scheme, which operated from 1 January 1991 to 14 July 2001, was based. That scheme was superseded by a new legislative scheme which commenced on 15 July 2001. The new scheme is based on Commonwealth legislation enacted with the assistance of relevant power referred by the States. It is envisaged that a new Agreement, reflecting the changed constitutional basis of the relevant law, will be signed but meanwhile the Commonwealth, States and the Northern Territory consider themselves bound by the proposed new agreement.
The responsible Ministers of the States and the Northern Territory on the Ministerial Council for Corporations have been consulted about the draft regulations and the Council has agreed with them, to the extent required by the proposed new agreement.
The Financial Services Reform Act 2001 amends the Corporations Act and other relevant legislation, and will provide:
• a single licensing regime for financial sales, advice and dealings in relation to financial products;
• consistent and comparable financial product disclosure; and
• a single authorisation procedure for financial exchanges and clearing and settlement facilities.
The regulations will:
• provide detailed requirements - for example, the procedure for transferring securities, the matters which must be addressed in an application for a licence and the requirements for disclosure by the issuer of a superannuation product;
• provide for exemptions from the requirements of the Act (or for modified application) where the impact is inappropriate - for example, where an exchange which facilitates settlement of transactions between brokers through its operating rules would otherwise be regulated as operating a clearing and settlement facility, as well as being regulated as the operator of a financial market;
• assist in the transition to the new regime; and
• make consequential and miscellaneous amendments.
Details of the proposed regulations are set out in the Attachment.
The proposed regulations will commence at the same time as Item 1 of Schedule 1 of the Financial Services Reform Act 2001 commences that is, on 11 March 2002.
ATTACHMENT
INDEX
| Part
|
Subject
|
| Introduction
| |
| 1
|
Definitions
of general relevance
|
| 2.
|
Licensing
of financial markets
|
| 3.
|
Licensing
of clearing and settlement facilities
|
| 4.
|
Limits
on involvement with markets and clearing and settlement facility licensees
|
| 5.
|
Compensation
regimes for financial markets
|
| 6.
|
Licensing
of providers of financial services
|
| 7.
|
Financial
services disclosure
|
| 8.
|
Other
provisions relating to conduct connected with financial products and financial
services
|
| 9.
|
Financial
product disclosure
|
| 10.
|
Market
misconduct and other prohibited conduct relating to financial products and
financial services
|
| 11.
|
Title
and transfer
|
| 12.
|
Consequential
|
| 13.
|
Transitional
|
| 14.
|
Miscellaneous
|
Abbreviations
| ABN
|
Australian
Business Number
|
| ASIC
|
Australian
Securities and Investments Commission
|
| ASIC
Act
|
Australian
Securities and Investments Commission Act 2001
|
| Consequential
Provisions Act
|
Financial
Services Reform (Consequential Provisions) Act 2001
|
| Corporations
Act
|
Corporations
Act 2001
|
| FSR
Act
|
Financial
Services Reform Act 2001
|
| I(AB)
Act
|
Insurance
(Agents and Brokers) Act 1984
|
| Insurance
Contracts Act
|
Insurance
Contracts Act 1984
|
1. INTRODUCTION
Overview
The Financial Services Reform Act 2001 (the FSR Act) is the culmination of an extensive reform program examining current regulatory requirements applying to the financial services industry. In particular, the FSR Act provides the legislative response to a number of recommendations of the Financial System Inquiry (the Wallis Committee).
The Financial System Inquiry was a comprehensive stocktake of Australia's financial system structure and regulation. The broad policy direction for what were known as the CLERP 6 reforms, now contained in the FSR Act, is consistent with the findings of the Financial System Inquiry.
The Financial System Inquiry found that financial system regulation was piecemeal and varied, and was determined according to the particular industry and the product being provided. This was seen as inefficient, as giving rise to opportunities for regulatory arbitrage, and in some cases leading to regulatory overlap and confusion.
To address these deficiencies, the Financial System Inquiry proposed that there be a single licensing regime for financial sales, advice and dealings in relation to financial products, consistent and comparable financial product disclosure, and a single authorisation procedure for financial exchanges and clearing and settlement facilities.
The FSR Act implements these proposals, and puts in place a competitively neutral regulatory system which benefits participants in the industry by providing more uniform regulation, reducing administrative and compliance costs, and removing unnecessary distinctions between products. In addition, it will give consumers a more consistent framework of consumer protection in which to make their financial decisions. The FSR Act will therefore facilitate innovation and promote business, while at the same time ensuring adequate levels of consumer protection and market integrity.
The regulatory framework covers a wide range of financial products including securities, derivatives, general and life insurance, superannuation, deposit accounts and means of payment facilities. The requirements will apply to the activities of existing financial intermediaries such as insurance agents and brokers, securities advisers and dealers, and futures brokers, as well as any other person carrying on a financial services business.
The FSR Act will also put in place a simplified authorisation process for the operators of financial markets and clearing and settlement facilities. The new regulatory regime provides a flexible and adaptable framework that encourages innovation and competition in markets and clearing and settlement facilities.
Consultation
An extensive public consultation process was engaged in to produce the FSR Act, involving the release of a position paper in December 1997, a consultation paper in March 1999 and an exposure draft of the Bill in February 2000.
This consultation provided valuable feedback on the reform proposals, and was integral to the development of the Financial Services Reform Bill.
In a similar vein, the draft regulations were subject to public consultation, being released in tranches during August and September 2001. An informal body, the Financial Services Reform Implementation Consultative Committee, was established to provide industry feed-back on the draft regulations. The Committee met three times in person to consider the first three tranches of draft regulations, relating to markets/clearing and settlement facilities, the licensing of financial services providers and product disclosure. It also met Treasury officers through a video-link to discuss the transitional arrangements for financial services licensees and financial products.
In addition, the draft regulations were put on the Treasury website for public comment.
About 49 submissions on the draft regulations were received from members of the Committee and the general public and taken into account in the formulation of the currently regulations. The submissions were important in bringing forward concerns about policy issues, inadvertent application of the provisions and technical problems.
Title, Format and commencement of the Regulations (Regulations 1-2)
The regulations are entitled the Corporations Amendment Regulations 2001 (No. 4) (regulation 1).
As indicated above, they are to commence on the day on which Item 1 of Schedule 1 to the Financial Services Reform Act 2001 commences (Regulation 2).
Format of the Explanatory Memorandum
The balance of this attachment provides further details of the amendments to the Corporations Regulations (Schedule 1 of the Regulations).
It does not reflect the order of the regulations, instead grouping them by subject.
References to provisions in the Corporations Act 2001
The FSR Act omits Chapters 7 and 8 of the Corporations Act and inserts a new Chapter 7 in their place.
There are therefore a number of occasions in this Explanatory Memorandum when references are made to the relevant provision of the current Corporations Act and to the comparable provision in that Act after the FSR has commenced.
To avoid confusion, when comparing such provisions, a reference to a provision in the current Corporations Act is phrased 'section x of the old Corporations Act', and a reference to the Corporations Act as amended by the FSR Act as 'section y of the new Corporations Act'.
However, where neither 'the old Corporations Act' nor 'the new Corporations Act' is used, the section referred to is from the 'new Corporations Act'.
1. DEFINITIONS OF GENERAL RELEVANCE
The definition of financial product - regulations 7.1.04 to 7.1.08
Definition of derivatives - regulation 7.1.04
The word 'derivative' is defined in section 761D of the new Corporations Act. The definition requires that three conditions be fulfilled. The second condition requires that consideration is or may be required to be provided at a future time that is not less than the number of days prescribed by regulations after the day on which the arrangement is entered into.
Subregulation 7.1.04(1) prescribes the period as two business days in the case of spot foreign exchange transactions, and one business day in other cases.
The definition in section 76 1 D also empowers the making of regulations under subsection 761D(2) to declare a relevant arrangement to be a derivative. This power is used in subregulation 7.1.04(2) to exclude spot foreign exchange contracts. Subregulation 7.1.04(2) also declares an arrangement to be a derivative where the future time at which consideration may be provided under the arrangement may be less than 1 day after the arrangement is entered into.
What is not a financial Product? - regulations 7.1.05 to 7.1.08
The term 'financial product' is defined in general terms in section 763A of the new Corporations Act. Each limb of the general definition is then further examined in sections 763B to 763D. Section 764A provides a list of things which are financial products and 765A a list of specific things that are not financial products.
This list of exclusions is extended by the regulations to include:
• exempt public sector superannuation schemes within the meaning of the Superannuation Industry (Supervision) Act 1993 (regulation 7.1.05);
• credit facilities (regulation 7.1.06);
• surety bonds (regulation 7.1.07); and
• bank drafts (regulation 7.1.08).
Meaning of retail client and wholesale client - regulations 7.1.11 to 7.1.28
Introduction
A key definition in the FSR reforms is that of 'retail client' (section 761G). In Chapter 7 of the new Corporations Act there is a clear distinction between retail and wholesale clients. Generally, the consumer protection provisions will apply only to retail clients, as it is recognised that wholesale clients do not require the same level of protection, being better informed and better able to assess the risks involved in financial transactions. The new definition of 'retail client' has several limbs.
The first limb (subsection 761G(5)) applies only to general insurance, and is product based. An individual or small business that purchases or receives advice on one of the listed general insurance policies will be considered a retail client.
The second limb (subsection 761G(6)) provides that a person will always be considered a retail client where the relevant financial product is a superannuation product or a retirement savings account.
The third provision (subsection 761G(7)) relates to all financial products except general insurance, superannuation and retirement savings accounts, and comprises four tests. The product-value test provides that a person is not a retail client where they purchase a financial product, or a financial service related to a financial product, and the value of the product is above the prescribed threshold (to be set initially at $500,000). Regulations may modify the application of the test where appropriate. The second test ensures that small businesses receive protection as retail clients under the regime. The third test considers individual wealth and provides power to make regulations specifying the net assets or gross income that will be required for a person to be a 'wholesale client'. Finally, professional investors are always considered wholesale clients.
The purpose of regulations 7.1.11 to 7.1.28 is to flesh out the definition included in section 761G. A number of definitions related to these regulations are contained in subregulation 1.02(1), for example definitions of concepts such as income stream or investment-based financial product.
Definitions of general insurance - retail client test (section 761G(5)(b)) - regulations 7.1.11-7.1.17
As foreshadowed in the Explanatory Memorandum to the Bill, the definitions of the classes of general insurance which will mean that an individual is a retail client under paragraph 761G(5)(b) have been based on the 'standard cover' definitions appearing in the regulations to the Insurance Contracts Act 1984 (the Insurance Contracts Act).
There are a number of differences between the definitions adopted in the regulations and 'standard cover'. These include:
• an allowance for the owner of the insurance to be a person other than an individual (since small businesses may also be retail clients); and
• expanding the events and items covered to take into account the fact that such contracts of insurance (for example, travel insurance) can generally be broader in coverage than those reflected in the definitions of standard cover.
In addition, the exclusions (some of which were based on section 9 of the Insurance Contracts Act) have generally been limited to marine insurance, workers' compensation insurance, compulsory third party insurance and, in the case of home building insurance, cover required under statute in respect of residential building works. This is generally because the other types of cover named in section 9 if the Insurance Contracts Act are otherwise not 'financial products' under the new Corporations Act, in which case no exclusion from being a product under subsection 761G(5) is required.
A new concept of 'personal and domestic property insurance' has been included (regulation 7.1.17). This includes any property that:
• the insured, or those who live with or are related to the insured, intend to use for personal, domestic or household purposes; and
• is ordinarily used for such purposes.
Whilst the regulations specify examples of the types of property, insurance of which falls within this category (subregulation 7.1.17(3)), this is not meant to be an exhaustive list. It is likely that, because of the requirement that the property be used by the insured or certain natural persons related to the insured wholly or predominantly for personal, domestic or household purposes, small business will have only a very limited ability, if any, to purchase personal and domestic property insurance.
If there is any doubt about the use to which property will be. put in this context, the provider of financial services can have the client sign a statement to the effect that the insurance is insurance covered by this regulation.
Section 761G(7) and related provisions on the pricelvalue test
- the Price/Value Test
Paragraph 761G(7)(a) of the new Corporations Act provides one of the means for determining whether a client is wholesale for financial products other than general insurance, superannuation and retirement savings account products.
If either:
• the price for the provision of the financial product; or
• the value of the financial product to which the financial service relates
equals or exceeds the amount specified in regulations, then the client will be a retail client.
- Individual Wealth Test
Subsection 761G(10) of the new Corporations Act provides the way in which paragraph 761G(7)(a) operates to allow regulations to do either or both of.
• deal with how a price or value is to be calculated, either generally or in relation to a specified class of financial products, or
• modify the way in which paragraph 761G(7)(a) applies in particular circumstances.
- How Price/Value Test works
Where they both apply to a particular class of products, the tests for price and value are expected to operate as alternative means of assessing a client's status - a client may hold a product the value of which is below specified limits, but ultimately be wholesale because the price that they initially paid for it is above the specified limits for price.
- Price
The price test can be applied to assess the status of a client as either retail or wholesale when the client intends to acquire or be issued with, or actually does acquire or is issued with, a product. The price that the client pays for the issue or acquisition of the product will be the amount that is assessed. After that, a client who is a wholesale client in respect of a particular product due to the price that they paid for that financial product will be a wholesale client in relation to that product because the original price determined their status.
Where ongoing contributions are received for an existing financial product (such as deposits to a deposit account), these are not to be regarded as the "price" paid for the product, unless the issue or acquisition depended on those later amounts being, or undertaken to be, paid.
The price test for most products covered under this paragraph is $500,000 (as foreshadowed in the Explanatory Memorandum of the FSR Bill). This will not apply to derivatives or life risk insurance products, the treatment for which are explained in further detail below.
Rules for calculating the price of products have generally been outlined in the regulations (for example, regulations 7.1.18, 7.1.20 and 7.1.23). Where specified, they will not include amounts that are paid or payable out of money lent by the issuer or an associate, or fees or charges due to the issuer or another person relating to the issue of the product. However, any amount paid by the client for advice and related services will not be included in the price for the product.
- Value
The value test can be applied to assess the status of a client as either retail or wholesale while they hold the financial product.
The value test allows a client who might not have been a wholesale client at the time that they acquired the product to become wholesale. For example, if the client paid a price of $400,000 for units in a managed fund (making them a retail client), and then later contributions and investment earnings bring the value of the fund up to $ 5 00,000, the client maybe wholesale.
The value test for most products covered under this paragraph is generally $500,000 (as foreshadowed in the Explanatory Memorandum of the FSR Bill). This will not apply to derivatives or life risk insurance products, the treatment for which are explained in further detail below.
Rules for calculating the value of products have generally been outlined in the regulations (for example, regulations 7.1.19, 7.1.21, 7.1.22 and 7.1.24). Where specified, they will not include amounts of fees or charges that are due to or have accrued to the product issuer. For example, where the product issuer has the right to deduct fees or charges at specified intervals (eg monthly), the fees or charges that would have accrued at a particular date toward that amount are not to be included in determining the value of the financial product (even though the fees may not yet have been deducted from the client's product). Any amount that stands to the client's credit that is to be paid, or was paid, out of money lent by the issuer or their associate is also to be disregarded.
- Cumulative value - services relating to investment and income stream products
Where a person either provides financial product advice in relation to, or arranges for a person to (for example) acquire or dispose of a number of financial products, the provider of that service can accumulate the value of those products where they relate to investment-based financial products and/or income stream financial products before applying the test in paragraph 761G(7)(a).
For example, where a client approaches a financial services provider to obtain advice or have the provider arrange for them to apply for a number of investment or income stream financial products, and the amount they intend to invest across those products is over $500,000, the provider will be able to treat that client as wholesale for the purpose of providing them with advice.
It is important to note, however, that the requirement for a Product Disclosure Statement when the
client is retail in respect of a particular product is not affected, and where the price for the provision
of the product (for example) is less than $500,000, the client will need to be provided with a Product Disclosure Statement in accordance with Part 7.9 of the new Corporations Act.
Treatment for specific products
Income strewn financial products - regulation 7.1.21
Whilst the price test of $500,000 will be the same as for other investment products, due to the nature of income streams, the method for valuation of income stream products such as annuities needs to be different. Accordingly, a number of different tests may apply depending on the type of income stream product in question. Where contracted commutation values apply, this will be the appropriate amount. However, if no such values exist, the amounts determined by applying ordinarily acceptable actuarial standards will be used, or the amount that stands to the client's credit where relevant (for example in an allocated annuity product where an account balance is held).
In the event that none of these tests are appropriate for the product, a general calculation based on the price less amounts such as payments and fees, and taking into account inflation, will apply.
Derivatives - regulation 7.1.22
Formulating a value in respect of derivatives is difficult because derivatives as a class of financial products includes products of different types. There appears to be no simple formula for the determination of value that has wide application that can be quickly applied. The value in the regulation is the face value or "notional amount" (in dollar terms) of the derivative as at the date the arrangement is entered into by the parties. If the value of a single derivative is being assessed, the &mount is $100,000. If the derivative is included in 2 or more related financial products, the amount applicable is $500,000 in relation to all of those products.
Life Risk Insurance and other risk management products - regulation 7.1.25
Paragraph 761G(7)(a) of the new Corporations Act will not apply to life risk insurance and other risk management products because they are not appropriate to be subject to the price/value test. There are a number of reasons for this. First, life insurance is considered to be a particularly "personal" type of insurance for which advice and appropriate disclosure will usually be required.
Second, it is not possible to set a price amount for life risk products, as higher premiums do not necessarily correlate to higher sums insured or more sophisticated clients. They also relate to the levels of risk determined by matters including the insured's health status, occupation, pastimes, age, and whether or not they smoke. Premiums also differ between insurers depending on their particular underwriting guidelines and rates applicable at given times. Similarly, it was not possible to set amounts based on sums insured, as these amounts vary substantially depending on factors going beyond just their income, and include the type of cover sought, the age of the proposed insured, and their dependents and other financial obligations.
Even for disability income insurance where the sum insured is based upon the income of the insured, determining whether the price/value test should, for example, be based on the sum insured was difficult. While much of the market bases cover on 75% of income, there are variations on this, and it is not uncommon to find some levels of cover reaching 100% of income and/or taking into account additional amounts such as superannuation contributions. In addition, as a matter of policy, the complexity of disability products indicate that appropriate advice will be required by the majority of purchasers of such cover.
However, although the price/value test in paragraph 761G(7)(a) will not apply, the remaining tests in subsection 761G(7) will apply to ascertain whether a life risk insurance client is wholesale.
For any other risk management products that are not general insurance, life risk insurance or derivatives, provision has been made for ASIC to declare that the price/value test applies to such types of financial products if appropriate. ASIC will also have the ability to determine how the test applies.
Other regulations
Group Products
Section 1012H of the new Corporations Act contemplates that different disclosure rules apply to clients who elect or may elect to be covered by a group product. The price or value test is to be applied in respect of each such person, regardless of whether the ultimate owner of the product is retail or wholesale.
Superannuation-sourced money - not to be counted in price/value test - regulation 7.1.26
Where a person is being given advice or is being provided with a financial product in circumstances where a Product Disclosure Statement would be required for a retail client, and is using funds to invest that have been sourced from a superannuation fund, the amount of those funds will not be counted in the price of the product under paragraph 761G(7)(a). This will be determined by a test related to whether the adviser or issuer actually knows, or reasonably ought to know, that the money used to purchase the income stream product is sourced from superannuation.
This will catch payments made both to members of superannuation funds (eg a payment on the retirement of the member), and to beneficiaries (eg death benefit payments). Since it is restricted to pay-outs from funds where the holder of the superannuation product would have been a retail client, it is not intended to apply to those people who would be wholesale clients for the purposes outlined in paragraph 761G(6).
Once wholesale, always wholesale - subregulation 7.1.27(1)
Subregulation 7.1.27(1) ensures that practical problems of a client appearing to move between retail and wholesale status due to (for example) fluctuations in the value of the product are resolved.
For example, if a client becomes a wholesale client in respect of a product, then they will remain a wholesale client at all times after that in relation to that product as between themselves and the product issuer. This will ensure that issuers do not need to continually monitor a client's status once they are wholesale under paragraph 761G(7)(a). This relief is limited, and where that person seeks advice in relation to the product from someone other than the product issuer, they may be a retail client for that adviser if the value of the product is not the specified amount at the time the advice is provided.
Subsequent acquisitions from wholesale holders - subregulation 7.1.27(2)
If a wholesale holder of a financial product under paragraph 761G(7)(a) disposes of the product, or it otherwise changes hands, the issuer will not be liable under the new Corporations Act merely because the holder is a retail client if the issuer did not actually know, and it was not reasonable for them to know, that the client was retail.
Individual Wealth Test
The relevant dollar amounts for the assessment of the assets and income under paragraph 761G(7)(c) of the Act have been set at $2.5 million for net assets, and $250,000 per annum for the income test.
An amendment to section 708 (offers that do not need disclosure) was included in the FSR Act so that the test for net assets or gross income necessary to qualify as a sophisticated investor was prescribed in the regulations, rather than in section 708.
Therefore, equivalent regulations have been made under sections 708(8)(c)(i) and (ii) in Chapter 6D (regulation 6D.2.03), and 648J(4)(a) (regulation 6.5.01) in relation to wholesale holders for the purpose of telephone taping during takeovers.
Under subsection 761G(10A), the regulations can specify the way in which net assets and gross income is determined, valued or calculated for the purposes of the wholesale client test in paragraph 761G(7)(c)(i) and (ii). An equivalent provision exists in section 708(9A). At this stage, it is not intended to make a regulation specifying this.
Other definitions
Definitions of more specific relevance are included in the section of this Explanatory Memorandum to which they relate even though they may be located in Part 7.1 of the regulations.
2. LICENSING OF FINANCIAL MARKETS
Applications for an Australian market licence
Introduction
A body corporate may apply for an Australian market licence by lodging an application with ASIC) that includes the information and is accompanied by the documents (if any) required by regulations (paragraphs 795A(1)(a) and (b) of the new Corporations Act).
Under section 795B, two kinds of application are catered for:
• 'general applications' (subsection 795B(1)); and
• 'foreign applications' (subsection 795B(2)) where a body corporate wishes to operate the same financial market in Australia as it is authorised to operate in the foreign country in which its principal place of business is located.
The requirements for the two types of application are different and this is reflected in the regulations.
The information and documents specified in the regulations are intended to enable the Minister, when considering an application, to be satisfied that the criteria for general or foreign applications, under whichever of subsection 795B(1) or (2) applies have been met. These criteria are designed to ensure that the granting of an Australian market licence will not compromise standards of market integrity or consumer protection in Australian financial markets.
The material sought in the regulations will generally be the same as that currently sought by ASIC for applications lodged under the repealed provisions relating to approvals of stock exchanges and futures exchanges (sections 769 and 1126 of the old Corporations Act). The exception is that to be required of foreign applicants, which are currently not separately addressed.
The regulations for foreign applications will set out the material needed to qualify for approval to operate the same financial market in Australia as the foreign applicant operates in the foreign country in which its principal place of business is located. For approval purposes, it will be important for foreign applicants to demonstrate that their home country market is subject to at least equivalent regulatory standards as those in Australia.
Regulations 7.2.10 to 7.2.12 in Division 4 will deal with general applications. Regulations 7.2.13 to 7.2.15 in Division 5 will deal with foreign applications.
General applications - regulations 7.2.10 to 7.2.12
Regulation 7.2.10 provides that Division 4 (ie regulations 7.2.10 to 7.2.12) applies in relation to general applications submitted under subsection 795B(1).
Regulations 7.2.11 and 7.2.12 set out the information and documents respectively to be submitted in general applications. The requirements are intended to provide the Minister with enough information about the applicant, its organisation, proposed modus operandi, staffing, expertise, and technological and financial resources to enable the Minister to determine whether or not the application should be granted.
Foreign applications - regulations 7.2.13 to 7.2.15
Regulation 7.2.13 provides that Division 5 (ie regulations 7.2.13 to 7.2.15) applies in relation to foreign applications submitted under subsection 795B(2) of the new Corporations Act.
Regulations 7.2.14 and 7.2.15 set out the information and documents respectively to be submitted in foreign applications. The requirements for foreign applications are intended to provide the Minister with enough information about the applicant's existing and proposed financial markets to enable the Minister to determine whether or not the application should be granted.
The application will need to provide details of the financial market to be extended into the Australian jurisdiction, the standard of regulation applicable to the home country market, and the organisation and structure of the applicant. The applicant will also have to establish that it is authorised to operate a financial market in its home country.
Obligations On Licensees
Provision of information to ASIC - regulations 7.2.01 to 7.2.05
Among other things, regulations in Part 7.2 require market licensees to give certain information to ASIC:
• Regulation 7.2.01, in conjunction with subsection 792B(3), requires market licensees to inform ASIC of matters relating to participants who are financial services licensees - for example a contravention of a condition on a licence or an accounting requirement of the Corporations Act.
- It seeks to replicate the effect of section 862 of the old Corporations Act.
• Regulations 7.2.02 and 7.2.03 specify information that will allow ASIC to keep track of those persons who are associated with the management of market licensees.
• Regulation 7.2.04 specifies information that will enable ASIC to keep track of those persons who hold 15 per cent or more of the voting power in a market licensee.
Other regulations relating to the provision of information to ASIC are:
• Regulations 7.2.01 and 7.2.05 which provide an exemption from subsection 792C(2) of the new Corporations Act where information is provided via the stock exchange automated trading system notification message or an Australian Stock Exchange voiceline announcement. In these circumstances the market licensee is not required, in addition, to lodge the information with ASIC, as would otherwise be required by subsection 792C(2).
Preparation of an annual report - regulation 7.2.06
Section 792F of the new Corporations Act requires market licensees to provide ASIC with an annual report on the extent to which the licensee complied with its obligations as a market licensee under new Chapter 7.
Subsection 792F(2) provides that the licensee must ensure that the annual report is accompanied by any information and statements prescribed by regulations made for the purpose of this subsection.
Regulation 7.2.06 specifies information that a market licensee must supply to ASIC if the annual report of such a body does not include this information. The regulation refers to, among other things, a description of the activities of the market licensee and its resources.
Content of licensed market's operating rules - regulation 7.2.07
Subsection 793A(1) of the new Corporations Act provides that the operating rules of a licensed market must deal with the matters described by the regulations made for the purposes of this subsection.
Regulation 7.2.07 sets out the matters which must be addressed in a licensed market's operating rules. The matters referred to include access, the ongoing requirements for participants, the execution of orders, the listing of entities and the products to be traded.
The regulation draws on the lists in sections 769 and 1126 of the old Corporations Act, but is framed so that it can apply to both a derivatives and a securities market.
Content of licensed market's written procedures - regulation 7.2.08
Subsection 793A(2) of the new Corporations Act provides that the regulations may prescribe matters in respect of which a licensed market must have written procedures.
Regulation 7.2.08 sets out the matters which must be addressed in a licensed market's written procedures. The matters referred to include exchange of appropriate information with clearing and settlement facilities, arrangements to ensure the integrity and security of systems (including computer systems) and arrangements for supervising the market.
The rationale for this provision is that there are matters within the control of the market operator which are of legitimate regulatory concern but which are not suitable for inclusion in the operating rules (which are public documents forming the contracts between the market operator and the participants, and between the market operator and listed entities (in the case of a securities market)).
Powers of the Minister and ASIC
Provision of compliance assessment to other agencies - regulation 7.2.09
Section 794C of the new Corporations Act empowers ASIC to assess how well a market licensee is complying with any or all of its obligations as a market licensee under new Chapter 7.
Subsection 794C(5) provides that if an assessment, or part of an assessment, relates to a serious contravention of a law of the Commonwealth or of a State or Territory, ASIC may give a copy of the written report, or the relevant part of the report to the Australian Federal Police, certain other nominated agencies and those agencies prescribed by regulations for the purpose of paragraph 794C(5)(d).
Regulation 7.2.09 prescribes further agencies for this purpose. They include the Australian Competition and Consumer Commission, the Australian Prudential Regulation Authority, as well as a number of State and Territory fair trading agencies.
Participant - regulation 7.1.02
Section 761A of the new Corporations Act defines the term 'participant' to include a recognised affiliate (in the case of the Australian Stock Exchange, natural persons are affiliates, rather than 'members' or direct participants) in relation to the market for the purpose of certain nominated sections.
Regulation 7.1.02 will add one further section - section 792A - to that list. This has the effect of extending the market licensee's obligation to supervise the market to the conduct of recognised affiliates.
3. LICENSING OF CLEARING AND SETTLEMENT FACILITIES
What is a clearing and settlement facility?
Obligations related to clearing and settlement facility - regulation 7.1.09
The term 'clearing and settlement facility is defined in section 768A of the new Corporations Act to mean a facility which provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that arise from entering into the transactions and are of a kind prescribed by the regulations.
Regulation 7.1.09 prescribes the obligations for the purpose of this provision. The regulations refer, for example, to each obligation arising from a contract to transfer securities or derivatives.
Conduct that does not constitute operating a clearing and settlement facility - regulation 7.1.10
Subsection 768A(2) of the new Corporations Act specifies conduct that does not constitute operating a clearing and settlement facility for the purpose of the new Chapter 7. This subsection refers, for example, to the conduct of an authorised deposit-taking institution acting in the ordinary course of its banking business.
Subsection 768A(2) also empowers the making of regulations to take other conduct out of the concept of operating a clearing and settlement facility.
Regulation 7.1.10 omits the following conduct from the concept of operating a clearing and settlement facility:
• the conduct of TNS Clearing Pty Limited innovating transactions entered into on the Australian Stock Exchange (subregulation 7.1.10(1));
- TNS Clearing Pty Limited is a subsidiary of the Australian Stock Exchange Limited. It is interposed in the course of novation but is not otherwise involved in conducting a
clearing and settlement facility;
- subregulation 7.1.10( 1) does not affect the regulation of the Australian Stock Exchange's two clearing houses as clearing and settlement facilities;
• the conduct of the Stock Exchange of Newcastle Limited, the Bendigo Stock Exchange Limited and their participants in facilitating direct broker-broker settlement of transactions which are entered into on these exchanges and where the settlement is regulated by the market's operating rules (subregulations 7.1.10(2) and (3));
- the exchanges are already regulated as financial markets.
In both these situations, regulation of these entities as clearing and settlement facilities is considered inappropriate.
Applications for the Australian CS facility licence
Introduction
A body corporate may apply for an Australian CS (clearing and settlement) facility licence by lodging an application with ASIC that includes the information and is accompanied by the documents (if any) required by regulations (paragraphs 824A(1)(a) and (b) of the new Corporations Act).
Application
Under section 824B of the new Corporations Act, two kinds of application are catered for:
• subsection 824B(1) applies to 'general applications'; and
• subsection 824B (2) applies to 'foreign applications', where a body corporate wishes to operate the same clearing and settlement facility in the Australian jurisdiction as it is authorised to operate in the foreign country in which its principal place of business is located.
The requirements for the two types of application are different and this is reflected in the regulations.
The information and documents specified in the regulations are intended to enable the Minister to consider whether an application has satisfied the criteria for general or foreign applications (subsection 824B(1) or (2)) have been met. These criteria are designed to ensure that the granting of an Australian CS facility licence will not compromise standards of market integrity or consumer protection in Australian financial markets.
Material sought in the regulations will generally be similar to that sought by ASIC for applications lodged under section 1131 of the old Corporations Act for approval to operate a clearing house facility for a futures exchange. The exception is foreign applicants who are currently not separately addressed.
The regulations will enable foreign applicants to obtain approval to operate the same clearing and settlement facility in Australia as they operate in the foreign country in which their principal place of business is located. For approval purposes, it is important for foreign applicants to demonstrate that their home country clearing and settlement facility is subject to at least equivalent regulatory standards as those in Australia.
Regulations 7.3.09 to 7.3.11 of Division 4 will deal with general applications. Regulations 7.3.12 to 7.3.14 of Division 5 will deal with foreign applications.
General applications - regulations 7.3.09 to 7.3.11
Regulation 7.3.09 provides that Division 4 (regulations 7.3.09 to 7.3.11) applies in relation to general applications submitted under new subsection 824B(l).
Regulations 7.3.10 and 7.3.11 set out the information and documents respectively to be submitted in general applications. The requirements are intended to provide the Minister with enough information about the applicant, its organisation, proposed modus operandi, staffing, expertise, risk management arrangements, and technological and financial resources to enable the Minister to determine whether or not the application should be granted.
Foreign applications - regulations 7.3.12 to 7.3.14
Regulation 7.3.12 provides that Division 5 (regulations 7.3.12 to 7.3.14) applies in relation to applications by foreign applicants submitted under subsection 824B(2) of the new Corporations Act.
Regulations 7.3.13 and 7.3.14 in Division 5 set out the information and documents respectively to be submitted by foreign applicants. The requirements for foreign applications are intended to provide the Minister with enough information about the applicant's existing and proposed clearing and settlement facilities to enable the Minister to determine whether or not the application should be granted.
The application will need to provide details of the clearing and settlement facility to be extended into the Australian jurisdiction, the standard of regulation applicable to facility in the home country, and the organisation and structure of the applicant. The applicant will also have to establish that it is authorised to operate a clearing and settlement facility in its home country.
Obligations On Licensees
Provision of information to ASIC - regulations 7.3.01 to 7.3.03
Section 821B of the new Corporations Act requires that CS facility licensees (that is, clearing and settlement facilities which are licensed under Part 7.3 of the new Corporations Act) provide certain information to ASIC.
Subsection 821B(4) provides that the licensee must give written notice to ASIC when a person becomes or ceases to be a director, secretary or executive officer of a CS facility licensee or its holding company (paragraph 821B(4)(a)) or when a CS facility licensee becomes aware that a person has come to have or ceased to have more than 15% of the voting power in the licensee or holding company (paragraph 821B(4)(b)).
The notice must include such other information about the matter as is prescribed by regulations made for the purpose.
Regulations 7.3.01 to 7.3.03 specify this information.
Annual report of CS facility licensee - regulation 7.3.04
Section 821E of the new Corporations Act requires CS facility licensees to provide ASIC with an annual report on the extent to which the licensee complied with its obligations as a CS facility licensee under new Chapter 7.
Subsection 821E(2) provides that the licensee must ensure that the annual report is accompanied by any information and statements prescribed by regulations made for the purpose of this subsection.
Regulation 7.3.04 specifies information that a CS facility licensee must supply to ASIC if the annual report of such a body does not include this information. The regulation refers to, among other things, a description of the activities of the licensee and its resources.
Content of the licensed CS facility's operating rules - regulation 7.3.05
Subsection 822A(1) of the new Corporations Act provides that the operating rules of a licensed CS facility must deal with the matters prescribed by regulations made for the purposes of this subsection.
Regulation 7.3.05 lists those matters. It includes the regulated services provided, access, matters relating to risk and the handling of defaults.
This list draws on those in sections 779B and 1131 of the old Corporations Act but is more comprehensive, since the new Corporations Act no longer includes the assumption inherent in current Chapter 7 that the clearing house will be operated by a body related to the exchange.
Content of the licensed CS facility's written procedures - regulation 7.3.06
Subsection 822A(2) of the new Corporations Act provides that the regulations may prescribe matters in respect of which a licensed CS facility must have written procedures.
Regulation 7.3.06 sets out the matters which must be addressed in a licensed facility's written procedures. The matters referred to include exchange of appropriate information with other clearing and settlement facilities, markets, ASIC and the RBA, and arrangements to ensure the integrity and security of systems (including computer systems).
The rationale for this provision is that there are matters within the control of the facility operator which are of legitimate regulatory concern but which are not suitable for inclusion in the operating rules.
Powers of the Minister and ASIC
Provision of compliance report to other agencies - regulations 7.3.07 and 7.3.08
Section 823CA of the new Corporations Act empowers the Reserve Bank to assess how well a CS facility licensee is complying with its obligation to comply with the financial stability standards applying to it and to do all other things necessary to reduce systemic risk.
Similarly, section 823C of the new Corporations Act will empower ASIC to assess how well a CS facility licensee is complying with any or all of its other obligations as a CS facility licensee under the new Chapter 7.
Subsections 823C(5) and 823CA(4) provide that if an assessment, or part of an assessment, relates to a serious contravention of a law of the Commonwealth or of a State or Territory, ASIC or the Reserve Bank, as appropriate, may give a copy of the written report, or the relevant part of the report to the Australian Federal Police, certain other nominated agencies and those agencies prescribed by regulations for the purpose of new paragraph 823C(5)(d) or 823CA(4)(d), as appropriate.
Regulations 7.3.07 and 7.3.08 each prescribes further agencies for these purposes. The lists are the same and include the Australian Competition and Consumer Commission, the Australian Prudential Regulation Authority, as well as a number of State and Territory fair trading agencies.
4. LIMITS ON INVOLVEMENT WITH MARKETS AND CLEARING AND SETTLEMENT FACILITY LICENSEES
Introduction
Divisions 1 and 2 of Part 7.4 of the new Corporations Act separately address:
• limits on voting power in prescribed licensees (or their holding companies) (Division 1); and
• the need for individuals involved in all market and CS (clearing and settlement) facility licensees to be fit and proper (Division 2).
A prescribed licensee (or its holding company) which is prescribed for the purpose of Division 1 is defined as a 'widely held market body' (new subsection 850A(2)).
Widely held market body - regulation 7.4.01
Regulation 7.4.01 prescribes particular market and CS facility licensees as widely held market bodies.
The bodies specified in regulation 7.4.01 are those that have been assessed as being of national significance in accordance with the guidelines provided in paragraph 9.9 of the Explanatory Memorandum to the Financial Services Reform Bill 2001.
In general terms they are the Australian Stock Exchange Limited, its securities clearing house, the SFE
Corporation Limited and its clearing house.
Record-keeping - regulations 7.4.02 to 7.4.04
Section 854A of the new Corporations Act empowers the making of regulations relating to record-keeping and the giving of information in connection with obligations found in Divisions 1 and 2 of new Part 7.4.
Regulations 7.4.02 and 7.4.03 require a market licensee and CS facility licensee to keep records that detail the people involved in the management of the market licensee or CS facility licensee and the people who hold more than 15 per cent of the voting power in these bodies.
Regulation 7.4.04 requires a person who has a substantial holding and voting power in a widely held market body (see section 850A and regulation 7.4.01) to give this information to the widely held market body.
5. COMPENSATION REGIMES FOR FINANCIAL MARKETS
Introduction
Part 7.5 of the new Corporations Act addresses:
• the National Guarantee Fund and its administration (which is regulated under Part 7.10 of the old Corporations Act); and
• requirements for compensation arrangements which certain other markets will be required to make (that is, cover accessible by a retail client for specified losses of property entrusted to a participant in a financial market).
The regulations under Part 7.5 of the new Corporations Act are divided into 5 Divisions:
1. preliminary (regulations 7.5.01 to 7.5.13);
2. where there must be a compensation regime (regulation 7.5.14);
3. approved compensation arrangements (regulations 7.5.15 to 7.5.17);
4. National Guarantee Fund compensation regime (regulations 7.5.18 to 7.5.85);
5. provisions common to both kinds of compensation arrangements (regulations 7.5.86 to 7.5.93).
Each of these Divisions is examined separately below.
(1) Preliminary - regulations 7.5.01 to 7.5.13
Division 1 of Part 7.5 of the regulations contains the definitions and other preliminary matters required for the regulations.
These definitions are derived from sections 9, 93, 761, 920, 924, 924A, 948, 954, 954A, 954B, 954L, 954W, 955, 956, 961C, 962 and 1113A of the old Corporations Act.
(2) Where there must be a compensation regime - regulation 7.5.14
Section 881B of the new Corporations Act provides the matters which a person who is applying for an Australian market licence must state in their application in relation to compensation arrangements and, in addition, provides that the regulations may specify the information required where the applicant must have approved compensation arrangements (other than the National Guarantee Fund).
Regulation 7.5.14 specifies the information required for this purpose. The information includes the services and products provided by the market, the source of funds for the compensation and the proposed minimum amount of the cover.
The regulation outlines the information required to be provided by the applicant to enable the Minister to decide whether the proposed compensation arrangements should be approved.
(3) Approved compensation arrangements - regulations 7.5.15 to 7.5.17
Application for approval of compensation arrangements after grant of Australian market licence regulation 7.5.15
Section 882B of the new Corporations Act relates to getting compensation arrangements approved after a licence has been granted. It is relevant where, for example, a financial market initially has participants who are only trading on behalf of wholesale clients or on their own behalf and the participants fulfil the criteria for 'wholesale'. If the market activity subsequently changes so that participants are trading on behalf of retail clients, then approved compensation arrangements would be required.
Subsection 882B(2) provides that the application must contain the information, in relation to the proposed compensation arrangements, required by regulations made for the purpose.
Regulation 7.5.15 specifies information required for this purpose in terms comparable to that which would be required if the approval had been sought at the time of obtaining the licence. The information includes the services and products provided by the market, the source of funds for the compensation and the proposed minimum amount of the cover.
This regulation outlines the information required to enable the Minister to decide whether the compensation arrangement should be approved.
Notification of payment of levies - regulation 7.5.16
Section 883D of the new Corporations Act provides the mechanism for the payment of levies to support 'Division 3 compensation arrangements' (that is, compensation arrangements other than the National Guarantee Fund).
Since the levies are imposed with the assistance of the law, the levy is paid to the market operator as an agent for the Commonwealth. While the Financial Management and Accountability Act 1997 does not generally apply, the operator is required, in accordance with the regulations, to notify the Commonwealth of payments of levy it receives as agent for the Commonwealth.
Regulation 7.5.16 sets out the requirements for this notification - to whom it must be given, when and what it must contain.
Comparable requirements in relation to levies in connection with the National Guarantee Fund are found in regulations 7.5.74 and 7.5.75.
Amount of compensation - regulation 7.5.17
Subsection 885E of the new Corporations Act provides in effect that 'Division 3 compensation arrangements' (that is, other than the National Guarantee Fund) must pay interest on the amount of the loss at the rate prescribed by the regulations.
Regulation 7.5.17 specifies the rate of interest as 5%.
(4) National Guarantee Fund compensation regime - regulations 7.5.18 to 7.5.85
Purpose
The regulations made under sections 888A - 888E of the new Corporations Act contain the details of the heads of claim available against the National Guarantee Fund, the compensation available under these heads of claim and the procedure for making and determining these claims which have been moved from Divisions 6-8 of Part 7.10 of the old Corporations Act into the regulations.
Moving these matters into the regulations will provide flexibility to adjust the heads of claim in line with changes in the procedure of the members of the Securities Exchanges Guarantee Corporation (currently only the Australian Stock Exchange) and to reflect changes in the products that may be traded on their markets.
The Securities Exchanges Guarantee Corporation Limited is the administrator of the National Guarantee Fund.
Details of the regulations
To a large extent the regulations made under sections 888A - 888E of the new Corporations Act are intended to replicate the provisions in the old Corporations Act. While the regulations incorporate some changes (for example to take account of definitional changes), the regulations generally reflect the scope of the provisions in the old Corporations Act.
The nine Subdivisions of Division 4 are summarised below.
Subdivision 4.1 - application of Division 4 - regulation 7.5.18
Subdivision 4.2 - clearing arrangements - regulation 7.5.19
Subdivisions 4.1 and 4.2 contain preliminary matters. In particular, the regulations in these subdivisions outline the relevant power under which the regulations will be made and detail how third party clearing arrangements will apply in relation to the regulations in Subdivision 4.3 and 4.9.
Subdivision 4.3 - contract guarantees - regulations 7.5.20 to 7.5.32
The regulations in Subdivision 4.3 replicate the provisions in Division 6 of old Part 7.10 of the old Corporations Act.
The regulations:
• relate to claims arising as a result of a failure of one party to fulfil a contract for the transfer of securities within a specified time; and
• provide that the compensation available for successful claims under this Subdivision will be the supply of securities of the same kind and number that were the subject of the failed contract, or if that is not possible, the payment of the amount of the actual pecuniary loss suffered by the claimant.
Subdivision 4.4 - securities loans guarantees - regulations 7.5.33 to 7.5.39
The regulations in Subdivision 4.4 replicate the provisions in Division 6A of old Part 7.10 of the old Corporations Act.
The regulations detail the circumstances in which a lender will be able to claim in respect of a borrower's failure to discharge an obligation under a guaranteed securities loan.
Claims in Subdivision 4.4 will be required to be made within 6 months after the day on which the lender became entitled to make the claim.
The regulations provide that the compensation available for successful claims will be the transfer of securities or security benefits of the same kind and number or the payment of an amount equal to the pecuniary loss suffered by the lender.
Subdivision 4.5 - claims in respect of net obligations regulations 7.5.40 to 7.5.47
The regulations in Subdivision 4.5 replicate the provisions in Division 6B of Part 7.10 of the old Corporations Act.
The regulations detail the circumstances in which claims will be able to be made in respect of failures to pay net amounts and to transfer net numbers of securities in respect of transactions.
Claims made under Subdivision 4.5 will need to be made within 6 months after the day on which the claimant became entitled to make the claim.
The regulations provide that the compensation available for successful claims will be:
• payment of an amount equal to the amount that remains undischarged;
• payment of an amount equal to the actual pecuniary loss; or
• a transfer of securities of the same kind and number as the outstanding securities.
Subdivision 4.6 - transfer delivery service guarantees - regulations 7.5.48 to 7.5.52
The regulations in Subdivision 4.6 replicate the provisions in Division 6C of Part 7.10 of the old Corporations Act.
The regulations will allow a person to make a claim in respect of default by a transfer delivery service nominee.
Claims under this Subdivision will be required to be made within 6 months after the day on which the claimant became entitled to make the claim.
The regulations provide that the compensation available for successful claims will be the transfer of securities of the same kind and number as the default securities to the claimant, or the payment of an amount equal to the actual pecuniary loss suffered to the claimant.
Subdivision 4.7 - unauthorised transfer - regulations 7.5.53 to 7.5.59
The regulations in Subdivision 4.7 apply if a dealer executes a document of transfer of securities on behalf of a person but the person did not authorise the dealer to execute the document. Equivalent provisions are in Division 7 of Part 7.10 of the old Corporations Act.
The regulations:
• provide that the compensation available for successful claims will be either the transfer of securities of the same kind and amount as those of the transferred securities that the claimant has ceased to hold, or the payment to the claimant of the amount that is the actual pecuniary loss suffered by the claimant;
• enable further compensation to be paid to the claimant if the supply of securities or the payment of money will not adequately compensate the claimant for a pecuniary or other gain that the claimant might, if the claimant had continued to hold the transferred securities, have made but did not in fact make.
Subdivision 4.8 - contraventions of ASTC certificate cancellation provisions - regulations 7.5.60 to 7.5.63
The regulations in Subdivision 4.8 replicate the provisions in Division 7A of Part 7.10 of the old Corporations Act. This Subdivision will relate to a contravention by a dealer of the ASTC certificate cancellation provisions (this is a defined term in regulation 7.5.01).
The regulations provide that the compensation available for successful claims will be the payment to the claimant of an amount that is the actual pecuniary loss suffered by the claimant. This Subdivision also includes a regulation that allows further compensation to be paid to the claimant if the payment of money will not adequately compensate the claimant.
Subdivision 4.9 - claims in respect of insolvent participants - regulations 7.5.64 to 7.5.71
The regulations in Subdivision 4.9 replicate the provisions in Division 8 of Part 7.10 of the old Corporations Act.
This Subdivision provides that claims can be made in respect of property that have been entrusted to, or received by, dealers before these dealers became insolvent.
The regulations provide that the compensation available for successful claims will be the transfer of property of the same kind that was entrusted to the dealer or if this is not obtainable the payment of an amount equal to the actual pecuniary loss suffered by the claimant.
The total amounts paid out of the National Guarantee Fund in connection with claims under this Subdivision will not exceed an amount equal to 14 per cent of the minimum amount of the National Guarantee Fund as at the end of the day when the claim is satisfied. This limit is contained in the old Corporations Act.
Subdivision 4.10 - general - regulations 7.5.72 to 7.5.84
Subdivision 4.10 includes regulations that will:
• enable claims to be settled and partially allowed (regulation 7.5.72);
• provide that financial products purchased to provide compensation form part of the Fund (regulation 7.5.73);
• provide a discretion to pay amounts (such as dividends) not received because of a failure to transfer securities (regulation 7.5.74);
• enable the compensation payable to be reduced by reference to a right of set-off available to the claimant, to the extent to which the claimant was responsible for causing the loss, or to the extent the claimant has adversely affected the Securities Exchanges Guarantee Corporation's right to be subrogated to any of the claimant's right and remedies in relation to the loss to which the claim relates (regulation 7.5.75 to 7.5.77);
• enable a claimant to be paid an amount that represents the reasonable costs and disbursements incidental to the proof and making of the claim and attempting to recover the loss (regulation 7.5.78);
• require interest to be paid to the claimant (regulation 7.5.79);
• require the SEGC to notify the claimant if a claim is disallowed (regulation 7.5.80);
• provide for arbitration for the cash settlement of certain claims (regulation 7.5.8 1);
• provide for compensation payments to be made in instalments (regulation 7.5.82); and
• provides for notification to the Commonwealth of the receipt of levies for the benefit of the National Guarantee Fund (regulations 7.5.83 and 7.5.84).
Subdivision 4.11 - other provisions relating to compensation - regulation 7.5.85
Section 891A of the new Corporations Act empowers the Minister to authorise the payment out of the National Guarantee Fund of that amount attributable to clearing house support to a body corporate specified in the regulations which has made adequate arrangements covering all or part of the clearing and settlement system support that Division 4 of Part 7.5 of the new Corporations Act provides for and if he or she is satisfied that the remaining funds are appropriate for the risks remaining with the fund.
Subdivision 11 consists of regulation 7.5.85 which nominates the ASX Settlement and Transfer Corporation Limited (ASTC) for the purposes of new subsection 891A(1). This will enable the Minister to direct the Securities Exchanges Guarantee Corporation Limited to pay a specified amount to this body corporate out of the National Guarantee Fund.
ASTC is a subsidiary of the Australian Stock Exchange Limited which operates the securities clearing house of the Exchange.
Forms
Forms 719A, 719B, 720 and 721 are included in Schedule 2. They provide:
• a notice calling for claims in relation to unauthorised transfer (Form 719A);
• a notice calling for claims in relation to certificate cancellation provisions (Form 719B);
• a notice calling for claims in relation to an insolvent broker (Form 720); and
• a notice of disallowance of a claim (Form 721).
(5) Provisions common to both kinds of compensation arrangements - regulations 7.5.86 to 7.5.93
Excess money in regulated funds - regulations 7.5.86 and 7.5.87
Subsection 892G(1) of the new Corporations Act provides that the regulations may determine, or provide a method for determining, when there is excess money in a regulated fund (that is, the National Guarantee Fund or a fidelity fund which forms part of a market's compensation arrangements).
Regulation 7.5.86 provides such a mechanism for the National Guarantee Fund, while regulation 7.5.87 provides it in the case of other fidelity funds.
Approval of financial industry development purposes - regulations 7.5.88 to 7.5.92
Subsection 892G(2) of the new Corporations Act provides that the regulations may make provision in relation to how excess money in a regulated fund may be, or is to be dealt with.
Regulation 7.5.88 to 7.5.92 make such provision, including
• provision for the Minister to approve a matter as an approved purpose if it meets particular criteria relating to the development of the financial industry (regulation 7.5.88); and
• provision for the payment and use of such excess funds from the National Guarantee Fund and other fidelity funds (regulations 7.5.89 to 7.5.92).
Regulations 7.5.90(4) and 7.5.92(4) require the market licensee receiving such funds to account to ASIC for their use by lodging Form 719 not later than 3 months after the end of each relevant financial year.
Qualified privilege - regulation 7.5.93
Section 892J provides that regulations may provide for specified persons to have qualified privilege in respect of specified things done under compensation rules forming part of Division 3 arrangements or under regulations made for the purposes of a provision of Subdivision B of Division 4.
Regulation 7.5.93 provides qualified privilege for the market licensee, its employees and board, and an agent of the board in connection with giving notice seeking claims and any statement that a contract of insurance does or does not cover a particular participant. While this regulation relates only to Division 3 arrangements, qualified privilege is provided to a comparable extent in relation to the National Guarantee Fund arrangements through other means.
6. LICENSING OF PROVIDERS OF FINANCIAL SERVICES
Activities conducted by accountants - regulation 7.1.29
Section 766A of the new Corporations Act describes when a person provides a financial service, a key concept in the reforms.
Paragraph 766A(2)(b) provides that the regulations may set out the circumstances in which persons are taken to provide, or taken not to provide, a financial service.
To clarify the operation of the requirement to be licensed as a financial services provider in the case of accountants, regulation 7.1.29 provides that a qualified accountant when engaging in the activities listed in subregulation 7.1.29(1) will not be taken to be providing financial product advice in the circumstances referred to in subregulation 7.1.29(2).
In general terms, this means that, for example, an accountant who is advising in relation to the preparation or auditing of financial statements is not providing financial product advice provided that the accountant does not make a recommendation or provide an opinion, or a report of either of those things, that is intended to influence a person in making a decision in relation to a class of financial products or could reasonably be regarded as being intended have such an influence.
Need for an Australian financial services licence - regulation 7.6.01
Paragraph 911A(2)(k) provides that a person is exempt from the requirement to hold an Australian financial services licence for a financial service where the provision of the service is covered by an exemption prescribed in regulations made for the purposes of this paragraph.
Regulation 7.6.01 provides various exemptions from the need to hold an Australian financial services licence.
Superannuation entities
Paragraphs 7.6.01 (1)(a)-(d) provide an exemption for trustees of non-public offer superannuation entities, and trustees of pooled superannuation trusts, provided the pooled superannuation trust does not invest the assets of a regulated superannuation fund below a certain asset size. Subregulation 7.6.01(2) sets out certain consequences where the requirements of paragraph 7.6.01 (c) are not fulfilled.
Referral to a financial services licensee
Paragraph 7.6.01 (1)(e) provides an exemption from a requirement to hold a financial services licence in relation to the provision of a financial service that consists solely of the referral of a person to a financial services licensee. This exemption will only be available where a person provides referrals as an incidental part of their ordinary activities. It would not therefore be available to a person whose business consists of the promotion of services made available by financial services licensees. The exemption will also be conditional on the provision of written disclosure, at the time the referral is made, of any benefits (including commission) that the person making the referral (or an associate) is to receive in respect of, or that are attributable to, the referral.
Arranging payment into a superannuation fund or retirement savings account
Paragraphs 7.6.01(1)(h) and (i) provide an exemption for arranging for contributions to be paid into a superannuation fund or retirement savings account, and for the provision of factual information to members or prospective members of superannuation funds, or holders or prospective holders of retirement savings accounts. These exemptions would apply, for example, to an employer who arranges for employee contributions to be paid into a superannuation fund, or who gives information to employees about the fund.
Handling insurance claims
Paragraph 7.6.01(1)(j) provides an exemption for persons involved solely in insurance claims handling on behalf of insurers.
Alternative dispute resolution systems - regulation 7.6.02
Among the general obligations imposed on a financial services licensee by subsection 912A(1) of the new Corporations Act is the requirement to have a dispute resolution system complying with subsection 912A(2) if it provides financial services to retail clients.
Subsection 912A(2) sets out the requirements for both internal and external dispute resolution procedures and empowers the making of regulations to flesh out the requirements.
Regulation 7.6.02 include the matters that ASIC is to take into account when considering whether to make or approve standards or requirements relating to internal dispute resolution. The regulation also sets out the matters ASIC is to take into account when considering whether to approve an external dispute resolution scheme.
Applying for Australian financial services licence - regulation 7.6.03
Section 913A of the new Corporations Act provides that a person may apply for an Australian financial services licence by lodging an application with ASIC that includes the information required by the regulations and is accompanied by the documents (if any) required by the regulations.
Regulation 7.6.03 sets out a range of information that is required as part of an application for an Australian financial services licence. This information includes the person's name, principal business address, ABN (Australian Business Number) (if any), a description of the financial services the person proposes to provide and information relating to how the person will comply with their general obligations contained in section 912A of the new Corporations Act. The regulation also requires any other information that is required by ASIC for the purpose of considering the application.
Conditions on Australian financial services licence - regulation 7.6.04
Subsection 914A(8) provides that a financial services licence is subject to such conditions as are prescribed by regulations made for the purpose of this subsection, as well as those envisaged by earlier subsections.
Regulation 7.6.04 imposes a range of conditions on Australian financial services licences. These include conditions relating to:
• notification to ASIC in relation to events that may make a material adverse change to the financial position of the licensee (this condition will not apply to licensees that are bodies regulated by Australian Prudential Regulation Authority);
• notification to ASIC in relation to certain changes in details entered in the register of financial services licensees and the register of authorised representatives of financial services licensees;
• the maintenance of a record of training undertaken by representatives; and
• the supply of copies of authorisations of authorised representatives.
It should be noted that ASIC is empowered to impose conditions on a financial services licence. Accordingly, the range of conditions dealt with in the regulations should not be regarded as an exhaustive list of conditions which may be imposed on licensees. It is envisaged that ASIC may use this power both in applying various conditions in relation to licensees generally and also in relation to particular classes of licensees.
Register of financial services licensees and register of authorised representatives of financial services licensees - regulation 7.6.05 ASIC register relating to persons against whom banning order or disqualification order is made - regulation 7.6.06
Relevant provisions
Subsection 922A(1) of the new Corporations Act provides that ASIC must establish and maintain one or more registers relating to financial services.
Subsection 922A(2) empowers the making of regulations to prescribe the way in which the register or registers must be established or maintained, including the details that ASIC must enter.
Register of financial services licensees and authorised representatives
Regulation 7.6.05 sets out a range of information that is to be included in the register of financial services licensees. This information includes the licensee's name, ABN (if any), licence number, the date on which the licence was granted, details relating to conditions on the licence and any other information that ASIC believes should be included in the register.
The regulation also sets out a range of information to be included in the register of authorised representatives of financial services licensees. This information includes the authorised representative's name, ABN (if any), the number allocated to the authorised representative by ASIC, the name of each licensee for which the authorised representative is an authorised representative, the date of the authorisation and any other information that ASIC believes should be included in the register.
Register of persons banned or disqualified
Regulation 7.6.06 sets out the range of information that is to be included in the register referred to in subsection 922A(2) relating to persons against whom a banning order or a disqualification order under Division 8 has been made.
The information required in relation to persons against whom a banning order is made includes the person's name, the day the banning order took effect, the terms of the banning order and any other information that ASIC believes should be included in the register.
The information required in relation to each person against whom a disqualification order is made includes the person's name, the day on which the disqualification order took effect, the terms of the disqualification order and any other information that ASIC believes should be included in the register.
Restriction on use of certain words or expressions - regulation 7.6.07
Section 923A of the new Corporations Act restricts the use of certain words and expressions (for example, 'independent').
Use of a restricted word or expression is prohibited by subsection 923A(1).
However, subsection 923A(2) provides that it is not a contravention of subsection 923A(1) for a person to assume or use a restricted word or expression if certain criteria are fulfilled. These criteria include that:
• the person does not receive a commission or certain other forms of remuneration; and
• none of the persons listed in paragraph 923A(2)(b) receive such remuneration.
- The persons listed in paragraph 923A(2)(b) include, in subparagraph 923A(2)(b)(iii), any other person identified in regulations made for the purposes of this subparagraph.
For the purposes of subparagraph 923A(2)(b)(iii) of the Act, regulation 7.6.07 prescribes 'any other persons' to include those persons identified in sections 942B or 942C of the Act (relating to Financial Services Guides) who may receive remuneration or other benefits that are required to be disclosed in the Guide.
7. FINANCIAL SERVICES DISCLOSURE
How documents, information and statements etc are to be given - regulation 7.7.01
Section 940C of the new Corporations Act sets out requirements for the provision of documents, statements and information. Subsection 940C(3) requires the providing entity to give the client certain information (essentially on remuneration, associations and interests of the providing entity) in the manner required by regulation in the following situations:
• where general financial product advice is given in a public forum (an exception to the requirement to provide a Financial Services Guide: subsection 941C(5)); and
• where the providing entity provides execution-related telephone advice (an exception to the requirement to provide a Statement of Advice: subsection 946B(3)).
Regulation 7.7.01 sets out the manner for providing the required information in these situations. It is modeled on paragraphs 849(2)(a) and (b) of the old Corporations Act. Under this approach, disclosure is to be provided in the same manner that the advice is provided. Therefore:
• where advice is given orally, disclosure must be given orally;
• where advice is given in printed or electronic form, disclosure must be given in that form; and
• where advice is given in any other form, disclosure must also be given in that form.
(1) Financial Services Guide - regulations 7.7.02 to 7.7.08
Situations in which Financial Services Guide is not required - regulation 7.7.02
Section 941C provides the situations in which a Financial Services Guide is not required.
Subsection 941C(6) provides that a providing entity does not have to give the client a Financial Services Guide if the financial service is a dealing in, or otherwise relates to, among other things, a financial product of a kind prescribed by regulations made for the purpose of paragraph 941C(6)(c).
Regulation 7.7.02 prescribes travellers' cheques for this purpose.
Special rules apply in a number of areas of the new Corporations Act to reduce the intensity of regulation in relation to 'basic deposit products' (as defined in section 761A) and related non-cash payment facilities on the basis that those product are capital guaranteed and well understood by consumers.
There are regulation-making powers to extend those special rules to other products. Those powers are to be used to prescribe travellers' cheques as a product to which these special rules apply. As well as regulation 7.7.02, which is described above, this means that:
• A Statement of Advice is not required in relation to travellers' cheques, but certain information must be given (subregulation 7.7.10); and
• A Product Disclosure Statement may be given after the cheques are issued (regulation 7.9.80).
Financial Services Guide given by financial services licensee: description of documents - regulation 7.7.03
Financial Services Guide given by financial services licensee: remuneration, commission and benefits -regulation 7.7.04
Record-of advice given by financial services licensee - regulation 7.7.05
Section 942B sets out the main requirements of a Financial Services Guide.
Paragraph 942B(2)(k) provides that the Financial Services Guide must include any other statement or information required by the regulations.
- additional requirements - regulation 7.7.03
Regulation 7.7.03 sets out requirements in relation to the additional information that must be contained in a Financial Services Guide given by a financial services licensee.
it requires the Financial Services Guide to include a statement explaining the purpose and content of the document to the client, as well as explaining, if appropriate, the circumstances in which the client may also receive a Statement of Advice or a Product Disclosure Statement.
Certain aspects of the content of the Financial Services Guide must, at a minimum, be drawn to the client's attention by the statement. This does not preclude other matters being drawn to the client's attention, so long as the statement is presented in a way that is easy for the client to understand.
- remuneration - regulation 7.7.04
Regulation 7.7.04 requires that the Financial Services Guide contains information relating to remuneration paid to persons who refer clients to the licensee.
The regulation also sets out the level of detail of the information required to be disclosed in relation to remuneration paid to certain persons, but does not limit the generality of subsection 942B(3), which requires that the level of information should be such as a person would reasonably require for the purpose of making a decision about whether to acquire financial services from the providing entity as a retail client. The regulation contains guidance on the type of disclosure that will satisfy the requirements of the regulation.
- period for requesting record of execution-related telephone advice - regulation 7.7.05
Regulation 7.7.05 sets out requirements of the statement in the Financial Services Guide relating to the time in which a client can request a record of execution-related telephone advice provided by a financial services licensee (the request period). Where the licensee is required to provide periodic reports to the client, the request period is linked to the timing of those reports. In all other cases, the minimum request period is 90 days.
Financial Services Guide given by authorised representative of financial services licensee: description of documents - regulation 7.7.06
Financial Services Guide given by authorised representative of financial services licensee: remuneration, commission and benefits - regulation 7.7.07
Records of advice given by authorised representative of financial services licensee - regulation 7.7.08
Section 942C of the new Corporations Act sets out the main requirements for the Financial Services Guide which is given by an authorised representative.
Paragraph 942C(2)(m) requires that the Financial Services Guide must include any other statement or information required by the regulations.
- additional requirements - regulation 7.7.06
Regulation 7.7.06 contains requirements equivalent to those set out in regulation 7.7.03 in relation to Financial Services Guides given by financial services licensees.
- remuneration - regulation 7.7.07
Regulation 7.7.07 contains requirements in relation to the disclosure of information regarding remuneration in Financial Services Guides given by authorised representatives which are equivalent to those in regulation 7.7.04 relating to Financial Services Guides given by financial services licensees.
- Record of advice given by authorised representative of financial services licensee - regulation 7.7.08
Regulation 7.7.08 sets out requirements of the statement in the Financial Services Guide relating to the time in which a client can request a record of execution-related telephone advice provided by an authorised representative. They are equivalent to the requirements in regulation 7.7.05 relating to financial services licensees.
(2) Statement of advice - regulation 7.7.09 to 7.7.12
Situations in which a Statement of Advice is not required: record of execution-related telephone advice -regulation 7.7.09
Situations in which Statement of Advice is not required: travellers' cheques - regulation 7.7.02
Section 946B of the new Corporations Act sets out the circumstances in which a Statement of Advice is not required.
- execution related telephone advice - regulation 7.7.09
Subsections 946B(1) to (3A) relate to execution-related telephone advice.
Subsection 946B(3A) provides that the providing entity must keep a record of the advice and, in doing so, must comply with any applicable requirements of regulations made for the purposes of this subsection.
Regulation 7.7.09 sets out these requirements, including the time for which the record must be kept. The time is linked to the period in which a client may request a copy of the record.
- travellers' cheques - regulation 7.7.10
Regulation 7.7.10 provides that travellers' cheques are prescribed, and thus no Statement of Advice is required in relation to their provision.
Statement of Advice given by financial services licensee - regulation 7.7.11
Section 947B sets out the main requirements for a Statement of Advice given by a financial services licensee. It includes regulation-making powers which have been exercised in regulation 7.7.11.
Regulation 7.7.11 sets out further requirements in relation to information that must be contained in a Statement of Advice given by a financial services licensee.
The regulation provides that the Statement of Advice must contain information relating to remuneration received by a person who makes referrals to the licensee. This is similar to the requirement relating to Financial Services Guides.
The regulation also sets out the level of detail of the information required to be disclosed in relation to remuneration paid to certain persons, but does not limit the generality of subsection 947B(3), which requires that the level of information should be such as a person would reasonably require for the purpose of making a decision whether to act on the advice as a retail client.
The information regarding remuneration required to be disclosed in the Statement of Advice is necessarily more specific than that required under the Financial Services Guide. Generally, remuneration will need to be disclosed as a dollar amount, but where this is not possible, a description of how the remuneration is to be calculated, including, where appropriate, worked dollar examples and percentage amounts, should be provided.
The regulation makes no specific reference to 'back office' functions. However, this should not be taken to imply that remuneration, commission or other benefits received for the performance of such functions is not required to be disclosed. It is recognised that the concept of 'back office' functions varies depending on the nature of the financial services business. Nevertheless, remuneration received for performing such functions should be treated the same as any other remuneration received, and should be disclosed if it might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice (see paragraph 947B(2)(d) relating to a Statement of Advice given by a financial services licensee, and paragraph 947C(2)(e) relating to a Statement of Advice given by an authorised representative).
It is not practicable, or indeed appropriate, for the regulation to be prescriptive about the level of detail that should be disclosed. It will depend to a degree on the circumstances of each particular case, and will call for some judgement on the part of the financial services licensee (or authorised representative).
If an explanation of the activities or functions for which the remuneration is received would assist the client to compare similar products or services offered by other providers, it would be acceptable to disclose this. For example, it would be acceptable to disclose whether part of the remuneration was used to pay for administrative costs, or the costs of running an office.
A balance needs to be struck between providing the client with sufficient information with which to make comparisons with products and services of other providers, while not overwhelming or confusing the client by providing too much information.
Statement of Advice given by authorised representative of financial services licensee - regulation 7.7.12
Section 947C provides the main requirements for a Statement of Advice given by an authorised representative. It includes regulation-making powers which have been exercised in regulation 7.7.12.
Regulation 7.7.12 contains requirements in relation to the information to be contained in a Statement of Advice given by an authorised representative equivalent to those in regulation 7.7.11 relating to Statements of Advice given by financial services licensees.
8. OTHER PROVISIONS RELATING TO CONDUCT CONNECTED WITH FINANCIAL PRODUCTS AND FINANCIAL SERVICES
Obligation to pay money into an account - regulation 7.8.01
Section 981B relates to the obligation on a financial services licensee to pay money into an appropriate account.
Regulation 7.8.01 contains various requirements for accounts maintained under section 981B of the Act. For subparagraph 981(1)(a)(ii) an account may be held with an approved foreign bank or as a cash management trust (subregulation 7.8.01(2)).
The term 'approved foreign bank' is defined in subregulation 1.0.02(1).
Subregulation 7.8.01(5) states that an account maintained for the purposes of Division 2 of Part 7.8 must be designated as a trust account and financial services licensees must hold all moneys paid into the account on trust for the benefit of the person entitled to the moneys.
Accounts maintained for section 981B of the Act - regulation 7.8.02
Section 981C provides that the regulations may deal with all or any of a number of matters in relation to accounts maintained for the purposes of section 981B.
This power is exercised in regulation 7.8.02 which deals with the circumstances in which payments may be made out of an account (including the circumstances in which money may be withdrawn and invested, and the kinds of investment that may be made), the minimum balance to be maintained in an account, how interest on an account is to be dealt with, and how interest or other earnings on an investment of money withdrawn from an account, or the proceeds of the realisation of such an investment, are to be dealt with.
How money to be dealt with if licensee ceases to be licensed etc. - regulation 7.8.03
Section 981F provides that the regulations may include provisions dealing with how money in an account maintained for the purposes of section. 981B, or an investment of such money, is to be dealt with if, among other things, the licensee ceases to be licensed.
This power is exercised in regulation 7.8.03 which sets out how money in an account maintained for section 98 1 B is to be dealt with if the financial services licensee ceases to be a financial services licensee, becomes insolvent or ceases to carry on some or all of the activities authorised by their licence.
Money to which Subdivision A of Division 2 of Part 7.8 of the Act applies taken to be held in trust: breach of financial services law - regulation 7.8.04
Subsection 981H(1) provides that, generally, money to which Subdivision A of Division 2 of Part 7.8 applies is held in trust for the licensee for the benefit of the client.
Subsection 981H(3) provides that the regulations may, among other things, provide for matters relating to the taking of money to be held in trust.
Regulation 7.8.04 provides that if client money is held by a financial services licensee or held in an investment mentioned in subregulation 7.8.02(5) following a breach of a financial services law, then the money, the investment and the proceeds of the investment are subject to a trust in favour of the client to the extent that the client is entitled to the money, investment or proceeds as the case may be.
Money to which Subdivision A of Division 2 of Part 7.8 of the Act applies taken to be held in trust: risk accepted by insurer - regulation 7.8.05
Subsection 981H(1) provides that, generally, money to which Subdivision A of Division 2 of Part 7.8 applies is held in trust for the licensee for the benefit of the client.
Subsection 981H(3) provides that the regulations may, among other things, provide for matters relating to the taking of money to be held in trust.
Regulation 7.8.05 provides for the money held by a financial services licensee in relation to an insurance product where the risk in relation to the insurance product has been accepted by an insurer to be held in trust for the insurer (rather than the insured).
Statement setting out terms of loan etc. - regulation 7.8.06
Subsection 982C(1) provides that the licensee must, in accordance with the regulations, give the client a statement setting out the terms and conditions on which the loan is made and accepted and the purpose for which and the manner in which the licensee is to use the money.
Regulation 7.8.06 states that the financial services licensee must give a client a disclosure document that contains, as far as practicable, the matters required by Division 2 of Part 7.9.
How property to which Division 3 of Part 7.8 of the Act applies is to be dealt with - regulation 7.8.07
Subsection 984B(1) provides that, with certain exceptions, a licensee must ensure that property to which Division 3 of Part 7.8 applies is only dealt with in accordance with the requirements specified in regulations made for the purpose of paragraph 984B(1)(a).
Regulation 7.8.07 provides that the financial services licensee must hold the property on trust for the benefit of the person who is entitled to the money. It also includes provision for deposit of the property in safe custody with an authorised deposit-taking institution and for a number of other possible requests by clients.
Subregulations 7.8.07(8) and (9) specifically address deposit of property for a loan or advance to the financial services licensee.
Debts of financial services licensee in relation to premiums etc. - regulation 7.8.08
Subsection 985C(1) provides that the regulations may impose requirements to be complied by a financial services licensee in relation to, or make other provision dealing with, a situation specified in subsection (2) that arises in relation to a contract or proposed contract of insurance under which the licensee is not the insurer. The situations specified in subsection 985C(2) include where the licensee receives an amount as a premium.
Regulation 7.8.08 enables the effect of the current section 27 of the Insurance (Agents and Brokers) Act 1984 (the I(AB) Act) to be carried across to the new regime (Explanatory Memorandum to the FSR Bill, paragraph 13.26).
The regulation provides for limits on a financial services licensee holding a client's money in relation to the placement of insurance business and makes a licensee accountable for the payment of moneys to those entitled to receive them.
Reporting in relation to money to which Subdivision A or B of Division 2 of Part 7.8 of the Act applies or property to which Division 3 of Part 7.8 applies - regulation 7.8.09
Section 986A provides that the regulations may impose reporting requirements to be complied with by a financial services licensee in relation to money to which Subdivision A or B of Division 2 of Part 7.8 applies or property to which Division 3 of Part 7.8 applies.
This power is used in regulation 7.8.09 which outlines the reporting requirements in relation to clients' money and property. Where a financial services licensee has held money or property to which Part 7.8 applies, the licensee must within 14 days of the end of the relevant quarter day, as defined in s 9 of the Corporations Act, give the client a written statement setting out the information contained in subregulations 7.8.08(2) and 7.8.08(3)
Reporting in relation to derivatives - regulation 7.8.10
Section 986B provides that the regulations may impose reporting requirements to be complied with by a financial services licensee in relation to dealings in derivatives on behalf of other people.
Regulation 7.8.10 outlines the reporting requirements in relation to derivatives in relation to retail clients. A wholesale client may request a financial services licensee in writing to apply the reporting requirements to money received from the client.
Particular categories of information to be shown in records - regulation 7.8.11
Section 98SE relates to the records which a financial services licensee must keep.
Paragraph 988E(g) requires the licensee to keep records in sufficient detail to show particulars of such other matters (if any) as are specified in regulations made for the purposes of this paragraph.
This power is used in regulation 7.8.11 to specify the following additional matters:
• all underwriting transaction entered into by the licensee;
• all derivatives dealt with by the licensee under instructions from another person;
• each person who gave instructions to deal with derivatives;
• all property that is not the property of the financial services licensee and for which the licensee, or any nominee controlled by the licensee is accountable, showing by whom, and for whom, the property is held and the extent to which the property is either held for safe custody or deposited with a third party as security for loans or advances made to the broker; and
• all transaction in relation to insurance products entered into with, or on behalf of, foreign insurers.
Requirements in relation to financial records of financial services licensees - regulation 7.8.12
Section 988F provides that the regulations may impose additional requirements to be complied with in relation to financial records of financial services licensees including, for example, requirements for filings to be contained in the records, and requirements relating to the level of detail to be shown in the records.
Regulation 7.8.12 provides such additional requirements in relation to basic deposit products and other financial products. It also addresses the situation where the financial services licensee is a partner in a firm.
Auditor's report with annual profit and loss statement and balance sheet - regulation 7.8.13
Subsection 989B(1) requires that a financial services licensee prepare a true and fair profit and loss statement and balance sheet in respect of each financial year.
Subsection 989B(3) provides that the licensee must lodge an auditor's report with ASIC containing the information and matters required by the regulations.
Regulation 7.8.13 states for the purposes of preparing an auditor's report under subsection 989B(3), the auditor must check or examine:
• internal procedures applied to ensure compliance with Part 7.8; and
• the operation and control of accounts required to be maintained under sections 981B and 982B; and
• other ledgers or records as the auditor considers it necessary to examine.
Contents of annual profit and loss statement and balance sheet and applicable accounting procedures -regulation 7.8.14
Section 989C provides that the profit and loss statement and the balance sheet must contain the information that is required by the regulations and be prepared in accordance with any requirements in the regulations as to the accounting principles to be used.
Regulation 7.8.14 requires that the profit and loss statement and balance sheet contain a declaration by the licensee:
• that the profit and loss statement and balance sheet give a true and fair view; and
• that the auditor's report attached to the profit and loss statement and balance sheet is a true copy of the auditor's report on the audited accounts.
Appointment of auditor by financial services licensee - regulation 7.8.15
Section 990B relates to the appointment of an auditor by the financial services licensee.
Regulation 7.8.15 deals with matters related to the appointment of a firm as auditor of the financial statements of a financial services licensee - for example, reconstitution of the firm because of a death and the admission of new partners. The regulation carries over the effect of some parts of sections 857 and 1215 of the old Corporations Act.
When person is ineligible to act as auditor of financial services licensee - regulation 7.8.16
Section 990C provides that a person or firm is ineligible to act as auditor of the licensee if regulations made for the purposes of this section provide that the person or firm is ineligible so to act.
Regulation 7.8.16 sets out the circumstances when a person is ineligible to act as auditor of a financial services licensee. They include indebtedness to the financial services licensee and not being a registered company auditor. This regulation carries over the effect of subsections 857(2) and 1215(2) of the old Corporations Act.
Priority to clients' orders - regulation 7.8.17
Section 991B relates to the priority to be given to clients' orders.
Paragraph 991B(3)(b) provides that the prohibition in subsection 991B(2) on entering into a transaction on the licensee's own behalf in priority to a client's outstanding order does not apply if the transaction, or the giving of the instructions, is permitted by regulations made for the purposes of this paragraph.
Regulation 7.8.17 provides that the general rule does not apply in relation to transactions entered into by a participant in a licensed market in accordance with the operating rules of the market. It essentially replicates existing Corporations Regulation 7.4.05, but is extended in its application from a stock exchange to all licensed markets.
Instructions to deal through licensed markets - regulation 7.8.18
Section 991C provides that regulations may deal with various matters relating to instructions to deal through licensed markets.
Regulation 7.8.18 carries over the requirements set out in subsections 1266(2), (4) and (6) of the old Corporations Act relating to futures, which will now apply in respect of instructions received by financial services licensees to deal in financial products through licensed markets.
However, it is recognised that the current requirements for futures markets may not be appropriate for other licensed markets, which may have their own rules in relation to these matters. The requirements in the regulation therefore apply except to the extent that the operating rules of a licensed market of which the financial services licensee is a participant otherwise provide.
Records of instructions to deal on licensed markets and foreign markets - regulation 7.8.19
Section 991D provides that regulations may require records to be kept in relation to instructions to deal on licensed and foreign markets.
Regulation 7.8.19 sets out record-keeping requirements in relation to the receipt, transmission and execution of instructions received by financial services licensees to deal in financial products through licensed markets or through other financial markets, whether inside or outside Australia.
Dealings with non-licensees - regulation 7.8.20
Section 991E relates to the obligations on financial services licensees in relation to dealings with non-licensees. This includes, for example, disclosing that the licensee is acting on its own behalf.
Regulation 7.8.20 sets out a number of requirements relating to situations where financial services licensees deal on their own account.
The regulation sets out exceptions to the requirement that the licensee must notify the non-licensee that the licensee is acting on its own behalf. This replicates an existing exception for the sale or purchase of certain securities and interests in managed investment schemes.
The regulation provides exceptions to the prohibition against the licensee charging a brokerage, commission or fee to the non-licensee in relation to transactions in which the licensee acts on its own behalf, subject to certain conditions being met.
The regulation also imposes record-keeping requirements in relation to transactions entered into by financial services licensees on their own behalf.
Dealings involving employees of financial services licensees - regulation 7.8.21
Section 991F relates to dealings involving the employees of financial services licensees.
The terms of subsection 991F(2), which relates to the provision of credit to employees of the licensee to enable them to provide financial products, are subject to the regulations.
Regulation 7.8.21 sets out exceptions to the prohibition on financial services licensees providing credit to their own employees (or the associates of employees) to acquire financial products. The exceptions include if the licensee is a bank and, in certain circumstances, loans to buy shares in the licensee. These exceptions in general terms carry forward the existing exceptions in Corporations Regulations.
However, they extend the current requirements in one respect. That is, a body corporate related to the financial services licensee may act as the agent of the licensee's employee in the acquisition of a financial product, subject to certain conditions.
9. FINANCIAL PRODUCT DISCLOSURE
Introduction
Part 7,9 of the new Corporations Act establishes a harmonised disclosure framework that applies consistent disclosure requirements to financial products, based upon point of sale disclosure through a Product Disclosure Statement, ongoing disclosure of material matters and periodic reporting requirements. A central objective of the disclosure obligations is to enhance consumer protection, including by providing better comparability and consistency in the information available to consumers about various financial products, including superannuation.
Preliminary - Division 1
Interpretation: regulation 7.9.01
Regulation 7.9.01 provides various definitions, primarily relating to superannuation and retirement savings account products.
Sub-plans: regulation 7.9.02 and Part 1 of Schedule 10A
Regulation 7.9.02 includes the concept of sub-plans used in the Superannuation Industry (Supervision) Regulations, 1994 and provides that the changes of membership of superannuation funds in relation to interests in different sub-plans are to be regarded as the issue of superannuation interests for the purposes of the product disclosure provisions. The effect of this is that generally a Product Disclosure Statement will be required to be given where a person moves from one sub-plan to another. Part 1 of Schedule 10A clarifies this point, as interests in different sub-plans will not constitute the same superannuation product for the purposes of determining a person's obligation to provide a Product Disclosure Statement.
Similarly, application forms will generally be required in the event of a product holder acquiring an interest in a different sub-plan from that already held.
Arrangements for Product Disclosure Statements in relation to superannuation products and retirement savings account products - Division 2
Provision of Product Disclosure Statements: regulations 7.9.03 to 7.9.07; Parts 2 to 4 of Schedule 10A
Division 2 provides various modifications to the obligation to provide Product Disclosure Statements in relation to superannuation and retirement savings account products. These modifications reflect the nature of existing legislative arrangements under the Superannuation Industry (Supervision) Regulations 1994.
Where the holder of the superannuation product or retirement savings account does not initiate the issue of the product, the requirement to provide a Product Disclosure Statement has been modified.
Regulation 7.9.04 allows a Product Disclosure Statement for superannuation products to be provided later in certain circumstances, including the provision of a Product Disclosure Statement for standard employer sponsored members and members of non-public offer superannuation funds.
Regulation 7.9.05 and Part 2 of Schedule 10A varies the requirement to provide a Product Disclosure Statement for retirement savings account products where the retirement savings account provider is subject to a takeover or merger, or operating at the direction of a regulatory agency.
In some instances where the prospective product holder does not instigate the issue of a superannuation product it may be necessary for another person to receive a Product Disclosure Statement. Regulation 7.9.06 and Part 3 of Schedule 10A require a Product Disclosure Statement to be provided by the trustee of an eligible rollover fund to certain persons to give sufficient information for a transfer of product holder benefits.
Division 2 also relates to the provision of a Product Disclosure Statement to a product holder in conjunction with other disclosure requirements. Regulation 7.9.07 and Part 4 of Schedule 10A provide that the provision of a Product Disclosure Statement is not required when a superannuation or retirement savings account product holder seeks to vary the condition of an associated insurance product where the product holder has already been supplied with sufficient information through the satisfaction of other disclosure requirements to make an informed decision.
Dealing with money received for a financial product before the product is issued - Division 3
Accounts - regulation 7.9.08
Section 1017E of the new Corporations Act imposes an obligation on product issuers and sellers who are required to prepare a Product Disclosure Statement to hold any application money in an account for the applicant until the product is issued or transferred or the money returned. Subsection 1017E(2) provides that the money must be paid into an account with an Australian authorised deposit-taking institution, or of a kind prescribed by regulation under subparagraph 1017E(2)(a)(iii).
Subregulation T9.08(1) allows application money to be paid into foreign bank accounts and cash management trusts, as well as into Australian authorised deposit-taking institutions.
Paragraph 1017E(2)(c) provides that additional requirements may be imposed by regulations in relation to such accounts. Following the approach taken in Part 7.8, subregulation 7.9.08(2) requires the account to be a trust account.
Content of Product Disclosure Statements - Division 4
Product Disclosure Statements - content requirements for superannuation and retirement savings account products: regulations 7.9.09 to 7.9.11; Schedule 10, Part 5 of Schedule 10A; Schedules 10B and 10C
The reforms included in the FSR Act contain the general principles of disclosure that are capable of application across the full range of financial products. The main content requirements for Product Disclosure Statements are outlined in section 1013D of the new Corporations Act. The explanatory memorandum to the FSR Bill foreshadowed that while for many products the general principles would be sufficient, some products, such as superannuation and retirement savings account products, would require further detail on the application of the general principles.
The prescription in more detail of the general information requirements for superannuation and retirement savings account products reflects the long term nature and legislated requirements for the acquisition of those products as a means to provide retirement income. It is not intended that such prescription should influence of the interpretation of section 1013D for other financial products.
For superannuation and retirement savings account products, regulations 7.9.09 to 7.9.11 and Schedules 10B and 10C generally set out a, more detailed statement of the information content requirements in section 1013D.
The regulations recognise that variation in the type of superannuation products and retirement savings account products will necessitate the provision of different forms of information. Accordingly, capital guaranteed superannuation products and retirement savings account products are subject to differing requirements from other regulated superannuation products due to their lower risk-return nature. Whereas, due to the proximity of members and trustees in self managed superannuation funds, no further prescription of the general Product Disclosure Statements information content requirements has been made.
The more detailed information prescribed in Schedules 10 and 10B includes a standardised expense measure to aid in the comparison of costs across certain financial products.
Subregulation 7.9.11(2) and Part 5 of Schedule 10A allows for limited prescription of the format of a Product Disclosure Statement to aid the awareness of superannuation and retirement savings account product holders to certain material information due to the nature of the products.
Application forms for superannuation and retirement savings account products: regulation 7.9.12, 7.9.13; Part 6 of Schedule 10A
Subdivision 4.3 recognises practical difficulties in compliance with obligations for applications to acquire interests in superannuation and retirement savings account products. Regulations 7.9.12, 7.9.13 and Part 6 of Schedule 10A remove the requirement to provide an eligible application in relation to certain transfers of benefits of superannuation and retirement savings account product holders and standard employer sponsored arrangements. These regulations include suitable defence and offence provisions relating to the issue of products without an eligible application in relation to standard employer sponsored members.
Remedies for person acquiring financial product under defective Product Disclosure Statement: regulation 7.9.14
Regulation 7.9.14 requires a person exercising their right of return under section 1016F in relation to superannuation and retirement savings account products to nominate where certain monies are to be repaid within a 1 month period. The nomination requirement is intended to prevent persons from removing benefits subject to preservation rules and cashing restrictions from the superannuation system.
Unauthorised foreign insurers - regulation 7.9.15
Section 34 of the I(AB) Act requires an insurance intermediary to disclose to an insured (where relevant) that the insurer is an unauthorised foreign insurer. Rather than placing this obligation on the financial services provider, regulations have been made to require it to be included in the Product Disclosure Statement for the particular product.
Regulation 7.9.15 has been made for the purposes of paragraph 1013D(4)(c) of the new Corporations Act, which allows regulations to provide a more detailed statement of the information than is required by a provision of subsection (1), either in a particular situation or generally. It provides a more detailed elaboration of the matters contained in paragraph 1013D(1)(c), which requires disclosure of information about any significant risks associated with holding the relevant product.
Generally, the regulation requires similar disclosure to that currently contained in the acknowledgement required to be signed by an intending insured under section 34 of I(AB) Act. The expression 'unauthorised foreign insurer' is to be defined in the same way that it is currently defined in section 9 of I(AB) Act.
Consumer credit insurance - regulation 7.9.16
The Insurance Contracts Act provides for disclosure to consumers of information in relation to consumer credit insurance. Some aspects of the Insurance Contracts Act disclosure obligations are not covered by the Product Disclosure Statement requirements in section 1013D of the new Corporations Act. Those aspects are covered by regulation 7.9.12B.
This regulation has been made for the purposes of paragraph 1013D(4)(c) of the new Corporations Act and will apply only to consumer credit insurance. The regulation adopts the definition of consumer credit insurance used in the Insurance Contracts Act (see subregulation 7.9.16(2)).
Ongoing requirements for product disclosure - Division 5
Division 5 prescribes the information content requirements for periodic statements and fund information to be provided to superannuation and retirement savings account product holders.
Periodic statements: regulations 7.9.18 to 7.9.28; Parts 7 and 8 of Schedule 10A
The periodic statements for superannuation and retirement savings account products are subject to further prescription of the information content requirements. Similar to the more detailed prescription of the information content requirements of Product Disclosure Statements, this reflects the nature of the products and their importance to retirement incomes. Regulation 7.9.17 restricts application of the Division to superannuation entities and retirement savings accounts.
Regulations 7.9.19 to 7.9.22 and regulation 7.9.26 prescribe the information content requirements for periodic reports. The regulations take into account the different types of superannuation and retirement savings account products on offer and vary the information required accordingly.
Regulations also require the inclusion of certain information in periodic statements upon certain events. Regulations 7.9.23 and 7.9.28 require information to be provided members of capital guaranteed funds and retirement savings account when the amount Of benefits reaches a prescribed limit to ensure that the risk/return nature of the products are suitable to the product holders circumstances.
Regulations 7.9.24 and 7.9.27, and Parts 7 and 8 of Schedule 10A also vary periodic statement information requirements for superannuation and retirement savings account products to account for other circumstances where the product holders benefits are subject to compulsory protection or the holder of a pension product.
Modification of section 1017D - information already given: Division 8, regulation 7.9.72
Regulation 7.9.72 ensures that superannuation and retirement savings account providers are not subject to a duplication of reporting obligations by the interaction of information content requirements for periodic statements under paragraphs 1017D(5)(a) to, (e) and the regulations under paragraph 1017D(5)(g) in Division 5 of these Regulations.
Fund information - information for change to choices: regulations 7.9.29 and 7.9.30; Part 9 of Schedule 10A
Regulations 7.9.29, 7.9.30 and Part 9 of Schedule 10A act to ensure that product holders receive adequate disclosure to make an informed decision to vary the nature of a product under facilities available through an existing contract or legal relationship in relation to a superannuation or retirement savings account product. Where information is not supplied on an ongoing basis the issuer may provide the relevant information either in a specific response or by providing a relevant Product Disclosure Statement.
Fund information - general: regulations 7.9.31 to 7.9.42
The disclosure regime under the new Corporations Act has replaced existing disclosure requirements for superannuation interests under the Superannuation Industry (Supervision) Act 1993 (and Superannuation Industry (Supervision) Regulations 1994), including the provision of fund information.
The regulations address when the required information about the fund is to be provided. Regulations 7.9.31 and 7.9.32 replicate the reporting period requirements for periodic statements for the provision of fund information for superannuation entities. However, fund information is not required to be given where a person does not hold the superannuation product on the last day of period and superannuation entities may provide fund information in respect of periods of various lengths.
Regulation 7.9.33 allows fund information to be provided in a similar manner to Product Disclosure Statements and periodic statements.
Regulations 7.9.34 to 7.9.42 prescribe the information to be supplied as part of fund information requirements and are generally consistent with existing requirements under the Superannuation Industry (Supervision) Regulations 1994.
Ongoing disclosure of material changes and significant events - superannuation entities and retirement savings accounts: regulations 7.9.43 and 7.9.44; Part 10 of Schedule 10A
Regulation 7.9.43 and Part 10 of Schedule 10A prescribe a number of events that are considered to be significant for ongoing disclosure purposes for superannuation entities and retirement savings accounts, and modify the time to provide information in certain circumstances. These events are prescribed as significant events to ensure appropriate disclosure. The regulations include a requirement to advise product holders of certain decisions of the responsible person before an event occurs.
Regulation 7.9.44 requires the provision of a notice to a product holder whose interests are to be transferred to an eligible rollover fund in order to permit the product holder to make an informed decision.
Information on request: regulations 7.9.45, 7.9.46 and 7.9.47; Part 11 of Schedule 10A
Regulations 7.9.45 and 7.9.46 define prescribed documents for the purposes of section 1017C in relation to certain superannuation entities and retirement savings accounts.
Regulation 7.9.47 and Part 11 of Schedule 10A permit a responsible person to charge for information requested under the operation of section 1017C of the new Corporations Act. This is consistent with the ability to charge for information under section 1017A and an existing ability to charge for information on request in relation to superannuation products under the Superannuation Industry (Supervision) Regulations 1994.
Information about complaints: regulation 7.9.48
Regulation 7.9.48 requires the responsible person of a superannuation or retirement savings account product to provide information on external dispute resolution mechanisms in the event of a decision on a complaint by an internal dispute resolution mechanism.
Periodic report when product holder ceases to hold product - superannuation products and retirement savings account products: regulation 7.9.49 to 7.9.60, Parts 12 and 13 of Schedule 10A
Regulations 7.9.49 to 7.9.60 recognise that the periodic statement required to be provided to a person who has ceased to hold a superannuation or retirement savings account product should not be the same as the content and other requirements provided to a person who remains a product holder.
Regulation 7.9.50 defines the periodic report referred to in paragraph 1017D(2)(d) of the new Corporations Act as the exit reporting period.
Regulation 7.9.51 and Part 12 of Schedule 10A reduce the time for compliance with the requirement to provide a periodic report for the exit reporting period in relation to superannuation and retirement savings account products, to account for the needs of former product holders. For administrative purposes, superannuation and retirement savings account product providers are provided with the option of supplying a combined periodic report in relation to a prior reporting period and the exit reporting period.
For superannuation products and retirement savings accounts regulations 7.9.52 and 7.9.53 address the issue whether the product holder has ceased to hold the product through death of otherwise. In particular, they clarify to whom and what level of information is to be provided in the event that the holder of such a product dies.
Regulations 7.9.54, 7.9.55, 7.9.58 and 7.9.59 prescribe information to be included in the periodic report for the exit reporting period for superannuation products and retirement savings account products in terms of the general periodic statements information requirements for those products. Further or varied information required due to the person ceasing to hold the product are detailed.
Regulations 7.9.56, 7.9.60 and Part 13 of Schedule 10A provide an exception to exit reporting periods removing the obligation for superannuation and retirement savings account providers for the supply of a periodic statement in order to prevent a possible duplication of information. Specifically this relates to an event where the benefits of former product holder are transferred to another entity, and that entity supplies the required information.
Regulation 7.9.57 provides a further exception to periodic reporting requirements for the exit reporting period in certain circumstances for superannuation products and retirement savings accounts related to product holders benefits that are subject to compulsory protection.
Ongoing disclosure - all financial products: regulation 7.9.61, Part 14 of Schedule 10A
Regulation 7.9.69 and Part 14 of Schedule 10A modify various parts of Division 7.9 in order to remove various product disclosure obligations that could not reasonably be expected to be satisfied. Where a responsible person does not have an address for a product holder, or is reasonably satisfied that the address is incorrect, and has taken reasonable steps to locate the product holder they will not be subject to product disclosure and other associated obligations.
Confirmation of transactions - Division 6
Confirmation of transaction - superannuation products and retirement savings accounts: regulation 7.9.62
Regulation 7.9.62 exempts superannuation entities and retirement savings accounts from having to confirm a transaction to a product holder where they have already provided effective confirmation as part of their periodic reporting obligations.
Confirmation of transactions - precise costs of transaction not known: regulation 7.9.63; Part 15 of Schedule 10A
Regulation 7.9.63 allows responsible persons to confirmation a transaction to the extent known at the time of confirmation, where information on amounts or taxes payable is not known at that time. Part 15 of Schedule 10A provides the subsequent confirmation procedures, including a number of options for the supply of the information to the product holder when that information becomes known.
Cooling off periods - Division 7
Cooling-off periods not to apply: regulation 7.9.64
Regulation 7.9.64 details circumstances where cooling-off provisions of die new Corporations Act are not to apply. The circumstances reflect, in part, limitations on product disclosure provisions in the new Corporations Act and practical difficulties in applying cooling-off provisions to certain financial products.
Return of financial product: regulation 7.9.65
Regulation 7.9.65 limits a person's right of return in relation to short-term risk insurance products to ensure that the cooling-off provisions are not inappropriately utilised to obtain a refund of monies when the product has effectively been used (for example, travel insurance).
Return of financial product - transfer between superannuation entities or retirement savings accounts: regulation 7.9.66:
Regulation 7.9.66 operates to prevent persons using cooling-off provisions to access superannuation related monies that are subject preservation requirements - under the Superannuation Industry (Supervision) Act 1993 and the Retirements Savings Account Act 1997 and associated provisions in the event of a transfer of between superannuation entities or retirement savings accounts.
Variation of amount to be repaid: regulation 7.9.67
Regulation 7.9.67 varies the amount of monies to be repaid in the event a person exercises their right of return of a financial product under Division 5 of Part 7.9 of the new Corporations Act. These variations account for the different nature of various types of products and certain liabilities or costs incurred in relation to the issue and subsequent return of the financial product.
Investment-linked product
In particular, sub-regulations 7.9.67(2)-(3) act to make the product holder subject to market risk where the value of the financial product is linked to the market. Thereby preventing the use of cooling-off provisions by a product holder to avoid market losses.
Tax
Similarly, subregulation 7.9.67(6) ensures that a product holder meets any non-recoverable taxation or duty liabilities associated with their acquisition of the product.
Other reasonable costs
Subregulation 7.9.67(7) allows a product issuer to recover certain reasonable costs associated with the product holders acquisition and subsequent exercise of a right of return. These costs may otherwise have been borne by remaining product holders.
Risk insurance products
Subregulation 7.9.67(8) allows the issuer of a risk insurance product to reduce the amount of monies to be repaid to account for contingent liabilities that may arise because of the effective operation of the financial product prior to its termination upon the exercise of the right of return.
Superannuation and retirement savings account products
Subregulation 7.9.67(9) provides a default mechanism for superannuation and retirement savings account product providers in the event that a product holder's nomination of superannuation entity or retirement savings account for the return of monies is not effective.
Client includes standard employer-sponsor: regulation 7.9.68
Regulation 7.9.68 acts to permit standard employer sponsors of public offer superannuation entities and retirement savings accounts to exercise rights of return under cooling off provisions due to their legal relationship with the product provider.
Subregulations 7.9.68(2) and (3) require a product issuer to return monies in accordance with the direction of employer sponsors. Similar to regulation 7.9.66 this is to prevent inappropriate access to superannuation monies through the use of the cooling-off provisions.
Modification of provisions of Division 5, Part 7.9 and regulations - terms of contract: regulation 7.9.69
The purpose of regulation 7.9.69 is to ensure that product issuers acting under the operation of the new Corporations Act cooling-off provisions do not contravene the terms of any existing contract or legal relationship governing the issue and redemption of a financial product.
Modification of provisions of Division 5, Part 7.9 and regulations - distributions: regulation 7.9.70
Regulation 7.9.70 clarifies that the exercise of a right or power by a product holder under an investment-linked financial product does not include the receipt of distribution from the product issuer. Accordingly, in the event a product holder receives a distribution from the issuer, the product holder still exercises a right of return under the cooling-off provisions. However, the receipt of the distribution may affect the amount of monies repaid as it may affect the price of the product.
Other requirements - Division 8
Periodic Statements - use of more than 1 document: regulation 7.9.71
Regulation 7.9.71 clarifies that periodic statements may be provided in a manner similar to Product Disclosure Statements, being comprised of more than one document and requiring that publication dates be specified.
Reporting periods - general: regulation 7.9.73, Part 16 of Schedule 10A
Subregulation 7.9.73 and Part 16 of Schedule 10A permit reporting periods for periodic statements to be in excess of 12 months (following an application made by a product issuer to ASIC) to allow for unforeseen circumstances.
Form of application: regulation 7.9.74
Regulation 7.9.74 prescribes information to be included on an application for the acquisition of a financial product.
Content of periodic statements - costs of transactions: regulation 7.9.75
Subregulation 7.9.75(1) provides that if a transaction has been confirmed where the costs of the transaction were not provided (see regulation 7.9.63) that the information may be provided in the periodic statement.
Subregulation 7.9.75(2) requires periodic reports in relation to all financial products to include advice on the ongoing costs of the products and advice on how to obtain further information, in particular in relation to dispute resolution mechanisms.
Consents to certain statements: regulation 7.9.76
Regulation 7.9.76 aligns the requirements for the holding of consents and their form with Product Disclosure Statement obligations.
Additional statement - trustee required to provide benefits: regulation 7.9.78
Regulation 7.9.78 requires superannuation product providers to give information in association with a periodic statement in the event of the death of the product holder. The requirement relates to the payment of benefits in accordance with obligations under the Superannuation Industry (Supervision) Regulations 1994.
Alternative dispute resolution requirement where the product issuer is not a financial services licensee -regulation 7.9.77
Section 1017G requires that certain product issuers and regulated persons must meet appropriate alternative dispute resolution requirements.
The requirements in subsection 1017G(2) relate to internal and external dispute resolution and provide for the making of regulations.
Regulation 7.9.77 specifies the matters which ASIC is to take into account in approving such procedures and schemes.
Travellers' cheques - regulation 7.9.80
A Product Disclosure Statement may be given after travellers' cheques are issued. This is one aspect of the special treatment of travellers' cheques - see above.
Short selling - regulation 7.9.79
Section 1020B of the new Corporations Act deals with the short selling of the financial products listed in subsection (l):
• securities;
• managed investment products;
• financial products referred to in paragraph 764A(1)(j) (authorised deposit-taking institutions' deposit-taking facilities); and
• financial products prescribed by regulation (paragraph (1)(d)).
Subsection 1020B(2) provides that - subject to section 1020B and the regulations - a person must only sell the above-listed products if, at the time of sale:
• the person has a presently exercisable and unconditional right to vest the products in the buyer; or
• reasonably believes that he/she has such a right.
Section 846 of the old Corporations Act currently deals with short selling of securities. Section 1020B new Corporations Act is modeled on section 846 (but is expanded to apply to financial products other than securities). Existing Corporations regulations 7.4.07 and 7.4.08 have been made under section 846. Regulation 7.9.79 carries over the effect of existing Corporations regulations 7.4.07 and 7.4.08 as a regulation made under section 1020B of the new Corporations Act.
10. MARKET MISCONDUCT AND OTHER PROHIBITED CONDUCT RELATING TO FINANCIAL PRODUCTS AND FINANCIAL SERVICES
While the FSR Act includes a Part 7.10 with this title, there are no regulations made pursuant to these provisions.
This page of the Explanatory Memorandum is therefore included solely so that the following sections correspond with the numbering in the regulations and the Act.
11. TITLE AND TRANSFER
Introduction
Purpose
The FSR Act will:
• repeal Part 7.13 of the old Corporations Act which currently addresses title to securities and their transfer; and
• insert Part 7.11 and regulations made under this part.
Many of the procedural provisions relating to transfer of title that are set out in Part 7.13 of the old Corporations Act are included in the regulations. By placing the mechanical and procedural provisions in the regulations, they can be amended more readily to accommodate changes within the industry.
Prescribed CS facility licensee - regulation 7.1.03
The FSR Act will remove the statutory monopoly of the Australian Stock Exchange's securities clearing house and thereby facilitate competition in this area. Any appropriately qualified CS facility licensee can be prescribed to enable it to gain access to those provisions of the new Corporations Act and which will facilitate electronic transfer of legal title.
This is achieved through the definition of 'prescribed CS facility' in section 761A.
Regulation 7.1.03 will prescribe the ASX Settlement and Transfer Corporation Pty Limited (the Australian Stock Exchange's securities clearing house) for the purpose of this Division.
However, other suitably qualified CS facility licensees may be prescribed for this purpose at a later date.
Application
The regulations will be based on the provisions of the old Corporations Act. The regulations will provide:
(a) pursuant to new section 1073D, a form-based system for the transfer of legal title to securities as defined in the FSR Act (Division 3 transfers);
(b) pursuant to new section 1074E, an electronic system for the transfer of legal title to financial products by a prescribed CS facility (Division 4 transfers). The prescribed CS facility to which the regulations will apply is that owned and operated by the ASTC. New section 1014A also provides for the specification in the regulations of the financial products to which Division 4 applies in relation to each prescribed CS facility.
Regulations made under subsection 1071B(3) and section 1073C will specify additional requirements for proper instruments of transfer and expand the meaning of company for the purposes of Division 3 transfers respectively.
Division 3 transfers
The transfer system set up by the regulations in Part 7.11 Division 3 will apply to "securities" defined in section 1073A of the new Corporations Act.
The regulations in this Division will replicate the transfer regime currently operating in the Corporations Act and will require:
• "due completion" entailing the completion of Forms 1 to 10 in new Schedule 2A;
• "sufficient transfers" which will require "due completion" of Forms 1 to 10 in specified combinations according to the interest involved and the nature of the transfer; and
• "proper instruments of transfer" which will require an instrument to be a "sufficient transfer". other requirements for a "proper instrument of transfer" are set out in subsection 1071B(3) and in Regulation 7.11.21.
Division 4 transfers
The regulations will replicate a number of provisions of the old Corporations Act to provide legislative support to the electronic transfer system operated by the ASTC. The regulations will apply to the transfer of "Division 4 financial products defined in regulation 7.11.03.
The regulations will adopt the concept of the "proper ASTC transfer" which, in combination with the sections in the new Corporations Act, replicates the features of the "proper SCH transfer". Under the regulations, a transfer of a financial product will have to be a "proper ASTC transfer" to attract the application of subsection 1074D(1). This subsection provides that such a transfer is valid and effective for the purposes of any law or instrument governing or relating to the way in which the financial product may be transferred.
DETAILS
Preliminary - Division 1
Definitions - regulation 7.11.01
Regulation 7.11.01 defines words and terms used in the regulations for Part 7.11. The regulation adapts several of the definitions contained in subsection 1097(1) of the old Corporations Act and adds new ones to accommodate the new regulatory framework introduced by the FSR Act.
Authorised trustee corporation - regulation 7.11.02
Regulation 7.11.02 defines "authorised trustee corporation" and refers to a list of such corporations in Schedule 9 of the regulations. An amendment to the numbering of the relevant regulation has been made.
Arrangements about Division 4 financial products - regulation 7.11.03
Regulation 7.11.03 is based on sections 1097A and 1097B of the old Corporations Act and:
• defines a Division 4 financial product; and
• sets out the status of Division 4 financial products that have been admitted to quotation or suspended in various circumstances.
Arrangements for forms - regulation 7.11.04
Regulation 7.11.04 is based on subsections 1097(2) and (3) of the old Corporations Act and refers to forms in Schedule 2A of the regulations.
Document duly completed in accordance with a particular form - regulation 7.11.05
Regulation 7.11.05 describes what constitutes due completion of Forms 1 to 8 based on old section 1098 of the old Corporations Act. Forms 9 and 10 relate to transfers by authorised trustee corporations and are covered by Regulations 7.11.11 and 7.11.12 based on section 1102 of the old Corporations Act.
Stamping of documents - regulation 7.11.06
Regulation 7.11.06 describes what constitutes the stamping of documents and is based on section 1099 of the old Corporations Act.
Application of Part 7.11 - Division 2
Application - regulation 7.11.09
Regulation 7.11.09 applies new Part 7.11 to conduct engaged in this jurisdiction and otherwise.
Transfer of Division 3 securities effected otherwise than through a prescribed CS facility Division 3
Application of Division 3 - regulation 7.11.10
Regulation 7.11.10 provides that the Division applies to Division 3 transfers.
Sufficient transfers - regulations 7.11.11, 7.11.12 and 7.11.13
Regulations 7.11.11 to 7.11.13 are based on sections 110 1 and 1102 of the old Corporations Act, and describe what constitutes a "sufficient transfer" of "Division 3 assets" and "Division 3 rights" in general circumstances and by authorised trustee corporations.
Sufficient transfer - regulation 7.11.14
Regulation 7.11.14 is based on section 1100 of the old Corporations Act and provides that a sufficient transfer of Division 3 assets may be used as a proper instrument of transfer under section 1071B of the new Corporations Act. It also confers validity on sufficient transfers of Division 3 assets and Division 3 rights.
Transferee's execution of transfer of Division 3 assets or rights - regulations 7.11.15 and 7.11.16
Regulations 7.11.15 to 7.11.16 are based on sections 1103 and 1104 of the old Corporations Act respectively. They deem a transferee of Division 3 assets or rights to have agreed to the transfer upon certain terms and conditions upon the affixing of the transferee's broker's stamp to the transfer document. The use of the stamp obviates the need for the transferee's execution of the document.
Brokers' stamps - regulations 7.11.17, 7.11.18 and 7.11.19
Regulations 7.11.17 to 7.11.19:
• deem certain warranties about the propriety of a transfer to have been made by a transferor's broker or a market licensee where the transfer bears or purports to bear the stamp of the transferor's broker or a market licensee;
• impose liability on the transferor's broker or a market licensee to indemnify certain identified parties where they have suffered loss or damage arising from unauthorised transfers and also provide for the transferor's broker to indemnify the market licensee.
Joint and several warranties and liabilities - regulation 7.11.20
Regulation 7.11.20 is based on section 1108 of the old Corporations Act. It provides for joint and several warranties and liabilities where 2 or more persons are involved.
Registration of certain instruments - regulation 7.11.21
Regulation 7.11.21 is based on section 1109 of the old Corporations Act and enables a company to register a sufficient transfer or issue without having to "look behind" the prima facie validity of a sufficient transfer.
Details to be included in instrument of transfer - regulation 7.11.22
Regulation 7.11.22 provides that transfers should show the deemed State or Territory of registration of the company whose securities (as defined in section 1071A of the new Corporations Act) are being transferred.
Transfer of Division 4 financial products effected through prescribed CS facility - Division 4
Application of Division 4 - regulation 7.11.23
Regulation 7.11.23 provides that the Division applies to Division 4 transfers.
Application of ASTC operating rules - regulation 7.11.24
Regulation 7.11.24 is based on subsection 1097(4) of the old Corporations Act and provides for the ASTC operating rules to determine when a participant has effected a proper ASTC transfer or when it takes effect.
Participant's authority to enter into transaction continues despite client's death - regulation 7.11.25
Regulation 7.11.25 is based on section 1109A of the old Corporations Act and deems a person's authorisation to a participant to dispose of a financial product to continue despite that person's death. Only the person's legal representative may revoke the authority in certain circumstances.
Authority to enter into transaction gives authority to transfer - regulation 7.11.26
Regulation 7.11.26 is based on section 1109B of the old Corporations Act and deems a person's authorisation to a participant to dispose of a financial product to be an authority to effect any proper ASTC transfer. The authorisation can only be revoked before entry into the transaction and otherwise continues in force.
Effect of proper ASTC transfer on transferee - regulations 7.11.27 and 7.11.28
Regulations 7.11.27 and 7.11.28 are based on section 1109D of the old Corporations Act provide that, if a proper ASTC transfer of a Division 4 financial product takes effect at a particular time, the transferee is taken to have agreed at that time to the transfer upon certain terms and conditions.
Indemnities and Warranties - regulations 7.11.29, 7.11.30, 7.11.31 and 7.11.32
Regulations 7.11.29 to 7.11.32:
• deem certain warranties about the propriety of a transfer to have been made by a participant acting or purportedly acting for a transferor where that participant's identification code appears in the transfer document; and
• impose liability on the participant acting or purportedly acting for the transferor to indemnify certain specified person where they have suffered loss or damage arising from unauthorised transfers.
Where the transferor had no legal entitlement or authorisation to transfer, the warranties and indemnities will not apply for the benefit of the transferor.
Joint and several warranties and liabilities - regulation 7.11.33
Regulation 7.11.33 is based on section 1109G of the old Corporations Act and applies for the purposes of Regulations 7.11.29 to 7.11.32. It provides for joint and several warranties and liabilities where 2 or more persons are involved.
ASTC entitled to assume its operating rules complied with - regulation 7.11.34
Regulation 7.11.34 is based on section 1109J of the old Corporations Act and provides that the ASTC on its own account or if acting for an issuer is entitled to assume, without inquiry or knowledge to the contrary, that ASTC transfers have been effected in compliance with ASTC operating rules.
ASTC-regulated transfer not to be registered unless proper ASTC transfer - regulation 7.11.35
Regulation 7.11.35 is based on section 1109K of the old Corporations Act and provides that the issuer and the ASTC (when acting on behalf of the issuer) must not register an ASTC-regulated transfer unless it is a proper ASTC transfer.
Issuer not to refuse to register proper ASTC transfer - regulation 7.11.36
Regulation 7.11.36 is based on section 11 09L of the old Corporations Act and provides that the issuer of a Division 4 financial product must not refuse to register a proper ASTC transfer.
Determinations of who holds Division 4 financial products - regulations 7.11.37 and 7.11.38
Regulations 7.11.37 and 7.11.38 are based on section 1109N of the old Corporations Act and apply to Division 4 financial products that are securities or securities in a class of securities respectively. The regulations enable convenors of a meeting to determine the holders of securities for the purposes of the meeting.
Determination of who holds Division 4 financial products for the purposes of conferring security benefits -regulation 7.11.39
Regulation 7.11.39 is based on section 1109P of the old Corporations Act and will provide for the determination of who holds or is taken to hold ASTC financial products at a particular time for the purpose of conferring a security benefit (e.g. a dividend, the issue of bonus shares, the conferral of options, etc).
Offences - Division 5
Offences - regulations 7.11.40, 7.11.41 and 7.11.42
Regulations 7.11.40 to 7.11.42 are based on sections 1112, 1112A and 1112B of the old Corporations Act, and provide for offences in the event of.
• improper or unauthorised use of a broker's or market licensee's stamp
• unauthorised use of a participant's identification code
• intentional or reckless contravention of the ASTC certificate cancellation provisions.
Civil liability - Division 6
Contravention by participant of the ASTC certificate cancellation provisions - regulation 7.11.43
Regulation 7.11.43 is based on section 1112C of the old Corporations Act and provides that a participant will be liable to compensate a person who suffers loss or damage arising from the participant's contravention of the ASTC certificate cancellation provisions. The action must be brought within 6 years and cannot be brought by a person involved in the contravention.
Forms of transfer of Division 3 securities - Schedule 2A
Schedule 2A contains new Forms 1 to 10 which are to be used for the transfer of Division 3 securities.
12. CONSEQUENTIAL
Subregulation 1.0.02(1), definition of approved form
Subregulation 1.0.05(1)
Paragraph 1.0.05(2)(a)
Paragraph 1.0.18(b)
Regulation 12.8.08 - Member shares
Schedule 4, Item 6
These current regulations have been amended to correct cross-references to provisions in the Corporations Act which have been amended by the FSR Act.
Interpretation - omission of Part 1.2
Part 1.2 is omitted because the provisions which empower the making of these regulations are omitted by the FSR Act. They relate to financial products which are not clearly securities or futures contracts under the old Corporations Act (for example, share ratio contracts) and are no longer needed under the new Corporations Act, which introduces the new concept of financial product.
Lodgment with ASIC - regulation 1.0.05A
Regulation 1.0.05A provides that for the definition of lodge with ASIC in section 761A of the new Corporations Act, the definition relates to each provision of Chapter 7 that includes the expression lodge with ASIC.
The purpose of this provision is to attract the operation of section 350 (which deals with forms for documents to be lodged with ASIC), in relation to relevant provisions of Chapter 7.
The regulation also contains a number of specific provisions which are designed to attract the operation of section 350 to particular provisions of the Act.
General requirements for documents - amendment to regulation 1.0.07(f)
A minor amendment has been made to this regulation so that it does not imply that all who lodge forms with ASIC have an ACN (Australian Company Number), ABN, ARBN (Australian Registered Body Number) or ARSN (Australian Registered Scheme Number). The amendment is necessary to make the form consistent with draft Corporations Regulation 7.6.03(1)(e) and the possibility that not all persons regulated under the new Chapter 7 will have such a number.
Territorial Application of the Act - regulation 1.0.22
Regulation 1.0.22 deals with the application of Chapter 7 of the new Corporations Act and associated provisions to the external Territories. It provides that Chapter 7 of the Act (other than Parts 7.2 to 7.5 and 7.11) applies in relation to a financial product that is, or a financial service that relates to, a superannuation product or an retirement savings account product as if this jurisdiction included all of the external Territories.
It therefore applies Commonwealth legislation on these issues to the external Territories to the same extent as currently.
Prescribed financial market (Act s 170(3)) - amendment to regulation 2C.1.01
Current Regulation 2C.1.01 defines 'securities exchange' for the purpose of subsection 170(3) (which relates to registers of option holders).
The term 'securities exchange' will no longer be appropriate following the commencement of the FSR Act which will insert one set of provisions regulating financial markets, whether derivatives or securities are traded on them.
The FSR Act amends the term 'securities exchange' in subsection 170(3) to read 'prescribed financial market.
The same change has been made to the term when used in Regulation 2C.1.01.
At the same time the reference to Ballarat Stock Exchange has been omitted because it has not been operational for some years and is being wound up.
'securities exchange' for the purpose of section 205G - amendment to regulation 2D.1.02
Current Regulation 2D.1.02 defines 'securities exchange' for the purpose of section 205G (which requires directors of listed companies to notify the securities exchange of shareholdings etc).
The phrase 'relevant securities exchange' in this section is amended to read 'relevant market operator' by the FSR Act which also includes a definition of the phrase 'relevant market operator' in section 9.
There is therefore no reason to retain Regulation 2D.1.02 since its operation is achieved by other means, and it has therefore been repealed.
Variation of offers, acceptances, compulsory acquisitions and buy-outs after a takeover bid amendments to regulations 6.6.01 to 6.6.02, 6.8.02, 6A.1.01
Regulations 6.6.01, 6.8.01, 6.8.02 and 6A.1.01 generally replicate the effect of subsection 650E(3), and paragraphs 650E(4)(a) and (b), 650E(5)(a), 653A(b), 653B(4)(a) and 661C(4)(a) of the old Corporations Act.
The regulations have been amended to accommodate the removal of the concept of the 'Securities Clearing House' by the amendments in the FSR Act and instead insert references to 'prescribed CS facilities'.
Prescribed financial market operators - regulation 7.1.01
The old Corporations Act refers in many provisions outside Chapter 7 to 'securities exchange'. An example is section 253F which relates to how to value an interest in a registered scheme for the purpose of voting at meetings.
The FSR Act omits the concept of 'securities exchange' and in many of the provisions which used this term, substitutes the phrase 'prescribed financial market'.
Regulation 7.1.01 prescribes the financial markets for the purpose of this definition. It prescribes the Australian Stock Exchange Limited, the Bendigo Stock Exchange Limited and the Stock Exchange of Newcastle Limited.
The aim of the amendment is to maintain the effect of the current provisions.
Destruction of records by ASIC - regulation 7.12.01
Section 1101D of the new Corporations Act provides that ASIC may destroy or otherwise dispose of any document that is lodged under, or for the purposes of, a provision in Chapter 7 if ASIC is of the opinion that it is no longer necessary or desirable to retain it and it has been in the possession of ASIC for such period as is specified in the regulations, either generally or in relation to a particular document or class of documents.
Regulation 7.12.01 provides that the period of possession is 7 years.
Prescribed Registers - amendment to regulation 9.1.01
Current regulation 9.1.01 prescribes a series of registers for subsections 1274A(2) to (4) (which relate to obtaining information from certain registers).
The amendment to regulation 9.1.01 adds three new registers - of financial services licensees, authorised representatives and persons who are banned or disqualified.
Prescribed information - amendment to regulation 9.1.02
Current regulation 9.1.02 prescribes information for subsections 1274A(3) and (4) (which relate to provision of prescribed information by ASIC).
The amendment to regulation 9.1.02 adds relevant information from the registers referred to in the amendments to regulation 9.1.01.
Definitions for Part 9.4A - Regulation 9.4A.01
Regulation 9.4A.02(1) and (2)
These regulations have been amended to change a reference to 'issuing body (which was defined in a section which is omitted by the FSR Act) to refer instead to 'issuer', a term which is defined in section 761A of the new Corporations Act.
Schedules 1 and 2 - omission of forms
Items 110 to 146 of Schedule 1 (the list of forms) have been omitted, as have forms 702 to 812 (inclusive) of Schedule 2 (the actual prescribed forms).
Schedule 2, Form 902 - information supplementary to a form or document lodged previously omission
This form would need amendment to expand the list of categories of person who may be lodging it.
The Form has instead been omitted and section 350 allowed to operate so that the new form will be that approved by ASIC.
Schedule 3 Items 6-7 - amendment
The offices listed in Schedule 3 are regarded as not having relevant interests in the securities held by virtue of that office. The concept of 'relevant interest' is used particularly in the provisions dictating the circumstances in which a takeover offer must be made.
The references to the President and Members of the Corporations and Securities Panel have been amended to refer to the President and Members of the Takeovers Panel (the body's new name).
Schedule 11 - recognised futures exchanges - omission
Schedule 11 provides a list of recognised futures exchanges for the purposes of provisions of Chapter 8 of the old Corporations Act.
Chapter 8 is repealed by the FSR Act and this list has no role in the new Corporations Act.
Schedule 11 has therefore been repealed.
13. TRANSITIONAL
Introduction
Part 10.2 of the regulations contains regulations made pursuant to section 1444 (which is to be inserted in the Corporations Act by the Consequential Provisions Act). Part 10.2 is divided into 28 Divisions.
The term 'FSR commencement' is used in this section as defined in subsection 1410(1) - that is, commencement of Item 1 of Schedule 1 of the FSR Act.
Preliminary - Division 1 - regulations 10.2.01 to 10.2.02
Division 1 of Part 10.2 of the regulations contains an application provision and definition that are required for the Part.
Transitional arrangements relating to business rules or listing rules - Division 2 - regulations 10.2.03 to 10.2.07
Division 2 of Part 10.2 of the regulations deals with transitional arrangements relating to business rules or listing rules. The regulations in this Division provide transitional arrangements for circumstances where bodies, including securities and futures exchanges, have lodged with ASIC amendments to business or listing rules prior to the commencement of the FSR Act reforms but as at that time the period of disallowance has not expired. The regulations deem the lodgment of amendments as having been in accordance with the provisions of the new Chapter 7 and the 28 days continues to run.
Status of directions and notices - Division 3 - regulations 10.2.08 to 10.2.11
Division 3 of Part 10.2 of the regulations provides transitional arrangements for directions and notices given under the Corporations Act prior to the commencement of the FSR Act reforms. The regulations provide that compliance with such directions and notices must be fulfilled after that date in accordance with the new provisions in the new Chapter 7.
Assistance to ASIC - Division 4 - regulations 10.2.12 to 10.2.18 Special Reports - Division 5 -regulations 10.2.19 to 10.2.20
Divisions 4 and 5 of Part 10.2 of the regulations provide transitional arrangements relating to certain obligations of securities exchanges, the securities clearing house, and futures exchanges. The regulations provide that these obligations must be met in accordance with the new Chapter 7.
Self-listing - Division 6 - regulation 10.2.21 to 10.2.22
Division 6 of Part 10.2 of the regulations provides that arrangements, including exemptions, in relation to selflisting continue to have effect after the commencement of the FSR Act reforms and they are taken to have been entered into in accordance with the new provisions of the new Chapter 7.
Currently, the Australian Stock Exchange Limited is the only self-listed exchange.
Decisions about membership of futures exchange - Division 7 - regulations 10.2.23 to 10.2.24
Division 7 of Part 10.2 of the regulations preserves the obligation placed on a futures exchange to give an applicant for membership to the exchange or ASIC a notice under subsection 1135(1) of the old Corporations Act.
This enables a person who has been notified that they are refused status of membership or suspended from membership to appeal to a Court regarding this decision.
Claims against the National Guarantee Fund - Division 8 - regulations 10.2.25 to 10.2.27
Division 8 of Part 10.2 of the regulations provides that if circumstances giving rise to a claim against the National Guarantee Fund occur before the commencement of the provisions in the FSR Act then Divisions 6 -8 of Part 7.10 of the old Corporations Act will continue to govern these claims against the National Guarantee Fund.
Claims against Fidelity Funds - Division 9 - regulations 10.2.28 to 10.2.30
Division 9 of Part 10.2 of the regulations provides that if circumstances giving rise to a claim against a fidelity fund occur before the end of the transition period (as outlined in subsection 1414(2) of the Consequential Provisions Act) then Parts 7.9 and 8.6 of the old Corporations Act continue to govern these claims.
Status of netting markets - Division 10 - regulations 10.2.31 to 10.2.32
Division 10 of Part 10.2 of the regulations relates to the status of netting market approvals within the meaning of the Payment Systems and Netting Act 1998. These regulations will provide that netting market approvals given before the FSR Act commencement will continue to have effect after the FSR Act commencement and that certain bodies will be able to apply for netting market approvals during the transitional period.
Status of listed securities - Division 11 - regulation 10.2.33
Division 11 of Part 10.2 of the regulations provides that the definition of 'listed security' in the Superannuation Industry (Supervision) Act 1993 continues, during the transitional period, to include securities listed for quotation in the official list of an exempt stock market.
Miscellaneous - Division 12 - regulation 10.2.34
Regulation 10.2.34 will preserve the nomination of the Securities Exchanges Guarantee Corporation that currently has effect by virtue of section 1390 of the Corporations Act.
Regulated Principals - Division 13 - regulations 10.2.35 to 10.2.47
People excluded from Streamlining - regulations 10.2.35-10.2.36
Certain people will be excluded from streamlining under section 1433. These people are dealt with in regulation 10.2.36 and are listed in Schedule 10D. Some of those excluded from streamlining are excluded for a period of time that is expressed in Schedule 10D. Those people to whom legal streamlining will not be available include people who have been insolvent or bankrupt, have been or may be convicted of criminal fraud, people against whom a regulator has successfully taken action or has a pending action in respect of conduct relating to their provision of financial services, and certain associates of such people.
Where a person is deemed to be an insurance broker under section 24(2) of the I(AB) Act they will not be able to streamline under section 1433. However, where a person conducts other financial services activities to which streamlining may apply, they are not precluded from streamlining in respect of those other activities other than the insurance broking activities in question.
The preclusion from streamlining will not mean that ASIC is not able to issue a licence to that person. Instead, its effect is to ensure that ASIC is able to fully consider that person's licence application and circumstances generally when considering whether to grant them an Australian financial services licence.
However, even if a person is someone to whom section 1433 does not apply under this regulation, it is possible for them to be eligible for "administrative" streamlining under section 1435.
Variation on conditions of licence g-ranted under subsection 1433 - regulations 10.2.37
This regulation deals with the situation where a person lodges an application for a 'streamlined' licence but also wants to obtain a licence for other activities for which they are not eligible for a streamlined licence. The regulation allows the person to lodge the application for the licence and the variation of the conditions at the same time and ASIC to grant the licence subject to those conditions rather than having to grant the licence and subsequently vary the conditions.
Incidental advice - regulation 10.2.38
Due to the repeal of the "incidental advice" exemption for solicitors and accountants in section 77(5) of the current Corporations Act, it is possible that there will be an amount of uncertainty for such people during the transition period. Solicitors and accountants who are providing incidental advice prior to FSR commencement will receive the transition period under sections 1430 and 143 1.
Under regulation 10.2.38, those solicitors and accountants who first provide such advice during transition will now receive the full transition period to obtain their licence by being one of the group of people included in item 9 of section 1430. This will ensure that situations for example, where new partners or staff of such partnerships first give incidental advice during the transition period, they will receive the transition period so that they can obtain or be covered under an appropriate licence at the same time as others in the practice.
In addition, a number of people operate under exemptions in the old Corporations Act or another law are expressed specifically to receive the transition period. Examples include those operating exempt futures and stock markets. Where this was the case, there is now a clarification that such people will receive the benefit of a transition period.
References to financial services licensees - regulations 10.2.39 to 10.2.42
Regulations 10.2.39 -10.2.42 effectively modify the application of Part 7.6 so that it can operate correctly during the transition period when people who have not yet obtained a financial services licence are 'regulated principals'. For example, certain references to 'financial services licensee' need to include regulated principals during their transition period (regulation 10.2.40).
Insurance agents - regulation 10.2.43
Regulation 10.2.43 provides that a person who is an insurance agent and who is not subject to the new Chapter 7 because of section 1436A is not a representative of their insurer for the purposes of section 910A. This is merely a clarification which is consistent with the intent of section 1436A that agents should not necessarily be subject to the FSR regime when their insurers obtain a financial services licence.
Compensation Arrangements - regulations 10.2.44-10.2.45
Regulations 10.2.44-10.2.45 deal with the compensation arrangements during the transitional period. Generally, section 912B will not apply during the transitional period. Current arrangements for contracts of professional indemnity insurance for insurance agents under for I(AB) Act will be preserved during this period and will continue to apply to both existing and new participants. Similar arrangements will apply to securities imposed as conditions on licences under subsection 786(9) of the old Corporations Act. However, this is not intended to limit or restrict ASIC's ability to impose any other conditions on a financial services licence.
Granting of licence - regulation 10.2.46
Regulation 10.2.46 will allow ASIC to specify that a financial services licence takes effect from a date after it was granted. This will simplify the transitional arrangements for existing participants who will be able to know in advance at what date they begin to be subject to the new Chapter 7.
Dispute resolution.- regulation 10.2.47
Regulation 10.2.47 provides that a financial services licensee does not have to be a member of an external dispute resolution scheme where there is no such relevant scheme during the transitional period. This recognises that the establishment and approval of such schemes will take a period of time and, therefore, they may not be available for licensees immediately when they obtain a financial services licence.
Financial Product disclosure and other provisions relating to issue and sale of financial products -Division 14 - regulations 10.2.48 to 10.2.50
Obligation to provide Financial Services Guide - regulation 10.2.48
A Financial Services Guide does not have to be given for a service where the provision of that service was agreed to between a client and a person prior to the application of Part 7.7 of the new Corporations Act to that person.
Financial Services Guides for Existing clients - regulation 10.2.49
Also, a financial service provider has greater flexibility in the time required to provide a Financial Services Guide where the service is provided in the period 6 months after Part 7.7 of the new Corporations Act first begins to apply to that person and the service is to an existing client.
Content of Financial Services Guide - regulation 10.2.50
This regulation details the information that must accompany a Financial Services Guide where a financial services licensee or an authorised representative is also able to provide financial services as a regulated principal or a representative of a regulated principal. Generally, they must disclose the fact that they are able to provide financial services in this capacity as well as in their capacity as a licensee or authorised representative. Although this statement is not part of the Financial Services Guide for the purposes of Part 7.7 it could be provided in the same document as an Financial Services Guide or separately.
Other provisions relating to conduct etc. - Division 15 - regulations 10.2.51 to 10.2.73
Sale offers that need disclosure - regulation 10.2.51
Regulation 10.2.51 deals with the application of sections 707 and 1012C of the Corporations Act in relation to managed investment products and other financial products.
Section 707 of the old Corporations Act:
• will continue to apply to a sale of a managed investment product that was issued prior to the FSR commencement, where the sale occurs before the end of the transition period that applies to that product;
• will apply to a sale of a managed investment product that was issued after the FSR commencement where the sale occurs before the end of the transition period that applies to that product.
Section 1012C will apply to all sales of managed investment products that occur after the end of the transition period for that product (regardless of when the product was issued). Finally, section 1012C will only apply to the sale of financial products (other than securities or managed investment products) that were issued after the end of the transition period for the financial product.
Offers that do not need disclosure: small scale offerings - regulation 10.2.52
Regulation 10.2.52 will provide that, in counting issues and sales of managed investment products for the purposes of section 1012E of the Corporations Act, it is necessary to include issues or sales of managed investment products that were made before the end of the transition period that applied to that product (other than issues or sales for which a disclosure document was not required (other than because of subsection 708(1)) and issues and sales that were made pursuant to a disclosure document that was lodged with ASIC under Chapter 6D of the old Corporations Act).
Money other than loans: financial services licensee who formerly held dealer's licence - regulation 10.2.53
Regulation 10.2.53 deals with money to which old subsection 867(1) applied that was received by a financial services licensee before transitioning to the FSR regime. It provides that old sections 866 to 871 and any associated provisions, continue to apply to the financial services licensee in relation to this money.
Money other than loans: financial services licensee who formerly held futures broker's licence regulation 10.2.54
Regulation 10.2.54 deals with money to which old section 1209 applied that was received by a financial services licensee before transitioning to the new regime. It provides that old section 1209 continues to apply to the financial services licensee in relation to this money. This money must continue to be dealt with under the relevant provisions of the old Corporations Act. It also ensures that old section 1209 will continue to apply to money received from the investment of this money (including realisation of an investment of this money) as well as money that is transferred to a licensee under subsection 1209(5A). Part 7.8 of the Act will only apply to this money in a situation where the licensee ceases to hold a licence.
Money other than loans: financial services licensee who was formerly registered insurance broker regulation 10.2.55
Regulation 10.2.55 deals with money that was received by a registered insurance broker before the end of the transition period that applied to the person in their capacity of a regulated principal of this kind. It provides that section 26 of the I(AB) Act and any associated provisions, will continue to apply to the financial services licensee in relation to this money. This money must be dealt with under the relevant provisions of the I(AB) Act. It also provides that section 26 of that Act, and any associated provisions, will apply in relation to money received by a financial services licensee from the investment of this money. Part 7.8 of the Act will only apply to this money in a situation where the licensee ceases to hold a licence.
Money other than loans: financial services licensee who ceases to be licensed - regulation 10.2.56
Regulation 10.2.56 provides that if a financial services licensee holds money in an account maintained under old sections 866 or 1209 or section 26 of the I(AB) Act, the money is to be dealt with under new paragraphs 981F(a) to (d) as if the money was held by the licensee in an account maintained for the purposes of section 981B.
Loan money: financial services licensee who formerly held dealer's licence - regulation 10.2.57
Regulation 10.2.57 deals with loan money to which old section 872 applied that was received by a financial services licensee before transitioning to the new licensing regime. It provides that this money must continue to be dealt with by the licensee in accordance with old section 872.
Other property of clients: financial services licensee who formerly held dealer's licence - regulation 10.2.58
Regulation 10.2.58 deals with scrip to which section 873 of the old Corporations Act applied that was received by a financial services licensee before transitioning to the new licensing regime. It provides that this scrip must continue to be dealt with by the licensee in accordance with section 873 of the old Corporations Act.
Other property of clients: financial services licensee who formerly held futures broker's licence regulation 10.2.59
Regulation 10.2.59 deals with client property as defined in sections 1209 and 1214 of the old Corporations Act that was received by a financial services licensee before transitioning to the new regime. It will provide that licensee must continue to deal with this property in accordance with sections 1209 and 1214 of the old Corporations Act.
Special provisions relating to insurance: financial services licensee who was formerly registered insurance broker - regulation 10.2.60
Regulation 10.2.60 deals with licensees who were formerly insurance brokers. It provides that section 27 (other than subsections 27(3) and 27(5)) of the I(AB) Act will continue to apply in relation to money that was received by the licensee prior to transitioning to the FSR licensing regime. This regulation also provides that the notification requirements in subsections 27(3) and 27(5) of the I(A & B) Act will continue to apply in relation to contracts of insurance, or proposed contracts of insurance that were arranged or effected by a financial services licensee before becoming a licensee.
Obligation to report: financial services licensee who formerly held futures broker's licence regulation 10.2.61
Reporting in relation to dealings in derivatives: financial services licensee who formerly held dealer's licence -regulation 10.2.62
Regulations 10.2.61 and 10.2.62 deal with the reporting obligations of a financial services licensee who was formerly the holder of a futures brokers licence. It provides that the monthly reporting requirements contained in section 1207 of the old Corporations Act will continue to apply in relation to: client money or property that is held by the licensee under section 1209 or 1214 of the old Corporations Act; futures contracts that were acquired by the licensee on behalf of a client before becoming a licensee and that have not been disposed on by the end of a particular month and discretionary accounts for which authority was provided before the licensee transitioned to the new regime and this authority has not been revoked.
Financial statements of financial services licensee: general - regulation 10.2.63
Subdivision C of Division 6 of Part 7.8 of the Act requires financial services licensees to prepare and lodge with ASIC audited profit and loss statements and balance sheets in respect of each financial year.
Regulation 10.2.63 will provide financial services licensees who did not formerly hold either a securities dealers or futures brokers licence and were not formerly registered insurance brokers or registered foreign insurance agents with the option, in relating to the financial year in which they first transitioned into the new licensing regime, of preparing and lodging financial statements covering either the entire financial year or the period of that financial year that began on the day they first became a financial services licensee.
Financial statements of financial services licensees who were certain regulated principals regulation 10.2.64
Regulation 10.2.64 applies to financial services licensees who formerly held a securities dealers or futures brokers licence or were either registered insurance brokers or registered foreign insurance agents. The reporting obligations contained in the old Corporations Act or the I(AB) Act will continue to apply to these licensees in relation to financial years or accounting periods that were completed before the licensee first transitions to the new regime.
However, these obligations will not apply in relation to the financial year in which the licensee first transitions to the FSR licensing regime. This is because the obligation to prepare and lodge an audited annual profit and loss statement and balance sheet will apply in relation to the entire financial year in which the licensee transitioned to the new regime.
This new requirement will apply in place of pre-existing reporting obligations in relation to the financial year in which the licensee first transitions into the new regime.
Auditors: certain financial services licensee who formerly held dealer's licence - regulation 10.2.65
Auditors: certain financial services licensees who held futures broker's licence - regulation 10.2.66
Regulations 10.2.65 and 10.2.66 deal with transitional arrangements concerning the auditors of financial services licensees who were formerly securities dealers or futures brokers and are not bodies corporate (other than proprietary companies) to which section 327 of the Act applies. As a general rule, auditors of a securities dealer or futures broker that are in office when these regulated persons transition to the new regime will be deemed to be appointed as auditor of the financial services licensee under the new regime.
If there is a vacancy in the office of auditor of a securities dealer or futures broker when the person transitions to the new regime, the licensee will have to appoint a new auditor under Part 7.8 of the Act within 14 days of the vacancy occurring.
The only exception to this rule would be where before transition, a licensee that was both a securities dealer and a futures broker had an auditor in its capacity as a securities dealer, but no auditor in its capacity as a futures broker at the time of transition (or vice versa). In these circumstances it will not be necessary for the licensee to fill the second vacancy within 14 days.
Auditor's report in certain matters: - regulations 10.2.67 to 10.2.69
Section 990K of the Corporations Act requires the auditor of a financial services licensee to report to ASIC within 7 days if it becomes aware of certain matters listed in subsection 990K(2). Regulations 10.2.67 to 10.2.69 will place additional obligations on an auditor of a financial services licensee who formerly held a securities dealers licence or a futures brokers licence, or who were formerly registered insurance brokers, to report to ASIC within 7 days if the auditor becomes aware of other specified matters.
An auditor of a licensee who formerly held a securities dealers licence or a futures brokers licence will be required to report to ASIC if it becomes aware of any matter that, in the opinion of the auditor, have adversely affected the capacity of the licensee to meet its obligations as a licensee under the old Corporations Act or that constitute or may constitute a contraventions of the conditions that applied to a securities dealers or futures broker licence that was formerly held by the licensee.
An auditor of a licensee who formerly held a securities dealers licence or a futures brokers licence or was formerly a registered insurance broker will also be required to report on any matters that constitute or may constitute a contravention of specified provisions of the old regulatory framework.
Priority to clients' orders: financial services licensee who held dealers licence - regulation 10.2.70
Regulation 10.2.70 deals with client instructions to buy or sell securities of a particular class that were received by a financial services licensee before it transitioned to the new licensing regime. It provides that section 844 of the old Corporations Act will continue to apply in relation to these instructions until the licensee has complied with the instructions.
Sequencing of instructions to deal through licensed markets: financial services licensee who formerly held futures brokers licence - regulation 10.2.71
Records relating to instructions to deal through licensed markets: financial services licensee who held futures brokers licence - regulation 10.2.72
Regulations 10.2.71 and 10.2.72 deal with instructions to deal in a class of futures contracts that were received by a licensee before it transitioned to the new licensing regime. It provides that section 1266 of the old Corporations Act will continue to apply in relation to these instructions.
Dealing with non-licensees: financial services licensee who held dealers licence - regulation 10.2.73
Regulation 10.2.73 provides that section 843 of the Corporations Act will continue to apply to transactions of sale or purchase of securities that were entered into by a licensee before the licensee transitioned to the new licensing regime.
Product disclosure provisions for existing products during transition period - Division 16 regulations 10.2.74 to 10.2.87
Definition of 'class' - regulation 10.2.74
This regulation defines what a 'class' of financial products is for the purposes of subsection 1438(1). This effectively determines what is a 'new' financial product to which the new Chapter 7 applies immediately and what is an existing product which is subject to the two year transitional arrangements.
For a range of common financial products, this regulation sets out the circumstances when they will be in the same class as other financial products. For financial products that are not specifically dealt with, it is intended that this regulation will act as a guide in setting out the types of factors that should be considered in determining whether or not that product is in the same class as another financial product.
This definition of 'class' is intended only for subsection 1438(1) and is not intended to influence the meaning of the expression 'class' where it is used in other provisions of the new Chapter 7.
References to 'Financial services licensee' - regulation 10.2.75
This regulation provides that references to 'financial services licensee' in Part 7.9 and section 761E include references to regulated principals for the duration of their transition period. This is necessary as Part 7.9 may begin to apply to some financial products while people who will eventually be financial services licensees are still in their transition period, therefore certain references to licensees need to include people who are regulated principals for the duration of their transition period.
References to retail client - regulation 10.2.76
This regulation sets out how to determine whether a product that was acquired prior to FSR commencement was acquired by a person as a retail client. Such a product is acquired by a person as a retail client unless they either would have acquired it as a wholesale client if the new regulatory regime had applied at the time they acquired it or if they would have acquired it as a wholesale client if they acquired it at FSR commencement. This will simplify the process of determining whether such a product was acquired by a person as a retail or wholesale client as in some cases information about the person necessary to determine whether they were retail or wholesale at the time they actually acquired the product may now not be available.
References to issue of product - regulation 10.2.77
This regulation provides that the reference to first issue of a product in subsection 1438(1) includes a reference to the first making of an offer to issue a financial product. This will remove uncertainty about the operation of subsection 1438(1).
Product Disclosure Statements - regulations 10.2.78-10.2.81
Where a person makes an offer to an issuer or seller or accepts an offer from an issuer or seller to acquire product prior to Part 7.9 applying to that product, then any existing regime continues to. apply to that acquisition and Part 7.9 does not apply (regulation 10.2.78). Product Disclosure Statements can be lodged early to facilitate the seamless transition into the new regime (regulation 10.2.80). Certain references to a Product Disclosure Statement in Part 7.9 are taken to include references to disclosure documents prepared under Chapter 6D (regulation 10.2.79). This is necessary to ensure that certain provisions in Part 7.9 that contain references to a Product Disclosure Statement operate satisfactorily in the transitional period when some products will still have disclosure documents prepared under Chapter 6D. Regulation 10.2.81 provides for the meaning of 'responsible person' in the context of a product issued prior to commencement.
Money received before product is issued - regulations 10.2.82-10.2.83
Regulation 10.2.82 deals with the situation where money is paid to a person to acquire a product before Division 2 of Part 7.9 begins to apply to that product but the money is retained after that point in time. The regulation provides that such money continues to be held in accordance with any requirements of the regime that applied when it was received and the FSR regime only applies to money received after Part 7.9 begins to apply to that product.
Section 37 of the I(AB) Act (other than subsection (2)) does not apply to money when section 1017E applies to that money (regulation 10.2.83). This is necessary as the obligations imposed by section 1017E and section are not consistent. Section 37 may apply at the same time as section 1017E due to the transitional arrangements for licensing which in certain circumstances preserve the effect of the I(AB) Act despite its repeal.
Confirmation - regulation 10.2.84
Subsection 37(2) of the I(AB) Act does not apply in relation to a financial product when section 1017F also applies to that product (regulation 10.2.84). This avoids two substantially similar obligations applying at the same time.
Dispute Resolution - regulation 10.2.85-10.2.87
Regulation 10.2.85 clarifies that an obligation on a product issuer to have dispute resolution systems available does not apply to financial products that were not available at a time when Division 2 of Part 7.9 applied to them.
Regulation 10.2.86 provides that section 1017G does not apply to a regulated principal during their transition period if the issue or sale of the products is within that regulated principal's regulated activities. Therefore, where an issuer of a product (whose regulated activities include the issue of the product) elects to have Part 7.9 apply to that product but has not yet obtained a financial services licence, the requirement in section 1017G will not apply to them.
Finally, regulation 10.2.87 provides that during the period of two years after FSR commencement a person does not have to be a member of an external dispute resolution scheme where no relevant scheme is in existence. In addition, a person will during this two year period have three months from the time when such a scheme comes into existence to become a member of a relevant scheme.
Arrangements relating to enforcement of matters by ASIC - Division 17 - regulations 10.2.88 to 10.2.91
Definition of "financial services laws" - clarification - regulation 10.2.88-10.2.89
During transition, the relevant old legislation will be preserved so that it applies to people who are regulated principals under section 1430 until their transition into the new regulatory regime, as well as to holders of Australian financial services licences who are subject to the I(AB) Act until all people who act as their insurance agents transition into the new regulatory regime under section 1436A (see section 1432).
Due to the possible width of the definition of "financial services law" in section 761A(d), Regulation 10.2.53 is intended to clarify that the tern "any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of financial services" does not include the "relevant old legislation". This is required to ensure that a person's conduct which is not subject to the new regime is not taken to be a breach of their licence requirements under the new regulatory regime, or otherwise has unintended consequences (see sections 912A(c), 912E(1), 920A(1)(e) and 920A(1)(f).
This will not have the effect of preventing ASIC from taking into account the conduct of a person under relevant old legislation, as such conduct may form part of ASIC's decision-making under a number of provisions. Instead, it will ensure that there is not an anomalous result in respect of other legal regimes that the person may be subject to at the same time as they are caught by the new financial services regulatory regime.
ASIC - consideration of prior conduct - regulation 10.2.90
ASIC must be able to take into account prior conduct in exercising certain of its enforcement powers. This conduct includes conduct occurring prior to FSR commencement, and after FSR commencement but that is regulated by a law other than the new Chapter 7.
In particular, under regulation 10.2.90, ASIC may take into account any matter, breach of law or non-financial services conduct that arose before FSR commencement, or under any relevant old legislation in exercising any power to do a number of things, including determining whether to grant an Australian financial services licence, or whether a person will not comply with their general obligations.
Administration of old regimes during transition - regulation 10.2.91
For clarification, because the relevant old legislation continues in effect during the transition period under section 1432, this regulation clarifies that ASIC's powers to administer the old regulatory regimes remain effective. This will include the ability to alter licence conditions, revoke licences, suspend people, cancel registrations and execute new instruments.
Specific kinds of documents in existence before FSR commencement - Division 18 regulations 10.2.92 to 10.2.98
Banning orders - regulations 10.2.92 - 10.2.94
Regulations 10.2.92 to 10.2.94 will ensure that ASIC may conduct effective enforcement under a number of concurrent legal regimes which will exist in the transitional period. In particular, both existing and new banning orders can be amended to cover the equivalent activities under all legislation regarding financial services that operates at a particular time, and apply for the period of time they were originally intended to apply for.
However, banning orders cannot be extended to apply to conduct or products outside those to which the primary legislation they are made under enable the banning order to be made.
Enforceable Undertakings - regulation 10.2.95
A number of enforceable undertakings have been entered into with ASIC under sections 93AA and 93A of the ASIC Act. Where the undertaking was entered into prior to FSR commencement, regulation 10.2.95 provides that ASIC may amend it to ensure that it will have an equivalent effect after FSR commencement. This can be achieved by ASIC issuing a notice to a person. The regulation also ensures that the undertaking continues in force to ensure that it has effect regardless of which legal regime a person's conduct is regulated under.
Old registers, documents, etc - regulations 10.2.96-10.2.98
Under regulation 10.2.97, ASIC must enter the relevant details from any old register into certain equivalent new registers under the new regulatory regime.
Also, where a person had an obligation to keep a register, document or other thing under a law that is being repealed, the obligation to keep that information is retained for the same period by regulations 10.2.96 and 10.2.98.
Extension of limitation periods - Division 19 - regulation 10.2.99
Due to the increase in the limitation periods under the ASIC Act in items 111 and 121 of the Consequential Provisions Act, there may be confusion about conduct to which this extension applies. Accordingly, regulation 10.2.99 clarifies that the amendments apply to conduct engaged in after commencement of those items, and also to prior conduct provided that the relevant old limitation period has not yet expired at that time.
Rules for dealing with liability during transition period - Division 20 - regulations 10.2.100 to 10.2.104
Key issues
During the transition period, a number of liability regimes will apply to the various principals and representatives who provide financial services.
The liability regime in the new regulatory regime is not drafted to operate in a regime where financial services providers are providing financial services under legal regimes outside that framework. In particular, Division 6 of Part 7.6 contemplates that all representatives operate under new Chapter 7.
Accordingly, some clarification and modification is needed to ensure that liability as between a provider of financial services and a client is equitable during the transition period.
Key policy objectives
In determining the appropriate approach, the following key policy objectives were taken into account:
• generally, neither holders of Australian financial services licences nor other principals or providers of financial services should have their exposure to liability increased beyond what would otherwise apply under the law regulating their conduct that would apply either before or after the transition period
• the regime should ensure that consumers can relatively easily understand who they are able to recover against
• principals should always be liable for their own conduct
• any person who has committed an offence should not be relieved from any liability in respect of the offence
• generally, holders of Australian financial services licences should not take on liability that those operating under other legal regimes should otherwise be responsible for (this would otherwise operate as a de facto cross-endorsement, which may discourage people from obtaining their new Australian financial services licence at an early stage during the transition period)
In general, it is expected that liability for particular conduct may fall to more than one person, and that such persons may be regulated under different legal regimes. It is expected, while those persons will be jointly and severally liable to the extent that the remedies are the same, that Courts and dispute resolution bodies will ensure that a person who suffers loss or damage does not become unjustly enriched by being able to recover for a particular loss to a greater extent than would otherwise be appropriate.
In a similar way, where a person may be guilty of more than one offence under various laws in relation to particular conduct, general law is expected to operate to limit that criminal liability in appropriate circumstances.
Regulations
In accordance with the above, the liability provisions in regulations 10.2.100-10.2.1-04 that will apply during transition will have the following effect:
• Sections 917B and 917C(4) will have unintended results if they operate in their full sense during the transition period. This will result in those principals who have an Australian financial services licence being responsible for all financial services conduct, even if a particular representative acts for principals who have their Australian financial services licence, as well as other principals who are still operating under relevant old legislation during the transition period. Accordingly, sections 917B and 917C(4) are modified during the transition period so that, if a particular representative has one or more principals who have an Australian financial services licence, and one or more principals that do not, the Australian financial services licence principals will only be liable to the client for activities that are within the class of services they have authorised. This is to ensure that a person who transitions into the FSR regime early is not disadvantaged by being liable for the full range of financial services conducted by a particular representative unless the representative is fully regulated by the amended Corporations Act.
• Where more than one person is, as a result of different regulatory regimes applying to a particular situation during transition, liable for the conduct of a representative, they will be jointly and severally liable to the client.
• The client can choose to exercise recovery rights against any or all of the people who are liable to them, including where different remedies are available in respect of that conduct.
• A person will always be liable for their own conduct
ASIC may deal with unintended consequences
It is expected that, where unintended consequences result from the various liability regimes applying at the same time, ASIC will use its modification and exemption powers to ensure that this is corrected.
Title and transfer - Division 21 - regulations 10.2.105 to 10.2.115
The provisions of Part 7.13 of the old Corporations Act will be replaced by Part 7.11 of the new Corporations Act. They relate to title and the transfer of securities, in the case of Part 7.13, and certain financial products, in the case of Part 7.11.
Many of the repealed provisions involve processes which may be incomplete at the time of the FSR Act commences. the transitional regulations will ensure that processes commenced but incomplete before the commencement of the FSR Act can be completed and their legal validity preserved after that date.
Thus, for example, regulation 10.2.109 continues the operation of section 1093 of the old Corporations Act to preserve a company's obligations arising upon its refusal to register a transfer of shares in, debentures of or interests made available by the company.
Transitional matters under relevant old legislation: Financial Transactions Reports Act 1988 -Division 22 - regulation 10.2.116 to 10.2.117
Division 22 of Part 10.2 of the regulations provides that the definition of a cash dealer in subsection 3(1) of the Financial Transactions Reports Act 1988 will continue to include securities dealers and futures brokers throughout the transition period for each of these regulated principals. It also provides that a transaction between a futures broker and a clearing and settlement facility associated with a licensed market in which the broker is a participant will continue to be an 'exempt cash transaction' throughout the transition period for each of these regulated principals.
Transitional matters under relevant old legislation: Income Tax Assessment Act 1936 -Division 23 - regulation 10.2.118
Division 23 of Part 10.2 of the regulations will ensure that commercial funds management companies that hold a dealers licence or an investment advisers licence may still be declared to be offshore banking units during the transition period for each of these regulated principals.
Transitional matters under relevant old legislation: Insurance Act 1973 - Division 24 -regulation 10.2.119
Division 25 of Part 10.2 of the regulations will ensure that persons who carry on a class of general insurance business that was prescribed for the purposes of section 113 of the Insurance Act 1973 will continue to required to be an party to an agreement to comply with a code of practice that has been approved by ASIC in relation to these classes of insurance business during the transition period for each of these regulated principals.
Transitional matters under relevant old legislation: Marine Insurance Act 1909 - Division 25 - regulation 10.2.120
Division 26 of Part 10.2 of the regulations will provide that section 59 and 60 of the Marine Insurance Act 1909 will continue to apply in relation to marine policies that were effected prior to the FSR commencement.
Transitional matters under relevant old legislation: Superannuation (Resolution of Complaints) Act 1993 - Division 26 - regulation 10.2.121
Division 29 of Part 10.2 of the regulations will provide that the definition of a life insurance broker in subsection 3(2) of the Superannuation (Resolution of Complaints) Act 1993 will continue to include a regulated principal registered under Part III of the I(AB) Act during the transition period for each of these regulated principals.
Transitional matters under the Act (other than Chapter 7) - Division 27 - regulation 10.2.122 to 10.2.135
References to professional investor - regulation 10.2.122
Regulation 10.2.122 will provide that the definition of a professional investor in section 9 of the Corporations Act will include securities dealers and investment advisers as well as exempt dealers and exempt investment advisers during the transition period for each of these regulated principals.
Managed investment products held by 100 or more persons - regulation 10.2.123
Regulation 10.2.123 will provide that managed investment products in a class of managed investment products issued by a body are ED securities if 100 or more persons hold managed investment products in that class as a result of either offers that gave rise to an obligation to lodge a disclosure document with ASIC under Chapter 6D of the old Corporations Act or offers that gave rise to obligations to give Product Disclosure Statement (whether or not all in the same terms) under Chapter 7.
When a managed investment scheme must be registered - regulation 10.2.124
Regulation 10.2.124 will ensure that a managed investment scheme will only be exempt from registration under subsection 601ED(2) of the Corporations Act if none of the issues of interests in the scheme that were made under Chapter 6D of the old Corporations Act would have needed disclosure to investors if the scheme had been registered at the time the issues were made and none of the issues of interests in the scheme that have been made under Chapter 7 of the amended Corporations Act have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.
Responsible entity to be public company and hold Australian financial services licence - regulation 10.2.125
Regulation 10.2.125 will provide that a public company that holds a dealers licence will continue to be able to be the responsible entity of a registered managed investment scheme during its transition period.
Duties of officers of responsible entity - regulation 10.2.126
Regulation 10.2.126 provides that an officer of a public company that is the responsible entity of a registered managed investment scheme will continue to be required to comply with any condition imposed on the responsible entity's dealers licence during the transition period for the regulated principal.
Voidable contracts - regulation 10.2.127
Regulation 10.2.127 will provide that section 601MB will continue to operate in relation to an offer of interests in registered managed investment schemes for subscription or invitations to subscribe for an interest in a managed investment scheme that are made during the transition period that applies to the relevant managed investment product.
Situations not giving rise to relevant interests - regulation 10.2.128
Regulation 10.2.128 will provide that a securities dealer will not be deemed to have a relevant interest in securities held on behalf of someone else in the ordinary course of their securities business during the transition period during its transition period.
Bidder's statement content - regulation 10.2.129
Regulation 10.2.129 will provide that, if a bidder offers securities as consideration in a takeover bid, and the bidder is the body that has or will issue the securities or a person who controls that body, and the securities are managed investment products that have not transitioned to the new product disclosure regime at the time the bidder's statement is lodged with ASIC, the bidder's statement will be required to contain all material that would be required for a prospectus for an offer of those securities by the bidder under section 710 to 713 of the Corporations Act.
Continuous disclosure - other disclosing entities - regulation 10.2.130
Regulation 10.2.130 will provide that a disclosing entity will not be required to disclose information under section 675 of the Corporations Act if the information has been included in a supplementary disclosure document or a replacement disclosure document lodged with ASIC under Chapter 6D of the old Corporations Act.
Sale offers that need disclosure: securities issued before FSR commencement - regulation 10.2.131
Regulation 10.2.131 (second mentioned) deals with the application of the amended section 707 of the Corporations Act to the sale of securities (other than managed investment products). It provides that section 707 of the Corporations Act applies only in relation to the sale of a security issued after the FSR commencement. Section 707 of the old Corporations Act will continue to apply in relation to a. security that was issued prior to the FSR commencement.
Offers that do not need disclosure: offer to sophisticated investor through licensed dealer regulation 10.2.132
Regulation 10.2.132 will provide that an offer of a body's securities after the FSR commencement will not need disclosure under Chapter 6D of the Corporations Act if the offer is made through a securities dealer during its transition period. This will ensure that subsection 708(10) of the Corporations Act maintains its current effect in relation to securities after the FSR commencement.
Prospectus content- general disclosure test - regulation 10.2.133
Regulation 10.2.133 will ensure that a securities dealer's knowledge will be relevant for the purposes of section 710 of the Corporations Act if the securities dealer is named in the prospectus as being involved in anyway in the issue or sale of the securities to which the prospectus applies.
Prospectus content - specific disclosure - regulation 10.2.134
Regulation 10.2.134 will ensure that disclosures will need to be made under subsections 711(2) or (3) of the Corporations Act in relation to a securities dealer named in the prospectus as a person involved in anyway in the issue or sale.
Registers - regulation 10.2.135
Regulation 10.2.135 will provide that a document that is lodged with ASIC under Chapters 7 (other than subsection 776(2B), section 1011B or Part 7.13) or 8 of the old Corporations Act will continue to be exempt from public inspection under subsection 1274(2). This will apply regardless of whether the document was lodged before or after the FSR commencement.
Retail clients and wholesale clients - Division 28 - regulation 10.2.136 to 10.2.138
Preservation of status under old Corporations Act - regulation 10.2.136 - 10.2.137
Where certain people were not retail investors under the old Corporations Act for disclosure purposes, they are deemed to be wholesale clients in relation to that product as between themselves and the issuer.
Similarly, if a person who was not a retail investor under the old Corporations Act or the relevant old legislation is being provided with advice in relation to securities immediately before the adviser becomes regulated under FSR for those activities, the services may continue until completion (provided it takes no longer than 4 weeks after FSR applies to that activity) under the old Corporations Act. Accordingly, the client will not require a Financial Services Guide or a Statement of Advice. However, the client will need a Product Disclosure Statement if they are not otherwise a wholesale client for disclosure purposes.
Professional Investors - regulation 10.2.138
During the transition period, certain regulated principals should be included in the category of "professional investor" under section 9 of the Act. This applies to those holding dealers licences, investment advisers licences, futures advisers or brokers licences, and exempt dealers or investment advisers working as principals. This ceases to apply at the end of that principal's transition period.
14. MISCELLANEOUS
Notices - amendment to regulation 5B.3.04
This amendment corrects an errant reference to 'Corporations Law' so that it refers instead to the Act.
The legislation referred to as the Corporations Law was superseded on 15 July 2001.
Olympic Games protection - omission of Schedule 6 Part 2 - rules 6201, 6202, 6206, 6207 and 6208
These rules have been repealed because they have done the work intended for them and were expressed to cease to have effect at the end of 31 December 2000.
Schedule 8 paragraph 8203(b) - correction
This amendment omit 'ASC' and inserts 'ASIC'.
The name of the regulator was changed from the Australian Securities Commission (ASC) to the Australian Securities and Investments Commission (ASIC) in 1998, at the same time as its role was extended.
Continuous Disclosure - Regulation 6CA.1.01
Section 675 of the new Corporations Act provides for continuous disclosure in relation to unlisted disclosing entities and, in limited circumstances, for listed disclosing entities.
Regulation 6CA.1.01 specifies when disclosure to ASIC will not be required of such entities. The exceptions in this regulation generally reflect those that apply to listed disclosing entities bound by the Listing Rules of the Australian Stock Exchange.
Thus information which is confidential, for example, will not be required to be disclosed.
REGULATION IMPACT STATEMENT - ALTERNATIVE DISPUTE RESOLUTION SYSTEMS (Regulation 7.6.02)
Background
The Financial Services Reform Act 2001 (FSR Act) is supplemented by regulations that outline some of the detail provided for in the Act. Section 912A of the Act describes a range of general obligations that financial service provides must satisfy in order to apply for and hold a financial services license.
In sub-section 912A (1)(g), the Act requires financial service licensees to have in place complying dispute resolution system, when they provide services to retail clients. The Act elaborates on the compliance requirements in sub-section 912A (2), and makes provision for regulations to outline the issues ASIC needs to consider in:
• making or approving standards or requirements for internal dispute resolution (IDR) procedures (see paragraph 912A(2)(a)(i)); and
• approving external dispute resolution (EDR) schemes. (see paragraphs 912A(2)(b)(i))
These issues are addressed in Regulation 7.6.02 of the FSR Act.
The Problem
The general problem to which this regulation relates, is that where financial service providers fail to establish appropriate alternative dispute resolution systems themselves, consumers would need to devise their own strategies for seeking redress, in circumstances where they felt that they had been unfairly treated by a financial services provider. In these circumstances, the only formal channel through which consumers could seek resolution of their complaint, would be to proceed with legal action against the provider through the court system. This is a high cost process, which does not provide the requisite flexibility in dealing with complaints and issues, that could be more appropriately and efficiently handled outside of the court system.
This general problem is resolved in the FSR Act, by requiring license holders to have alternative dispute resolution systems in place. Given that this requirement would be implemented by ASIC, as an independent statutory body, the Government wanted to avoid any uncertainty about its intentions in relation to the application of this requirement. Uncertainty could lead to difficulties in implementing the requirement (ie. the approval process could be made too lenient or too onerous) in keeping with the Government's intent.
The Objective
To avoid any uncertainty about the Government's intentions in relation to ASIC's powers to approve internal and external dispute resolution systems, guidance needs to be given to ASIC, and clarity to potential license holders, about the matters the Government considers are relevant in the approval process.
The Options
One option (option 1) that could achieve the objective of providing guidance to ASIC and clarity to license holders, would be to prescribe in detail, all the matters that the Government considered were necessary for license holders to meet their requirement of having appropriate internal and external dispute resolution systems.
Another option (option 2) would be to require ASIC to consider (rather than adopt) a range of matters the Government considered relevant to the approval processes, but to also provide ASIC with the flexibility to consider other matters as appropriate. Such an option would have the regulation list a range of matters that must be considered by ASIC when it approved external dispute resolution systems (EDRs), or approved various standards or requirements in relation to internal dispute resolution systems (IDRs).
in relation to IDRs, such a regulation would implicitly provide for a range of possible options in meeting the regulatory objectives behind IDR procedures. That is, ASIC would need to take into account (but not strictly adopt) the Australian Standard AS 4269-1995 (known as Complaints Handling), but would also have the flexibility to consider other matters it considered relevant.
In relation to EDRs, such a regulation would require ASIC (when considering whether to approve an EDR scheme) to take into account issues such as the: accessibility; independence; fairness; accountability; efficiency; and effectiveness of the scheme. However, again, they would also be able to consider other matters that they considered relevant.
These specific matters already form part of ASIC's checklist when it approves EDR schemes under Policy Statement 139. Under this policy statement, ASIC has already approved three EDR schemes with financial sector members. The three schemes (ABIO, IEC and FICS) cover the banking, general insurance, life insurance, funds management and advisory services sectors of the financial services industry. Therefore, by making a regulation under the FSR Act which requires ASIC to take into account the matters that it has already been using for approving EDRs under the existing Corporations Laws, with the added flexibility to consider other matters as relevant, ASIC would not be subject to new obligations from such a regulation under FSR.
Costs and Benefits
Option 1
Option 1 would appear to carry with it significant costs to both ASIC and financial service provider licensees, due to its overly prescriptive nature. Explicit and inflexible approval conditions in a regulation will impose costs on financial service providers to the extent that such requirements cannot adequately address the wide range of businesses and business sizes that will be licensed under the FSR Act.
A small life insurance provider for example, may only receive a relatively small number of complaints which are of a simple and straightforward nature. However, a large stockbroking firm or derivatives dealer may potentially receive a large number of complaints (given the number of transactions they handle) which could relate to relatively complex advice that their clients receive. By requiring ASIC to impose a "one size fits all" approval condition on a licensee's internal dispute resolution system, would impose unnecessary costs on those licensees for whom the requirement was not appropriate.
However, Option 1 would have benefits in terms of providing explicit clarity to ASIC and licensees in relation to the Government's intentions behind the requirement for all license holders to have alternative dispute resolutions systems in place. Explicit requirements would potentially remove one element of uncertainty in relation to ASIC's application of its approval conditions. Although, uncertainty would still remain in relation to the practical application of such strict standards on the approval of dispute resolution systems across the wide range of potential financial service providers under the FSR Act.
Option 2
Option 2 may carry some short-term costs in relation to a greater degree of uncertainty about how ASIC might apply its discretion in relation to the approval of alternative dispute resolution systems. However, some of this uncertainty can be reduced through ASIC's consultation process in the development of its policy papers that relate to its approval of alternative dispute resolution systems. Further, the costs of any uncertainty would also be minimised because of the guidance and references to certain standards and factors that the Government wanted ASIC to take into account in their application of the approval powers.
Option 2 will carry significant benefits though, because of the greater flexibility and discretion provided to ASIC in its approval process. That said, ASIC and license holders will still benefit from the presence of references to appropriate standards that the Government expects ASIC to take into account in their approval process.
The major benefit of option 2 is that it does not force ASIC to adopt the standards referred to in the regulation. ASIC need only take account of these issues in their approval processes. ASIC would have the flexibility (through the authority to consider other matters as relevant) to tailor the approval process/requirements to the size of the businesses and the nature of the business being conducted. This will benefit license holders by enabling ASIC to apply conditions on the approval of their alternative dispute resolution systems that are consistent with the size and nature of their business activities.
In this context, it is worth noting that option 2 would be less prescriptive than that which already applies to various license holders under the existing corporations regulations (7.3.02B5), Such license holders must have internal complaints handling processes which are in accordance with the Complaints Handling standard AS 4269-1995.
Consultations
The FSR Regulations in general, have been subject to a thorough and open process of public consultation, which is the culmination of extensive consultation on the reforms since 1997. The regulations were released in draft form for public comment, and to facilitate focussed industry and consumer input a formal consultation body, the Implementation Consultative Committee (ICC) was established by the Treasury.
This body includes a wide range of practitioners from 40 key interest groups representing the financial services industry and consumers and has assisted in the development of the regulations to support the FSR regulatory regime both at a general and at an operational level. Industry and consumer input has been invaluable to this process and four ICC meetings have been held to consider the draft regulations.
A regulation in relation to Alternative Dispute Resolution Systems (along the lines of option 2 referred to earlier) was released as part of the general consultation process. No specific problems were raised by industry or consumer groups in relation to the regulation.
ASIC's specific role in this area is also the subject of their policy proposal papers on the Financial Services Reform Bill. ASIC has issued a policy proposal paper (FSRB PPP no. 7) on its approval role in relation to external and internal dispute resolution schemes for licensees and other entities under the FSR Act. Consultations have been conducted and it is expected to be issued as a final Policy Statement in December 2001.
Conclusion
Option 1 has the potential to provide benefits to licensee holders to the extent that they are in no doubt as to how ASIC will impose conditions on the approval of their alternative dispute resolution systems. However, these benefits will come at the cost of an inflexible approval regime that will not be able to cater to the wide range of business activities and business sizes that will be licensed under the FSR Act. In these circumstances it is hard to conceive of a scenario where the benefits of option 1 would outweigh the costs for the vast majority of businesses (license holders).
Option 2 has the benefit of providing ASIC and license holders with some guidance on the Government's intentions in relation to ASIC's approval powers for alternative dispute resolution systems, but with the flexibility of tailoring conditions on approvals to the nature and size of the businesses in question. This is a crucial consideration in the recommendation of option 2 over option 1.
The entire thrust of the FSR Act is to provide overall guidance on appropriate regulatory standards across the financial services industry, but with the critical caveat that the regulation should be appropriate to the nature and extent of the business being undertaken. The flexibility in option 2 is consistent with this theme, as it accommodates and takes account of the expanded range of financial service providers that will be licensed under the FSR regime. Option 2 appears to have the better cost/benefit trade-off of the two options, and is fully consistent with the overall objectives of the FSR Act. It did not receive any unfavourable commentary from industry in consultations on the regulation.
Implementation and Review
The reforms contained in the FSR Act and its Regulations will be reviewed after the two-year transitional period for their implementation, which is expected to commence on 11 March 2002.