House of Representatives

Financial Services Reform (Consequential Provisions) Bill 2001

Explanatory Memorandum

(Circulated by authority of the Minister for Financial Services & Regulation the Hon Joe Hockey, MP)

Amendments to the Australian Securities and Investments Commission Act 2001

Amendments to Division 2 of Part 2

Application of Division 2 of Part 2

3.1 In line with the mirror provisions contained in Parts IVA and V of the Trade Practices Act 1974 (TPA), Subdivisions C, D and E of Division 2 of Part 2 of the Australian Securities and Investments Commission Act 1989 (ASIC Act) currently apply only to corporations in trade or commerce. The Bill proposes to extend the application of these Subdivisions in the proposed Australian Securities and Investment Commission Act 2001 (proposed ASIC Act) so that they will apply to relevant conduct by any person in trade or commerce. It does so by replacing existing references to a corporation in trade or commerce in Subdivisions C, D and E with references to a person in trade or commerce.

3.2 As a consequence of these amendments, the Bill repeals section 12AA and subsection 12AD(2) as well as the definitions of corporation and foreign corporation contained in subsection 12BA(1). It also amends sections 12CB, 12DK, 12DL and 12DM in order to clarify the operation of these provisions.

Definition of Territory in subsection 12BA(1)

3.3 The Bill will repeal the definition of Territory in subsection 12BA(1). The proposed FSR Act includes amendments to section 4 that will enable particular provisions of the proposed ASIC Act to be applied in specified circumstances to particular External Territories. It is intended that the amended section 4 will be used to apply Division 2 of Part 2 to the External Territories as required.

Definition of a consumer in section 12BC

3.4 The Bill will clarify the definition of a consumer currently contained in section 12BC. It will clarify that only small businesses will fall within the definition of a consumer in relation to financial services acquired for use in connection with a small business. A small business is defined as one that employs fewer than:

·
if it is a manufacturing business - 100 people; or
·
otherwise, 20 people.

3.5 This definition of a small business replicates the definition of a small business contained in subsection 761G(12) of the proposed Corporations Act(as inserted by the proposed FSR Act ) .

Unconscionable conduct in business transactions

3.6 Section 51AC of the TPA was introduced following the insertion of Division 2 of Part 2 into the ASIC Act. This provision extended the unconscionable conduct provisions of the TPA to business transactions involving the supply or acquisition of goods or services valued at up to $1 million by a person or corporation other than a public listed company. This monetary limit has recently been increased to $3 million.

3.7 Proposed section 12CC of the ASIC Act will operate as a mirror provision to section 51AC of the TPA. It will extend the unconscionable conduct provisions of Division 2 of Part 2 to cover transactions involving the supply or acquisition of financial services valued at up to $3 million.

Misleading or deceptive conduct in relation to financial services

3.8 The current prohibition on misleading or deceptive conduct in relation to financial services contained in section 12DA will be retained (with amendments in the proposed FSR Act). It will operate alongside section 1041H of the proposed Corporations Act.

3.9 Section 12DA has been retained as the definition of a financial service that will be contained in section 12BAB of the proposed ASIC Act is broader than that which will be contained in the Division 4 of Part 7.1 of the proposed Corporations Act.

Prescribed information providers

3.10 The Bill amends subsection 12DN(1) by replacing current references to securities with references to financial products. These amendments reflect amendments to subsection 12DC contained in the proposed FSR Act that extended the application of this section to encompass financial products that involve interests in land (as defined in proposed subsection 12BAA) rather than simply securities that involve interests in land.

Maximum penalty in relation to offences under section 12GB

3.11 The Bill will amend paragraph 12GB(1)(f) to increase the maximum penalty that may be imposed by the Court where offences under section 12GB have been established to 2,000 penalty units (currently $210,000) in relation to an individual and 10,000 penalty units (currently $1,100,000) in relation to a body corporate.

Preference to be given to compensation for victims

3.12 A person who contravenes Division 2 of Part 2 may be required to pay a fine and compensate those who have suffered loss or damage as a result of the contravention. Where the person who has contravened the Division has insufficient financial resources for both, proposed section 12GCA will require the Court to give preference to compensating those who have suffered loss or damage.

3.13 The new section is not directed at allowing the Court to waive or reduce the fine where it considers that the defendant does not have sufficient financial resources, thereby allowing the defendant to avoid punishment. The Court may still impose a fine. The provision allows the Court to order that a person who has suffered loss or damage will be compensated before a fine will be paid into consolidated revenue. Where a fine is not paid, proceedings for enforcement and recovery may be commenced under section 12GC.

3.14 Alternatively, it would be open to the Court to make an additional order under proposed sections 12GLA or 12GLB. For example, the Court may make a community service or adverse publicity order where it feels that a defendants financial resources would prevent a fine from being recovered.

3.15 Proposed section 12GCA will protect consumers of financial services by providing a remedy where they have suffered loss or damage because of a contravention of the Division.

Punitive and non-punitive orders

3.16 The Bill will repeal section 12GE, which currently allows the Court to make orders requiring a person that has contravened a provision of Subdivision D to disclose information within their possession or to publish an advertisement as specified in the order. In place of section 12GE, the Bill inserts new sections 12GLA and 12GLB dealing with punitive and non-punitive orders.

3.17 Section 12GLA will enable the Court to make a non-punitive order in relation to a person who has engaged in contravening conduct. A non-punitive order includes a community service order, a probation order, an order requiring the disclosure of information and an order requiring an advertisement to be published.

3.18 Section 12GLB will enable the Court to make punitive orders requiring adverse publicity against a person who is guilty of an offence under section 12GB. An adverse publicity order may require a person to disclose information that they have in their possession or have access to. A person who is guilty of an offence under section 12GB may also be required to publish, at their own expense, an advertisement publicising the fact that they have breached Division 2 of Part 2, along with details of any remedial action they have been required to undertake.

Actions for damages under section 12GF

3.19 The Bill will amend section 12GF to allow a person who has suffered loss or damage as a consequence of a contravention of Subdivision C to seek damages under section 12GF. Currently, a contravention of the unconscionable conduct provisions of Division 2 of Part 2 will only give rise to an action under sections 12GD (injunctive relief) or 12GM (other orders).

3.20 In effect, section 12GM currently makes provision for a compensatory order similar in nature to an action for damages. Subsection 12GM(7) contains a non-exhaustive list of orders the Court may make under section 12GM, including an order that a person in contravention of the Division pay the person who suffered loss or damage the amount of the loss or damage (paragraph 12GM(7)(e)). The proposed amendment to section 12GF clarifies that damages are available for a contravention of Subdivision C.

Representative actions under section 12GM

3.21 The Bill will amend subsection 12GM(3), which prescribes the conditions that ASIC must satisfy before it may commence a representative action on behalf of a person or persons who have suffered loss or damage as a consequence of conduct that contravenes Division 2 of Part 2 of the Division.

3.22 The amendment will remove the current requirement for ASIC to commence legal action under sections 12GB or 12GC before it may commence a representative action under section 12GM. ASIC will still be required to obtain the prior written consent of the person or persons on behalf of whom it proposes to commence proceedings under section 12GM.

Intervention by ASIC

3.23 The Bill repeals the current section 12GO. In its place it inserts a new section 12GO that will allow ASIC to intervene in private proceedings instituted under Division 2 of Part 2. The Commission may only intervene with the leave of the Court. Where it does intervene, ASIC will become a party to the proceedings and, as such, the Court may make an order of costs against it.

3.24 The new section 12GO will, subject to the Court, allow ASIC to intervene in cases that raise issues of public interest that have not been fully addressed by the parties. Intervention by ASIC will also allow the Court to make a more balanced judgement in cases that have a significant impact on the community at large.

Extension of limitation periods

3.25 The Bill will amend sections 12GF and 12GM to extend the applicable limitation periods within which a person must commence an action under these sections from three years to six years after the day on which the cause of the action that relates to the conduct occurred.

Criminal Code Compliance

3.26 The Bill will amend the offence provisions throughout the ASIC Act (including offences against Subdivision D of Division 2 of Part 2). These amendments are necessary to make the ASIC Act compliant with the Commonwealth Criminal Code.

3.27 New section 4A states that Chapter 2 of the Criminal Code applies to all offences against the Act.

Technical Changes

3.28 The Bill makes minor technical changes to paragraph (a) of the definition of member in subsection 5(1) and the definition of misleading representations in section 12BB.

3.29 The Bill also corrects a typographical error in paragraph 12GM(2)(a).


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