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)

Transitional provisions relating to Financial Services Reform Act

4.1 Item 223 of Schedule 1 to the Bill will insert a new Part 10.2 into the proposed Corporations Act containing provisions relating to the transition to the proposed FSR Act. These transitional provisions are divided into two different categories.

4.2 The first category is provisions that deal with when the FSR regime begins to apply to different people. For example, in many circumstances these provisions would allow existing participants to choose when during the two-year transitional period the FSR regime begins to apply to them by opting in. Detailed provisions dealing with this issue are contained in the Bill; they are subsequently referred to as the phase in transitional provisions.

4.3 The second category of transitional provisions are those that deal with how a person moves from their existing regulatory regime (if any) into the FSR regime. Relevant issues here are, for example, the extent and way in which conduct done under a former regime is recognised under the FSR regime. The Bill does not set out the specific rules dealing with these situations but instead provides for regulation making powers and powers for ASIC to make such rules.

Phase in transitional provisions

4.4 These transitional provisions are divided into three categories, reflecting the three key areas of the proposed FSR Act that are subject to phasing in arrangements:

·
Licensing of financial markets and clearing and settlement facilities (Parts 7.2-7.5 of the proposed FSR Act);
·
Licensing, conduct and disclosure of financial service providers (Parts 7.6-7.8 of the proposed FSR Act); and
·
Product Disclosure (Part 7.9 of the proposed FSR Act).

4.5 Other provisions in the proposed FSR Act will apply immediately on commencement, subject to any regulations or ASIC determinations.

Preliminary

4.6 Proposed Subdivision A contains interpretative and other preliminary matters associated with proposed Part 10.2.

4.7 Proposed subsection 1410(1) defines a number of terms used throughout proposed Part 10.2. Of note, associated provisions is defined so that in relation to particular provisions of an Act it includes a range of other provisions in that Act that are necessary for their operation. These include regulations or other instruments, interpretative provisions, provisions that impose liability and any other provisions that affect their operation.

4.8 Proposed subsection 1410(2) and the definition of class in subsection (1) provide that regulations may specify what a class of financial products is for the purposes of a provision in which that concept is used.

4.9 Proposed subsection 1410(3) clarifies that where the transitional provisions preserve the operation of a provision that has been repealed in relation to a particular person, thing or matter that preserved provision only continues to have the effect, if any, that it had previously. That is, this subsection clarifies that the fact that a provision has been preserved in relation to a particular person should not, of itself, be thought to imply that that provision has any particular effect or extends the operation that the provision previously had.

Financial markets

4.10 The specific provisions addressing the time at which particular categories of financial markets will move into the new regulatory regime are contained in Subdivision B of proposed Part 10.2.

4.11 Currently, there are seven categories of authorised stock and futures markets. However, the proposed FSR Act includes only one set of provisions for the regulation of financial markets (Parts 7.2, 7.4 and 7.5).

4.12 Each of the categories of authorised stock and futures market under the current law is addressed separately in the transitional provisions. These are:

·
Markets being operated immediately prior to commencement by the Australian Stock Exchange Limited, and bodies corporate covered by approvals in force under subsections 769(2) or 1126(2) of the current law (see proposed sections 1413 to 1416);
·
Exempt stock markets and exempt futures markets (other than those which do not have an identifiable operator) (see proposed section 1418);
·
Exempt stock markets and exempt futures markets which do not have one identifiable operator (see proposed section 1419);
·
Stock markets of approved securities organisations (see proposed section 1420);
·
Special stock markets for unquoted interests in a registered scheme (see proposed section 1421); and
·
Other markets which are operated immediately before commencement but are not unauthorised stock or futures markets under the current law (see proposed section 1422).

4.13 Proposed section 1411 provides interpretative assistance in determining whether a market is being operated immediately before the 'FSR commencement'. This provision clarifies that just because trading is not actually occurring immediately before the commencement (for example, because of a routine temporary closure of the market) this not a reason to conclude that it is not being operated at that time.

4.14 Subdivision B also includes proposed section 1412 which addresses markets that have not started to operate by the 'FSR commencement'. It is anticipated that this provision will be particularly relevant to those exchanges which are approved by the Minister under the current law but have not commenced operation at that time.

4.15 In general terms, the effect of the provisions is to require:

·
The Minister to issue an Australian market licence with effect from 'FSR commencement' to the main existing markets which are operational at that time (proposed section 1413);

-
The Australian market licence issued to the main existing markets will reflect the financial products in relation to which they are currently entitled to provide services (see proposed subsections 1413(2) and (4));
-
The provisions relating to the content of operating rules and written procedures and Division 3 of Part 7.5 (compensation arrangements other than the National Guarantee Fund) are excluded from application during the transition period (and the comparable provisions of the current law applied) (see proposed sections 1414 and 1415);

·
The operators of other authorised markets to seek and obtain a new licence, or conceivably an exemption, under the proposed FSR Act by the end of the transition period (at most, 2 years)(see proposed sections 1418, 1420 and 1421);

-
Until that point, they are regulated under the current law;
-
There are, however, limitations on varying the services provided during the transitional period; and

·
The operators of other markets which were being operated immediately before commencement (but were not unauthorised stock or futures markets) to seek and obtain a new licence under the proposed FSR Act within 2 years (see proposed section 1422);

-
A similar transition period applies in relation to currently unregulated services which may be provided by the main markets which will be regulated under the FSR regime (see proposed section 1417).

4.16 As indicated above, special provision is made for the participants of exempt stock and futures markets, which do not have an identifiable single operator (see proposed section 1419). In brief, after the commencement of the proposed FSR Act and the appropriate transition period, they will be regulated under as financial service providers (if their conduct is such as to trigger the requirements for such a licence).

4.17 The transitional provisions are complicated by:

·
The number of categories of currently authorised markets; and
·
The change from the emphasis in the current law on approval of a body corporate as a stock or futures exchange (which then operates one or more stock or futures markets) to a focus on the market which is to be the subject of the licence (and the capacities of the operator to fulfil its obligations in relation to that market).

4.18 Extensive regulation making powers are included in the specific transitional provisions in Subdivision B (see proposed section 1416 and subsections 1417(3), 1418(5), 1419(5), 1420(5), 1421(5), 1422(3)). Additional regulation making powers are included in Division 2 - 'Other transitional provisions'. The aim of these powers is to assist in a smooth transition into the new regulatory scheme.

Clearing and settlement facilities

4.19 The specific provisions addressing the time at which particular categories of clearing and settlement facilities will move into the new regulatory regime are contained in Subdivision C of proposed Part 10.2

4.20 There are two categories of approved clearing houses under the current law:

·
The securities clearing house approved under section 779B; and
·
Any futures clearing house which was being operated by a body corporate in accordance with an approval under section 1131 of the current law.

4.21 In contrast, the proposed FSR Act includes only one set of provisions for the regulation of clearing and settlement facilities - Parts 7.3 and 7.4.

4.22 In general terms, the effect of the transitional provisions is to require:

·
The Minister to issue an Australian CS facility licence with effect from 'FSR commencement' to the 'securities clearing house' and those futures clearing houses approved under section 1131 which are operational at that time (see proposed sections 1425 to 1427);

-
The Australian CS facility licence issued to these entities will reflect the financial products in relation to which they are currently entitled to provide services;
-
The provisions relating to the contents of operating rules and written procedures are excluded from application during the transition period (see proposed section 1426(2)); and

·
The operators of other clearing and settlement facilities which were being operated immediately before commencement (but were not required to be approved under the current law) to seek and obtain a new licence under the proposed FSR Act within 2 years (see proposed section 1429);

-
There are, however, limitations on varying the services provided during the transitional period (see proposed paragraph 1429(2)(d));
-
A similar transition period applies in relation to any currently unregulated services which may be provided by approved clearing houses which will be regulated under the FSR regime (see proposed section 1428).

4.23 Proposed section 1423 provides interpretative assistance in determining whether a clearing and settlement facility is being operated immediately before the 'FSR commencement'. This provision clarifies that just because services were not actually being provided immediately before the commencement (for example, because of a routine temporary closure of the facility) this not a reason to conclude that it is not being operated at that time.

4.24 Subdivision C also includes proposed section 1424 which addresses facilities that have not started to operate by the 'FSR commencement'. It is anticipated that this provision will be particularly relevant to any clearing houses which are approved by the Minister under the current law but have not commenced operation by that time.

4.25 Extensive regulation making powers is included in the specific transitional provisions in Subdivision C (see proposed section 1427 and subsections 1428(3) and 1429(3)). Additional regulation making powers are included in Division 2 - 'Other transitional provisions' (see proposed section 1444). The aim of these provisions is to assist in a smooth transition into the new regulatory scheme.

Licensing, conduct and disclosure for financial service providers

4.26 Proposed Subdivision D provides for when Parts 7.6-7.8 of the proposed FSR Act will begin to apply to a person who carries on a financial services business.

Outline

4.27 The general approach is that:

·
All current financial service providers will have up to two years after commencement to obtain a new licence for their existing activities. During this time any existing regulatory regime will continue to apply to those people and their representatives;
·
New financial service providers who begin business after commencement or existing providers who enter into a new area of business after commencement will need to have an Australian financial services licence covering those activities; and
·
Many existing participants will be automatically entitled to an Australian financial services license covering their existing activities (called a streamlined licence) which they can obtain at any time during two years following commencement.

4.28 This approach reflects the rationale that those people who are currently engaging in a particular type of financial services business that will, under the proposed FSR Act, require a financial services licence should be given up to two years to make the necessary changes that will allow them to comply with the requirements of the FSR regime and to obtain a financial services licence.

Financial services providers

4.29 Proposed section 1430 defines who are existing financial services providers (regulated principals), what their pre-commencement activities are (regulated activities) and which provisions (if any) prior to commencement regulated these activities (relevant old legislation).

4.30 These existing participants are holders of: dealers licences, investment advisers licences, futures brokers licences and futures advisers licences under the proposed Corporations Act as well as insurance brokers, bodies regulated by APRA, foreign insurance agents and foreign exchange dealers. There is also provision for regulations to add to these categories of people (item 9 of the table in proposed section 1430).

4.31 Item 9 of the table in proposed section FSL1 includes within the category of regulated principal any other person who prior to commencement carried on activities that after commencement would require them to have a financial services licence. This is intended to ensure that all existing participants who are not currently subject to any existing regulatory regime or are exempt from such a regime gain the benefit of the two-year transitional period.

4.32 However, this does not apply where the person in carrying on those activities was contravening a requirement of a pre-commencement regime (proposed subsection 1430(2)). Therefore, a person who was carrying on a business of dealing in securities without the necessary licence prior to commencement would not gain the benefit of the two-year transitional period.

4.33 Where a person is in more than one of these categories, Subdivision D applies to them separately in relation to each category (proposed subsection 1430(3)). This could result in a person having to comply with the FSR regime in relation to some of their activities and at the same time having to comply with a former regulatory regime (if any) in relation to other activities.

4.34 Proposed section 1431 ensures that Parts 7.6 to 7.8, other than Subdivisions A and B of Division 4 and Division 5, of the proposed FSR Act do not apply to regulated principals and their regulated activities during the transitional period. This ensures that they are not subject to the obligation to obtain an Australian financial services licence during this period. However, this ceases to apply to a person when they are granted a financial services licence covering those activities, are or would be covered by an exemption from holding such a licence or cease to be a regulated principal (for example, because their securities dealers licence is revoked).

4.35 The exclusion of Subdivisions A and B of Division 4 and Division 5 ensures that those provisions dealing with applying for and being granted a licence and with authorising representatives do apply to a person during their transitional period. If this were not the case, they would be unable to apply for and be granted a licence during this period.

4.36 Proposed subsection 1431(2) deals with how Division 7 of Part 7.6 applies to a person who is still in their transitional period. It is intended to ensure that a person can do any of the things provided for in that Division prior to actually becoming a licensee, with the result that those things do not take effect until their licence is granted. Therefore, a person currently carrying on a financial services business who applies for a licence can, for example, give authorisations to those people who they will need to authorise before they are actually granted their licence. This could be used by a financial services provider to remove the possibility that there could be a gap between when they are granted their licence and when they can authorise their representatives. Otherwise, there could be a period of time when those representative were unable to provide services on behalf of the licensee. It will allow for a seamless transition from an existing regime to the FSR regime.

4.37 Proposed subsection 1431(3) provides that where an exemption or licence that a regulated principal acquires during the transitional period under subsection (1) covers only part of a regulated principals activities, that principal continues to be exempt from Parts 7.6-7.8 in relation to the remainder of their regulated activities.

4.38 Proposed section 1432 provides that for a regulated principal, their previous regulatory regime (the relevant old legislation as set out in 1430, which generally also include any associated provisions) continues to apply until they become subject to Parts 7.6-7.8 (see proposed subsection 1432(2)). These provisions would include provisions allowing the principal to appoint and remove representatives. This previous regime continues to apply not only to the regulated principal but also, where necessary, to other people (see proposed paragraph 1432(1)(b)). This ensures that where obligations are placed on other people in relation to the regulated principal, those other people will still be subject to these obligations.

Streamlined licensing

4.39 Proposed section 1433 provides the mechanism for some existing licensees to automatically obtain a licence covering their existing activities. The purpose of this mechanism is to provide a simpler and more appropriate method for those existing participants who wish only to continue to engage in their existing activities to obtain a licence without going through the entire licensing process.

4.40 A person who obtains such a licence and wishes to then extend the financial services that they can provide, would have to apply for a variation to the conditions on their licence in the usual manner.

4.41 This avenue is only available to those existing participants who are already subject to a consumer protection licensing regime, those who are currently not but are, for example, prudentially regulated or are not subject to any regulation at all must obtain a licence using the normal process. It also does not include people who are exempted participants under proposed section 1419.

4.42 There is provision for regulations to exclude certain classes of people from obtaining a streamlined licence (proposed subparagraph 1433(1)(a)(ii) and subsection 1433(3)). This will allow categories of people to be excluded by regulations if it is appropriate that their applications be subject to scrutiny by ASIC.

4.43 Applications for streamlined licences must include a statement by the licensee in which they state that they will comply with their obligations as a financial services licensee (proposed paragraph 1433(2)(b)). The purpose of this requirement is to ensure that those applying for streamlined licences appreciate that although they are entitled to such a licence, it will entail a change in the obligations to which they are subject.

4.44 In issuing a streamlined licence ASIC does not have any discretion and must grant the licence if it is made in accordance with proposed section 913A (proposed paragraph 1433(2)(c)). ASIC must impose a condition on the licence specifying the financial services that the licensee can provide and these must be as close a possible to regulated activities of the applicant (see paragraph 1433(2)(d)). ASIC can, however, at the time of issue, or at a subsequent time, impose additional conditions on the licence in the normal manner.

Qualified licences for multi-agents

4.45 Proposed section 1434 will give insurance agents who represent more than one principal (multi-agents as defined in proposed subsection 1434(1)) the option of applying for a special type of financial services licence (called a qualified licence) during the two year transitional period.

4.46 In order to be eligible for such a licence a person must have been a multi-agent immediately prior to commencement of the proposed FSR Act and apply for the licence either while they are still an agent for one of their insurers or within six months of ceasing to be an agent for any one of those insurers (proposed subsection 1434(2)).

4.47 This qualified licence will not require the applicant to comply with paragraphs 912A(e) or (f) of the proposed FSR Act either at the time the licence is issued or subsequently (proposed paragraph 1434(2)(d) and subparagraph 1434(3)(a)(i)). These provisions require a licensee to maintain the competence to provide financial services and to ensure that their representatives are adequately trained and competent to provide the financial services.

4.48 Qualified licences will expire at the end of the two-year transitional period. A person who held such a licence would then have to apply for a normal licence which would require them to meet the competency standards.

4.49 A qualified licence will only cover dealing and providing advice in relation to risk insurance and investment life insurance products (proposed paragraph 1434(2)(e)) and cannot be extended to other products (proposed paragraph 1434(3)(b)). In addition, the Financial Services Guide provided by these licensees and their authorised representatives would have to disclose the fact that they have a qualified licence and do not have to meet competency standards (proposed subparagraph 1434(3)(a)(ii)).

4.50 The purpose of qualified licences is to facilitate the transition for multi-agents who decide that they want to continue providing financial services under the FSR regime not as an agent but as a principal. A qualified licence will provide these agents with the necessary time to meet the competency requirements normally imposed on licensees.

Applications relating to existing activities

4.51 Proposed section 1435 deals with applications for licences made during the transitional period. The purpose of this provision is to clarify that ASIC can take into account certain factors when considering such applications. Specifically, it provides that where the applicant, or a related body corporate of the applicant, is currently providing financial services that are the same as or are similar to those to which the application relates, ASIC may consider the conduct and experience of that body when determining whether or not to grant the applicant a licence. For example, ASIC could (if it wished) then rely on this previous experience and conduct in determining that it has no reason to believe that the applicant will not fulfil its obligations as a licensee.

4.52 ASIC may, however, take any other factors into account when considering such an application. This provision is intended only to clarify and highlight particular factors, which ASIC may choose to take into account and in no way limits other factors which ASIC may want to consider (proposed subsection 1435(3)).

4.53 However, this proposed section does not apply to an application for a streamlined licence as ASIC has not discretion in determining whether or not to grant a streamlined licence.

4.54 This provision will be of particular use where a corporate group wants to re-structure in such a way that different bodies will hold licences but the overall scope of the financial services offered by the group remains unchanged. In such circumstances the various bodies would be ineligible for streamlining under proposed section 1433, but proposed section 1435 enables ASIC to consider their previous activities in granting them licenses. It will also be of use where people wish to obtain a licence for activities which prior to the FSR regime do not require any form of licence or approval. Again, in these circumstances they would not be eligible for a streamlined licence.

Representatives

4.55 Proposed section 1436 deals with the treatment of representatives of financial service providers during the transitional period.

4.56 The general approach is that in the transitional period a representative (the agent) of a financial service provider (the principal) will be able to continue to act on behalf of that principal until the principal transitions into the FSR regime. However, once the principal moves into the FSR regime, their representatives will cease to be covered by any relevant old legislation and will also have to comply with the FSR regime. A principal may then need to authorise their former representatives if those representatives are to continue to act on behalf of the principal.

4.57 A representative is any agent of a regulated principal and can include employees or directors of the principal (proposed subsection 1436(1)).

4.58 For any such representative, Parts 7.6-7.8 do not apply to that representative (proposed subsection 1436(2)) in relation to those activities to which those provisions also do not apply to the representatives principal and for which the representative acts as an agent of the principal. Similarly, relevant old legislation that apply to the representatives principal and which relate to activities for which the representative acts for or on behalf of the principal also apply to that representative (proposed subsection 1436(3)).

Exemptions and Modifications

4.59 ASIC will have the power to make exemptions and modifications to the provisions in proposed Subdivision D (proposed section 1437). These powers have been included to ensure that ASIC is able to modify the application of provisions in this subdivision where they would otherwise produce an undesirable result. It may, for example, be necessary to apply certain provisions differently in relation to specific categories of people in order to achieve an outcome that is consistent with the overall objective of these provisions. The inclusion of such powers is particularly desirable in the context of the very wide range of people who may be subject to the FSR licensing provisions and the different circumstances which might apply to them.

4.60 The exemption and modification powers apply to all provisions in proposed Subdivision D and any provisions that make up a former regime which may continue to apply to a person in the transitional period under this subdivision (proposed subsection 1437(1)).

4.61 ASICs power under this provision extends to exempting people from provisions and modifying their effect in relation to people. This can include extending the two year transitional period (proposed paragraph 1437(3)(a)). However, it is envisaged that this will occur only in very limited situations such as where circumstances beyond the control of the relevant person necessitate the extension of their transitional period. Exemptions and modifications cannot result in the application of provisions to people to whom that they would not otherwise apply (proposed paragraph 1437(3)(a)).

4.62 Exemptions and modifications can be made subject to conditions that can be enforced by a Court on the application of ASIC.

4.63 Modifications and declarations must be in writing and be notified in the Gazette. In order for a person to be convicted of an offence due to the effect of an exemption or modification, ASIC must have notified the person concerned in writing or the declaration must have been made available on the Internet by ASIC. This ensures that people are not subject to prosecution for offences that they could not have been aware of.

Financial Product Disclosure

4.64 The general approach to the application of Part 7.9 is:

·
For new products, Part 7.9 will apply from commencement;
·
For existing products, Part 7.9 will not apply for a period of up to two years. The product issuer can elect when during this period Part 7.9 begins to apply; and
·
A limited number of provisions in Part 7.9 will apply immediately on commencement to all products.

4.65 Proposed subsection 1438(1) defines the products to which this subdivision applies. These are all financial products other than financial products which are in a class first issued by a product issuer after FSR commencement. As discussed in paragraph 4.8, regulations may deal with the precise meaning of class of financial products. Therefore, where a product issuer continues to offer products of a type that they offered prior to commencement, these are included in these transitional arrangements. However, where they issue products in a particular class for the first time after commencement, then they will be subject to Part 7.9 immediately.

4.66 Proposed subsection 1438(2) defines those provisions in Part 7.9 which are the new product disclosure provisions. Those provisions are all the provisions of Part 7.9 other than a small number related to: the provision of information to existing holders of superannuation and retirement savings account (RSA) products, dealing with money, confirmation of transactions, cooling-off periods, short selling and contracting out of Part 7.9. These are all provisions which can apply immediately on commencement without requiring the significant alterations needed to justify a transitional period.

4.67 Proposed subsection 1438(3) provides that the new product disclosure provisions do not apply to existing financial products for a period of up to two years beginning on commencement of the proposed FSR Act and ending when the product issuer lodges a notification with ASIC indicating that they wish to opt in in relation to that product (that is, they want all the new product disclosure provisions to begin to apply to that financial product) (proposed paragraph 1438(3)(b)). The date specified in such a notice must be at least 28 days after the date on which the notice is lodged (proposed subparagraph 1438(3)(b)(ii)).

4.68 Product issuers may lodge an opt in notice prior to commencement and they can decide to dispense with the transitional period entirely if they wish. They can do this by lodging an opt in notice specifying commencement as the opt in date (proposed subsection 1438(4)).

4.69 To provide product issuers with flexibility in deciding when to opt in this notification can be amended or revoked up to 28 days before the time it begins to apply. Such a variation or revocation must be lodged in writing with ASIC (proposed subsection 1438(5)).

4.70 ASIC may make determinations setting out the steps which a product issuer who has opted in must take to notify people that they have opted in (proposed subsection 1438(6)). These determinations may specify different requirements for different classes of financial products and are subject to disallowance (proposed subsection 1438(7)).

4.71 ASIC must then take reasonable steps to ensure that information about such opt in notices and any subsequent variations or revocations is available at their offices and on the Internet for the duration of the transitional period (proposed subsection 1438(8)). This will ensure that information about what regime a particular financial product is subject to will be publicly available.

4.72 Proposed section 1439 deals with when a person may be liable for an offence against or based on a provision of Part 7.9 of the proposed FSR Act during the transitional period.

4.73 Where Part 7.9 applies to a financial product because the relevant product issuer has lodged an opt in notice then for an offence against or based on proposed Part 7.9 the prosecution must prove one of two additional elements, either:

·
The defendant knew or was reckless as to whether the relevant product issuer had opted in in relation to that product (proposed paragraph 1439(1)(c)); or
·
The defendant did not know and was not reckless about the opting in arrangements for that product, but the conduct would still have contravened a provision of the former regime (if any) that applied to that product (proposed paragraph 1439(1)(d)).

4.74 The purpose of this provision is to ensure that people who do not know and have not been reckless about whether or not the proposed Part 7.9 applies to a financial product are not convicted of offences against the new regime. However, this does not apply where the conduct would also have contravened the former regime. The prosecution effectively has a choice of which situation it will attempt to prove. The result is that where the defendant did not know and was not reckless about whether an opt in had taken place and continued to comply with regime that used to apply, they will not be guilty of an offence under proposed Part 7.9 during the transitional period.

4.75 During the transitional period, while a financial product is not subject to the FSR regime in Part 7.9, the existing regime (if any) for that product continues to apply (proposed section 1440). These regimes are any relevant old legislation and their associated provisions which imposed disclosure requirements in relation to those products.

4.76 When a product issuer has opted in in relation to a financial product, Part 7.9 of the FSR regime will apply to that product. This has the effect of then applying Part 7.9 not just to the product issuer but also to any other person on whom those provisions apply to (for example by placing obligations, rights or liabilities on them). This includes all regulated persons as defined in section 1011B of the proposed FSR Act. However, during the transitional period, many people will not fall within the definition of regulated person as they will still be subject to their existing regime. To overcome this difficulty proposed section 1441 provides that regulated principals and their representatives must comply with Part 7.9 as if they were regulated persons. Therefore, a person who in their transitional period and has not yet obtained an Australian financial services licence will still have to comply Part 7.9 in relation to new products or those products for which the product issuer has opted in.

Exemptions and Modifications

4.77 ASIC has the power to make exemptions and modifications to the provisions in Subdivision E (see proposed section 1442). These powers have been included to ensure that ASIC is able to modify the application of provisions in this subdivision where they would otherwise produce an undesirable result. It may, for example, be necessary to apply certain provisions differently in relation to specific categories of people or products in order to achieve an outcome that is consistent with the overall objective of this subdivision. The inclusion of such powers is particularly desirable in the context of the very wide range of financial products that are subject to the product disclosure provisions in the proposed FSR Act and the range of people who will be affected by the application of these provisions.

4.78 The exemption and modification powers in proposed section 1442 are based on those applying to Subdivision D (see paragraphs 4.59 to 4.63 above).

Regulation and ASIC determination powers

4.79 Proposed Division 2 provides the mechanism for dealing with issues related to how a person moves from their existing regime (if any) to the FSR regime as discussed above in paragraph 4.3. It is proposed that matters of this nature will be able to dealt with either by regulations or through determinations made by ASIC.

4.80 While it is envisaged that significant transitional matters will be dealt with by regulation prior to the commencement of the new regime, there is still considerable scope for transitional issues to emerge subsequently. This is due to the wide ambit of the FSR regime and the range of existing regimes that are being replaced by it. These provisions will ensure that ASIC is able to respond in an appropriate and timely manner to particular transitional issues that emerge during the transitional period.

4.81 In addition, many of these issues may be confined to individuals or particular classes of individuals who may face a particular issue or difficulty in transitioning into the FSR regime. Such issues which are confined to a limited group of people are more efficiently and appropriately dealt with in determinations made by ASIC than by regulations.

Regulations

4.82 Generally regulations under proposed section 1444 may deal with transitional, saving or application matters related to the transition from a former regime to the FSR regime. In particular, these regulations may deal with the fact that because of the phase in transitional provisions, different parts of the new regime may apply to different people at different times. This is intended to deal with situations where a number of people interact with each other when some of them are subject to the new regime and others are subject to existing regimes. Similar situations may arise where a single person has to comply with some aspects of the new regime (for example, Part 7.9 relating to product disclosure) and aspects of an old regime (parts of the pre-FSR Corporations Act because the person has not yet gained a financial services licence).

4.83 Regulations made under proposed section 1444 cannot, however, override the provisions in Division 1 relating to the phasing-in of the transitional arrangements or regulations and determinations made under provisions of Division 1. Sufficient flexibility in the application of those provisions is provided for in Division 1 through a number of regulation making powers and, in some cases, ASIC exemption and modification powers. However, regulations under this section could add to or deal with additional matters similar to the subject matter in Division 1 provided they were not inconsistent with it.

4.84 Proposed subsection 1444(3) clarifies the flexible nature of these regulations by providing that they may deal with transitional issues in a number of ways, including by specifying rules or applying provisions of Commonwealth laws including repealed laws.

4.85 Proposed subsection 1444(4) allows the regulations to provide that certain things or instruments continue to have effect after the commencement of the proposed FSR Act, subject to any specified modifications. In addition, the regulations can provide for the identification of these things and instruments, the purpose for which they continue to have effect and any modifications to be determined by a particular person. This provision is necessary to ensure that a range of things and instruments (for example, exemptions and modifications by ASIC) can be easily preserved without a need for them to be individually redone or remade. Proposed subsection 1444(5) ensures that the individual identification and modification of these things or instruments can be done by a specified individual and does not have to be done by regulation. Otherwise, it might be necessary for regulations to specify a significant degree of detail that would be cumbersome and might considerably reduce the speed with which transitional issues can be addressed.

4.86 Regulations made under these provisions can be retrospective (proposed subsection 1444(6)). Although it is not envisaged that this be done frequently, the ability to do this is necessary in cases where a transitional issue or difficulty might only become apparent after a particular event. In these situations it may be necessary for regulations to be retrospective in order for them to be able to effectively remedy the issue.

ASIC determinations

4.87 Proposed section 1445 allows for ASIC to make determinations dealing with transitional issues. Subject to the following matters, these determinations have the same scope and may deal with issues in the same manner as regulations made under proposed section 1444.

4.88 Determinations are subject to disallowance (proposed subsection 1445(2)). This is appropriate because of the significant potential scope and subject matter of determinations and will ensure that they are subject to an appropriate level of scrutiny.

4.89 Determinations will be able to override inconsistent regulations made under propose section 1444 but not where the regulations specifically provide that they are to have effect despite any determinations.


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