House of Representatives

Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 5 The standards body

Outline of chapter

5.1 Schedule 1 to the Bill amends the Corporations Act to allow the Minister to declare a Commonwealth company limited by guarantee to be the body in relation to the education standards and the Code. It also sets out the powers, duties and obligations of the body.

Comparison of key features of the new law and current law

New law Current law
A standards body will make legislative instruments which set out the education standards and the Code. It will also approve foreign qualifications. No equivalent.
The Minister may declare a Commonwealth company limited by guarantee to be the standards body. The Minister may also revoke the declaration. No equivalent.

Summary of new law

5.2 The Bill provides for a new body to approve foreign qualifications and develop the education standards described in Chapter 2. The new body will also set the Code discussed in Chapter 3.

5.3 The Minister may declare a Commonwealth company limited by guarantee to be the body.

5.4 The Minister must be notified of any significant changes to the body's constitution. The Minister can disallow any modifications to the body's constitution.

5.5 If the Minister considers that the body is not complying with its obligations the Minister may give the body a written direction. The Minister may also declare in writing that the nominated company ceases to be the body.

5.6 There is a statutory review of the framework which must be commenced by 31 December 2026.

Detailed explanation of new law

Functions and powers of the body

5.7 The body is required to be a Commonwealth company incorporated under the Corporations Act and it is to be limited by guarantee. [Schedule 1, Part 1, item 12, subsection 921X(2)]

5.8 The body has all of the powers of a natural person under common law and Chapter 2B of the Corporations Act, including the power to enter into contracts. The directors of the company also need to act in accordance with the company's constitution. As the body is a Commonwealth entity, it is subject to Chapter 3 of the Public Governance, Performance and Accountability Act 2013 (PGPA). There are also additional functions and powers set out in the Bill.

5.9 The Bill provides that the body must develop and set the education and ethical standards described in Chapters 2 and 3 of this explanatory memorandum. This includes:

·
approving degrees or higher or equivalent qualifications;
·
approving foreign qualifications;
·
approving and/or administering the exam;
·
determining the requirements for the professional year;
·
setting supervision or other requirements for provisional relevant providers;
·
selecting an appropriate common term for provisional relevant providers;
·
determining the CPD requirements in relation to licensees' CPD years;
·
determining the requirements for financial advisers whose CPD year changes and whether to modify the operation of the Corporations Act for these individuals, for example, by requiring licensees to report non-compliance with the CPD requirement at a time other than at the end of their new CPD year;
·
determining the bridging course requirements for existing providers; and
·
setting the Code.

[Schedule 1, Part 1, items 12, sections 921B, 921U and 921V, and Schedule 1, Part 2, item 27, subsection 1546B(7)]

5.10 The body has a broad discretion when setting these standards. Some of the issues that it may need to consider are shown in the table below.

Table 5.1 : Issues for the body to consider

Education Requirement Issues
Degree

·
which courses are relevant to the provision of financial advice and should be approved
·
which foreign degrees (if any) should be approved
·
whether to approve some or all of the courses offered by providers other than universities

Exam

·
length, format and assessable content for the exam
·
whether to include different modules for different product classes

Professional year

·
length (noting that it must be at least one year)
·
amount and type of work and training that new advisers should be required to complete
·
whether the professional year should include a requirement to complete CPD courses
·
the disclosure and other supervision requirements that should apply to provisional relevant providers

CPD

·
required number of hours of CPD
·
the courses that meet the CPD requirement
·
whether special rules should apply to individuals who work part-time or take extended leave during the CPD year
·
rules for individuals who become a relevant provider part way through a CPD year
·
rules for individuals whose CPD year changes because:

-
the individual change licensees and the new licensee has a different CPD year to their previous licensee; or
-
the licensee changes the start date of their CPD year

General considerations

·
how to appropriately take into account product specialisations
·
how to reduce misalignment with the regime for tax financial advisers in the TASA

5.11 The standards set by the body which are of general application must be made by legislative instrument. They are subject to parliamentary scrutiny and may be disallowed. Approvals relating to a particular financial adviser who completed a foreign qualification do not need to be made by legislative instrument but they are subject to merits review in the same way as decisions made by ASIC. [Schedule 1, item 12, sections 921U and 921V]

5.12 The body must review the standards and the Code regularly, and they will sunset after 10 years if they are not remade (see the Legislation Act 2003). [Schedule 1, Part 1, item 12, paragraph 921U(1)(b)]

5.13 When setting and reviewing standards, the body must consult financial services licensees and practitioners, consumer organisations, professional associations, industry associations, ASIC, the Treasury and any other stakeholders that it considers appropriate, such as the Tax Practitioners Board. The body is not required to consult every individual within that group or ensure that every individual actually provides input. Rather, it is sufficient if the body gives the group as a whole reasonable opportunity to comment. [Schedule 1, Part 1, item 12, subsection 921U(6)]

5.14 It is expected that, in many cases, the body will satisfy the consultation requirement by making the proposed legislative instrument available on its website and inviting persons to comment on it. If the body fails to comply with the consultation requirement, the legislative instrument remains valid. [Schedule 1, Part 1, item 12, subsections 921U(7) to (8)]

5.15 The Code must not commence earlier than 30 days after it is registered on the Federal Register of Legislation established under the Legislation Act 2003. A similar rule applies to any future amendment to the Code. [Schedule 1, Part 1, item 12, section 921W]

5.16 The body may charge fees for its services. For example, it may choose to charge a fee for individuals to sit the exam. The body is not required, or expected, to recover all of its costs by charging a fee for service. [Schedule 1, Part 1, item 12, subsection 921U(9)]

Board of directors

5.17 The directors of the body are appointed by the Minister [Schedule 1, Part 1, item 12, paragraph 921X(2)(x)]. When deciding on the appointments, the Minister may wish to consider candidates nominated by stakeholders.

5.18 The Minister also has the power to remove or suspend a director under subsection 33(4) of the Acts Interpretation Act 1901.

5.19 The Minister's power to appoint all of the directors will give the Commonwealth control of the company for the purposes of the PGPA. This means that the body will be classified as a 'Commonwealth company' under section 89 of the PGPA and will be subject to the requirements in Chapter 3 of that Act.

5.20 The body must have nine directors, including the chair. The board must comprise of at least:

·
three directors with experience in operating a financial services business or providing a financial service;
·
three directors with experience in representing consumers in relation to financial services;
·
one director with practical experience in designing, or the requirements of, educational courses or degrees; and
·
one ethicist.

[Schedule 1, Part 1, item 12, paragraph 921X(2)(c)]

5.21 A single director may satisfy two or more of the criteria as to experience, for example, the same person may be the expert in setting education standards and the ethicist. Nevertheless, the body must have nine directors, even though it could meet the criteria as to experience with a lesser number of directors.

5.22 To reduce the risk of conflicts of interests and protect the independence of the board, there is a prohibition on directors holding a managerial or executive position in an industry association or a consumer association [Schedule 1, Part 1, item 12, subparagraph 921X(2)(c)(viii)]. A person who held a managerial or executive position in an industry or consumer association in the past may become a director, provided that they do not hold that managerial or executive position during the period of their directorship. There is no prohibition on a director being a member of an industry or consumer association, however, the director will sit on the board in a personal capacity and not as a representative of the association. In other words, the director is not simply a spokesperson for the industry or consumer association and must make his or her own decision. [Schedule 1, Part 1, item 12, subparagraph 921X(2)(c)(ix)]

5.23 There is no prohibition on directors holding a senior position at an education provider which delivers courses for relevant providers. This reflects the fact there is a relatively small pool of persons who have practical experience in designing education courses and degrees.

5.24 As the new body will be a company, the directors must also comply with the rules relating to conflicts of interest in existing sections 191 and 192 of the Corporations Act.

Example 5.1 : Persons prohibited from being directors Maxwell is a relevant provider employed by a small licensee. He has a position in middle management at that licensee and he is a member of a professional association called Amazing Advisers Association.Nancy is the head of Amazing Advisers Association.Olivia is on the board of a body which resolves disputes between consumers and financial services providers. She was previously on the board of a consumer association but she no longer holds that position.Professor Smith is the Dean at Leading Australia University. Leading Australia University offers over 100 degrees and some of those degrees relate to financial planning.The Minister may appoint Maxwell, Olivia and Professor Smith as three of the body's directors. Maxwell, Olivia and Professor Smith do not currently hold a managerial or executive office in a professional association or an association which represents consumers.With respect to Maxwell, a licensee is not a professional association. There is no prohibition on a person being a member of a professional association, provided that they do not hold a managerial or executive position in that professional association.In the case of Olivia, the dispute-resolution body does not 'represent' consumers. Olivia is no longer on the board of a consumer association and the new law only prohibits a person from being a director of a consumer association and the new body at the same time.On the other hand, Nancy cannot be appointed as a director unless she resigns from her position as the head of Amazing Advisers Association.

5.25 Directors may resign from their positions on the body by writing to the Minister and the body. The resignation will take effect on the day that it is received by both the Minister and the body, or a later day specified in the resignation. If a director resigns, the Minister will need to appoint an additional director to ensure that the requirements set out in paragraph 5.14 are satisfied. [Schedule 1, Part 1, item 12, subparagraphs 921X(2)(c)(xi) and (xii)]

Declaration of the body by the Minister

5.26 The Bill provides for the Minister to declare, in writing, a company limited by guarantee to be the body. The declaration must specify the date from which the company is to act as the body. The declaration must be tabled in Parliament and registered on the Federal Register of Legislation as a notifiable instrument. [Schedule 1, Part 1, item 12, section 921X]

5.27 The Minister may only declare a body if the following prerequisites are met:

·
the body is a company limited by guarantee;
·
the Minister is satisfied that the body will comply with its obligations under the Corporations Act and other relevant laws;
·
the company's constitution states that the company must exercise the functions set out in section 921U and contains details about the composition of the board, and the appointment and resignation processes.

[Schedule 1, Part 1, item 12, section 921X]

5.28 The Minister may at any time declare that the company ceases to be the body. The declaration must state the date from which it takes effect. Any revocation by the Minister must be tabled in Parliament as soon as practicable. [Schedule 1, Part 1, item 12, section 921Y]

5.29 The Minister may specify in the declaration revoking the body's approval whether the standards, the Code and the approvals relating to foreign qualifications will continue in force, or whether they will be replaced by other requirements specified by the Minister. Once a new body is nominated, it may develop new standards and a Code. [Schedule 1, Part 1, item 12, subsections 921Y(2), (5) and (6)]

5.30 The body must notify the Minister of significant changes to its constitution. The notice must set out the text of the change, specify the date on which it is to take effect, and explain the purpose of the change. If no notice is provided within 21 days after the change is made the change ceases to have effect. In order to assist readers, the Bill clarifies that any such notice made under this section is not a legislative instrument within the meaning of section 8 of the Legislation Act 2003. It does not provide an actual exemption from the Legislation Act 2003. [Schedule 1, Part 1, item 12, section 921Z]

5.31 The body does needs to notify the Minister of changes to the constitution that are not significant. For example, no notice is needed for amendments which are technical or minor, or relate to small administrative matters. [Schedule 1, Part 1, item 12, subsection 921Z(1)]

5.32 The Minister may disallow all or part of the change within 28 days of receiving a notice. The Minister must notify the body as soon as practicable of the Minister's disallowance. The change ceases to have effect from the day the body receives the Minister's notification. [Schedule 1, Part 1, item 12, section 921ZA]

5.33 If the Minister considers that the body is not complying with its obligations under the Corporations Act or an arrangement it has with the Government, the Minister may give the body a written direction. The body must comply with such a direction. The Minister may at any time vary or revoke such a direction. [Schedule 1, Part 1, item 12, subsections 921ZB(1) to (3)]

5.34 The directions power provides a mechanism for the Minister to intervene if he or she has a significant concern. It is not designed to allow the director to become the controlling mind of the body or a de facto director and the new law explicitly states that it does not render the Minister a shadow director of the body. [Schedule 1, Part 1, item 12, subsection 921ZB(4)]

5.35 There is an established practice of Ministers only using their directions powers in very exceptional circumstances. For example, the Minister has had the power to direct ASIC and the Australian Prudential Regulatory Authority for over 15 years, [1] but the power to direct ASIC has only been used once and the power to direct the Australian Prudential Regulatory Authority has never been used.

5.36 Every year, the body must prepare an annual report in accordance with Chapter 2M of the Corporations Act. The report must be given to the Minister and published on the body's website as soon as practicable after the end of each financial year. If the body is appointed during the course of a financial year it must delay its first annual report until the conclusion of the following financial year. This report must cover the whole period from the body's appointment until the end of the following financial year. [Schedule 1, Part 1, item 12, section 921ZC and Schedule 1, Part 2, item 27, section 1546H]

Statutory review

5.37 A review of the new framework must be commenced before 31 December 2026. By this time, all elements of the new framework should have been in place for at least two years. [Schedule 1, Part 2, item 27, section 1546ZB]

5.38 The legislation does not specify the length of the review or the person who will conduct the review. However, the reviewer and the length of the review should be appropriate to ensure that the review is able to consider the suitability of the new framework.

5.39 The statutory review is in addition to the regular reviews of the body's standards, the Code and compliance schemes (see paragraphs 5.6 and 5.7 above).

Application and transitional provisions

5.40 The amendments in this Chapter, with the exception of the provision in section 921W requiring the body to prepare an annual report, commence on the day after the Bill receives Royal Assent. The annual report provision in section 921W commences on 1 July 2017. [Schedule 1, Part 2, item 27, section 1546H]


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