House of Representatives

Treasury Laws Amendment (2017 Measures No. 5) Bill 2017

ASIC Supervisory Cost Recovery Levy Amendment Bill 2017

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 3 ASIC rule making powers

Outline of chapter

3.1 The Australian Securities and Investments Commission (ASIC) is given two rule making powers. The first rule making power enables ASIC to make rules setting out the requirements that apply to the financial benchmarks subject to the licensing regime. The second rule making power enables ASIC to make rules that confer powers for ASIC to compel certain activities in relation to licensed significant financial benchmarks only.

Summary of new law

3.2 ASIC may make financial benchmark rules setting out in detail the requirements that apply to benchmark administrator licensees and the financial benchmarks that are subject to the licensing regime. These rules may also deal with the responsibilities of entities whose activities result in the provision of data or information to benchmark administrator licensees for the generation or administration of the financial benchmarks subject to the licensing regime.

3.3 ASIC may also make compelled financial benchmark rules. These rules are only relevant to licensed significant financial benchmarks. Under these rules, ASIC can require certain entities to provide information to a significant benchmark administrator licensee or ASIC, or require a benchmark administrator licensee to continue generating or administering a significant financial benchmark specified in its licence.

3.4 Obligations are imposed on ASIC in making the rules, including an obligation to have regard to certain matters and to consult publicly.

3.5 A compliance and enforcement regime is established, including offences, civil penalties and alternatives to civil penalties, such as enforceable undertakings and infringement notices, as well as a regulation-making power for additional alternatives to civil penalties to be provided.

Comparison of key features of new law and current law

New law Current law
ASIC may make financial benchmark rules setting out in detail the requirements that apply to the financial benchmarks that are subject to the licensing regime. ASIC may also make compelled financial benchmark rules that can require an entity to provide data or information on a licensed significant benchmark to a significant benchmark administrator licensee or ASIC, or require a benchmark administrator licensee to continue operating a significant financial benchmark specified in its licence.

Obligations are imposed on ASIC in making the rules, including an obligation to have regard to certain matters and to consult.

A compliance and enforcement regime is established, including offences, civil penalties and alternatives to civil penalties.

No current law.

Detailed explanation of new law

Schedule 1 - Amendments

Part 1 - Main amendments

Division 3 - Financial benchmark rules and compelled financial benchmark rules

Subdivision A - Power to make financial benchmark rules

3.6 ASIC may make financial benchmark rules as permitted by the Bill. Such rules are legislative instruments and are therefore subject to parliamentary disallowance. [Schedule 1, item 1, section 908CA]

3.7 The main matters that the rules may deal with include the following:

·
the responsibilities of benchmark administrator licensees and their governance, management and resources;
·
the generation and administration of financial benchmarks;
·
the manner in which licensees provide their services and the conditions (including fees) on which they provide access to their benchmarks, which may include requirements to provide open and non-discriminatory access, including with regard to price;
·
business continuity planning for financial benchmarks, including the possible transition of such benchmarks to new licensees;
·
the disclosure of the conditions (including fees) applying to the licensee's services;
·
the handling and use of financial benchmark data held by the licensee;
·
the responsibilities of entities that directly or indirectly provide data or information to licensed benchmark administrators for use in the generation or administration of their benchmarks;
·
reporting to ASIC and other regulators; and
·
any matters prescribed by regulations. [Schedule 1, item 1, section 908CB]

3.8 The rules may also address matters that are incidental or related to the matters set out in section 980CB, including the following:

·
the persons who are required to comply with the rules, subject to any exemptions provided by regulations made under section 908CP;
·
the manner and form in which such persons must comply with the rules;
·
the circumstances in which relief may be provided from the rules;
·
record-keeping requirements; and
·
any other matters prescribed in the Corporations Act 2001 (the Corporations Act). [Schedule 1, item 1, section 908CC]

Subdivision B - Power to make compelled financial benchmark rules

3.9 ASIC may make compelled financial benchmark rules as set out in the Bill. [Schedule 1, item 1, section 908CD]

3.10 Ordinarily, entities participating in the markets underlying a financial benchmark would be expected to voluntarily contribute to the benchmark setting process. For example, by quoting prices on a trading venue, trading in certain products on a trading venue, and/or submitting prices to the benchmark administrator.

3.11 Benchmark administrators would in the ordinary course of business be expected to continue operating their benchmarks. However, in rare and exceptional cases, a benchmark could cease to be published due to benchmark participants or the administrator being unwilling to perform their responsibilities. In these circumstances, to prevent the disruption that would result from the sudden cessation of a licensed significant financial benchmark, it may be necessary for ASIC to compel participants to submit data or information to the administrator, or to compel the administrator to continue to generate and administer the benchmark. For example, ASIC may compel an administrator to continue to administer a licensed significant financial benchmark for a specified period if ASIC, in consultation with the Reserve Bank of Australia, considers doing so is necessary to ensure an orderly transition or winding down of the benchmark and to protect financial system stability.

3.12 It is important that the compulsion power can be executed quickly, since the disruption resulting from the cessation of a benchmark such as the bank bill swap rate (BBSW) would occur as soon as the benchmark is not published on its usual daily schedule. The compelled financial benchmark rules permitted in the Bill are intended to address these rare and exceptional circumstances.

3.13 The permitted ASIC powers and matters that may be dealt with in the compelled financial benchmark rules are:

·
a power for ASIC to give a written notice requiring an entity referred to in paragraph 908CB(h) to provide data or information to a benchmark administrator licensee for the generation or administration a licensed significant financial benchmark. Such data or information might include transaction data, quotes or opinions and views, including those based on expert judgement. The notice may also require the entity to provide some or all of data or information to ASIC;

-
An entity benchmark contributor can only be compelled under a written notice of this type if the entity has been previously participating in the generation or administration of that significant financial benchmark. [Schedule 1, item 1, paragraph 908CE(2)(b)]

·
a power for ASIC to compel by written notice a benchmark administrator licensee to continue to generate or administer a significant financial benchmark specified in its licence, or to do so in a particular way; and
·
incidental powers and matters, including those prescribed in regulations.

ASIC may only impose a requirement as permitted under the powers set out above if it reasonably believes it to be in the public interest to do so. It is noted that any notice given by ASIC as permitted above is not a legislative instrument because the decision to give the notice will be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (see paragraph (a) in table item 19 in subsection 6(1) of the Legislation (Exemptions and Other Matters) Regulation 2015). [Schedule 1, item 1, section 908CE]

Subdivision C - Compliance with each set of rules etc.

3.14 Any entity, whether it is a benchmark administrator licensee or not, that is subject to the financial benchmark rules or the compelled financial benchmark rules must comply with them. A civil penalty applies to breaches of this provision. The primary objective of the civil penalty is to act as a deterrent, which is achieved by imposing a high maximum amount for the penalty, being 5,500 penalty units or $1.155 million (for details see paragraphs 3.27 and 3.45 below). While this is a substantial penalty, it is justified because of the potentially grave impact of misconduct in this area (see paragraph 3.27 below for more comments in relation to the penalty amount). [Schedule 1, item 1, subsection 908CF(1)]

3.15 In the event there is inconsistency, the compelled financial benchmark rules prevail over the financial benchmark rules. Other rules made under Chapter 7 of the Corporations Act prevail over the financial benchmark rules and the compelled financial benchmark rules in the case of an inconsistency. These rules include the market integrity rules, the derivative transaction rules, the derivative trade repository rules and the client money reporting rules. [Schedule 1, item 1, subsections 908CF(2) and (3)]

3.16 The regulations may allow for alternatives to civil penalty proceedings for a person who is alleged to have breached the financial benchmark or the compelled financial benchmark rules. The potential alternatives that may be provided for are limited to:

·
processes for paying a penalty to the Commonwealth (limited to one-fifth the penalty amount specified in the applicable rules);
·
undertaking or instituting remedial measures (including education programs); or
·
accepting sanctions other than the payment of a penalty to the Commonwealth.

3.17 The penalty payable under regulations made for this purpose in relation to the rules is capped at one-fifth of the maximum penalty payable under the rules (the maximum penalty being 5,550 penalty units, which is $1.1655 million). It is noted that a person would remain free to reject any available alternatives to civil proceedings and deal with the matter in civil proceedings before a court. [Schedule 1, item 1, section 908CG]

3.18 Breaches of the financial benchmark or the compelled financial benchmark rules are also subject to the infringement notice regime in Part 5 of the Regulatory Powers (Standard Provisions) Act 2014 (the Regulatory Powers Act). Because the rules may prescribe detailed operational matters, minor breaches may be expected to occur with some frequency. For this reason, the Regulatory Powers Act sets out a maximum penalty of 60 penalty units ($12,600) that can be imposed in an infringement notice, which is the amount set out in A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, issued by the Attorney-General's Department (the Guide). Infringement notices are an efficient way of dealing with minor breaches, as they avoid the significant delays and costs associated with court action. [Schedule 1, item 1, subsection 908CH(1)]

3.19 Part 5 of the Regulatory Powers Act sets out a standard framework under which infringement notices can be issued. This includes important matters such as when an infringement notice may be issued and by whom, what matters must be set out in an infringement notice, how an extension of time for payment may be requested, how and under what circumstances an infringement notice may be withdrawn, and the effect and consequences if a person pays the amount stated in the notice. In order for the framework to operate as intended the Bill sets out who in ASIC can act as an infringement officer and as a chief executive as defined in the Regulatory Powers Act as follows:

·
An infringement officer is any ASIC officer with a position equivalent to that of a member of the Senior Executive Service in the Commonwealth public service.
·
A chief executive is any member of the ASIC Commission, which is ASIC's governing body. [Schedule 1, item 1, subsections 908CH(2) and (3)]

3.20 Breaches of the financial benchmark or the compelled financial benchmark rules may also be addressed through enforceable undertakings, based on the general framework set out under Part 6 of the Regulatory Powers Act. This Part allows an authorised person in ASIC to accept a written undertaking to comply with a particular provision by taking or refraining from taking specified action. If an enforceable undertaking is breached the authorised person may apply to a relevant court for orders to comply with the undertaking, to pay an amount to the Commonwealth equivalent to any financial benefit that the person has obtained through the breach, to compensate any other person for damages suffered because of the breach, or for any other order the court considers appropriate. [Schedule 1, item 1, subsection 908CI(1)]

3.21 Any ASIC officer with a position equivalent to that of a member of the Senior Executive Service in the Commonwealth public service is permitted to act as an authorised officer. The relevant courts may include the Federal Court, the Federal Circuit Court or any State or Territory court with the necessary jurisdiction. [Schedule 1, item 1, subsections 908CI(2) and (3)]

3.22 Protection from civil or criminal action is given to a person who is required under ASIC's compelled financial benchmark rules to provide financial benchmark data or other information, or to provide access to such information if the person does so in good faith. This protection is also given to a benchmark administrator licensee that is compelled by ASIC to generate or administer a licensed significant financial benchmark in a particular way under compelled financial benchmark rules, if the person does so in good faith. [Schedule 1, item 1, section 908CJ]

Subdivision D - Matters relating to the making of each set of rules

3.23 Before making a financial benchmark or compelled financial benchmark rule, ASIC must consider a number of matters. These include the Principles for Financial Benchmarks, IOSCO (IOSCO Principles), as amended from time to time (see paragraph 5.3 for further explanation of the power to incorporate by reference), the likely effect of the rule on the Australian economy and the Australian financial system, the likely regulatory impact of the rule, and any other relevant matter. Information is provided in a note assisting the reader to locate the IOSCO Principles. Another note provides an example of other relevant matters including matters raised during consultation as required under section 908CL. [Schedule 1, item 1, section 908CK]

3.24 ASIC must conduct public consultation prior to making any rule. Regulations may prescribe other persons or bodies that ASIC must consult. Consultation may be held by exposing the proposed rule on ASIC's website, with an invitation to the public to comment. A failure to consult at all or for a particular time does not invalidate a rule. While the Government expects ASIC to consult on every proposed rule, this provision is designed to promote certainty among regulated entities by ensuring that an alleged technical failure to comply with the consultation requirements does not affect the validity of the rule. It also provides ASIC with the flexibility to use targeted consultation with affected stakeholders where this is appropriate without creating uncertainty as to the validity of a rule. Furthermore, there are additional safeguards to ensure that ASIC undertakes proper consultation, including that the financial benchmark or the compelled financial benchmark rules are disallowable by the Parliament. ASIC is also regularly called to appear before Parliamentary Committees to explain its actions. [Schedule 1, item 1, section 908CL]

3.25 The Minister must provide consent before ASIC makes a rule. Such consent provided by the Minister is not a legislative instrument because it is an 'approval' and as such falls within the exemption in table items 4 and 5 in regulation 6 of the Legislation (Exemptions and Other Matters) Regulation 2015. [Schedule 1, item 1, section 908CM]

3.26 ASIC may in emergency situations make a rule without consultation and without obtaining the consent of the Minister. ASIC may only make a rule without the consent of the Minister when it is of the opinion that it is necessary or in the public interest to do so in order to protect the Australian economy or financial system, or the security or confidentiality of the information held by one or more financial benchmark administrators. ASIC must then write to the Minister on the following day explaining the need for the rule and, if directed to do so in writing by the Minister, amend or revoke the rule. To assist readers, an explanation is included that such a direction given by the Minister under this provision is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act 2003 (the Legislation Act) but is merely declaratory of the law as such a direction is not a legislative instrument within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, section 908CN]

3.27 The financial benchmark or the compelled financial benchmark rules may impose penalties up to an amount equivalent to 5,550 penalty units, which is $1.1655 million. This is a substantial penalty that is justified by the potentially significant impact that misconduct of a serious nature may have, given the widespread use of financial benchmarks in the financial system. The penalty is generally expected to apply to large financial entities. It is noted that fines imposed in overseas jurisdictions for manipulation of benchmarks such as the London Interbank Offered Rate (LIBOR) have been far larger. This amount is similar to that imposed by other important rules in the Corporations Act, such as the market integrity rules and the client money rules. [Schedule 1, item 1, section 908CO]

3.28 Regulations may limit the extent to which or the way in which permitted matters are dealt with in the financial benchmark or the compelled financial benchmark rules, the classes of persons captured by the rules, or the extent to which the rules may impose requirements on designated classes of persons. For example, regulations could limit the application of the rules in relation to public sector entities or index benchmarks, if doing so would harmonise the Australian regime with key overseas benchmarks regulatory regimes. [Schedule 1, item 1, section 908CP]

3.29 ASIC may vary or revoke a rule but only subject to the same conditions applying when it makes a rule, as set out in the Acts Interpretation Act 1901. However, these conditions (such as the requirement to consult and for ministerial consent) do not apply if ASIC revokes or amends a rule pursuant to a direction given by the Minister under section 908CN after ASIC makes an emergency rule. [Schedule 1, item 1, section 908CQ]

Consequential amendments

3.30 New section 1317HC (see paragraph 3.46 for an explanation of this new section) is added to the definition of civil penalty order in the Corporations Act. [Schedule 1, item 3, section 9 (paragraph (c) of the definition of civil penalty order)]

3.31 A number of key definitions are inserted into section 9, the main definitions section in the Corporations Act. These include definitions of financial benchmark rules and compelled financial benchmark rules, which refer to the relevant sections in the Bill setting out what they designate. Other definitions inserted include:

·
Financial benchmark data refers to information (including derived information) obtained to generate or administer a financial benchmark.
·
The Regulatory Powers Act being the Regulatory Powers (Standard Provisions) Act 2014.

[Schedule 1, item 4, section 9]

3.32 A company or related body corporate may not indemnify a person for a liability incurred as an officer or auditor of the company through a compensation order issued by a court under new section 1317HC. [Schedule 1, item 5, paragraph 199A(2)(b)]

3.33 A company or related body corporate may not indemnify a person for legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred in defending proceedings brought by ASIC or a liquidator. Clarification is provided in a note that this includes proceedings by ASIC for a compensation order under new section 1317HC. [Schedule 1, item 6, subsection 199A(3)(note 1)]

3.34 A person giving information to ASIC concerning a possible breach of the financial benchmark or the compelled financial benchmark rules is given qualified privilege (which provides immunity from being sued for defamation, unless the act involved malice). [Schedule 1, item 16, paragraph 1100A(1)(b)]

·
Where the Corporations Act provides for qualified privilege, this applies in proceedings for defamation to remove a person's liability in respect of an act, matter or thing, unless malice is present.

3.35 In addition, qualified privilege is provided for benchmark administrator licensees when giving any information to ASIC in connection with the performance or exercise of ASIC's functions or powers under, or in relation to Chapter 7 or regulations made for the purposes of Chapter 7. [Schedule 1, item 16, paragraph 1100A(1)(b)]

3.36 A person with qualified privilege under the above provisions also has protection from actions based on breach of confidence in relation to the same conduct.

3.37 The Court may make such orders as it sees fit if it considers that a person has been wronged by another person breaching the financial benchmark or the compelled financial benchmark rules. [Schedule 1, item 17, paragraph 1101B(1)(d)]

3.38 Without limiting the Court's ability to make other orders, examples are given of the kind of orders the Court could make under subsection 1101B(1) for a breach of the financial benchmark or the compelled financial benchmark rules. These include orders giving directions about complying with a provision of these rules, requiring the disclosure of specified information, or requiring a person to publish an advertisement in accordance with the order. [Schedule 1, items 18, 19 and 20, paragraph 1101B(4)(b) and subparagraphs 1101B(4)(c)(i) and 1101B(4)(d)(i)]

3.39 A decision by ASIC to make, vary or revoke financial benchmark or compelled financial benchmark rules, as well as a decision by the Minister to consent to their making, is made exempt from appeals to the Administrative Appeals Tribunal (AAT). These exemptions are justified because these decisions are financial decisions with a significant public interest element (as set out in the publication What decisions should be subject to merits review? released by the Administrative Review Council (ARC)) and are fundamental to the effective implementation of the Government's policy for regulating financial benchmarks. [Schedule 1, item 23, paragraph 1317C(gdi) and subparagraph 1317C(gdk)(i)]

3.40 A decision by the Minister to direct ASIC to revoke or amend a rule made in an emergency situation as set out in section 908CM is provided with a similar exemption. These decisions will be made on the basis of whether the rule is in the public interest or whether it is necessary to protect the Australian economy, the Australian financial system, or the security or confidentiality of information held by licensed benchmark administrators. Given the strong public interest element in such a decision by the Minister it is consistent with the guidance provided by ARC to provide a carve-out from AAT review. [Schedule 1, item 23, subparagraph 1317C(gdk)(ii)]

3.41 A decision by ASIC to propose or agree to an alternative to a civil penalty proceeding is excluded from AAT review. Such a decision is preliminary in nature and does not in itself have a conclusive effect on the person alleged to have committed a contravention, as set out in the ARC publication referred to above. The person remains free to reject the proposed alternative (if any) and deal with the matter in civil proceedings before a court. In addition to being preliminary, these decisions have a law enforcement nature. They are based on a judgment by ASIC regarding the most appropriate enforcement approach in response to an alleged breach of the law. Making such decisions subject to AAT review could jeopardise the effective investigation of alleged breaches and the subsequent enforcement of the law. [Schedule 1, item 23, paragraph 1317C(gdj)]

3.42 A decision by ASIC to apply its compulsion powers under the compelled financial benchmark rules is made exempt from appeals to the AAT. A decision to impose compulsion, whether on a submitter entity or on a benchmark administrator licensee of a licensed significant financial benchmark, may need to be made very quickly and would need to be effective immediately to avoid disruption to financial contracts and markets. In the event that key participants in a licensed significant financial benchmark were no longer willing to participate in the benchmark setting process, ASIC may only have very short notice ahead of the benchmark ceasing to be published. The actual length of notice would depend on each benchmark. For example, under the current BBSW conventions, reliance on the fallback calculation methodology based on algorithms will not extend beyond two days. In this scenario, ASIC would need to assess the case for imposing compulsion, and take action to impose compulsion within the two days, to prevent the disruption that would occur if the benchmark was not published on its usual daily schedule.

3.43 Providing the right to appeal ASIC's decision to compel would significantly raise the risk that the significant financial benchmark will cease to be published and trigger the disruption to financial contracts and markets discussed above. Disruption would occur even if there was only a short and temporary interruption in the publication of a benchmark as investor confidence in the benchmark would be seriously eroded. It is therefore considered to be in the public interest for ASIC to have the ability to take prompt action to ensure the significant financial benchmark will be published without interruption. This public interest consideration provides justification for removing review rights for ASIC's decision to impose compulsion, as set out in the ARC guidance referred to above. [Schedule 1, item 23, subparagraph 1317C(gdl)]

3.44 Compliance with the financial benchmark or compelled financial benchmark rules is made a civil penalty provision by inserting a reference to subsection 908CF(1) in the table in the Corporations Act setting out the list of these provisions. A Court can make a declaration of contravention if it is satisfied that a breach of these rules has occurred, which may then lead to penalties and compensation orders being imposed. [Schedule 1, item 24, subsection 1317E(1), table item 17A]

3.45 A Court may make a declaration of contravention if it is satisfied that a breach of the financial benchmark or compelled financial benchmark rules has occurred. A penalty payable to the Commonwealth may then be imposed up to the amount specified in the rules. The maximum amount the rules can specify (as set out in section 908CO) is 5,550 penalty units ($1.1655 million). [Schedule 1, item 26, subsections 1317G(1DC) and (1DD)]

3.46 A Court may order a person to compensate another person for damages suffered due to a breach of the financial benchmark rules or compelled financial benchmark rules committed by the first person. In determining the amount of the damages, profits made by the person as a result of the contravention and (in the case of a registered scheme) any diminution in the value of the scheme's property must be included. [Schedule 1, item 27, section 1317HC]

3.47 A court may provide whole or partial relief to a person who has breached a financial benchmark or compelled financial benchmark rule if it considers that the person has acted honestly and ought to be excused for the contravention having regard to all the circumstances of the case. Schedule 1, item 28, subsection 1317S(1)]

3.48 If the Court is satisfied that a person has breached a financial benchmark or compelled financial benchmark rule it may order the person to disclose information as specified in the order to the public or to particular persons. The Court may also require the person to publish at their own expense an advertisement in accordance with conditions set out in the order. [Schedule 1, item 29, section 1324B]

3.49 The Court may also make certain other orders against a person breaching a financial benchmark or compelled financial benchmark rule if it considers that the order will provide whole or partial compensation to the person suffering loss or damage because of the breach, or prevent or reduce such loss or damage. A person suffering such loss or damage may also apply to the Court and the Court may then make such orders as it considers fit against the person committing the breach (or against a person involved in the breach) for compensating the first person suffering the consequences of the breach. ASIC may make such an application on behalf of one or more persons suffering loss or damage because of a breach. The person or persons on whose behalf ASIC makes the application must first provide their consent in writing. [Schedule 1, item 30, subsections 1325(1), (2) and (3)]

3.50 The changes explained in the last two paragraphs above to sections 1324B and 1325 will have an impact on two items in Schedule 5 of the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 which has received Royal Assent but will likely only come into effect after this Bill commences. Two small consequential amendments are therefore made to items 27 and 28 in Schedule 5 of the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 to ensure that they continue to operate as originally intended once that Act comes into effect. [Schedule 1, item 32, section 1324B and subsections 1325(1), (2) and (3)]

Application and transitional provisions

3.51 The obligation to comply with the financial benchmark or compelled financial benchmark rules (regardless of when they are made by ASIC) applies from 1 January 2018 or any later day being the day after which the Bill receives the Royal Assent. [Schedule 1, item 31, sections 1639 to 1641]

3.52 The extended meaning of financial products and Division 3 financial products for Part 7.10 for bank accepted bills (BABs) and negotiable certificates of deposit (NCDs) applies in relation to acts or omissions occurring from 1 January 2018 or any later day being the day after which the Bill receives the Royal Assent, regardless of when the BABs or NCDs were issued. [Schedule 1, item 31, sections 1639 and 1642]


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