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 6 Financial Benchmarks - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Financial Benchmarks

6.1 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.2 This Schedule makes amendments to the Corporations Act 2001 (the Corporations Act) to establish a new licensing regime for administrators of financial benchmarks declared to be significant financial benchmarks. Administrators of other financial benchmarks may opt-in to the licencing regime.

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Financial benchmarks are used to determine the pay-out or value of financial products or contracts, or to measure the performance of investment funds.
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As benchmarks affect the pricing of financial products, a number of benchmarks are critical to a wide range of users in financial markets and throughout the broader economy. This means there is a risk of financial contagion or instability, or undermining of investor confidence, if the availability or integrity of such key benchmarks is disrupted. In this Bill, such key benchmarks are defined as significant financial benchmarks.
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Significant financial benchmarks are financial benchmarks that:

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are systemically important in Australia; or
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a disruption to the availability or integrity of the benchmark would cause a material risk of financial contagion or systemic instability in Australia; or
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a disruption of that kind would have a material impact on Australian retail or wholesale investors.

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The Australian Securities and Investments Commission (ASIC), in its July 2017 Consultation paper 292: Implementing the financial benchmark regulatory regime noted that initially (and consistent with the Council of Financial Regulators (CFR) [6] advice), ASIC considers that the following five benchmarks are likely to meet the criteria for significant financial benchmarks in section 908AC(2) of the Bill:

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the bank bill swap rate (BBSW);
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Standard & Poor's (S & P)/ASX 200 index;
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ASX Bond futures settlement price (formerly Commonwealth Government Securities yield curve survey);
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the cash rate (including the Total Return Index derived from the cash rate); and
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the Consumer Price Index.

The last two are generated and administered by public institutions, while the others are generated and administered by large institutions.

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Globally there have been many cases of market misconduct regarding the determination of financial benchmarks (particularly interest rate reference benchmarks such as the London Interbank Offered Rate (LIBOR)). As of August 2017, penalties paid by financial institutions globally had reached around AUD25 billion. Also, there are court proceedings in Australia for alleged market manipulation and unconscionable conduct in relation to the BBSW, which is the Australian equivalent of the LIBOR.
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In 2013, in response to these issues, the International Organization of Securities Commissions (IOSCO) developed the Principles for Financial Benchmarks, IOSCO (the IOSCO Principles). These set out the desirable characteristics of a regulatory regime for financial benchmarks.

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Jurisdictions, including the United Kingdom, the European Union (EU), Japan, Singapore and Canada, have since worked to align their regulatory regimes with the IOSCO Principles.

6.3 In line with these developments, the Government has decided to implement a regulatory framework for financial benchmarks in Australia that is consistent with the IOSCO Principles.

6.4 The amendments made by the Bill are based on CFR recommendations for reforming the regulation of financial benchmarks used in Australia consistent with the IOSCO Principles. The CFR's recommendations were formulated following extensive consultation with stakeholders.

6.5 Consistent with overseas regulatory developments, manipulation of financial benchmarks will be made a specific offence.

6.6 The Schedule gives ASIC powers to make rules imposing a regulatory framework for licensed benchmark administrators and related matters. This framework will also reflect the IOSCO Principles.

Offences and civil penalties

1. Requirement to be licensed offences

6.7 The first offence applies to administrators of significant financial benchmarks if they are not licenced as required (see section 908BA). Benchmark administrators of significant financial benchmarks will generally be large institutions or financial entities. Absolute liability applies to the physical element of the offence about the end of the period (that is, paragraph 908BA(1)(c)). The element is jurisdictional in nature.

6.8 The second offence relates to when a person holds out in Australia something that is not true (see section 908BB). For example, the person asserts that they hold a benchmark administrator licence, or that a particular benchmark is or is not a significant financial benchmark.

6.9 Breaches of the above offences, is punishable by a penalty of 500 penalty units ($105,000), 5 years' imprisonment or both. This is a relatively severe penalty, which is proportionate in view of the extensive damage and serious harm that may be caused to Australia's financial system and broader economy by the unsupervised operation of an important financial benchmark, or a person not complying with the prohibitions on holding out.

2. Benchmark administrator licensees offences

6.10 A benchmark administrator licensee has obligations to:

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notify ASIC of certain matters, such as a breach of a licensee's general obligations under section 908BP, and if a licensee becomes aware that they may no longer be able to comply with the general obligations, as well as specified changes in relation to certain personnel (see section 908BQ);
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assist ASIC, APRA and the Reserve Bank of Australia when any of these regulators makes a reasonable request to inspect the licensee's books or obtain other assistance relating to the performance of the regulator's function (see section 908BR);
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give ASIC access to the licensee's facilities as they relate to the person's capacity as a licensee (see section 908BS); and
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comply with an ASIC direction requiring reports (see section 908BV).

6.11 These offences attract a penalty of up to 100 penalty units ($21,000). They are intended to provide ASIC with necessary information to efficiently perform its function of regulating the financial benchmarks framework. This is important to the regulatory framework being able to minimise potential significant risks to Australia's financial system and the broader economy.

3. Benchmark administrator licensees civil penalties (related to an administrator's obligation to comply with financial benchmark and compelled financial benchmark rules)

6.12 In addition to the above obligations to which offences apply, a benchmark administrator licensee is also obligated take certain actions, such as complying with the conditions on their licence and complying with financial benchmark rules and compelled financial benchmark rules. Failure to meet this obligation may be subject to civil penalties of up to 5,500 penalty units or $1.155 million.

6.13 The primary objective of the civil penalty is to act as a deterrent and the penalty is generally expected to apply to large financial entities. 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.

6.14 While the penalty is substantial, it is justified because of the potentially grave impact of misconduct in this area, given the widespread use of financial benchmarks in the financial system.

6.15 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:

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

6.16 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).

4. Offences and civil penalties relating to the manipulation of financial benchmarks

6.17 Offences for manipulating financial benchmarks in two specified ways are created: doing or not doing an act or acts with an intention to influence the level at which a financial benchmark is generated or administered (see section 908DA); and making a false or misleading statement or disseminating false or misleading information that could affect a financial benchmark (see section 908DB).

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Manipulation of financial benchmarks is currently prosecuted under the general market manipulation and related provisions in Division 2 of Part 7.10 of the Corporations Act.
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For the offence under section 908DA, 'intention' has been specified as the fault element to apply. This imposes a higher bar for prosecution than if the standard fault element of 'recklessness' under the Criminal Code set out in the Schedule of the Criminal Code Act 1995 (the Criminal Code) applied. This is also a higher bar for prosecution that than under the general market manipulation and related provisions of the Corporations Act.
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Intention has been specified as the fault element to avoid the potential for the offence to have a chilling effect on market activities.

6.18 Extended geographical scope Category B (as set out in section 15.2 of the Criminal Code) is applied to each of these offences. Applying an extended geographical scope for these offences is critical because of the potential for financial benchmarks to be manipulated across borders.

6.19 Penalties for the two offences are defined in section 908DC as follows:

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For an individual, imprisonment of up to 10 years and/or a fine being the greater of 4,500 penalty units ($0.945 million) or three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence; and
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For a body corporate, a fine being the greatest of 45,000 penalty units ($9.45 million), three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence, or 10 per cent of the body corporate's annual turnover during the 12 month period ending at the time the offence was committed.

6.20 The above penalties for offences are based on the penalties applying to the existing market manipulation and related offences.

6.21 Category B of the extended geographical jurisdiction provisions in section 15.2 of the Criminal Code is applied to the civil penalty provisions attached to contraventions of the financial benchmark manipulation provisions. If a contravention is found, a Court may impose a penalty of up to $200,000 for an individual and $1 million for a body corporate. These are the same amounts as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions. These are intended to have punitive or deterrent effects.

6.22 The civil penalties also apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs (see subsection 908DD(3)). A defendant bears an evidential burden in relation to this defence. Whether there is a corresponding offence in the domestic law of the jurisdiction where the conduct occurs will generally be a matter that is peculiarly within the defendant's knowledge.

6.23 These amounts are justified because of the seriously damaging impact of misconduct of the kind specified in the offence and the significant profits that may be achieved as a result. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The penalty specified for the offence is modelled on the existing market manipulation and other similar offences and penalties in Part 7.10 of the Corporations Act. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.

Human rights implications

6.24 This Schedule engages or may engage the following human rights to the extent that they are likely to impact individuals or groups of individuals:

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the right to be presumed innocent until proved guilty according to law;
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the right to a fair and public hearing;
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the right not to be compelled to testify against oneself or to confess guilt;
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the right to freedom of expression; and
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the right to privacy.

6.25 The likelihood of the offences relating to benchmark administrator licences and benchmark administrator licensees engaging human rights is considered to be low, as administrators of benchmarks that are likely to be declared as significant financial benchmarks are large institutions or government entities.

Assessment of civil penalties

6.26 Practice Note 2: Offence provisions, civil penalties and human rights [7] , observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR), regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of the Articles 14 and 15 of the ICCPR.

6.27 The civil penalty provisions in the Bill should not be considered 'criminal' for the purposes of international human rights law. While the civil penalty provisions included in the Bill have relatively high maximum penalties (intended to deter people from not complying with the obligations imposed), none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty. The penalties are directed at people in a specific regulatory context.

6.28 The amounts are justified because of the seriously damaging impact of misconduct of the kinds specified and are proportionate to the significant profits that a person may derive from a contravention. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.

6.29 In relation to breaches of the financial benchmark or the compelled financial benchmark rules, the Bill provides for graduated alternatives for contraventions of the rules allowing for infringement notices to be issued and providing a regulation making power for alternatives to civil penalty proceedings. The penalties are generally expected to apply to large financial entities. It is noted that fines imposed in overseas jurisdictions for manipulation of benchmarks such as the 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.

6.30 In addition, the maximum pecuniary penalty that may be imposed on an individual for contravening a civil penalty provision is generally lower than maximum pecuniary penalty that may be imposed for the corresponding criminal offence.

6.31 The statement of compatibility therefore proceeds on the basis that the civil penalty provisions in the Bill do not create criminal offences for the purposes of Articles 14 and 15 of the ICCPR.

Presumption of innocence

6.32 Paragraph 2 of Article 14 of the ICCPR protects the right of a person charged with a criminal offence to be presumed innocent until proven guilty according to law. The presumption of innocence is also a fundamental principle of the common law. As the Human Rights Committee has observed, the presumption of innocence 'imposes on the prosecution the burden of proving the charge, guarantees that no guilt can be presumed until the charge has been proved beyond reasonable doubt, ensures that the accused has the benefit of doubt, and requires that persons accused of a criminal act must be treated in accordance with this principle'. [8] The presumption of innocence generally requires the prosecution to prove each element of a criminal offence beyond reasonable doubt.

Offence provisions which carry an evidential burden

6.33 An offence provision which requires a defendant to carry an evidential burden may be considered to engage the right to the presumption of innocence.

6.34 The civil penalties relating to the manipulation of financial benchmarks apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs (see subsection 908DD(3)). A defendant bears an evidential burden in relation to this defence.

6.35 Assuming that these penalties are criminal for human rights purposes, the imposition of an evidential burden is justified because whether there is a corresponding offence in the domestic law of the jurisdiction where the conduct occurs will generally be a matter that is peculiarly within the defendant's knowledge. Moreover, the effect of the limitation is that the defendant must merely adduce or point to evidence there is no corresponding offence. Once this is done, the prosecution must refute this beyond the balance of probability. As a result, the risk that a person may be found to have contravened the civil penalty is considered to be low. Accordingly, to the extent the civil penalty may be considered 'criminal' under human rights law and limit the presumption of innocence, the limitation is reasonable in the circumstances.

Strict liability and absolute liability offences

6.36 Strict liability and absolute liability offences engage and limit the presumption of innocence because they allow for the imposition of criminal liability without the need to prove fault. The difference between strict and absolute liability is that strict liability allows a defence of honest and reasonable mistake to be raised, whereas an offence of absolute liability does not.

6.37 The Schedule does not create any strict liability offences. While also not creating any absolute liability offences, the Schedule does apply absolute liability to one physical element of the offence in relation to the requirement for benchmark administrators of significant financial benchmarks to be licensed within a certain period after the benchmark is declared by ASIC to be a significant financial benchmark.

6.38 Absolute liability applies to that aspect of the offence concerning whether the period has ended, which is a jurisdictional element of the offence. Hence, the state of mind of the person is not relevant. This is appropriate because an ASIC declaration is a legislative instrument that is made publicly available and the benchmark administrator will also have been notified of the declaration. The decision to apply for a licence or withdraw an application is a decision of the administrator, and an ASIC decision relating to a licence application will be notified to the administrator. Therefore, the administrator will be aware of when the period started and when this will end. It is noted that the administrators of benchmarks that are likely to be significant financial benchmarks, and thus subject to the requirement to be licensed offences, will generally be large institutions or financial entities.

6.39 The period element is uncomplicated, readily understood and based on information that is readily available to the person. While benchmark administrators of significant financial benchmarks are likely to be large financial entities, to the extent that this offence may impact individuals, the limitation is reasonable and proportionate.

Right to a fair and public hearing

6.40 Article 14 of the ICCPR ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

6.41 To the extent that it may impact individuals, new section 908CH of the Bill might be considered to engage the right to a fair and public hearing because it permits an infringement notice to be given by an infringement officer if the officer believes on reasonable grounds that the person contravened a civil penalty provision relating to breaches of the financial benchmark or the compelled financial benchmark rules. Persons covered by the rules will generally be larger entities, although obligations could impact individuals.

6.42 Because financial benchmark or the compelled financial benchmark rules may prescribe detailed operational matters, minor breaches may be expected to occur with some frequency. For this reason, the Regulatory Powers (Standard Provisions) Act 2014 (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.

6.43 However, the right of a person to fair and public hearing by a competent, independent and impartial hearing is not limited by the Bill because the provisions in Part 5 of the Regulatory Powers Act allow a person to elect to have the matter heard by a court rather than pay the amount specified in the infringement notice. Moreover, the Regulatory Powers Act requires that this right must be stated in any infringement notice given to the person. For these reasons the Bill is not considered to limit the right to a fair and public hearing.

Right not to be compelled to testify against oneself or to confess guilt

6.44 Paragraph 3(g) of Article 14 of the ICCPR guarantees the right of an individual not to be compelled to testify against oneself or to confess guilt. The privilege against self-incrimination is recognised by the common law and applies unless it is expressly abrogated.

Requirement to provide information or documents

6.45 New section 908BV of the Bill provides an offence when a benchmark administrator licensee fails to comply with an ASIC direction requiring reports. The direction must specify a reasonable period for giving ASIC the report. As this offence is limited to benchmark administrator licensees and such licensees will generally be large institutions or financial entities, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the regulator with oversight of the regulation of financial benchmarks has the necessary powers to efficiently perform its function is important to the regulatory framework minimising significant risks to Australia's financial system and the broader economy.

Right to freedom of expression

6.46 Paragraph 2 of Article 19 of the ICCPR requires States parties to guarantee the right of everyone to freedom of expression, including the 'freedom to seek, receive and impart information and ideas of all kinds'. The right to freedom of expression includes the right not to impart information.

6.47 New section 908BV of the Bill may engage the right to freedom of expression because it allows ASIC to direct a benchmark administrator licensee to provide a report to ASIC within a specified reasonable period. As this direction is limited to benchmark administrator licensees and such licensees will generally be large institutions, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the relevant regulator has the necessary powers to efficiently perform its function is critical to minimising risks to Australia's financial system and broader economy. There is a rational and proportionate connection between the purpose of the provision and any limitation of the right.

Right to privacy

6.48 New section 908BR, which requires benchmark administrator licensees to assist specified regulators when the regulator makes a reasonable request to inspect the licensee's books or obtain other assistance relating to the performance of the regulator's function and new section 908BS of the Bill, which requires a benchmark administrator licensee to give ASIC access to the licensee's facilities as they relate to the person's capacity as a licensee, may engage the right to privacy and reputation.

6.49 As the above are limited to benchmark administrator licensees and such licensees will generally be large institutions, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the relevant regulator has the necessary powers to efficiently perform its function is critical to minimising risks to Australia's financial system and broader economy. There is a rational and proportionate connection between the purpose of the provision and any limitation of the right.

Conclusion

6.50 This Schedule is compatible with human rights because to the extent that it may engage and limit human rights, the limitations are reasonable, necessary and proportionate.


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