Senate

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 5: ALRC Financial Services Interim Report

Outline of chapter

5.1 This chapter outlines how Schedule 2 to the Bill simplifies and improves the navigability of Australia's corporations and financial services laws.

Context of amendments

5.2 Schedule 2 to the Bill enacts recommendations and other suggested improvements identified by the ALRC in Interim Report A to simplify and improve the navigability of Australia's financial services laws.

5.3 In September 2020, the Attorney-General referred to the ALRC for inquiry and report, under subsection 20(1) of the Australian Law Reform Commission Act 1996, a consideration of whether, and if so what, changes to the Corporations Act and Corporations Regulations could be made to simplify and rationalise the law.

5.4 The ALRC Review forms part of the response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which found that the law needs to be simplified to ensure that its intent is met.

5.5 Interim Report A deals with the use of definitions in corporations and financial services legislation. Interim Report B was handed down on 30 September 2022 and deals with the hierarchy of laws. Interim Report C is due to be handed down in August 2023 and will focus on the structure of Chapter 7 of the Corporations Act. The Final Report is due on 30 November 2023.

5.6 The Government is progressing these amendments at this time because the ALRC found that there was support for these recommendations in Interim Report A and they should be implemented prior to the conclusion of the ALRC Review. These amendments improve the use of definitions in the ASIC Act, Corporations Act and Corporations Regulations.

5.7 The recommendations primarily address unwarranted complexity in the law. By removing erroneous references and redundant definitions, using consistent headings to definitions sections, as well as other simplifications, Schedule 2 to the Bill improves the navigability and clarity of the corporations and financial services law.

Comparison of key features of new law and current law

Table 5.1 Comparison of new law and current law

Detailed explanation of new law

5.8 Schedule 2 to the Bill makes technical amendments to Australia's corporations and financial services laws to facilitate a more adaptive, efficient and navigable legislative framework. The amendments do this by making the following changes:

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removing erroneous references;

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removing redundant definitions;

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improving the use of definitions, including:

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clarifying the meaning of defined terms; and

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using consistent headings for definition sections; and

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removing substantive obligations from definitions;

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repealing redundant regulations;

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making other minor and technical amendments to simplify and improve the readability and navigability of the ASIC Act and Corporations Act.

5.9 Schedule 2 to the Bill only implements the recommendations from Interim Report A. The report's recommendations, as opposed to its proposals and questions, were designed for immediate implementation, address technical aspects of the legislation, do not raise significant policy issues and had overwhelming support from stakeholders. Removing erroneous references and redundant definitions

5.10 Schedule 2 to the Bill removes the erroneous reference in the ASIC Act to Part 1.3 of the Corporations Act. There is no Part 1.3 of the Corporations Act. This implements recommendation 1 from Interim Report A. [Schedule 2, item 1, subsection 5(3) of the ASIC Act]

5.11 Schedule 2 to the Bill repeals the following defined terms in section 9 of the Corporations Act:

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'arbitrage transaction';

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'Australian bank';

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'Australian register';

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'cash management trust interest';

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'chargeable matter';

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'court of summary jurisdiction';

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'deal';

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'emoluments';

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'exempt foreign company';

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'financial corporation';

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'Full Court';

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'non-voting share';

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'quarter day';

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'renounceable option'.

5.12 These terms are not used in the Corporations Act or the Corporations Regulations, or are only used in the Corporations Regulations. For defined terms that are used in the Corporations Regulations, it is more appropriate for the definition to be located in the Corporations Regulations.

[Schedule 2, item 2, section 9 of the Corporations Act]

5.13 The amendments also repeal the defined term 'financial product advice law' from section 761A of the Corporations Act. The term is not used in the Corporations Act or the Corporations Regulations. [Schedule 2, item 3, section 761A of the Corporations Act]

5.14 These amendments implement recommendation 2 from Interim Report A.

Using consistent headings for definitions sections

5.15 The words used in headings in the Corporations Act for provisions containing definitions are not consistent. Some provisions have headings indicating they contain one or more definitions, however, the words used are inconsistent. Headings include 'dictionary', 'meaning of...' and 'what is a...'. This makes it difficult for a reader to identify the location of defined terms in the Act and use computer assisted search tools to easily find definition sections.

5.16 In recommendation 9 of Interim Report A, the ALRC recommended that the headings of provisions containing definitions should appear in a consistent form across the Corporations Act.

5.17 Schedule 2 to the Bill gives effect to this recommendation. It amends the headings of provisions in the Corporations Act that contain definitions and no substantive content. Schedule 2 to the Bill replaces existing headings with the phrase 'Meaning of [defined term]' to consistently identify those provisions containing definitions. This assists readers to more easily identify the location of definitions in the Act.

[Schedule 2, items 4-80, 144, 146, 148 and 154, Division 2 of Part 1.2 (heading) and sections 45A (heading), 45B (heading), 46 (heading), 50 (heading), 50AAA (heading), 50AA (heading), 51M (heading), 64A (heading), 66A (heading), 88A (heading), 88B (heading), 89 (heading), 91 (heading), 92 (heading), 95A (heading), 102B (heading), 102C (heading), 111AC (heading), 111AD (heading), 111AL (heading), 111AM (heading), 323D (heading), 323DAA (heading), 324AE (heading), 324AF (heading), 345A (heading), 453A (heading), 458E (heading), 588FA (heading), 588FB (heading), 588FC (heading), 588FD (heading), 588FDA (heading), 588FDB (heading), 602A (heading), 738N (heading),738U (heading), 761G (heading), Division 3 of Part 7.1 (heading), sections 763A (heading), 763B (heading), 763C (heading), 763D (heading), Division 4 of Part 7.1 (heading), sections 766A (heading), 766B (heading), 766D (heading), 766E (heading), 766F (heading), 766H (heading), Division 5 of Part 7.1 (heading), section 767A (heading), Division 6 of Part 7.1 (heading), sections 768A (heading), 850B (heading), 908AB (heading), 908AC (heading), 912D (heading), 961C (heading), 961D (heading), 961F (heading), 961P (heading), 962A (heading), 962B (heading), 962C (heading), 962L (heading), Subdivision B of Division 4 of Part .7A (heading), sections 963A (heading), 964F (heading), 964H (heading), 994AA (heading), 1014A (heading), 1014H (heading), 1200B (heading), 1272B (heading), 1311D (heading), 1317AAA (heading), 1317AAB (heading), 1317AAC (heading) and 1317GAD (heading) of the Corporations Act]

Other amendments

Single use definitions

5.18 Words and phrases should be defined in legislation only if the definition significantly reduces the need to repeat text. Definitions that are only used in one section do not reduce the need to repeat text. They also impede navigability when the reader is required to consult the main dictionary in section 9 of the Corporations Act to find the meaning of a term.

5.19 Schedule 2 to the Bill removes the following terms from section 9 of the Corporations Act:

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'aggregated turnover';

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'ancillary offence';

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'chargee';

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'close associate';

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'connected entity';

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'current market bid price';

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'deductible gift recipient';

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'group executives';

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'machine-copy';

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'old Division 11 of Part 11.2 transitionals';

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'Part 7.7A civil penalty provision'; and

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'State or Territory authority'.

5.20 These terms are only used in one section.

[Schedule 2, items 83, 85, 87 and 90, section 9 of the Corporations Act]

5.21 For relatively simple definitions, Schedule 2 to the Bill locates the substance of the definition where the defined term is currently placed. If the definition is longer and more complex, the amendments place the definition in a separate subsection of the section in which the defined term is used. This avoids making the provision more difficult to read. [Schedule 2, items 86, 89, 91-96, 98 and 106-109, section 9 (paragraph (c) of the definition of 'examinable affairs') and (definition of 'reproduction'), paragraph 45B(1)(b), section 51B (paragraph (b) of the definition of 'secured party'), paragraph 300A(4)(b), section 300A, subparagraphs 588FDA(1)(b)(ii) and (iii), paragraph 601QA(5)(c), section 649B, paragraphs 1274(2AA)(b), 1317AAE(3)(b) and 1317G(1)(c) and subsection 1317G(1) of the Corporations Act]

5.22 Schedule 2 to the Bill inserts a signpost in section 9 to the definition of 'connected' with a corporation. 'Connected' with a corporation is a term that is used throughout the Act, so it should be included in section 9 as a signpost to make its meaning easy to find. That meaning is in section 64B of the Corporations Act. [Schedule 2, item 84, section 9 of the Corporations Act]

5.23 Rather than replacing the term 'current market bid price' in s 649B with the current meaning of that term, Schedule 2 to the Bill replaces the term with a phrase which is of the same meaning but is easier to read and understand. [Schedule 2, items 97-98, subsection 621(2)(note) and section 649B of the Corporations Act]

5.24 The definition of 'recognised affiliate' in section 761 of the Corporations Act is only used in the definition of 'participant'. Schedule 2 to the Bill repeals the definition of 'recognised affiliate' incorporates its substance into the meaning of 'participant'. [Schedule 2, items 100, 102 and 103, sections 761A, 767A and 768A of the Corporations Act]

5.25 The definition of 'funeral expenses facility' in section 761A of the Corporations Act is only used in the definition of 'funeral benefit'. Accordingly, Schedule 2 to the Bill repeals the definition of 'funeral expenses facility' and incorporates its substance into the definition of 'funeral benefit'. Schedule 2 to the Bill also repeals section 765B, which states that a funeral expenses facility is not a funeral benefit, because it is now redundant. [Schedule 2, items 99, 100 and 101, sections 761A and 765B of the Corporations Act]

5.26 Schedule 2 to the Bill also repeals the definition of 'ancillary offence' in section 9 because it refers to provisions of the Crimes Act which no longer exist. Schedule 2 to the Bill amends the only provisions which rely on the definition, being section 5 of the ASIC Act and paragraph 916G(5)(c) of the Corporations Act, to refer directly to the meaning of 'ancillary offence' in the Criminal Code and section 6 of the Crimes Act. [Schedule 2, item 81, subsection 5(1) (paragraph (a) of the definition of 'contravention') of the ASIC Act; item 104, paragraph 916G(5)(c) of the Corporations Act]

Definitions about resolutions

5.27 The function of definitions should be to convey or enhance meaning. Including substantive obligations within definitions should be avoided where possible as it conceals the substantive obligation. This makes it harder for regulated entities to understand their rights and obligations.

5.28 Schedule 2 to the Bill repeals the definitions of 'extraordinary resolution' and 'special resolution' in section 9 and replaces them with new definitions that signpost to new substantive provisions. These provisions are located in the part of the Act which contain the operative laws about these types of resolutions. [Schedule 2, items 110 and 111, section 9 (definition of 'extraordinary resolution') and (definition of 'special resolution') of the Corporations Act]

5.29 The new substantive provisions establish that in order for a special resolution or extraordinary resolution to have effect, the following three requirements must be met:

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notice of the meeting, required under sections 249J and 252G, must contain certain content;

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the resolution must be passed by the specified percentage of votes; and

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the resolution must be otherwise valid.

5.30 The new definitions and substantive provisions do not alter the effect of the current definitions. The first requirement is an existing requirement, and the new law simply sets it out in the operative section to assist readers in understanding how the different components of these types of resolutions fit together. The reference to resolutions being 'otherwise valid' recognises that the Act or the scheme or company's constitution may impose other requirements that must be complied with for a resolution to be valid.

5.31 The new provisions are subject to the operation of section 1322 of the Act. Section 1322 states that proceedings and meetings are not automatically invalidated because of procedural irregularities or accidental omissions to give, or failures to receive, notices about a meeting. [Schedule 2, items 112 and 113, sections 250MA and 253LA of the Corporations Act]

5.32 The amendments also maintain ASIC's existing power to exempt a person from, or modify, the obligations associated with establishing a special resolution or extraordinary resolution for a registered scheme, as they apply in relation to the operation of Chapter 5C or regulations made for the purposes of Chapter 5C. This does not insert any new powers for ASIC. ASIC currently uses its power under section 601QA to grant relief in situations where compliance with the strict notice requirements is not reasonable and it is anticipated that ASIC will continue to use its power for that purpose. [Schedule 2, item 114, paragraph 601QA(5)(ba) of the Corporations Act]

Certain inclusive and relational definitions

5.33 Inclusive definitions can be used to clarify ambiguity or expand the meaning of a term. However, these definitions can also add complexity by requiring the reader to consider whether the term is being used in its defined, inclusive sense or not.

5.34 Schedule 2 to the Bill repeals the following definitions:

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'have';

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'hold';

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'information';

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'statement'.

5.35 The definitions of 'have', 'hold' and 'statement' do not add anything to the ordinary meaning of these words. 'Information' is defined to include 'complaint'. This usage is not in the Corporations Act. Relying on the ordinary meaning of 'statement' does not change the operation of the law in any way. [Schedule 2, items 115 and 117, section 9 of the Corporations Act]

5.36 The amendments replace the definition of 'on' in section 9, which only applies in relation to a financial market, with a signpost to the provision that provides the meaning of a financial market. Schedule 2 to the Bill inserts a new subsection in that provision to confirm that something which is done through or by means of the facility that constitutes a financial market is done 'on' the financial market. [Schedule 2, items 116 and 118, section 9 and subsection 767A(2) of the Corporations Act]

Review fee

5.37 The definition of 'review fee' erroneously refers readers to section 5 of the Corporations (Review Fees) Act instead of section 4 of that Act. The Corporations Act is also inconsistent in whether it uses the term 'review fee' or refers to 'fees imposed under the Corporations (Review Fees) Act' .

5.38 Schedule 2 to the Bill replaces the definition of 'review fee' with a signpost to the definition in the Corporations (Review Fees) Act. Schedule 2 to the Bill also updates references to review fees so that the Corporations Act uses a consistent expression. [Schedule 2, items 119-123, section 9 (definition of 'review fee'), section 1242G, subsections 1351(2), 1351(3) and 1351(4) and paragraph 1364(2)(n) of the Corporations Act]

Court rules

5.39 Section 9 defines 'rules' to mean the rules of the Federal Court or rules of a State or Territory Supreme Court. However, the Corporations Act frequently uses the word 'rules' in its ordinary sense. This can confuse readers, who are required to consider whether the word is used in its defined or ordinary sense.

5.40 Schedule 2 to the Bill replaces the defined term 'rules' with the term 'rules of court'. The substance of the definition is unchanged. Schedule 2 to the Bill updates references to 'rules' (in their defined sense to 'rules of court' to match the new definition. [Schedule 2, items 124-137, section 9 (definition of 'rules'), section 9 (definition of 'rules of court') subparagraph 423(1)(a)(iv), paragraph 459E(3)(b), subparagraph 459Q(c)(ii), section 465C, paragraph 467(3)(b), subsections 475(8), 488(1), 488(2), 596C(1), 597(14) and 597(15), subparagraphs 1337S(1)(b)(i), 1337S(1)(b)(ii), 1337T(1)(b)(i), 1337T(1)(b)(ii), 1337U(1)(b)(i) and 1337U(1)(b)(ii) of the Corporations Act]

Other minor and technical amendments to simplify and improve the readability and navigability of Australia's financial services law

5.41 The Corporations Act is inconsistent in the label for the defined term 'professional member of an audit team' and the manner in which the term is used (usually expressed as a plural). Schedule 2 to the Bill fixes this inconsistency. It repeals the definition and substitutes it with a simpler term which is used consistently . Schedule 2 to the Bill does not change the substance of the meaning of the term. [Schedule 2, items 140, 141 and 148, sections 9 (definition of 'professional member of an audit team') (definition of 'professional member') and 324AE of the Corporations Act]

5.42 The Corporations Act defines 'participant' in sections 9 and 761A in relation to a clearing and settlement facility and in relation to a financial market. Schedule 2 to the Bill repeals this definition and replaces it with a simpler definition in section 9 which signposts to sections 767A-Meaning of financial market and section and 768A-Meaning of clearing and settlement facility. These sections contain the substance of the definition. The substance of the definition is unchanged. [Schedule 2, items 88, 102 and 103, sections 9 (definition of 'participant'), 761A, 767A and 768A of the Corporations Act]

5.43 Moving the term 'participant' to section 9 of the Act is consistent with the ALRC's recommendation to create a single definition section with all key words. Schedule 2 to the Bill updates references to 'participant' in other legislation to reflect that the term is now a defined term in section 9.

[Schedule 2, item 82, subsection 243F(5) of the ASIC Act; item 105, subsection 1241A(5) of the Corporations Act; items 158-159, section 7 (subparagraphs (d)(i) and (d)(ii) of the definition of 'market infrastructure entity') of the ASIC Supervisory Cost Recovery Levy Act 2017; item 160, section 396-55 of Schedule 1 (table item 5) to the Taxation Administration Act 1953]

5.44 Section 9 of the Corporations Act defines 'exempt body' by signposting to section 66A of the Corporations Act. That section provides that a 'body corporate' is an 'exempt body' if it satisfies certain conditions. There is inconsistency between the use of the word 'body' and 'body corporate'. Schedule 2 to the Bill rectifies this by replacing the term 'exempt body' with the term 'exempt body corporate' throughout the Corporations Act. [Schedule 2, items 138, 139, 145 and 149-155, sections 9 (definition of 'exempt body') and 66A, subsections 708(20) and 708(20) (note), paragraph 994B(3)(e), subsection 1012D(8) (heading), paragraph 1012D(8)(b), subsection 1012D(8) (Note 1) and section 1023B (paragraph (a) of the definition of 'financial product') of the Corporations Act]

5.45 The definition of 'public document' in section 9 of the Corporations Act includes the term 'body corporate' with a signpost to section 88A of the Act. However, section 88A of the Act provides the meaning of 'public document' in relation to a 'body'. Schedule 2 to the Bill rectifies this inconsistency by replacing the term 'body corporate' with 'body' in the definition of 'public document' in section 9 of the Corporations Act. [Schedule 2, item 142, section 9 (definition of 'public document') of the Corporations Act]

5.46 In the definition of 'related body corporate' in section 9 of the Corporations Act, Schedule 2 to the Bill replaces the words 'by virtue of section 50' with 'as determined in accordance with section 50'. This has the same meaning but is clearer. [Schedule 2, item 143, section 9 (definition of 'related body corporate') of the Corporations Act]

5.47 Subsection 102B(1) of the Corporations Act bolds and italicises the phrase 'in Australia or elsewhere'. Schedule 2 to the Bill removes this formatting. The phrase does not need to be bolded or italicised as the phrase takes on its ordinary meaning. It is not a defined term. This is consistent with the ALRC's recommendation about consistently identifying when defined terms are used. [Schedule 2, item 147, subsection 102B(1) of the Corporations Act]

Commencement, application, and transitional provisions

5.48 Schedule 2 to the Bill inserts application and transitional provisions. These ensure that the repeal of certain definitions in the ASIC Act and Corporations Act has the intended effect for instruments made under either of those Acts prior to the commencement of the Schedule.

5.49 The transitional rules provide that if an instrument made under the Corporations Act or ASIC Act references a provision repealed by this Schedule, that reference is taken to be in relation to the corresponding provision inserted by this Schedule. For instance, if a definition is moved by this Bill from Chapter 7 to section 9, a reference to the term as defined in Chapter 7 in an existing instrument is to be read as a reference to the term as defined in section 9. While consequential amendments update references in instruments to the greatest extent practicable, this transitional provision preserves the effect of any ASIC or other instruments that may now have incorrect section references. [Schedule 2, item 156, sections 344 and 344A of the ASIC Act; item 157, sections 1698 and 1698A of the Corporations Act]

5.50 If an instrument refers to a provision that is repealed, and this Schedule does not insert a corresponding provision, the repealed provision continues to have effect in relation to the instrument as if it had not been repealed. [Schedule 2, item 156, sections 344 and 344A of the ASIC Act; item 157, sections 1698 and 1698A of the Corporations Act]