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Senate

Financial Services Reform Amendment Bill 2003

Explanatory Memorandum

(Circulated by authority of the Parliamentary Secretary to the Treasurer, the Hon Ross Cameron, MP)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced

1 -Outline and financial impact

Outline

1. The Financial Services Reform Amendment Bill 2003 (FSR Amendment Bill) will clarify and amend various aspects of the regulatory framework governing the licensing, conduct and disclosure of providers of financial services, and the licensing of financial markets and clearing and settlement facilities, contained in Chapter 7 and related provisions of the Corporations Act 2001 (Corporations Act). The FSR Amendment Bill will also make related amendments to the Australian Securities and Investments Commission Act 2001 as well as minor amendments to the Income Tax Assessment Act 1997 and the Retirement Savings Accounts Act 1997.

2. The Financial Services Reform Act 2001 (FSR Act) commenced on 11 March 2002. It amended the Corporations Act and related legislation, introducing a new regulatory framework governing the licensing, conduct and disclosure of providers of financial services, along with a licensing regime for financial markets and clearing and settlement facilities.

3. The amendments to the Corporations Act made by the FSR Act are subject to a two-year transition period, such that they come into full effect on 11 March 2004.

4. During the transition period, the Government has continued a consultation process with industry and consumer representatives that began during the development of the FSR Act, with a view to ensuring that the implementation of the new arrangements occurs as smoothly as possible.

5. As a result of this consultation process, a number of issues have been identified which require clarification or amendment to enable industry participants to transition to the new regulatory arrangements prior to the end of the transition period.

6. Many of these issues have been capable of resolution through the making of regulations or the provision of policy guidance by the Australian Securities and Investments Commission.

7. However, some issues require amendment to the legislation itself, and the FSR Amendment Bill is directed to this end. The amendments contained in the FSR Amendment Bill will provide industry participants with the necessary certainty to transition to the new licensing, conduct and disclosure framework introduced by the FSR Act.

Financial impact statement

1.8 The financial impact of the new regulatory framework introduced by the FSR Act was set out in the Explanatory Memorandum to the Financial Services Reform Bill. The FSR Amendment Bill will not involve any additional costs. Rather, it will assist in achieving the compliance cost reductions outlined in the financial impact statement for the Financial Services Reform Bill.

2 - Abbreviations

The following abbreviations are used in this Explanatory Memorandum:

AFSL Australian Financial Services Licence
APRA Australian Prudential Regulation Authority
ASIC Australian Securities and Investments Commission
ASIC Act Australian Securities and Investments Commission Act 2001
ASX Australian Stock Exchange
Corporations Act Corporations Act 2001
FSG Financial Services Guide
FSR Act Financial Services Reform Act 2001
PDS Product Disclosure Statement
RSA Retirement Savings Account
SoA Statement of Advice

3 - Notes on clauses

Clause 1: Short Title

Clause 1 is a formal provision specifying the short title of the Bill.

Clause 2: Commencement

Clause 2 contains a table setting out when each of the items in the Bill commences.

Clause 3: Schedule

Clause 3 provides that the Acts specified in the Schedules are amended as set out.

Schedule 1 - Amendments of the Corporations Act 2001 relating to unsolicited offers to purchase financial products off-market

Items 1 and 2 - amendment of section 760B and Part 7.9 of Chapter 7 (heading)

3.4 The heading of Part 7.9 and a citation of that heading will be amended to reflect that the Part 7.9 disclosure provisions are to apply to the purchase of financial products in addition to sales.

Items 3 to 5 - Division 5A of Part 7.9 is to apply to securities

3.5 Section 1010A is not to apply to Division 5A. The amendments ensure that Division 5A operates in relation to all financial products including securities.

Item 6 - Division 5A of Part 7.9 is to apply to financial products not issued in the course of a business

3.6 Section 1010B is not to apply to Division 5A. It is intended that Division 5A operates in relation to financial products issued in the course of a business, as well as financial products not issued in the course of a business.

Item 7 - unsolicited offers to purchase financial products off-market

3.7 This item establishes a disclosure regime in relation to unsolicited offers to purchase financial products off-market.

3.8 The new disclosure regime would apply if a person (the offeror) makes an unsolicited offer to purchase a financial product from another person (the offeree) and that offer was made other than on a licensed financial market, and:

·
That unsolicited offers was made in the course of a business of purchasing financial products; and/or
·
The unsolicited offer was made and the offeror was not in a personal or business relationship with the offeree.

3.9 Regulations under this section would be able to specify additional circumstances that would constitute an offer to which the provisions of Division 5A would apply.

3.10 Section 1019D also specifies offers to which Division 5A is not intended to apply.

3.11 Should Division 5A apply to an offer, than a number of obligations must be met by the offeror.

3.12 Under section 1019E, the relevant offer needs to be made in printed or electronic form. Unsolicited offers in any other form, for example via telephone, are prohibited.

3.13 Under section 1019F, inviting someone to sell his or her financial product off-market would be an offence. This proposed prohibition would only apply to invitations that, if structured as an offer, would be caught by the proposed provisions of this Division.

3.14 Section 1019G introduces a timeframe for which offers are to remain open (at least one month but not more than 12 months). In addition, this provision specifies the way in which an offer can be withdrawn.

3.15 Under section 1019H, the terms of an offer, as set out in the offer document, will not be able to be varied by either party. This restriction will not affect the ability of an offeror to make a lawful withdrawal of an offer and make a new offer, nor would it stop an offeree making a separate counter offer.

3.16 Under section 1019I, the offeror must disclose, amongst other things, the current market value of any financial products they make off-market offers to purchase, in an offer document. In the event that the current market value is not available, for example where a financial product is not traded on a licensed financial market, then the offeror must provide a 'fair estimate' of the value of the product. Where such an estimate is given, the offer document must explain how the estimate was derived.

3.17 Regulation-making powers are available under section 1019I so as to allow the specification of other disclosure requirements to be included in the offer document or alternatively to clarify existing requirements.

3.18 Section 1019J requires the offeror to provide additional disclosure where the actual market value of the financial product under offer varies from the disclosed market value, by a percentage greater than that specified in the regulations.

3.19 Pursuant to such a variation, offerors would have to withdraw their offer (and subsequently make another offer) or alternatively, send the offeree a supplementary offer document. The purpose of the supplementary offer document would be to disclose the market value variance only. That is, the terms of the original offer could not be varied through the issue of the supplementary offer document and the document must include a statement to that effect.

3.20 In that regard, if an offeror wished to amend the terms of the original offer document, the offer must be withdrawn and a new offer made.

3.21 Non-compliance with the supplementary disclosure provisions would constitute an offence.

3.22 In certain circumstances, section 1019K allows an offeree (the seller) the right to terminate a contract to sell a financial product off-market and as such, refuse to transfer that product to the offeror (the buyer). Alternatively, if the transfer has already taken place, section 1019K allows the seller the right to have the financial product returned.

3.23 These rights would exist for up to 30 days after the contract was entered into and would only be available where:

·
The offer was accepted after 12 months from the date of the initial offer;
·
A sale takes place, however, the offer document was somehow defective, for example it did not comply with the requirements in section 1019E, or section 1019I or the offer document contained misleading or deceptive statements;
·
A person accepts an unlawful invitation under section 1019F; or
·
A sale is undertaken, however the offeror does not provide the offeree with a required supplementary offer document due to 1019J (or the supplementary offer document is not made available to the seller until after the completion of the sale). Alternatively, the sale is undertaken based on a supplementary offer document that is defective, or contains a misleading or deceptive statement.

Items 8 and 9 - ASIC stop orders

3.24 ASIC will have stop order powers in relation to the new provisions under Division 5A of Part 7.9, particularly where an offer document is defective. For example, an ASIC Stop Order may be required where an offer document contained a misleading or deceptive statement.

Item 10 - offences relating to offers to which Division 5A applies

3.25 This item specifies what would constitute an offence under Division 5A.

Items 11 to 22 - civil liability

3.26 Civil recourse is available to an offeree in the following circumstances:

·
A sale takes place, however, the offer document was defective, for example it did not comply with the requirements in section 1019E or section 1019I;
·
A person accepts an invitation prohibited under section 1019F; or
·
A sale is undertaken, however the offeror does not provide the offeree with a required supplementary offer document due to 1019J (or the supplementary offer document is not made available to the seller until after the completion of the sale). Alternatively, the sale is undertaken based on a supplementary offer document that is defective.

Item 23 - Division 5A applies during the transition period

3.27 The new disclosure provisions commence upon Royal Assent, rather than at the end of the transition period.

Item 24 - amendment of Schedule 3 (after table item 309A)

3.28 This item specifies the penalties for Division 5A.

Schedule 2 - Other Amendments of the Corporations Act 2001

Items 1A, 4A & 7A - definition of professional investor

3.29 Item 4A amends the definition of professional investor in section 9 to make clear that it excludes trustees of superannuation funds, approved deposit funds, pooled superannuation trusts or public sector superannuation schemes with assets of less than $10 million. It is arguable that a combined reading of paragraphs (b) and (d) of the definition as currently drafted includes such trustees, which is not intended.

3.30 Amendments are also made to move the definition of body regulated by APRA from the definition section (section 761A) in Chapter 7 of the Act to the general definition section (section 9) at the beginning of the Act. The definition itself will not change.

Items 1, 8, 29 to 31, 41, 43 & 44, 52 & 53, 57 to 60, 75 & 76, 99 & 100, 103, 110 & 111 - removal of references to 'declared professional body'

3.31 The concept of a declared professional body (DPB) was contained in the Financial Services Reform Bill (FSR Bill) when it was introduced into the Parliament in 2001. However, the concept was removed during the FSR Bill's debate and passage. Not all references to DPBs were removed at that time. These items therefore remove references to DPBs where they remain, and also remove redundant references to sections relating to DPBs that were removed from the FSR Bill prior to its enactment.

Item 2 - section 9 - definitions of 'dispose'

3.32 Currently there are two definitions of dispose in section 9. This item consolidates those definitions, and removes references to repealed provisions.

Items 3 to 5 - section 9 - definitions of 'licence', 'licensee' and 'responsible officer'

3.33 These items remove redundant definitions of licence and licensee from section 9, and amend the definition of responsible officer to clarify that the reference to 'licence' in that definition is a reference to an AFSL.

Items 6 and 7 - section 761A - definition of 'basic deposit product'

3.34 These items amend the definition of basic deposit product in section 761A. The amendment to subparagraph (c)(ii) expands the definition of 'basic deposit product' to include deposit products with a term of five years or less. The second amendment (item 7) is to paragraph (d). This amendment ensures that term deposits with the terms and conditions contemplated by subparagraph (c)(ii) of the definition will not be required to meet the 'at call' requirement set out in subparagraph (d)(i). That is, term deposits with a maturity of five years or less will not need to be 'at call' in order to be included in the definition of basic deposit product.

Items 9A-B, 45A-F & 46A-C - personal advice given in a 'live' market situation

3.35 These items amend section 946B of the Act and related provisions. Section 946B provides certain concessions from the requirement to provide a SoA where personal advice is given and that advice is 'execution-related telephone advice' (ERTA). ERTA is defined as advice given by telephone which relates to financial products able to be traded on a licensed market, and which is given as an integral part of the execution of a transfer of, or order for, those financial products.

3.36 In order to come within the exception to the requirement to give a SoA for ERTA, the client must agree to a SoA not being provided for the advice, or advice of that kind. The advice provider must verbally disclose, at the time the ERTA is given, information relating to remuneration and conflicts of interest, and must also keep a record of the advice for 90 days from the date the ERTA is given (this last requirement is contained in the Corporations Regulations).

3.37 The proposed amendments to section 946B in items 46A-C have the following features:

·
The expression 'execution-related telephone advice' will be replaced with 'further market-related advice' (FMRA), which will necessitate consequential amendments to other provisions that refer to ERTA (sections 761A, 942B and 942C - see items 9A-B and 45A-F);
·
In order to be excepted from the requirement to give a SoA for FMRA, it will be a prerequisite that the client has previously been given a SoA which sets out the client's relevant personal circumstances in relation to the advice contained in that SoA (proposed paragraph 946B(1)(b));
·
It is also an existing requirement of paragraphs 947B(2)(b) and 947C(2)(b) that the SoA must include information about the basis on which the advice is or was given.
·
So long as the client's relevant personal circumstances set out in this 'initial' SoA, and the basis on which the advice contained in the SoA was given, are not significantly different from the personal circumstances and basis for the advice that exist when FMRA is provided, a further SoA will not be required at that time (proposed paragraph 946B(1)(d));
·
Consequently, where relevant personal circumstances or the basis on which the advice in the SoA was given do significantly change, it will be necessary for the providing entity to give the client a fresh SoA.
·
In this regard, it is a requirement of section 945A that providing entities have a reasonable basis for any personal advice given, which requires them to determine the client's relevant personal circumstances. It will therefore be expected that providers of FMRA regularly make enquiries regarding clients' personal circumstances, to ensure they are up to date.
·
The means by which FMRA may be provided will be expanded from telephone only to include other forms of electronic communication such as fax and e-mail. There will also be provision for the regulations to specify additional forms of electronic communication (proposed paragraph 946B(1)(g));
·
It will no longer be a requirement that the advice is given as an integral part of the execution of a transfer of, or an order for, financial products traded on a licensed market;
·
This change recognises that advice given in a 'live' market situation may not always result in a trade occurring (for example, advice may be to 'hold' a financial product, rather than to 'buy' or 'sell' - see proposed subparagraph 946B(1)(c)(i)).
·
Nevertheless, it remains a critical element of the concessions provided by section 946B that the advice is given in the context of a 'live' financial market. To reinforce this, the following conditions will apply;
·
It will be a requirement that the FMRA is provided by a participant in a licensed market, or an authorised representative of such a participant (proposed paragraph 946B(1)(a)); and
·
The advice provider must have a reasonable belief that the client requires the FMRA promptly, or it is in the client's interests that the FMRA be provided promptly (proposed paragraph 946B(1)(e)).
·
Promptly is not defined in the provision, but is intended to convey the need for advice to be provided with urgency and expedition. The provision does not remove the need for a SoA to be provided to a client when personal advice is given by a participant on a licensed market if that advice is not required in order for the client to make a 'time critical' decision.
·
FMRA will include advice relating to offers or invitations which, if accepted, would result in the client acquiring or disposing of securities, managed investment products or derivatives that are able to be traded on a licensed market (proposed subparagraph 946B(1)(c)(ii)).
·
Thus it will cover, for example, advice on offers or invitations under which a client may acquire further securities in an entity in which the client already holds securities (for example, share purchase offers and takeover offers).
·
FMRA must not contain advice of any other kind, other than cash management facility advice (proposed paragraph 946B(1)(f)).

'Able to be traded on a licensed market'

3.38 An important element of the amended section 946B is the range of financial products to which it relates. Rather than referring to financial products able to be traded on a licensed market as the current section 946B does, the new provision is expressed to apply in respect of securities, managed investment products and derivatives (all defined in section 761A) able to be traded on a licensed market.

3.39 A definition of able to be traded on a licensed market is included in the provision (proposed subsection 946B(2)) specifying, in relation to securities and managed investment products, that they must be admitted to quotation on a licensed market and that quotation is not suspended, or that they are further products of a kind that are already admitted to quotation and that quotation is not suspended.

·
The definition will, for example, include further securities of an entity that already has some securities of the same kind admitted to quotation, but will not include securities of an entity that is yet to have any of its securities admitted to quotation.

3.40 In relation to derivatives, the concept of admission to quotation is not appropriate, so the criteria require that, in order for a derivative to be able to be traded, the standard terms of the arrangement that constitutes the derivative must be set out in a licensed market's operating rules, and those rules must also provide that the derivative is able to be dealt with on that market.

'Cash management facility' and 'cash management facility advice'

3.41 New definitions of cash management facility and cash management facility advice are included (proposed subsection 946B(2)). FMRA may include advice about the use (but not the establishment) of cash management facilities (defined to include interests in cash common funds or cash management trusts, basic deposit products and bank accepted bills) which facilitate the acquisition or disposal of securities, managed investment products or derivatives to which the FMRA relates.

·
Cash management facility advice does not include advice about the establishment of cash management facilities. Such advice, if it is personal advice, will require a SoA. It is anticipated that advice about the establishment of a cash management facility will normally form part of the 'initial' SoA provided to the client.

3.42 The current requirement in subsection 946B(3) regarding the verbal disclosure that must be provided to a client will be retained. However, the wording is amended to make it more appropriate to the additional means by which FMRA may be provided.

3.43 As with the requirements relating to SoAs generally, the amended section 946B will apply to a providing entity once it is issued with an Australian financial services licence (the amended section 946B will also apply to any providing entities who are authorised representatives of the licensee from that time).

Item 12 - subsection 761E(3A) - a situation that is not an issue of a financial product

3.44 Section 761E provides the definition of what is an 'issue' in relation to financial products. Without limiting the operation of subsections 761E(2) and (3), subsection 761E(3A) lists examples that do not constitute an issue of a financial product. As it is not intended that contributions made by an employer would be treated as being a new issue, this situation is provided as a further example in subsection (3A).

Items 12A & 12B - bundled insurance products

3.45 These items amend section 764A of the Act to provide a consistent basis for determining when general insurance products are provided to retail clients, irrespective of whether the products are provided individually through separate contracts of insurance or are provided in a 'bundled' contract. The proposed amendments maintain the principle of promoting consumer protection through disclosure for retail clients.

3.46 A bundled contract of insurance is a single contract that includes a range of insurance covers, from which consumers are able to choose which of those various insurance covers they wish to acquire.

·
A general insurance product is currently defined in paragraph 764A(1)(d) by reference to a 'contract of insurance'.
·
Subsection 761G(5) provides that certain types of general insurance (for example, home contents, consumer credit, sickness and accident) are taken to be provided to a retail client, where the client is an individual or the insurance product is or would be used in connection with a small business. Those types of general insurance are classified under subsection 761G(5) and associated Corporations Regulations 7.1.11 to 7.1.17.

3.47 The amendments utilise the kinds of insurance covers and underlying assets to distinguish between classes of general insurance products contained within a bundled contract. For example, insurance cover in respect of the destruction or damage to a home building can be distinguished from insurance cover in respect of the destruction or damage to commercial premises. This basis is consistent with that used in Corporations Regulation 10.2.74.

3.48 By making these amendments, disclosure and other obligations under Part 7.9 of the Act will not apply to those individual general insurance covers provided within a bundled contract of insurance that are ordinarily considered to be provided to wholesale clients. This outcome is consistent with that for similar general insurance products when provided in separate contracts of insurance.

3.49 The amendments only apply for the purposes of determining what constitutes a general insurance product (and therein a financial product) and do not have a general effect on the meaning of 'contract of insurance' when used elsewhere in Chapter 7 of the Act.

Items 13, 13A & 13B - expert statements

3.50 Under section 766B of the Act, giving an 'exempt document or statement' is not considered to be the provision of financial product advice. An 'exempt document' is defined under subsection 766B(9). Consequently, information contained in an exempt document that would otherwise be considered to be financial product advice, such as a valuation provided by a merchant bank, will not be classified as financial product advice if it is included in an exempt document.

3.51 The amendment is intended to ensure that experts' reports about financial products do not automatically lose their status as financial product advice merely through being included in an exempt document.

Items 14 & 15 - section 766C - definition of 'dealing'

3.52 Dealing is defined under section 766C. The regulation-making power in the section allows the creation of regulations that determine conduct that is taken 'not to be dealing.'

3.53 These items amend the regulation-making power in the section to allow the creation of regulations that, in addition to determining conduct that is taken 'not to be dealing,' would allow regulations that determine what is dealing.

Item 16 - section 766E - exceptions to the provision of a custodial or depository service

3.54 Section 766E defines when a custodial or depository service is provided. Subsection 766E(3) lists exceptions to this definition. The current exception in paragraph 766E(3)(c) relates to the operation of certain superannuation entities. This item makes an amendment to the exception in paragraph 766E(3)(c), to clarify that it only applies to the operation of those superannuation entities by the trustees of those entities. Thus, the exception will not apply in respect of conduct engaged in by parties other than the trustees (such as third party service providers).

Item 17 - section 766E - exceptions to the provision of a custodial or depository service

3.55 This item inserts a new paragraph (ca) into subsection 766E(3) to provide an exception to the provision of a custodial or depository service for conduct that is the operation of a statutory fund by a life office within the meaning of the Life Insurance Act 1995, which also includes the operation of a benefit fund by a friendly society under the Life Insurance Act 1995.

Items 18, 48 & 49, 66 & 67, 92 & 93, 95, 106 to 109 - exemption and modification powers

(a) ASIC's exemption and modification powers

3.56 Under various provisions of Chapter 7 and Part 10.2, powers to provide exemptions from, or make modifications to, the application of certain provisions of the Act (referred to hereafter as 'exemption and modification powers') are given to ASIC (sections 951B, 992B, 1020F, 1075A in Chapter 7 and sections 1437 and 1442 in Part 10.2).

3.57 The exemption and modification powers provided to ASIC generally contain the limitation that they may not be exercised by ASIC to declare that provisions are modified such that they apply in relation to persons and/or financial products to which they would not otherwise apply (subsections 951B(2), 992B(2), 1020F(3) and paragraphs 1437(3)(b) and 1442(3)(b)).

3.58 ASIC uses its exemption and modification powers to provide administrative 'relief' from the operation of various provisions of the legislation in circumstances where it judges that application of those provisions is not warranted, or that they should apply in a modified way. In most situations, the exemption and modification powers are exercised in response to requests for relief from parties who are experiencing difficulties complying with a particular provision of the legislation or where the application of the provisions is not appropriate to particular circumstances.

3.59 Depending on the circumstances, the strict operation of the legislation may produce unintended or unreasonable results. Moreover, exemptions and modifications will often be necessary to facilitate innovative products that were not contemplated at the time the legislation was drafted, while maintaining an appropriate degree of investor protection.

3.60 The limitation mentioned above which prevents ASIC from declaring that a provision is modified such that it applies in relation to a person and/or financial product to which it would not otherwise apply presents a substantial impediment to the effective use of the exemption and modification powers.

3.61 ASIC's experience to date has been that it has occasionally been impossible for ASIC to give industry the relief that it seeks in circumstances where its provision would be entirely appropriate. In other cases, the limitations have made the provision of relief much more difficult and complex.

3.62 For example, a number of insurance brokers have been effectively denied the benefit of the 2-year transition period to the new licensing regime introduced by the FSR Act. The brokers concerned failed to lodge the renewal of their registration in accordance with the rigid time limits of the Insurance (Agents and Brokers) Act 1984 (IABA). This lapse of registration meant that the brokers in question had to immediately obtain a licence under the new licensing regime introduced by the FSR Act (ie. the transition period was immediately terminated), or cease carrying on business. This was considered a harsh, undesirable and unintended outcome.

3.63 The limitations on ASIC's modification powers preventing it from declaring provisions to be modified so that they applied in relation to persons to whom they didn't otherwise apply meant ASIC was not able to provide the relief requested of it. That is, ASIC was unable to reinstate the IABA regime for those brokers who had failed lodge the application for renewal of their registration on time (as this would have been literally to apply the IABA provisions to persons to whom they did not, at the time the relief instrument was executed, apply). This was the case regardless of whether the delay was inadvertent or slight, or whether the renewal would have been granted but for the delay.

3.64 The relief instrument ASIC executed in this context was only able to assist those brokers whose registration hadn't lapsed at the time of the instrument but may at some future time lapse.

3.65 Additionally, under the existing law, ASIC could be precluded from granting industry concessions, for example, for the issue of a single PDS in some situations where there is doubt, because of the way the investment is structured, that a party within the corporate group is issuing a product to a retail client. This could produce anomalous outcomes for industry. In one matter, ASIC was asked to permit the offer of a combined product, namely installment receipts and units in a managed investment scheme, through a single PDS by joint issuers within a conglomerate group.

3.66 Under the arrangement, person A was the technical issuer of the installment receipts to the retail sector. Persons B and C, however, were to be substantively responsible to retail investors for the investment. Person A applied for relief from being an issuer of the product and therefore from the obligation to prepare the PDS as required under subsection 1013A(1).

3.67 In this matter, ASIC had no policy objection to providing relief to person A, who in substance played a minor role in the investment transaction, on the basis that persons B and C, who were playing the substantive roles, assumed responsibility for the obligations under Part 7.9 in respect of the installment receipts (including the preparation of a PDS). In ASIC's view the legislation fixed the applicant with obligations that were disproportionate to acting as a bare custodian, essentially as a technical consequence of the way in which the offer was structured.

3.68 Whilst ASIC did not have a policy objection to granting the relief applied for, subsection 1020F(3) had the effect that any obligation that person A is relieved of in relation to the installment receipts can only be shifted to another person who already has an obligation under the relevant provision in the context of this transaction.

3.69 Another effect of the limitations to the modification powers has been to complicate the instrument-drafting process. For example, to provide clarification of the operation of Corporations Regulation 10.2.74 (which identifies what is a "class of financial product") required ASIC to produce a six-page class order ([CO 02/1071] issued on 9 October 2002). ASIC considers that, without the limitation on its exemption and modification power in subsection 1020F(3), this class order relief could have been provided in a single paragraph. It is not helpful to industry, or indeed anyone else, to require ASIC instruments to be much longer and more complex than they would otherwise need to be.

3.70 The exemption and modification powers provided to ASIC under other chapters of the Act do not contain the limitation imposed under Chapter 7 and Part 10.2 (see section 283GS in Chapter 2L; section 601QA in Chapter 5C; section 655A in Chapter 6; section 669 in Chapter 6A; section 673 in Chapter 6C and section 741 in Chapter 6D).

3.71 Items 49, 67, 93, 107 and 109 therefore respectively repeal subsections 951B(2), 992B(2), 1020F(3) and amend subsections 1437(3) and 1442(3) to remove the existing limitation which presently prevents ASIC from declaring that a provision is modified such that it applies to a person and/or financial product to which it would not otherwise apply.

3.72 This will achieve consistency throughout the Act and enable ASIC to more effectively and efficiently exercise its exemption and modification powers, and in so doing enhance industry certainty about the regulator's powers. The exemption and modification powers given to ASIC in parts of the Act outside of Chapter 7 and Part 10.2 which do not contain the limitation have been in place for some time, and there is no evidence that ASIC has ever used those powers inappropriately. The powers are invariably used in order to provide some form of concessional treatment, rather than to impose additional obligations. In addition, ASIC's use of its exemption and modification powers is subject to a number of safeguards to ensure that the powers are not abused, including administrative review by the Administrative Appeals Tribunal, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman.

(b) Regulation-making exemption and modification powers

3.73 Sections 854B, 893A and 1020G in Chapter 7 provide exemption and modification powers that may be exercised through the making of regulations. Subsection 854B(2) and paragraph 1020G(2)(a) specifically provide that the regulations may modify a provision so that it applies to a person, body (in the case of subsection 854B(2)), financial product (in the case of paragraph 1020G(2)(a)) or situation to which it would not otherwise apply. Section 893B makes no such provision. Subsections 854B(2) and paragraph 1020G(2)(a) do not add to the scope of the exemption and modification power which is established by subsections 854B(1) and 1020G(1). Rather, they merely serve to highlight the distinction between the exemption and modification powers granted to ASIC discussed above, and the regulation-making exemption and modification powers.

3.74 Given that it is proposed to remove from ASIC's exemption and modification powers the current limitation which prevents ASIC declaring that a provision is modified so that it applies to a person and/or financial product to which it would not otherwise apply, subsection 854B(2) and paragraph 1020G(2)(a) will serve no useful purpose. Therefore, they will be repealed.

3.75 If subsection 854B(2) and paragraph 1020G(2)(a) were not repealed, this might suggest that the ASIC exemption and modification powers still do not permit ASIC to declare that a provision is modified so that it applies to a person and/or financial product to which it would not otherwise apply (that is, because they do not contain a similar 'positive' statement to this effect like those in subsection 854B(2) and paragraph 1020G(2)(a)). To prevent this misinterpretation arising, items 18 and 95 respectively repeal subsections 854B(2) and paragraph 1020G(2)(a).

3.76 The repeal of these provisions does not mean that regulations made under sections 854B and 1020G may not modify a provision so that is applies to a person, body, financial product or situation (as the case requires) to which it would not otherwise apply. The power to make such modification is within the scope of the relevant exemption and modification power provided in subsections 854B(1) and 1020G(1) (indeed, it is within the scope of all of the regulation-making exemption and modification powers, and will be within the scope of the exemption and modification powers available to ASIC, following removal of the limitation discussed above).

3.77 Item 95 repeals not only paragraph 1020G(2)(a), but also paragraph 1020G(2)(b), which provides that regulations may declare that provisions of Part 7.9 are modified so that they apply in a way that changes the person by whom or to whom a document or information is required to be given. Again, the inclusion of this provision does not add to the basic exemption and modification power set out in subsection 1020G(1). This is made clear by the opening words of subsection 1020G(2) which provides 'Without limiting subsection (1)...'.

3.78 Paragraph 1020G(2)(b) is therefore redundant and does not add to the power to exempt and modify granted under section 1020G. Its retention could lead to interpretational problems. For example, it might be implied that exemption and modification provisions that do not contain the equivalent of paragraph 1020G(2)(b) do not permit a modification that changes the person to whom or by whom a document is to be given. Item 95 therefore repeals the whole of subsection 1020G(2), including paragraph 1020G(2)(b). For the same reasons, item 93 similarly repeals an equivalent provision in subsection 1020F(2).

Items 25, 27 and 28 - subsection 911A(2)(h) and 911A(5) - licensing exemption for services regulated by overseas regulatory authorities

3.79 Paragraph 911A(2)(h) provides an exemption from licensing for a person regulated by an overseas regulatory body. To improve the practical operation of this exemption, ASIC will have the power to exempt a person from FSR licensing based upon overseas regulation of the financial service a person provides. This is in line with the FSR regime's intention to regulate financial services and is in contrast to the existing exemption, which requires ASIC to base their exemption on approving a relevant overseas regulatory body, with no regard to the alternate regulation of that service.

3.80 The associated amendment to subsection 911A(5) allows any relief provided by ASIC from the licensing conditions for services regulated by an overseas body to be either unconditional or subject to conditions.

3.81 It is not intended that ASIC's powers under the amended paragraph 911A(2)(h) will limit the operation of the powers under paragraphs 911A(2)(k) or (l).

Items 32 to 34 - subsections 912C(1A) and (2) and new section 912CA - collection of information by ASIC

3.82 ASIC may direct a licensee in writing to provide it with specific information under section 912C. In order to improve the effectiveness and flexibility of this information gathering provision, these provisions will enable an increase in the range of information that ASIC can request from licensees.

3.83 ASIC will be able to seek information on a periodic basis in amendments to subsections 912C(1A) and (2). A regulation-making power is also provided in 912CA to allow other forms of information to be specified.

Item 35 - subsection 912D(1) - reporting of breaches to ASIC

3.84 This item substitutes subsection 912D(1) and inserts a new subsection 912D(1A). It makes a number of changes to the requirement for AFSL holders to report to ASIC breaches, or likely breaches, of obligations set out in sections 912A and 912B.

3.85 First, the current wording in subsection 912D(1) referring to an AFSL holder that 'becomes aware that it can no longer meet, or has breached', the relevant obligations is replaced by reference to an AFSL holder that 'has breached, or is likely to breach' the relevant obligations. New subsection 912D(1A) defines the expression 'likely to breach'. This change in terminology is to make the provision more understandable, and does not change its basic requirements.

3.86 Second, the basic reporting period is extended from 3 days to 5 business days.

3.87 Third, the concept of a 'significant' breach or likely breach is introduced in paragraph 912D(1)(b). It is only significant breaches or likely breaches that require reporting to ASIC. Factors to which regard must be had in determining the significance of a breach or likely breach are listed in subparagraphs 912D(1)(b)(i)-(v). Included in this list is a power for further factors to be prescribed in the regulations. Although no regulations are presently contemplated, the reporting to ASIC of breaches or likely breaches will be monitored, and the results of this monitoring will be taken into account in deciding whether any additional factors need to be prescribed in regulations.

3.88 Finally, the requirement to report breaches or likely breaches of the obligation in paragraph 912A(1)(c) (which requires AFSL holders to comply with the financial services laws - defined in section 761A) is limited to those laws set out in paragraphs (a) to (c) of the definition (which specify various parts of the Corporations Act and the ASIC Act), and laws of the Commonwealth that are specified in the regulations.

3.89 It is intended that the regulations will specify legislation under which ASIC or APRA are given powers and/or functions. While not pre-empting any proposed regulations, an indicative list of the relevant legislation would include the following Acts:

Banking Act 1959
Financial Sector (Collection of Data) Act 2001
Financial Sector (Shareholdings) Act 1998
Financial Sector (Transfer of Business) Act 1999
Insurance Acquisitions and Takeovers Act 1991
Insurance Act 1973
Insurance Contracts Act 1984
Life Insurance Act 1995
Retirement Savings Accounts Act 1997
Superannuation Industry (Supervision) Act 1993
Superannuation (Resolution of Complaints) Act 1993

Item 36 - subsection 912F(1) - AFSL number on specified documents

3.90 Section 912F creates a strict liability offence for failure to include a person's AFSL number on documents connected with providing financial services under the licence. To ensure there is certainty over which documents must include an AFSL number, a regulation making power is provided that will be used to specify which documents will be subject to this requirement.

Items 37 to 40 & 105 - section 916F - notification of the appointment of authorised representatives

3.91 Items 37 and 39 make amendments to subsections 916F(1) and (1A) respectively to extend the time period within which the appointment of authorised representatives must be notified under those provisions from 10 to 15 business days. Item 105 makes a consequential amendment to a transitional provision, paragraph 1431(2)(d) in Part 10.2.

3.92 Item 38 inserts a new subsection 916F(1AA) the effect of which is to provide that the appointment of certain individual authorised representatives (IARs) by a corporate authorised representative (CAR) does not have to be notified to ASIC if certain conditions are met. These conditions are that the IARs are members of a specified class of individuals, the appointment of which by the CAR has the consent of the licensee under section 916B; the IARs are employees of the CAR; and the IARs are only authorised to provide general advice in relation to, and/or deal in, financial products specified in the regulations. It is envisaged that general insurance products will be specified.

3.93 Item 40 makes a consequential amendment to paragraph 916F(3)(b) to clarify that where the obligation to notify the appointment of an authorised representative does not apply, neither is it necessary to notify of the revocation of such an appointment.

Item 42 - new sections 926A and 926B - exemption and modification powers

3.94 This item inserts two new provisions, sections 926A and 926B, which respectively provide for exemptions and modifications to be made by ASIC and the regulations, in respect of the provisions of Part 7.6. These new exemption and modification powers will provide flexibility for either ASIC or the regulations to grant relief or concessions through exemption from, or modification to, the provisions in Part 7.6. New section 926A is similar to the exemption and modification powers provided to ASIC under other Parts of Chapter 7 (as those provisions are amended by this Bill), with the difference that the exemption and modification power granted to ASIC under Part 7.6 does not apply to provisions in Divisions 4 and 8 of that Part.

3.95 New section 926B is equivalent to the existing regulation-making exemption and modification power in section 1020G (as that section is amended by this Bill). Similar regulation-making exemption and modification powers are also being inserted into Parts 7.7, 7.8 and 7.10 (see discussion under items 51, 69 & 97).

Item 45 - subsection 941C(6) - exemption from the requirement to provide a FSG for certain basic deposit and other products

3.96 Section 941C lists situations in which a FSG is not required. Subsection 941C(6) provides an exemption from the requirement to provide a FSG for certain basic deposit and other products. The proposed amendment clarifies the scope of the exemption by specifying dealing and the provision of product advice as activities that are covered by the exemption.

Items 46, 47, 54, 55, 56, 74 & 96 - sections 942DA, 947E and 1013M, paragraphs 952I(1)(b), 952I(2)(b) and 952J(1)(b) and subparagraph 1021H(1)(b)(i) - ability to combine disclosure documents (FSGs, PDSs and SoAs).

3.97 The amendments contained in these items will allow a FSG and a PDS to be combined into a single document in certain circumstances. These circumstances will be specified by the regulations and will be aimed at ensuring that the effectiveness of the information contained in the document is preserved.

3.98 Combining a FSG and PDS contrary to the conditions set out in the regulations will result in a minor penalty being applicable under paragraphs 952I(1)(b) and 952I(2)(b), and subparagraph 1021H(1)(b)(i). The combined document will also be subject to the offence provisions for being 'defective' and will be required to be presented in a 'clear, concise and effective' manner as stipulated in subsections 942B(6A) and 1013C(3).

3.99 ASIC may also facilitate combined documents in specified circumstances by the use of a declaration under section 951B.

3.100 Item 47 will also clarify that a SoA cannot be combined with a FSG or PDS. This reflects the personal nature of the advice offered in a SoA.

Item 47A - exemptions from the section 949A obligation to warn the client

3.101 General advice usually is accompanied by the general advice warning in section 949A. This warning puts on notice those who received general advice that it has not taken their personal circumstances into account. However, there are situations where general advice is given but providing the warning may not be practical or enhance consumer protection.

3.102 This item inserts a regulation-making power in section 949A to specify limited circumstances where the general advice warning will not need to be provided.

3.103 It is envisaged regulations under this section will only be made in circumstances where the absence of the warning does not have a material detrimental impact on consumers. An example could be general advice provided to the public at large through a radio advertisement. However, regulations would not be envisaged in circumstances where there is potential for an investor to be significantly influenced by the advice, for example, during an investment seminar.

Items 50, 68, 94 & 98 - new notes - exemption and modification powers

3.104 These items respectively add notes to the end of provisions in Chapter 7 which give ASIC exemption and modification powers (sections 951B, 992B, 1020F and 1075A), the effect of which is to draw attention to the fact that references in those provisions to the respective parts of Chapter 7 or Part 10.2 include references to regulations or other instruments, due to section 761H. In short, this clarifies that the exemption and modification powers in those provisions extend to apply to regulations and other instruments made under provisions in those parts of Chapter 7 or Part 10.2 (which deals with transitional matters).

Items 51, 69 & 97 - regulation making exemption and modification powers

3.105 The FSR Act was intended to form a general regulatory umbrella that covered the financial services industry. The intent of the FSR Act was to replace industry-specific financial services regulation, with a consolidated and single licensing, conduct and disclosure regime.

3.106 The regime introduced by the FSR Act applies across a range of financial services and in particular applies to new areas such as banking, insurance and superannuation.

3.107 While the FSR Act provides a broad framework for financial services regulation, the diverse and complex nature of the financial services industry means that the general legislation does not always appropriately 'fit' in relation to all segments of the industry and situations.

3.108 As such, the legislation was designed to make use of regulations to provide greater detail and specificity in relation to particular products and situations as appropriate. This two-tiered approach was a fundamental structural element of the FSR Act. To this end a range of specific regulation making powers were included in those areas expected to require further detail or clarification through the regulations.

3.109 The FSR Act allows a period of two years for existing industry participants to transition to the new regime. After the implementation of the FSR Act on 11 March 2002, industry participants and ASIC have raised a number of instances where the legislative intent has not been fully achieved and refinements have been required.

3.110 While many of the issues raised have required relatively minor adjustments to remedy, on a number of occasions problems have been experienced trying to resolve these issues using the limited regulation making powers contained in areas other then Part 7.9. This has in all cases resulted in a delay or less than satisfactory remedy being adopted and in a number of cases led to a requirement to make further minor amendments to the Act through this Bill. These problems can be directly attributed to weaknesses in the nature and extent of regulation making powers under the Act.

3.111 To ensure that such issues raised can be resolved through regulations, the Bill proposes to include further regulation making powers in Parts 7.6 (see item 42), 7.7, 7.8 and 7.10 of Chapter 7.

3.112 These regulation-making powers are consistent with other regulation making powers in the Act, for example section 1020G.

3.113 The new powers will enable exemptions and modifications via regulations, to provisions under the relevant parts.

3.114 For example, the regulation-making power proposed for Part 7.6 will permit modifications to section 923A in relation to restrictions on the use of certain words, including 'independent', 'unbiased' and 'impartial', to address practical concerns with the operation of the section.

Items 53A & 58A - defective Financial Services Guide (FSG)

3.115 Amendments are proposed to provide greater certainty in relation to the interaction between section 941E, which provides that a FSG must be 'up to date' when given to a client, and the meaning of 'defective' within the criminal and civil liability provisions of Part 7.7 of the Act.

3.116 The items provide that the inclusion in a FSG of information that is not up to date is considered to constitute a misleading or deceptive statement for the purposes of determining whether a FSG is defective.

3.117 They also provide that, for the purposes of determining whether a FSG is defective, an 'omission' will include the absence of information relating to new circumstances that may influence a retail client's decision to acquire a financial service.

Item 61 - subparagraph 981B(1)(b)(i)

3.118 This item corrects an error in subparagraph 981B(1)(b)(i) by replacing the word 'or' with 'of'.

Items 62 & 63 and 89 & 90 - subsections 981H(2) and 1017E(2B) - money held on trust

3.119 Items 63 and 90 respectively repeal subsections 981H(2) and 1017E(2B). Items 62 and 89 make consequential amendments to subsections 981H(1) and 1017E(2A).

3.120 Subsection 981H(1) provides that client moneys paid to a licensee are taken to be held on trust by the licensee. Subsection 1017E(2A) contains a similar requirement in the situation where a product provider (who may or may not be a licensee) receives money before a product is issued.

3.121 Subsection 981H(2) provides that subsection 981H(1) does not apply where the licensee and client agree in writing that the money shall not be held on trust. Similarly, subsection 1017E(2B) provides that subsection 1017E(2A) does not apply where the product provider and the person who paid the money agree in writing that the money shall not be held on trust.

3.122 The rationale behind the insertion of subsections 981H(2) and 1017E(2B) was that the statutory trust imposed by subsections 981H(1) and 1017E(2A) should not override any agreement reached by the parties which created an express trust applying to the money. It was not intended that subsections 981H(2) and 1017E(2B) should allow the parties to agree in writing that the money is not subject to a trust at all, as this would have the potential to undermine the protection that is intended to be afforded to such moneys. However, the current drafting does not reflect this intention.

3.123 The effect of the repeal of subsections 981H(2) and 1017E(2B) is that the parties to whom those provisions refer will not be permitted to agree in writing that moneys are not held on trust. However, paragraphs 981H(3)(a) and 1017E(2C)(a) state that the regulations may provide that the statutory trusts respectively created by subsections 981H(1) and 1017E (2A) do not apply to money in specified circumstances. Thus it will be possible to cater for situations, if any, in which there is a genuine need to exclude the statutory trust through the making of regulations.

Items 64 & 65 - sections 992A and 992AA - anti-hawking provisions

3.124 The amendments to the anti-hawking provisions will ensure that references to offers for issue or sale are interpreted consistently with definitions provided in subsections 700(2) and 1010C(2).

Items 10, 26, 70 & 72 - section 1012D - situations where a PDS not required

3.125 The exemption provided by the proposed insertion of subsection 1012D(2A) recognises the trustee/member relationship in determining when a PDS is to be provided for the acquisition of an interest in a self-managed superannuation fund.

3.126 The proposed exemption provides that the obligation to give a PDS does not apply in circumstances where prospective members have the information available to make an informed decision. For example, a PDS would not be required to be provided in circumstances where all the prospective members/ trustees of a fund have, or have available to them, the relevant information or where the fund has only one member.

3.127 In determining whether a PDS should be provided, the responsible person(s) would need to have regard to the information that would be contained in a PDS and the persons to whom they would be providing the information. The term self-managed superannuation fund is also defined for the purposes of Chapter 7.

Items 70, 71 & 73 - sections 1012D and 1013F - information in a PDS

3.128 Item 73 amends section 1013F (which relates to limitations on the information required in a PDS) to clarify that it applies in relation to all the content requirements established by the Act and regulations for PDS.

3.129 Item 70 amends section 1012D to exempt a regulated person from the need to provide a PDS in circumstances where section 1013F results in there being no obligation to provide any information.

3.130 The operation of section 1013F is subject to a 'reasonableness' test which applies in relation to information required by a person as a retail client to determine whether to acquire a product. Accordingly, section 1013F would not generally remove the obligation to provide a PDS in relation to financial products offered to the public.

Items 71A-B, 95C-D, 95G-U, 96A-F, 96H-I, 96L-U & 114 - section 1012G oral statement requirements

3.131 Section 1012G provides a regulated person, such as a product provider, in time critical recommendation and issue situations, an alternate means to supply information to a client, rather than the ordinary requirement to provide a PDS. However, the regulated person must still provide a PDS as soon as practicable after that time (in any event by the time of any confirmation or not later than 5 days after issue).

3.132 As presently drafted these 'verbal PDS' provisions pose practical difficulties and impose undue costs because they may be interpreted as requiring a 'block' statement to be provided, for example through a recorded monologue which might take some minutes to deliver over the phone.

3.133 The items amend paragraph 1012G(3)(a) to permit a regulated person to provide the required information in an unscripted form. In doing so, the amendments facilitate the information being provided in a more tailored manner. For example, during the course of a telephone call the regulated person would be obliged to provide the required information and would also be able to respond to any queries a client may have in relation to that information as it was being conveyed.

3.134 The amendments also remove the requirement for the information to be given based on material prepared by the product issuer. This will remove practical difficulties and potential conflicts for those intermediaries that are not representatives of the product issuer. For example, the relevant person might not have access to, or wish to confine their comments to, information provided by the product issuer.

3.135 The removal of reliance on issuer-prepared information requires adjustment to the criminal and civil liability provisions within Part 7.9. Those provisions currently rely on the issuer-prepared information as a basis for determining what is a defective disclosure document or statement (and hence subject to criminal or civil liability). Amendments to the definition of 'disclosure documents or statements' and various other references within liability provisions are also required.

3.136 Items 95U and 114 amend the criminal liability provisions such that they apply to the actions of the persons actually giving or preparing the information (subject to the regulated person taking reasonable steps to ensure that information provided was not defective and reliance upon information provided by the issuer of the product). This involves the proposed insertion of new liability provisions and penalties within Part 7.9.

3.137 The proposed civil liability provisions distinguish between the product issuer/authorised representative relationship and other financial services providers in determining their application. As such, where the person giving the information is an authorised representative of the product issuer, the product issuer is subject to the operation of the civil liability provisions (see item 96T).

3.138 The new liability provisions and associated penalties are based on comparable criminal and civil liability provisions that operate for Part 7.7 of the Act, in relation to the oral provision of FSGs and SoAs. For example, proposed section 1021FA is based on existing subsections 952D(1) and 952E(1), (2), (5) and (6), and proposed section 1021FB is derived from sections 952F and 952G.

3.139 Further, it should be noted that the proposed amendments would permit the liability provisions to apply to information provided, including information purporting to be that required by paragraph 1012G(3)(a).

3.140 The proposed amendments to the Part 7.9 criminal and civil liability provisions are necessary to ensure those disclosure obligations remain effective, enforceable and attach appropriate liabilities for actions.

3.141 The existing section 1020E stop order provisions provide ASIC with the ability to prevent a person being able to utilise the verbal PDS provisions where they have provided defective information in relation to a financial product.

Item 77 - subsection 1015D(2) - removing the requirement for self-managed superannuation funds (SMSF) to lodge an 'in use' notice

3.142 Section 1015B does not require trustees of SMSFs to issue or lodge PDSs or Supplementary PDSs with ASIC. Instead, subsection 1015D(2) stipulates that the responsible person for the statement must lodge a notice with ASIC advising that a statement is 'in use'.

3.143 The primary purpose of an 'in use' notice is to provide information to assist ASIC in conducting surveillance. In the case of SMSFs however, the information which would be provided via an 'in use' notice is already generally available to ASIC from the Register of Complying Super Funds database, maintained by the Australian Taxation Office.

3.144 The proposed amendment to subsection 1015D(2) will remove the obligation on trustees of SMSFs to lodge an 'in use' notice.

Items 77A-B, 78A-T, 95A-B, 95E-F, 96G & 96J-K - interaction between provisions of Part 7.9 (sections 1012J, 1016A to 1016E and Division 7)

3.145 These items address a range of issues related to the interaction of various provisions within Part 7.9 of the Act, in particular:

·
how the requirement for PDSs to be 'up to date' operates in respect of enforcement provisions, and therein the definition of defective;
·
whether a product can be issued following receipt of an application based on a PDS subject to non-materially adverse misstatements or omissions;
·
the ability of a regulated person to rectify defects in a PDS by providing a new PDS, rather than providing a supplementary PDS; and
·
the operation of the pre-requisite requirements for the issue or sale of a financial product in circumstances where the PDS does not contain material defects.

Clarifying 'up to date' and 'defective' concepts

3.146 Items 95F and 96K amend subsections 1021B(1) and 1022A(1) to improve the interaction between the concept of 'up to date' (section 1012J) and the meaning of 'defective' under the criminal and civil liability provisions for PDSs. The approach adopted is consistent with that which applies for FSGs (see also items 53A & 58A).

3.147 In addition, consistent terminology is to be applied across other provisions within section 1016E (that is, those provisions relating to 'new circumstances' already incorporate the up to date requirements but do not use a consistent terminology). In this regard, as paragraphs 1016E(1)(c) & (d) will be replaced and proposed subsection 1016E(5) inserted, direct reference will be made to the term defective, as opposed to outlining the respective sub-components.

Eligible applications & non-defective PDSs

3.148 Section 1016A of the Act currently requires an 'eligible application' to be one that is taken from a PDS that contains all of the required information as at the time of the application.

3.149 Items 77A-B and 78C will amend the definition of eligible application in section 1016A. This will enable a restricted issue or sale, or a person to become a superannuation 'standard employer-sponsor', provided that at the time of the application the PDS from which it was derived was not defective.

·
Defective (and in turn 'not defective') for these purposes is defined with reference to the criminal liability provisions of Part 7.9. Under those provisions a PDS is defective if the consumer would be subject to materially adverse effects as a result of misstatements it contains or omissions from it.

3.150 Section 1016E prescribes those circumstances in which issues or sales may occur where an application has been received based on a defective PDS. The current terms of sections 1016A or 1016E do not provide an avenue through which a person can proceed with an issue or sale where an application is derived from a PDS that is subject to non-materially adverse misstatements or omissions - that is, issues or sales in those instances are effectively prohibited.

3.151 Given the non-material nature of the defects in relation to the relevant investment decision, it is considered that allowing for issues or sales of financial products in such instances would not diminish the ability of the client to make an informed investment decision. To require specific rectification of each and every minor misstatement or omission through additional disclosure might result in undue disclosure obligations being imposed on the product issuer.

3.152 Under the amendments a person supplying a disclosure document that contains non-materially adverse misstatements or omissions would be open to the operation of the civil liability provisions. Accordingly, if a person suffers any loss through these non-material deficiencies it would be open to them to seek restitution through the existing civil liability provisions under Subdivision B, Division 7 of Part 7.9.

3.153 Action may be available to ASIC through the stop order provision in relation to PDSs, which will not be limited to a PDS which contained materially adverse misstatements or omissions under other proposed amendments (see items 91A and 91C-D).

3.154 When considered in conjunction with proposed clarification of the relationship between the defective and up to date concepts, the amendment also caters for circumstances involving a superseded PDS. The issue or sale of a financial product may be able to occur based on such a PDS provided that there was nothing materially adverse to the client's decision that was not disclosed.

Choices related to applications received based on defective PDSs & revised PDSs

3.155 The insertion of paragraphs 1016E(2)(aa) and 1016E(2)(ba) allows for the provision of a revised PDS (instead of a supplementary PDS -section 1014A) in circumstances related to the issue of products where an application is based on a defective PDS. This will provide an alternate practical means of addressing deficient PDSs.

3.156 Corporations Regulation 7.9.13A currently allows a revised PDS to be provided, however it is considered preferable for these provisions to be included within the Act.

Choices related to applications received based on defective PDSs & pre-requisites for issues or sales of financial products under sections 1016A to 1016D

3.157 Item 78S clarifies the interaction of section 1016E (relating to applications based on a defective PDS) and section 1016A (relating to eligible applications). There is currently no clear linkage between the operation of sections 1016A and 1016E.

3.158 The amendments permit the original application to constitute an eligible application for the purposes of section 1016A. New subsections 1016E(2A) and (2B) deem that an original application received by the responsible person (ie. an application derived from a defective PDS) is taken to have come from a revised PDS or supplementary PDS issued for the purposes of satisfying paragraph 1016E(2)(b). Further, amendments to section 1016E are required to align the provision of a replacement PDS or a supplementary PDS with the eligible application provisions.

3.159 Further, consequential amendments will also clarify the interaction of sections 1016B to D, which relate to pre-acquisition conditions for the issue or sale of a financial product, with the operation of section 1016E.

·
Where a PDS is lodged with ASIC, section 1016B prohibits the issue or sale of the specified financial product for a specified period (this requirement does not apply to a supplementary PDS).
·
Section 1016C restricts a responsible person's ability to issue or sell a financial product where minimum subscription conditions apply.
·
Section 1016D restricts a responsible person's ability to issue or sell a financial product where conditions apply in relation to the trading of the subject product on a financial market.

3.160 Section 1016B is amended by item 78S such that it will not apply to a revised PDS provided in circumstances specified by section 1016E. This is consistent with the treatment of a supplementary PDS under the same circumstances.

3.161 Sections 1016C and 1016D will not have effect where the responsible person opts to proceed with an issue or sale under the circumstances outlined in paragraphs 1016E(2)(ba) and (c). This outcome is consistent with the current intent of section 1016E, which permits an issue or sale to proceed subject to the provision of a supplementary PDS that 'changes the statement' related to the pre-requisite conditions described in sections 1016C and 1016D.

3.162 Where the responsible person decides to retain the application but not proceed with the issue or sale at that time, section 1016B to D requirements will remain in effect for any subsequent issue or sale.

Technical amendments

3.163 For consistency, item 78A will amend paragraph 1016A(2)(f) to allow the making of regulations in relation to restricted sales to augment the existing power in relation to restricted issues.

3.164 Items 95A and 95B address referencing errors.

3.165 Items 95E, 96G & 96J amend sections 1021B, 1021J and 1022A to provide for the term 'regulated person' to be defined on a consistent basis across the criminal and civil liability provisions of Part 7.9 of the Act.

Items 79 & 80 - section 1017B - disclosure of material changes and significant events

3.166 Item 79 amends section 1017B to remove the current reliance on the obligation imposed on a responsible person to provide a PDS acting as a trigger for the later provision of information regarding 'significant events'. Instead the obligation to disclosure a significant event relies on whether the occurrence would have affected material that is required to be included in a PDS.

3.167 The person on whom the obligation falls is the product issuer rather than the 'responsible person' as defined in section 1013A. This is consistent with other ongoing disclosure obligations, which fall on the entity providing the product, and reflects the involvement of the issuer (as required by section 1013C) in the preparation of the PDS for a sale situation and the knowledge of the issuer regarding ongoing matters affecting the product.

3.168 A regulation-making power is included to enable modification of the types of information to be provided.

Items 9, 11, 78, 81 to 87, 112 & 113 - section 1017C - information for existing holders of superannuation and RSA products

3.169 Item 82 modifies the operation of section 1017C to remedy drafting errors. Some of these errors are currently addressed by the operation of Corporations Regulation 7.9.83.

3.170 Terminology for section 1017C is also modified by referring to the product issuer rather than the responsible person for the purposes of applying the obligation to provide information on request. Items 112 and 113 make consequential amendments to the table of penalties in Schedule 3, and items 9, 11 and 78 relate to associated definitions.

Item 88 - section 1017D - periodic statements for retail clients

3.171 This item amends paragraph 1017D(5)(c) to insert a regulation-making power, which will enable specification of the requirements in relation to the disclosure of information for transactions.

Item 91 - subparagraph 1020E(1)(a)(i) - stop order for breach of the clear, concise and effective presentational requirement

3.172 Section 1020E allows ASIC to issue a stop order for breach of the 'clear, concise and effective' requirement under subsection 1013C(3). There is currently no specific remedy available to ASIC for a breach of the 'clear, concise and effective' requirement. A breach of this provision will not be an offence, but rather will enable ASIC to issue a stop order.

Items 91A-C - subsection 1020E(11) - definition for the stop orders by ASIC

3.173 These items amend the ASIC stop order provisions (section 1020E) to ensure that they are consistent with the operation of similar provisions within the company fundraising provisions contained in Chapter 6D of the Act (sections 728 and 739). That is, the ASIC stop order provisions will be permitted to operate in relation to non-materially adverse circumstances subject to existing due process requirements.

3.174 Currently section 1020E gives ASIC the power to prohibit sales or issues of products based on 'defective' disclosure documents. The definition of defective used in this context is that under the offence provisions of Part 7.9 and is subject to a materiality constraint.

Items 101 & 102 - section 1274 - inspection of registers

3.175 Subsection 1274(2) lists documents lodged with ASIC that are not open to inspection by the public. Subparagraph 1274(2)(a)(ia) includes in this list documents lodged under Chapter 7.

3.176 It is important that documents lodged with ASIC under certain provisions of Chapter 7, namely sections 1015B (PDSs) and 1015D ('in use' notices where s1015B does not apply) should be open to public inspection. To prevent inspection of such documents would defeat one of the major purposes of section 1016B, which seeks to subject a PDS to scrutiny by the market and the regulator before it is used to effect sales. Item 101 therefore amends subparagraph 1274(2)(a)(ia) to provide that the public may inspect documents lodged with ASIC under sections 1015B and 1015D. The item also removes an erroneous reference to section 675, which is not in Chapter 7.

3.177 Item 102 removes a redundant reference to section 452 (which no longer exists) from subparagraph 1274(2)(a)(iv).

Items 103A, 104A & 104B - transitional period for sections 1414, 1426 & 1428

3.178 These items amend sections 1414, 1426 and 1428 to provide that the transitional period ends when a market or clearing and settlement facility licence is varied. The current provisions (which provide for the end of the transition period upon the licensee lodging an application to vary its licence) do not accord with the desirable and efficient processing of applications to vary the licence and approval of compensation arrangements. This consequence was not envisaged when the provisions were originally drafted.

Item 104 - section 1416 - transitional

3.179 Section 1416 provides power to make regulations which change how the provisions of old and new Chapters 7 apply to financial markets during the transitional period.

3.180 This item will add subsection 1416(3) which would clarify that the power provided in subsection 1416(1) may be used to achieve such changes even though the reason is not to transition into the new regime. This will, for example, facilitate the transfer of a fidelity fund of a market which is not operational.

Schedule 3 - Amendment of Other Acts

Australian Securities and Investments Commission Act 2001

Items 1A & 1B - section 12AE - saving of State and Territory laws

3.181 The proposed amendments contained in these items address a potential inconsistency that may exclude or limit the application of the unconscionable conduct provisions of State and Territory fair trading laws.

Items 1C & 1D - subsection 12BAB(10)

3.182 These items make amendments to subsection 12BAB(10) that are equivalent to the amendments to subsection 766C(7) of the Corporations Act made by items 14 and 15 of Schedule 2 to the FSR Amendment Bill.

Item 1E - paragraph 127(4C)(a) - confidentiality

3.183 Section 127 of the ASIC Act imposes confidentiality obligations in relation to information that is given to ASIC in confidence or in connection with the performance of its functions or the exercise of its powers under the corporations legislation. Subsection 127(4B) authorises disclosure of this information under certain circumstances to a body corporate specified in regulations under subsection 127(4C). Subsection 127(4C) allows the regulations to specify a body corporate for the purposes of subsection 127(4B) if, and only if, the body corporate conducts a financial market or holds an Australian clearing and settlement facility licence.

3.184 The proposed amendment to subsection 127(4C) in this item will expand the range of bodies corporate that can be prescribed under subsection 127(4C) to include bodies corporate that are involved in the supervision of a financial market (but which do not actually conduct a financial market themselves). This amendment is intended to ensure that ASIC is able to disclose information in accordance with subsection 127(4B) to companies that are involved in supervising financial markets (such as Regulation Services Inc, a company established jointly by the Toronto Stock Exchange and the Canadian Securities Dealers Association to regulate broker conduct in relation to Canadian financial markets), not just to market operators.

Income Tax Assessment Act 1997

Item 1 - subsection 995-1(1) - substitution of note

3.185 This item makes a minor amendment consequential to the amendment to paragraph 911A(2)(h) of the Corporations Act in item 25 of Schedule 2.

Retirement Savings Accounts Act 1997

Item 2 - subsection 182(1A) - definition of 'regulatory provision'

3.168 This item makes an amendment consequential to the amendments to the 'information on request' disclosure requirements in section 1017C of the Corporations Act in items 81 to 87 of Schedule 2.

Schedule 4 - Transitional Provisions

Item 1 - new Part 10.4 of the Corporations Act 2001 (sections 1449 to 1452)

3.187 New Part 10.4 sets out transitional arrangements for the application of the amendments to Chapter 7 of the Corporations Act (the Act) contained in the Bill. The transitional provisions have three functions:

i.
They ensure that the current 'phase-in' regime (under Division 1 of Part 10.2 of the Act) applies to Chapter 7 (as introduced by the FSR Act), as amended by this Bill, in the same way as it does to the provisions of Chapter 7 prior to its amendment by this Bill. This is dealt with in new subsections 1450(1) and (2);
ii.
They deal with how people transition from the old Chapters 7 and 8 of the Act (ie. Chapters 7 and 8 prior to the amendments introduced by the FSR Act) to the Chapter 7 regime, as amended by this Bill. This is dealt with in new subsection 1450(3); and
iii.
They clarify how various provisions of Chapter 7 of the Act that may already apply to a person or product (ie. A 'phase-in' under Division 1 of Part 10.2 of the Act has already occurred) are affected by the amendments in this Bill. This is dealt with in new section 1451.

3.188 New section 1452 provides transitional arrangements in relation to the amendments to section 1274 of the Act contained in items 101 and 102 of Schedule 2.


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