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Financial Services Reform Act 2001 (122 of 2001)

Schedule 1 Financial Services and Markets

Part 1 Main amendments

Corporations Act 2001

1 Chapter 7 - Part 7.5 - Division 3

Division 3 - Approved compensation arrangements

Subdivision A - Approval of compensation arrangements

882A How to get compensation arrangements approved with grant of licence

(1) If an application for an Australian market licence contains information in relation to proposed compensation arrangements in accordance with paragraph 881B(2)(c), the Minister must treat the application as also being an application for approval of the compensation arrangements and, for that purpose, must consider whether the proposed arrangements are adequate.

(2) If the Minister does not consider that the proposed compensation arrangements are adequate, the application for the licence must be rejected.

(3) If the Minister considers that the proposed compensation arrangements are adequate, the Minister may (subject to the other provisions about granting licences) grant the licence. On the granting of the licence, the Minister is taken to have approved the compensation arrangements.

Note: The other provisions about granting licences are in Subdivision A of Division 4 of Part 7.2.

(4) In the conditions of the licence, the Minister must:

(a) deal with the minimum amount of cover required in relation to the compensation arrangements in such manner as the Minister thinks appropriate; and

(b) identify the source of funds available to cover claims, on the basis of which the Minister approves the arrangements (see section 885H).

882B How to get compensation arrangements approved after licence is granted

(1) If the operator of a licensed market wants to have compensation arrangements for the market approved after the licence has been granted, the operator must apply for approval in accordance with this section.

(2) The application must:

(a) contain the information, in relation to the proposed compensation arrangements, required by regulations made for the purposes of this paragraph and be accompanied by a copy of the proposed compensation rules; and

(b) be made to the Minister by lodging the application with ASIC.

Note: For fees in respect of lodging applications, see Part 9.10.

(3) If the Minister does not consider that the proposed compensation arrangements are adequate, the application for approval must be rejected.

(4) If the Minister considers that the proposed compensation arrangements are adequate, the Minister must:

(a) approve the compensation arrangements in writing; and

(b) vary the conditions of the operator’s licence so as to:

(i) deal with the minimum amount of cover required in relation to the compensation arrangements in such manner as the Minister thinks appropriate; and

(ii) identify the source of funds available to cover claims, on the basis of which the Minister approves the arrangements (see section 885H).

(5) In varying licence conditions as mentioned in paragraph (4)(b), the Minister must proceed under section 796A as though the licensee had applied for the variation to be made.

882C Revocation of approval

The Minister may at any time revoke an approval of compensation arrangements if the Minister considers that the arrangements are not adequate.

882D Minister’s power to give directions

(1) If the Minister considers that a market licensee’s approved compensation arrangements are no longer adequate, the Minister may give the licensee a written direction to do specified things that the Minister believes will ensure that the arrangements become adequate once more.

(2) The licensee must comply with the direction.

(3) If the licensee fails to comply with the direction, ASIC may apply to the Court for, and the Court may make, an order that the licensee comply with the direction.

(4) The Minister may vary or revoke a direction at any time by giving written notice to the licensee.

Subdivision B - Effect of compensation rules forming part of Division 3 arrangements

883A Legal effect of compensation rules

Compensation rules forming part of Division 3 arrangements for a financial market have effect as a contract under seal between the operator of the market and each participant in the market under which each of those persons agrees to observe the rules to the extent that they apply to the person and engage in conduct that the person is required by the rules to engage in.

883B Enforcement of compensation rules

(1) If a person who is under an obligation to comply with or enforce any of the compensation rules forming part of Division 3 arrangements for a financial market fails to meet that obligation, an application to the Court may be made by:

(a) ASIC; or

(b) the operator of the market; or

(i) there are clearing and settlement arrangements (as defined in section 790A) for some or all transactions effected through the market; and

(ii) those arrangements are with the operator of the facility; or

(d) a person aggrieved by the failure.

(2) After giving an opportunity to be heard to the applicant and the person against whom the order is sought, the Court may make an order giving directions to:

(a) the person against whom the order is sought; or

(b) if that person is a body corporate - the directors of the body corporate;

about compliance with, or enforcement of, the compensation rules.

(3) For the purposes of this section, if the operator of the market fails to comply with or enforce provisions of the compensation rules, a person who is, under the rules, entitled to make a claim for compensation is (whether or not they have actually made a claim) taken to be a person aggrieved by the failure.

(4) There may be other circumstances in which a person may be aggrieved by a failure for the purposes of this section.

883C Other sources of funds for compensation

Nothing in this Division makes the operator of a financial market liable to pay compensation from any source of funds other than the source identified in the licence conditions under paragraph 882A(4)(b) or subparagraph 882B(4)(b)(ii).

883D Payment of levies

(1) This section applies if, under the compensation rules forming part of Division 3 arrangements for a particular financial market, a levy is payable by all or some of the participants in the market in order to ensure that adequate funds are available for the purposes of the arrangements.

(2) The levy is payable to the operator of the market, as agent for the Commonwealth, by each of the participants affected.

Note: For the imposition and amount of the levy, see theCorporations (Compensation Arrangements Levies) Act 2001.

(3) An amount of levy payable under subsection (2) must be paid within the time and in the manner specified by the operator either generally or in relation to a particular case.

(4) Whenever an amount of levy (the levy amount ) is paid under this section, or under section 6 of theCorporations (Compensation Arrangements Levies) Act 2001, to the operator of a market as agent for the Commonwealth:

(a) the operator must pay an amount equal to the levy amount to the Commonwealth; and

(b) the Consolidated Revenue Fund is appropriated by that amount for the purpose of payment to the operator; and

(d) the operator must deal with the amount it receives under paragraph (c) in accordance with the compensation rules.

(5) A payment of an amount to the operator of a market as required by paragraph (4)(c) in respect of a particular levy amount is subject to a condition that, if the Commonwealth becomes liable to refund the whole or a part of the levy amount, the operator must pay the Commonwealth an amount equal to the amount that the Commonwealth is liable to refund.

(6) TheFinancial Management and Accountability Act 1997 does not apply in relation to the payment of an amount of levy under this section to the operator of a market as agent for the Commonwealth. However, the operation of that Act in relation to the following payments is not affected:

(a) the payment of an amount to the Commonwealth as required by paragraph (4)(a); or

(b) the payment of an amount by the Commonwealth as required by paragraph (4)(c).

The operator must, in accordance with the regulations, notify the Commonwealth of payments of levy it receives as agent for the Commonwealth.

(7) An amount payable by an operator as required by paragraph (4)(a) may be set off against an amount payable to the operator as required by paragraph (4)(c).

Subdivision C - Changing Division 3 arrangements

884A Division 3 arrangements must generally only be changed in accordance with this Subdivision

(1) The operator of a financial market in relation to which there are Division 3 arrangements must not change those arrangements except in accordance with this Subdivision.

(2) However, a change may be made to Division 3 arrangements otherwise than in accordance with this Subdivision if:

(a) the change is not to a matter required by section 885B to be dealt with in the compensation rules; and

(b) the change is merely a minor administrative change.

884B Changing Division 3 arrangements - matters required to be dealt with in the compensation rules

(1) If the proposed change is to a matter required by section 885B to be dealt with in the compensation rules, the change may only be made by changing the rules.

(2) As soon as practicable after the change is made, the operator must lodge with ASIC written notice of the change.

(3) The notice must:

(a) set out the text of the change; and

(b) specify the date on which the change was made; and

(4) If no notice is lodged with ASIC within 21 days after the change is made, the change ceases to have effect.

(5) As soon as practicable after receiving a notice under subsection (2), ASIC must send a copy of the notice to the Minister.

(6) Within 28 days after receiving the copy of the notice, the Minister may disallow all or a specified part of the change to the compensation rules.

(7) The Minister must not disallow all or part of the change unless the Minister considers that, because of the change, or that part of the change, the compensation arrangements are not adequate.

(8) As soon as practicable after all or part of a change is disallowed, ASIC must give notice of the disallowance to the operator of the market concerned. The change ceases to have effect, to the extent of the disallowance, when the operator receives the notice.

884C Changing Division 3 arrangements - matters not required to be dealt with in the compensation rules

(1) If:

(a) the proposed change is to a matter that is not required by section 885B to be dealt with in the compensation rules (including a matter that is dealt with in the compensation rules even though it is not required to be dealt with in those rules); and

(b) the change is not merely a minor administrative change;

the operator must not make the change unless:

(d) the change has been approved by the Minister.

(2) The application for approval must:

(a) include the information, required by regulations made for the purposes of this paragraph, in relation to the proposed change; and

(b) be made to the Minister by lodging the application with ASIC.

Note: For fees in respect of lodging applications, see Part 9.10.

(3) If the Minister does not consider that the compensation arrangements as proposed to be changed are adequate, the application for approval must be rejected.

(4) If the Minister considers that the compensation arrangements as proposed to be changed are adequate, the Minister must approve the change.

(5) If:

(a) the proposed change is to a matter that is dealt with in the compensation rules even though it is not required to be dealt with in those rules; and

(b) the change is approved;

the operator may make any change to the compensation rules that is necessary to give effect to the change that has been approved or that is incidental to giving effect to that change.

(6) If a change to the compensation rules is made as permitted by subsection (5), the operator must, as soon as practicable after the change is made, give ASIC written notice of the change.

(7) A notice required by subsection (6) must:

(a) set out the text of the change; and

(b) specify the date on which it was made; and

Subdivision D - Are compensation arrangements adequate?

885A Purpose of this Subdivision

(1) This Subdivision applies for the purpose of determining, for the purposes of a provision of this Division:

(a) whether:

(i) proposed compensation arrangements are adequate; or

(ii) compensation arrangements as proposed to be changed are adequate; or

(b) whether compensation arrangements that have been approved are adequate.

(2) A reference in this Subdivision to the arrangements is a reference to the proposed arrangements, the arrangements as proposed to be changed, or the arrangements that have been approved, as the case requires.

(3) A reference in this Subdivision to the compensation rules is a reference to the compensation rules, or the proposed compensation rules, forming part of the arrangements under consideration.

885B Requirements to be complied with for arrangements to be adequate

(1) The arrangements are adequate if, and only if, the Minister is satisfied that:

(a) the compensation rules provide adequate coverage for Division 3 losses (see sections 885C and 885D); and

(b) the compensation rules provide for adequate compensation to be paid in respect of Division 3 losses (see section 885E); and

(c) the compensation rules deal adequately with how compensation in respect of Division 3 losses is to be paid (see section 885F); and

(d) the compensation rules deal adequately with the making and determination of claims in respect of Division 3 losses, and with the notification of the outcome of such claims (see section 885G); and

(e) the arrangements provide for an adequate source of funds for paying compensation in respect of Division 3 losses and in respect of any other losses covered by the arrangements (see section 885H); and

(f) the arrangements include adequate arrangements for administration and monitoring (see section 885I); and

(g) under the arrangements, potential claimants have reasonable and timely access to the compensation regime; and

(h) if the licensee ceases (for whatever reason) to be required to have Division 3 arrangements, the rights of people to seek compensation under the arrangements, being rights that accrued while the licensee was required to have such arrangements, will be adequately protected.

(2) In considering the matters mentioned in subsection (1), the Minister must also have regard to the matters mentioned in section 885J.

(3) The matters that may be dealt with in compensation rules are not limited to matters mentioned in this section.

885C The losses to be covered

(1) Subject to section 885D, the compensation rules must cover losses ( Division 3 losses ) of a kind described in the following paragraphs:

(a) a person (the client ) gave money or other property, or authority over property, to a person (the participant ):

(i) who was a participant in the market at that time; or

(ii) who the client reasonably believed to be a participant in the market at that time and who was a participant in the market at some earlier time; and

(b) the money or other property, or the authority, was given to the participant in connection with effecting a transaction, or proposed transaction, covered by provisions of the operating rules of the market relating to transactions effected through the market; and

(c) the effecting of the transaction through the market constitutes or would constitute the provision of a financial service to the client as a retail client; and

(d) the client suffers a loss because of:

(i) if the client gave the participant money or other property - the defalcation or fraudulent misuse of the money or other property by the participant; or

(ii) if the client gave the participant authority over property - the fraudulent misuse of that authority by the participant.

(2) The compensation rules must provide that a claim relating to an alleged loss caused by defalcation or fraudulent misuse may be allowed even if:

(a) the person against whom the defalcation or misuse is alleged has not been convicted or prosecuted; and

(b) the evidence on which the claim is allowed would not be sufficient to establish the guilt of that person on a criminal trial in respect of the defalcation or fraudulent misuse.

(3) The compensation rules may exclude losses of a kind described above that occur in specified situations. However, the compensation arrangements will not be adequate unless the Minister is satisfied that those exclusions are appropriate.

885D Certain losses that are not Division 3 losses

(1) If, in relation to a loss suffered by a person:

(a) the requirements of subsection 885C(1) are satisfied in relation to a participant and 2 or more financial markets; and

(b) the person did not (expressly or impliedly) instruct the participant to use a particular one of those markets; and

(c) it is not reasonably apparent from the usual business practice of the participant which of those markets the participant would use when acting for the person;

the loss is taken not to be a Division 3 loss .

(2) If, in relation to a loss suffered by a person:

(a) the requirements of subsection 885C(1) are satisfied in relation to a participant and a financial market; and

(b) the loss is also connected (see section 888A) with a financial market to which Division 4 applies; and

(d) it is not reasonably apparent from the usual business practice of the participant which of those markets the participant would use when acting for the person;

the loss is taken not to be a Division 3 loss .

(3) If, in relation to a loss suffered by a person:

(a) the transaction referred to in paragraph 885C(1)(b) could have been effected otherwise than through a financial market; and

(b) the person did not (expressly or impliedly) instruct the participant concerned to effect the transaction through a financial market; and

(c) it is not reasonably apparent from the usual business practice of the participant that the transaction would be effected through a financial market;

the loss is taken not to be a Division 3 loss .

885E The amount of compensation

(1) Subject to this section, the compensation rules must provide that the amount of compensation to be paid in respect of a Division 3 loss is to be not less than the sum of:

(a) the actual pecuniary loss suffered by the claimant, calculated by reference to the market value of any relevant assets or liabilities as at the date on which the loss was suffered; and

(b) the claimant’s reasonable costs of, and disbursements incidental to, the making and proof of the claim.

(2) The compensation rules may provide for the amount of compensation payable in respect of a Division 3 loss to be reduced by reference to a right of set-off available to the claimant.

(3) The compensation rules may impose an upper limit on the amount of compensation to which a person is entitled in respect of a claim in particular circumstances, or an upper limit on the total amount of compensation to which persons are entitled in respect of claims referable to a particular event or circumstance.

(4) That upper limit may be specified in the compensation rules or determined by a method specified in the rules.

(5) The compensation rules must also provide for the payment to the claimant of interest at the rate applicable under the regulations on the amount of the actual pecuniary loss, or so much of that loss as from time to time has not been compensated by an instalment or instalments of compensation, in respect of the period starting on the day when the loss was suffered and ending on the day when the compensation, or the last instalment of compensation, is paid.

(6) The compensation rules may provide for what is to happen if there are insufficient funds to meet claims in respect of Division 3 losses and in respect of any other losses covered by the arrangements. For example, they may provide for the prioritisation of claims, or the apportionment of available funds between claims.

(7) In other provisions of this Division a reference to compensation in respect of a Division 3 loss includes (unless the contrary intention appears) a reference to interest referred to in subsection (5).

885F Method of payment of compensation

(1) The compensation rules must deal with how compensation in respect of Division 3 losses is to be paid.

(2) Without limiting subsection (1), the compensation rules may provide for compensation to be paid in a lump sum or by instalments.

885G Making and determination of claims

(1) The compensation rules must provide for how claims in respect of Division 3 losses are to be made and determined, and for how claimants are notified of the outcome of their claims.

(2) Without limiting subsection (1), the compensation rules may:

(a) require a person making a claim to pay money, or transfer other property, in support of a claim; and

(b) provide for claims to be disallowed unless persons exercise rights of set-off; and

(d) provide for claims to be partially allowed (including, for example, in a case where the operator considers that the claimant’s conduct contributed to the loss).

885H The source of funds - general

There must be an adequate source of funds available to cover claims made under the compensation arrangements in respect of Division 3 losses and in respect of any other losses covered by the arrangements.

Note 1: For example, the source of funds may consist of:

(a) a fidelity fund; or

(b) insurance arrangements; or

Note 2: The source of funds does not have to consist of a single thing. It may consist of a combination of different things.

885I Administration and monitoring

(1) The arrangements must include arrangements for:

(a) the administration of the compensation arrangements; and

(b) monitoring compliance with the compensation arrangements and reporting breaches of the arrangements to the board of the operator of the market; and

(c) monitoring the adequacy of the arrangements and reporting to the board of the operator of the market on the need for, or desirability of, changes to the compensation arrangements.

(2) Without limiting subsection (1), the arrangements may give responsibilities to:

(a) the operator of the market, or a related company, or a director or employee of the operator or a related company; or

(b) a committee; or

(3) The people who may be members of a committee referred to in paragraph (2)(b) include, but are not limited to:

(a) participants in the market, or representatives of such participants; and

(b) members of the board of the operator of the market.

885J The losses to be covered - other matters to be taken into account

(1) In considering whether the arrangements are adequate, the Minister must also have regard to:

(a) the services provided by the market and by the participants in the market; and

(b) any risk assessment report in relation to the market given to the Minister under section 892K.

(2) The Minister may take into account such other matters as the Minister thinks appropriate.

Subdivision E - Other provisions about Division 3 arrangements

886A Only one claim in respect of the same loss

If:

(a) a claim by a person for compensation in respect of a particular Division 3 loss suffered by the person has been allowed under Division 3 arrangements; and

(b) the person makes or has made another claim under those Division 3 arrangements, or under other Division 3 arrangements, in respect of the same loss;

that other claim must not be allowed.

886B Regulations relating to fidelity funds

The regulations may include provisions relating to how a fidelity fund, or part of a fidelity fund, is to be dealt with if:

(a) the operator of a financial market becomes insolvent, within the meaning of the regulations; or

(b) a financial market merges with another financial market; or

(c) a financial market ceases to operate (otherwise than because of a merger), or ceases to be required by subsection 881A(1) to have approved compensation arrangements.

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