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Tuesday, 4 November 2003
Page: 21987

Mr GRIFFIN (8:05 PM) —We are here tonight to debate the Financial Services Reform Amendment Bill 2003. The main purpose of this bill is to amend the regulatory framework governing the licensing, conduct and disclosure of providers of financial services in chapter 7 of the Corporations Act 2001. Chapter 7 of the Corporations Act was inserted by the Financial Services Reform Act 2001. The provisions inserted by the FSR Act are subject to a two-year transition period and come into full effect on 11 March next year. The bill makes a variety of amendments that aim to clarify aspects of the new regulatory regime prior to the end of the transition period. Although the implications of some of the changes proposed by the bill need careful consideration, Labor supports the overall purpose of the bill, which is to clarify aspects of the FSR regime.

The key changes made by the bill include establishing a disclosure regime for unsolicited off-market offers to purchase financial products—what I call the David Tweed amendments; expanding the definition of a basic deposit product; widening ASIC's powers to make exemptions and modifications; expanding the government's regulation-making powers; modifying the application of parts of the new FSR regime to superannuation, particularly self-managed super funds; and other changes to the FSR regime.

A hearing in relation to this bill was conducted by the Senate Standing Committee on Economics. Since that hearing, the government has proposed further amendments to the bill. The amendments to this FSR amendment bill amount to an additional 30 pages. These new amendments include further amendments for unsolicited off-market offers; replacing the existing provisions relating to execution-related telephone advice with a new concept called `further market-related advice'—in other words, the stockbroker exemption; changes to the oral statements regime; and changes to the provisions relating to defective PDSs.

Before discussing the areas of concern for Labor, I would like to comment on David Tweed. ASIC has made a number of attempts to stop some of the activities of David Tweed. In August this year ASIC took action against National Exchange and David Tweed on the basis that his offers to buy shares in OneSteel were misleading and deceptive. I hope that the amendments proposed by this bill will finally ensure that bottom feeders like David Tweed and his company National Exchange are finally caught by the law.

The amendments proposed by this bill which affect people like Mr Tweed are already largely contained in the regulations. Today I will focus on the main areas of concern for Labor, which include expanding the definition of basic deposit products with a term of up to five years, ASIC's power to modify the operation of part 7.6 of the Corporations Act 2001, and the introduction of further market related advice—in other words, as I said earlier, the stockbroker exemption.

The definition of basic deposit product is important, as the FSR Act has relaxed requirements in relation to these products. For example, there is no requirement to give the consumer a financial services guide or a statement of advice, and recent amendments to ASIC policy statement 146 have removed the need for basic deposit product and non-cash payment facilities training courses to be assessed by an authorised assessor and placed on the ASIC training register. Authorised deposit taking institutions have consistently argued that basic deposit products should be excluded from the FSR regime. Recently it has been reported that the banks have given up on obtaining a total exemption.

Labor has consistently argued that deposit products with a maturity of greater than two years should not be classified as basic deposit products. Currently, basic deposit products with a maturity of up to two years are classed as basic deposit products under the FSR Act. The bill proposes to expand the class of deposit products which are basic deposit products to include deposit products which are not at call and deposit products with a term of five years or less. Currently, to be classified as a basic deposit product, the deposit product must be at call. Treasury have advised that a technical reading of the terms and conditions of most deposit products would not classify them as at call. The bill proposes to amend the definition of basic deposit products to include deposit products which are not at call in accordance with the original intention of parliament.

The second issue relates to whether the definition of basic deposit products should be expanded to include deposit products with a term of up to five years. During the Senate hearing, ADIs argued that the definition should be expanded in order to reduce the costs of providing these products. The ADIs argued that the imposition of training and compliance costs and the costs of providing financial services guides and statements of advice were so great that ADIs would not continue to offer products with a maturity of up to five years. Labor's concern is that, should this change be adopted, there is a risk that there will be a strong commercial incentive to corral consumers into the five-year product.

Banks and other ADIs would have little incentive to encourage customers to place their money in a two-year deposit product. The concern is that, over the long term, this type of two-year term deposit product may eventually become so unpopular that it is removed from the range of term deposit products on offer by banks and ADIs, with the result that customers may, through lack of choice, be forced to take up a five-year term deposit product. Labor are also of the view that a term deposit of more than two years is a significant investment for a consumer. Accordingly, consumers should be afforded the protections offered by the FSR regime in relation to term deposits of more than two years. In the Senate, Labor will move an amendment such that the definition of basic deposit product is not expanded to include products with a maturity of up to five years and instead remains limited to term deposits of up to two years.

The bill expands ASIC's powers to make exemptions and modifications by inserting a new provision giving ASIC the power to grant relief in relation to the licensing provisions and/or modify their application. This power will allow ASIC to exempt companies from parts of part 7.6 and modify or clarify its operation. ASIC already has the power to exempt companies from the whole of part 7.6. ASIC will be able to exercise this power without the need for a disallowable instrument—that is, without the sanction of parliament. The bill also inserts a new regulation-making power in relation to part 7.6. This will allow the government to make regulations in relation to part 7.6 which by their nature may be disallowed by parliament. ASIC stated:

Without one or both of a regulation-making powers or ASIC exemption and modification powers, there will be no efficient and timely means to address these likely Part 7.6 issues.

Whilst either the government or ASIC may require a body to modify the application of part 7.6, it is not clear why both ASIC and the government require similar powers to modify the operation of part 7.6. The regulation-making power which can be exercised by the government is subject to parliamentary scrutiny, as it may be subject to a disallowance motion, whereas the power given to ASIC is not. ASIC's proposed power in section 926A was considered by the Senate Standing Committee for the Scrutiny of Bills. This committee has advised that section 926A:

... may be considered to delegate legislative powers inappropriately, in breach of principle 1(a)(iv) of the Committee's terms of reference, and may be considered to insufficiently subject the exercise of legislative power to parliamentary scrutiny, in breach of principle 1(a)(v) of the Committee's terms of reference.

The Senate Standing Committee for the Scrutiny of Bills has sought the parliamentary secretary's advice:

... as to why such a power has been conferred on the Australian Securities and Investments Commission, and whether the powers of exemption and modification granted by the proposed new section 926A should not be exercised by regulation rather than by the Commission.

The parliamentary secretary advised the committee that the two powers will complement each other. In a letter to the committee dated 11 September 2003, the parliamentary secretary said:

I acknowledge that the individual use of E&M powers by a regulatory agency such as ASIC is not subject to parliamentary oversight in the same way as exemptions or modifications implemented by regulation would be.

In light of this lack of parliamentary oversight and the fact that there will be an identical regulation-making power exercisable by the government, Labor plans to move an amendment to the bill in the Senate to remove the proposed power provided to ASIC under section 926A.

The final area I will discuss today relates to the amendments to section 946B. Currently this provision relates to executive related telephone advice. According to Treasury, the purpose of this amendment is to recognise that advice given in a live market situation may not always result in a trade occurring. The EM says that advice may be to hold a financial product rather than to buy or sell it, and in this situation a statement of advice is not required. This provision relates to advisers providing financial product advice but will be particularly relevant to stockbrokers. The proposed amendments to this provision will mean that, although the client will be given an SOA initially, the provider will be exempt from the requirement to give an SOA for further market related advice. Such advice may be given over the telephone, by fax or by email, but the advice must be given in a live market situation.

Labor's concern with this provision is that it assumes that the broker will be making regular inquiries about the client's personal circumstances and so will know if they do in fact change. Section 945A provides a general obligation for entities to have a reasonable basis for any personal advice given, which, according to the EM, requires them to determine the client's relevant personal circumstances. Labor queries whether this general requirement is sufficient in this context. It may be the case that an additional requirement is necessary—for example, a requirement that the broker go back to the client at least annually to check whether their circumstances have changed. Labor will consider moving an amendment to this effect in the Senate. The interesting point about the provision is that even though the broker is no longer required to provide an SOA they are still required to make other disclosures in relation to issues like remuneration and conflicts of interest. I urge the government to take those issues into consideration. We will certainly be revisiting them in the Senate. Other than that, I commend the bill to the House.