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Financial Services Reform Bill 2001
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THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
FINANCIAL SERVICES REFORM BILL 2001
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments and New Clauses to be Moved on Behalf of the Government
(Circulated by authority of the Minister for Financial Services and Regulation,
the Hon Joe Hockey, MP)
Table of Contents
1. Outline..................................................................................................................................... 1
2. Abbreviations........................................................................................................................... 2
3. Notes on amendments.............................................................................................................. 3
1.1 The proposed Financial Services Reform Act 2001 (proposed FSR Act) is the culmination of an extensive reform program examining current regulatory requirements applying to the financial services industry. In particular, the proposed Act provides the legislative response to a number of recommendations of the Financial System Inquiry (FSI).
1.2 The FSI was a comprehensive stocktake of Australia’s financial system structure and regulation. The broad policy direction for what were known as the CLERP 6 reforms, now contained in the proposed FSR Act, is consistent with the findings of the FSI.
1.3 The new regulatory regime for the financial services industry is outlined in greater detail in the Explanatory Memorandum to the Financial Services Reform Bill (FSR Bill).
1.4 The amendments proposed to be moved by the Government further refine a number of the provisions in the proposed FSR Act and correct some minor technical or drafting errors. This Explanatory Memorandum provides commentary on the refinements, but does not address in detail the minor corrections.
Financial impact Statement
1.5 The proposed amendments have no financial impact.
Regulation Impact Statement
1.6 The Office of Regulation Review has advised that a Regulation Impact Statement is not required.
2.1 The following abbreviations are used in this Explanatory Memorandum:
ADIs Authorised deposit-taking institutions
APRA Australian Prudential Regulation Authority
ASIC Act Australian Securities and Investments Commission Act 2001
ASIC Australian Securities & Investments Commission
CAMAC Corporations and Markets Advisory Committee
CASAC Companies and Securities Advisory Committee
Corporations Act Corporations Act 2001
CS facility Clearing and Settlement facility
DPB Declared Professional Body
ED securities Enhanced disclosure securities
FSG Financial Services Guide
FSR Bill Financial Services Reform Bill 2001
FSR(CP) Bill Financial Services Reform (Consequential Provisions) Bill 2001
NGF National Guarantee Fund
PDS Product Disclosure Statement
Proposed FSR Act Proposed Financial Services Reform Act 2001
RBA Act Reserve Bank Act 1959
RSA Act Retirement Savings Accounts Act 1997
RSA Retirement savings account
SEGC Securities Exchanges Guarantee Corporation
SIS Act Superannuation Industry (Supervision) Act 1993
SOA Statement of Advice
SPDS Supplementary Product Disclosure Statement
Notes on amendments
Amendments to Chapter 7 of the Corporations Act 2001
Part 7.1 - Preliminary
Definition of a ‘basic deposit product’ - section 761A
3.1 Special rules apply in a number of areas of the FSR Bill to reduce the intensity of regulation in relation to basic deposit products. These rules were included on the basis that these products are capital guaranteed and well understood by consumers. The rules apply to ‘at call’ accounts as well as to ‘term deposit’ accounts of up to two year’s duration. To qualify as a basic deposit account, a facility must enable a customer to withdraw their funds any time without any loss of capital (although the customer may be required to pay transaction fees and experience a reduction in the return that would otherwise have been generated by their investment).
3.2 Item 1 will amend proposed paragraph (d) of the definition of a ‘basic deposit product’. The proposed amendment will enable regulations to be made that allow certain ADIs to impose a short notification period on withdrawals from term deposit accounts whilst enabling these accounts to remain within the definition of a ‘basic deposit product’ for the purposes of the Bill.
3.3 The purpose of this amendment is to address concerns that have been raised by a number of smaller ADIs (most notably credit unions). Whilst these institutions generally allow their clients to make an early withdraw of funds from “term deposit” accounts (subject to any fees and penalties that would apply in these circumstances), they may benefit from the capacity to require a short notification period to assist with liquidity management.
Definition of ‘holder’ - section 761A
3.4 Item 4 will insert a definition of ‘holder’. This will clarify who is the current holder of a financial product by reference to the existing concepts of ‘issue’ and ‘dispose’ in the Bill. The holder of a product will be the person to whom it has been issued or if they have disposed of it to another person, the last person to whom it has been disposed who has not themselves disposed of the product.
Meaning of issue etc - section 761E
3.5 Proposed section 761E defines when a financial product is issued to a person. Proposed subsection 761E(2) states that a financial product is generally issued when it is first issued, granted or otherwise made available. However proposed subsection 1012D(4) currently provides that additional contributions to superannuation products (whether or not the additional contribution is made on the same terms as earlier contributions), RSA products, life insurance products and deposit products also constitute an issue situation (but that a Product Disclosure Statement (PDS) is not required to be given in these circumstances to a person that is a retail client).
3.6 Item 7 will insert a new subsection 761E(3A). The purpose of this proposed new subsection is to clarify that additional contributions by a person to the financial products described above will not constitute an issue situation (and therefore potentially give rise to the relevant obligations in Part 7.9).
Meaning of retail and wholesale client - subsection 761G(6)
3.7 As currently drafted, proposed subsection 761G(6) of the Bill states that all persons will be retail clients in relation to financial services that relate to superannuation and RSA products.
3.8 These proposed amendments will ensure that certain persons are not treated as retail clients in relation to financial services that relate to superannuation and RSA products (other than the provision of these products).
3.9 Item 9 will provide that all RSA providers and trustees of superannuation entities with net assets of at least $10 million will not be treated as retail clients when acquiring financial services that relate to superannuation interests (other than services that involve the provision of superannuation interests).
3.10 It is necessary to treat the trustees of these superannuation entities as retail clients in relation to the issue of superannuation interests so that disclosure requirements that currently apply to Pooled Superannuation Trusts (PSTs) can be imposed under Part 7.9. However it is envisaged that the regulations will exempt the trustees of PSTs from the requirement to hold a financial services licence in certain circumstances.
3.11 Items 8 and 10 will make consequential amendments to proposed subsections 761G(1) and 761G(9).
Foreign exchange contracts - sections 764A and 765A
3.12 Items 13 and 15 amend proposed subparagraph 764A(1)(k)(ii) and paragraph 765A(1)(m) so that all contracts for the exchange of one currency for another currency that are settled immediately are not included in the definition of financial product. When such a transaction is settled immediately, the associated risks do not justify its regulation as financial product by the Bill. However, these transactions will be subject to the consumer protection provisions of Division 2 of Part 2 of the ASIC Act.
Contracts for the future provision of services - section 765A
3.13 Item 16 omits proposed paragraph 765A(1)(o). It is not appropriate that all contracts for the future provision of services be excluded from the definition of financial product.
Meaning of a financial product - sections 764A & 765A
3.14 As currently drafted, proposed section 764A of the Bill explicitly includes interests etc. in registered managed investment schemes as well as interests etc. in unregistered overseas managed investment schemes that would be required to be registered if they were operated in this jurisdiction within the definition of a financial product. Proposed section 765A of the Bill explicitly excludes interests etc. in unregistered overseas managed investment schemes that would not be required to be registered if they were operated in this jurisdiction from the definition of a financial product.
3.15 The Bill does not explicitly deal with interests etc. in schemes that are operated in this jurisdiction but are exempt from registration under subsections 601ED(1) or 601ED(2) of the Corporations Act. However interests etc in both types of schemes would generally be taken to be financial products under the general definition of financial product in proposed section 763A.
3.16 It is proposed to amend the provisions of proposed sections 764A and 765A that deal with interests etc. in managed investment schemes. The purpose of these proposed amendments is to refine the application of the proposed new Chapter 7 to these financial products.
3.17 Item 17 will ensure that interests etc. in all managed investment schemes (regardless of whether or not the scheme is operated in this jurisdiction) that are not registered under Part 5C.1 of the Corporations Act and in relation to which none of paragraphs 601ED(1)(a), (b) or (c) are satisfied will be explicitly excluded from the definition of a financial product for the purposes of Chapter 7 (proposed paragraph 765A(1)(s)). These are schemes that have 20 members or fewer, are not professionally promoted and are not subject to a declaration under paragraph 601ED(1)(c) of the Corporations Act. However interests etc. in these schemes will be included within the definition of a financial product in proposed section 12BAA of the ASIC Act. They will therefore be financial products for the purposes of the consumer protection provisions of Division 2 of Part 2 of the ASIC Act.
3.18 By contrast, items 12 and 14 will ensure that interests etc. in all other categories of managed investment schemes (regardless of whether or not the scheme is operated in this jurisdiction) will be explicitly included in the definition of a financial product for the purposes of Chapter 7. Interests etc. in these schemes will also be financial products for the purposes of Division 2 of Part 2 of the ASIC Act.
3.19 Item 5 will amend the definition of a ‘managed investment product’ in section 761A. The proposed amendment will narrow this definition to interests etc. in registered managed investment schemes. It will no longer include interests etc. in unregistered overseas schemes that would be required to be registered if they operated in this jurisdiction.
Meaning of financial product advice - section 766B
3.20 As currently drafted, proposed subsection 766B(3) defines personal advice as financial product advice that is given or directed to a person in circumstances where the provider has considered the ‘objectives, financial situation and needs’ of the person (or where a reasonable person might expect the provider to have considered these matters).
3.21 Item 19 amends proposed subsection 766B(3) to define personal advice as advice given or directed to a person where the provider has considered one or more of the person’s objectives, financial situation and needs (or where a reasonable person might expect the provider to have considered one or more of these matters).
3.22 The purpose of this proposed amendment is to ensure that a financial services provider will be subject to the requirements of proposed Divisions 3 or 5 of Part 7.7 (including the requirement to provide a SOA) when advising a retail client that a particular financial product (of class of financial products) is appropriate to them as an individual.
3.23 As subsection 766B(3) is currently drafted, a financial services provider could recommend a financial product or class of financial product as being appropriate to a retail client’s individual needs and objectives, but avoid the requirements of proposed Divisions 3 or 5 of Part 7.7 because they had not considered the client’s financial situation.
Meaning of exempt document - section 766B
3.24 Proposed subsection 766B(1) currently states that the provision of an ‘exempt document’ is not taken to constitute the provision of financial product advice. The definition of an ‘exempt document’ is contained in proposed subsection 766B(6). The purpose of these provisions is to ensure that the provision of a FSG or a PDS by a licensee in the course of dealing will not be taken to constitute the provision of advice (and hence trigger additional licensing and disclosure obligations).
3.25 Items 18 and 21 amend these provisions by including oral statements that may also be required to be given by Chapter 7 or by other Commonwealth financial services legislation (for example, the SIS Act or the RSA Act) within the meaning of an ‘exempt document or statement’.
Meaning of personal advice and certain situations excluded from being financial product advice - section 766B
3.26 Item 20 amends proposed subsection 766B(5). The revised exemption in paragraph (5)(b) for lawyers will exempt from the definition of financial product advice all advice given by a lawyer in the ordinary course of their activities as a lawyer that is reasonably regarded as a necessary part of those activities. This revised definition is intended to clarify that the advice given by lawyers in the ordinary course of carrying on their professional activities will not constitute financial product advice.
3.27 This item by inserting paragraph (5)(c) also exempts the activities of registered tax agents from the definition of financial product advice on a similar basis to lawyers.
3.28 This item also inserts new subsections (5A) and (5B) into proposed section 766B. Proposed subsection (5A) will ensure that where, in response to a request, a person provides information about the cost of acquiring a financial product and makes reference to a valuation of an item, and that valuation is provided or suggested by the person, the provision of the information is not financial product advice merely because it relies on the suggested or recommended value of the item.
3.29 This amendment is intended to allow for the provision of quotations of the cost of acquiring financial products such as many types of general insurance products without the provision of financial product advice. The provision of valuations of items often occurs in the process of calculating the cost of car and other types of insurance policies.
3.30 Proposed subsection (5B) will deal with the situation where certain information about a financial product (such as the cost of the product, the rate of return or other prescribed information) is provided in response to a request. In responding to such a request information may be provided about one particular financial product in a situation where the provider of the information could have provided equivalent information about another financial products. This amendment will ensure that this conduct (choosing a particular financial product from a range of such products) does not, by itself, constitute the provision of financial product advice.
3.31 Finally, proposed subsection (5C) will clarify that these two amendments are not intended to affect whether other situations not covered by them constitute financial product advice.
Definition of dealing - section 766C
3.32 Items 22 to 24 clarify the operation of the definition of ‘dealing’ in proposed section 766C. The proposed amendments will ensure that in proposed subsection 766C(1), the conduct of an agent acting on behalf of a person who is dealing in a financial product is also within the definition of dealing. Therefore, where a person acquires a financial product through an intermediary such as a stockbroker, both the principal and the broker will be ‘dealing’ for the purposes of subsection (1).
3.33 The amendment to insert proposed subsection (3A) will ensure that in these situations where a principal has used an agent, although the principal will gain the benefit of subsection (3) so that they are not within the definition of dealing, the agent will not be exempt and will be within the definition of ‘dealing’. Therefore, a person (such as a stockbroker) who acts on behalf of other people in dealing in financial products engages in dealing but their principals do not.
Meaning of ‘make a market’ for a financial product - section 766D
3.34 Proposed section 766D defines the meaning of ‘make a market’. Item 25 will amend this section to ensure that a person who is an issuer of superannuation products or interests in a managed investment scheme would not be taken to be making a market if they state prices at which they propose to acquire and dispose of financial products that they have issued.
3.35 The purpose of this proposed amendment is to ensure that trustees of superannuation entities and managed investment scheme operators will not be required to meet any additional licensing obligations if they engage in the conduct described in subsection 766D(1) as a consequence of issuing or redeeming interests in their respective undertakings.
Definition of custodial or depository service - section 766E
3.36 Item 26 amends proposed subsection 766E(1) that defines ‘custodial or depository service’. The proposed revised definition includes conduct where a person under an arrangement holds financial products on trust for or on behalf of another person. This includes a situation where the agreement is with one person but the products are held for the benefit of a third party. It also includes conduct where the agreement is between the client and one person but a third party actually holds the products. The proposed definition will also encompass the holding of a beneficial interest in a financial product, this will ensure that where a sub-custodian provides a custodial or depository service to a master custodian who then provides such a service to a client, the provision of both services is within the definition.
3.37 The new definition removes the requirement in proposed subsection 766E(1) that the arrangement must be in connection with the person providing a financial product to the client as this is not an essential feature of a custodial or depository service.
3.38 The revised definition uses the concept of ‘hold’, which it is now proposed to define in section 761A (item 4). The use of this proposed definition will ensure that the mere physical holding of a document does not constitute the provision of a custodial or depository service (where this result is appropriate). This also removes the need for proposed paragraph 766E(1)(b).
3.39 Proposed subsection (2) will clarify when a custodial or depository service is provided. Generally, it is provided at the time when the financial product or benefit is first held under the arrangement. However, for the purposes of Part 7.6 (and other provisions provided by regulation) the service is provided for the duration of the time when the financial product or benefit is held. This will ensure that the licensing obligation on the providers of these services continues while they hold financial products or benefits under these arrangements.
3.40 Item 136 will make a consequential amendment to the definition in Division 2 of Part 2 of the ASIC Act.
3.41 Item 27 clarifies that the holding of the assets of a registered scheme is not the provision of a custodial or depository service. This result is appropriate because of subsection 601FB(2) of the Corporations Act, which provides that the responsible entity is generally taken to have done things or failed to do things that an agent of the responsible entity has done.
3.42 Item 137 makes a consequential amendment to the definition in Division 2 of Part 2 of the ASIC Act.
Liability under subsection 601FB(2) - section 769B
3.43 Item 28 clarifies the interaction between subsection 601FB(2) of the Corporations Act and proposed section 769B. Other than proposed subsections 769B(7) and (8) (which provide for the liability of authorised representatives and regulated persons under proposed Parts 7.7 and 7.9) nothing in proposed section 769B limits or excludes liability under subsection 601FB(2). Therefore, subsection 601FB(2) continues to operate and acts as an alternative mechanism to proposed section 769B of establishing that conduct of an agent of a responsible entity was also engaged in by the responsible entity.
Part 7.2 - Licensing of Financial Markets
Definition of ‘clearing and settlement arrangements’ - section 790A
3.44 Item 29 revises the definition of ‘clearing and settlement arrangements’ in proposed section 790A in order to acknowledge that clearing and settlement arrangements will not necessarily involve the operator of a clearing and settlement facility. Currently, for example, certain securities transactions on the Newcastle exchange are settled directly between brokers. This is considered appropriate given the limited nature of the market's operations.
3.45 Item 32 will amend proposed section 792G to enhance the disclosure to be made to participants in a market where there are no arrangements with the operator of a clearing and settlement facility.
3.46 Item 37 makes a consequential amendment to proposed section 883B (in Part 7.5).
Obligation to notify ASIC of certain matters - section 792B
3.47 Item 31 amends proposed paragraph 792B(5)(b) by omitting ‘an individual’ and substituting ‘a person’ so that the market licensee is required to inform ASIC when a body corporate, as well as a natural person, gains or ceases to have 15 per cent voting power in the licensee.
3.48 The reason for the amendment is to ensure that ASIC obtains information that is relevant for the purposes of ensuring that licensees comply with both Divisions of Part 7.4 (the ‘fit and proper’ person test and the 15 per cent limitation on voting power in prescribed market and clearing and settlement facility licensees). Whilst the proposed amendment changes the ambit of the provision marginally, it is consistent with the policy currently reflected in the Bill.
Part 7.3 - Licensing of Clearing and Settlement Facilities
Obligation to notify ASIC of certain matters - section 821B
3.49 Item 34 amends proposed paragraph 821B(4)(b) by omitting ‘an individual’ and substituting ‘a person’ so that the CS facility licensee is required to inform ASIC when a body corporate, as well as a natural person, gains or ceases to have 15 per cent voting power in the licensee.
3.50 The reason for the amendment is to ensure that ASIC obtains information that is relevant for the purposes of ensuring that licensees comply with both Divisions of Part 7.4 (the ‘fit and proper’ person test and the 15 per cent limitation on voting power in prescribed market and clearing and settlement facility licensees). Whilst the proposed amendment changes the ambit of the provision marginally, it is consistent with the policy currently reflected in the Bill.
Part 7.4 - Limits on involvement with licensees
Exemption and modification by regulation - section 854B
3.51 Items 35 and 36 insert a regulation making power enabling exemption and modifications to Part 7.4. This will allow flexibility in applying the provisions in this Part. The regulation making power is intended to be used only in exceptional circumstances.
Part 7.6 - Financial Service Provider Licensing
Definition of a representative - section 910A
3.52 Proposed section 910A defines a representative for the purposes of Part 7.6. As currently drafted, this provision refers only to the representatives of a licensee.
3.53 Item 38 inserts an amended version of section 910A that defines a representative in relation to both licensees and other persons that are not licensees. The proposed definition of a representative in relation to a person that is not a licensee is relevant for the exemptions listed in proposed subsection 911A(2) (as these would also apply to the representatives of the persons listed in relation to conduct covered by the relevant exemption).
Product provider exemption - subsection 911A(2)
3.54 Proposed section 911A states when a financial services licence is required to carry on a financial services business in this jurisdiction. Proposed subsection 911A(2) sets out several circumstances in which a person carrying on a financial services business in this jurisdiction is exempt from the requirement to hold a licence.
3.55 Proposed paragraph 911A(2)(b) currently provides an exemption from licensing for a product provider that arranges for a licensee to distribute its products (the so-called ‘product provider exemption’).
3.56 Item 39 inserts a new version of paragraph 911A(2)(b). The purpose of this amendment is to address concerns that the current wording of this paragraph means that the product provider exemption would operate more narrowly than intended. The redrafted paragraph will ensure that a licensee will be able to deal in the products of a product provider on behalf of both the provider and its own clients. Proposed new paragraph 911A(2)(ba) will ensure that the exemption explicitly allows a product provider to make arrangements with a licensee to distribute its financial products (the intermediary authorisation). Without the proposed amendment this activity could be taken to be ‘arranging to deal’, a service that is outside the scope of the proposed exemption.
Media exemption - subsection 911A(2)
3.57 Sections 71 and 77 of the Corporations Act currently provide a limited exemption from licensing for media organisations in relation to the provision of investment and futures advice in certain circumstances. These provisions will be repealed by the proposed FSR Act because they refer to concepts, such as ‘futures advice’ and ‘investment advice’, that will be replaced under the proposed new FSR regime.
3.58 Items 40 and 42 will provide a media exemption on the face of the law in proposed paragraphs 911A(2)(ea), (eb) and (ec). The proposed exemption will cover the provision of general advice in relation to all financial products. It will apply to those same media organisations in the same circumstances as the current exemptions. That is to say, it would apply to publications, broadcasts and recordings that are generally available to the public otherwise than by means of subscription and whose sole or principal purpose is not to provide financial product advice.
3.59 It is also proposed that consequential amendments will be made to subsection 911A(5) and the definition of ‘information service’ that is currently contained in section 9 of the Corporations Act will be inserted as subsection 911A(6).
Requirement to be licensed - section 911A
3.60 Item 41 amends subparagraph 911A(2)(g)(ii) so that the only services that are exempted under proposed paragraph 911A(2)(g) from the licensing requirements are those in relation to which APRA has regulatory or supervisory responsibility not those which are provided in the course of carrying on the business of which causes that APRA regulation to be required.
3.61 Item 43 will ensure that, where a financial services licensee provides a financial service on behalf of a second financial services licensee under proposed paragraph 911B(1)(d), the licensee who is actually providing the service (the first licensee) is liable for the provision of that service. The provision therefore takes that service for the purposes of other provisions of proposed Chapter 7 to have been provided by the first licensee. Otherwise there could be confusion over which licensee is liable under a number of provisions of the Bill.
Obligations of financial services licensees - paragraph 912A(g)
3.62 Proposed section 912A lists the general obligations of financial services licensees. As currently drafted, paragraph 912A(g) would require licensees who provide financial services to retail clients to have internal and external dispute resolution procedures that are that are approved by ASIC in accordance with the regulations to resolve complaints that such persons may make in connection with the provision of financial services that are covered by the licence.
3.63 Items 44 and 45 amend proposed paragraph 912A(g) and insert new subsections 912A(2) and (3). The purpose of these amendments is to clarify the obligations of licensees in relation to internal and external dispute resolution as well as the role of ASIC in making or approving standards and requirements in relation to dispute resolution procedures and in approving dispute resolution schemes.
3.64 The amended paragraph 912A(g) will require licensees who provide financial services to retail clients to have a ‘dispute resolution system’ that complies with proposed new subsection 912A(2).
3.65 Proposed subsection 912A(2) will require licensees to have an internal dispute resolution (IDR) procedure that complies with standards and requirements made or approved by ASIC in accordance with regulations made for the purpose of subparagraph 911A(2)(a)(i). IDR procedures must be able to deal with all complaints made by retail clients in relation to all of the financial services covered by the licence (including any obligations of the licensee under Part 7.9).
3.66 This approach ensures that ASIC will not be required to individually approve the IDR procedures adopted by each licensee but may instead make standards and approve requirements that licensees will be required to meet to satisfy their licensing obligations. It also ensures that a licensee’s IDR procedures must be able to deal with all complaints made by retail clients in relation to financial services covered by the licence, rather than be able to resolve all of these complaints.
3.67 Proposed subsection 912A(2) will also require licensees that provide financial services to retail clients to be a member of one or more external dispute resolution (EDR) schemes that have been approved by ASIC in accordance with the regulations. These schemes must be able to deal with complaints made by retail clients in connection with the provision of all of the financial services covered by the licence (including any obligations of the licensee under Part 7.9). The only exception will relate to complaints that fall within the statutory jurisdiction of the Superannuation Complaints Tribunal (SCT). Licensees will be required to subscribe to as many ASIC approved EDR schemes as are necessary to deal with complaints relating to the different financial services they provide to retail clients. Some licensees will only be required to join a single EDR scheme. However others will be members of two or more schemes.
3.68 This approach ensures that ASIC will be able to approve EDR schemes that licensees are required to join rather than having to approve the arrangements adopted by particular licensees. It also recognises that certain complaints may be covered by the statutory Superannuation Complaints Tribunal (SCT). The licensing obligation will therefore apply to complaints that are outside the jurisdiction of the SCT. Finally, the revised provisions also recognise that EDR schemes are inevitably characterised by restrictions on the types of complaints that they are able to handle (for example, monetary claims limits and limits on complaints that have previously been considered in another forum, relate only to a legitimate commercial decision of a licensee or relate to the underlying performance of a financial product) and will not always be able to resolve complaints satisfactorily from the perspective of the client.
3.69 Proposed subsection 912A(3) will enable regulations to be made dealing with the variation or revocation of standards and requirements made by ASIC or approvals given by ASIC.
3.70 It is also proposed to make consequential amendments to proposed paragraphs 942B(2)(h), 942C(2)(i) and 1013D(1)(g) (which set out content requirements for FSGs and PDSs) to reflect the revised terminology proposed for paragraph 912(1)(g) (as well as proposed paragraph 919(1)(e) and subsection 1017G(1)) (see items 74, 77 and 107).
Surveillance checks by ASIC - section 912E
3.71 Item 46 amends proposed subsection 912E(1). The proposed amendment will require a licensee and its representatives to give such assistance to ASIC or a person authorised by ASIC as ASIC or the authorised person reasonably requests in order to determine a licensee’s compliance with the ‘financial services laws’ (rather than the Corporations Act) or in relation to the performance of ASIC’s other functions.
3.72 This proposed amendment is consistent with the amendment to proposed paragraph 912A(c) that was introduced in the House of Representatives (item 65 of those amendments).
APRA regulated bodies - sections 914A & 915I
3.73 Items 47, 48, 50 and 51 amend the phrase ‘significantly limiting or restricting’ to ‘preventing’ in proposed sections 914A and 915I. The purpose of these amendments is to narrow the range of situations where ASIC must consult with APRA or the powers that ASIC would otherwise have become the Minister’s powers.
3.74 Item 50 also amends proposed subsection 915I(1) to ensure that ASIC must notify APRA within one week where it suspends or cancels the licence of a body regulated by APRA (or a related body corporate) and that suspension or cancellation does not in ASIC’s opinion have the effect of preventing the APRA regulated body from carrying on all or any of its usual activities in relation to which APRA has responsibility. This brings proposed section 915I into line with proposed section 914A.
Immediate suspension or cancellation of a financial services licence - section 915B
3.75 Proposed section 915B sets out how ASIC may suspend or cancel the licences held by the different categories of persons who may obtain a licence under the FSR licensing regime.
3.76 Item 49 inserts a new subsection 915B(6) dealing with a licence held by trustees. This proposed amendment is consistent with the provisions enabling a group of trustees (or a single trustee who was trustee of the trust at a time when it had two or more trustees) to hold a licence that were inserted into the Bill in the House of Representatives (see items 10 and 69 to 71 of those amendments). The purpose of the amendment is to ensure that ASIC will be able to suspend or cancel a licence that is held by a group of trustees (or a single trustee who was trustee of the trust at a time when it had two or more trustees).
Authorised representatives - Division 5 of Part 7.6
3.77 Items 52, 53, 57 and 58 insert offences into proposed sections 916A, 916B, 916C and 916D so that a person who gives a purported authorisation contrary to the requirements of these provisions commits an offence. This is necessary to ensure that people do not give authorisations that are void and which consumers may rely on. The penalty for these offences is up to 100 penalty units and/or imprisonment for 2 years (see item 147).
3.78 Item 57 will also omit proposed subsection 916C(3). This will ensure that where there is an existing authorisation and a second authorisation which is void is purportedly given the first authorisation continues to have effect and only the second authorisation is void. In addition, item 58 clarifies that proposed subsection 916D(1) does not prevent a licensee from being an authorised representative in accordance with proposed section 916E.
3.79 Item 54 amends proposed subsection 916B(3) so that a consent given by a licensee under that subsection must be in writing.
3.80 Item 55 inserts a new subsection (5A) into proposed section 916B which requires a licensee to keep a copy of consents that they give under that section for 5 years after the day on which such a consent ceases to have effect. The keeping of these consents is necessary to ensure that it is possible to ascertain whether a particular person was in fact properly authorised to provide financial services on behalf of the licensee at a particular point in time. A contravention of this requirement is an offence with a penalty of up to 50 penalty units and/or imprisonment for 1 years (see item 147).
3.81 Item 56 clarifies who may revoke an authorisation given under proposed section 916B. These are authorisations given by bodies corporate that are authorised representatives of a licensee. The amendment will allow either the relevant licensee or the body corporate that gave the authorisation to revoke it. It is appropriate that both the body corporate that gives the authorisation and the licensee who is then generally responsible for the conduct of the authorised representative are able to revoke the authorisation. The authorisation must be revoked by either of these people giving a written notice to the individual. The person revoking the authorisation must also notify the other person who could have revoked it. The amendment also clarifies that for the purposes of proposed sections 916D to 916F the authorisation is given by the body corporate not the licensee.
3.82 Items 59 and 60 provide that where a body corporate authorises a person under proposed section 916B and the licensee’s consent to that authorisation is not specific to the person but covers a class of people, the body corporate must notify the licensee in writing within 10 business days. This amendment is necessary to ensure that the licensee is aware of exactly who its authorised representatives are. A contravention of this requirement is an offence with a penalty of up to 25 penalty units and/or imprisonment for 6 months (see item 148).
3.83 Item 61 amends proposed subsection 916F(3) to clarify who must notify ASIC when the details of an authorised representative change or the authorisation is revoked.
Liability of licensees for representatives - section 917C
3.84 Item 62 amends section 917C so that where a representative is the representative of more than one licensee in relation to a class of financial service and conduct relates to that class of financial service but is within authority in relation to only a number of those licensees then only those licensees are responsible as between the licensee and the client for the relevant conduct.
Declared professional bodies (DPB) - Division 7 of Part 7.6
3.85 It is proposed to make a number of amendments to the provisions governing DPBs in proposed Division 7 of Part 7.6 of the Bill.
3.86 Proposed paragraph 919A(e) imposes obligations on a DPB to ensure that members that provide financial product advice to retail clients have internal and external dispute resolution procedures that can deal with complaints in connection with the provision by the member of the kind of financial product advice covered by the declaration. Items 63 and 64 will amend paragraph 919A(e) in line with the proposed amendments to paragraph 912A(g) described above. A DPB will be required to ensure that each member has a dispute resolution system that complies with proposed new subsection 919A(2). The requirements set out in proposed subsection 919A(2) will be the same as those that will apply to licensees under proposed in subsection 912A(2) (except that they relate only to the provision of financial product advice to retail clients covered by the relevant DPB declaration). Proposed subsection 919A(3) will enable regulations to be made dealing with the variation or revocation of standards and requirements made by ASIC or approvals given by ASIC.
3.87 Items 65 and 66 will amend subsection 919B(1) to remove references to ‘the body’ in paragraphs (a) and (b). This amendment is necessary because it is the members of a DPB that will provide financial services under this arrangement and not the body itself.
3.88 Item 67 will amend subsection 919C(3) so that a DPB would be required to give ASIC written notice within 3 days if it forms a belief that a member of the body has committed, is committing or is about to commit a breach of a ‘financial product advice law’. This obligation currently applies only in relation to breaches of Chapter 7. This amendment is consistent with the obligation on a DPB under paragraph 919A(b) House of Representatives amendments).
3.89 Finally, item 68 amends section 919E through the addition of a new subsection 919E(5). The purpose of this amendment is to ensure that section 1303 of the Corporations Act will properly apply to DPB registers. This amendment is necessary because section 1303 would only apply in relation to a refusal to allow an inspection of a register if such a refusal were ‘in contravention of this Act’). The current subsection 919E(5) will become subsection 919E(6).
Part 7.7 - Financial Services Disclosure
Meaning of a public forum - section 941C
3.90 Section 941C sets out the circumstances in which a Financial Services Guide (FSG) is not required to be given. One of these circumstances consists of the provision of general advice in a ‘public forum’.
3.91 Item 71 inserts a regulation-making power that will enable the regulations to define a ‘public forum’ for the purposes of this subsection.
Obligation to give updated FSG - section 941F
3.92 As currently drafted, proposed section 941F requires a providing entity to update a FSG that has been given to a retail client if there is a change in circumstances during the period after the FSG is provided to the client and before the service is provided, and as a consequence the FSG no longer contains all of the material that it would be required to contain if it was given to the client immediately after the change.
3.93 Item 72 amends proposed paragraph 941F(b) by inserting a materiality test. The purpose of this amendment is to ensure that the requirements of section 941F will not place an undue burden on industry participants. The amended section will require an updated FSG to be given only if the fact that the FSG does not contain the new information (reflecting the changes in circumstances) would be materially adverse from the perspective of a reasonable person as a retail client deciding whether to proceed to be provided with the financial service.
Main requirements for FSG given by licensee or authorised representative - sections 942B and 942C
3.94 Items 73, 75, 76, 78 and 85 will amend the provisions of proposed sections 942B and 942C as they relate to the provision of execution-related telephone advice (paragraphs 942B(2)(g) and 942C(2)(h)).
3.95 Items 73 and 76 will require all licensees and authorised representatives that provide execution-related telephone advice to provide retail clients with a FSG that contains a statement to the effect that a client may request a record of execution-related telephone advice that is provided to them if they have not already been provided with a record of this advice. These statements must set out particulars of how a client may request such a record. Subparagraphs 942B(2)(g)(iii) and 942C(2)(h)(iii) will enable the regulations to provide for the minimum requirements for the period within which a client may request a record of advice from a licensee or authorised representative.
3.96 The purpose of these amendments is to clarify the rules relating to the provision of records of advice in relation to execution-related telephone advice. As currently drafted, the relevant provisions of proposed sections 942B and 942C apply only apply to financial service providers that provide execution-related telephone advice and do not ‘usually’ provide such records of advice to clients, whilst subsection 946B(2) states that clients must be given a ‘reasonable opportunity’ to request such a record.
3.97 Finally, items 75, 78 and 85 relocate the offence provision relating to failure to provide a record of advice pursuant to a request from a client from current subsection 946B(4) to proposed subsections 942B(8) and 942C(8). The purpose of this amendment is to clarify the operation of this offence provision by locating it in the same sections as the provisions that would require licensees and authorised representatives to inform clients of their ability to obtain a record of advice (see items 149 and 151 for relevant amendments to Schedule 3).
3.98 Item 2 will insert a definition of ‘execution-related telephone advice’ in proposed section 761A.
Requirement to have a reasonable basis for personal advice - section 945A
3.99 Proposed amendments to the definition of ‘personal advice’ in subsection 766B(3) will necessitate consequential amendments to subsection 945A(1).
3.100 Item 79 amends subsection 945A(1) to add an additional requirement for a providing entity to determine the ‘relevant personal circumstances’ of a client in relation to the personal advice that is being provided to the client. A definition of ‘relevant personal circumstances’ will be inserted into proposed section 761A (item 6).
3.101 The purpose of this provision is to ensure that a providing entity will only be required to make reasonable inquiries of a client’s objectives, financial situation and needs to the extent that these could reasonably be considered relevant to the advice being provided.
3.102 Where a client’s objectives, financial situation and needs could reasonably be considered to be relevant to the personal advice being provided, the providing entity will be required to make reasonable inquiries in relation to all three of these matters. However, in circumstances where only one or two of these matters could reasonably be considered relevant, it will only be necessary for the providing entity to make reasonable inquiries in relation to those matters. For example, a client’s financial situation may not reasonably be considered to be a relevant personal circumstance in relation to advice concerning a motor vehicle insurance product, but may reasonably be considered to be a relevant personal circumstance in relation to advice concerning a sickness and accident insurance product.
Obligation to warn client if personal advice based on incomplete or inaccurate information - section 945B
3.103 The proposed amendments to subsections 766B(3) and 945A(1) will also necessitate consequential amendments to proposed section 945B.
3.104 Items 80, 81 and 82 will amend this section so that a providing entity is only required to warn clients in relation to incomplete or inaccurate information where this information relates to matters that could reasonably be considered to be relevant personal circumstances in relation to this advice.
Situations in which SOA is not required - subsections 946B(1) to (4)
3.105 Proposed subsections 946B(1) to (4) will enable a providing entity not to give a SOA to a retail client when providing execution-related telephone advice in certain circumstances.
3.106 Item 83 will omit proposed paragraph 946B(2)(b). This paragraph will be replaced with the new versions of proposed paragraphs 942B(2)(g) and 942C(2)(h) (see items 73 and 76).
3.107 Item 84 will move the provisions of proposed paragraph 946B(2)(c) to a new subsection 946B(3A). As currently drafted, this provision would require a providing entity to keep a record of advice before the advice is provided. The proposed new subsection 946(3A) will require a providing entity to retain records of advice for a period specified in the regulations. Contravention of this rule will constitute an offence with a maximum penalty of 50 penalty units (item 150).
General advice warning - section 949A
3.108 It is also necessary to make consequential amendments to the provisions relating to the content of general advice warnings in proposed section 949A.
3.109 Items 87 and 88 will amend section 949A so that, rather than being required to provide a general advice warning in relation to advice to a retail client that has been prepared without taking account of the client’s objectives, financial situation and needs, a providing entity would be required to warn a client if advice had been prepared without taking account of the client’s objectives, financial situation or needs.
3.110 The providing entity will still be required to warn the client that, before acting on the general advice, the client should consider its appropriateness having regard to their own objectives, financial situation and needs. This is because it would be most appropriate for the client in these circumstances to determine their ‘relevant personal circumstances’ in relation to the general advice to which the warning relates.
Obligations on DPB members who provide personal advice - sections 950B & 950C
3.111 Proposed sections 950B and 950C would impose upon a member of a DPB that provides personal advice similar requirements to those imposed on other providing entities under subsection 945A and section 945B in relation to personal advice provided to retail clients.
3.112 Items 89 to 92 will amend these provisions along similar lines to the amendments proposed to subsection 945A and section 945B. These amendments will replace current requirements relating to consideration of the ‘objectives, financial situation and needs’ of a client with new requirements relating to consideration of a client’s ‘relevant personal circumstances’.
Obligation on DPB member to disclose commission payments etc - section 950D
3.113 Proposed section 950D would require members of a DPB that provide personal advice to retail clients to provide these clients with information about commissions or other payments that may be received in connection with the advice and well as other interests and associations that might reasonably be expected to influence the advice that is being provided.
3.114 Item 93 adds a regulation-making power that will enable the regulations to require the disclosure of other information specified in the regulations. The proposed new subsection 950D(4) is similar to current paragraph 947B(2)(g), which applies to personal advice given by a licensee to a person as a retail client.
Civil actions for loss or damage - section 953B
3.115 Item 94 inserts a new subsection (3C) into proposed section 953B to clarify that although proposed section 917C applies under subsection 953B(3), proposed section 917D does not apply. The potential limitation on liability imposed by proposed section 917D was not intended to extend to civil liability created under proposed Part 7.7.
Part 7.8 - Other provisions relating to conduct
Dealing with client’s money - Division 2 of Part 7.8
3.116 Item 96 clarifies that in proposed subparagraph 981A(1)(b)(iii) the money must not just be paid for the benefit of the client but must be paid to the licensee in their capacity as a person acting on behalf of the client. This limits the money that is within the definition in proposed section 981A.
3.117 Item 97 will insert proposed section 981H, which provides that money to which that Subdivision applies (see proposed section 981A) is taken to be held on trust by the licensee for the benefit of the client. This provision does not apply where the licensee and client agree in writing that the money is not to be held on trust for the benefit of the client (proposed subsection (2)) and regulations may provide that it does not apply in certain circumstances or may specify additional matters related to the nature of the trust (proposed subsection (3)). The imposition of a trust in these situations will provide greater protection for client money held by licensees.
Part 7.9 - Financial Product Disclosure
Jurisdictional scope of Division 2 of Part 7.9 - section 1011A
3.118 Proposed section 1011A deals with the jurisdictional application of Division 2 of Part 7.9. As currently drafted, it provides that this Division applies to offers, recommendations and advice that are received in this jurisdiction. However it does not explicitly deal with the jurisdictional scope of the Division in relation to the issue of financial products (other than in an offer situation).
3.119 Item 99 replaces the current section 1011A with a revised version dealing with the jurisdictional application of Division 2 of Part 7.9.
3.120 The proposed new section 1011A will explicitly state that sections 1012A, 1012B and 1012C apply only in relation to offers and recommendations referred to in these sections that are received in this jurisdiction. It will also state that proposed section 1012B applies in relation to issues referred to a subparagraph 1012B(3)(a)(iii) that are made in this jurisdiction. Finally, it will insert a regulation-making power that would enable the regulations to make statements about the jurisdictional scope in relation to the application of other provisions of Division 2 of Part 7.9.
Issue situations in which a PDS is not required - subsection 1012D(4)
3.121 As currently drafted, subsection 1012D(4) provides that additional contributions to superannuation products (on the same terms), RSA products, life insurance products and deposit products constitute an issue situation. Item 100 will omit this subsection.
3.122 As previously noted (in relation to proposed section 761E), item 7 will make consequential amendments to proposed section 761E to clarify that additional contributions to the financial products listed in current subsection 1012D(4) will not constitute an issue situation.
Exemption for interests in schemes operated by an exempt body - subsection 1012D(8)
3.123 Subsection 708(20) of the Corporations Act currently provides an exemption from disclosure requirements for certain offers of securities by an exempt body of a State or Territory (as defined in section 66A of the Corporations Act). As currently drafted, proposed subsection 1012D(8) provides a similar exemption in relation to certain offers of managed investment products made by responsible entities that are exempt bodies.
3.124 Items 101 to 103 will amend subsection 1012D(8) to replace the current reference to ‘managed investment products’ with a reference to interests etc. in a managed investment scheme that is unregistered other than because of subsection 601ED(1), and to replace the current references to a responsible entity with references to the holder of the office in relation to these schemes that corresponds most closely to the office of a responsible entity of a registered scheme.
Exemption for clients associated with a registered scheme - subsections 1012D(9A) & (9B)
3.125 Item 104 inserts new provisions into Division 2 of Part 7.9 that mirror the current subsection 708(12) of the Corporations Act. Subsection 708(12) currently applies to all securities as defined for the purposes of Chapter 6D (including interests in a registered managed investment scheme). It provides that an offer of securities does not require disclosure if it is made to an executive officer of a body or a related body, certain relatives of the executive officer or a body corporate controlled by any of these persons.
3.126 Following the commencement of the FSR framework, disclosure in relation to offers of ‘managed investment products’ will be subject to regulation under Chapter 7. The purpose of this proposed amendment is therefore to maintain the current effect of this exemption in relation to managed investment products.
Requirement to provide a PDS - Part 7.9
3.127 Item 106 inserts proposed section 1012IA. This section deals with situations where a client has an arrangement with another person to acquire financial products at their instruction and that person then holds the financial products for the benefit of the client. Its objective is to ensure that in these situations the client will receive an appropriate level of disclosure for the products that are acquired under such an arrangement. This is necessary as the clients themselves are making the decision whether or not to acquire that particular financial product (or a financial product of a particular kind).
3.128 Arrangements where the client gives a direction to a person and another person then actually acquires the product and holds (either directly for the benefit of the client or a nominee or for the benefit of the person to whom the instruction was given) are also subject to this proposed provision (proposed subsection (1), definition of ‘custodial arrangement’).
3.129 Therefore, if the client would have received a PDS if they were acquiring the product directly from the issuer or seller rather than through one of these types of arrangements, this proposed provision will ensure that they must also receive a PDS. This obligation is placed on the provider of the service and the PDS must be given before the acquisition occurs so that the client has an opportunity to consider the contents of the PDS.
3.130 In determining whether the client would have received a PDS (and consequently whether this proposed provision would require the provider of the custodial arrangement to provide one), other provisions in proposed Part 7.9 are applied on the basis that issue or sale is occurring directly between the client and the issuer or seller (proposed paragraphs (2)(a) and (b)). It is necessary, however, to modify the application of a number of proposed Part 7.9 so that they operate appropriately for this purpose. Proposed subsections (3) to (7) set out these modifications and proposed subsection (8) provides that regulations may make other modifications.
PDS content requirements - section 1013D
3.131 Proposed subsection 1013D(1) lists the information that is required to be contained in a PDS (to the extent that it would reasonably be required by a person making a decision about whether to purchase the product as a retail client).
3.132 Item 108 adds a regulation making power to proposed subsection 1013D(1). This will permit the regulations to require the disclosure of additional information in a PDS in certain circumstances. For example, the issuer of interests in an ‘illiquid’ managed investment scheme could be required to disclose that no cooling-off period is available in relation to these interests (due to the nature of the underlying assets). This type of disclosure could not be achieved using the regulation-making powers contained in proposed subsection 1013D(4).
Application forms - section 1016A
3.133 Proposed section 1016A contains provisions relating to the use of application forms. Subsection 1016A(2) generally provides that an issuer or seller may only make a restricted issue or sale of a ‘relevant financial product’ if the issue or sale occurs pursuant to an ‘eligible application’.
3.134 Item 109 adds a regulation-making power to subsection 1016A(2). Proposed paragraph 1016A(2)(f) will enable the regulations to exempt applications for a restricted issue or sale of particular ‘relevant financial products’ in certain circumstances from the ‘eligible application’ requirements.
3.135 The main purpose of this amendment is to enable current exceptions contained in the SIS regulations to be carried over to the FSR regime.
Ongoing disclosure - subsection 1017B(2)
3.136 As currently drafted, proposed subsection 1017B(2) would exempt the responsible person in relation to all managed investment products from requirements to give ongoing disclosure of material changes and significant events.
3.137 Items 110 and 111 amend subsection 1017B(2) so that this exemption applies only to managed investment products that are ED securities under proposed Chapter 6CA.
Dealing with money received for financial products - section 1017E
3.138 Item 112 amends proposed section 1017E to provide that money that the section applies to is held on trust by the product provider for the benefit of the person who paid the money. This provision does not apply where the product provider and person agree in writing that the money is not to be held on trust for the benefit of the person (proposed subsection (2B)) and regulations may provide that it does not apply in certain circumstances or may specify additional matters related to the nature of the trust (proposed subsection (2C)). The imposition of a trust in these situations will provide greater protection for client money held under proposed section 1017E.
Confirming transactions - section 1017F
3.139 Proposed section 1017F imposes obligations on responsible persons (generally the issuers or sellers of financial products) to confirm certain transactions undertaken by the holders of financial products that were issued or sold to them as retail clients.
3.140 As currently drafted, proposed subsection 1017F(7) would require confirmations to provide a product holder with the information necessary to understand the nature of the transaction (having regard to the information the holder has received before the transaction).
3.141 Item 113 amends subsection 1017F(7). This amendment will provide that a ‘responsible person’ would only be required to provide information that they reasonably believe the product holder would require to understand the transaction (having regard to the information the holder has received before the transaction).
3.142 The purpose of this amendment is to reduce the subjectivity of proposed section 1017F. Without this proposed amendment, product issuers or sellers might confront difficulties as a consequence of their inability to know exactly what information would be required by each of the different persons that might hold their financial products.
Dispute resolution obligations on product issuers and other regulated persons - section 1017G
3.143 As currently drafted, proposed section 1017G requires financial product issuers that are not licensees but whose products are available for acquisition by retail clients to have internal and external dispute resolution procedures that are approved by ASIC in accordance with the regulations to resolve complaints that such persons may make in relation to alleged contraventions of proposed Part 7.9.
3.144 Item 114 will amend proposed section 1017G along the lines of the proposed amendments to paragraphs 912A(g) and 919A(e) and associated provisions.
3.145 In contrast to the current approach, these obligations will apply to both product issuers that are not licensees, as well as any regulated persons that are obliged under subsections 1012C(5), (6) or (8) to give a retail client a Product Disclosure Statement (PDS). These two categories of persons will be required to have dispute resolution systems that cover complaints that may be made be retail clients in relation to financial services provided by product issuers and sellers in relation to any of the products described in proposed paragraph 1017G(1)(a).
3.146 It is envisaged that dispute resolution systems will be able to deal with complaints including those by retail clients that relate to any dealing activities covered by exemptions under proposed section 911A as well as the obligations that would apply to these person under proposed Part 7.9.
3.147 It will be an offence to contravene this requirement. The maximum penalty will be 100 penalty units and/or two year’s imprisonment (item 152).
Cooling off period for return of financial product- section 1019B
3.148 Item 115 will insert a new subsection 1019B(5A) into proposed section 1019B. This will enable the regulations to specify circumstances in which a right to return a product and be repaid cannot be exercised. In relation to travel insurance, this will prevent a right to return the product being exercised after the commencement of the ‘specified journey’ to which the product relates.
3.149 Item 116 will enable the regulations to provide for an increased as well as a reduced amount of money to be ‘repaid’ to a client if a right to return a financial product is exercised. This will be relevant in relation to market-linked products that increased in value between the time at which they were acquired and the time the client exercised a right to return the product.
Offers of managed investment interests in certain circumstances - section 1020A
3.150 Proposed section 1020A is intended to make it an offence for a person to recommend, make an offer to issue or sell or accept an offer to issue or sell interests in managed investment scheme if the scheme concerned needs to be or will need to be registered but has not been registered.
3.151 The provision does not operate correctly as currently drafted, as it applies only in relation to interests in registered managed investment schemes (and not to interests in illegally unregistered schemes).
3.152 Items 117 and 118 will amend subsection 1020A(1) to replace the current reference to a ‘managed investment product’ with a reference to a financial product defined in proposed paragraph 764A(1)(ba) (an interest in an unregistered scheme).
Contracting out - section 1020D
3.153 Item 119 amends proposed paragraph 1020D(b) so that a condition of a contract which takes a party to the contract to have notice of a contract, document or matter not specifically referred to in a PDS only applies where the party is required by a provision of proposed Part 7.9 to have been given a PDS. This amendment is necessary to ensure that proposed paragraph 1020D(b) would not apply in a range of situations where there would not be a requirement that the party be given a PDS.
Civil actions for loss or damage - section 1022B
3.154 Item 120 inserts a new subsection (4A) into proposed section 1022B to clarify that although proposed section 917C applies under subsection (4), proposed section 917D does not apply. The potential limitation on liability imposed by proposed section 917D is not intended to extend to civil liability created under proposed Part 7.9.
Part 7.10 - Market Misconduct
False or misleading statements - section 1041E
3.155 Items 121 to 124 and 155 will amend proposed section 1041E (and the relevant table item in Schedule 3). The purpose of these amendments is to ensure that this section to which the Criminal Code will apply, fully replicates the effect of section 999 of the current Corporations Act.
Part 7.12 - Miscellaneous
Concealing etc books relating to financial products - section 1101E
3.156 Proposed section 1101E would make it an offence to conceal, destroy, mutilate or alter various books that are required to be kept by market and financial services licensees. It would also make it an offence to send such a book out of this jurisdiction.
3.157 Items 126 and 127 extend these provisions to encompass books that are required to be kept by Declared Professional Bodies. This amendment would ensure that these provisions apply to registers of members that a DPB would be required to establish under section 919E.
Falsification of records - section 1101F
3.158 Item 128 will insert a new offence provision as part of proposed section 1101F. Proposed new subsection 1101F(1A) would create an offence of engaging in conduct that results in the falsification of a book required to be kept by a provision of Chapter 7 or a register or any accounting or other record referred to in section 1101C. This proposed offence would attract a maximum penalty of 50 penalty units or one year’s imprisonment or both (item 156).
3.159 Item 130 will ensure that the defence in proposed subsection 1101A(2) will apply to proposed subsection 1101F(1A) as well as proposed subsection 1101F(1).
3.160 This amendment is necessary because as currently drafted, proposed section 1101F would only create an offence in relation to the falsification of matter that is stored by means of a mechanical, electrical or other device.
Application of Part 9.3 to books required to be kept by Chapter 7 - section 1101GA
3.161 Item 131 inserts a proposed new section 1101GA into Part 7.12 of the Bill.
3.162 The purpose of this amendment is to clarify the application of the general provisions governing ‘books’ in Part 9.3 of the Corporations Act in relation to books, registers and other accounting records that are required to be kept by Chapter 7.
3.163 The proposed new section will ensure that section 1303, section 1305 and subsections 1306(5) and (6) apply to all to books, registers and other accounting records that are required to be kept by Chapter 7. The other provisions of Part 9.3 would not generally apply to books, registers and other accounting records that are required to be kept by proposed Chapter 7. However a regulation-making power in proposed paragraph 1101GA(2)(c) would enable the regulations to apply other provisions of Part 9.3 to books, registers and other accounting records that are required to be kept by proposed Chapter 7, with such modifications as necessary.
Amendments to the Australian Securities and Investments Commission Act 2001
Definition of a financial product - section 12BAA
3.164 Proposed section 12BAA defines a ‘financial product’ for the purposes of Division 2 of Part 2 of the ASIC Act (as well as for the purposes of the Trade Practices Act 1974 (TPA)).
3.165 Proposed subsection 12BAA(7) lists facilities that are financial products for the purposes of Division 2 of Part 2, whilst proposed subsection 12BAA(8) lists facilities that are specifically excluded from the definition of a financial product for the purposes of Division 2 of Part 2.
3.166 As currently drafted, subsection 12BAA(7) defines interests in two categories of managed investment schemes as financial products: schemes that are registered in Australia and unregistered overseas schemes that would be required to be registered if they were operated in this jurisdiction. Subsection 12BAA(8) excludes from the definition of a financial product interests in unregistered overseas schemes that would not be required to be registered if they were operated in this jurisdiction.
3.167 Items 132, 133 and 134 will amend proposed section 12BAA so that interests in all types of managed investment schemes (both schemes that are operated in Australia and overseas schemes) will be financial products for the purposes of the consumer protection provisions of the ASIC Act.
Definition of a financial service - section 12BAB
3.168 Proposed section 12BAB defines a financial service for the purposes of the Division 2 of Part 2. As currently drafted, subsection 12BAB(3) excludes conduct of a kind ordinarily engaged in by clerks and cashiers from the definition of a ‘financial service’ contained in subsection 12BAB(1).
3.169 Item 135 amends proposed section 12BAB by omitting the current subsection (3). This will ensure that conduct that would otherwise fall within the ambit of subsection 12BAB(1) and hence would be subject to the provisions of Division 2 of Part 2, will not be excluded from the definition of a ‘financial service’ by the operation of subsection 12BAB(3), and therefore be potentially subject to regulation by the ACCC under Parts IVA or V of the Trade Practices Act 1974 rather than by ASIC under Division 2 of Part 2 of the ASIC Act.
Other amendments to the Corporations Act 2001
Definition of a professional investor
3.170 Item 139 amends the definition of ‘professional investor’ in section 9 of the Corporations Act. As currently drafted, paragraph (b) of this definition provides that all persons that are APRA regulated bodies are professional investors. However paragraph (d) states that the definition should apply only to the trustees of superannuation entities with more that $10 million in net assets.
3.171 The proposed amendment will clarify that the rule in paragraph (b) would not apply to the trustees or funds listed in subparagraphs (d)(i) to (iv).
Updating references to a ‘securities exchange’ in the Act
3.172 These amendments replace the current references to a ‘securities exchange’ in section 9 (definitions of ‘on-market buy-back’ (item 138), ‘trading day’ (item 140), paragraph 92(3)(g) (item 141), subsection 633(1) (table item 14) (item 143), paragraph 662B(1)(d) (item 145) and paragraph 724(1)(b) (item 146) with references to equivalent FSR concepts (involving the use of the term ‘financial market’ rather than ‘securities exchange’).
Forms for documents to be lodged with ASIC - section 350
3.173 Item 142 substitutes a revised section 350. The proposed subsection 350(1) will ensure that where a form is prescribed or approved, that form can require that information, statements or explanation be included as required by the form and that the form be accompanied by any other material required by the form.
3.174 Proposed subsection 350(2) provides that any reference to a document that has been lodged (to which proposed section 350 would apply) includes a reference to any other material lodged with the document as required by the relevant form.
3.175 Proposed subsection 350(3) provides that this proposed amendment can apply to provisions requiring the lodgement of a document even where that provision makes separate provision for regulations to specify information etc. or other material that must be included with the form.
Content of bidder’s statements - section 636
3.176 Section 636 of the Corporations Act sets out the required contents of a bidder’s statement in a takeover bid. Paragraph 636(1)(g) sets out the information that a statement must include if any securities (including shares or interests in registered managed investment schemes) are offered as consideration under the bid.
3.177 As currently, drafted, this paragraph requires the bidder’s statement to include the information required that would be required under sections 710 to 713 to be contained in a prospectus for these securities.
3.178 Item 144 adds a new paragraph 636(1)(ga) dealing with ‘managed investment products’. The effect of this provision will be to require a bidder’s statement that offers managed investment products as consideration to include the information that a Product Disclosure Statement (PDS) would be required to contained under proposed section 1013C.
3.179 This amendment is necessary because provisions governing disclosure in relation to managed investment products would be moved from Chapter 6D to proposed Chapter 7. Without this amendment, bidders would not be required to provide disclosure to target shareholders in relation to any managed investment products offered as consideration in a takeover bid.
Penalty provisions - Schedule 3
3.180 Amendments to Schedule 3 add penalties for contraventions of the offence provisions contained in subsections 1021M(1) and (3) (item 153).
Amendments related to telephone monitoring provisions
Limiting application to retail investors - proposed subsections 648J(3) and (4)
3.181 Item 160 will amend proposed subsections 648J(3) and (4) to remove potential interference with current market operations for institutional and professional investors. The amendments in proposed subsections 648J(3) and (4) distinguish between retail and wholesale investors and apply the requirement to record telephone calls during takeover bids only in relation to retail investors. This recognises that the imposition of telephone monitoring requirements on participants in the wholesale market may have impeded the flow of commercial information and in certain circumstances been impractical to implement.
3.182 However, the amended provisions will still facilitate consumer protection measures that seek to prohibit the provision of misleading or deceptive advice to retail shareholders during a takeover bid.
Removing an anomaly - proposed subsection 648J(1A) and section 648K
3.183 A potential anomaly is removed by proposed subsection 648J(1A) and amendment of proposed section 648K. Those instances where a target or a bidder solicits calls from retail shareholders for the purpose of discussing a takeover are now captured by the legislation. Requiring parties to record both incoming and outgoing telephone calls with retail shareholders that involve discussion a takeover bid will ensure the integrity of the measure (items 159, 161 and 162).
Compliance with criminal code - subsection 648J(1)(b)
3.184 Item 158 makes a minor amendment to proposed paragraph 648J(1)(b) to make it compliant with the Criminal Code.