Save Search

Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

Bill home page  


Download WordDownload Word


Download PDFDownload PDF

2010-2011-2012

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

SENATE

 

 

 

commonwealth government securities legislation amendment (retail trading) bill 2012

 

 

 

 

REVISED EXPLANATORY MEMORANDUM

 

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Retail trade in Commonwealth Government Securities 5

Chapter 2               Statement of Compatibility with Human Rights........... 23

Index................................................................................................................. 25

 

Do not remove section break.



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

AGD

Attorney-General’s Department

AOFM

Australian Office of Financial Management

ASIC

Australian Securities and Investments Commission

ASX

Australian Securities Exchange

Bill

Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

CGS

Commonwealth Government Securities

CIS Act

Commonwealth Inscribed Stock Act 1911

Corporations Act

Corporations Act 2001

DI

Depository interest

DN

Depository nominee

PDS

Product Disclosure Statement

Williams case

Ronald Williams v The Commonwealth of Australia & Ors [2012] HCA 23



Outline

The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 (the Bill) amends the Commonwealth Inscribed Stock Act 1911 (the CIS Act) to facilitate trading of beneficial interests in Commonwealth Government Securities (CGS) on financial markets in Australia that are accessible to retail investors.  The Bill also contains amendments to the Corporations Act 2001 (the Corporations Act) requiring financial advisers to provide a prescribed information statement to retail clients when they give them personal advice about investing in CGS.  Finally, a number of minor amendments are made to the CIS Act to facilitate the Australian Office of Financial Management’s (AOFM) daily administrative work and to remove some redundant provisions.

Date of effect The day after the Act receives the Royal Assent.

Proposal announced The measure was announced in a media release titled ‘A competitive and sustainable banking system’ by the Deputy Prime Minister and Treasurer dated 12 December 2010 and included in the 2011-12 Budget.

Financial impact :  Total f unding of $11.2 million for implementing the measure was provided to the AOFM in the 2011-12 Budget and the costs have been included in the forward estimates as follows: 

2010-11

2011-12

2012-13

2013-14

2014-15

nil

$0.9 million

$3.5 million

$3.4 million

$3.4 million

Human rights implications :  This Bill does not raise any human rights issue.  See Statement of Compatibility with Human Rights — Chapter 2, paragraphs 2.3 to 2.6.

Compliance cost impact This Bill has a minor compliance cost impact on financial advisers due to the requirement to provide the prescribed information statement for retail CGS when giving personal advice.  The information statement will be available on a designated website and financial advisers will be able to download and print out the document for provision to their clients.

Summary of regulation impact statement

Regulation impact on business

Impact The Office of Best Practice Regulation has confirmed that the amendments do not require a regulation impact statement because they only have a minor impact on business (Office of Best Practice Regulation reference ID 13950).

Do not remove section break.



Outline of chapter

1.1                   The Bill amends the CIS Act to facilitate the trading of beneficial interests in CGS on financial markets in Australia that are accessible to retail investors.  The Bill also contains amendments to the Corporations Act requiring financial advisers to provide a prescribed information statement to retail clients when they give them personal advice about investing in CGS.  Finally, a number of minor amendments are made to the CIS Act to facilitate the AOFM’s daily administrative work and to remove some redundant provisions.

Context of amendments

CIS Act amendments

1.2                   The measure to facilitate the trading of CGS on financial markets in Australia accessible to retail investors forms part of a collection of Government measures to promote a competitive and sustainable banking system.  The overall objectives of the measures are to improve consumer protection in banking services, support smaller lenders in increasing competitive pressure on the big banks, and secure the long-term safety and sustainability of the Australian financial system by reducing reliance on offshore wholesale funding markets.

1.3                   As part of these objectives the Government has committed to fostering a deep and liquid corporate bond market.  Trading of CGS on financial markets accessible to retail investors is a crucial element of this proposal as it provides retail investors with a visible pricing benchmark for investments they may wish to make in corporate bonds.  Establishing a strong and liquid retail market in the premium debt security — that is, CGS — is a critical step in the formation of a wider retail debt market, including corporate debt. 

1.4                   The CIS Act provides an overall framework for the activities of the AOFM in issuing, selling and managing CGS.  Currently CGS are mainly traded over-the-counter (OTC) and on professional financial markets that are not accessible to retail investors.  Amendments to the CIS Act are required to allow the trading of CGS on financial markets accessible to retail investors.  The amendments to the Corporations Act are required to ensure that a range of investor protection measures, including the provision of appropriate disclosure documentation, apply to retail investors investing in CGS.

1.5                   The amendments to the CIS Act are required because beneficial interests in CGS will be traded and settled by retail investors in a manner that is different from the practices in the wholesale market.  In particular, CGS traded in the wholesale market are currently registered and settled through the Austraclear System, which is the Australian Securities Exchange’s (ASX) clearing and settlement facility for debt securities traded in the over-the-counter market and on professional financial markets.  The Austraclear System is not equipped to deal with retail investors, and it is therefore necessary to use a different system for the settlement of trading by retail investors.

1.6                   Following consultation with potential market operators, the Government has decided to consider proposals based on an 'indirect' or 'beneficial ownership' type of trading model.  Beneficial ownership models are already in place for trading CGS on wholesale markets, and are used on retail financial markets for financial products that for some reason cannot be directly traded on a financial market.  Examples are bearer securities, securities held in another settlement and depository system or foreign-listed shares.

1.7                   Under this model, retail investors will not acquire the legal ownership of the CGS.  Instead, a new financial product called a Depository Interest (DI) will be created which is linked to the CGS.  Ownership of DIs will provide retail investors with beneficial ownership of the underlying CGS which will provide them with the right to receive periodic interest and principal payments due on the underlying CGS.  DIs will be governed by the financial market operator operating rules and not the CIS Act. 

1.8                   Legal ownership of the underlying CGS will remain with the wholesale securities depository.  In a second step, DIs will be created and issued over some of the underlying CGS.  The DIs will be able to be traded by retail investors on a financial market in a manner similar to shares, with the trades settled through clearance and settlement facilities.  There will be a separate Registry showing ownership of DIs which will be updated whenever a transfer of DIs occurs.

1.9                   The DIs will be issued by a legal entity known as a Depository Nominee (DN).  The DN is a nominee company used as a vehicle with the function of issuing the DIs to the beneficial owners, that is, the retail investors.  Registry services, including maintaining the record of DI holders and arranging for payments of interest and capital, will be provided by a commercial registry operator selected by the AOFM.

1.10               The creation of beneficial interests does not increase the amount of outstanding Commonwealth debt.  It also does not increase the amount of interest and principal the Commonwealth has to pay, as the beneficial owners are paid out of the payments of interest or principal made by the AOFM to the legal owner of the CGS.

1.11               Payments of interest and principal to DI holders will first be made by the AOFM to the legal holder of the CGS, which will be Austraclear.  In relation to CGS for which there are corresponding DIs, Austraclear will pass on the appropriate amount of interest and principal to the DN for payment to the holders of DIs.  As the DN is a legal vehicle and not an operating entity, the registry operator will be responsible for arranging the payments to the DI holders.

1.12               The amendments to the CIS Act will allow the AOFM to impose a high level of control and scrutiny over payments to DI holders by providing it with the flexibility to direct and control the flow of funds relating to payments to DI holders.  An additional advantage of this structure is that any unclaimed monies in respect of CGS DIs can be dealt with in line with the AOFM's standard procedures for CGS.

1.13               In Ronald Williams v The Commonwealth of Australia & Ors [2012] HCA 23 (the Williams case) a majority of the High Court held that legislative authority is necessary for certain spending.  The authority previously sought in the Bill extends mainly to the making of payments in relation to CGS DIs.  It has become clear that in order to commence retail CGS trading, the Commonwealth will have to enter into a range of arrangements with public exchanges, registry operators and other parties.  A provision is included ensuring that expenditure in connection with arrangements entered into by the Commonwealth in relation to the issue, trading and management of CGS, including CGS DIs, is legislatively authorised.

Corporations Act amendments

1.14               Chapter 7 of the Corporations Act imposes a range of investor protection measures applying to financial services providers, in particular when they provide services to retail clients.  Consideration has been given to the appropriate level of investor protection that should be offered to retail clients when they consider an investment in retail CGS DIs.

1.15               By defining CGS DIs as securities, the Bill ensures that most of the investor protection provisions in Chapter 7 will apply with respect to retail investors in CGS DIs (in the absence of this definition there is uncertainty over the classification of CGS DIs so the changes remove any doubt).  The investor protection provisions include the requirement for financial services providers to obtain a licence from ASIC and submit to ASIC supervision if they want to provide services in relation to CGS DIs, as well as a wide range of conduct and disclosure requirements.  The Bill also ensures that important rules applying to products quoted and traded on financial markets will apply to CGS DIs.

1.16               One of the key investor protection measures imposed in Chapter 7 of the Corporations Act is the provision of relevant product disclosure documentation to retail clients about a financial product.  The Corporations Act generally requires that a product disclosure statement (PDS) is prepared by or on behalf of the issuer or seller of a financial product.  A PDS must contain sufficient information so that a retail client may make an informed decision about whether to purchase a financial product.  There are extensive provisions in the Corporations Act prescribing when and how the PDS must be given, what the contents of a PDS must be as well as a range of associated requirements.  The Corporations Act also defines certain offences and civil liability actions related to these provisions.

1.17               In the absence of the proposed changes, the DNs as issuers of the CGS DIs would likely be responsible for providing a PDS statement to retail investors.

1.18               Rather than the DNs being responsible for producing the disclosure documentation (whose primary function is a vehicle for facilitating the issue of DIs to beneficial owners), the Government has decided it would be more efficient for the AOFM to have the sole responsibility for preparing a disclosure document for retail investors.  Therefore an exemption will be provided from the PDS requirements for issuers of CGS DIs.

1.19               As the Commonwealth is not bound by the disclosure requirements of the Corporations Act, the AOFM will instead produce tailored information statements that summarise the key information necessary for a retail investor to understand a proposed investment in retail CGS as well as the terms of a particular offering.  This approach is considered more appropriate than a full PDS as:

•        retail CGS are a relatively safe and simple investment; and

•        the Commonwealth Government already publishes a wealth of information on its financial situation through the budget process. 

1.20               The information statements will be made available to investors, financial advisers and the public in general through a dedicated website.  The information statements will cover general information on retail CGS as well as specific information on the maturity date and interest coupon rate of a particular class of CGS issuance.

1.21               One of the situations in which a PDS must be given to a retail client occurs when financial advisers provide personal advice to retail investors.  As CGS DIs will be exempt from the PDS requirements, it is necessary to require that clients in these situations must be given the information statements for the particular CGS issue they are considering.

1.22               The Government will pursue other avenues than this Bill to ensure that the information statements are provided to retail investors through on-market transactions, for example through the online trading platforms offered by online brokers. 

1.23               It is possible that a DI for CGS could be created without the agreement and approval of the Commonwealth, and sold to retail investors through arrangements that are beyond the AOFM’s control (although this would not satisfy the definition of a CGS DI).  In this case, these products will be subject to the full PDS requirements in Chapter 7 of the Corporations Act. 

Summary of new law

1.24               The CIS Act currently includes provisions allowing the AOFM to make all necessary payments in connection with the issuance, sale and management of CGS, including payments of principal, interest and all relevant costs and expenses.  The amendments to the CIS Act will extend these provisions to enable the AOFM to make the same payments in relation to CGS DIs sold to retail investors if the DIs have been issued subject to an agreement with the AOFM.

1.25               CGS DIs are defined as securities in Chapter 7 of the Corporations Act which will have the effect that the licensing, disclosure and conduct obligations attaching to financial products also apply to CGS DIs.  The definition and a number of further amendments also ensure that important rules applying to financial products quoted and traded on licensed financial markets will apply to CGS DIs.

1.26               The amendments will exempt CGS DIs from the PDS requirements in Part 7.9.  .  Instead, provisions are inserted requiring financial advisers to provide relevant information statements (produced by the AOFM) when advisers give personal financial advice about CGS DIs.  The information statements will be made available on a dedicated website, and the internet address of the website will be provided in a regulation.

1.27               A number of offences are defined providing for appropriate penalties if a retail client is not given an information statement or is given an information statement that differs from the one provided on the dedicated website.  Persons suffering losses or damages because they were not given the prescribed information statement are given the right to take civil action for compensation against the person committing the breach.  These offences and civil action provisions are generally modelled on those applying to PDSs and provide for similar penalties and remedies.

1.28               An amendment is made to the CIS Act widening the scope of functions the Minister is allowed to delegate in order to facilitate the AOFM’s daily administrative work.  A number of redundant sections in the CIS Act are repealed.

Comparison of key features of new law and current law

New law

Current law

The AOFM can make payments of principal, interest and all relevant fees and costs in connection with the issuance, sale and management of CGS DIs.

The AOFM is not able to make any payments in relation to CGS DIs.

To provide certainty, CGS DIs will be classified as securities and hence will be covered by all the investor protection and financial market rules in Chapter 7 of the Corporations Act.  CGS DIs are provided with an exemption from the PDS requirements in Part 7.9 of the Corporations Act.  Financial advisers giving personal advice to retail clients about investing in such CGS DIs are required to instead provide the relevant information statements written by the AOFM and provided on a designated website.

There is some doubt about how CGS DIs would be classified in the Corporations Act with the likely position being that they would be deemed derivatives under Chapter 7 (a form of complex product).  All the provisions of that Chapter would consequently apply to CGS DIs, including the requirement to produce and provide a PDS in defined situations.

Detailed explanation of new law

Schedule 1 — Retail trade in Commonwealth Government Securities

Commonwealth Inscribed Stock Act 1911

1.29               The amendments to the CIS Act enable the AOFM on behalf of the Commonwealth to make payments of interest and principal as well as payments to cover costs and expenses in connection with the management of CGS DIs.  The amendments are required because the CIS Act in its current form only encompasses the direct ownership of CGS by investors and not the indirect ownership through beneficial interests such as CGS DIs.

1.30               A definition of ‘depository interest’ is provided saying that it is a beneficial interest in stock issued by a depository nominee.  It is noted that such depository interests must be issued subject to an agreement with the Commonwealth, as explained in the following paragraph.  Stock is a defined term in section 3 of the CIS Act encompassing the range of debt instruments issued by the Commonwealth.  [Schedule 1, item 1, subsection 3(1)]

1.31               A definition of ‘depository nominee’ is provided as a person who issues beneficial interests in stock subject to the agreement of the Commonwealth.  It is envisaged that this agreement will take the form of a formal agreement signed between the AOFM and the market operator, which will include provisions relating to the depository nominee. 

1.32               The definition allows the depository nominee to either own the stock outright in which the beneficial interests are issued, or to own a beneficial interest in the stock and issue further beneficial interests based on those holdings.  The latter arrangement could for instance apply to situations similar to the current arrangements the AOFM has with Austraclear, whereby Austraclear is the legal owner of all CGS issued by the AOFM, and issues beneficial interests in these CGS to wholesale investors.  If the AOFM comes to an agreement with a market operator about issuing CGS DIs, it is possible that the market operator’s central securities depository (that is, the equivalent to Austraclear) would issue beneficial interests over CGS to the depository nominee, who would issue further beneficial interests over the beneficial interests it receives from the central securities depository to other investors including retail investors.  It is noted that the definition allows the depository nominee to retain certain residual beneficial interests in the CGS, for example to assert payment of coupon and interest amounts on behalf of the DI holders.  [Schedule 1, item 3, subsection 3(1)]  

1.33               As discussed above in paragraph 1.10, the creation of beneficial interests does not increase the debt issued by the Commonwealth or the payments of interest and principal for which the Commonwealth is liable. 

1.34               A definition of ‘depository interest registry operator’ is provided as the person engaged by the depository nominee to provide key services, in particular for arranging payments to retail investors of interest and principal.  [Schedule 1, item 2, subsection 3(1)]

1.35               The CIS Act contains two key standing appropriations which enable the AOFM to issue and service Commonwealth debt, that is, make payments of interest and principal, and to pay all costs and expenses involved in issuing, selling and managing the debt.  The two appropriations are contained in existing sections 6 (for payments of interest and principal) and 13A (for costs and expenses) of the CIS Act.  The scope of these two provisions is currently limited to stock (as defined in the CIS Act) and it is necessary to amend their scope to include depository interests. 

1.36                These amendments will allow the AOFM to impose a high level of control and scrutiny over payments to DI holders, such as requiring a DN to make payments of principal and interest out of a bank account in the name of the AOFM.  This will enable the AOFM to monitor these payments.  It is noted that all such payments will be fully offset by the receipt of monies from the legal owner of the CGS underlying the CGS DIs, and therefore do not involve a double payment by the Commonwealth.  Since the payments to CGS DI holders may be made out of an AOFM bank account the AOFM requires the necessary appropriation authority to make payments to holders of CGS DIs.

1.37               The current standing appropriation for payments of principal and interest on stock is contained in existing section 6 of the CIS Act.  As the wording of this section is out of date, it has been decided that it is preferable to repeal section 6 and substitute a new section 13AA which will be inserted before existing section 13A containing the standing appropriation for the payment of costs and expenses.  In this way the two standing appropriations, which are closely related in terms of their content, will also be located together in the CIS Act.  Accordingly, existing section 6 is repealed.  [Schedule 1, item 4, Section 6]

1.38               Existing section 6 is replaced by new section 13AA which incorporates the content of existing section 6 by creating a standing appropriation for the payment of interest and principal on stock.  It expands this standing appropriation to include payments of principal and interest by the Commonwealth to CGS DI holders.  [Schedule 1, item 5, After section 13, 13AA Payment of principal and interest on stock and related amounts connected with depository interests]

1.39               The AOFM also needs similar authority to pay costs and expenses involved in issuing, selling and managing DIs, including for example fees charged by depository nominees and registry operators as well as clearing and settlement fees.  This authority is provided by expanding the existing standing appropriation in section 13A for the payment of costs and expenses for the issue and sale of stock as well as for the management of existing stock.  The standing appropriation also explicitly covers costs and expenses incurred in connection with making the payments themselves to ensure that this item is included in the scope of the appropriation.  [Schedule 1, item 7, At the end of section 13A]

1.40               The Treasurer acting on behalf of the Commonwealth is given the authority to enter into arrangements that relate to a range of matters, including the issue, management or transfer of CGS and CGS DIs, trading of CGS and CGS DIs on financial markets, and a number of necessary support services such as registry or clearing and settlement services.  [Schedule 1, item 7A, at the end of Part II, 13C Arrangements etc.  relating to stock and depository interests]

1.41               The title of existing section 13A is amended to reflect the fact that it also covers the payment of costs and expenses in relation to DIs as well as stock.  [Schedule 1, item 6, Section 13A (heading)]

Corporations Act 2001

1.42               The overall objective of the Corporations Act amendments is to ensure that the investor protection and market integrity regime contained in Chapter 7 applies to CGS DIs.  Amendments are made to the disclosure requirements in Part 7.9 of the Act to ensure that relevant information statements will be provided to retail clients when they receive personal advice about investing in CGS DIs (see detailed explanation of the policy in paragraphs 1.16 to 1.23 above).

1.43               A definition of ‘CGS depository interest’ is inserted into Chapter 7 of the Corporations Act.  The term is defined as having the same meaning as the term ‘depository interest’ in the CIS Act referred to above in paragraph 1.30.  The consequence of linking this definition to the one in the CIS Act is that the amendments made in the Bill will only apply to CGS Dis issued by and with the agreement of the Commonwealth.  If an unauthorised DI in CGS is created it would be subject to Chapter 7 of the Corporations Act and would not benefit from the PDS exemption applying to Commonwealth authorised CGS DIs (as explained above in paragraph 1.23).  [Schedule 1, item 9, Section 761A]

1.44               It is clarified that CGS DIs are securities for purposes of the Corporations Act.  This classification constitutes a natural fit as CGS DIs are beneficial interests in debentures, which are defined as securities in the Corporations Act (there is doubt whether in the absence of this change they would be classified as securities given they are issued by the Commonwealth which is not a ‘body’ for the purposes of the Corporations Act).  By classifying CGS DIs as securities this ensures that the investor protection and market integrity regimes in Chapter 7 apply to CGS DIs.  [Schedule 1, items 10 and 11, Section 761A]

1.45               The requirement to provide a disclosure document to retail investors when they are provided with personal advice forms part of the PDS requirements in Part 7.9 of the Corporations Act and it is appropriate to locate the requirement for financial advisers to provide the information statement in this Part of the Act.  However, in general Part 7.9 of the Corporations Act does not cover securities, which instead are covered by the prospectus requirements in Chapter 6D of the Act.  To achieve the intended outcome it is therefore necessary to make amendments to the Corporations Act ensuring that Chapter 6D does not apply to CGS DIs, and that Part 7.9 applies instead.

1.46               A provision is inserted exempting CGS DIs from the scope of Chapter 6D.  [Schedule 1, item 8, Subsection 700(1)]

1.47               A further provision then ensures that the relevant parts of Part 7.9 of the Corporations Act apply to CGS DIs.  This includes new Division 5C which contains the requirement for financial advisers providing personal advice to retail clients about investments in CGS DIs to give them the relevant information statements.  Given this requirement there is no need for a PDS to cover CGS DIs and the provision ensures the parts of Part 7.9 that concern various aspects of the PDS regime do not apply to CGS DIs.  [Schedule 1, item 13, Subsection 1010A(1)]

1.48               The Bill includes a number of provisions encompassing the requirement for financial advisers to give their retail clients the relevant information statements when giving them personal advice about investing in retail CGS.  This includes a number of offences and civil liability provisions together with their penalties and remedies.  These provisions are incorporated in new Division 5C of Part 7.9 of the Corporations Act.  The provisions in this Division are in general modelled on the relevant provisions in existing Division 2 of Part 7.9 of the Corporations Act, including in relation to offences and civil liability provisions.  [Schedule 1, item 14, After Division 5B of Part 7.9 insert: Division 5C — Information about CGS depository interests]

1.49               It is clarified that the requirement to provide the information statements only applies to recommendations which are received within the jurisdiction.  A regulation making power is provided which can be used to prescribe the jurisdictional scope of the other provisions in the Division.  This provision is modelled on existing section 1011A in the Corporations Act.  [Schedule 1, item 14, Section 1020AG]

1.50               A number of key definitions are provided that apply to new Division 5C.  The first is a definition of ‘CGS depository interest information website’ as a website that is defined in the regulations.  This will be the website on which the information statements will be available.  The exact website address will be set out in a regulation made under this provision.  It is considered preferable to provide the exact address in a regulation rather than in the primary legislation because the website is yet to be established and it is possible the address may change in the future, in which case a regulation provides more flexibility than primary legislation.  [Schedule 1, item 14, section 1020AH]

1.51               The next definition states that an 'information statement' will be prepared by the Commonwealth which will provide information relevant to one or more classes of CGS DIs and will be published on the website designated in the regulations. 

1.52               The term 'information statement' encompasses both a generic statement and a specific statement covering the terms of a particular bond line.  All information statements will carry a statement displayed in a prominent position that it is an information statement for purposes of Division 5C of Part 7.9 of the Corporations Act. 

1.53               It is intended that the AOFM will prepare two generic information statements that will be available on the designated website, one for Treasury Bonds and one for Treasury Indexed Bonds.  Both are medium to long-term debt securities with the former carrying a fixed interest rate until maturity and the latter having a capital value that is adjusted periodically and at maturity in line with inflation as measured by the Consumer Price Index. 

1.54               Specific information statements will also be produced that will specify the applicable key terms such as maturity date and interest coupon rate. 

1.55               When providing personal advice to a retail client about investing in a particular issue of CGS DIs, financial advisers will be required to give their client the relevant generic information statement (depending on whether the advice relates to a Treasury Bond or a Treasury Indexed Bond) and the relevant specific information sheet with the terms of the particular issue.  The website will be designed with a view to assisting financial advisers in locating the information statements relevant to the specific advice they are giving to their clients.  [Schedule 1, item 14, Section 1020AH]

1.56               The final definition of a ‘regulated person’ clarifies which persons are subject to the requirements in new Division 5C.  As the requirements apply exclusively to personal advice situations the main persons affected are expected to be financial services licensees that are licensed to provide personal advice and their authorised representatives.  [Schedule 1, item 14, Section 1020AH]

1.57               New subsection 1020AI(1) requires a regulated person providing personal advice to a retail client recommending an investment in a particular class of CGS DIs to give the client the information statements relevant to the product that is being recommended.  This will require the provision of the generic information statement and the term sheet relevant for the particular issue of CGS DIs. 

Example 1.1  

John is a financial adviser and is recommending to his client Susie that she invest in a Treasury Indexed Bond that will mature in August 2015.  John is required to provide Susie with two information statements in relation to this recommendation.  The first is a generic information statement on Treasury Indexed Bonds and the second is a specific information statement outlining the terms of the bond.  John will be able to extract both sets of information by downloading the statements from the CGS depository interest information website.

1.58               The requirement for a regulated person to provide information statements to a client when providing personal advice is closely modelled on existing section 1012A of the Corporations Act which requires a PDS to be provided when personal advice is given recommending a particular financial product.  [Schedule 1, item 14, Subsection 1020AI(1)]

1.59               To avoid unnecessary duplication, new subsection 1020AI(2) clarifies that a regulated person does not need to provide the information statements if the client has already received them or if the person providing the personal advice has reasonable grounds to believe that that is the case.  [Schedule 1, item 14, Subsection 1020AI(2)]

1.60               New subsections 1020AI(3) and (4) make it an offence for a regulated person not to provide the required information statements if they are required to do so under new subsections 1020AI(1) and (2).  New subsection 1020AI(4) states that this is an offence of strict liability.  While this treatment is modelled on the corresponding strict liability offence in existing section 1021C(2) for not giving a PDS as required, guidance issued by the Attorney-General’s Department (AGD) [1] on the application of strict liability has been consulted in considering whether the use of strict liability in these circumstances can be justified.  The conclusion reached is that strict liability is appropriate for this case, for the following reasons:

•        the requirement is clear and easy to understand, and the offence depends entirely on the action or non-action of the person who is liable for the offence;

•        the provision of relevant disclosure documents is a fundamental requirement of the investor protection regime in the financial services sector, and the use of strict liability in this case is considered necessary to protect the integrity of the regime; and

•        the offence is not punishable by imprisonment and the applicable fine is 50 penalty units, which is below the maximum amount of 60 penalty units recommended by AGD for strict liability offences.  [Schedule 1, items 14 and 17, Subsections 1020AI(3) and (4) and Schedule 3, Item 300AE]

1.61               A defendant is made to bear an evidential burden if they claim that the requirement to provide the prescribed information statements did not apply because of the matters set out in new subsection 1020AI(2), that is, the client had already received the statements or the defendant reasonably believed that that was the case.  It is considered that it is appropriate to reverse the burden of proof in these circumstances because the matters in new subsection 1020AI(2) are particularly within the knowledge of the defendant and would be very difficult for the prosecution to prove otherwise.  For instance, the defendant could readily explain why he or she reasonably believed that the client had already received the information statements, whereas for the prosecution to provide positive proof that the defendant did not have such a reasonable belief would be almost impossible in most circumstances.  It is noted that in applying this treatment the AGD guidance cited in the previous paragraph was consulted.  New subsection 1020AI(2) is also consistent with existing subsection 1021C(1) which similarly reverses the burden of proof where a defendant claims that the requirement to provide a PDS did not apply based on a range of exemptions provided in the Corporations Act.  [Schedule 1, items 14 and 17, Subsections 1020AI(3) and (4)]

1.62               Not giving an information statement as required in new subsections 1020AI(1) and (2) is also made an ordinary offence, with a higher penalty (100 penalty units) and the added possibility of a term of imprisonment in comparison with the strict liability offence.  This is considered appropriate because the deterrence effect needs to be strengthened where there is proof of a fault element in breaching the requirement.  As is the case for the strict liability offence, the burden of proof is reversed where a defendant claims relief from the requirement under new subsection 1020AI(2), for the same reasons as set out above in paragraph 1.61.  [Schedule 1, items 14 and 17, Subsection 1020AI(5) and Schedule 3, Item 300AF]

1.63               A defence is provided for an authorised representative of a financial services licensee from both the strict liability offence (subsection 1020AI(3)) and the ordinary offence (subsection 1020AI(5)) for not providing an information statement as required by new subsection 1020AI(1) where they did so by reasonably relying on information or instructions provided by the licensee.  The burden of proof is reversed for this provision because the facts in these circumstances are within the knowledge of the defendant in that it will under most circumstances be a relatively straightforward matter for the defendant to prove that the licensee provided such information or instructions.  This provision is modelled on existing section 1021C(4) of the Corporations Act which provides a similar defence for an authorised representative that did not provide a PDS.  [Schedule 1, item 14, Subsection 1020AI(6)]

1.64               An offence is created for licensees that do not take reasonable steps to ensure that their authorised representatives comply with the requirement to provide an information statement.  The penalty for this offence is 200 penalty units or imprisonment for 5 years or both.  This provision is modelled on existing section 1021G of the Corporations Act which creates a similar offence in relation to the requirement to give a PDS and carries a similar penalty.  [Schedule 1, items 14 and 17, Subsection 1020AI(7) and Schedule 3, Item 300AG]

1.65               An offence is created where a person for purposes of complying with new subsection 1020AI(1) gives a retail client an information statement that is not the same as the relevant information statement that is provided on the designated website at the time it is given.  This could occur under various scenarios, for example where an out of date statement was given, or where a statement has been altered in some way.  The penalty prescribed for this offence (100 penalty units and/or 2 years imprisonment) is comparable to that imposed for similar existing offences in relation to the required provision of PDSs (for example an offence in existing subsection 1021E(1) for preparing and giving a defective document (whether or not known to be defective); or an offence in existing section 1015E for altering a Statement after its preparation and before giving it to a person).  [Schedule 1, items 14 and 17, Section 1020AJ and Schedule 3, Item 300AH]

1.66               An amendment is made stating how an information statement may be given, including by electronic means.  This provision replicates existing section 1015C, to ensure that current means of giving documents such as PDSs can be used for providing the information statements required for CGS DIs as well.  [Schedule 1, item 14, Section 1020AK]

1.67               A provision is included providing persons with a civil action for loss or damage if they did not receive an information statement (new subsection 1020AI(1)) or received a different information statement from the one they should have been given (new section 1020AJ).  The provision states who the responsible persons are in each of these two circumstances and against whom the action may be taken.  The provision also clarifies that licensees are responsible for the conduct of authorised representatives in not giving an information statement as required, and provides flexibility to a court to make additional orders where it considers it necessary to ensure that justice is done, including voiding a contract and making orders for the return of money or payment of interest.  This provision is modelled on a number of relevant provisions in existing section 1022B (civil action for loss or damage) and existing section 1022C (additional powers of court).  [Schedule 1, item 14, Section 1020AL]

1.68               Divisions 3 and 4 of Part 7.11 of the Corporations Act regulate the transfer of title in relation to designated securities.  It is necessary to ensure that these provisions apply to CGS DIs, which would partly be achieved by expanding the list of securities in existing section 1073A to include CGS DIs.  It is noted that, because of the way the law in this part of the Corporations Act is drafted, an additional regulation will have to be made to ensure that Division 4 of Part 7.11 applies to CGS DIs.  [Schedule 1, item 15, After paragraph 1073A(1)(d)]

1.69               The penalties for the offences defined in new subsections 1020AI(3), 1020AI(5) and 1020AI(7), as well as in section 1020AJ are inserted in the relevant Schedule to the Corporations Act.  [Schedule 1, item 17, Schedule 3 (after table item 300AD)]

Schedule 2 — Minor amendments to CIS Act

1.70               This Schedule makes a number of minor amendments to the CIS Act which are not related to the policy initiative concerning CGS DIs, but which are, on the one hand, intended to streamline the day to day work of the AOFM and, on the other hand, remove a number of provisions that have become redundant over time.

1.71               Sections 51JA and 51K allow the Treasurer to delegate certain defined functions under the CIS Act.  The scope of this delegation power is expanded to include functions contained in three further sections in the CIS Act.  The first is new section 13C containing the authority provided to the Treasurer to enter into certain arrangements relating to stock and depository interests, as set out in detail in paragraph1.40.  The second is section 27, which imposes time restrictions on the registration of CGS trading transactions at times close to payments of interest and capital.  The introduction of electronic registers has made these restrictions in many instances obsolete, and it is sensible for the Treasurer to be able to delegate the power given to him in the section to waive or amend these restrictions.  The third is section 55, which prescribes certain forms which are to be used by Registrars and provides a power for the Treasurer to approve changes to the forms.  It is not practical to require approval by the Treasurer to change the form or use a different form in each instance and hence the Treasurer is given the ability to delegate the power to approve such changes.  The delegation powers are all combined together in existing section 51JA, rather than having them split between existing sections 51JA and 51K.

1.72               A new heading is substituted for existing section 51JA, to reflect the fact that it now contains all the delegations by the Treasurer.  [Schedule 2, item 1, Section 51JA (heading)]

1.73               The scope of existing section 51JA is expanded to include the existing delegation powers under existing section 51K (applying to existing sections 14 and 29) as well as the additional delegation powers (applying to existing sections 27 and 55 and new section 13C).  [Schedule 2, item 2, Subsection 51JA(1)]

1.74               It is made clear that the amendments to existing subsection 51JA(1) do not affect any existing delegations under that subsection.  [Schedule 2, item 3, Saving of delegations]

1.75               Section 51K is then repealed as all the delegation powers it provided have been moved to section 51JA.  [Schedule 2, item 4, Section 51K]

1.76               Section 51JA has detailed requirements about what kinds of persons the Treasurer’s powers may be delegated to, being SES employees in the Department, Executive Level 2 employees in the Department, and their equivalents in the Reserve Bank.  It is made clear that existing delegations under section 51K are not affected by the repeal of that section, provided they satisfy those requirements.  [Schedule 2, item 5, Transitional provision for delegations under section 51K]

1.77               Subsection 52B(1) exempts interest earned from CGS from State income tax.  However, income tax is now levied by the Commonwealth, and no State has levied income tax in 60 years.  Subsection 52B(1) is therefore repealed.  [Schedule 2, item 6, Subsection 52B(1)]

1.78               Subsection 52B(3) creates an exemption from income tax for Commonwealth debt instruments known as War Savings Certificates or Savings Certificates.  There are no such instruments outstanding in the market, and none have been issued since 1949.  This subsection is therefore repealed.  [Schedule 2, item 8, Subsection 52B(3)]

1.79               An editorial amendment is made to existing subsection 52B(2) to reflect that it is now the only remaining provision in existing section 52B after the repeal of existing subsections 52B(1) and 52B(3).  [Schedule 2, item 7, Subsection 52B(2)]

1.80               Section 57B applies certain provisions of the Treasury Bills Act 1914 to various types of savings stamps.  These provisions have in the meantime been abolished, so that the section has no application and is consequently repealed.  [Schedule 2, item 9, Section 57B]

Application and transitional provisions

1.81               The amendments in the Bill commence on the day after the Act receives the Royal Assent.

Consequential amendments

1.82               Existing section 949A imposes a requirement to provide certain warnings to clients when they are provided with general advice (as opposed to personal advice).  Paragraph 949A(2)(c) says that one of those warnings is for the client to obtain the relevant PDS where the general advice relates to a particular financial product.  This paragraph is amended to include a requirement to warn the client to obtain the relevant information statements if the general advice relates to CGS DIs (which are covered by information statements and not by a PDS).  [Schedule 1, item 12, Paragraph 949A(2)(c)]

1.83               The list of securities in existing subsection 1073A(1) of Division 3 of the Corporations Act is expanded to ensure that requirements regulating the transfer of title apply in relation to CGS DIs (see paragraph 1.68).  A consequential amendment is made to a note in subsection 1073E(1) ensuring that it mentions the new expanded list of securities in subsection 1073A(1).  [Schedule 1, item 16, Subsection 1073E(1)(note)]

Do not remove section break.



Chapter 2          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012

2.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.2                   The Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012 (the Bill) amends the Commonwealth Inscribed Stock Act 1911 (the CIS Act) to facilitate  trading of beneficial interests in Commonwealth Government Securities (CGS) on financial markets in Australia that are accessible to financial investors.  The Bill also contains amendments to the Corporations Act 2001 requiring financial advisers to provide a prescribed information statement to retail clients when they give them personal advice about investing in CGS.  Finally, a number of minor amendments are made to the CIS Act to facilitate the Australian Office of Financial Management’s daily administrative work and to remove some redundant provisions.

Human rights implications

2.3                   This Bill may raise human rights issues because it contains a number of offences where the evidentiary burden is reversed.  This may raise concerns with respect to the presumption of innocence.

2.4                   The reasons for reversing the evidentiary burden have been assessed in the light of guidelines provided by the Attorney-General’s Department and have been found to be consistent with those guidelines (see paragraph 1.61 above for details). 



 

2.5                   The main reason for reversing the burden of proof for the offences is that the relevant matters are particularly within the knowledge of the defendant and would be very difficult for the prosecution to prove or disprove.

Conclusion

2.6                   This Bill is compatible with human rights because, to the extent that it may limit those rights, those limitations are reasonable, necessary and proportionate.

The Hon Wayne Swan MP, Deputy Prime Minister and Treasurer



Schedule 1:  Retail trade in Commonwealth Government Securities

Bill reference

Paragraph number

Item 1, subsection 3(1)

1.30

Item 2, subsection 3(1)

1.34

Item 3, subsection 3(1)

1.32

Item 4, Section 6

1.37

Item 5, After section 13, 13AA Payment of principal and interest on stock and related amounts connected with depository interests

1.38

Item 6, Section 13A (heading)

1.41

Item 7A, at the end of Part II, 13C Arrangements etc.  relating to stock and depository interests

1.40

Item 7, At the end of section 13A

1.39

Item 8, Subsection 700(1)

1.46

Item 9, Section 761A

1.43

Items 10 and 11, Section 761A

1.44

Item 12, Paragraph 949A(2)(c)

1.82

Item 13, Subsection 1010A(1)

1.47

Item 14, Section 1020AG

1.49

Item 14, section 1020AH

1.50

Item 14, Section 1020AH

1.55, 1.56

Item 14, Subsection 1020AI(1)

1.58

Item 14, Subsection 1020AI(2)

1.59

Items 14 and 17, Subsections 1020AI(3) and (4) and Schedule 3, Item 300AE

1.60

Items 14 and 17, Subsections 1020AI(3) and (4)

1.61

Items 14 and 17, Subsection 1020AI(5) and Schedule 3, Item 300AF

1.62

Item 14, Subsection 1020AI(6)

1.63

Items 14 and 17, Subsection 1020AI(7) and Schedule 3, Item 300AG

1.64

Items 14 and 17, Section 1020AJ and Schedule 3, Item 300AH

1.65

Item 14, Section 1020AK

1.66

Item 14, Section 1020AL

1.67

Item 14, After Division 5B of Part 7.9 insert: Division 5C — Information about CGS depository interests

1.48

Item 15, After paragraph 1073A(1)(d)

1.68

Item 16, Subsection 1073E(1)(note)

1.83

Item 17, Schedule 3 (after table item 300AD)

1.69

Schedule 2:  Minor Amendments

Bill reference

Paragraph number

Item 1, Section 51JA (heading)

1.72

Item 2, Subsection 51JA(1)

1.73

Item 3, Saving of delegations

1.74

Item 4, Section 51K

1.75

Item 5, Transitional provision for delegations under section 51K

1.76

Item 6, Subsection 52B(1)

1.77

Item 7, Subsection 52B(2)

1.79

Item 8, Subsection 52B(3)

1.78

Item 9, Section 57B

1.80

 

Do not remove section break.

 

 




[1]    Attorney-General’s Department, Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers , September 2011, available at: http://www.ag.gov.au/.