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ASIC Supervisory Cost Recovery Levy Amendment Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

TREASURY LAWS AMENDMENT (2017 MEASURES NO. 5) bill 2017



ASIC SUPERVISORY COST RECOVERY LEVY AMENDMENT BILL 2017

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)



Table of contents

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

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

Chapter 1               Background........................................................................... 7

Chapter 2               Licensing framework............................................................ 9

Chapter 3               ASIC rule making powers................................................. 25

Chapter 4               Offences and civil penalties............................................. 39

Chapter 5               Other provisions................................................................. 47

Chapter 6               Financial Benchmarks - Statement of Compatibility with Human Rights 51

Chapter 7               Council of Financial Regulators: Recommended approach for regulatory reform of financial benchmarks.................................................. 65

Chapter 8               ASIC Supervisory Cost Recovery Levy Amendment Bill 2017       85

Chapter 9               Indigenous policy and program evaluation................... 89

 



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

Abbreviation

Definition

AAT

Administrative Appeals Tribunal

AFSL

Australian financial services licence

APRA

Australian Prudential Regulation Authority

ARC

Administrative Review Council

ASIC

Australian Securities and Investments Commission

ASIC Levy Bill

ASIC Supervisory Cost Recovery Levy Amendment Bill 2017

BAB

Bank accepted bill

BBSW

Bank bill swap rate

Bill

Treasury Laws Amendment (2017 Measures No. 5) Bill 2017

CFR

Council of Financial Regulators

Commission

Productivity Commission

Corporations Act

Corporations Act 2001

Cost Recovery Act

ASIC Supervisory Cost Recovery Levy Act 2017

Criminal Code

The Criminal Code set out in the Schedule of the Criminal Code Act 1995

Guide

A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Power s, issued by the Attorney-General’s Department

ICCPR

International Covenant on Civil and Political Rights

IOSCO

International Organization of Securities Commissions

IOSCO Principles

Principles for Financial Benchmarks , IOSCO

Legislation Act

Legislation Act 2003

LIBOR

London Interbank Offered Rate

NCD

Negotiable certificate of deposit

Productivity Commission Act

Productivity Commission Act 1988

Regulatory Powers Act

Regulatory Powers (Standard Provisions) Act 2014



Outline

Schedule 1 to this Bill makes amendments to the Corporations Act 2001 (the Corporations Act) [1] to:

•        establish a new licensing regime requiring administrators of designated significant financial benchmarks to obtain a new ‘benchmark administrator licence’ from the Australian Securities and Investments Commission (ASIC). ASIC will have the power to designate significant financial benchmarks, subject to one or more of the specified criteria being met;

•        give ASIC powers to make rules imposing a regulatory framework for licensed benchmark administrators and related matters. This framework will reflect a set of principles released by the International Organization of Securities Commissions (IOSCO); and

•        make manipulation of financial benchmarks a criminal offence and subject to civil penalties, with appropriate penalties attached.

The ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 (ASIC Levy Bill) supports the Bill by adding benchmark administrator licensees which are provided for in that Bill to the list of entities from which the ASIC may recover its regulatory costs (see Chapter 8).

Date of effect :  The key parts of this Bill (Parts 1 and 2 of Schedule 1 and Schedule 2) will commence on the day after Royal Assent is given.

Schedule 1 of the ASIC Levy Bill will commence at the same time as Part 1 of Schedule 1 of the Bill, unless that Part does not commence, in which case Schedule 1 to the ASIC Levy Bill will also not commence.

Proposal announced 4 October 2016.

Financial impact No financial implications.

Human rights implications :  Schedule 1 raises human rights issue. However, the Schedule is compatible with human rights because to the extent that it may limit human rights, the limitations are reasonable, necessary and proportionate. See Statement of Compatibility with Human Rights — Chapter 6.

The ASIC Levy Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 8, paragraphs 8.12-8.15.

Compliance cost impact $0.1 million per annum.

Summary of regulation impact statement

Regulation impact on business

Impact Schedule 1 to the Bill is estimated to increase the regulatory burden on industry by around $0.1 million per annum.

Main points :

•        Schedule 1 to the Bill will require the administrators of significant financial benchmarks to obtain a new ‘benchmark administrator licence’ and comply with a range of requirements in line with international best practice.

•        Schedule 1 to the Bill also clarifies that the manipulation of all financial benchmarks used in Australia, and the manipulation of all financial products used to determine a financial benchmark used in Australia (including bank accepted bills (BABs) and negotiable certificates of deposit (NCDs)), is a specific criminal offence and also can be subject to civil penalties.

•        The regulatory burden associated with this proposal arises as a result of a number of entities having to obtain licenses that they did not previously hold. Advice has been received that the administrators of benchmarks likely to be deemed to be ‘significant’ already comply with international best practice.

•        There is no additional regulatory burden associated with the introduction of new offences. This is because conduct that manipulates a financial benchmark already offends existing market misconduct provisions and any costs associated with non-compliance with the legislative requirements are not regulatory costs for the purposes of Australia’s Regulatory Burden Management Framework.

•        The Treasury has certified that the Council of Financial Regulators’ final advice to Government on Reforming Australia’s Regulation of Financial Benchmarks satisfies the requirements of a Regulation Impact Statement. See Chapter 7 for the final advice.

Indigenous policy and program evaluation

Schedule 2 to this Bill amends the Productivity Commission Act 1998 to provide for the appointment of an additional Commissioner to oversee the work of the Productivity Commission in relation to the evaluation of policies and programs that have an impact on Indigenous persons.

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

Proposal announced 14 February 2017.

Financial impact Costs of $2.9 million over the forward estimates will be offset from the Indigenous Advancement Strategy within the Prime Minister and Cabinet Portfolio.

Human rights implications :  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights —paragraphs 9.15 to 9.19.

Compliance cost impact Nil.

 

 



Chapter 1          

Background

Outline of chapter

1.1                   Chapter 1 sets out the background and context for the reforms to the regulation of financial benchmarks contained in Schedule 1 to the Bill.

Context of amendments

1.2                   Financial benchmarks are used to determine the pay-out or value of financial products or contracts, or to measure the performance of investment funds.

1.3                   The ASX 200 equity index is an example of a financial benchmark used to measure the performance of funds, while the bank bill swap rate (BBSW) (which is used as a reference interest rate for a range of financial products) is an example of a financial benchmark used to determine the pay-out under financial contracts.

1.4                   While some benchmarks are calculated by their administrator using regulated and publicly available data (such as equities indexes), others rely on submissions from banks or other market participants (for example, reference interest rates like the London Interbank Offered Rate (LIBOR) and Australia’s BBSW).

1.5                   Globally there have in recent years been many cases of market misconduct regarding the determination of financial benchmarks (particularly interest rate reference benchmarks such as LIBOR). As of August 2017, penalties paid by financial institutions globally had reached around AUD25 billion.

1.6                   In Australia, the Australian Securities and Investments Commission (ASIC) commenced formal court proceedings in 2016 against ANZ, NAB, and Westpac for alleged market manipulation and unconscionable conduct in relation to the BBSW. These court proceedings are continuing.

1.7                   In 2013, in response to these issues, the International Organization of Securities Commissions (IOSCO) developed the Principles for Financial Benchmarks , IOSCO (the IOSCO Principles), which set out the desirable characteristics of a regulatory regime for financial benchmarks. A number of jurisdictions, including the United Kingdom, the European Union (EU), Japan, Singapore and Canada, have since worked to align their regulatory regimes with the IOSCO Principles.

1.8                   In line with these developments, the Government has decided to implement a regulatory framework for financial benchmarks in Australia that is consistent with the IOSCO Principles.

1.9                   The amendments made by the Schedule 1 to the Bill are based on recommendations made by the Council of Financial Regulators (CFR) [2] for reforming the regulation of financial benchmarks used in Australia consistent with the IOSCO Principles. The CFR’s recommendations were formulated following extensive consultation with stakeholders.

1.10               Administration of financial benchmarks at present does not require a licence and is not a regulated activity under current law. Consistent with overseas regulatory developments, manipulation of financial benchmarks will be made a specific offence.



Chapter 2          

Licensing framework

Outline of chapter

2.1                   A new licensing regime is established requiring administrators of designated significant financial benchmarks to obtain a new ‘benchmark administrator licence’ from the Australian Securities and Investments Commission (ASIC). ASIC is given the power to designate significant financial benchmarks. Licensees are subject to a number of obligations. Failure to comply with these obligations can lead to licences being suspended or cancelled.

Summary of new law

2.2                   ASIC is given the power to designate significant financial benchmarks, but only if it is satisfied that at least one of the specified criteria is met. These include that the designated benchmark is systemically important in Australia or that there would be a material impact on Australian retail or wholesale investors if there was a disruption to the operation or integrity of the benchmark.

2.3                   A new licensing regime is established requiring administrators of designated significant financial benchmarks to obtain a new ‘benchmark administrator licence’ from ASIC. ASIC may impose conditions in granting a licence. Licensees are required to comply with any conditions on the licence as well as a range of general obligations imposed in the legislation.

2.4                   Failure to comply with the licence conditions or the general obligations may lead to licences being suspended or cancelled. ASIC would generally give the licensee a hearing before it suspends or cancels a licence.

Comparison of key features of new law and current law

New law

Current law

ASIC is given the power to designate significant financial benchmarks where at least one of the specified criteria is met.

A new licensing regime is established requiring administrators of designated significant financial benchmarks to obtain a new ‘benchmark administrator licence’ from ASIC.

ASIC may suspend or cancel benchmark administrator licences subject to holding a hearing with the licensee.

Systemically important benchmarks are not subject to a specific regulatory regime.

Detailed explanation of new law

Schedule 1 - Amendments

Part 1 - Main amendments

2.5                   Part 1 of Schedule 1 inserts a new Part 7.5B after Part 7.5A in the Corporations Act 2001 (the Corporations Act). Part 2 makes consequential amendments to existing provisions in the Corporations Act. Part 3 makes two minor consequential amendments to another Act affected by certain amendments in this Bill.

2.6                   The new Part 7.5B carries the title ‘Regulation of Financial Benchmarks’ and contains the new licensing framework for designated significant financial benchmarks, as well as a power for ASIC to make two new kinds of rules; one prescribing detailed requirements relating to the operation of financial benchmarks specified in a licence and the other, conferring powers for ASIC to compel certain activity relating to significant financial benchmarks. There are offences related to the licensing framework. Two offences are created relating to the manipulation of financial benchmarks.

Division 1 - Preliminary

2.7                   A simplified outline of new Part 7.5B is provided, summarising the key matters in the Part as follows:

•        Administrators of significant financial benchmarks must be licensed, while other administrators can opt-in to the licensing regime. All licensees are subject to a number of obligations.

•        ASIC may make financial benchmark rules. These apply to licensees and their benchmarks.

•        ASIC may make compelled financial benchmark rules. These only apply to licensed significant financial benchmarks and deal with certain critical situations such as the possible failure of a significant financial benchmark.

•        Two new offences relating to the manipulation of financial benchmarks are defined.

[Schedule 1, item 1, section 908AA]

2.8                   A definition of financial benchmark is provided stating that it can be a price, estimate, rate, index or value. It must also be available to users and be calculated periodically from one or more of the following: transactions, currencies, rates, indices, bank accepted bills (BABs), negotiable certificates of deposits (NCDs) and others. Benchmarks calculated from other benchmarks are within the scope of this definition. A financial benchmark must be used for certain purposes which may include the calculation of interest or other amounts payable for a financial product, the calculation of the price or value of a financial product, and the measurement of the performance of a financial product. This definition is aligned with that provided in the Principles for Financial Benchmarks , IOSCO (IOSCO Principles). [Schedule 1, item 1, subsection 908AB(1)]

2.9                   The regulations, or ASIC by written instrument, may provide that a price, estimate, rate, index or value is not a financial benchmark. The ASIC written instrument is a legislative instrument if it applies to a class of prices, estimates, rates, indices or values. Otherwise, if ASIC makes a written instrument it must be published on ASIC’s website. This power is intended to provide certainty about whether something may be captured by the definition of a financial benchmark. This is different from the exemption powers in section 908EB, which may be exercised to exempt a financial benchmark from some or all provisions of this Part; for example, where the regulatory cost may outweigh the regulatory benefit.

2.10               For an ASIC written instrument that is not a legislative instrument and so is not a disallowable instrument, this is appropriate because the instrument will be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (see paragraph (a) in table item 19 in subsection 6(1) of the Legislation (Exemptions and Other Matters) Regulation 2015). [Schedule 1, item 1, subsections 908AB(2) to (4)]

2.11               ASIC may declare a financial benchmark to be a significant financial benchmark if it is satisfied that one of the following is met:

•        the benchmark is systemically important to the Australian financial system; or

•        a disruption to the availability or integrity of the benchmark would cause a material risk of financial contagion or systemic instability in Australia; or

•        a disruption of that kind would have a material impact on Australian retail or wholesale investors.

[Schedule 1, item 1, subsections 908AC(1) and (2)]

2.12               ASIC will take reasonable steps to consult before making a declaration, unless there are exceptional circumstances.

2.13               Two notes are included to assist readers. The first refers the reader to subsection 13(3) of the Legislation Act 2003 (the Legislation Act) for declarations by reference to a class or classes of matters. The second notes that the power to make such a declaration under section 908AC includes a power to vary or revoke it, as provided in subsection 33(3) of the Acts Interpretation Act 1901 . [Schedule 1, item 1, notes 1 and 2 to subsection 908AC(2)]

2.14               ASIC may not make such a declaration unless it has obtained the Minister’s consent in writing. Under table items 4 and 5 in regulation 6 of the Legislation (Exemptions and Other Matters) Regulation 2015, such ministerial consents are not legislative instruments within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, subsections 908AC(3) and (4)]

2.15               However, ASIC may, if immediate action is required, make an emergency declaration under subsection 908AC(2) without the consent of the Minister to protect the Australian economy or the Australian financial system. However, if it does so, ASIC must write to the Minister on the following day explaining the need for its action and revoke the declaration if directed to do so by the Minister. This allows the Government to exercise ultimate oversight in case of any declarations made by ASIC under this provision. [Schedule 1, item 1, subsections 908AD(1) to (3)]

2.16               To assist readers, an explanation is included that a written direction given by the Minister under subsection 908AD(3) is not a legislative instrument. This clarification is merely declaratory of the law as such directions are not legislative instruments within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, subsection 908AD(4)]

2.17               ASIC must, as soon as practicable, give the financial benchmark administrator written notice about the declaration of a financial benchmark as a significant financial benchmark under subsection 908AC(2), as well as any variation or revocation of this. [Schedule 1, item 1, section 908AE]

2.18               ASIC is given the function of supervising financial benchmarks that are specified in benchmark administrator licences. If such a benchmark is generated or administered overseas, ASIC may, to the extent it considers appropriate, rely on a regulator in a foreign country in exercising its regulatory functions. However, ASIC may only do so if it is satisfied that there is an adequate level of supervision of the financial benchmark based on its assessment of the regulatory regime in the foreign jurisdiction. Alternatively, ASIC must be satisfied that there are adequate cooperation arrangements in place with the foreign regulator to ensure that the benchmark is adequately supervised.

2.19               A significant number of prominent benchmark administrators are based overseas, and may be interested in entering the Australian market. The ability of ASIC to rely on the foreign regulator in supervising such entities ensures that there is no unnecessary duplication of regulatory requirements and burdens. However, such reliance by ASIC is subject to conditions that are intended to guarantee that an adequate level of regulation and supervision is maintained. [Schedule 1, item 1, section 908AF]

2.20               The requirements in new Part 7.5B apply both within and outside Australia, subject to certain restrictions imposed in section 908BB and section 908DD (paragraphs 2.25 and 4.14 provide details on those restrictions). [Schedule 1, item 1, section 908AG]

Division 2 - Licensing of financial benchmarks
Subdivision A - Requirement to be licensed

2.21               Administering a significant financial benchmark, or holding out to be doing so, requires a benchmark administrator licence covering that benchmark. [Schedule 1, item 1, paragraphs 908BA(1)(a) and (b)]

2.22               Breaching this requirement is an offence, punishable by a penalty of 500 penalty units [3] ($105,000), 5 years’ imprisonment or both. This is a relatively severe penalty, which is proportionate in view of the extensive damage and harm that may be caused by the unsupervised operation of an important financial benchmark. [Schedule 1, item 1, subsection 908BA(1)]

2.23               Once ASIC declares a benchmark to be a significant financial benchmark, the licensing requirement, as well as the holding out prohibition, generally applies after a period of 90 days from the day after ASIC’s declaration. This is intended to allow time for the benchmark administrator to apply for a licence. However, where the benchmark administrator has applied for a licence within the 90 days and the 90 days has passed, the prohibition applies from the earlier of the day after:

•        the applicant withdraws its licence application; or

•        the person is notified of ASIC’s decision to grant or refuse to grant the licence.

[Schedule 1, item 1, paragraph 908BA(1)(c) and subsection 908BA(2) and (3)]

2.24               Absolute liability applies to that aspect of the offence concerning whether the period referred to in the previous paragraph has ended, which is a jurisdictional element of the offence. Hence, the state of mind of the person is not relevant. This is appropriate because an ASIC declaration is a legislative instrument that is made publicly available and the benchmark administrator will also have been notified of the declaration. The decision to apply for a licence or withdraw an application is a decision of the administrator, and an ASIC decision relating to a licence application will be notified to the administrator. Therefore, the administrator will be aware of when the period started and when this will end. [Schedule 1, item 1, section 908AE. paragraph 908BA(1)(c) and subsections 908BA(2) to (4)]

2.25               Prohibitions also apply to making a number of related assertions if they are not true, such as that a person holds a benchmark administrator licence, or that a particular benchmark is or is not a significant financial benchmark . Breaches of these prohibitions attract the same penalty as for the offence of administering a significant financial benchmark without a licence. This is because the potential harm and damage that could be caused by this kind of misconduct is extensive and no less serious than the offence of administering a significant financial benchmark while being unlicensed. Holding out in this manner is an offence only if done so in Australia, as extending the offence to conduct outside Australia would not comply with Australian Government policy on extended geographical jurisdiction under domestic law. [Schedule 1, item 1, section 908BB]

Subdivision B - Granting licences

2.26               ASIC may grant a benchmark administrator licence if it is satisfied that an application has been made in accordance with the application requirements prescribed under section 908BD, that the licensee will comply with the applicable obligations and that no disqualified individual appears to be involved in the applicant. An individual may be a disqualified individual by being declared to be so by ASIC under the power provided in Division 2 of Part 7.4 of the Corporations Act, by being disqualified from managing corporations for the reasons set out in section 206B, or because they form part of the register of persons who have been disqualified from managing corporations kept by ASIC under section 1274AA. ASIC may impose conditions when it grants a licence. Note 1 to this subsection points the reader to certain other matters in section 908BO that ASIC must have regard to when considering whether to grant a licence (see paragraphs 2.45 and 2.56 for details). Note 2 to this subsection clarifies that a licence is required in the case of a significant financial benchmark, but can be granted for other benchmarks. [Schedule 1, item 1, subsection 908BC(1)]

2.27               In the case of an overseas applicant, ASIC must not grant a licence unless the applicant has registered as a foreign company as prescribed in Division 2 of Part 5B.2, which includes a requirement to have an agent in Australia. Requiring overseas applicants to have a local presence in this way is important, for example in ensuring that service of documents can be executed in Australia. [Schedule 1, item 1, subsection 908BC(2)]

2.28               A licence may also not be granted unless 42 days have passed since the application was submitted and no notice of disqualification as set out in subsection 853D(2) has been given. However, if ASIC proposes to declare a person as disqualified under section 853C, ASIC must commence the process to do so under section 853D within 42 days of receiving the application, by giving a written notice to the applicant. In such situations, ASIC can then grant the licence if ASIC decides not to make a declaration under section 853C. [Schedule 1, item 1, subsection 908BC(3)]

2.29               ASIC must notify an applicant in writing about its decision to grant a licence or not, including about any conditions imposed if a licence is granted. [Schedule 1, item 1, subsection 908BC(4)]

2.30               A benchmark administrator licence application must be lodged by a body corporate in the form prescribed or approved by ASIC. ASIC may, by written notice, request further information to be provided and may refuse to consider the application or refuse to take any further action in relation to the application if the request is not complied with. There is nothing to prevent an administrator of a benchmark that is not a significant financial benchmark from applying for a benchmark administrator licence. However, a person granted a licence for a financial benchmark that is not a significant financial benchmark will have to comply with all the relevant requirements and obligations. [Schedule 1, item 1, section 908BD]

2.31               A benchmark administrator licence may specify more than one financial benchmark. The legislation applies as if each benchmark was covered under a separate licence; for example, with regard to decisions to suspend or cancel a licence. [Schedule 1, item 1, section 908BE]

2.32               After ASIC grants a licence it must publish a notice setting out a number of prescribed details including the name of the licensee and of the financial benchmark specified in the licence, when the licence was granted and any conditions imposed. [Schedule 1, item 1, section 908BF]

Subdivision C - Conditions on licences

2.33               ASIC may at any time revoke or alter existing conditions on a licence, or impose additional conditions on a benchmark administrator licence. In doing so it must give written notice to the licensee and publish a notice setting out the details of what it has done. ASIC must have regard to certain matters set out in section 908BO before imposing, varying or revoking conditions. [Schedule 1, item 1, subsection 908BG(1)]

2.34               ASIC may impose, revoke or vary conditions on its own initiative. However, ASIC may only do so if it considers it appropriate in view of the licensee’s obligations under Part 7.5B as well as under any rules imposed by ASIC (see Chapter 3 of this explanatory memorandum for details of ASIC’s rule-making powers), as well as having regard to any change in the way the benchmark specified in the licence is administered. ASIC must give the licensee written notice of its proposed action and allow the licensee the opportunity to make a submission. The restrictions on ASIC taking action to impose, revoke or vary conditions on its own initiative do not apply when ASIC imposes conditions when a licence is first granted. [Schedule 1, item 1, paragraph 908BG(2)(a) and subsection 908BG(3)]

2.35               ASIC may impose, revoke or vary conditions on a licence at the request of the licensee as set out in an application in the form required by ASIC. A fee may be payable for lodging an application. [Schedule 1, item 1, paragraph 908BG(2)(b)]

Subdivision D - When a licence can be varied, suspended or cancelled

2.36               ASIC may vary a licence if a licensee lodges an application for the variation because of a change in the licensee’s name or a change in the financial benchmark specified in the licence. ASIC may also vary an existing licence to add a further specified benchmark. For a variation based on a change in the financial benchmark, or to add a further benchmark, ASIC must have regard to the matters set out in section 908BO. A fee may be payable by the licensee for lodgement of the application. [Schedule 1, item 1, section 908BH]

2.37               ASIC may by written notice suspend a licence for a specified period or cancel it if the licensee stops operating the benchmark specified in its licence, becomes insolvent under Chapter 5 of the Corporations Act or an equivalent foreign law, if the licensee asks ASIC to do so, or if the licensee is a leviable entity (within the meaning of the ASIC Supervisory Cost Recovery Levy Act 2017 ), any payable levy, late payment penalty, or shortfall penalty has not been paid in full at least 12 months after the due date. Before doing so ASIC must first consider anything that is required or could be required of the licensee under the compelled financial benchmark rules (see paragraph 3.9 for an explanation of those rules). Because those rules only apply to benchmark administrator licensees that operate licensed significant financial benchmarks, which are benchmarks that are systemically important to the Australian financial system or where there may be material risks or impacts if the availability or integrity of the benchmark were disrupted, it is important that ASIC considers this before it cancels or suspends a licence. [Schedule 1, item 1, section 908BI]

2.38               If ASIC considers that a licensee has breached a condition on its licence or any of its obligations under Part 7.5B or under the rules made by ASIC (see Chapter 3 for details on ASIC’s rule-making powers), ASIC may give a written notice to the licensee providing it with an opportunity to explain at a hearing before a specified person why its licence should not be suspended or cancelled. The notice must state the grounds on which ASIC is proposing to act and a reasonable time and place for the hearing. A different time or place may be fixed by the person holding the hearing if the licensee consents. [Schedule 1, item 1, subsections 908BJ(1) to (3)]

2.39               To assist readers, an explanation is included that such a notice is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act but is merely declaratory of the law as such notices are not legislative instruments within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, subsection 908BJ(5)]

2.40               The person conducting the hearing must, after hearing the licensee’s explanation, give ASIC a report with a recommendation concerning the grounds on which ASIC is proposing to act. After considering the report ASIC must give a written advice or notice to the licensee with its final decision, regardless of whether it decides to take no further action, suspend the licence for a specified period, or cancel it. [Schedule 1, item 1, subsections 908BJ(3) and (4)]

2.41               A person is taken not to hold a licence if that licence has been suspended, unless ASIC in its written notice (whether provided under section 908BI or paragraph 908BJ(4)(b)) states that the contrary applies for specified purposes. [Schedule 1, item 1, section 908BK]

2.42               ASIC can at any time vary or revoke the suspension of a licence by written notice to the licensee. [Schedule 1, item 1, section 908BL]

2.43               ASIC must publish a notice if it suspends or cancels a benchmark administrator licence, or varies or revokes the suspension of such a licence. The notice must state when the action took effect. [Schedule 1, item 1, section 908BM]

2.44               A benchmark administrator licence can only be varied, suspended or cancelled as set out in this Subdivision. [Schedule 1, item 1, section 908BN]

Subdivision E - Matters to which ASIC must have regard

2.45               ASIC must take a prescribed list of matters into consideration when it decides to grant a benchmark administrator licence, impose, vary or revoke conditions on such a licence, vary a licence because of a change in the financial benchmark specified in the licence, or suspend or cancel a licence. [Schedule 1, item 1, subsection 908BO(1)]

2.46               ASIC must mainly have regard to the way the benchmark is administered, its nature, purpose and the manner in which it is used, and the persons who may be reporting information to the licensee for purposes of calculating the benchmark. In the case of a foreign applicant that is authorised to administer the same or a similar benchmark in its home jurisdiction, ASIC must consider the regulatory framework in that jurisdiction, what criteria and obligations the benchmark administrator is under to obtain and maintain its authorisation, the level of supervision to which it is subject, and whether adequate cooperation arrangements exist with the supervisory authority of that jurisdiction. ASIC must also consider whether it is in the public interest to take any action as set out in subsection 908BO(1), for example, to impose conditions on a licence or suspend or cancel a licence. Finally, ASIC may consider any other matter that it believes is relevant. [Schedule 1, item 1, subsections 908BO(2) and (3)]

Subdivision F - Other obligations of licensees

2.47               A benchmark administrator licensee must comply with a number of general obligations. These include:

•        complying with the licence conditions;

•        registering as a foreign company under Division 2 of Part 5B.2 if the licensee is a foreign body corporate; and

•        taking all reasonable steps to ensure that no disqualified individual is involved in the operation of the benchmark covered by the licence.

A breach of these conditions may lead to suspension or cancellation of the licence under section 908BJ. A note clarifies that under section 908CF, a benchmark administrator must also comply with financial benchmark rules and compelled financial benchmark rules made under Division 3. [Schedule 1, item 1, section 908BP]

2.48               A benchmark administrator licensee must report to ASIC the following events:

•        a breach of a licensee’s general obligations under section 908BP;

•        if a licensee becomes aware that they may no longer be able to comply with the general obligations; and

•        specified changes in relation to certain personnel.

When reporting the event, the report must include any related information prescribed in regulations. ASIC may then consider whether further action is necessary, for example suspending or cancelling a licence. Failure to notify such matters is an offence that attracts a penalty of up to 100 penalty units ($21,000). [Schedule 1, item 1, paragraphs 908BQ(1)(a) and (c) and subparagraphs 908BQ(1)(b)(i) and (ii)]

2.49               A benchmark administrator licensee must notify ASIC of any changes to directors, secretaries or senior managers, including with respect to its holding company. The regulations may prescribe other information that must be provided in such a notification. Failure to notify ASIC and include any prescribed information is an offence. A maximum penalty of 100 penalty units ($21,000) applies. It is important that ASIC becomes aware of changes in the management of licensees, given its responsibility for enforcing the prohibition on involvement by disqualified individuals. [Schedule 1, item 1, paragraphs 908BQ(1)(a) and (c), subparagraphs 908BQ(1)(b)(iii) and (iv), and subsection 908BQ(2)]

2.50               A benchmark administrator licensee must give assistance to ASIC, Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia if any of these regulators makes a reasonable request to inspect the licensee’s books or obtain other assistance relating to the performance of the regulator’s function. Failure to comply with this requirement is an offence attracting a penalty of up to 100 penalty units ($21,000). [Schedule 1, item 1, section 908BR]

2.51               A financial benchmark licensee must comply with a reasonable request by ASIC to provide access to its facilities as they relate to the person’s capacity as a licensee. Failure to comply with this requirement is an offence, attracting a penalty of up to 100 penalty units ($21,000). [Schedule 1, item 1, section 908BS]

Subdivision G - Directions to licensees

2.52               ASIC may give a benchmark administrator licensee a written direction if ASIC believes that the licensee is not complying with its obligations, including obligations under rules made by ASIC (see Chapter 3 of this explanatory memorandum for details of ASIC’s rule-making powers). The direction may specify certain things that ASIC believes will promote compliance by the licensee with those obligations. If the licensee fails to comply with the direction, ASIC may apply to the Court for an order that the licensee comply with the direction. ASIC may vary or revoke a direction at any time by giving written notice to the licensee. To assist readers, an explanation is included that such a direction given by ASIC is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act but is merely declaratory of the law as such directions are not legislative instruments within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, section 908BT]

2.53               As soon as practicable after giving a direction or a notice of variation or revocation of a direction, ASIC must give a copy to the Minister who may then within 30 days disallow all or part of the direction or notice. In deciding whether to disallow a direction or notice the Minister must consider certain matters, such as the consistency of the direction or notice with the licensee’s obligations referred to in subsection 908BT(1) (that is, the licensee’s obligations to comply with Part 7.5B and rules made under this Part) and the matters set out in subsection 908BO(2) (see above paragraph 2.46). ASIC must then notify the licensee of the disallowance, which takes effect as soon as the licensee receives ASIC’s notification. To assist readers, an explanation is included that a disallowance notice given by the Minister to ASIC under this provision is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act but is merely declaratory of the law as such an advice or direction is not a legislative instrument within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, section 908BU]

2.54               ASIC may give a benchmark administrator licensee a written direction to give ASIC a report on specified matters. For example, ASIC may direct a licensee to provide a report relating to how it has generated the financial benchmark over a specified period, or relating to a change in the design and methodology of the financial benchmark. The written direction must include a deadline that is reasonable in the circumstances. ASIC may give a copy of that report to the Minister. ASIC may also require the licensee to give ASIC an audit statement on the report, and must nominate a particular person or body that is suitably qualified to prepare the statement. Failure to comply is an offence, with a penalty of 100 penalty units ($21,000). To assist readers, an explanation is included that a direction given by ASIC under this provision is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act but is merely declaratory of the law as such a direction is not a legislative instrument within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, section 908BV]

Subdivision H - Other matters

2.55               ASIC may assess how well a benchmark administrator licensee is complying with its obligations, including obligations under rules made by ASIC (see Chapter 3 of this explanatory memorandum for details of ASIC’s rule-making powers). In doing so, ASIC may take account of any information that it thinks is appropriate. ASIC must give a written report on the assessment to the licensee as soon as practicable after completing the assessment. ASIC may also give a copy to the Minister and any other person who appears to be materially affected by the assessment. If the assessment relates to a serious contravention of the law of the Commonwealth or a State or Territory, ASIC may also give a copy of the report, or the relevant part of the report, to the Australian Federal Police, the Chief Executive Officer or a member of staff of the Australian Crime Commission [4] , the Commonwealth Director of Public Prosecutions or other persons or bodies prescribed by regulation. ASIC may also publish a report, or part of the report. [Schedule 1, item 1, section 908BW]

2.56               A benchmark administrator licence may be varied, suspended or cancelled, or made subject to conditions as allowed by this Bill or later legislation. Clarification is provided that variation, suspension or cancellation of licences, or the imposition of conditions or additional conditions, do not give rise to compensation. [Schedule 1, item 1, section 908BX]

Consequential amendments

2.57               A number of key definitions are inserted into section 9, the main definitions section in the Corporations Act. These include the key definitions of benchmark administrator licence and benchmark administrator licensee . A benchmark administrator licence is a licence granted under section 908BC and a benchmark administrator licensee is defined as a person who holds such a licence. There are also definitions of financial benchmark and significant financial benchmark , which refer to the relevant sections in the Bill setting out what they designate. [Schedule 1, items 2 and 4, section 9]

2.58               A number of consequential changes are made to Division 2 of Part 7.4, which prescribes limits on involvement with certain licensees. The changes allow ASIC to declare a person who is involved in a benchmark administrator licensee to be a disqualified person. ASIC may only do so if it considers the person unfit to be so involved and giving rise to a risk that the licensee will breach its obligations. [Schedule 1, items 9 and 10, section 853B and subsection 853C(1)]

2.59               Section 853D sets out the procedure that ASIC must follow before declaring that a person involved in a relevant licensee is disqualified. Paragraphs 853D(2)(a) and (b) are amended so that ASIC must also follow that procedure when seeking to declare that a person involved in a benchmark administrator licensee to be a disqualified person. [Schedule 1, item 11, paragraphs 853D(2)(a) and (b)]

2.60               A disqualified person must not become involved in a benchmark administrator licensee. If they are already involved, the licensee must take all reasonable steps to ensure that they cease to be involved. [Schedule 1, item 12, subsections 853F(1) and (2)]

2.61               If ASIC becomes aware that an individual involved in a benchmark administrator licensee is disqualified because they are disqualified from managing a corporation under section 206B (for example, due to bankruptcy or a conviction for certain offences), or are included on the register of disqualified company directors and other officers that ASIC must keep under section 1274AA, then ASIC must notify the individual, the licensee and the Minister as soon as practicable. [Schedule 1, item 13, section 853G]

2.62               A decision by ASIC to declare a significant financial benchmark, including a decision to vary or revoke such a declaration, is made exempt from appeals to the Administrative Appeals Tribunal (AAT). The same exemption is applied to a consent by the Minister to ASIC making such a declaration and to a direction by the Minister to ASIC to revoke or amend a declaration. These exemptions are appropriate because the decisions to which they relate are based on considerations that have a direct impact on the stability and efficient functioning of the Australian financial system. Appeals by persons affected by these decisions are unlikely to take account of these public interest considerations. So allowing appeals to be made would undermine the implementation of the Government’s policy and the intended functioning of the regulatory framework established in the Bill. [Schedule 1, item 23, paragraphs 1317C(gdf) and (gdg)]

2.63               A decision by the Minister under section 908BU (see paragraph 2.53 above) to disallow a written compliance direction or notice given by ASIC to a licensee under section 908BT (see paragraph 2.52 above) is made exempt from appeals to the AAT. This exemption is appropriate because ASIC’s original decision is subject to merits review by the AAT. Thus, if a licensee is dissatisfied with the original direction, and remains dissatisfied after the Minister takes (or fails to take) action, they may then appeal to the AAT and obtain a merits review as to whether the direction should stand or not. [Schedule 1, item 23 , paragraph 1317C(gdh)]

Application and transitional provisions

2.64               There are no application or transitional provisions for these Divisions.



Chapter 3          

ASIC rule making powers

Outline of chapter

3.1                   The Australian Securities and Investments Commission (ASIC) is given two rule making powers. The first rule making power enables ASIC to make rules setting out the requirements that apply to the financial benchmarks subject to the licensing regime. The second rule making power enables ASIC to make rules that confer powers for ASIC to compel certain activities in relation to licensed significant financial benchmarks only.

Summary of new law

3.2                   ASIC may make financial benchmark rules setting out in detail the requirements that apply to benchmark administrator licensees and the financial benchmarks that are subject to the licensing regime. These rules may also deal with the responsibilities of entities whose activities result in the provision of data or information to benchmark administrator licensees for the generation or administration of the financial benchmarks subject to the licensing regime.

3.3                   ASIC may also make compelled financial benchmark rules . These rules are only relevant to licensed significant financial benchmarks. Under these rules, ASIC can require certain entities to provide information to a significant benchmark administrator licensee or ASIC, or require a benchmark administrator licensee to continue generating or administering a significant financial benchmark specified in its licence.

3.4                   Obligations are imposed on ASIC in making the rules, including an obligation to have regard to certain matters and to consult publicly.

3.5                   A compliance and enforcement regime is established, including offences, civil penalties and alternatives to civil penalties, such as enforceable undertakings and infringement notices, as well as a regulation-making power for additional alternatives to civil penalties to be provided.

Comparison of key features of new law and current law

New law

Current law

ASIC may make financial benchmark rules setting out in detail the requirements that apply to the financial benchmarks that are subject to the licensing regime. ASIC may also make compelled financial benchmark rules that can require an entity to provide data or information on a licensed significant benchmark to a significant benchmark administrator licensee or ASIC, or require a benchmark administrator licensee to continue operating a significant financial benchmark specified in its licence.

Obligations are imposed on ASIC in making the rules, including an obligation to have regard to certain matters and to consult.

A compliance and enforcement regime is established, including offences, civil penalties and alternatives to civil penalties.

No current law.

Detailed explanation of new law

Schedule 1 - Amendments

Part 1 - Main amendments

Division 3 - Financial benchmark rules and compelled financial benchmark rules
Subdivision A - Power to make financial benchmark rules

3.6                   ASIC may make financial benchmark rules as permitted by the Bill. Such rules are legislative instruments and are therefore subject to parliamentary disallowance. [Schedule 1, item 1, section 908CA]

3.7                   The main matters that the rules may deal with include the following:

•        the responsibilities of benchmark administrator licensees and their governance, management and resources;

•        the generation and administration of financial benchmarks;

•        the manner in which licensees provide their services and the conditions (including fees) on which they provide access to their benchmarks, which may include requirements to provide open and non-discriminatory access, including with regard to price;

•        business continuity planning for financial benchmarks, including the possible transition of such benchmarks to new licensees;

•        the disclosure of the conditions (including fees) applying to the licensee’s services;

•        the handling and use of financial benchmark data held by the licensee;

•        the responsibilities of entities that directly or indirectly provide data or information to licensed benchmark administrators for use in the generation or administration of their benchmarks;

•        reporting to ASIC and other regulators; and

•        any matters prescribed by regulations. [Schedule 1, item 1, section 908CB]

3.8                   The rules may also address matters that are incidental or related to the matters set out in section 980CB, including the following:

•        the persons who are required to comply with the rules, subject to any exemptions provided by regulations made under section 908CP;

•        the manner and form in which such persons must comply with the rules;

•        the circumstances in which relief may be provided from the rules;

•        record-keeping requirements; and

•        any other matters prescribed in the Corporations Act 2001 (the Corporations Act). [Schedule 1, item 1, section 908CC]

Subdivision B - Power to make compelled financial benchmark rules

3.9                   ASIC may make compelled financial benchmark rules as set out in the Bill. [Schedule 1, item 1, section 908CD]

3.10               Ordinarily, entities participating in the markets underlying a financial benchmark would be expected to voluntarily contribute to the benchmark setting process. For example, by quoting prices on a trading venue, trading in certain products on a trading venue, and/or submitting prices to the benchmark administrator.

3.11               Benchmark administrators would in the ordinary course of business be expected to continue operating their benchmarks. However, in rare and exceptional cases, a benchmark could cease to be published due to benchmark participants or the administrator being unwilling to perform their responsibilities. In these circumstances, to prevent the disruption that would result from the sudden cessation of a licensed significant financial benchmark, it may be necessary for ASIC to compel participants to submit data or information to the administrator, or to compel the administrator to continue to generate and administer the benchmark. For example, ASIC may compel an administrator to continue to administer a licensed significant financial benchmark for a specified period if ASIC, in consultation with the Reserve Bank of Australia, considers doing so is necessary to ensure an orderly transition or winding down of the benchmark and to protect financial system stability.

3.12               It is important that the compulsion power can be executed quickly, since the disruption resulting from the cessation of a benchmark such as the bank bill swap rate (BBSW) would occur as soon as the benchmark is not published on its usual daily schedule. The compelled financial benchmark rules permitted in the Bill are intended to address these rare and exceptional circumstances.

3.13               The permitted ASIC powers and matters that may be dealt with in the compelled financial benchmark rules are:

•        a power for ASIC to give a written notice requiring an entity referred to in paragraph 908CB(h) to provide data or information to a benchmark administrator licensee for the generation or administration a licensed significant financial benchmark. Such data or information might include transaction data, quotes or opinions and views, including those based on expert judgement. The notice may also require the entity to provide some or all of data or information to ASIC;

-                  An entity benchmark contributor can only be compelled under a written notice of this type if the entity has been previously participating in the generation or administration of that significant financial benchmark. [Schedule 1, item 1, paragraph 908CE(2)(b)]

•        a power for ASIC to compel by written notice a benchmark administrator licensee to continue to generate or administer a significant financial benchmark specified in its licence, or to do so in a particular way; and

•        incidental powers and matters, including those prescribed in regulations.

ASIC may only impose a requirement as permitted under the powers set out above if it reasonably believes it to be in the public interest to do so. It is noted that any notice given by ASIC as permitted above is not a legislative instrument because the decision to give the notice will be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (see paragraph (a) in table item 19 in subsection 6(1) of the Legislation (Exemptions and Other Matters) Regulation 2015 ) . [Schedule 1, item 1, section 908CE]

Subdivision C - Compliance with each set of rules etc.

3.14               Any entity, whether it is a benchmark administrator licensee or not, that is subject to the financial benchmark rules or the compelled financial benchmark rules must comply with them. A civil penalty applies to breaches of this provision. The primary objective of the civil penalty is to act as a deterrent, which is achieved by imposing a high maximum amount for the penalty, being 5,500 penalty units or $1.155 million (for details see paragraphs 3.27 and 3.45 below). While this is a substantial penalty, it is justified because of the potentially grave impact of misconduct in this area (see paragraph 3.27 below for more comments in relation to the penalty amount). [Schedule 1, item 1, subsection 908CF(1)]

3.15               In the event there is inconsistency, the compelled financial benchmark rules prevail over the financial benchmark rules. Other rules made under Chapter 7 of the Corporations Act prevail over the financial benchmark rules and the compelled financial benchmark rules in the case of an inconsistency. These rules include the market integrity rules, the derivative transaction rules, the derivative trade repository rules and the client money reporting rules. [Schedule 1, item 1, subsections 908CF(2) and (3)]

3.16               The regulations may allow for alternatives to civil penalty proceedings for a person who is alleged to have breached the financial benchmark or the compelled financial benchmark rules. The potential alternatives that may be provided for are limited to:

•        processes for paying a penalty to the Commonwealth (limited to one-fifth the penalty amount specified in the applicable rules);

•        undertaking or instituting remedial measures (including education programs); or

•        accepting sanctions other than the payment of a penalty to the Commonwealth.

3.17               The penalty payable under regulations made for this purpose in relation to the rules is capped at one-fifth of the maximum penalty payable under the rules (the maximum penalty being 5,550 penalty units, which is $1.1655 million). It is noted that a person would remain free to reject any available alternatives to civil proceedings and deal with the matter in civil proceedings before a court. [Schedule 1, item 1, section 908CG]

3.18               Breaches of the financial benchmark or the compelled financial benchmark rules are also subject to the infringement notice regime in Part 5 of the Regulatory Powers (Standard Provisions) Act 2014 (the Regulatory Powers Act). Because the rules may prescribe detailed operational matters, minor breaches may be expected to occur with some frequency. For this reason, the Regulatory Powers Act sets out a maximum penalty of 60 penalty units ($12,600) that can be imposed in an infringement notice, which is the amount set out in A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Power s, issued by the Attorney-General’s Department (the Guide). Infringement notices are an efficient way of dealing with minor breaches, as they avoid the significant delays and costs associated with court action. [Schedule 1, item 1, subsection 908CH(1)]

3.19               Part 5 of the Regulatory Powers Act sets out a standard framework under which infringement notices can be issued. This includes important matters such as when an infringement notice may be issued and by whom, what matters must be set out in an infringement notice, how an extension of time for payment may be requested, how and under what circumstances an infringement notice may be withdrawn, and the effect and consequences if a person pays the amount stated in the notice. In order for the framework to operate as intended the Bill sets out who in ASIC can act as an infringement officer and as a chief executive as defined in the Regulatory Powers Act as follows:

•        An infringement officer is any ASIC officer with a position equivalent to that of a member of the Senior Executive Service in the Commonwealth public service.

•        A chief executive is any member of the ASIC Commission, which is ASIC’s governing body. [Schedule 1, item 1, subsections 908CH(2) and (3)]

3.20               Breaches of the financial benchmark or the compelled financial benchmark rules may also be addressed through enforceable undertakings, based on the general framework set out under Part 6 of the Regulatory Powers Act. This Part allows an authorised person in ASIC to accept a written undertaking to comply with a particular provision by taking or refraining from taking specified action. If an enforceable undertaking is breached the authorised person may apply to a relevant court for orders to comply with the undertaking, to pay an amount to the Commonwealth equivalent to any financial benefit that the person has obtained through the breach, to compensate any other person for damages suffered because of the breach, or for any other order the court considers appropriate. [Schedule 1, item 1, subsection 908CI(1)]

3.21               Any ASIC officer with a position equivalent to that of a member of the Senior Executive Service in the Commonwealth public service is permitted to act as an authorised officer. The relevant courts may include the Federal Court, the Federal Circuit Court or any State or Territory court with the necessary jurisdiction. [Schedule 1, item 1, subsections 908CI(2) and (3)]

3.22               Protection from civil or criminal action is given to a person who is required under ASIC’s compelled financial benchmark rules to provide financial benchmark data or other information, or to provide access to such information if the person does so in good faith. This protection is also given to a benchmark administrator licensee that is compelled by ASIC to generate or administer a licensed significant financial benchmark in a particular way under compelled financial benchmark rules, if the person does so in good faith. [Schedule 1, item 1, section 908CJ]

Subdivision D - Matters relating to the making of each set of rules

3.23               Before making a financial benchmark or compelled financial benchmark rule, ASIC must consider a number of matters. These include the Principles for Financial Benchmarks , IOSCO (IOSCO Principles), as amended from time to time (see paragraph 5.3 for further explanation of the power to incorporate by reference), the likely effect of the rule on the Australian economy and the Australian financial system, the likely regulatory impact of the rule, and any other relevant matter. Information is provided in a note assisting the reader to locate the IOSCO Principles. Another note provides an example of other relevant matters including matters raised during consultation as required under section 908CL. [Schedule 1, item 1, section 908CK]

3.24               ASIC must conduct public consultation prior to making any rule. Regulations may prescribe other persons or bodies that ASIC must consult. Consultation may be held by exposing the proposed rule on ASIC’s website, with an invitation to the public to comment. A failure to consult at all or for a particular time does not invalidate a rule. While the Government expects ASIC to consult on every proposed rule, this provision is designed to promote certainty among regulated entities by ensuring that an alleged technical failure to comply with the consultation requirements does not affect the validity of the rule. It also provides ASIC with the flexibility to use targeted consultation with affected stakeholders where this is appropriate without creating uncertainty as to the validity of a rule . Furthermore, there are additional safeguards to ensure that ASIC undertakes proper consultation, including that the financial benchmark or the compelled financial benchmark rules are disallowable by the Parliament. ASIC is also regularly called to appear before Parliamentary Committees to explain its actions . [Schedule 1, item 1, section 908CL]

3.25               The Minister must provide consent before ASIC makes a rule. Such consent provided by the Minister is not a legislative instrument because it is an ‘approval’ and as such falls within the exemption in table items 4 and 5 in regulation 6 of the Legislation (Exemptions and Other Matters) Regulation 2015 . [Schedule 1, item 1, section 908CM]

3.26               ASIC may in emergency situations make a rule without consultation and without obtaining the consent of the Minister. ASIC may only make a rule without the consent of the Minister when it is of the opinion that it is necessary or in the public interest to do so in order to protect the Australian economy or financial system, or the security or confidentiality of the information held by one or more financial benchmark administrators. ASIC must then write to the Minister on the following day explaining the need for the rule and, if directed to do so in writing by the Minister, amend or revoke the rule. To assist readers, an explanation is included that such a direction given by the Minister under this provision is not a legislative instrument. This does not constitute an actual exemption from the relevant provisions in the Legislation Act 2003 (the Legislation Act) but is merely declaratory of the law as such a direction is not a legislative instrument within the meaning of subsection (8)(1) of the Legislation Act. [Schedule 1, item 1, section 908CN]

3.27               The financial benchmark or the compelled financial benchmark rules may impose penalties up to an amount equivalent to 5,550 penalty units, which is $1.1655 million. This is a substantial penalty that is justified by the potentially significant impact that misconduct of a serious nature may have, given the widespread use of financial benchmarks in the financial system. The penalty is generally expected to apply to large financial entities. It is noted that fines imposed in overseas jurisdictions for manipulation of benchmarks such as the London Interbank Offered Rate (LIBOR) have been far larger. This amount is similar to that imposed by other important rules in the Corporations Act, such as the market integrity rules and the client money rules. [Schedule 1, item 1, section 908CO]

3.28               Regulations may limit the extent to which or the way in which permitted matters are dealt with in the financial benchmark or the compelled financial benchmark rules, the classes of persons captured by the rules, or the extent to which the rules may impose requirements on designated classes of persons. For example, regulations could limit the application of the rules in relation to public sector entities or index benchmarks, if doing so would harmonise the Australian regime with key overseas benchmarks regulatory regimes. [Schedule 1, item 1, section 908CP]

3.29               ASIC may vary or revoke a rule but only subject to the same conditions applying when it makes a rule, as set out in the Acts Interpretation Act 1901 . However, these conditions (such as the requirement to consult and for ministerial consent) do not apply if ASIC revokes or amends a rule pursuant to a direction given by the Minister under section 908CN after ASIC makes an emergency rule. [Schedule 1, item 1, section 908CQ]

Consequential amendments

3.30               New section 1317HC (see paragraph 3.46 for an explanation of this new section) is added to the definition of civil penalty order in the Corporations Act. [Schedule 1, item 3, section 9 (paragraph (c) of the definition of civil penalty order)]

3.31               A number of key definitions are inserted into section 9, the main definitions section in the Corporations Act. These include definitions of financial benchmark rules and compelled financial benchmark rules , which refer to the relevant sections in the Bill setting out what they designate. Other definitions inserted include:

•        Financial benchmark data refers to information (including derived information) obtained to generate or administer a financial benchmark.

•        The Regulatory Powers Act being the Regulatory Powers (Standard Provisions) Act 2014 .

[Schedule 1, item 4, section 9]

3.32               A company or related body corporate may not indemnify a person for a liability incurred as an officer or auditor of the company through a compensation order issued by a court under new section 1317HC. [Schedule 1, item 5, paragraph 199A(2)(b)]

3.33               A company or related body corporate may not indemnify a person for legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred in defending proceedings brought by ASIC or a liquidator. Clarification is provided in a note that this includes proceedings by ASIC for a compensation order under new section 1317HC. [Schedule 1, item 6, subsection 199A(3)(note 1)]

3.34               A person giving information to ASIC concerning a possible breach of the financial benchmark or the compelled financial benchmark rules is given qualified privilege (which provides immunity from being sued for defamation, unless the act involved malice). [Schedule 1, item 16, paragraph 1100A(1)(b)]

•        Where the Corporations Act provides for qualified privilege, this applies in proceedings for defamation to remove a person’s liability in respect of an act, matter or thing, unless malice is present.

3.35               In addition, qualified privilege is provided for benchmark administrator licensees when giving any information to ASIC in connection with the performance or exercise of ASIC’s functions or powers under, or in relation to Chapter 7 or regulations made for the purposes of Chapter 7. [Schedule 1, item 16, paragraph 1100A(1)(b)]

3.36               A person with qualified privilege under the above provisions also has protection from actions based on breach of confidence in relation to the same conduct.

3.37               The Court may make such orders as it sees fit if it considers that a person has been wronged by another person breaching the financial benchmark or the compelled financial benchmark rules. [Schedule 1, item 17, paragraph 1101B(1)(d)]

3.38               Without limiting the Court’s ability to make other orders, examples are given of the kind of orders the Court could make under subsection 1101B(1) for a breach of the financial benchmark or the compelled financial benchmark rules. These include orders giving directions about complying with a provision of these rules, requiring the disclosure of specified information, or requiring a person to publish an advertisement in accordance with the order. [Schedule 1, items 18, 19 and 20, paragraph 1101B(4)(b) and subparagraphs 1101B(4)(c)(i) and 1101B(4)(d)(i)]

3.39               A decision by ASIC to make, vary or revoke financial benchmark or compelled financial benchmark rules, as well as a decision by the Minister to consent to their making, is made exempt from appeals to the Administrative Appeals Tribunal (AAT). These exemptions are justified because these decisions are financial decisions with a significant public interest element (as set out in the publication What decisions should be subject to merits review? released by the Administrative Review Council (ARC)) and are fundamental to the effective implementation of the Government’s policy for regulating financial benchmarks. [Schedule 1, item 23, paragraph 1317C(gdi) and subparagraph 1317C(gdk)(i)]

3.40               A decision by the Minister to direct ASIC to revoke or amend a rule made in an emergency situation as set out in section 908CM is provided with a similar exemption. These decisions will be made on the basis of whether the rule is in the public interest or whether it is necessary to protect the Australian economy, the Australian financial system, or the security or confidentiality of information held by licensed benchmark administrators. Given the strong public interest element in such a decision by the Minister it is consistent with the guidance provided by ARC to provide a carve-out from AAT review. [Schedule 1, item 23, subparagraph 1317C(gdk)(ii)]

3.41               A decision by ASIC to propose or agree to an alternative to a civil penalty proceeding is excluded from AAT review. Such a decision is preliminary in nature and does not in itself have a conclusive effect on the person alleged to have committed a contravention, as set out in the ARC publication referred to above. The person remains free to reject the proposed alternative (if any) and deal with the matter in civil proceedings before a court. In addition to being preliminary, these decisions have a law enforcement nature. They are based on a judgment by ASIC regarding the most appropriate enforcement approach in response to an alleged breach of the law. Making such decisions subject to AAT review could jeopardise the effective investigation of alleged breaches and the subsequent enforcement of the law. [Schedule 1, item 23, paragraph 1317C(gdj)]

3.42               A decision by ASIC to apply its compulsion powers under the compelled financial benchmark rules is made exempt from appeals to the AAT. A decision to impose compulsion, whether on a submitter entity or on a benchmark administrator licensee of a licensed significant financial benchmark, may need to be made very quickly and would need to be effective immediately to avoid disruption to financial contracts and markets. In the event that key participants in a licensed significant financial benchmark were no longer willing to participate in the benchmark setting process, ASIC may only have very short notice ahead of the benchmark ceasing to be published. The actual length of notice would depend on each benchmark. For example, under the current BBSW conventions, reliance on the fallback calculation methodology based on algorithms will not extend beyond two days. In this scenario, ASIC would need to assess the case for imposing compulsion, and take action to impose compulsion within the two days, to prevent the disruption that would occur if the benchmark was not published on its usual daily schedule.

3.43               Providing the right to appeal ASIC’s decision to compel would significantly raise the risk that the significant financial benchmark will cease to be published and trigger the disruption to financial contracts and markets discussed above. Disruption would occur even if there was only a short and temporary interruption in the publication of a benchmark as investor confidence in the benchmark would be seriously eroded. It is therefore considered to be in the public interest for ASIC to have the ability to take prompt action to ensure the significant financial benchmark will be published without interruption. This public interest consideration provides justification for removing review rights for ASIC’s decision to impose compulsion, as set out in the ARC guidance referred to above. [Schedule 1, item 23, subparagraph 1317C(gdl)]

3.44               Compliance with the financial benchmark or compelled financial benchmark rules is made a civil penalty provision by inserting a reference to subsection 908CF(1) in the table in the Corporations Act setting out the list of these provisions. A Court can make a declaration of contravention if it is satisfied that a breach of these rules has occurred, which may then lead to penalties and compensation orders being imposed. [Schedule 1, item 24, subsection 1317E(1), table item 17A]

3.45               A Court may make a declaration of contravention if it is satisfied that a breach of the financial benchmark or compelled financial benchmark rules has occurred. A penalty payable to the Commonwealth may then be imposed up to the amount specified in the rules. The maximum amount the rules can specify (as set out in section 908CO) is 5,550 penalty units ($1.1655 million). [Schedule 1, item 26, subsections 1317G(1DC) and (1DD)]

3.46               A Court may order a person to compensate another person for damages suffered due to a breach of the financial benchmark rules or compelled financial benchmark rules committed by the first person. In determining the amount of the damages, profits made by the person as a result of the contravention and (in the case of a registered scheme) any diminution in the value of the scheme’s property must be included. [Schedule 1, item 27, section 1317HC]

3.47               A court may provide whole or partial relief to a person who has breached a financial benchmark or compelled financial benchmark rule if it considers that the person has acted honestly and ought to be excused for the contravention having regard to all the circumstances of the case. Schedule 1, item 28, subsection 1317S(1)]

3.48               If the Court is satisfied that a person has breached a financial benchmark or compelled financial benchmark rule it may order the person to disclose information as specified in the order to the public or to particular persons. The Court may also require the person to publish at their own expense an advertisement in accordance with conditions set out in the order. [Schedule 1, item 29, section 1324B]

3.49               The Court may also make certain other orders against a person breaching a financial benchmark or compelled financial benchmark rule if it considers that the order will provide whole or partial compensation to the person suffering loss or damage because of the breach, or prevent or reduce such loss or damage. A person suffering such loss or damage may also apply to the Court and the Court may then make such orders as it considers fit against the person committing the breach (or against a person involved in the breach) for compensating the first person suffering the consequences of the breach. ASIC may make such an application on behalf of one or more persons suffering loss or damage because of a breach. The person or persons on whose behalf ASIC makes the application must first provide their consent in writing. [Schedule 1, item 30, subsections 1325(1), (2) and (3)]

3.50               The changes explained in the last two paragraphs above to sections 1324B and 1325 will have an impact on two items in Schedule 5 of the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 which has received Royal Assent but will likely only come into effect after this Bill commences. Two small consequential amendments are therefore made to items 27 and 28 in Schedule 5 of the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 to ensure that they continue to operate as originally intended once that Act comes into effect. [Schedule 1, item 32, section 1324B and subsections 1325(1), (2) and (3)]

Application and transitional provisions

3.51               The obligation to comply with the financial benchmark or compelled financial benchmark rules (regardless of when they are made by ASIC) applies from 1 January 2018 or any later day being the day after which the Bill receives the Royal Assent. [Schedule 1, item 31, sections 1639 to 1641]

3.52               The extended meaning of financial products and Division 3 financial products for Part 7.10 for bank accepted bills (BABs) and negotiable certificates of deposit (NCDs) applies in relation to acts or omissions occurring from 1 January 2018 or any later day being the day after which the Bill receives the Royal Assent, regardless of when the BABs or NCDs were issued. [Schedule 1, item 31, sections 1639 and 1642]



Chapter 4          

Offences and civil penalties

Outline of chapter

4.1                   Offences relating to the manipulation of financial benchmarks are created, including an appropriate penalty regime.

Summary of new law

4.2                   Offences for manipulating financial benchmarks in two specified ways are created: doing or not doing an act or acts with an intention to influence the level at which a financial benchmark is generated or administered; and making a false or misleading statement or disseminating false or misleading information that could affect a financial benchmark.

4.3                   Extended geographical scope Category B (as set out in section 15.2 of the Criminal Code, set out in the Schedule of the Criminal Code Act 1995 (the Criminal Code) is applied to each offence under this Division. Applying an extended geographical scope for these offences is critical because of the potential for financial benchmarks to be manipulated across borders.

4.4                   Penalties are imposed for these offences that are based on the penalties applying to the existing market manipulation and related offences. Category B of the extended geographical jurisdiction provisions in section 15.2 of the Criminal Code is applied to the civil penalty provisions attached to contraventions of the financial benchmark manipulation provisions.

Comparison of key features of new law and current law

New law

Current law

Two specific offences are created for manipulating financial benchmarks.

Penalties based on those applying to the current market manipulation offences are imposed.

The international jurisdictional scope of the offences and related civil penalty provisions is defined by reference to Category B of the extended geographical jurisdiction provisions in the Criminal Code.

Manipulation of financial benchmarks is currently prosecuted under the general market manipulation and related provisions in Division 2 of Part 7.10 of the Corporations Act 2001 (the Corporations Act).

Detailed explanation of new law

Schedule 1 - Amendments

Part 1 - Main amendments

Division 4 - Offences and civil penalties relating to manipulation of financial benchmarks

4.5                   A person commits an offence if the person does, or does not do, an act or acts with an (that is, any) intention of influencing the level of a financial benchmark. Influencing the level at which the financial benchmark is generated or administered does not require a person to have a specific level in mind. A range of activities may legitimately contribute to or impact on the level at which a benchmark is generated or administered but activity undertaken with an intention of influencing the level of the benchmark is inappropriate and would contravene this offence. Just as market misconduct provisions apply to all financial products, and consistent with overseas developments, the offence applies to all financial benchmarks.

•        For this offence, ‘intention’ has been specified as the fault element to apply. This imposes a higher bar for prosecution than if the standard fault element of ‘recklessness’ under the Criminal Code applied. Intention has been specified as the fault element to avoid the potential for the offence to have a chilling effect on market activities.

4.6                   Under the geographical scope provision applied to this offence in section 908DD (see paragraph 4.13 below), this limb of the offence applies to Australian citizens, residents and bodies corporate incorporated in Australia regardless of where the conduct giving rise to the offence occurs. It also applies to other entities if the conduct giving rise to the offence takes place wholly or at least partly in Australia. [Schedule 1, item 1, subsections 908DA(1) and (3)]

4.7                   A separate limb of the offence is created which applies to foreign nationals and bodies, as set out in the geographical scope provision in section 908DD. In the case of these entities the offence applies if an Australian entity (a defined term including both individuals and bodies corporate: see paragraph 4.16) suffers, or is likely to suffer, some financial or other disadvantage as a consequence of the act or omission. [Schedule 1, item 1, subsections 908DA(2) and (3]

4.8                   An offence is committed by breaching either of the two limbs of the offence.

4.9                   The applicable penalty is determined in section 908DC, with an extended geographical scope as defined in section 908DD. Breaches also attract a civil penalty (see paragraph 4.20 and following below), which have a similar extended geographical scope as explained in paragraph 4.14 below. [Schedule 1, item 1, subsection 908DA(3) and note]

4.10               A person commits an offence if they knowingly or recklessly make a statement or disseminate false or misleading information knowing that the statement or information could be used for the calculation of a financial benchmark. This includes by omitting any matter that without which the statement or information is misleading. This offence provision is structured in the same way as the offence in section 908DA, with a separate limb applying to Australian citizens, residents and bodies corporate incorporated in Australia as well as conduct by any person occurring wholly or at least partly in Australia. A second limb applies to foreign nationals and bodies if their false or misleading statements or information results in or is likely to result in an Australian entity suffering some financial or other disadvantage from using the financial benchmark. The same penalty provision in section 908DC applies to this offence, as well as the extended geographical scope as set out in section 908DD. A breach of this provision also attracts a civil penalty. [Schedule 1, item 1, section 908DB]

4.11               Penalties for the two offences are defined as follows:

•        For an individual, imprisonment of up to 10 years and/or a fine being the greater of 4,500 penalty units ($0.945 million) or three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence [Schedule 1, item 1, subsection 908DC(1)] ; and

•        For a body corporate, a fine being the greatest of 45,000 penalty units ($9.45 million), three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence, or 10 per cent of the body corporate’s annual turnover during the 12 month period ending at the time the offence was committed [Schedule 1, item 1, subsection 908DC(2)].

4.12               The maximum amounts specified both for the offence and for the civil penalty are relatively high (see paragraph 4.22 below for more details on the civil penalty). However, these amounts are justified because of the seriously damaging impact of misconduct of the kind specified in the offence and the significant profits that may be achieved as a result. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The penalty specified for the offence is modelled on the existing market manipulation and other similar offences and penalties in Part 7.10 of the Corporations Act. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.

4.13               Applying an extended geographical scope to these offences is critically important given the ease with which financial transactions resulting in the manipulation of a benchmark can be conducted across borders in today’s global financial markets. Failure to provide a wide geographical scope for these offences would represent a serious gap that would be highly likely to prevent the effective enforcement of the financial benchmark regulatory regime by Australian regulators.

4.14               Extended geographical jurisdiction - Category B as set out in section 15.2 of the Criminal Code is applied to each offence under this Division (see Table 4.1 below for a summary table explaining this provision). Under this category, the offences apply to Australian citizens, residents and bodies corporate incorporated in Australia regardless of where the conduct giving rise to the offence occurs. The offences apply to foreign nationals and bodies corporate if the conduct giving rise to the offences occurs at least partly in Australia. They also apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs. [Schedule 1, item 1, subsection 908DD(1)]

4.15               The same extended geographical jurisdiction is applied to the civil penalty provisions created under section 1317E in relation to the offences in this Division (see paragraph 4.21 and following below). It is also made clear that the Attorney-General’s consent must be obtained before proceedings can be commenced against a foreign person or body corporate for conduct occurring wholly outside Australia. This provision is based on section 16.1 of the Criminal Code. Similarly, provisions explaining in further detail when an act is taken to have occurred in Australia are based on section 16.2 of the Criminal Code. Sections 16.1 and 16.2 of the Criminal Code also apply to the offences in this Division, by virtue of the application of the extended geographical jurisdiction - Category B. [Schedule 1, item 1, subsections 908DD(2) to (8)]

Consequential amendments

4.16               A definition of Australian entity , which means an Australian citizen, a resident of Australia within the meaning of the Criminal Code and a body corporate incorporated under a law of the Commonwealth or of a State or Territory, is inserted in the main definitions section in Chapter 7 of the Corporations Act. [Schedule 1, item 7, section 761A]

4.17               A note to the definition of financial product in section 761A is amended to take account of the new inclusions in this term created by this Bill; for example, through section 1040B with respect to bank accepted bills (BABs) and negotiable certificates of deposit (NCDs) (see paragraph 4.18 below). [Schedule 1, item 8, section 761A, Note to the definition of ‘financial product’]

4.18               A new section 1040B is inserted in Part 7.10, which addresses market misconduct and other prohibited conduct relating to financial products and services. This makes BABs and NCDs financial products and Division 3 financial products (within the meaning of Division 3) for purposes of that Part. This has the effect of applying the important offences in that Part, including those relating to market manipulation and artificially maintaining a trading price, to conduct relating to these two products. This section is inserted in order to remove any ambiguity as to whether conduct relating to BABs and NCDs is captured under Part 7.10. Where a term used in the Part is defined outside of the Part by reference to financial product the term is to be interpreted as including BABs and NCDs. Such terms include ‘financial service’, which is defined in section 766A and ‘financial market’, which is defined in section 767A. The Acts Interpretation Act 1901 provides that words in the plural number include the singular. [Schedule 1, item 14, section 1040B]

4.19               Section 1312 of the Corporations Act allows a penalty of five times the maximum amount of the penalty applying to an offence committed by an individual to be imposed on a body corporate committing the offence, and exempts specified provisions from this rule. The offences related to the manipulation of financial benchmarks in this Division are specified as exempt from this rule, because the penalties applying to them as set out in section 908DC already make provision for higher penalties for bodies corporate. [Schedule 1, item 21, paragraph 1312(2)(aa)]

4.20               An amendment is made to the note in subsection 1312(2) drawing the reader’s attention to the fact that not all penalty amounts are set out in Schedule 3 to the Corporations Act. The penalty amounts for the three offences added to section 1312 (see previous paragraph) are, for instance, set out in section 908DC and not in Schedule 3. [Schedule 1, item 22, subsection 1312(2) (note)]

4.21               The provisions relating to the manipulation of financial benchmarks in Division 4 of new Part 7.5B are made civil penalty provisions by inserting a reference to subsections 908DA(1) and (2) and subsections 908DB(1) and (2) in the table in the Corporations Act at subsection 1317(1) setting out the list of these provisions. A Court can make a declaration of contravention if it is satisfied that a breach of these provisions has occurred, which then allows penalties and orders for compensation to be imposed. [Schedule 1, item 24, subsection 1317E(1)(after table item 17), table item 17B]

4.22               A note is inserted directing the reader’s attention to section 908DD because it contains matters that may be relevant for making declarations of contravention for the new civil penalty provisions in table item 17B. Section 908DD clarifies the extended geographic jurisdiction of these provisions, Category B, which may be important in determining whether a declaration of contravention can be made in certain circumstances (see paragraph 4.14 above for a detailed explanation). [Schedule 1, item 25, note 3 at the end of subsection 1317E(1)]

4.23               A Court may make a declaration of contravention if it is satisfied that a breach of one of the offences in Division 4 of new Part 7.5B has occurred. A penalty payable to the Commonwealth may then be imposed up to the amount of $200,000 for an individual and $1 million for a body corporate. [Schedule 1, item 26, subsections 1317G(1DE) and (1DF)]

Application and transitional provisions

4.24               All the offences in Division 4 of new Part 7.5B apply from the start day of the Bill (which will be the later of 1 January 2018 and the day after which the Bill receives the Royal Assent). [Schedule 1, item 31, sections 1639 and 1641]



Chapter 5          

Other provisions

Outline of chapter

5.1                   A small number of miscellaneous provisions that support the new financial benchmarks licensing regime are included in this Division, Division 5 of new Part 7.5B.

Summary of new law

5.2                   A small number of miscellaneous provisions are grouped together within this Division, including a provision allowing references to be made to instruments as in force from time to time or at a particular time, and a provision giving the Australian Securities and Investments Commission (ASIC) and the regulations exemption powers in relation to the provisions in the Bill.

Comparison of key features of new law and current law

New law

Current law

References may be made in the regulations and ASIC rules to instruments or other written materials, as in force from time to time or at a particular time.

ASIC and the regulations are given exemption powers in relation to the provisions in the Bill.

No current law.

Detailed explanation of new law

Schedule 1 - Amendments

Part 1 - Main amendments

Division 5 - Other provisions

5.3                   Regulations made under a provision in the Bill and ASIC rules made under Division 3 of the Bill may refer to instruments as in force from time to time or at a particular time. This provision is justified because some of the regulations and ASIC rules are likely to refer to relevant international standards, in particular the Principles for Financial Benchmarks , IOSCO (IOSCO Principles), as the regulatory framework established in this Bill is based on this instrument. It is likely that these instruments will be updated from time to time, with the participation of Australian authorities. Given that it is Australian Government policy for our regulatory framework to remain consistent with the IOSCO Principles, this provision will allow the updated instrument to continue to apply without the need to amend the reference to them in the regulations or ASIC rules. Interested stakeholders who wish to review any changes will have convenient access to the IOSCO Principles as they are set out in a publicly available document which can be accessed on the internet. [5] Any other international standards that may be incorporated by reference in future will be accessible in a similar way. [Schedule 1, item 1, section 908EA]

5.4                   ASIC or the regulations may exempt persons or benchmarks from provisions in this Bill, including from regulations and from ASIC financial benchmark or compelled financial benchmark rules made under Division 3. Conditions may be imposed on an exemption given. An ASIC exemption must be a legislative instrument if it affects a class of persons or a class of benchmarks. This allows Parliament to review the exemption and disallow it if necessary. Otherwise an ASIC exemption must be in writing and must be published on ASIC’s website. Unlike a regulation, such an exemption in writing is not subject to disallowance, this is appropriate because it is subject to AAT merits review. The regulations prevail over an ASIC exemption in case of an inconsistency. [Schedule 1, item 1, section 908EB]

Consequential amendments

5.5                   There are no consequential amendments for this Division.

Application and transitional provisions

5.6                   There are no application and transitional provisions for this Division.



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

Financial Benchmarks

6.1                   This Schedule 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

6.2                   This Schedule makes amendments to the Corporations Act 2001 (the Corporations Act) to establish a new licensing regime for administrators of financial benchmarks declared to be significant financial benchmarks. Administrators of other financial benchmarks may opt-in to the licencing regime.

•        Financial benchmarks are used to determine the pay-out or value of financial products or contracts, or to measure the performance of investment funds.

•        As benchmarks affect the pricing of financial products, a number of benchmarks are critical to a wide range of users in financial markets and throughout the broader economy. This means there is a risk of financial contagion or instability, or undermining of investor confidence, if the availability or integrity of such key benchmarks is disrupted. In this Bill, such key benchmarks are defined as significant financial benchmarks.

•        Significant financial benchmarks are financial benchmarks that:

-                  are systemically important in Australia; or

-                  a disruption to the availability or integrity of the benchmark would cause a material risk of financial contagion or systemic instability in Australia; or

-                  a disruption of that kind would have a material impact on Australian retail or wholesale investors.

•        The Australian Securities and Investments Commission (ASIC), in its July 2017 Consultation paper 292: Implementing the financial benchmark regulatory regime noted that initially (and consistent with the Council of Financial Regulators (CFR) [6] advice), ASIC considers that the following five benchmarks are likely to meet the criteria for significant financial benchmarks in section 908AC(2) of the Bill:

-                  the bank bill swap rate (BBSW);

-                  Standard & Poor’s (S&P)/ASX 200 index;

-                  ASX Bond futures settlement price (formerly Commonwealth Government Securities yield curve survey);

-                  the cash rate (including the Total Return Index derived from the cash rate); and

-                  the Consumer Price Index.

The last two are generated and administered by public institutions, while the others are generated and administered by large institutions.

•        Globally there have been many cases of market misconduct regarding the determination of financial benchmarks (particularly interest rate reference benchmarks such as the London Interbank Offered Rate (LIBOR)). As of August 2017, penalties paid by financial institutions globally had reached around AUD25 billion. Also, there are court proceedings in Australia for alleged market manipulation and unconscionable conduct in relation to the BBSW, which is the Australian equivalent of the LIBOR.

•        In 2013, in response to these issues, the International Organization of Securities Commissions (IOSCO) developed the Principles for Financial Benchmarks , IOSCO (the IOSCO Principles). These set out the desirable characteristics of a regulatory regime for financial benchmarks.

-                  Jurisdictions, including the United Kingdom, the European Union (EU), Japan, Singapore and Canada, have since worked to align their regulatory regimes with the IOSCO Principles.

6.3                   In line with these developments, the Government has decided to implement a regulatory framework for financial benchmarks in Australia that is consistent with the IOSCO Principles.

6.4                   The amendments made by the Bill are based on CFR recommendations for reforming the regulation of financial benchmarks used in Australia consistent with the IOSCO Principles. The CFR’s recommendations were formulated following extensive consultation with stakeholders.

6.5                   Consistent with overseas regulatory developments, manipulation of financial benchmarks will be made a specific offence.

6.6                   The Schedule gives ASIC powers to make rules imposing a regulatory framework for licensed benchmark administrators and related matters. This framework will also reflect the IOSCO Principles.

Offences and civil penalties

1. Requirement to be licensed offences

6.7                   The first offence applies to administrators of significant financial benchmarks if they are not licenced as required (see section 908BA). Benchmark administrators of significant financial benchmarks will generally be large institutions or financial entities. Absolute liability applies to the physical element of the offence about the end of the period (that is, paragraph 908BA(1)(c)). The element is jurisdictional in nature.

6.8                   The second offence relates to when a person holds out in Australia something that is not true (see section 908BB). For example, the person asserts that they hold a benchmark administrator licence, or that a particular benchmark is or is not a significant financial benchmark.

6.9                   Breaches of the above offences, is punishable by a penalty of 500 penalty units ($105,000), 5 years’ imprisonment or both. This is a relatively severe penalty, which is proportionate in view of the extensive damage and serious harm that may be caused to Australia’s financial system and broader economy by the unsupervised operation of an important financial benchmark, or a person not complying with the prohibitions on holding out.

2. Benchmark administrator licensees offences

6.10               A benchmark administrator licensee has obligations to:

•        notify ASIC of certain matters, such as a breach of a licensee’s general obligations under section 908BP, and if a licensee becomes aware that they may no longer be able to comply with the general obligations, as well as specified changes in relation to certain personnel (see section 908BQ);

•        assist ASIC, APRA and the Reserve Bank of Australia when any of these regulators makes a reasonable request to inspect the licensee’s books or obtain other assistance relating to the performance of the regulator’s function (see section 908BR);

•        give ASIC access to the licensee’s facilities as they relate to the person’s capacity as a licensee (see section 908BS); and

•        comply with an ASIC direction requiring reports (see section 908BV).

6.11               These offences attract a penalty of up to 100 penalty units ($21,000). They are intended to provide ASIC with necessary information to efficiently perform its function of regulating the financial benchmarks framework. This is important to the regulatory framework being able to minimise potential significant risks to Australia’s financial system and the broader economy.

3. Benchmark administrator licensees civil penalties (related to an administrator’s obligation to comply with financial benchmark and compelled financial benchmark rules)

6.12               In addition to the above obligations to which offences apply, a benchmark administrator licensee is also obligated take certain actions, such as complying with the conditions on their licence and complying with financial benchmark rules and compelled financial benchmark rules. Failure to meet this obligation may be subject to civil penalties of up to 5,500 penalty units or $1.155 million.

6.13               The primary objective of the civil penalty is to act as a deterrent and the penalty is generally expected to apply to large financial entities. This amount is similar to that imposed by other important rules in the Corporations Act, such as the market integrity rules and the client money rules.

6.14               While the penalty is substantial, it is justified because of the potentially grave impact of misconduct in this area, given the widespread use of financial benchmarks in the financial system.

6.15               The regulations may allow for alternatives to civil penalty proceedings for a person who is alleged to have breached the financial benchmark or the compelled financial benchmark rules. The potential alternatives that may be provided for are limited to:

•        processes for paying a penalty to the Commonwealth (limited to one-fifth the penalty amount specified in the applicable rules);

•        undertaking or instituting remedial measures (including education programs); or

•        accepting sanctions other than the payment of a penalty to the Commonwealth.

6.16               The penalty payable under regulations made for this purpose in relation to the rules is capped at one-fifth of the maximum penalty payable under the rules (the maximum penalty being 5,550 penalty units, which is $1.1655 million).

4. Offences and civil penalties relating to the manipulation of financial benchmarks

6.17               Offences for manipulating financial benchmarks in two specified ways are created: doing or not doing an act or acts with an intention to influence the level at which a financial benchmark is generated or administered (see section 908DA); and making a false or misleading statement or disseminating false or misleading information that could affect a financial benchmark (see section 908DB).

•        Manipulation of financial benchmarks is currently prosecuted under the general market manipulation and related provisions in Division 2 of Part 7.10 of the Corporations Act.

•        For the offence under section 908DA, ‘intention’ has been specified as the fault element to apply. This imposes a higher bar for prosecution than if the standard fault element of ‘recklessness’ under the Criminal Code set out in the Schedule of the Criminal Code Act 1995 (the Criminal Code) applied. This is also a higher bar for prosecution that than under the general market manipulation and related provisions of the Corporations Act.

•        Intention has been specified as the fault element to avoid the potential for the offence to have a chilling effect on market activities.

6.18               Extended geographical scope Category B (as set out in section 15.2 of the Criminal Code) is applied to each of these offences. Applying an extended geographical scope for these offences is critical because of the potential for financial benchmarks to be manipulated across borders.

6.19               Penalties for the two offences are defined in section 908DC as follows:

•        For an individual, imprisonment of up to 10 years and/or a fine being the greater of 4,500 penalty units ($0.945 million) or three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence; and

•        For a body corporate, a fine being the greatest of 45,000 penalty units ($9.45 million), three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence, or 10 per cent of the body corporate’s annual turnover during the 12 month period ending at the time the offence was committed.

6.20               The above penalties for offences are based on the penalties applying to the existing market manipulation and related offences.

6.21               Category B of the extended geographical jurisdiction provisions in section 15.2 of the Criminal Code is applied to the civil penalty provisions attached to contraventions of the financial benchmark manipulation provisions. If a contravention is found, a Court may impose a penalty of up to $200,000 for an individual and $1 million for a body corporate. These are the same amounts as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions. These are intended to have punitive or deterrent effects.

6.22               The civil penalties also apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs (see subsection 908DD(3)). A defendant bears an evidential burden in relation to this defence. Whether there is a corresponding offence in the domestic law of the jurisdiction where the conduct occurs will generally be a matter that is peculiarly within the defendant’s knowledge.

6.23               These amounts are justified because of the seriously damaging impact of misconduct of the kind specified in the offence and the significant profits that may be achieved as a result. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The penalty specified for the offence is modelled on the existing market manipulation and other similar offences and penalties in Part 7.10 of the Corporations Act. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.

Human rights implications

6.24               This Schedule engages or may engage the following human rights to the extent that they are likely to impact individuals or groups of individuals:

•        the right to be presumed innocent until proved guilty according to law;

•        the right to a fair and public hearing;

•        the right not to be compelled to testify against oneself or to confess guilt;

•        the right to freedom of expression; and

•        the right to privacy.

6.25               The likelihood of the offences relating to benchmark administrator licences and benchmark administrator licensees engaging human rights is considered to be low, as administrators of benchmarks that are likely to be declared as significant financial benchmarks are large institutions or government entities.

Assessment of civil penalties

6.26               Practice Note 2: Offence provisions, civil penalties and human rights [7] , observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR), regardless of the distinction between criminal and civil penalties in domestic law. This is because the word ‘criminal’ has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a ‘criminal’ penalty for the purposes of the Articles 14 and 15 of the ICCPR.

6.27               The civil penalty provisions in the Bill should not be considered ‘criminal’ for the purposes of international human rights law. While the civil penalty provisions included in the Bill have relatively high maximum penalties (intended to deter people from not complying with the obligations imposed), none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty. The penalties are directed at people in a specific regulatory context.

6.28               The amounts are justified because of the seriously damaging impact of misconduct of the kinds specified and are proportionate to the significant profits that a person may derive from a contravention. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.

6.29               In relation to breaches of the financial benchmark or the compelled financial benchmark rules, the Bill provides for graduated alternatives for contraventions of the rules allowing for infringement notices to be issued and providing a regulation making power for alternatives to civil penalty proceedings. The penalties are generally expected to apply to large financial entities. It is noted that fines imposed in overseas jurisdictions for manipulation of benchmarks such as the LIBOR have been far larger. This amount is similar to that imposed by other important rules in the Corporations Act, such as the market integrity rules and the client money rules.

6.30               In addition, the maximum pecuniary penalty that may be imposed on an individual for contravening a civil penalty provision is generally lower than maximum pecuniary penalty that may be imposed for the corresponding criminal offence.

6.31               The statement of compatibility therefore proceeds on the basis that the civil penalty provisions in the Bill do not create criminal offences for the purposes of Articles 14 and 15 of the ICCPR.

Presumption of innocence

6.32               Paragraph 2 of Article 14 of the ICCPR protects the right of a person charged with a criminal offence to be presumed innocent until proven guilty according to law. The presumption of innocence is also a fundamental principle of the common law. As the Human Rights Committee has observed, the presumption of innocence ‘imposes on the prosecution the burden of proving the charge, guarantees that no guilt can be presumed until the charge has been proved beyond reasonable doubt, ensures that the accused has the benefit of doubt, and requires that persons accused of a criminal act must be treated in accordance with this principle’. [8] The presumption of innocence generally requires the prosecution to prove each element of a criminal offence beyond reasonable doubt.

Offence provisions which carry an evidential burden

6.33               An offence provision which requires a defendant to carry an evidential burden may be considered to engage the right to the presumption of innocence.

6.34               The civil penalties relating to the manipulation of financial benchmarks apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs (see subsection 908DD(3)). A defendant bears an evidential burden in relation to this defence.

6.35               Assuming that these penalties are criminal for human rights purposes, the imposition of an evidential burden is justified because whether there is a corresponding offence in the domestic law of the jurisdiction where the conduct occurs will generally be a matter that is peculiarly within the defendant’s knowledge. Moreover, the effect of the limitation is that the defendant must merely adduce or point to evidence there is no corresponding offence. Once this is done, the prosecution must refute this beyond the balance of probability. As a result, the risk that a person may be found to have contravened the civil penalty is considered to be low. Accordingly, to the extent the civil penalty may be considered ‘criminal’ under human rights law and limit the presumption of innocence, the limitation is reasonable in the circumstances.

Strict liability and absolute liability offences

6.36               Strict liability and absolute liability offences engage and limit the presumption of innocence because they allow for the imposition of criminal liability without the need to prove fault. The difference between strict and absolute liability is that strict liability allows a defence of honest and reasonable mistake to be raised, whereas an offence of absolute liability does not.

6.37               The Schedule does not create any strict liability offences. While also not creating any absolute liability offences, the Schedule does apply absolute liability to one physical element of the offence in relation to the requirement for benchmark administrators of significant financial benchmarks to be licensed within a certain period after the benchmark is declared by ASIC to be a significant financial benchmark.

6.38               Absolute liability applies to that aspect of the offence concerning whether the period has ended, which is a jurisdictional element of the offence. Hence, the state of mind of the person is not relevant. This is appropriate because an ASIC declaration is a legislative instrument that is made publicly available and the benchmark administrator will also have been notified of the declaration. The decision to apply for a licence or withdraw an application is a decision of the administrator, and an ASIC decision relating to a licence application will be notified to the administrator. Therefore, the administrator will be aware of when the period started and when this will end. It is noted that the administrators of benchmarks that are likely to be significant financial benchmarks, and thus subject to the requirement to be licensed offences, will generally be large institutions or financial entities.

6.39               The period element is uncomplicated, readily understood and based on information that is readily available to the person. While benchmark administrators of significant financial benchmarks are likely to be large financial entities, to the extent that this offence may impact individuals, the limitation is reasonable and proportionate.

Right to a fair and public hearing

6.40               Article 14 of the ICCPR ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

6.41               To the extent that it may impact individuals, new section 908CH of the Bill might be considered to engage the right to a fair and public hearing because it permits an infringement notice to be given by an infringement officer if the officer believes on reasonable grounds that the person contravened a civil penalty provision relating to breaches of the financial benchmark or the compelled financial benchmark rules. Persons covered by the rules will generally be larger entities, although obligations could impact individuals.

6.42               Because financial benchmark or the compelled financial benchmark rules may prescribe detailed operational matters, minor breaches may be expected to occur with some frequency. For this reason, the Regulatory Powers (Standard Provisions) Act 2014 (Regulatory Powers Act) sets out a maximum penalty of 60 penalty units ($12,600) that can be imposed in an infringement notice, which is the amount set out in A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers , issued by the Attorney-General’s Department (the Guide). Infringement notices are an efficient way of dealing with minor breaches, as they avoid the significant delays and costs associated with court action.

6.43               However, the right of a person to fair and public hearing by a competent, independent and impartial hearing is not limited by the Bill because the provisions in Part 5 of the Regulatory Powers Act allow a person to elect to have the matter heard by a court rather than pay the amount specified in the infringement notice. Moreover, the Regulatory Powers Act requires that this right must be stated in any infringement notice given to the person. For these reasons the Bill is not considered to limit the right to a fair and public hearing.

Right not to be compelled to testify against oneself or to confess guilt

6.44               Paragraph 3(g) of Article 14 of the ICCPR guarantees the right of an individual not to be compelled to testify against oneself or to confess guilt. The privilege against self-incrimination is recognised by the common law and applies unless it is expressly abrogated.

Requirement to provide information or documents

6.45               New section 908BV of the Bill provides an offence when a benchmark administrator licensee fails to comply with an ASIC direction requiring reports. The direction must specify a reasonable period for giving ASIC the report. As this offence is limited to benchmark administrator licensees and such licensees will generally be large institutions or financial entities, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the regulator with oversight of the regulation of financial benchmarks has the necessary powers to efficiently perform its function is important to the regulatory framework minimising significant risks to Australia’s financial system and the broader economy.

Right to freedom of expression

6.46               Paragraph 2 of Article 19 of the ICCPR requires States parties to guarantee the right of everyone to freedom of expression, including the ‘freedom to seek, receive and impart information and ideas of all kinds’. The right to freedom of expression includes the right not to impart information.

6.47               New section 908BV of the Bill may engage the right to freedom of expression because it allows ASIC to direct a benchmark administrator licensee to provide a report to ASIC within a specified reasonable period. As this direction is limited to benchmark administrator licensees and such licensees will generally be large institutions, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the relevant regulator has the necessary powers to efficiently perform its function is critical to minimising risks to Australia’s financial system and broader economy. There is a rational and proportionate connection between the purpose of the provision and any limitation of the right.

Right to privacy

6.48               New section 908BR, which requires benchmark administrator licensees to assist specified regulators when the regulator makes a reasonable request to inspect the licensee’s books or obtain other assistance relating to the performance of the regulator’s function and new section 908BS of the Bill, which requires a benchmark administrator licensee to give ASIC access to the licensee’s facilities as they relate to the person’s capacity as a licensee, may engage the right to privacy and reputation.

6.49               As the above are limited to benchmark administrator licensees and such licensees will generally be large institutions, this will not generally limit the human rights of individuals. However, to the extent it may, it is proportionate as ensuring that the relevant regulator has the necessary powers to efficiently perform its function is critical to minimising risks to Australia’s financial system and broader economy. There is a rational and proportionate connection between the purpose of the provision and any limitation of the right.

Conclusion

6.50               This Schedule is compatible with human rights because to the extent that it may engage and limit human rights, the limitations are reasonable, necessary and proportionate.

 

 



1. Executive Summary

7.1                   In March 2016, the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Commonwealth Treasury — together comprising the Council of Financial Regulators (CFR) - released a consultation paper seeking stakeholder views on options to reform the regulation of financial benchmarks in line with the International Organization of Securities Commission’s (IOSCO’s) Principles for Financial Benchmarks (IOSCO Principles).

7.2                   These reforms are necessary to ensure:

•        continued confidence in Australia’s financial markets’ architecture; and

•        that products referencing Australian financial benchmarks can continue to be traded in critical overseas markets (such as the European Union (EU)).

7.3                   Consultation closed in early May 2016 and the CFR received 19 written submissions. Between May and July 2016 the CFR held discussions with respondents.

7.4                   Stakeholders showed strong support for reforming the regulation of financial benchmarks in Australia, agreed that regulatory reform should be consistent with international best practice, and generally agreed with the positions put forward by the CFR.

7.5                   Stakeholders’ feedback has been critical in refining the CFR’s position on a number of issues, in particular the preferred option for regulating administrators and the preferred option and scope of regulation for submitters.

7.6                   In settling on the recommended reform proposals, the CFR has been guided by the following principles:

•        the reforms should help to ensure the robustness and reliability of financial benchmarks in the Australian economy and continued confidence in Australia’s financial markets;

•        the reforms should be aligned with international best practice wherever possible; and

•        the reforms should be capable of being applied in a proportionate manner that reflects the significance of a financial benchmark and the risks that may arise in relation to that financial benchmark.

7.7                   The CFR recommends to the Government that:

•        significant benchmarks (broadly, systemically important benchmarks and those that will have a significant impact on investors) be covered by the regulatory regime;

•        significant benchmarks be identified in a publicly accessible list that can be amended;

•        administrators of significant benchmarks be required to hold a new, standalone, ‘benchmark administration licence’ unless granted an exemption, and the licence be supported by ASIC powers to write rules imposing obligations;

•        an ‘opt-in’ mechanism be created that would allow administrators of non-significant financial benchmarks to apply to be licensed if they meet licensing obligations and there is commercial and regulatory value;

•        submitters to regulated benchmarks be required to comply with ASIC rules on regulatory matters related to benchmark submission, with benchmark administrators having primary responsibility for the operation of the benchmark;

•        ASIC be given the power to compel submission to a significant benchmark as a last resort when necessary to support market functioning;

•        the manipulation of any financial benchmark (significant or non-significant) be made a specific criminal and civil offence; and

•        bank accepted bills (BABs) and negotiable certificates of deposit (NCDs) be expressly made financial products for the purposes of the offence provisions of Chapter 7 of the Corporations Act 2001 (the Corporations Act).

7.8                   The CFR’s initial reform proposals, stakeholder feedback, and recommended approach are summarised in Table 1.

Table 7.1 Comparison of consultation and post-consultation proposal

Consultation Proposal

Stakeholder Views

Final Proposal

Scope of Reform

Significant benchmarks (broadly those that are systemically important) will be subject to regulation.

Stakeholders supported the CFR’s proposal.

Significant benchmarks (broadly, systemically important benchmarks and those that have a significant impact on investors) would be subject to the full suite of regulation.

Significant benchmarks would be either listed in legislation, determined using fixed criteria, or an initial list would be set out in legislation and ASIC would have the power to amend such list as necessary.

Stakeholders asked for certainty about which benchmarks have been identified as significant. Stakeholders asked for flexibility to add or remove benchmarks.

Legislation or regulations would be used to provide an initial public list of significant benchmarks and ASIC would be able to prescribe additional benchmarks as significant if they meet the criteria.

Regulating Benchmark Administrators

Benchmark administrators could be directly regulated through the Australian financial services licence (AFSL) regime or market integrity rules.

Stakeholders supported regulating significant benchmarks’ administrators, but pointed out pros and cons of options for regulation. Some suggested a new dedicated licence regime.

Administrators of significant benchmarks would be required to hold a new, standalone, ‘benchmark administration licence’ and be required to comply with ASIC rules.

Potential exemptions for some benchmark administrators.

Stakeholders supported exemptions for administrators, where appropriate.

ASIC would have exempting powers under the licence regime consistent with existing regulatory models.

 

A stakeholder proposed an opt-in mechanism for administrators of non-significant benchmarks.

Administrators of non-significant benchmarks would be able to ‘opt-in’, if they meet the requirements and doing so had value.

Regulating Submitters/Submissions

Regulatory options included indirect regulation via an administrator-controlled code of conduct; market integrity rules; or licence conditions.

Stakeholders supported the proposal to regulate submission. However, most stakeholders did not think indirect regulation by way of a code of conduct would be effective.

Submitters to regulated benchmarks be required to comply with ASIC rules on regulatory matters related to benchmark submission, with benchmark administrators having primary responsibility for the operation of the benchmark.

Introducing a Compulsion Power

Entities could be compelled to make submissions to a significant benchmark.

Stakeholders broadly supported CFR’s proposal.

ASIC would be given the power to write rules to compel submission to a significant benchmark as a last resort.

Strengthening Offences around benchmark manipulation

New offence provisions be introduced for manipulation of any benchmark.

Most stakeholders supported CFR’s proposal, though some proposed a narrower scope for the criminal offence.

Manipulation of all (significant and non-significant) benchmarks would be made a specific criminal and civil penalty offence.

BABs and NCDs could be expressly made financial products for the purposes of the Corporations Act.

Stakeholders supported CFR’s proposal in certain circumstances.

BABs and NCDs would be made financial products for the purposes of the Corporations Act Chapter 7 offence provisions.

 

2. Additional detail on the CFR’s proposed approach

7.9                   Additional detail on the options for reform initially put forward by the CFR, feedback on the options, and the reasoning behind the CFR’s final position are detailed below.

2.1 Scope of reform

CFR proposals

7.10               The CFR initially proposed that only significant benchmarks be subjected to additional regulation. This is in line with the proportionality that is central to the IOSCO Principles. The definition of benchmarks would take the IOSCO Principles as a starting point.

7.11               The CFR proposed that a benchmark would be ‘significant’ if there was a material risk of financial contagion or systemic instability if the availability or integrity of the benchmark was disrupted. Other factors put forward as potentially relevant to the significance of a benchmark included the materiality of the impact on retail or wholesale investors if the availability or integrity of the benchmark is disrupted.

7.12               The CFR’s consultation paper (March 2016) proposed that five benchmarks are likely to be significant benchmarks:

•        the bank bill swap rate (BBSW);

•        Standard & Poor’s (S&P)/ASX 200 index;

•        ASX Bond futures settlement price (formerly Commonwealth Government Securities yield curve survey);

•        the cash rate (including the Total Return Index derived from the cash rate); and

•        the Consumer Price Index.

7.13               The CFR also sought views on three options for identifying significant benchmarks.

•        A ‘list only’ option;

•        a ‘criteria only’ option; and

•        a hybrid of the list and criteria options (that is, a list in a legislative instrument that could be amended by both the Government and ASIC).

Feedback

7.14               Respondents generally agreed that it was appropriate and proportionate for a licensing regime to focus on significant benchmarks.

7.15               In relation to the criteria for identifying significant benchmarks, some respondents suggested additional criteria for determining significance or sought additional clarification on proposed criteria. Proposed criteria included:

•        Whether the benchmark is readily substitutable?

•        Whether there are conflicts of interest in the benchmark administration process?

•        Whether the input data is sourced from a regulated venue?

•        Whether it would be preferable to provide objective verifiable quantitative measures, if benchmark administrators would be expected to self-assess whether their benchmarks would be significant?

7.16               Most respondents expressed a preference for having a list of significant benchmarks published by the Government or regulators. This was seen to provide certainty about which benchmarks have been identified as significant.

7.17               With regards to the benchmarks identified as being potentially significant in the consultation paper:

•        most agreed that the BBSW and the ASX Treasury Bond Futures expiry settlement prices are appropriate benchmarks to be brought within the scope of regulation;

•        a number of respondents indicated that equity indices such as the S&P/ASX 200 should not be subject to regulation, while others highlighted the need for equity indices to be subject to equivalent regulation so that they can be ‘passported’ into other jurisdictions including the EU; and

•        a small number of additional financial benchmarks were suggested as potentially significant, including the WM/Reuters Australian dollar foreign exchange benchmarks.

CFR advice

7.18               In light of overall stakeholder support for the proposal to apply regulation to significant benchmarks, the CFR advises the Government to fix the scope of these reforms accordingly.

7.19               In this context, the CFR considers that significant benchmarks should be defined using the criteria that were proposed in the consultation. This is because the criteria, as proposed, provides an appropriate level of flexibility for the regulators to consider all factors that may be relevant to each benchmark under assessment (even if they are not numerically quantifiable factors). If the CFR’s advice was adopted this would mean that:

•        significant benchmarks would be defined as benchmarks that are systemically important and would present a material risk of financial contagion or systemic instability if the availability or integrity of the benchmark is disrupted; and

•        other factors that may be relevant to the significance of a benchmark include the materiality of the impact on retail or wholesale investors if the availability or integrity of the benchmark is disrupted.

7.20               Based on these criteria, the five benchmarks identified in the consultation paper are likely to be considered to be significant. The WM/Reuters Australian dollar foreign exchange benchmark could also be considered to be significant.

7.21               Reflecting stakeholder feedback on the need for certainty about which benchmarks are considered to be ‘significant’, the CFR proposes that the Government adopt a hybrid mechanism for identifying significant benchmarks. That is:

•        legislation or regulations would be used to provide an initial public list of significant benchmarks; and

•        ASIC would have the power to prescribe additional financial benchmarks, if they met the criteria for significant benchmarks and after due process for the prescription of a new benchmark was undertaken.

7.22               This would:

•        provide a high degree of certainty for industry;

•        remove any risk associated with making such assessments from benchmark administrators and market participants; and

•        would have some degree of flexibility to allow regulators to respond to market developments.

7.23               Flexibility would enable the regulators to add or remove a benchmark from the list of significant benchmarks as changes in the significance of a benchmark are identified. This would avoid potential delays in bringing the administrator of a new significant benchmark within licensing, or removing the requirement for an administrator to hold a licence when no longer significant.

7.24               For these reasons, it is proposed that an annual assessment of significance is not required. Instead, the CFR recommends that to add a benchmark to the list of significant benchmarks, ASIC, in consultation with RBA and APRA, would make an assessment if and when there is a potential benchmark identified. Under such a framework a similar process would be used to remove a significant benchmark from the list. While one stakeholder thought the regulatory regime could have wider application if the regime was capable of applying different levels of obligations depending on the importance of the benchmark, the CFR considers that the current scope of the proposed regime is appropriate when balanced with the proposal to introduce new offences that have wider application.

2.2 Regulating Benchmark Administrators

CFR proposals

7.25               The CFR proposed that the administrators of significant benchmarks should be directly regulated by ASIC and have to comply with obligations consistent with the IOSCO Principles (including audit, governance and conflicts management requirements).

7.26               The CFR sought views on two options for regulation:

•        making benchmark administration a type of financial service and thereby requiring benchmark administrators to hold an Australian financial services licence (AFSL); or

•        imposing obligations on administrators using an ASIC rulemaking power, modelled on ASIC market integrity rules or derivative trade repository rules.

Feedback

7.27               Respondents generally supported the proposal to regulate the administrators of significant benchmarks. While a small number of respondents proposed that it would be preferable to rely on alternative mechanisms, such as requiring product issuers, exchanges and central counterparties to only use benchmarks compliant with the IOSCO Principles, others emphasized the need to ensure that benchmarks such as the BBSW can be recognised as equivalent under key overseas regulatory regimes for financial benchmarks.

7.28               Respondents provided a range of views on the legal mechanism to be used for regulating administrators. While some supported the use of the AFSL regime (an existing mechanism that would not require further legislative reform), others considered that a stand-alone licensing regime would be preferable. It was noted that a separate mechanism would allow licensing obligations to be more targeted to addressing the risks arising from benchmark administration and be better aligned with the IOSCO Principles.

7.29               An additional suggestion was to create an opt-in mechanism that would allow administrators of non-significant benchmarks to apply for a licence and be subject to regulation, if the administrator considered there is value, and if the administrator meets the licensing requirements applicable for a ‘significant’ benchmark.

7.30               While not specifically canvassed in the consultation paper, some stakeholders provided additional information about how some benchmarks are determined, particularly where the methodology, sources of data, and governance arrangements are different from those of the major interest rate benchmarks. A small number of stakeholders also highlighted the relevance of IOSCO’s Principles for Oil Price Reporting Agencies (PRA Principles) in relation to commodities financial benchmarks.

CFR advice

7.31               The CFR has revised its recommended approach to regulating benchmark administration.

7.32               The CFR recommends that the administrators of significant benchmarks be subject to a new, stand-alone licensing regime, with ASIC to have the power to write rules imposing licence obligations and to provide exemptions from some or all licence obligations. This revised proposal incorporates elements of each of the options consulted on and the legal mechanism could be modelled on Australia’s derivative trade repository regime in Part 7.5A of the Corporations Act.

7.33               The CFR is of the view that a licensing regime with an ASIC rulemaking power has a number of advantages:

•        The obligations under the licence would be adapted to the activities and risks of benchmark administration, compared to the general obligations relating to the provision of financial services under the AFSL regime.

•        Rules can provide greater clarity on how licensees would be expected to comply with some of the IOSCO Principles.

•        Compared to hard-wiring obligations in legislation, rules can give ASIC more flexibility to accommodate a range of benchmark determination methodologies (such as whether data is sourced from market participants or commercial data vendors), governance structures, and other features as required. Importantly, ASIC can also respond in a timely manner to market developments.

•        Having a specific licence regime can also assist with equivalence assessments, which can allow Australian-licensed benchmarks to be used in overseas markets.

7.34               Under the proposed regime, the administrator of a significant benchmark would be required to be licensed, unless they received an exemption from ASIC (ASIC would have the ability to impose conditions on the exemption). This is consistent with existing regulatory models.

7.35               Alternatively, legislation or regulations could also be used to provide an exemption. If supported by Government, the CFR will further consider and advise the Government in relation to licensing exemptions.

7.36               Licensed administrators would be required to comply with ASIC rules. The CFR contemplates that the rules should:

•        impose obligations aligned with the IOSCO Principles and, if appropriate, the commodity specific IOSCO Principles for Oil Price Reporting Agencies;

•        impose obligations additional to the IOSCO Principles if necessary, for example, to address a specific risk or facilitate an equivalence decision; and

•        if necessary for a class of benchmarks, relieve or tailor certain obligations so that the regime applies in an appropriate and proportionate manner.

7.37               Similar to rulemaking powers in general, under the recommended approach ASIC would have the ability to exempt an entity or class of entities from the requirement to comply with particular provisions of the rules if there were grounds for doing so. Further, ASIC could impose conditions on such exemptions.

7.38               These features of the licensing regime and rulemaking power would give the Government and ASIC the flexibility to set rules for each benchmark administrator in a way that takes the specific characteristics of each benchmark into account. Equally importantly, these features of the licence regime could also facilitate regulatory harmonisation and avoid conflict or duplication between Australian and foreign regulatory regimes.

7.39               The licence regime, as proposed, would not distinguish between benchmark administrators solely based on their domicile. A financial benchmark primarily used, and having material impact, in Australia may be administered by an overseas-, or domestic-, domiciled entity. As such, the licensing regime should be capable of applying to the administrators of all benchmarks that have been identified as significant, regardless of where the administrators are domiciled.

7.40               To support the development and growth of other benchmarks, the CFR also recommends that administrators of non-significant benchmarks be able to opt-in to be licensed by applying for a benchmark administration licence if they believe that there is regulatory and/or commercial value in doing so and they meet the licensing requirements. Regulatory and commercial benefits may include the ability to ‘passport’ the administrator’s benchmarks into overseas markets and investors’ attraction to using a regulated benchmark.

7.41               If this recommendation is accepted by the Government, the CFR will consider further if there should be additional criteria for ASIC issuing a licence to an opt-in benchmark administrator. It is envisioned that if ASIC granted a licence to an opt-in administrator, the licensing obligations would apply in the same way as they would apply to licensees that are significant benchmark administrators. This would ensure that the integrity of licensed benchmark administration is maintained.

2.3 Regulating Benchmark Submitters

CFR proposals

7.42               Consistent with the IOSCO Principles, the CFR proposed imposing binding requirements on submitters to a significant benchmark.

7.43               The CFR sought views on four options for regulating submission to significant benchmarks:

•        indirect regulation via obligations imposed on benchmark administrators;

•        direct regulation by ASIC under the AFSL regime (for entities that are licensees);

•        direct regulation by ASIC using a rulemaking power modelled on ASIC’s market integrity rules or derivative transaction rules; and

•        self-regulation under an ASIC-approved ‘Code of Submitter Conduct’.

Feedback

7.44               Respondents generally supported the proposals to regulate submissions to significant benchmarks.

7.45               Respondents provided a range of views on the preferred mechanism to regulate submitters. Although there was support for each option, most respondents acknowledged that indirect regulation via a submitter code of conduct would not be an effective means of regulating submission without additional supporting regulation.

CFR advice

7.46               As a guiding principle, the CFR believes it is important to distinguish between the role of regulators and the role of benchmark administrators with respect to regulating benchmark submission. That is, benchmark administrators should retain primary responsibility for operating a benchmark, including by setting a submitter code of conduct and by putting in place the necessary commercial arrangements to enable a benchmark to be determined. Despite this, while benchmark administrators are best placed to develop and assess the input and control requirements for their benchmarks, the CFR believes that there is a need for direct regulation to address regulatory issues relating to submissions to a significant benchmark.

7.47               Consequently, the CFR recommends that the Government introduce an ASIC rulemaking power and for ASIC to write enforceable rules for matters that are of regulatory concern (such as record keeping, governance of the submission process and data quality) in relation to submission to a regulated benchmark.

7.48               It is important that any rulemaking power for benchmark submission provide a reasonable degree of flexibility. Flexibility would be necessary to ensure that rules relating to submission are capable of accommodating, and are responsive to, the risks arising from submission to benchmarks determined by different calculation methodologies and administered under different governance structures - both of which can evolve over time. Flexibility is also required to address any regulatory harmonisation and equivalence considerations arising out of other jurisdictions.

7.49               To achieve these objectives, the CFR recommends that any legislation to support a rulemaking regime should enable the rules to apply to a range of entities that may make a submission to a significant benchmark. The regime should also enable ASIC to relieve or tailor the application of certain rules according to the submitter entity or according to the subset or class of benchmark. ASIC should also be able to provide exemptions from the rules (including exemptions subject to conditions), where appropriate.

2.4 Compulsion Power

CFR proposals

7.50               The CFR proposed to create a legal power to compel submission (that is, a power requiring the submission of an expert opinion) to a significant benchmark.

7.51               The CFR sought views on four options to compel submission:

•        rely on a code of conduct or contractual obligations;

•        impose a licence condition on entities that hold an AFSL;

•        rely on an ASIC rulemaking power; or

•        have ASIC issue a declaration that identifies entities or a class of entities that are subject to compulsion for each significant benchmark, as required.

Feedback

7.52               A majority of respondents agreed with the proposal to introduce a compulsion mechanism and all respondents agreed that a compulsion power should be exercised by one of the regulators.

7.53               There were a range of views on the preferred legal mechanism to compel submission. For example, while some preferred rulemaking powers, others considered that submission should be a condition of a submitting entity’s AFSL.

7.54               While most respondents agreed that a compulsion power should be used as a last resort, others queried whether a compulsion power could be used to support other aspects of a transactions-based benchmark determination methodology.

7.55               Some suggested that the compulsion power should have some degree of proportionality that limits the scope of who can be compelled to submit, which could be determined by reference to scale, market position, or participation in the underlying instrument/s. However others supported capturing as wide a range of market participants as possible.

7.56               Stakeholders raised a number of additional questions including:

•        whether the power should extend to official sector benchmarks, even if those benchmarks are exempt from licensing? And

•        whether a submitter should have the opportunity to respond to or appeal the decision to compel submission?

CFR advice

7.57               In addition to rules that address regulatory requirements relating to submissions, the CFR recommends that the Government provide a rulemaking power that would also enable ASIC to write rules that could compel submission to a significant benchmark as a last resort. The CFR believes that the exercise of any such compulsion power falls appropriately within the role of the regulators rather than the role of the benchmark administrator.

7.58               While the CFR envisages that the rules would set out the details of a compulsion regime, the CFR recommend that a separate decision be required before any entity may be compelled to submit to a significant benchmark. This would mean that the compulsion regime would be ready to become enlivened at short notice only if and when it becomes necessary. This is consistent with stakeholder views that compulsion be used as a last resort.

7.59               If supported by Government, the CFR expects that rules to support compulsion would cover:

•        who may be subject to an exercise of compulsion power;

•        the procedure of being compelled, including whether there is a right of reply; and

•        the requirements that would apply to such entities if compulsion is applied.

7.60               The CFR also expects the specifics of the regime, including the cohort of entities that could be subject to compulsion, would be developed further in consultation with industry.

2.5 Strengthening offences relating to benchmark manipulation

CFR proposals

7.61               The CFR proposed that a new specific criminal and civil offence of benchmark manipulation applicable to all financial benchmarks (significant and non-significant) be introduced.

7.62               The CFR proposed criminalising two types of conduct (modelled on existing market misconduct provisions in the Corporations Act). That is:

•        making false or misleading statements (including by providing false or misleading data) in connection with the determination of a benchmark; and

•        engaging in dishonest conduct in relation to, or conduct that has or is likely to have the effect of creating or causing the creation of a false or misleading appearance with respect to trading (or the price for trading) in financial products that affects, the determination of the benchmark.

7.63               The CFR also sought views on the jurisdictional reach of the offence provisions and whether this should be different for benchmarks that are administered in Australia or outside of Australia.

7.64               Separately, the CFR proposed expressly extending the scope of ‘financial products’ for the purposes of Part 7.10 of the Corporations Act to cover certain financial products such as BABs and NCDs.

Feedback

7.65               The majority of respondents supported making benchmark manipulation a specific criminal and civil offence, with some variation of views in respect of the application of the criminal offence to non-significant benchmarks. A couple of respondents questioned the need to create a new offence, rather than expanding the scope of the existing market misconduct regime in Part 7.10 of the Corporations Act.

7.66               To support market integrity more broadly, a majority of respondents agreed that a new benchmark manipulation offence should extend to all financial benchmarks, not just significant benchmarks. One respondent suggested that the scope of the offence be subject to de minimis criteria based on the benchmark’s significance and risk of manipulation. Some stakeholders thought that the offence should only apply to designated significant benchmarks. Similarly, one respondent suggested that a criminal penalty would be appropriate for manipulation of a significant benchmark while a lighter regulatory or civil liability approach would be appropriate for manipulation of a non-significant benchmark.

7.67               Further, some respondents raised specific questions. For example:

•        whether the definition of ‘financial benchmark’ creates uncertainty about which products are or are not benchmarks, and therefore uncertainty about the scope of the offence provision;

•        whether inadvertent errors or unintentional conduct may be prohibited under the offence provision, potentially creating a ‘chilling’ effect. These respondents proposed the offence provision provide a ‘good faith’ defence or not apply to honest mistakes, which would be consistent with comparable offence provisions in the EU and the United States (US); and

•        whether it would be a disproportionate response to seek a criminal sanction for minor breaches or conduct that may have narrow impact (for example, conduct that affects a benchmark that is purely internal to an organisation).

7.68               A few respondents commented on the jurisdictional scope of the offence, in particular whether:

•        submissions should be regulated in the jurisdiction in which the benchmark is administered? And

•        Australian regulators should only take action against an entity in relation to an overseas-administered benchmark if the entity is not facing or has not already faced enforcement action in the overseas jurisdiction?

7.69               A number of stakeholders emphasised that the offence should not apply to unintentional conduct or errors, as doing so could deter market participants from making voluntary submissions. One suggested that the offence of making a false or misleading statement should only apply to materially false or misleading statements.

7.70               The majority of respondents did not address the proposal to expressly provide that BABs and NCDs are financial products. Those that did address this question were supportive of the proposal. Two respondents only supported applying Part 7.10 of the Corporations Act to BABs and NCDs, while another was of the view that NCDs are already within the definition of financial products and therefore that no reform was needed for that product.

CFR advice

7.71               The CFR considers that introducing a specific offence for financial benchmark manipulation would, together with licensing of administrators and regulation of submissions, provide the most effective and mutually reinforcing reform package.

Response to questions raised

7.72               The CFR has considered each of the questions raised by stakeholders. In response:

•        The CFR notes the definition of financial benchmark is currently proposed to be aligned with the definition used in the IOSCO Principles and with definitions used in key overseas regimes. Nonetheless, to add further clarity, the legislation or regulations could specify certain products that are to be taken to satisfy the definition of benchmark and/or certain products that are to be taken to be excluded from the meaning of benchmark. A similar mechanism exists in relation to the definition of key terms under the Corporations Act as ‘financial product’ or ‘derivative’.

•        In accordance with the general principles of criminal liability set out in Chapter 2 of the Commonwealth Criminal Code, the offence proposed by the CFR would only be contravened if a person knew or was reckless to the circumstance or result of their conduct. Accordingly, an offence would only be committed if a person knew or was reckless to the fact that the statement they made was false or misleading, that their conduct was dishonest, or that their conduct has or was likely to have the effect of creating or causing the false or misleading appearance. This general principle would have broadly the same effect as the ‘good faith’ or the ‘honest mistake’ defences highlighted by respondents.

•        The CFR notes that existing market manipulation offences do not distinguish between financial markets or between financial products, and that action taken in respect of identified misconduct is guided by ASIC’s long standing practice to pursue enforcement outcomes proportionate to the seriousness of the misconduct and its market impact, having regard to all of the relevant circumstances.

7.73               In relation to the suggestion that the proposed criminal and civil offences have different scopes, the CFR believes that the offence’s intended market integrity benefits would be curtailed if the criminal offence were to be of a narrower scope than the civil liability offence, irrespective of the severity of the misconduct. Narrowing the scope of the offence may therefore not help to promote confidence that all financial benchmarks used in the Australian financial system accurately reflect the underlying interest that they are intended to measure.

Jurisdictional reach

7.74               In regards to the jurisdictional reach of the proposed offence, the CFR no longer proposes to treat benchmark administrators, or the benchmarks administered by benchmark administrators, differently on the basis of whether the benchmark is administered in Australia or in another jurisdiction.

7.75               The global nature of financial markets could result in significant Australian benchmarks being administered from overseas. Similarly, on the submission side, some participants have established independent teams of submission personnel located separately from trading desks and, in some cases, located in its overseas headquarters from where they make all benchmark submissions.

7.76               Therefore, instead of focusing on the location of benchmark administration, the CFR recommends that any criminal offence and civil liability provisions focus on conduct relating to the determination of benchmarks that has the relevant impact in Australia, even if that conduct occurs outside of Australia. Accordingly, the CFR recommends that the offence apply to:

•        Conduct, whether occurring in Australia or elsewhere, in relation to:

-                  financial benchmarks that have been identified as significant benchmarks in Australia; and

-                  financial benchmarks that are used in Australia. A benchmark is used in Australia if it is used or referenced:

-                  in a financial product that is able to be traded on a financial market operated in Australia; or

-                  on a financial market operated in Australia; or

-                  in a financial product issued in Australia.

•        Conduct occurring in Australia in relation to:

-                  any financial benchmark. This would contribute to positioning Australia as a jurisdiction of sound integrity with regard to benchmark-related activities and would also enable ASIC to assist overseas regulators in accordance with established practices of supervisory and regulatory cooperation.

Recommended offences

7.77               The CFR proposes that the new criminal offence and civil liability provisions prohibit the following types of behaviour. These are broadly the same as the proposals consulted on:

•        making false or misleading statements (including by providing false or misleading data) in connection with the determination of a benchmark;

•        engaging in dishonest conduct in relation to the determination of a benchmark (whether alone or in combination with other conduct of the same kind, whether by the same or different persons); and

•        engaging in conduct that has or is likely to have the effect of creating or causing the creation of a false or misleading appearance with respect to trading or the price for trading in financial products that may affect the determination of a benchmark (whether alone or in combination with other conduct of the same kind, whether by the same or different persons).

7.78               Lastly, in line with stakeholder feedback, the CFR recommends that the Government, in order to provide regulatory clarity, define BABs and NCDs as financial products for the purposes of the offence provisions of Chapter 7 of the Corporations Act.

3. Timing and Next Steps

7.79               To ensure that Australian market participants’ ability to continue to use key benchmarks, including in transactions with overseas entities, is not disrupted, reforms equivalent to those implemented overseas must be in place by 1 January 2018.

7.80               To achieve this, legislation would ideally be considered by the Parliament in the 2017 Winter sittings. This should allow enough time for consideration of the bills by a Senate Committee, if required, and still allow passage by end-2017.

7.81               In the short term, however, once the Government has decided on its approach to reforming the regulation of financial benchmarks it will be important for the Government to make this position clear to the financial market. This regulatory certainty will support:

•        continued trade in the market underpinning the BBSW, which has been consistently weak over the past year; and

•        AFMA’s process to transfer its responsibility for the administration of the BBSW to a new administrator by providing some further clarity on the proposed regulatory landscape.

7.82               CFR agencies will work closely with the Government over the next 18 months to support the implementation of these reforms, as required.



Outline of chapter

8.1                   The amendments in the ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 (ASIC Levy Bill) add benchmark administrator licensees to the list of entities from which the Australian Securities and Investments Commission (ASIC) may recover its regulatory costs.

Context of amendments

8.2                   The ASIC Supervisory Cost Recovery Levy Act 2017 (the Cost Recovery Act) imposes a levy on persons regulated by ASIC to recover its regulatory costs.

8.3                   Under the Cost Recovery Act, similar types of entity regulated by ASIC are grouped together in different sub-sectors and different levy amounts may be payable for entities within each of these sub-sectors. The Cost Recovery Act also makes persons that are required to hold various licences, but do not hold those licences, a regulated entity. This is achieved by imposing a levy on persons that contravene certain licensing provisions.

8.4                   The amounts payable each year will be set through a legislative instrument with the ASIC Supervisory Cost Recovery Levy Regulations 2017 setting out the methods and/or formulas that will be used to apportion ASIC’s regulatory costs. The annual legislative instrument, which will be drafted and made by ASIC, will set out certain information that will be input into the methods or formulas, for example, the number of entities that are part of an industry sub-sector for each financial year.

8.5                   The Government will recover ASIC’s regulatory costs from its regulated population from 2017-18, which commenced on 1 July 2017. Due to the ex-post nature of the industry funding model, these amounts will not be collected until the first quarter of 2019.

8.6                   Under Schedule 1 to Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 (this Bill), administrators of designated significant financial benchmarks will be required to obtain a ‘benchmark administrator licence’ from ASIC. Administrators of other financial benchmarks may opt-in to the new licensing regime on a voluntary basis. As benchmark administrator licensees will be regulated by ASIC, it is appropriate that a levy should be imposed on them as part of the recovery of ASIC’s regulatory costs.

Summary of new law

8.7                   Benchmark administrator licensees, as well as entities that are required to hold a benchmark administrator licence because they operate a significant financial benchmark but fail to obtain such a licence, are included in the definition of a ‘market infrastructure entity’ in the Cost Recovery Act.

Comparison of key features of new law and current law

New law

Current law

Benchmark administrator licensees will be included in the Cost Recovery Act and will be liable to pay a levy as part of ASIC’s cost recovery arrangements.

No current law.

Detailed explanation of new law

Schedule 1 - Financial benchmarks

ASIC Supervisory Cost Recovery Levy Act 2017

8.8                   Benchmark administrator licensees are included in the definition of a ‘market infrastructure entity’ in section 7 of the Cost Recovery Act. Other entities in this category include market licensees, participants in a licensed market, clearing and settlement facility licensees, and derivative trade repository licensees. [Schedule 1, item 1, section 7 paragraph (ga) after paragraph (g) of the definition of ‘market infrastructure entity’]

8.9                   A person who is required to obtain a benchmark administrator licence because they administer a significant financial benchmark, but fails to do so, making them in breach of the licensing requirement in subsection 908BA(1) of Schedule 1 to this Bill, is also included in the definition of a ‘market infrastructure entity’. [Schedule 1, item 2, section 7 paragraph (ja) after paragraph (j) of the definition of ‘market infrastructure entity’]

Consequential amendments

8.10               Schedule 1 to the ASIC Levy Bill will commence at the same time as Part 1 of Schedule 1 to this Bill, unless that Part does not commence, in which case Schedule 1 to the ASIC Levy Bill will also not commence. Part 1 of Schedule 1 to this Bill, which contains the main amendments made in that Schedule 1 of that Bill, will commence on the day after the Treasury Laws Amendment (2017 Measures No. 5) Act 2017 receives the Royal Assent.

Application and transitional provisions

8.11               There are no application or transitional provisions for the ASIC Levy Bill.

Statement of compatibility with Human Rights

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

ASIC Supervisory Cost Recovery Levy Amendment Bill 2017

8.12               The ASIC Levy 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

8.13               The ASIC Levy Bill adds benchmark administrator licensees to the list of entities from which the ASIC may recover its regulatory costs

Human rights implications

8.14               The ASIC Levy Bill does not engage any of the applicable rights or freedoms.

Conclusion

8.15               The ASIC Levy Bill is compatible with human rights as it does not raise any human rights issues.

 



Chapter 9          

Indigenous policy and program evaluation

Outline of chapter

9.1                   Schedule 2 to this Bill amends the Productivity Commission Act 1998 (Productivity Commission Act) to provide for the appointment of an additional Commissioner to oversee the work of the Productivity Commission (the Commission) in relation to the evaluation of policies and programs that have an impact on Indigenous persons.

9.2                   All references to provisions are to the Productivity Commission Act unless otherwise stated.

Context of amendments

9.3                   In his Closing the Gap Report Statement to Parliament on 14 February 2017, the Prime Minister announced a new role for the Commission in Indigenous policy evaluation and the expansion of the Commission to include a new Commissioner to oversee this work.

9.4                   A number of high profile reports have highlighted the need for more evaluation of policies and programs that have an impact on Indigenous persons, including the Commission’s Overcoming Indigenous Disadvantage Report 2016 . This report included case studies of programs that are making a difference as ‘things that work’, but the report found that only a relatively small number have been rigorously evaluated. There is a pressing need for further evaluation to better understand which policies and programs are effective in improving outcomes for Indigenous persons.

9.5                   These amendments mandate the appointment of an additional Commissioner to the Commission with appropriate skills and experience in dealing with Indigenous policies and programs, Indigenous persons and their communities.

9.6                   The intention of the amendments is that, under the direction of the Minister, the new Commissioner will oversee the work of the Commission in developing a whole-of-government evaluation strategy for policies and programs impacting on Indigenous persons to be reported against by all Commonwealth agencies. The new Commissioner will also oversee the work of the Commission on other Indigenous policy matters, which may include evaluation or research of particular Indigenous policies and programs.

Summary of new law

9.7                   The new law provides for the appointment of a Commissioner with extensive skills and experience in dealing with policies and programs that have an impact on Indigenous persons, and experience in dealing with one or more communities of Indigenous persons. 

9.8                   The new law also increases the maximum number of Commissioners, not including the Commission Chair, from 11 to 12.

Detailed explanation of new law

9.9                   The amendments increase the maximum number of Commissioners constituting the Commission from 11 to 12 (not including the Commission Chair). [Schedule 2, item 2, paragraph 23(1)(b) of the Productivity Commission Act]

9.10               The amendments require that at least one Commissioner must have extensive skills and experience in dealing with policies and programs that have an impact on Indigenous persons, as well as experience in dealing with one or more communities of Indigenous persons. [Schedule 2, item 4, subsection 24(6) of the Productivity Commission Act]

9.11               The phrase ‘dealing with policies and programs’ covers a broad range of interactions with government, non-government and the private sector on policies and programs, including:

•        designing,  administering and delivering policies,  programs and services affecting Indigenous persons;

•        reviewing and evaluating policies and programs affecting Indigenous persons; and

•        representing the interests of Indigenous persons in relation to policies and programs affecting Indigenous persons.

 [Schedule 2, item 4, paragraph 24(6)(a)) of the Productivity Commission Act]

 

9.12               The phrase ‘that have an impact on Indigenous persons’ covers both:

•        policies and programs that specifically target Indigenous persons (that is, measures which can be characterised as ‘special measures’ for the purposes of the Racial Discrimination Act 1975 ); and

•        policies and programs that do not specifically target Indigenous persons, but which nonetheless affect the rights and interests of Indigenous persons.

[Schedule 2, item 4, paragraph 24(6)(a) of the Productivity Commission Act]

9.13               The phrase ‘dealing with one or more communities of Indigenous persons’ covers a broad range of interactions with Indigenous communities, including:

•        consulting and engaging with Indigenous persons in relation to policies and programs; and

•        representing the interests of Indigenous persons in relation to policies and programs affecting Indigenous persons.

[Schedule 2, item 4, paragraph 24(6)(b) of the Productivity Commission Act]

9.14               The amendments also:

•        insert a definition of Indigenous person in section 3, which aligns with the standard Commonwealth drafting practice definition;

•        make a consequential amendment resulting from the addition of the new Commissioner to ensure that the performance of the Commission’s functions are not affected by the lack of such a Commissioner for four months or less; and

•        remove duplication by repealing subsections 26(3), (4) and (5), which unnecessarily replicates the specialist skills and experience required of Commissioners under section 24.

[Schedule 2, items 1, 3 and 5, section 3, paragraph 23(2)(c) and subsections 26(3), (4) and (5)]

Statement of Compatibility with Human Rights

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

Indigenous policy and program evaluation

9.15               This Schedule 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

9.16               Schedule 2 to this Bill amends the Productivity Commission Act 1998 (Productivity Commission Act) to provide for the appointment of an additional Commissioner to oversee the work of the Productivity Commission (the Commission) in relation to the evaluation of policies and programs that have an impact on Indigenous persons.

Human rights implications

9.17               This Schedule does not engage any of the applicable rights or freedoms. This Schedule does no more than mandate the appointment of an additional Commissioner with particular skills and experience to the Commission. The work the Commissioner will be involved in will depend on the direction of the Minister to the Commission under subsection 6(1) of the Productivity Commission Act. 

9.18               The functions of the Commission under subsection 6(1) of the Productivity Commission Act relate to holding inquiries, undertaking research and providing advice to the Minister. While the work of the Commission may inform the development of policy and programs, including policies and programs that have an impact on Indigenous persons, an implementation decision of government is needed before any of the applicable rights or freedoms could be engaged.

Conclusion

9.19               This Schedule is compatible with human rights as it does not raise any human rights issues.



 




[1]     All references to legislative provisions in this explanatory memorandum are to the Corporations Act, unless otherwise specified.

[2]     The members of the CFR are The Treasury, the Reserve Bank of Australia, ASIC and the Australian Prudential Regulation Authority (APRA).

[3]     All monetary amount equivalents shown with penalty units in this explanatory memorandum are calculated based on the penalty unit value of $210 at 1 July 2017.

[4]     The Australian Crime Commission (ACC) is now known as the Australian Criminal Intelligence Commission (ACIC), as specified in regulations made under the Australian Crime Commission Act 2002 .

[5]     Available in August 2017 at the following link: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf .

[6]     The members of the CFR are The Treasury, the Reserve Bank of Australia, ASIC and the Australian Prudential Regulation Authority (APRA). See Chapter 7 for CFR’s final advice to the Government.

[7]     Parliamentary Joint Committee on Human Rights, Practice Note 2: Offence provisions, civil penalties and human rights , December 2014, http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Human_Rights/Guidance_Notes_and_Resources (last accessed on 15 August 2017).

[8]     Human Rights Committee, General Comment No 43 Article 14: Right to equality before courts and tribunals and to a fair trial , CCPR/C/GC/32, 23 August 2007, [30].