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Thursday, 9 August 2001
Page: 25961

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Senator IAN CAMPBELL (Parliamentary Secretary to the Minister for Communications, Information Technology and the Arts) (11:05 AM) —I table revised explanatory memoranda relating to the Financial Services Reform Bill 2001 and the Financial Services Reform (Consequential Provisions) Bill 2001 and» «move» :

That these bills «be» «now» «read» «a» «second» «time .

Senator IAN CAMPBELL —I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows

Today the Government introduces a package of bills to modernise the regulation of the Australian financial services industry.

This package will directly benefit the 330,000 people employed in the industry and will directly benefit the 17 million consumers of financial products.

Importantly, it provides the financial services industry with an unprecedented opportunity to become a major exporter of services to three billion people in Asia and other jurisdictions around the world.

The government had been aiming for commencement of the new regime on 1 July 2001. However, the delay in the introduction of the bills while we negotiated a secure constitutional basis for corporate regulation with the states meant that this was not possible.

The Government will now be taking all the steps it can to expedite the passage of the bills so that the new regime can commence on 1 October 2001.


The main component of this package is the Financial Services Reform Bill 2001 which will introduce a harmonised regulatory regime for market integrity and consumer protection across the financial services industry.

The reforms proposed in the Financial Services Reform Bill 2001 will facilitate the development of a financial services industry that is both globally competitive and consumer focused.

They are at the cutting edge of global regulatory practice.

The bill constitutes the third tranche of the government's legislative response to the financial system inquiry, FSI, report.

The FSI report—also known as the Wallis report—concluded that the complex and fragmented regulatory framework was creating inefficiencies for financial service providers and confusion for consumers.

It recommended the introduction of a single licensing regime for all financial sales, advice and dealing and the creation of a consistent and comparable product disclosure framework.

It argued that these changes would generate substantial benefits for both the industry and consumers.

This bill is the vehicle that will enable financial service providers to reap the efficiencies and cost savings identified by the FSI.

It will do so by introducing a harmonised licensing, disclosure and conduct framework for all financial service providers.

It will establish a consistent and comparable financial product disclosure regime.

It will create a streamlined regulatory regime for financial markets and clearing and settlement facilities.

The bill recognises that it is no longer possible for different financial institutions, services and products to be regulated under separate regulatory frameworks.

It will ensure that Australia's regulatory framework keeps pace with current developments in the financial services industry.

The bill will remove regulatory barriers to the introduction of technological innovations and assist Australia's financial services industry to meet the technological challenge posed by the spread of e-commerce.

It will ensure that Australian financial service providers that seek to compete in the global marketplace are not disadvantaged under Australia's domestic regulatory framework.

The streamlined regulatory regime proposed in the bill will reduce the compliance costs associated with carrying on a financial services business.

The bill will bring particular benefits to financial institutions that seek to provide their clients with a full range of financial services and products. However, it has been carefully crafted to ensure that specialist providers and small businesses will not be disadvantaged.

Consumers will benefit from the introduction of a consistent framework of consumer protection.

The bill will enhance the capacity of consumers to understand and compare different financial products and evaluate financial advice. It will also ensure that consumers can access appropriate complaint handling mechanisms for resolving disputes with financial service providers.

Whilst most industry participants have welcomed this bill, and many are keen for the new arrangements to commence at the earliest opportunity, a minority has resisted any change to the current regulatory arrangements. The government has listened very closely to the arguments of these industry participants, and has sought to address as many of their concerns as possible.

However, for the benefit of industry and consumers as a whole, it is necessary for these participants to move outside their `comfort zone' and become part of a highly dynamic and rapidly changing financial services industry.

The bill's overall objective is to harmonise, rather than increase the intensity of, the current regulatory framework.

Many financial service providers are already subject to regulatory frameworks governing licensing, disclosure and other conduct obligations. However, these frameworks vary across different industry sectors. This fragmentation increases compliance costs and reduces industry efficiency.

The bill seeks to harmonise these diverse requirements within a single overarching framework that will apply to all financial service providers.

The bill will replace a substantial amount of existing legislation, hence its size.

It is important to emphasise that harmonisation does not equal uniformity.

The new framework will protect individual and small business consumers without imposing higher costs on wholesale transactions between sophisticated professional investors that operate in a competitive global market.

The framework will also be capable of flexible implementation so that it can apply differently to different products where this difference can be justified within the overall objectives of the regulatory framework.

Basic deposit products will be subject to less intensive regulation than more complex investment products.

This will ensure that the bill will not jeopardise the cost-effective provision of basic banking services, especially in rural and regional areas.

The bill will also provide financial service providers with the flexibility to adopt corporate structures and distribution channels that best meet their commercial objectives.

Furthermore, it is anticipated that industry codes will play an important role in fleshing out standards for meeting the requirements of the new regime.

The bill is the product of an extensive process of consultation that has been widely applauded by both business and consumer representatives.

Discussion papers setting out the major reforms proposed in the bill were released for public comment in December 1997 and March 1999.

An exposure draft of the bill was released for public comment in February 2000. Over 120 submissions were received in response to the exposure draft.

This exposure draft was also considered by the Parliamentary Joint Committee on Corporations and Securities.

The Government would also like to thank the members of the government's Business Regulation Advisory Group for their participation in the consultation process.

The bill has been refined in response to issues identified by stakeholders, as well as the first report of the Parliamentary Joint Committee on Corporations and Securities, and the Business Regulation Advisory Group.

In addition, the relevant state and Northern Territory ministers have been consulted about these reforms in accordance with the Corporations Agreement and the Government has obtained the approval of the Ministerial Council for Corporations for those amendments included in this bill for which the council's approval is required under that Agreement.

The Government has asked the Parliamentary Joint Committee to consider the final form of the bill that was introduced in the House of Representatives, focusing particularly on the changes that have been made and other elements of the bill that have not previously been considered.

Coverage of the regime

The bill will cover a wide range of financial products: shares and debentures, derivatives, managed investment products, general and life insurance products—other than health insurance—superannuation products and retirement savings accounts, deposit products, non-cash payment facilities and some foreign exchange transactions—where contracts are not settled immediately.

Credit will be expressly excluded from regulation under the bill. Consumer credit will continue to be regulated under the Uniform Consumer Credit Code (UCCC).

Financial service provider licensing

A person who carries on a financial services business will be required to hold an Australian financial services licence.

A licence can be sought to provide all financial services in relation to all financial products or a more limited class of services and products. The licence criteria will be applied having regard to the scope of the licence being sought.

Licensees will be able to authorise natural persons or corporate representatives to act on their behalf. However, licensees will be responsible for the conduct of their representatives.

The new licensing provisions have been carefully crafted to accommodate existing representative structures. They will provide industry participants with the flexibility to structure their distribution arrangements in a manner that best meets their commercial objectives.

The bill contains a mechanism for professional bodies, whose members in the course of carrying on their profession give financial product advice, to come within the licensing regime through a mechanism referred to as the declared professional body.

Financial service provider disclosure and conduct

The financial service provider disclosure obligations contained in the bill will ensure that retail clients receive sufficient information to make informed decisions about whether to take up a financial service and whether to act on the advice they receive.

In particular, advisers will be required to disclose information on any conflicts of interest, including commissions, that might reasonably be expected to influence the advice provided. Additional requirements will apply where advice recommends the replacement of one financial product with another.

These provisions, particularly as they apply to risk insurance products, have been the subject of much debate in the consultation process. Modifications have been made to the original proposals.

There are still some in the industry who oppose the approach adopted in the bill. However, the Government remains convinced that we have got it right. To go further would compromise one of the key objectives of the bill, of moving away from inefficient product based regulation to a harmonised regulatory framework across the financial services industry.

Financial product disclosure

The bill will establish a regime for disclosure throughout the life of a financial product: from point of sale disclosure to confirmation of transactions, ongoing disclosure and periodic reporting.

In relation to point of sale disclosure a dual approach is taken. Shares and debentures will remain subject to the fundraising provisions that are contained in Chapter 6D of the Corporations Act 2001. These provisions were recently reformed by the Corporate Law Economic Reform Program Act 1999, and it would have been inappropriate to subject them to further change.

All other financial products, including managed investment products, will be subject to a new point of sale disclosure framework based on a product disclosure statement.

The product disclosure statement will be required to provide retail clients with key information relevant to a particular product as well as any other information that is known to the issuer that might reasonably be expected to influence a retail client's decision to acquire the product.

The bill's approach to financial product disclosure is intended to ensure that retail clients receive sufficient information to make informed choices in relation to the acquisition of financial products and that this information is provided in a concise and readily understandable format that facilitates comparisons between financial products.

The bill will also require product issuers that are not licensees to provide retail clients with access to internal and external dispute resolution procedures.

Markets and clearing and settlement facilities

The bill introduces a simplified approach to the regulation of financial markets and clearing and settlement facilities.

The seven routes to authorisation for securities and futures exchanges under the current Corporations Act will be replaced with a single licensing regime based on the Australian market licence. Similarly, the two current routes to authorisation for clearing and settlement facilities will be replaced with a single Australian clearing and settlement facility licence.

The new regulatory structure contained in the bill will clarify the roles and responsibilities of market and facility operators, the minister and the Australian Securities and Investments Commission.

Under the new licensing arrangements, licensees will have primary responsibility for the operation of markets and facilities.

The minister will have overall responsibility for licensing financial markets and clearing and settlement facilities.

ASIC will be empowered to advise the minister in relation to the minister's licensing responsibilities under the new framework, and the minister will be required to have regard to ASIC's advice. ASIC will also be required to undertake annual assessments of the adequacy of market and facility licensees' supervision arrangements and will assess their compliance with the relevant obligations under the new regime.

The bill will provide market operators with greater flexibility in developing market supervision and compensation arrangements to meet their obligations under the new regulatory regime.

The compensation arrangements in the bill are largely based on existing provisions in the Corporations Act. However, during the consultation process fundamental issues arose about the approach to compensation arrangements. Given the significance of the issue, the Government has asked the Companies and Securities Advisory Committee to consider the matter with a view to implementing further changes, if necessary, in the future.

Given structural changes in clearing and settlement both in Australia and globally, the Government has decided that it is appropriate for the Reserve Bank of Australia to have an explicit role in relation to systemic risk matters. As a result, amendments have been made to the bill to provide the RBA with a role to set financial stability standards, and monitor compliance with them. The RBA will also monitor the specific obligations of license holders of clearing and settlement facilities to ensure that they do all things practicable to reduce systemic risk. The RBA will be responsible for requesting ASIC to take any necessary actions in relation to systemic risk obligations.

The bill will apply a `fit and proper person' test to a range of persons involved in licensed financial markets and clearing and settlement facilities.

The current five per cent shareholding limitation applying to the Australian Stock Exchange Ltd will be removed. In its place the bill applies a voting power limitation of 15 per cent to financial markets and clearing and settlement facilities that are prescribed as being of national significance. However it will be possible for the minister to approve a larger voting power in relation to a market or facility where this in the national interest. The explanatory memorandum to the bill contains guidelines for assessing whether a market or clearing and settlement facility is of national significance.

Market and other misconduct provisions

The provisions relating to market and other misconduct in the current Corporations Act will be streamlined and extended, as appropriate, to apply to all financial products and markets.

A number of market misconduct provisions will become civil penalty provisions. This means that contraventions will be subject to both civil penalties and criminal consequences.

Telephone monitoring during takeover bids

The bill will amend the regulatory framework covering takeovers to provide greater protection for target shareholders. It will require bidders and targets to record all telephone conversations with target shareholders during the bid period. Privacy safeguards to protect the information will also be required.

This measure will enhance ASIC's capacity to investigate and take enforcement action in these situations.

Amendments to other Commonwealth legislation

The bill also makes amendments to a number of other Commonwealth acts. These involve repealing a range of existing provisions that will be replaced by provisions of the Financial Services Reform bill.

There are also amendments to other Commonwealth acts that contain references or concepts that will change under the Financial Services Reform bill. The objective of these consequential amendments is to maintain the current effect of the existing provisions.



The proposed transitional provisions relating to the commencement of the new regulatory framework are contained in the Financial Services Reform (Consequential Provisions) Bill 2001. The bill will also make a range of amendments to other Commonwealth legislation that are necessary as a consequence of the Financial Services Reform Bill.

The bill provides highly flexible and responsive transitional arrangements for the financial services industry in moving to the financial services reform regime. It will allow for a smooth and gradual move from existing regulatory regimes to the new regime, reducing the cost and disruption of the change in regulatory arrangements.

The transitional provisions in the bill are of two types: those that deal with when the financial services reform regime begins to apply to different people and those that deal with how a person moves from their existing regulatory regime into the financial services reform regime.

Generally, the bill allows for the provisions in the Financial Services Reform bill to be phased in over two years.

The transitional arrangements for financial service providers and financial products will ensure that the proposed 1 October commencement date will simply give those existing participants who are ready on that date the opportunity to comply if they so wish. Others who need more time to prepare will generally have up to 1 October 2003 to comply with the requirements of the Financial Services Reform Bill.

This will enable those financial service providers and product issuers who are ready by 1 October this year to take advantage of the efficiencies offered by the new regulatory regime at the earliest possible time, while not forcing an unrealistic commencement date on those who need more time.

Financial services provider licensing, conduct and disclosure

Existing financial services providers will have up to two years to comply with the new regime. During this period, they will be able to continue to operate under their existing regulatory regime.

This two-year period will provide current industry participants with sufficient time in which to arrange their affairs in order to comply with the new legislation and to apply for and be granted an Australian financial services licence.

New entrants will have to comply with the new regime from commencement.

Representatives of those who provide financial services will also be covered by the transitional arrangements.

During this period, existing participants will be able to choose when they wish to apply for a new licence. So those participants who are anxious to take advantage of the range of benefits which this new regime offers will be able to apply for a new licence immediately on commencement. Those who require more time to make the necessary changes can apply later for their new licence.

The bill also allows for some existing participants to automatically obtain a licence. This will minimise the administrative burden by ensuring that those who are currently complying with a similar regulatory regime will be automatically eligible for a licence covering their current activities.

There is also provision for insurance multiagents to be granted a special, restricted licence during the transitional period. This will facilitate the transition for multiagents who wish to seek a licence in their own right rather than continuing to act as agents.

Financial product disclosure

Issuers of financial products will also be given a two-year transitional period for existing products, that is, products that are in a class of products which they had issued prior to commencement. During that time they will still have to comply with any existing disclosure regime. They will be able to opt in to the new regime at any time during this two-year period.

For new products, the regime will apply immediately on commencement.

Markets and clearing and settlement facilities

The bill also includes transitional provisions for securities and futures markets and clearing houses which are approved under the current regulatory regime.

In brief, the minister will be required to issue a licence under the new regime to the main markets regulated under the current regime and to currently approved clearing houses in relation to activities they are currently entitled to provide—that is, existing main markets and approved clearing houses will be grandfathered in respect of their existing activities.

Other authorised markets, such as those which are currently regulated as exempt stock markets, will have two years to bring themselves under the new regulatory regime although there are limitations on expanding their business before doing so.

Similar transitional arrangements will apply to financial markets and clearing and settlement facilities which are not required to be approved under the current regulatory regime, but will be required to be licensed under the financial services reform regime.

Special provision is made for markets and clearing and settlement facilities which are approved but not operating at the time the new regulatory regime commences.

Other transitional issues

The bill also provides for regulation making powers and powers for the Australian Securities and Investments Commission to make determinations dealing with transitional issues connected with a person moving from their existing regulatory regime—if any—into the new financial services reform regime.

These arrangements will ensure that such transitional issues can be addressed flexibly and effectively. This is particularly important in a transition that involves moving from a significant number of existing regulatory regimes into a single new regime.

In relation to the potential tax consequences for current industry participants in moving to the new licensing regime, the government called for submissions from industry to determine the precise nature and extent of the issue. The Government is in discussion with industry on these matters, and will consider whether legislation is necessary to deal with any identified tax consequences of the FSR bill.


The bills dealing with fees and levies are the final pieces of the package to reform the regulation of financial services.

They complement the reforms included in the Financial Services Reform Bill 2001, but are included in separate bills to comply with section 55 of the Constitution.



The Corporations (Fees) Amendment Bill 2001 makes minor amendments to the Corporations (Fees) Act 2001 to accommodate fees currently charged by ASIC in connection with its role in supervising self-listed markets, such as the Australian Stock Exchange, and fees which may be charged by ASIC in other situations where it is required to take action in the face of conflict between the market licensee's role as a supervisor of the market and the licensee's commercial interests.



The Corporations (National Guarantee Fund Levies) Amendment Bill 2001 makes minor amendments to the Corporations (National Guarantee Fund Levies) Act 2001. In particular, it makes changes to terminology and cross-references which are necessary as a consequence of the reforms included in the Financial Services Reform Bill 2001.



The Corporations (Compensation Arrangements Levies) Bill 2001 makes provision for levies on market participants in markets not covered by the National Guarantee Fund to support the revised compensation arrangements for which the Financial Services Reform Bill makes provision. The Financial Services Reform Bill contemplates a wider range of compensation arrangements than is currently allowed and makes no distinction, on the face of the law, between stock and futures markets.

This bill will supersede the Corporations (Securities Exchanges Levies) Act 2001 and the Corporations (Futures Organisations Levies) Act 2001, which formed part of the Commonwealth's package of new corporations legislation.

This is an historic package of bills that is going to have a profound impact on seven per cent of the Australian economy, which is the financial services industry.

Debate (on motion by Senator Denman) adjourned.