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Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 and ASIC Supervisory Cost Recovery Levy Amendment Bill 2017



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ISSN 1328-8091

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BILLS DIGEST NO. 62, 2017-18 4 JANUARY 2018

Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 and ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 Phillip Hawkins Economics Section

Contents

Purpose of the Bills .............................................................. 3

Structure of the Bills ............................................................ 3

Background ......................................................................... 3

Manipulation of financial benchmarks .................................... 3

IOSCO principals for financial benchmarks ........................... 4

Supervisory cost recovery Levies ............................................. 4

Committee consideration .................................................... 4

Senate Standing Committee for the Scrutiny of Bills .............. 4

Treasury Laws Amendment Bill ........................................... 4

ASIC Levy Bill ....................................................................... 6

Senate Selection of Bills Committee........................................ 6

Policy position of non-government parties/independents ..... 6

Position of major interest groups ......................................... 6

Financial implications .......................................................... 6

Statement of Compatibility with Human Rights .................... 6

Parliamentary Joint Committee on Human Rights .................. 7

Treasury Laws Amendment Bill ........................................... 7

Treasury Laws Amendment Bill ............................................ 7

Key Provisions .......................................................................... 7

Financial Benchmarks .......................................................... 7

Licensing Regime ................................................................. 7

Financial benchmark rules and compelled financial benchmark rules .................................................................. 8

Date introduced: 7 September 2017

House: House of Representatives

Portfolio: Treasury

Commencement: For the Treasury Laws Amendment Bill, Schedule 1, Parts 1 and 2, and Schedule 2, the day after Royal Assent. Schedule 1, Part 3 commences on 4 April 2018, immediately after the commencement of Schedule 5 to the Treasury Laws Amendment (2016 Measures No. 1) Act 2017. For the ASIC Levy Bill, Schedule 1 will commence at the same time as Part 1 of Schedule 1 to the Treasury Laws Amendment (2017 Measures No. 5) Act 2017. The remaining sections commence on Royal Assent.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the homepages for the Treasury Laws

Amendment (2017 Measures No. 5 ) Bill 2017 and the ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 can be found on the Bill’s homepage, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

January 2018.

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Civil Penalty Regime ............................................................ 8

Table 1: offences under the proposed Part 7.5B of the Corporations Act ................................................................... 9

Emergency powers ............................................................ 10

Key Issues .............................................................................. 11

Identifying significant financial benchmarks ....................... 11

ASIC’s powers to suspend or cancel licences ...................... 11

Issues dealt with in delegated legislation............................ 11

Civil penalties ...................................................................... 12

Other provisions .................................................................... 12

Schedule 1 - Financial benchmarks..................................... 12

Division 1 - Preliminary ..................................................... 12

Division 2 - Licensing of financial benchmarks ................. 13

Division 3 - Financial Benchmark rules and compelled financial benchmark rules ................................................. 14

Division 4 - Offences and civil penalties relating to manipulation of financial benchmarks .............................. 15

Division 5 - Other provisions ............................................ 15

Schedule 2 - Productivity Commission Act ......................... 15

ASIC Levy Bill ..................................................................... 16

Key Provisions ........................................................................ 16

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Purpose of the Bills The purpose of the Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 (the Treasury Laws Amendment Bill) is to introduce a new regulatory regime for administrators of financial benchmarks. This includes providing ASIC with new supervisory powers, introducing a licensing regime for financial benchmark administrators and making manipulation of financial benchmarks an offence subject to civil penalties.

The Treasury Laws Amendment Bill also facilitates the Productivity Commission (PC) appointing an additional Commissioner with extensive experience in dealing with Indigenous policy areas and in Indigenous communities to oversee the PC’s work in evaluating indigenous policy and programs.

The purpose of the ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 (the ASIC Levy Bill) is to extend ASIC’s supervisory cost recovery levies to licensed benchmark administrators under the supervisory and licensing regime introduced by the Treasury Laws Amendment Bill.

These Bills are related as the ASIC Levy Bill extends existing supervisory cost recovery levies to entities covered by the regulatory regime established by the Treasury Laws Amendment Bill.

Structure of the Bills The Treasury Laws Amendment Bill contains two schedules. Schedule 1 amends the Corporations Act 2001 to introduce the new regulatory regime for administrators of financial benchmarks and Schedule 2 amends the Productivity Commission Act 1998 to add an additional PC Commissioner with Indigenous policy responsibility. Schedule 1 of the Treasury Laws Amendment Bill contains three parts:

• Part 1 contains the main amendments which add a new Part 7.5B - Regulation of financial benchmarks to the Corporations Act

• Part 2 makes a number of consequential amendments to other sections of the Corporations Act

• Part 3 makes a number of consequential amendments to the Treasury Laws Amendment (2016 Measures No. 1) Act 2017 (the TLA 2017 Act).

The ASIC Levy Bill contains one schedule which amends the ASIC Supervisory Cost Recovery Levy Act 2017 (ASIC Levy Act) to apply ASIC’s cost recovery levies to the new licensed benchmark administrators.

Background Manipulation of financial benchmarks Financial benchmarks are indicators that are used as reference prices for financial instruments or financial contracts and for measuring the performance of investment funds. They are critical to a wide-range of economic and financial market functions including the pricing of financial products.1

There have been a number of scandals and allegations in recent years around the manipulation of financial benchmarks by financial institutions. Most notable of these was the widespread manipulation of the London-Inter-bank Offer Rate (LIBOR), the reference rate for $300 trillion of loans worldwide, which implicated a number of major international banks and led to regulators in the United States, United Kingdom and the European Union applying fines of more than $9 billion across a number of significant global banks.2 A number of traders and managers have been prosecuted overseas for manipulating the LIBOR.3

In Australia, the Australian Securities and Investments Commission (ASIC) has commenced legal proceedings against the Australia and New Zealand Bank (ANZ), Westpac and the National Australia Bank (NAB) over allegations that they manipulated the Bank Bill Swap Rate (BBSW) between 2010 and 2012. ANZ and NAB have reached a settlement with ASIC.4 The proceedings against Westpac are ongoing.

1. Council of Financial Regulators (CFR), Financial benchmarks regulatory reform, Consultation paper, March 2016, p. 1. 2. J McBride, ‘Understanding the Libor scandal’, Council on Foreign Relations, 12 October 2016. 3. Ibid. Financial benchmarks regulatory reform. 4. B Butler, ‘Westpac going it alone on rate case’, The Australian, 26 October 2017, p. 21; Australian Securities and Investments Commission

(ASIC), ASIC accepts enforceable undertakings from ANZ and NAB to address conduct relating to BBSW, media release, 20 November 2017.

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The manipulation of financial benchmarks can increase the costs of banking for consumers and businesses and reduce confidence in financial markets5. LIBOR is a benchmark rate that banks use to price their lending to each other and is the base rate for setting interest rates on hundreds of trillions of dollars of consumer and corporate loans worldwide.6 The BBSW is a short-term lending benchmark rate which is used in Australia as the base rate for interest rates on some business loans, bonds and financial derivatives and also impacts banks’ costs of funding7.

On 4 October 2016 the Treasurer, Scott Morrison, announced that following the advice of the Council of Financial Regulators (CFR) the Government would introduce legislation to require administrators of significant financial benchmarks to be licenced, strengthen ASIC’s regulatory powers and make the manipulation of financial benchmarks an offence.8

IOSCO principals for financial benchmarks In response to the ongoing scandals regarding the attempted manipulation of financial benchmarks, the International Organisation of Securities Commissions (IOSCO) established a task force to establish ‘global policy guidance’ and a set of principles regarding the governance, calculation and administration of financial benchmarks.9 IOSCO published its principles for financial benchmarks on 17 July 2013.

The reforms recommended by the CFR are designed to comply with the IOSCO Principles and the Treasury Laws Amendment Bill seeks to implement the IOSCO Principles in Australia.10 ASIC has also stated that it intends to develop rules which are consistent with the IOSCO Principles in order to harmonise with key overseas regimes11

Supervisory cost recovery Levies From 1 July 2017, the ASIC Supervisory Cost Recovery Levy Act 2017 imposed a cost recovery levy on the entities that ASIC regulates.12 The amount of the levy is set in the ASIC Supervisory Cost Recovery Levy Regulations 2017 and is intended to be equal to ASIC’s regulatory costs relating to the sectors it regulates.

The ASIC Levy Bill would apply these current levy arrangements to the new benchmark administrator licensees.

Committee consideration Senate Standing Committee for the Scrutiny of Bills

Treasury Laws Amendment Bill The Treasury Laws Amendment Bill was considered by the Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee) and addressed in its Scrutiny Digest of 13 September 2017.

The Scrutiny Committee raised concerns about the degree to which details of the new regulatory regime, particularly the licencing regime and the imposition of civil penalties, would be addressed through delegated legislation, stating:

The committee's view is that significant matters, such as key details about how the financial benchmark administrator licensee scheme is to operate and the imposition of civil penalties, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. In this instance, the explanatory memorandum provides no justification as to why such matters are proposed to be included in delegated legislation.

13

5. CFR, Financial benchmarks regulatory reform, op. cit., p. 1. 6. McBride, ‘Understanding the Libor scandal’, op. cit. 7. E Moran (FIIG research), ‘What is the bank bill swap rate (BBSW)?’, FIIG, 12 December 2012. 8. S Morrison (Treasurer), Clamping down on market manipulation of financial benchmarks, media release, 4 October 2016. 9. International Organisation of Securities Commissions (IOSCO), Principles for financial benchmarks, final report, July 2013. 10. CFR, Financial benchmarks regulatory reform, op. cit., p. 6. 11. ASIC, Implementing the financial benchmark regulatory regime, Consultation paper, 292, July 2017, p. 10. 12. For more information see: Parliament of Australia, ‘ASIC Supervisory Cost Recovery Levy Bill 2017 homepage’, Australian Parliament website. 13. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, 2017, The Senate, 13 September 2017, p. 18.

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The Scrutiny Committee also raised concerns that if details of the regulatory regime are to be addressed through delegated legislation then it should be through regulations rather than through ASIC’s rule-making powers, stating:

The committee also notes that these significant matters are to be included in 'rules' rather than in 'regulations'. The issue of the appropriateness of providing for significant matters in legislative rules (as distinct from regulations) is discussed in the committee's First Report of 2015. In relation to this matter, the committee has noted that regulations are subject to a higher level of executive scrutiny than other instruments as regulations must be approved by the Federal Executive Council and must also be drafted by the Office of Parliamentary Counsel (OPC). Therefore, if significant matters are to be provided for in delegated legislation (rather than primary legislation) the committee considers they should at least be provided for in regulations, rather than other forms of delegated legislation which are subject to a lower level of executive scrutiny. The committee further notes that OPC's Drafting Direction 3.8 states that material covering civil penalties should be included in regulations unless there is a strong justification for prescribing it in another type of legislative instrument.

14

In his response to the Scrutiny Committee, the Treasurer stated that the primary reason for dealing with matters through delegated legislation was to provide the flexibility to respond to international developments and maintain equivalency with regulatory regimes in other countries.15 The Treasurer advised that the use of rules, rather than regulations allows a more timely response to rapid shifts or developments in the market, ensuring that the Australian regime maintains equivalence with key overseas regimes. The Committee asked for the additional information provided by the Treasurer to be included in the Explanatory Memorandum to the Bill.16

The Scrutiny Committee also raised concerns about procedural fairness given the powers that the Treasury Laws Amendment Bill gives to ASIC to suspend or cancel a benchmark administrator licence without providing affected licensees a hearing in certain circumstances, notably where the licence holder becomes insolvent, or where they fail to pay an ASIC supervisory cost recovery levy.

Proposed section 908BI provides that ASIC may, by giving written notice to a benchmark administrator licensee, suspend or cancel the licensee's licence in certain listed circumstances. Unlike the process for suspension or cancellation under proposed section 908BJ, there is no requirement that ASIC give the licensee an opportunity to show cause why the licence should not be suspended or cancelled. The committee notes that procedural fairness generally requires that a person should be given an opportunity to present their case, before a decision is made by a statutory or administration body that could affect their rights or interests. The explanatory memorandum does not explain why proposed section 908BI does not require ASIC to give affected licensees the right to be heard before their licence is cancelled.

17

The Treasurer’s response notes that the grounds under which ASIC may immediately revoke a license in proposed section 908BI are relatively narrow and would be within the knowledge of the licensee. The response notes that proposed section 908BJ deals with other circumstances where a licence may be revoked by ASIC—in these circumstances the licensee is entitled to a hearing before ASIC makes a decision.18

The Scrutiny Committee also raised concerns that the justification in the Explanatory Memorandum for the legislation providing criminal and civil immunity to individuals operating in good faith under the financial benchmark rules, is insufficient:

The committee expects that if a Bill seeks to provide immunity from civil or criminal liability, particularly where such immunity could affect individual rights, this should be soundly justified. In this instance, the explanatory memorandum provides no explanation for this provision, merely restating the terms of the provision. 19

14. Ibid., p. 18. 15. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, The Senate Canberra, 18 October 2017, p. 143. 16. Ibid., p. 144. 17. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, op. cit., p. 19. 18. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, op. cit., p. 145. 19. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, op. cit., p. 20.

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The Treasurer’s response clarifies that this only applies to acts done in complying with a compelled financial benchmark rule. This would be an act that is necessary to maintain the operation of a significant financial benchmark and prevent possible financial market or economic contagion.20

ASIC Levy Bill The Scrutiny Committee considered the ASIC Levy Bill in its Scrutiny Digest of 13 September 2017 and made no comment.21

Senate Selection of Bills Committee The Senate Selection of Bills Committee decided that the Bills should not be referred to a committee for inquiry.22

Policy position of non-government parties/independents At the time of writing, the specific views of non-government parties and independents on this legislation are not known.

Position of major interest groups The Australian Financial Market Association (AFMA) indicated as part of ASIC’s consultation process that it broadly supports the proposed rules and considers that they are broadly consistent with ASIC’s other licencing regimes.23 However, AFMA raised a number of specific concerns with ASIC’s proposed regime, most notably concerns about ASIC’s proposed approach to rulemaking:

The proposal is worded in such a way as to indicate that ASIC would use regulatory guidance to supplement rules. AFMA has on many occasions voiced the view that regulatory guidance should not be used to impose additional requirements, its role is merely to act as an illuminating commentary. In this case ASIC has extensive administration discretion and the rules should be drafted with sufficient clarity and precision that the law is understandable on its face without extensive further exposition.

24

Financial implications The Explanatory Memorandum to the Bills states that the ASIC Levy Bill and Schedule 1 of the Treasury Laws Amendment Bill have no financial implications. 25

Schedule 2 of the Treasury Laws Amendment Bill is estimated to have a financial impact of $2.9 million over the forward estimates period, which will be offset from unspecified savings from the within the Prime Minister and Cabinet Portfolio.26

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.

The Government considers that the Bills are compatible.27 However, the Explanatory Memorandum acknowledges that Schedule 1 of the Treasury Laws Amendment Bill may limit human rights, but to the extent it does the Government considers that the limitations are ‘reasonable, necessary and proportionate’.28

20. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, op. cit., p. 147. 21. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, op. cit., p. 3. 22. Senate Selection of Bills Committee, Report, 12, 2017, The Senate, Canberra, 19 October 2017, p. 3. 23. Australian Financial Markets Authority (AFMA), Implementing the financial benchmark regulatory regime, AFMA, 25 August 2017, p. 1. 24. Ibid., p. 3. 25. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy

Amendment Bill 2017, p. 3. 26. Ibid., p. 5. 27. The Statement of Compatibility with Human Rights for the Treasury Laws Amendment Bill can be found at pages 51 to 63 and 92 of the Explanatory Memorandum to the Bill and for the ASIC Levy Bill at page 87 of the Explanatory Memorandum. 28. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy

Amendment Bill 2017, p. 63.

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Parliamentary Joint Committee on Human Rights

Treasury Laws Amendment Bill The Parliamentary Joint Committee on Human Rights (PJCHR) considered the Treasury Laws Amendment Bill in its Scrutiny Report of 17 October 2017 and did not raise any human rights concerns.29

ASIC Levy Bill

The PJCHR considered the ASIC Levy Bill in its Scrutiny Report of 12 September 2017 and concluded that the Bill does not raise any human rights concerns.30

Treasury Laws Amendment Bill Key Provisions Item 1 of Schedule 1 of the Bill inserts a new Part 7.5B into the Corporations Act, which deals with the regulation of financial benchmarks. New Part 7.5B contains proposed sections 908AA to 908EB.

The key parts of the new regulatory regime established by the proposed Part 7.5B of the Corporations Act are:

• the designation of ‘significant financial benchmarks’ (proposed Division 1)

• administrators of significant financial benchmarks will need to be licensed by ASIC, and satisfy the obligations under those licences (proposed Division 2)

• ASIC will be able to make rules in relation to financial benchmarks including ‘compelled’ financial benchmark rules which deal with the failure of critical benchmarks (proposed Division 3) and

• a new criminal and civil penalties regime will be introduced dealing with the manipulation of financial benchmarks (proposed Division 4).

ASIC has consulted on its proposed implementation on parts of this regime in its consultation paper implementing the financial benchmark regulatory regime.31

Financial Benchmarks Proposed section 908AB of the Corporations Act defines a financial benchmark as a price, estimate rate, index or value that is made available to users, is calculated periodically and is used for the purpose of calculating interest, price or, value, or measuring the performance of, a financial product. Under proposed section 908AC, ASIC can declare that a financial benchmark is significant if it is systemically important to the Australian financial system, or if there is a risk of financial contagion if the benchmark were disrupted, or if there would be a material impact on investors if the integrity of the benchmark were disrupted. This declaration is generally subject to Ministerial consent (proposed subsection 908AC(3)) except in certain emergency circumstances (proposed section 908AD). Administrators of significant financial benchmarks would be subject to the licensing regime under the proposed Division 2 and associated rules under proposed Division 3.

Licensing Regime Division 2 of proposed Part 7.5B requires administrators of significant financial benchmarks to apply for and obtain a benchmark administrator licence (licence) from ASIC. Administering a financial benchmark without a licence or falsely holding out that a person holds a licence is an offence with a penalty of up to 500 penalty units, five years imprisonment or both (proposed section 908BA and 908BB) (see table 1 below for further details).32

The Bill would allow ASIC to immediately suspend or cancel a licence in certain circumstances, including if a licensee stops administering a benchmark specified by their licence, the licensee becomes insolvent or if the licensee fails to pay any payable ASIC supervisory cost-recovery levy, late payment penalty, or shortfall penalty within 12 months of it becoming due (proposed subsection 908BI).

29. Parliamentary Joint Committee on Human Rights, Eleventh report of the 45th Parliament, 17 October 2017, p. 1. 30. Parliamentary Joint Committee on Human Rights, Tenth report of the 45th Parliament, 12 September 2017, p. 33. 31. ASIC, ASIC consults on proposed financial benchmark regulatory regime, ASIC website, 17 July 2017. 32. Section 4AA of the Crimes Act 1914 provides that a penalty unit is currently equal to $210. As a result the maximum pecuniary penalty is

currently $105,000.

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It will also allow ASIC to suspend or cancel a licence if a licensee breaches any of its obligations under the conditions of the licence or under ASIC’s financial benchmark rules (see below). In these circumstances, licensees would have the opportunity to show cause at a hearing before a ‘specified person’ as to why their licence should not be cancelled (proposed subsection 908BJ).

Financial benchmark rules and compelled financial benchmark rules Proposed Division 3 allows ASIC to make financial benchmark rules (administration rules) and compelled financial benchmark rules (compelled rules) in relation to financial benchmarks and licences.

ASIC’s power to make administration rules is provided under proposed section 908CA. The matters which can be dealt with under the administration rules are listed under proposed sections 908CB and 908CC. They are broad and include the making of rules relating to:

• the responsibilities of licensees, including in their oversight of internal and external parties involved in administration of the benchmark (proposed paragraph 908CB(a))

• how the financial benchmarks are to be designed and calculated (proposed paragraph 908CB(b))

• the manner in which benchmark administrators may or must provide their services, including the manner and conditions under which they provide access to those benchmarks (including fees) (proposed paragraph 908CB(c))

- for example, requiring benchmark administrators to provide open and free access to financial benchmarks • the handling and use of financial benchmark data by licensees and their employees (proposed paragraph 908CB(g)) and

• the responsibilities of entities whose activities result in the provision of data or information to the licensee (proposed paragraph 908CB(h))

- this would include responsibilities of financial institutions which provide information for the purpose of calculating financial benchmarks - as is the case with the BBSW. In addition, the proposed legislation allows for regulations to specify additional matters which ASIC can address through its administration rules (proposed paragraph 908CB(j)).

ASIC also has powers to develop compelled rules under proposed section 908CD. The matters that can be dealt with in compelled rules are listed at section 908CE. Compelled rules are rules that ASIC can apply in certain exceptional circumstances to ensure that the provision of a significant financial benchmark is not disrupted in a way that may cause financial contagion (if, for example, a licensee became unable or unwilling to generate or administer the benchmark). The compelled rules may compel:

• an entity that provides information used in the generation or administration of a significant financial benchmark to provide the licensee and ASIC with the relevant information or data (proposed paragraph 908CE(1)(a))

• a licensee to continue to generate or administer a significant financial benchmark or generate or administer such a benchmark in a particular way (proposed paragraph 908CE(1)(b)).

ASIC may only apply these powers if it reasonably believes that it is in the public interest to do so (proposed section 908CE(2)).

Proposed section 908CF obliges licensees and other relevant persons to comply with the administration and compelled rules and applies penalties to contraventions of these rules (see table 1 below for further details).

ASIC must consult publicly (proposed section 908CL) and obtain Ministerial consent (proposed subsection 908CM) in order to make, vary or revoke an administration rule or compelled rule, except in limited emergency situations (proposed subsection 908CN). A decision by ASIC to make, vary or revoke an administration or compelled rule is excluded from review by the Administrative Appeals Tribunal (AAT) (proposed paragraph 1317C(gdi) of the Corporations Act).

Civil Penalty Regime The Treasury Laws Amendment Bill creates a number of new offences and civil penalties relating to the licensing regime and the financial benchmark rules, creates new offences related to the manipulation of financial benchmarks and expands the scope of some existing penalty regimes. The new offences and penalties created by the Bill are detailed in Table 1.

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However, proposed section 908CJ provides protection from civil or criminal action to a person who takes actions, in good faith, that they are compelled to take in complying with a compelled rule.

Table 1: offences under the proposed Part 7.5B of the Corporations Act Offence/ Civil penalty provision Penalty Legislative reference (proposed

provision)

Administering a significant financial benchmark without holding a benchmark administrator licence, or holding out that the person administers a significant financial benchmark when they do not hold a licence

500 penalty units ($105,000), or 5 years imprisonment or both

500 penalty units, or 5 years imprisonment or both

908BA(1)

Holding out by a person that they hold a benchmark administrator licence or are authorised to administer a financial benchmark when it is not the case

908BB(a)(i-ii)

Holding out that a financial benchmark is specified in a benchmark administrator licence when that is not the case

908BB(a)(iii)

Holding out that a financial benchmark is significant or not significant when it is not the case

908BB(a)(iv-v)

A licensed benchmark administrator fails to notify ASIC that they can no longer comply with an obligation of their licence or have already failed to satisfy an obligation of their licence

100 penalty units ($210,000)

908BQ(1)

A licensee fails to comply with a reasonable request from ASIC, APRA or the Reserve Bank of Australia to:

• access the books relating to their capacity as a licensee; or

• give other assistance to the regulator in performance of their regulatory functions

908BR(2)

Licensed benchmark administrator fails to gives ASIC reasonable access to their facilities

908BS

Licensee fails to provide ASIC a report on request

908BV

A person fails to comply with the Maximum 5,550 penalty units 908CF and 908CO

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Offence/ Civil penalty provision Penalty Legislative reference (proposed

provision)

administration rules or compelled rules

($1,165,500);

or as an alternative to civil proceedings:

• pay a penalty to the Commonwealth (not exceeding one-fifth of the penalty specified under the rules);

• undertake remedial measures (such as education programs); or

• apply sanctions other than the payment of a penalty.

908CG

Minor infringements of the administration or compelled rules - ASIC may issue infringement notices under Part 5 of the Regulatory Powers (Standard Provisions) Act 2014 (Regulatory Powers Act)

Maximum of 60 penalty units ($12,600) for a body corporate or 12 penalty units ($2,520) for an individual

908CH; subsection 104(2) of the Regulatory Powers Act

Manipulating a financial benchmark, either by acts or by omissions

For an individual:

10 years imprisonment and/or 4,500 penalty units ($945,000) or three times the value of total benefits obtained from committing the offence

For a body corporate:

45,000 penalty units ($9,450,000) or three times the benefit obtained or 10 per cent of turnover for the preceding 12 months

908DA

908DC

Making false or misleading statements that could affect a financial benchmark

908DB

908DC

Source: Proposed Treasury Laws Amendment (2017 Measures No. 5) Bill 2017

Note: As of 1 July 2017, 1 penalty unit equals $210. 33 From 1 July 2020 penalty units will be automatically indexed to the CPI. 34

Emergency powers Generally the Bill requires ASIC to obtain the written consent of the Minister in order to declare a significant financial benchmark and requires ASIC to consult and obtain written ministerial consent when making new administration and compelled rules.

However, in certain emergency situations ASIC may declare a significant financial benchmark without the consent of the Minister if ASIC is of the opinion that it is necessary to do so in the public interest (proposed subsection 908AD(1)) but must provide written notification to the Minister by the following day (proposed subsection 908AD(2)). The Minister may direct ASIC to revoke such a declaration (proposed subsection 908AD(3)).

33. Section 4AA of the Crimes Act 1914 (Cth). 34. Explanatory Memorandum, Crimes Amendment (Penalty Unit) Bill 2017, p. 2.

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ASIC may also make an administrative or benchmark rule without public consultation and without consent of the Minister if it considers that it is in the public interest to do so in order to protect the Australian economy, the financial system, or the security or confidentiality of financial benchmark data (proposed subsection 908CN(1)). ASIC must notify the Minister on the following day with an explanation for the rule (proposed subsection 908CN(2)). The Minister may direct ASIC to vary or revoke the rule (proposed subsection 908CN(3)).

Key Issues

Identifying significant financial benchmarks In its consultation ASIC indicated a number of benchmarks that it might consider significant,35 including:

• BBSW

• Standard & Poor’s ASX 200 stock market index - an index based on the top 200 shares (by market capitalisation) trading on the Australian Stock Exchange, used by investors as a benchmark for measuring share portfolio performance, and as the basis for pricing derivatives

• the ASX Bond futures settlement price - a benchmark rate for long-term bonds and interest rate derivatives

• the Reserve Bank of Australia’s cash-rate and

• the Consumer Price Index (CPI).

Of these, the BBSW, ASX200 and ASX Bond future settlement price are administered by market participants, while the cash rate and the CPI are administered by public sector entities, the RBA and the Australian Bureau of Statistics (ABS) respectively.

AFMA raised some questions in its submission to ASIC, including whether some of the benchmarks identified should be considered ‘significant’ and whether public sector entities would be covered by the regime, as AFMA considered that this may raise some ‘administrative law issues’36 (presumably, ASIC having regulatory oversight of another financial sector authority). However, ASIC has indicated that it would consider exempting public sector entities from the licensing regime.37

ASIC’s powers to suspend or cancel licences The Scrutiny Committee raised concern about procedural fairness under ASIC’s powers to suspend or cancel a licence without a hearing or opportunity to show cause under proposed section 908BI.38

It is worth noting that the circumstances that ASIC can immediately suspend or cancel a licence under section 908BI are similar to the circumstances under which ASIC can immediately suspend or cancel other licences it administers under the Corporations Act. These include:

• an Australian Financial Services Licence (AFSL) (under section 915B of the Corporations Act) and

• a licence for administering a derivative trade repository (under section 905H of the Corporations Act).

Under these sections insolvency of the licensee and failure to pay cost recovery levies are grounds where ASIC can suspend or cancel the respective licence immediately.

Notwithstanding the Scrutiny Committee’s concerns around procedural fairness, it appears that the arrangements in the proposed Bill are broadly consistent with existing arrangements under the Corporations Act.

Issues dealt with in delegated legislation The Scrutiny Committee drew attention to the extent to which significant matters in this new regulatory regime are addressed through regulations rather than the primary legislation.

Further, to the extent that issues are dealt with in delegated legislation the Committee raised specific concerns about issues being dealt with through ASIC’s rules rather than in regulations.39

35. ASIC, Implementing the financial benchmark regulatory regime, op. cit., p. 13. 36. AFMA, Implementing the financial benchmark regulatory regime, op. cit., pp. 4-5. 37. ASIC, Implementing the financial benchmark regulatory regime, op. cit., p. 14. 38. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, op. cit., p. 19. 39. Ibid., p. 18.

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As discussed, the Treasurer has noted that a level of flexibility is required to ensure that obligations placed on licensees maintain consistency with comparable international regimes.40

The Scrutiny Committee raised specific concerns about proposed paragraph 908CB(j) which allows for additional matters that rules can deal with to be specified in regulations, rather than in the legislation. 41 As the Scrutiny Committee noted:

… it is unusual for primary legislation to provide for the making of a regulation which, in turn, provides a power to set out what matters are to be set out in rules. 42

In this regard, It is also worth noting that the proposed legislation exempts ASIC’s ability to make or vary rules from appeal to the AAT (proposed paragraph 1317C(ge) at item 23 of Schedule 1 to the Bill).

AFMA also raised concerns about the extent that ASIC proposes to use its regulatory guidance to supplement its rules and to impose additional requirements on licensees.43 ASIC released draft administration rules44, compelled rules45 and administration guidance46 for consultation. The administration guidance documents how ASIC intends to administer the rules and compelled rules.47 ASIC has stated that it intends to ‘take a principles-based approach to the administration rules, with detailed expectations set out in regulatory guidance’,48 which it says is to ‘ensure that it can make administration rules that can be applied in a way that reflects the nature, complexity, and intended use of a licensed benchmark.’49 ASIC does not intend to write specific rules for each regulated benchmark.50

Civil penalties The Explanatory Memorandum to the Bill acknowledges that the proposed penalties in the Treasury Laws Amendment Bill are severe, however, it notes that the primary objective of these penalties is to act as a deterrent.51 The Treasurer has stated that, ‘in practice, if a monetary penalty was to be sought that it would be proportionate to the seriousness of the breach’.52

Other provisions

Schedule 1 - Financial benchmarks

Division 1 - Preliminary Division 1 of proposed Part 7.5B of the Corporations Act introduces a definition of financial benchmarks (section 908AB) and provides ASIC’s powers to declare a financial benchmark as significant (section 908AC). A declaration requires the written consent of the Minister (proposed subsection 908AC(4)).

ASIC is required to supervise significant financial benchmarks that are specified in licenses (proposed section 908AF). This includes financial benchmarks wholly or partly generated or administered in a foreign country (subsection 908AF(2)). ASIC can rely on foreign regulators and regulatory regimes if ASIC is satisfied that the financial benchmark is adequately supervised or if it has cooperative arrangements in place with the relevant foreign authority (proposed subsection 908AF(2)).

40. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, op. cit., pp. 142-143. 41. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 27. 42. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, 2017, op. cit., p. 18. 43. AFMA, op. cit., p. 3. 44. ASIC, ASIC Financial Benchmark (Administration) Rules, Consultation paper, 292, Regulatory guidance, July 2017. 45. ASIC, ASIC Financial Benchmark (Compelled) Rules, Consultation paper 292, Regulatory guidance, July 2017. 46. ASIC, Financial Benchmarks: Licensing and other obligations, Regulatory guidance, July 2017. 47. Ibid., p. 7. 48. ASIC, Implementing the financial benchmark regulatory regime, op. cit., p. 10. 49. Ibid., p. 11. 50. Ibid.

51. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 55. 52. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, op. cit., p. 143.

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Division 2 - Licensing of financial benchmarks Division 2 of the new Part 7.5B outlines the details of the proposed licensing arrangements for administrators of significant financial benchmarks.

Proposed Subdivision A establishes the requirement that administrators of significant financial benchmarks be licensed by ASIC. Administering a significant financial benchmark without a licence is an offence with a maximum penalty of 500 penalty units, or imprisonment for five years, or both (proposed subsection 908BA(1)).

The administrator has 90 days after a financial benchmark is declared to apply and obtain a licence before an offence is committed (proposed subsections 908BA(2) to 908BA(4)).

Proposed Subdivision B of Division 2 establishes ASIC’s powers to grant licenses. A body corporate may apply for a benchmark administrator licence for a particular financial benchmark (proposed section 908BD) or multiple financial benchmarks (proposed section 908BE). ASIC may grant a licence under proposed section 908BC if ASIC is satisfied:

• the applicant has made a valid application and provided sufficient information to support their application (requirements proposed under proposed section 908BD)

• the applicant will comply with the obligations of the licence (proposed paragraph 908BC(1)(b)) and

• no disqualified individual is involved with the applicant (proposed paragraph 908BC(1)(c)).

ASIC must publish the details of licenses it grants (proposed section 908BF).

Proposed Subdivision C establishes that ASIC can impose, vary and revoke conditions on licences (proposed subsection 908BG(1)). ASIC may vary and revoke conditions at the request of the licensee or on its own initiative (proposed subsection 908BG(2)). ASIC may only do so on its own initiative if it gives written notice of the proposed action and provides the licensee with an opportunity to make a submission before it takes effect (proposed subsection 908BG(3)).

Proposed Subdivision D allows ASIC to vary licences and suspend or cancel licences in certain circumstances.

• ASIC may immediately suspend or cancel a licence in certain circumstances, including if the licensee becomes insolvent (proposed paragraph 908BI(1)(b)) or fails to pay a supervisory cost recovery levy (or related late/under payment penalty) within 12 months of it becoming due (proposed paragraph 908BI(1)(d))

• ASIC may also suspend or cancel a licence if ASIC considers that the licensee has failed to satisfy the conditions of its licence or any of its obligations under proposed Part 7.5B or the administration or compelled rules. The licensee must be provided with an opportunity to show cause, at a hearing before a ‘specified person’, as to why their licence should not be suspended or cancelled (proposed subsection 908BJ(1)).

- the person conducting the hearing must report to ASIC with a recommendation on the grounds for suspending or cancelling the licence (proposed subsection 908BJ(3)), ASIC may suspend or cancel the licence after considering the recommendation (proposed subsection 908BJ(4)) - ASIC may revoke a suspension at any time (proposed subsection 908BL) and - ASIC must publish the details of any variations, suspensions or cancellations (proposed section 908BM). Proposed Subdivision E requires ASIC to have regard to a number of matters in determining whether to grant a licence, vary or revoke licence conditions or suspend or cancel a licence. These matters are specified in proposed section 908BO and include whether or not taking the particular action is in the public interest (proposed paragraph 908BO(2)(f)).

Proposed Subdivision F outlines a number of obligations of licensees and penalties that apply if these obligations are not met. These obligations include:

• complying with the conditions of the licence (proposed paragraph 908BP(a))

• if the licensee is a foreign body corporate, registering with ASIC (proposed paragraph 908BP(b))

• taking all reasonable steps to ensure that a disqualified individual does not become or remain involved in administering a financial benchmark (proposed paragraph 908BP(c))

• notifying ASIC that it can no longer comply or has failed to comply with an obligation under section 908BP, or that a person has become, or has ceased to be, a director or senior manager of the licensee (proposed paragraph 908BQ(1)(b))

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• providing ASIC, the Australian Prudential Regulatory Authority and the RBA with access to information or assistance in relation to its regulatory functions (proposed section 908BR) and

• providing ASIC with access to the licensee’s facilities related to its capacity as a licensee (proposed section 908BS).

Proposed Subdivision G gives ASIC powers to give directions to licensees. ASIC may give a direction to a licensee to do specified things that ASIC believes will promote its compliance with its licence obligations. The licensee must comply with these obligations (proposed section 908BT). The Minister may disallow all or part of an ASIC direction within 30 days of receiving notice of the direction (proposed section 908BU).

Proposed Subdivision H relates to ‘other matters’. Proposed section 908BW establishes that ASIC may undertake an assessment and prepare a report on a licensee’s compliance with its obligations. ASIC must provide a written copy of the report to the Minister. Proposed section 908BX establishes that no compensation is payable to a licensee if a licence is varied, suspended or cancelled under any provisions of proposed Division 2 or any later legislation.

Division 3 - Financial Benchmark rules and compelled financial benchmark rules Division 3 of proposed Part 7.5B establishes ASIC’s powers to make administration rules and compelled rules and the matters to which these rules may pertain (Subdivision A and B) and establishes licensees’ obligations to comply with these rules (Subdivision C). Under Subdivision D, ASIC must consult before making rules and obtain Ministerial consent except in certain ‘emergency’ situations.

Proposed Subdivision A provides that ASIC may make administration rules by legislative instrument relating to the matters specified at proposed section 908CB and 908CC. (See Key provisions, above for further details).

Proposed Subdivision B provides for ASIC to make compelled rules and specifies the matters which ASIC can address through compelled rules under proposed section 908CE. (See Key provisions, above).

Proposed Subdivision C obliges licensees to comply with the administration and compelled rules and applies penalties for non-compliance under subsection 908CF and 908CG (see Key provisions, above).

Proposed section 908CH also allows ASIC to issue the licensee with an infringement notice under the Regulatory Powers (Standard Provisions) Act 2014 (the Regulatory Powers Act), intended as a way of dealing with minor rule breaches. The maximum penalty that can be imposed in an infringement notice under the Regulatory Powers Act is 60 penalty units for a corporation and 12 penalty units for an individual.53

Proposed section 908CI allows for breaches of rules to be addressed through enforceable undertakings. Enforceable undertakings are a written representation that the licensee will comply with a specific rule by taking or not taking a particular action. Undertakings can be enforced by a relevant court.

Subdivision D outlines the matters that ASIC must have regard to and the steps that ASIC must take in making administration and compelled rules.

Proposed section 908CK requires ASIC to have regard to the IOSCO principles, the likely effect of the rule on the Australian economy and financial system, the likely regulatory impact of the proposed rule and may have regard to any other matter which ASIC considers relevant. ASIC must consult with the public, which may include providing opportunity to comment, on proposed rules (proposed section 908CL). However, a failure to consult does not make a rule invalid (proposed subsection 908CL(3)). ASIC must also receive the written consent of the Minister to make a rule (proposed section 908CM). As explained under Key provisions, above, the consultation and Ministerial approval requirements do not apply in emergency situations where ASIC considers that it is in the public interest to make the rule to protect: the Australian economy; the efficiency, integrity or stability of the Australian financial system; or the security or confidentiality of financial benchmark data (proposed subsection 908CN(1)). However, ASIC must comply with any direction from the Minister to vary or revoke such a rule (proposed subsections 908CN(2) and (3)).

53. Subsection 104(2) of the Regulatory Powers (Standard Provisions) Act 2014.

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Division 4 - Offences and civil penalties relating to manipulation of financial benchmarks Proposed Division 4 of new Part 7.5B creates new offences and civil penalties in relation to the manipulation of a financial benchmark. These penalties are summarised in Table 1 under ‘Key Provisions’.

Proposed section 908DD details the geographical scope of the offences and penalty provisions in Division 4. These provisions only apply to conduct:

• that occurs wholly or partly in Australia

• that occurs wholly outside Australia that has a resultant impact partly or wholly in Australia or

• that occurs wholly outside Australia and is committed by an Australian entity.54

However, if the conduct occurred outside Australia there is a defence available if there is no corresponding offence in the domestic jurisdiction where the conduct occurred.55 This defence does not apply to an Australian citizen or Australian corporation.

Division 5 - Other provisions Division 5 of new Part 7.5B provides for the regulations or ASIC to provide an exemption from any of the provisions in Part7.5B or any regulations made under Part7.5B to a person, class of person, financial benchmark or class of financial benchmarks.

Part 2 of Schedule 1 of the Treasury Laws Amendment Bill includes consequential amendments to other sections of the Corporations Act to add reference to the benchmark administration licensing regime as required. Notably:

• Item 14 inserts proposed section 1040B into Part 7.10 of the Corporations Act making bank accepted bills and negotiable certificates of deposit financial products for the purposes of that Part. This extends offence provisions under Part 7.10 relating to market misconduct and insider trading to conduct relating to those types of product.

• Item 23 inserts proposed paragraphs 1317C(gdf) to (gdl) to exclude from review by the AAT ASIC’s decisions to make, vary or revoke declarations about significant financial benchmarks and administration rules, or to decide whether or not to pursue an alternative to civil proceedings. The Minister’s decisions to consent, vary or revoke rules are also excluded from AAT review.

• Item 26 adds additional subsections 1DC to 1DF to section 1317G of the Corporations Act, which allow a court to order a person to pay a pecuniary penalty if they contravene an administration or compelled rule or if they are found to manipulate a financial benchmark.

• Item 27 inserts proposed section 1317HC into the Corporations Act, which allows a Court to order a person to compensate another person for damages suffered as a result of the first person contravening an administration rule or compelled rule.

Schedule 2 - Productivity Commission Act Schedule 2 of the Bill amends the Productivity Commission Act 1998 (the PC Act) to provide for the PC to appoint an additional Commissioner to oversee the work of the PC in relation to the evaluation of policies that impact on Indigenous people.

Item 2 expands the maximum number of Commissioners (in addition to the Chair) in the PC from 11 to 12.

Item 4 adds a requirement that at least one Commissioner of the PC has extensive skills and experience in dealing with policies and programs that impact Indigenous persons and has experience dealing with Indigenous communities.

Item 5 removes the requirements that at least one member of the Commission must have:

54. The Bill applies extended geographical jurisdiction category B to Division 4 of Part 7.5B. See section 15.2 of the Criminal Code Act 1995 for details. 55. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 57.

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• experience or expertise in matters relating to ecologically sustainable development and environmental conservation (subsection 26(3))

• experience or expertise in matters relating to the social effects of economic adjustment and social welfare service delivery (subsection 26(4)) and

• extensive skills and experience acquired from working in Australian industry (subsection 26(5)).

This removes duplication in the PC Act as section 24 already requires Commissioners with these skills to be appointed.56

ASIC Levy Bill Key Provisions The ASIC Levy Bill amends the ASIC Supervisory Cost Recovery Levy Act 2017 (the ASIC Levy Act) to apply ASIC’s cost recovery levies to benchmark administrator licensees.

Item 1 adds a ‘benchmark administrator licensee’ to the definition of ‘market infrastructure entity’ under section 7 of the ASIC Levy Act, making licensees a type of regulated entity that are liable to pay ASIC’s supervisory cost recovery levy.

Item 2 also adds to the definition of market infrastructure entity, a person who administers a significant financial benchmark, but who contravenes the requirement under the amended Corporations Act to hold a benchmark administrator licence. This applies the cost recovery levy to individuals who administer a financial benchmark that are required to be licenced, even if they are not licenced.

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56. Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 [and] ASIC Supervisory Cost Recovery Levy Amendment Bill 2017, op. cit., p. 91.