Australian Regulatory Compliance Review

Taxation of mutuals

I noted here that Coleambally Irrigation Mutual Co-operative Limited lost its appeal to the Full Federal Court against the Fedreral Court's decision that its income was taxable.

On 27 May 2005, the High Court decided not to grant Coleambally Irrigation Mutual Co-operative Ltd leave to appeal the decision that the principle of mutuality cannot apply where the members of an organisation are prevented under their Constitution from obtaining the value of the assets on its winding up.

The Minister for Revenue and Assistant Treasurer, Mal Brough, has announced that the Government will amend the income tax law to ensure mutual not-for-profit organisations are not subject to tax on income as a result of the High Court decision.

The amendment to the Income Tax Assessment Act 1997 will provide that the mutuality principle may apply to affected not-for-profit organisations even though the organisation is precluded from distributing to members on winding up. On winding up, any surplus would be required to be distributed to another not-for-profit organisation. The Tax Office estimates that around 200,000 to 300,000 organisations (largely RSL and social clubs) would potentially have become subject to tax on receipts that the Tax Office had previously considered to be excluded from assessable income under the mutuality principle.

The amendment will give legislative backing to the Tax Office practice that applied to distribution clauses prior to the judicial decisions.

Australian industrial relations changes

The Prime Minister and the Minister for Employment and Workplace Relations have announced proposed changes to the industrial relations system.

The Howard Government will:

• establish the Australian Fair Pay Commission; 
• enshrine minimum conditions in legislation;
• introduce the Australian Fair Pay and Conditions Standard;
• simplify the agreement making process at the workplace;
• provide award protection for those not covered by agreements;
• change the role of the Australian Industrial Relations Commission;
• amend the unfair dismissal laws; and
• introduce a national system of workplace relations (subject to States' agreement).

The Howard Government intends to exempt businesses who employ up to 100 employees from unfair dismissal laws. The Government will continue to protect all employees by providing a remedy for unlawful termination, which prohibits dismissal for discriminatory grounds such as race, colour, sex, union membership or pregnancy .

For businesses with over 100 employees, employees covered will be required to have been employed for six months before they can pursue an unfair dismissal remedy. This is an extension of the current 3-month qualifying period.

Identity fraud

Since Choicepoint, more reports are being made of privacy breaches in organisations such as financial institutions. BeSpacific points to this chronology of data breaches since Choicepoint. Is your customers' information really secure?

On the other side, if you are a financial institution how can you ensure the customer is who he or she says he is? The Australian Payments Clearing Association has announced a new electronic Identity Document Reference Guide to help test the authenticity of identification documents. See the APCA Payment Monitor 1st Quarter 2005.

Lender property valuation survey

APRA has released the results of its surveys on the property valuation practices used by authorised deposit-taking institutions (ADIs) and lenders mortgage insurers (LMIs) as part of their mortgage and insurance approval processes.

The main conclusion of the surveys is that there has been a movement away from the traditional reliance on a full external valuation of a property (involving an internal inspection) in favour of more streamlined valuation methodologies, particularly by the larger ADIs.

APRA Chairman, Dr John Laker, said that these new methodologies had not been tested in a major property market downturn and they may expose lenders to increased credit risk if appropriate controls are not in place.

“Good practice, in APRA’s view, would see these new techniques limited to lower risk lending, where there is benefit to the lender in reducing valuation costs without significantly adding to risk”, he said. “In addition, it is important that alternative methodologies have been appropriately researched and approved at senior levels, with a suitable level of subsequent back‑testing.”

Corporate governance for ADI's

The Australian Prudential Regulation Authority (APRA) has released draft prudential standards and a discussion paper outlining proposed governance arrangements for authorised deposit‑taking institutions (ADIs), general insurers, life insurers and authorised non-operating holding companies (NOHCs).

The objectives are to ensure that an ADI is well managed, has access to appropriate independent expertise, and gives due consideration to the impact of its decisions on depositors.

The draft standards are stricter than the ASX guidelines as previously explained by APRA Chair John Laker.

Key provisions include:

• a majority of independent non-executive directors on a board;
• the requirement for a policy on boartd renewal (in lieu of fixed terms for directors);
• no prohibition on a director serving onn the board of more than one APRA-regulated institution;
• a period of at least 3 years must pass before a chief executive can become chair;
• provision to APRA of written details of the resignation or removal of a director within 14 days.

Comments on the discussion paper and draft prudential standards are invited by 12 August 2005.

A "fit and proper" person standard will be released soon.

Analysis of Corporate Governance Reports

The ASX Corporate Governance Council has released its analysis of corporate governance practices as reported in listed companies' 2004 annual reports.

ASX listing rule 4.10.3 requires companies to disclose in the corporate governance section of their annual report the extent to which they have adopted the ASX Corporate Governance Council’s 28 Recommendations.

The analysis found the large majority of listed companies have fulfilled their reporting requirements satisfactorily, either confirming adoption of the Recommendations or providing ‘if not, why not?’ reporting.

However not all companies complied with the recommendations. For example 38% of reports reviewed disclosed the company had chosen to adopt the practice outlined in Recommendation 2.1 (majority of board to be independent) and 48% disclosed they had chosen to adopt alternative practices.

The following observations arise from the review of 2004 annual reports:
• Companies which addressed the recommendations in order, gave detailed cross-referencing or provided a table outlining adoption/exception reporting were the easiest to follow.
• Clear referencing to a website and to the remuneration section of the Annual Report were also attributes of the better reports.

Privacy Review Report

The Privacy Commissioner has released her report on the private sector provisions of the Privacy Act.

“While I have made a number of recommendations I believe that there is no fundamental flaw with the private sector provisions in the Privacy Act,” she said.

“The overall effect is that the National Privacy Principles have worked well and delivered to individuals protection of personal and sensitive information in Australia in those areas covered by the Act.

“The Report contains 85 recommendations stemming from a balanced and pragmatic examination of the Privacy Act, within the terms of reference set by the Attorney General,” said Ms Curtis.

“The submissions also made it clear that the health sector would particularly benefit from national consistency and I have therefore recommended that a national health code be implemented across federal, state and territory levels.

“Another issue highlighted in many submissions was the need to raise the privacy awareness of organisations and individuals and therefore a number of my recommendations address this issue. Those recommendations, if implemented, would form the ‘lynch pin’ of an improved privacy scheme that would benefit individuals while recognising the right of businesses to achieve their objectives in an efficient way.

“Consumer control over personal information, a key feature of the private sector amendments to the Privacy Act, was addressed in the Review. I have recommended that the control that individuals have over their personal information be strengthened, particularly in relation to information collected about them indirectly or used or disclosed for other purposes such as direct marketing.

“Simple steps that could be taken to make this happen include measures to promote clearer and more easily understood privacy notices and a general opt-out right for all direct marketing approaches.

“The report also contains recommendations about the small business exemption with the aim of simplifying its application while suggesting that some sectors that handle large volumes of personal information, such as internet service providers for example, should be covered by the private sector provisions.

“Because of their complexity, the issue of privacy and research, in particular medical research, and privacy and new technologies warrant further debate. The main recommendation on these issues is that they should be considered in the context of a wider review of the Privacy Act.

Other recommendations relate to residential tenants and deceased persons:

The Australian Government should advance as a high priority the work currently being undertaken by the Working Group on Residential Tenancy Databases of the Ministerial Council on Consumer Affairs/Standing Committee of Attorneys-General.

Deceased persons: If the National Health Privacy Code is adopted into the Privacy Act (see recommendation 13), then protection for health information under these provisions would extend to deceased persons. Also, the Australian Government's response to the Australian Law Reform Commission and the Australian Health Ethics Committee's inquiry into the protection of human genetic information in Australia may have implications for the Privacy Act. In addition, the Australian Government should consider as part of a wider review (recommendation 1) whether the jurisdiction of the Privacy Act should be extended to cover the personal information of deceased persons.

Corporate governance and state-owned enterprises

The OECD has approved new Guidelines on Corporate Governance of State-Owned Enterprises (pdf) to give concrete advice to countries on how to manage more effectively their responsibilities as company owners.

The Guidelines aim to help make state-owned enterprises more competitive, efficient and transparent.

In many OECD countries the state remains an important owner of large firms operating in key sectors, including energy, utilities and infrastructure. But a recent OECD study reveals the challenges facing such firms, including conflicting corporate objectives, unclear board responsibilities and opaque appointment procedures.

To address these issues, the Guidelines call on governments to:

Ensure a level-playing field for state-owned enterprises competing with the private sector by

• Clearly separating the state’s ownership role from its regulatory role
• Allowing more flexibility in capital structures while making sure that state-owned enterprises face competitive access to finance

Become more informed and active shareholders by

• Simplifying the chain of accountability through centralising or more effectively coordinating shareholding responsibilities within the state administration
• Reducing political interference in day-to-day management
• Introducing a transparent nomination process for boards, based on competence and skills

Empower boards by

• Clarifying their mandates and respecting their independence
• Separating the role of Chairman and CEO and giving boards the power to appoint CEOs
  Systematically monitoring the board’s performance

Improve transparency by

• Strengthening internal controls
• Carrying out independent, external audits based on international standards
• Disclosing any financial assistance from the state
• Producing aggregate performance reports

These Guidelines are based on and complementary to the OECD’s Principles of Corporate Governance, created in 1999 and revised in 2004, that are the benchmark for national codes of governance in members as well as non-member countries.

When is relief available for financial service providers?

ASIC has released an update report outlining decisions on recent applications for relief by financial service providers from the licensing, conduct, disclosure and managed investments provisions of the Corporations Act 2001 (the Act).

ASIC's general policy is only to consider granting relief from the requirements of Chapters 5C and 7 of the Act to address atypical or unforeseen circumstances and unintended consequences of those provisions.

The report covers the period from 15 August 2004 to 31 December 2004 and provides an overview of the circumstances in which ASIC has exercised, or refused to exercise, its discretionary powers to grant relief from the financial services provisions under Chapter 7 of the Act, and the managed investments provisions under Chapter 5C of the Act.

The report also outlines some instances where ASIC decided to take a no-action position regarding non-compliance with provisions of the Act.

ASIC updates FSR policies

ASIC has released five updated ASIC policy statements and two updated guidance papers relating to financial services reform (FSR) requirements.

The updated policy statements are:

• [PS 166] Licensing: Financial requirements;
• [PS 167] Licensing: Discretionary powers;
• [PS 168] Disclosure: Product disclosure statements (and other disclosure obligations);
• [PS 169] Disclosure: Discretionary powers; and 
• [PS 175] Licensing: Financial product advisers – Conduct and disclosure. 

Policy Statement 164 Organisational capacities [PS 164] is currently being reviewed. ASIC plans to issue an updated version of [PS 164] later in the year, and an update to PS 165 Licensing: Internal and external dispute resolution [PS 165] is under consideration.

The updated guidance papers are:

• The Hawking Prohibitions (Hawking Guide); and
• Licensing: The Scope of the Licensing Regime: Financial Product Advice and Dealing (Advice and Deal Guide).

 The amendments are largely of a minor and technical nature and do not raise significant new policy issues. Due to the nature and large number of changes, ASIC has not released marked-up versions of the updated policy statements and guidance papers. A summary of the amendments to each of the documents is provided in ASIC's Information Release.  

New rules for charities

From 1 July 2005 charities will need to be endorsed by the Tax Office in order to access income tax, fringe benefits tax (FBT) and goods and services tax (GST) charity concessions.

Corporate duties below board level

The Corporations and Markets Advisory Committee has released a Discussion Paper on Corporate duties below board level

The paper reviews the personal duties and liabilities under the Corporations Act of corporate officers, employees and other individuals below board level. It puts forward preliminary proposals to:

• extend the duties in ss 180 (care and diligence) and 181 (good faith and proper purpose) beyond directors and some corporate officers to 'any other person who takes part, or is concerned, in the management of that corporation'
• extend the prohibitions in ss 182 and 183 (dealing with improper use of corporate position or information) beyond directors, other officers and employees of a corporation to 'any other person who performs functions, or otherwise acts, for or on behalf of that corporation'
• extend the prohibitions in ss 1309(1) and 1307 (providing false information) beyond officers and employees of a corporation to 'any other person who performs functions, or otherwise acts, for or on behalf of that corporation'.

The paper also discusses whether there should be a general provision in the Corporations Act, as recommended in the HIH Royal Commission report, prohibiting individuals from acting dishonestly in connection with the performance or satisfaction of any obligation imposed on a corporation by any statute.

The Advisory Committee has called for submissions by 26 August 2005. The Committee will then prepare its final report, taking into account these submissions.

The Advisory Committee Discussion Paper on Personal liability for corporate fault, differs from this paper in focusing on the circumstances in which directors and corporate managers may be criminally liable for corporate misconduct in consequence of their formal position or function in a company, without the need to establish misconduct on their own part.

Cigarette makers agree that "light" and "mild" mislead

The Australian Competition and Consumer Commission has announced that it has obtained court-enforceable undertakings from British American Tobacco Australia Limited and Philip Morris Limited to remove 'light', 'mild' and similar descriptors from their products. The companies will also pay $8 million in total to the ACCC to fund anti-smoking information campaigns and programs.

BAT and Philip Morris are the two largest Australian tobacco companies, with a combined Australian market share of approximately 80 per cent.

"The ACCC has been seeking an industry wide solution to this important consumer health issue. However Imperial Tobacco Australia Limited, the third largest tobacco company in Australia with a market share of 20 per cent, has refused to cooperate with the ACCC", ACCC Chairman Mr Samuel said.

The ACCC's investigations led the ACCC to the view that the tobacco companies, in using descriptors on cigarette brands and packaging such as 'light', 'mild', 'medium' etc and numbers (ie. '1','4', '7' etc), represented to consumers through the descriptors and related marketing and packaging that there were health benefits in smoking those brands (known as low yield cigarettes due to claimed machine tested average lower yields of tar, nicotine and carbon monoxide) compared to higher yielding or full strength cigarette brands.

In the ACCC's view, such health claims for low yield cigarettes were likely to have breached section 52 (misleading and deceptive conduct provision) and other sections of the Trade Practices Act 1974, for reasons including the fact that it was generally known that smokers can, and do, compensate for claimed lower yields by smoking cigarettes in ways that obtain higher yields of tar, nicotine and carbon monoxide than indicated on the packets.

FSR fees and disclosure update

ASIC has issued answers to some regularly asked questions about the Corporations Amendment Regulations 2005 (No.1) (the enhanced fee disclosure regulations) that were made on 10 March 2005.

The enhanced fee disclosure regulations apply to superannuation and managed investment products

The enhanced fee disclosure regulations should not be confused with the dollar disclosure provisions for PDSs, statements of advice and periodic statements that take effect from 1 July 2005. For more information on the dollar disclosure provisions, see ASIC Information Release [IR 04-67] of 15 December 2004 ASIC issues dollar disclosure policy.

ACCC settles with Wizard over misleading employment advertisement

In 2004 the ACCC alleged Wizard Home Loans Pty Ltd breached section 52 of the Trade Practices Act by placing advertisements for Mobile Lending Managers in newspapers in New South Wales, Victoria and Queensland which were liable to mislead people into believing the positions were employed positions when they were self-employment opportunities.

The ACCC further alleged that annual remuneration figures provided to the managers were likely to mislead.

The ACCC also took representative action seeking compensation on behalf of an individual who responded to an advertisement and accepted one of the positions.

Wizard Home Loans Pty Ltd has now agreed to compensate a candidate for a Mobile Lending Manager position after admitting that it engaged in misleading conduct. The Federal Court has ordered Wizard, by consent, to compensate Mr David Cassar who responded to an advertisement and accepted the position.

Wizard has admitted that it breached section 52 of the Trade Practices Act 1974 by making representations to Mr Cassar, in an interview, about a level of commission that a good performing mobile lending manager may earn when there were not reasonable grounds to do so.

Wizard has reviewed its recruitment practices. The court proceeding settlement provides for:

• a declaration that Wizard misled Mr Cassar in an interview for a position as a mobile lending manager with Wizard
• a compensation order for Wizard to pay a confidential sum to Mr Cassar representing lost earning opportunity, and
• costs.

In addition Wizard has agreed to give a section 87B undertaking to the ACCC that it will not, for a three year period, make representations to any mobile lending manager candidate about the annual commission that person may earn unless there are reasonable grounds, after considering:

• the average annual commissions earned by mobile lending managers at that time
• the average annual commissions earned by mobile lending managers engaged in the geographical area where that mobile lending manager will be or is engaged
• the level of residential sales and sale prices in the geographical area where that mobile lending manager will be or is engaged, and
• the number of mobile lending managers engaged at that time and to be engaged during the next 12 months in the same geographical area.

As part of this undertaking, Wizard will implement and maintain a trade practices compliance program for a period of three years designed to make Wizard personnel aware of their responsibilities and obligations with respect to section 52 of the Act in connection with the recruitment of mobile lending managers.

Directors' remuneration

Draft Corporations regulations have been released which will permit information relating to remuneration  of directors and executives of listed companies not to be disclosed in the annual financial report in accordance with the accounting standards provided that the information is disclosed in the annual directors’ report and is audited.

Avoiding cartel behaviour

In broad terms, a cartel exists where two or more businesses that should be competing with each other agree to co-operate, for example on pricing or markets, rather than act independently.

The ACCC has focussed on this area with the recent enforcement results including:
o eight petrol companies in regional Victoria were fined $22.5 million for their involvement in a long-standing arrangement to fix retail petrol prices. Eight executives were also fined a total of more than $800 000, with two executives being fined $200 000 each for their involvement in the conduct.
• George Weston Foods – where a former divisional chief executive telephoned a competitor seeking to fix the wholesale price of flour. Even though the competitor did not agree to the scheme, George Weston was fined $1.5 million.
• Metro Bricks, which agreed in phone calls and meetings with its rival Midland Bricks simultaneously to lift the price of bricks by three per cent, and set a floor price for tender pricing for major builders (in Western Australia), was fined $1 million. The agreement was exposed when Boral, the parent company of Midland, voluntarily came to the ACCC to take advantage of its leniency policy. In so doing, Midland escaped financial penalty while its co-conspirator was fined $1 million.

The ACCC has published a new guide: Cartels- what you need to know.

Purchased Payment Facilities

The Australian Prudential Regulation Authority (APRA) has released a draft prudential standard and authorisation guidelines for providers of purchased payment facilities or PPFs, a new class of authorised deposit-taking institution (ADI).

PPFs are new forms of payment instruments such as stored-value cards and internet-based payment systems or ‘electronic purses’.

The draft proposals require PPFs to:

• obtain a conditional authorisation limited to providing PPF business;
• meet ADI prudential standards on governance, fitness and propriety, outsourcing, business continuity management and auditing requirements; and
• meet a simplified capital adequacy framework if the PPF also has stored value at risk. Under the proposed framework, such PPFs would at all times have to hold:
  • Tier 1 capital at least equal to the larger of either the minimum start-up capital as determined by APRA or five per cent of total outstanding PPF liabilities; and
  • high quality liquid assets at least equal to the value of the float.

Comment on the draft  authorisation guidelines, prudential standard and accompanying discussion paper  are invited by 30 June 2005.

Personal liability of directors and executives

The Corporations and Markets Advisory Committee has released a Discussion Paper on Personal liability for corporate fault.(pdf)

The paper reviews the circumstances in which directors and corporate managers may be held criminally liable for corporate misconduct by reason of their formal position or function in a company and without the need to establish misconduct on their part. This form of liability is separate from that of the company itself or of an officer who has actually participated in a corporate breach.

"The paper looks at a range of Commonwealth, State and Territory environmental, occupational health and safety, hazardous goods and fair trading statutes, as they provide significant examples of this kind of derivative liability. In pursuit of their various public interest goals, there is a trend in statutes of this kind to treat directors and other officers as personally liable, including for criminal offences, for breaches of the law by their company without the need to show personal culpability. Questions of balance arise between the objective of adding to the onus on those individuals to do what they can to ensure corporate compliance, and the reasonableness in the varying practical circumstances of corporate business activities of such a presumption of personal fault. An unduly harsh approach may discourage people from becoming directors or undertaking other responsible corporate roles."

The paper invites comments on the need to go beyond corporate and accessorial liability to impose liability on individuals by virtue of the position they hold in the company.

The Advisory Committee has called for submissions by 12 August 2005.

FSR FSG relief: tailored guides allowed

ASIC has granted relief to promote the provision of tailored Financial Services Guides (FSGs). This is set out in ASIC Class Order [CO 05/27] Financial Services Guides – Tailoring Relief.

This new class order promotes tailoring of FSGs by relieving financial services providers from the need to comply in all situations with the additional remuneration disclosure requirements currently prescribed by the Corporations Regulations 2001 (the regulations). 

Class Order [CO 05/27] exempts financial service providers from including any additional remuneration information required by regulations 7.7.04(2) and 7.7.07(2) in a FSG, where:

• the information does not relate to a financial service that will be or is likely to be provided to the client; or
• the information relates exclusively to services which do not require the provision of a FSG (e.g. if the service is provided only to wholesale clients).

However, if the providing entity later provides another financial service to a retail client and the additional remuneration disclosures have not previously been made to the client in an FSG because of the relief in Class Order [CO 05/27], the providing entity will be required to give the client a new FSG or supplementary FSG including the relevant additional remuneration disclosures for that financial service.

Financial planners issue draft conflict of interest principles

The Financial Planning Association (FPA) has released draft principles designed to assist members in managing potential or perceived conflicts of interest. A six month consultation period has begun, with FPA members invited to comment by Friday 28 October 2005.

The taskforce has adopted as the key principle that FPA members have a primary obligation to provide advice which is in the interest of the client.

FSR refinements released

The Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, has released a package of 25 proposed refinements to improve the operation of the Financial Services Regulation (FSR) framework.

The package of proposed refinements is based on feedback received from consumers, industry participants and their representatives, as well as the report provided to the Government by the Financial Sector Advisory Council.

The proposed refinements are intended to improve the quality of disclosure to consumers and provide greater certainty to industry participants as to how to comply with their obligations under the law.

The package includes changes to the following:

• drafting of Financial Service Guides;
• Statements of Advice;
• Product Disclosure Statement;
• Oral disclosure;
• General Advice Warning;
• Basic Deposit Products;
• General Insurance Products;
• Retail/Wholesale Client Distinction;
• General Advice Definition;
• Authorised Representatives;
• Staff training; and
• non-cash payment facilities.

In response, ASIC has announced that it will set up 8 projects to:

• issue further guidance on Statements of Advice (SOAs), including releasing a model SOA (discussion before refinement proposal 2.2 in the Government's proposal paper)
• issue guidance and/or relief about compliance with the general advice warning requirements where there is an ongoing relationship between the adviser and the retail client (refinement proposal 5.1)
• issue guidance and/or relief to deal with inconsistencies in the general advice warning requirements applying to product issuers in their advertisements (refinement proposal 5.2) issue guidance and/or relief to clarify that advisers do not necessarily provide personal advice merely because they have some personal information about a retail client (refinement proposal 10.2)
• issue further guidance and/or relief to promote the provision of basic online calculators (refinement proposal 10.3)
• issue guidance and/or relief on the authorisation requirements for product arranging agents of Australian general insurance issuers (refinement proposal 12.2)
• undertake a discrete review of ASIC Policy Statement 146 Licensing: Training of financial product advisers on adviser minimum qualifications as it applies to advice about basic deposit products and related non-cash payment facilities (refinement proposal 13), and
• issue guidance and/or relief to deal with the unintended application of the non-cash payment facility definition to certain kinds of facilities (refinement proposal 14).

UPDATE 13 May
ASIC has released further details of its refinement projects.