Australian Regulatory Compliance Review

Corporate governance update

Whilst reviews of corporate laws continue post-HIH and James Hardie, real world developments such as Telstra, AWB and Westpoint are raising new issues and fresh perspectives.

So it is worth recapping where the various reviews are up to:

1. Corporate Social Responsibility:

CAMAC issued a discussion paper in November 2005 and the time for submissions has now closed.

In summary the key issue is whether the law should be changed (from companies only being obliged to consider the interests of shareholders) to give companies the right to consider "social" issues or to oblige companies to consider interests of persons other than shareholders or to simply require additional reporting on social and environmental issues.

Interestingly the Discussion Paper made reference to overseas anti-bribery guidelines.

CAMAC's report is not expected before the middle of this year.

Separately, the Parliamentary Joint Committee's report on CSR is now due on 15 June 2006.

2. Duties of company officers below board level

The CAMAC report on this issue is now expected by April.

In summary, the issue is whether the duties of directors should be extended to employees.

3. Personal liability for corporate fault

The CAMAC report on this issue is also expected by April.

In summary, this issue relates to whether company directors should be personally liable for company offences even if they had no personal involvement.

The Discussion Paper usefully lists state legislation where this situation already applies (mainly tax, workplace health and safety, fair trading, environment and hazardous goods).

Court decisions on shareholder rights

Separate from any non-judicial reviews, the courts of course continue to interpret the law.

In this area, Australian shareholder class actions (by which shareholders sue the company they invested in) are continuing. Most recently the Full Court of the Federal Court of Australia confirmed the right to compensation by shareholders under section 729 of the Corporations Act for misleading or deceptive statements in a prospectus in Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCAFC 265

Damages can also be claimed by shareholders under section 674(2) of the Corporations Act (relating to breaches of a company's continuous disclosure obligations).

On 27 February the Full Court of the Federal Court of Australia in Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 17 affirmed that an on-market purchaser (as opposed to a subscribing shareholder) of shares can in a winding up prove for damages against the company for the misrepresentation which induced the purchase and so have claims in damages or for compensation for contraventions of s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Corporations Act 2001 (Cth) or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).

Further, the Full Court decided that such claimants were not claiming in their capacity as members but as third parties and therefore did not rank in priority after creditors under Section 563A Corporations Act.
 

Applied compliance: the regulation of online financial services

I have felt for a while that regulation (and therefore compliance) is designed and implemented in isolation of a total business.

For example if a particular product or service is regulated then businesses typically change their process for that particular product or service without looking at the impact on other products or services or distribution channels or other aspects of the business.

So my web seminar on 14 March looks at online financial services to try to piece together the myriad of laws that apply to that industry and ecommerce and whether there are any guidelines that can deliver an online financial service that satisfies customers as well as providing business efficiency and compliance.

Mandatory comparison rates extended for 1 year

The Uniform Consumer Credit Code Management Committee reports that the Ministerial Council of Consumer Affairs has agreed to extend the sunset date for comparison rates for a year until June 2007. An extension of a year was agreed to accommodate the possibility that the Queensland Government may call an election in the interim.

A draft of the amendment to the Code has been formulated and will be introduced in the early part of 2006.

Consultation on the Preliminary Impact Statement has now closed however a copy of the paper is still available. Hawkless Consulting will consider the submissions which will inform the drafting of the Final Decision Making Preliminary Impact Statement to be provided to MCCA for consideration and decision.

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Westpoint: a gap in regulation or a failure of supervision?

It is now official: Westpoint Corporation Pty Ltd will be wound up and the estimated 3600 "investors" (principally retirees) will lose their money (totalling around $300 million).

It appears that that the promoters raised funds by issuing promissory notes (unsecured IOU's) for amounts of at least $50,000 so that they would not have to comply with the debenture rules in the Corporations Act.

The funds were raised for property developments around the country. The investments were not secured against the developments and it appears that funds raised for one development were mixed with funds for other develoipments. The Corporations Act Managed Investment Scheme rules were not complied with.

Retirees were targeted through financial planners who were paid commissions. Some investors borrowed on the security of their home.

It is likely that financial planners and perhaps the Westpoint auditor will be sued in a class action.

Meanwhile ASIC is on the defensive over its apparent surveillance and supervision failure .

Yes, people can be greedy and invest unwisely. But ASIC's role is to enforce consumer protection laws and ensure that promoters comply with the rules and that advisers give advice appropriate to their clients.

UPDATE 22 February: class action announced

UPDATE 14 April: ASIC Bulletin and update on court action

ASIC issues reverse mortgage calculator

ASIC has issued a reverse mortgage calculator for seniors.

A reverse mortgage allows an older person with assets but little income to borrow money secured against their home, without having to pay back either the amount they borrowed or the interest due until they leave their home or die. Instead, the debt and interest builds up (or compounds) over time.

The calculator shows the effect on the equity in a borrower's home based on decisions they may make about:

* how much they borrow;
* whether they take an initial lump sum, or arrange regular payments or a combination of both;
* how long they borrow for;
* interest rates and various fees; and/or
* changes in home values.

Financial intelligence exchange between Australia and Hong Kong, China

The Minister for Justice and Customs, Senator the Hon. Christopher Ellison, has announced that the Australian Transaction Reports and Analysis Centre (AUSTRAC) has entered into an understanding with its counterpart agency in Hong Kong, China to allow the two countries to exchange financial intelligence and to work together to prevent money laundering and the financing of terrorism.

Trans-Tasman corporate regulation

The New Zealand Companies Office and ASIC have signed a Memorandum of Understanding.

The MOU is designed to promote greater regulatory cooperation between Australia and New Zealand.

The agreement reflects an ongoing interest in aligning the regulatory functions of both agencies and allows for cooperation and the exchange of information to assist each regulator, particularly on operational and enforcement matters.

Food Law

As regulations get more and more complex and specialised I am pleased to be able to point to FoodLegal as a source of information on Australian food regulations and labelling.

In particular I recommend you subscribe to their email bulletin if you have an interest in the area: the February Bulletin includes articles on toxic contamination of fish in Sydney Harbour, organic food labelling and the law of giving food to charity.

Choicepoint settles breaches of privacy

The US Federal Trade Commission has announced that data broker ChoicePoint has agreed to pay US$15 million to settle charges it did not properly protect consumers' personal financial information.

The FTC fined the company $10 million and said ChoicePoint would pay an additional $5 million to compensate consumers. The FTC says about 800 people have been victimized by identity theft stemming from the breach, but more would be eligible for compensation as cases arise. The FTC says it is establishing a fund and will develop a plan to get compensation to victims.

The settlement requires ChoicePoint to install new procedures so consumer reports are used only by legitimate businesses for lawful purposes. It also must create an information-security program, to be audited by an independent security professional every other year until 2026.

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ASIC issues draft policy on drafting prospectuses

ASIC has released draft guidelines for issuers and advisers on the preparation of prospectuses. 

The draft policy statement, Better prospectus disclosure, includes advice about the Corporations Act requirement that prospectuses be worded and presented in a clear, concise and effective manner. 

 ASIC Acting Chairman Mr Cooper said issuers should explain the practical implications of what is being offered, rather than presenting a mass of legal and financial details.

 Under the draft guidance, ASIC recommends issuers:

• make prospectuses as short as possible;
• leave out extraneous material;
• highlight critical information;
• organise information in a logical way - e.g. cascade the story from the simple to the more detailed;
• provide clear navigation around the document;
• consider incorporating technical and detailed financial information by reference;
• use plain and direct language; and
• use a range of communication tools, including simple graphical illustrations.

The policy statement also provides guidance on some specific prospectus content issues that have arisen in the past such as:

• risk disclosure;
• high-yield debentures;
• use of proceeds of the fundraising; and
• share allocation policy.

Comments on the draft policy statement are due by Friday, 7April 2006.