Australian Regulatory Compliance Review

When is a smartcard an identity card

Queensland has already announced a driver's licence smartcard.

The Commonwealth Government has now announced a health and welfare services smartcard which seems to rule out a compulsory national security ID card.

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Privacy case notes released

The Privacy Commissioner has published case notes 5 - 9 for 2006.

In particular the Commissioner reports that 2 complaints against accountants for disclosing clients' tax file numbers were upheld and resolved (Case Note 6 and Case Note 7). Apart from the privacy issues, as such disclosures might constitute a Tax File Number offence, the Commissioner advised the parties of this and referred the matter to the Australian Federal Police.

Case Note 9 concerned the disclosure by a utility company of a person's consumption information in breach of its own privacy policy.

ASIC guidance on use of administrative powers in enforcing financial services laws

Licensing: Administrative action against financial services providers outlines how ASIC will use administrative remedies to enforce compliance of Australian financial services (AFS) licensees, and their representatives, with the law. It is also targeted at consumers about financial services, explaining how ASIC seeks to protect the public and reinforce the integrity of the industry.

The guide indicates the matters ASIC takes into account in determining whether administrative action is the most appropriate regulatory response (rather than civil or criminal action). It also provides some indicative guidance on the kinds of factors ASIC will consider when determining the length of a banning order, including examples of relevant misconduct for illustration.

ACCC small business guide to trade practices compliance programs

The ACCC's Small business guide to trade practices compliance programs is designed to promote awareness of trade practices compliance issues in the small business sector and offer guidance to small business operators in their efforts to comply with trade practices obligations.

The guide also provides information on what the ACCC is likely to require from a small business in the event that it has failed to meet its trade practices obligations.

The ACCC explains that its policy does not seek compliance programs as a punishment: its purpose in requiring the implementation of compliance programs is to ensure that the business develops the skills and capacities it needs to minimise the risk of future compliance failures.

ASIC releases risk and return calculator for investors

ASIC's risk and return calculator uses a simple Excel spreadsheet: you input the investment type. the expected yearly return and the investment term and it will tell you whether the investment is risky or not.

It's no substitute for a financial planner but the assumptions seem reasonable.

Who is responsible for your organisation?

It seems that each time a new corporate crisis occurs or a rogue is exposed, governments and regulators find flaws in their existing systems and decide to redefine the notion of "responsibility".

There are long-standing laws which state the duties of company directors and officers to their company, shareholders and creditors. The courts fine-tune these laws from time to time to deal with particular facts, for example insolvent companies or the role of a chairman, but generally people understand these laws.

Recently the terms "responsible officers" and "responsible persons" have been added to the list of who is responsible for companies.

Under FSR, ASIC's AFS licence names the responsible officers: a responsible officer is the person who is responsible for making decisions about a product or service whether or not that person is the CEO . APRA has now introduced the concept of "responsible person" which extends responsibility from directors and senior managers to auditors and consultants. In each case the responsible person (or officer) must have particular competencies, skills or experience and be adequately trained to satisfy the regulator that the person is capable of carrying out their duties. Both ASIC and APRA have the power to disqualify persons who are not "fit and proper".

There is no guarantee that satisfying these new rules will make the business perform better or avoid future corporate failures but the message is clear: if you are responsible for a company, you will be held to account if you do not exercise the necessary skills.

Related article: Corporate governance update

AS 3806 - 2006 Compliance programs

Standards Australia has issued AS 3806-2006, Compliance programs to provide clearer guidance on implementing an effective compliance program in your organization. It supercedes AS 3806-1998.

The Standard provides 12 key principles to help organisations implement, monitor and measure and continually improve a compliance program.

Cole Inquiry and AWB: corporate culture and criminal responsibility

So far I have posted all my discussion about AWB and the Cole (Oil-for-food) Inquiry on my AWB Index on External Insights but I think it's time I did a cross-post discussing corporate culture and compliance .

If, as I noted at the beginning of the Inquiry, breaching the UN sanctions was not an offence under Australian law, what has the Inquiry been all about? According to the Terms of Reference, the Inquiry has been set up to determine:

whether any decision, action, conduct, payment or writing of:
(i) any of the three Australian companies that are mentioned in the Final Report ("Manipulation of the Oil-for-Food Programme by the Iraqi Regime") of the Independent Inquiry Committee into the United Nations Oil-for-Food Programme; or
(ii) any person associated with one of those companies;
might have constituted a breach of any law of the Commonwealth, a State or Territory

The Inquiry has clearly shown how the culture of a public company tasked with serving its shareholders in a politically and economically sensitive environment (ie selling wheat to Iraq) affects its actions.

But there has been a misunderstanding about "corporate culture". Having a non-compliant corporate culture is not an offence in itself. Section 12.3 of the Commonwealth Criminal Code is a provision that, for the purposes of Commonwealth law (including the Corporations Act), sets out when a company is deemed to be at fault when an offence requires fault to be proved: fault .. must be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence.

The means by which such an authorisation or permission may be established include:
....
(c) proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision; or
(d) proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

Factors relevant to the application of paragraph (2)(c) or (d) include:
(a) whether authority to commit an offence of the same or a similar character had been given by a high managerial agent of the body corporate; and
(b) whether the employee, agent or officer of the body corporate who committed the offence believed on reasonable grounds, or entertained a reasonable expectation, that a high
managerial agent of the body corporate would have authorised or permitted the commission of the offence.

corporate culture means an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place.

So the nature of an organisation's corporate cultute is relevant to determining whether a company has committed a fault offence. Commissioner Cole has not identified that offence yet.

Achieving a risk management and compliance-focussed culture means that in addition to organisation values staff need to understand what the risks are and who is responsible for managing and monitoring them. It means being willing to report problems as they go wrong.

AWB Index

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Bill Facilities Regulation by Consumer Credit Code

The UCCCMC has invited comments on the Consumer Credit (Bill Facilities) Amendment Regulation 2006 which will apply the Code to credit arising out of a bill facility unless the credit is provided by an authorised deposit-taking institution. The Explanatory Notes provide background to the Regulation.

Section 7(5) of the Code provides that:
This Code does not apply to the provision of credit arising out of a bill facility, that is, a facility under which the credit provider provides credit by accepting, drawing, discounting or endorsing a bill of exchange or promissory note. However the regulations may provide for the application of the Code to the provision of all or any credit arising out of such a facility.

The closing date for submissions has been expedited to 12 May 2006 because of concerns that the use of the bill facilities exemption for consumer credit is being exploited.

The Department of Consumer and Employment Protection in WA has noted the emergence of fringe providers operating in the WA marketplace using promissory notes. Similar examples have been noted in New South Wales using bills of exchange. In both cases, these credit providers target highly vulnerable consumers including Indigenous consumers and Centrelink recipients.

Senate report on Exposure Draft of the Anti-Money Laundering and Counter-Terrorism Financing Bill 2005

On 9 February 2006 , the Senate referred the Exposure Draft of the Anti-Money Laundering and Counter-Terrorism Financing Bill 2005 to the Senate Legal and Constitutional Legislation Committee for inquiry and report by 13 April 2006 (separate from the Attorney General/AUSTRAC process).

The Senate committee report has now been released.

Chapter 3 deals with concerns raised in submissions and the Department's response.

Chapter 4 sets out privacy issues.

The report concludes:

4.72 Despite expressing optimism in the previous chapter that the majority of outstanding issues will be resolved before finalisation of the regime, the committee does remain concerned about the apparent lack of formal consultation with privacy, civil rights and consumer representative groups in the development of the regime to this point. The committee is of the view that this may have resulted in some fundamental privacy, consumer and civil rights issues being overlooked. Nevertheless, the committee is also hopeful that these issues will be addressed through the parallel discussion groups established by the Department.
4.73 The committee notes the OPC's suggestion that an independent PIA would be useful in relation to the Exposure Bill. The committee agrees with this view and believes that a PIA would be beneficial in achieving a more balanced approach to the AML/CTF regime. This is particularly important given the complexity of the Exposure Bill, the vast number of reporting entities and transactions covered by the Exposure Bill's operation, the amount and type of information to be collected, and the ability of various agencies to access that information. The committee therefore strongly suggests that such an assessment be conducted.
4.74 The committee also notes that the Federal Government intends to address the issue of the small business exemption to the NPPs in relation to reporting entities. However, the committee believes that the concerns raised in submissions and evidence highlight a larger problem in relation to the privacy obligations of reporting entities. The committee's view is that any PIA should include a review as to whether the privacy protections set out in the NPPs are sufficient for the purposes of the information being collected and handled by reporting entities.

Managing conflicts of interest: ASIC Discussion Paper

ASIC has released a discussion paper on managing conflicts of interest in the financial services industry. Financial services licensees have been required to have in place adequate arrangements to manage conflicts of interest since 1 January 2005.

The discussion paper uses hypothetical case studies illustrating real or perceived conflicts of interest across the financial services industry to explain ASIC’s views on how those conflicts should be managed.

The discussion paper suggests practical ways of managing different types of conflicts of interest and covers financial advisers (wholesale and retail), licensees, research report providers, product issuers and fund managers. Comments are due by Friday 9 June 2006.

Following the consultation period, the case studies will most likely be incorporated in ASIC Policy Statement 181.

Link: ASIC sues Citigroup

Reverse mortgages reviewed

ASIC has issued a series of fact sheets on equity release products.

The Australian Consumers' Association has released a report.

The ACA wants state governments to introduce uniform reverse mortgage laws in order to force the industry to standardise its contracts and address problems it found.

It argues that a  new regulatory framework is needed to ensure:

• Separate contracts for reverse mortgages instead of an add-on section in a general home loan contract.
• Contracts are written in plain English
• A cooling-off period
• Default conditions are only in place for serious contract breaches.
• The ‘No Negative Equity Guarantee’ is very clearly spelled out in the contract and should only be conditional on serious breaches of the contract. It should cover the net proceeds of the house in an orderly arm’s length sale.
• All lenders and other companies dealing with the consumer about the loan, such as mortgage brokers and mortgage managers, are members of approved external dispute resolution schemes
• Licensing of mortgage brokers, especially if they’re dealing with reverse mortgages, to help ensure that consumers receive proper and complete advice.

International Comparison of Australian taxes

The Commonwealth Treasurer has released the Report of the International Comparison of Australia’s Taxes by Mr Dick Warburton and Mr Peter Hendy.

The aim of the study was to provide an authoritative statement on the public record about how Australian taxes compare to those in other countries, without making policy recommendations or judgments.

Whilst Australia’s corporate tax take as a proportion of GDP (5.3 per cent) is the third highest of the OECD-30, there are classification issues and Australia’s overall tax burden (31.6 per cent), measured as the tax to GDP ratio, is the eighth lowest of the 30-member OECD.

The Treasurer will consider the Report in his planning for the Budget to be delivered on Tuesday 9 May 2006.

Does auditor independence always require auditor rotation?

Under s324DA of the Corporations Act, the auditor of a listed company or listed registered managed investment scheme is not eligible to play a significant role in the audit of the company or scheme after 5 successive financial years.

ASIC have now issued a Policy Proposal Paper on relief from that requirement.

The Paper usefully gives an overview of the rotation requirements. Schedule 1 provides an overview of the audit market and Schedule 2 gives some examples of how the rotation requirements might apply in practice.

ASIC's view is that can only grant relief if it is satisfied that compliance with the rotation requirements will impose an unreasonable burden on either:
(a) the audit client; or
(b) the auditor .

It may be more likely to grant relief if an applicant can identify a burden on both the auditor and the audit client.

When is consumer protection really over-regulation?

I suspect that that the real problem that consumer protection agencies like ASIC and ACCC wrestle with is how can you force service providers to protect consumers from themselves?

Like cigarettes or speeding drivers, how many health warnings, shock ads or mountains of paper of warnings or disclosure will it take before people realise that a product or act is dangerous to their physical or financial health and comes with risks?

Some schemes or products are just unlawful: schemes to defraud people which are obvious crimes or products which are inherently unsafe.

But in daily life consumers demand choice and are willing to exchange risk for reward.

Can you regulate to protect people from themselves? And when does that regulation inhibit business?

Nicholas Gruen argues that, in the case of finance and mortgage brokers, consumer protection has become over-regulation:

Good regulation would:

1. ensure product information was simple and accessible;

2. subject all brokers to an ombudsman to detect and remove bad practice; and

3. require consumers to be advised that brokers were effectively sales agents who do not cover the whole market. Accordingly consumers would be advised to shop around.

Going beyond these simple measures to put customers in the driver’s seat will make things much worse.

But then we have a Westpoint, and surely someone must be to blame.

Financial services website compliance

I recently presented a web seminar on risk management for financial services websites.

I came up with 3 principles and 17 guidelines for developing a compliant financial services website. Whilst some overlap they are a starting point. But they are not an audit checklist for specific legal requirements:

Principles

1. A business website must be compliant, it can’t just look good
2. It must look good (and be easy to use)
3. Incorporate risk management and compliance into development

Guidelines

1.   Implement consumer protection and accessibility through good design
2. Avoid customer confusion by using well written content
3. Ensure there is adequate disclosure of key legal information
4. Provide security information to customers
5. Protect customer privacy and confidentiality
6. Know your customers
7. Be clear about third party relationships
8. Tell your story:use your website to report to your users about governance, social and     environmental matters as well as financial matters
9. Use your website to communicate with your customers
10. Provide users with interactive tools and functions
11. Provide information for investors
12. Implement member service systems
13. Integrate legal requirements into the website
14. Develop an IT governance policy: know your strategic goal
15. Be innovative
16. Communicate with employees
17. Involve your compliance officer in planning

You can order a copy of the audio recording and 60 page report here.

UPDATE :  Jakob Nielsen's latest article is relevant to Principles 1 and 2:

"the biggest design flaws destroying business value typically involve:

• Communicating clearly so that users understand you. Users allocate minimal time to initial website visits, so you must quickly convince them that the site's worthwhile.
• Providing information users want. Users must be able to easily determine whether your services meet their needs and why they should do business with you.
• Offering simple, consistent page design, clear navigation, and an information architecture that puts things where users expect to find them."

APRA reviews Tier 1 capital for ADI's

APRA has issued a Response to Submissions in respect of its August 2005 discussion paper on the adoption of International Financial Reporting Standards (IFRS), covering Tier 1 capital and securitisation.

The Response addresses the issues raised by respondents, particularly on the characteristics of Tier 1 capital instruments. Released concurrently with the paper are a draft prudential standard and guidance notes on the proposed capital requirements for ADIs (Tier 1 capital guidance note and Tier 2 Capital guidance note).

APRA intends to proceed with the definitions of Tier 1 instruments as proposed with some clarifications and refinements.

APRA proposes to issue the new prudential standards for ADIs late in the second quarter of 2006, to come into effect on 1 July 2006. New Tier 1 capital limits will be effective from 1 January 2008.

Written submissions on the draft prudential standard and guidance notes should be submitted by Friday 28 April 2006.

Reducing business regulation

Links:

• The recommendations of the Report of the Taskforce on Reducing the Regulatory Burdens on Business – Rethinking Regulation
• Joint Press Release by the Prime Minister and the Treasurer, announcing the Australian Government's response.
• Consultation paper on corporate and financial regulation.

ASIC super advice survey results released

ASIC has released the results of its Shadow Shopping Survey on Superannuation Advice.

The purpose of the survey was to assess whether the advice given to consumers after the introduction of Super Choice complied with the law.

Overall, the survey revealed a wide range in the quality of advice — from highly sophisticated advice at one end, with basic but valuable advice in the middle, through to negligent and inappropriate advice at the lower end.

ASIC Chairman, Mr Jeffrey Lucy said " the survey found the financial advice industry still has significant work to do before the quality of advice will be consistently at a level that ASIC and consumers would regard as acceptable.’

The survey revealed that:

• 16% of advice was not reasonable, given the client’s needs (as required by law) and a further 3% was probably not reasonable.
• where consumers were advised to switch funds, a third of this advice lacked credible reasons and risked leaving the consumer worse off.
• unreasonable advice was three to six times more common if the adviser had an actual conflict of interest over the advice given to the client. These conflicts were commonly created where either the adviser stood to get higher remuneration if the recommendation was followed, or the recommended product was associated with the adviser’s licensee.
• In 46% of cases, advisers failed to give a written Statement of Advice (SOA) when one was required. In a fifth of those cases, however, the advice was verbal advice to stay in an existing fund.

ASIC will be conducting specific follow up action with 14 licensees in response to issues raised in the survey. The survey raised particular concerns about the ability of these licensees to ensure their representatives are complying with the law.

ASIC will be sending the survey results to each licensee whose advisers participated in the survey. ASIC expects that these licensees will act quickly to fix any problems identified in the survey.

 Common problems areas seen by ASIC in the survey included:

• advisers not investigating the client’s current super fund before recommending a new fund;
• advisers overlooking the client’s insurance within an existing super fund;
• SOAs not adequately disclosing the reasons for recommended action; and
• SOAs not adequately disclosing the consequences of switching super funds.

The survey assessed 306 examples of advice given to real consumers who were recruited by Roy Morgan Research. The survey covered 259 individual advisers who were representatives of 102 Australian financial services licensees.

Consumer credit ecommerce amendments

The Consumer Credit and Trade Measurement Amendment Bill 2006 (pdf) was introduced into Queensland Parliament on 28 March 2006.

The objectives of the Bill in relation to credit matters are to:
• facilitate the application of the electronic transactions legislation in each State and Territory to the Consumer Credit Code;
• ensure that consumer protection is not diminished as a result of a debtor transacting in an electronic environment; and
• extend the sunset clause in relation to the mandatory comparison rate regime in the Consumer Credit Code by one year to 30 June 2007 to enable a review of that regime to be completed.

UPDATE: Although it is not possible to release the Regulations prior to the Bill being assented it is likely that the exemptions from electronic communication that were proposed in conjunction with the Bill will be adopted in the Regulations. These were:

• a guarantee under section 9
• a copy of a guarantee under section 52(1)(a)
• a copy of a credit contract under section 52(1)(B);
• a copy of a contract document under section 54(2)(a);
• a notice of particulars of change under section 56(1)(a);
• a default notice under section 80(1);
• a default notice under section 80(2);
• information provided to the occupier under section 91(1)(b);
• a request for entry under section 24(a);
• a consent to enter premises under section 24(c);
• a notice under section 94(1);
• a demand on the supplier under section 120(5)(a);
• a demand on the supplier under section 120(6)(a);
• a notice of intention to repossess under section 156(1);
• a transaction on which duty is only charged under the laws of a jurisdiction if the transaction is effected or evidenced by an instrument in hard copy form;
• an instrument on which duty is only charged under the laws of a jurisdiction if the instrument is in hard copy form.

Discrimination in Financial and Work-Related Entitlements and Benefits

The Human Rights and Equal Opportunity Commission has announced it will conduct a National Inquiry into discrimination against same-sex couples in accessing financial and work-related entitlements.

The Inquiry will conduct an audit of Commonwealth, State and Territory laws to develop a full list of circumstances in which same-sex couples and their children may be denied financial and/or work-related benefits and entitlements that heterosexual couples enjoy. The Inquiry will also collect individual stories about the impact of these laws on people in same-sex relationships.

The laws considered by the Inquiry will include laws dealing with:

1. Workplace leave entitlements
2. Social security benefits
3. Tax concessions
4. Medicare and the Pharmaceutical Benefits Scheme
5. Superannuation entitlements
6. Workers' compensation
7. Veterans' pensions and entitlements
8. Parliamentary entitlements
9. Judicial pensions
10. Inheritance

How to make submissions

National Do Not Call Register to be established

Following on from a Discussion Paper last year, the Minister for Communications, Information Technology and the Arts, Senator Helen Coonan, has announced that a national, legislated Do Not Call register will be created in 2007 to protect consumers from nuisance telemarketing phone calls.

The Government expects that there will be one million registrations in the first week of operation and four million after the Register’s first year.

The Register will apply to all telemarketers operating in Australia, as well as those overseas telemarketers who represent Australian companies. Enforcement options will include warnings, fines, formal directions and financial penalties.

The legislation will also establish national minimum contact standards for telemarketers.The standards will cover permitted calling hours, minimum information requirements and termination of calls.

The register will be open to individuals and small businesses who can opt out from receiving unsolicited telemarketing calls. Once a telephone number is registered, it will be prohibited for telemarketers to contact that number.

A limited range of exemptions will apply, for example, to charity groups and people undertaking social research. Exemptions will also apply to companies with an existing business relationship with an individual, for example with existing accounts or contracts.

Individuals and small businesses will not be required to pay a fee for registering their telephone numbers. Telemarketers will contribute to the costs of running the scheme through the payment of subscription fees to access the register.

Managing conflicts of interest in financial services: ASIC sues Citigroup

Since ASIC issued PS 181 there has been discussion about how it would be applied: ASIC's action against Citigroup Global Markets Australia Pty Ltd (Citigroup) gives us the first example.

ASIC says that Citigroup breached the conflicts policy and the law in not disclosing to Toll that it was trading in Patrick's shares on its own account whilst advising Toll.

ASIC has alleged that Citigroup:    

* did not have in place adequate arrangements for the management of conflicts between its own interests and the interests of its client, Toll;    

* engaged in unconscionable conduct in relation to financial services;    

* engaged in proprietary trading on the basis of inside information; and    

* did not have in operation arrangements that could reasonably be expected to ensure that inside information was not communicated to the Citigroup employee who traded in Patrick shares for the benefit of Citigroup.

Citigroup acted as an adviser to Toll Holdings Limited (Toll) in its $4.6 billion takeover bid for Patrick Corporation Limited (Patrick) announced on Monday 22 August 2005.

ASIC’s investigation into Citigroup identified substantial proprietary trading (trading on its own account) by Citigroup in Patrick securities on 19 August 2005, the last business day prior to Toll making an announcement of the bid to the market.

ASIC is seeking, among other things, the following declarations and orders:    

* declarations that Citigroup breached both the ‘conflicts of interest’ and ‘insider trading’ provisions of the Corporations Act (the Act);    

* orders requiring Citigroup to comply with s 912A(1)(aa) of the Act by putting in place adequate procedures for dealing with conflicts of interest;    

* injunctions restraining Citigroup from engaging in a breach of s 12CA of the ASIC Act by trading in securities on its own account while acting for clients to whom Citigroup owed duties in relation to the price of those securities;    

* orders under s 12GLA of the ASIC Act, requiring Citigroup to undertake certain action, including community service or education; and    

* orders that Citigroup pay a pecuniary penalty to the Commonwealth for a contravention of s 1043A(1) of the Act.

UPDATE: Read the statement of claim and trial submissions

UPDATE 28 June 2007: Decision: ASIC's claims fail