Australian Regulatory Compliance Review

Financial services compensation arrangements finalised

Corporations Amendment Regulations 2007 (No. 6) have been made to complement section 912B of the Corporations Act 2001 (the Act) and will operate from 1 July 2007.

Under section 912B, Australian financial services licensees (licensees) providing a financial service to retail clients must have arrangements for compensating them in the event of monetary losses suffered due to breaches of relevant obligations under the law. This may include providing inappropriate advice, or false or misleading conduct.

The new regulations provide that section 912B is satisfied if licensees have adequate professional indemnity insurance in place. Existing licensees as at 31 December 2007 have until 1 July 2008 to put their insurance in place. New licensees after 1 January 2008 must comply immediately on commencement of their licence. The regulations also deal with the return of the security bonds to licensees by the Australian Securities and Investments Commission (ASIC) and disclosing compensation arrangements in Financial Services Guides.

The foolowing AFS licensees are exempt from the insurance requirement:

(i) a general insurance company regulated by APRA under the Insurance Act 1973;
(ii) a life insurance company regulated by APRA under the Life Insurance Act 1995;
(iii) an authorised deposit-taking institution regulated by APRA under the Banking Act 1959.

Financial Sector Reform

The two reform Bills (see here and here) are now on ComLaw:

Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007

Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007

Both Bills are being considered by the Senate Economics Committee which is due to report on 31 July 2007.

Access Card update

The Office of Access Card has issued a series of fact sheets to accompany the second exposure draft of the Human Services (Enhanced Service Delivery) Bill 2007.

Chair of the Consumer and Privacy Taskforce, Professor Allan Fels AO, has also released a report on the Access Card Review and Appeals System and the Taskforce advice on governance.

“The Taskforce has recommended that a comprehensive system of internal and external review be established in relation to decisions about the card that affect individuals. Accountability mechanisms, primarily to the Parliament, should be strong,” Professor Fels said.

The draft Bill proposes to establish a dedicated Access Card Ombudsman rather than a separate review body for external reviews if a person is dissatisfied with an internal merits review.

Simpler Regulatory System Act commences

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and accompanying Bills were given Royal Assent on 28 June 2007.

UPDATE 5 July: Here's the Act

Most of the Simpler Regulatory System package commences on either Royal Assent or 1 July 2007.  Some parts, including particular changes to the regulation of financial advice, will not be fully effective without forthcoming supporting regulations.

UPDATE 5 July: here are the regulations

The Regulations to implement the Act are:

• Corporations Amendment Regulations 2007 (No. 2)
• Corporations Amendment Regulations 2007 (No. 3)
• Corporations Amendment Regulations 2007 (No. 4)
• Corporations Amendment Regulations 2007 (No. 5)
• Corporations Amendment Regulations 2007 (No. 6)
• Corporations Amendment Regulations 2007 (No. 7)
• Corporations Amendment Regulations 2007 (No. 8)

UPDATE 28 August: Corporations Amendment Regulations 2007 (No. 10)

You can check when the changes you are interested in commence by looking at my articles here.

The changes take effect immediately include amendments to facilitate distribution of annual reports over the internet, and to increase the monetary thresholds to define a large proprietary company as these thresholds have not been adjusted since 1995.  As these changes apply immediately, so they affect financial reports relating to the 2006-07 reporting period ending on 30 June 2007.

ASIC v Citigroup decision: no conflict and no insider trading

In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited
(ACN 113 114 832) (No. 4) [2007] FCA 963, the Federal Court has dismissed ASIC's claims and decided that :

(a)     Citigroup did not contravene its obligations under s 912A(1)(aa) of the Corporations Act to have in place adequate arrangements for the management of conflicts of interest (as it did not have a conflict); and

(b)     Citigroup did not breach the provisions of s 1043H of the Corporations Act and s 12DA of the ASIC Act which prohibit misleading and deceptive conduct; and

(c)     Citigroup did not contravene the insider trading provisions contained in s 1043A of the Corporations Act (firstly because the trader was not an "officer" of Citigroup and because he did not make the supposition alleged by ASIC as a result of a discussion with his superior (that Citigroup was acting for Toll in relation to the proposed takeover of Patrick) and secondly because the Chinese walls defence contained in s 1043F of the Corporations Act was engaged.)

As discussed here, the proceedings arose out of the purchase by a public side employee of Citigroup of over 1 million shares in Patrick Corporation Limited (‘Patrick’) at a time when private side employees working in the Investment Banking Division were acting for Citigroup’s client, Toll Holdings Ltd (‘Toll’) on a proposed takeover bid for Patrick.  The shares were purchased by the proprietary trader for Citigroup’s own account on the last trading day before Toll announced its bid for Patrick. When private side employees became aware of the proprietary trader’s purchase of the shares, steps were taken from within the private side that resulted in an instruction to the trader to stop buying any more shares in Patrick.  The trader did not buy more shares but in the half hour before the close of trading, he sold nearly 200,000 of the parcel of Patrick shares that he had purchased earlier that day.

The Court accepted Citigroup's  argument that  the terms of its letter of engagement with Toll excluded the existence of any fiduciary relationship between the investment bank and its client. ASIC contended that, notwithstanding the existence of a clause in the letter which excluded the existence of such a relationship, the investment bank breached certain fiduciary duties to its client by failing to obtain the client’s informed consent to proprietary trading in the takeover target’s shares by another division of the bank.The Court decided that the law does not prevent an investment bank from contracting out of, or modifying, any fiduciary obligations. In the absence of proof of a fiduciary relationship, ASIC's main claims failed.

The judgment contains useful discussions about conflicts of interest, insider trading and Chinese walls.

UPDATE 29 June: ASIC comments: "The Court has clarified important aspects of insider trading law, for example the operation of ‘Chinese Walls’ and the passing of sensitive information. These clarifications will assist ASIC in pursuing insider trading actions." 

UPDATE 18 July 2007: ASIC will not appeal

Simpler Regulatory System: financial services regulation changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 made changes to FSR requirements including:

• removing the need for a Statements of Advice to be provided in two circumstances:  where there is no recommendation in relation to a particular financial product and no remuneration (eg a free initial consultation or where a financial adviser recommends that a person continue to hold an existing product); and where the amount to which the advice relates is under the prescribed threshold;

• refining the circumstances where a Financial Services Guide is not required to be provided, particularly at seminars which are not open to the public;

• introducing changes to the retail/wholesale client distinction regarding sophisticated investors;
• refining the liability of licensees under the cross-endorsement provisions where authorised representatives act for a number of financial services licensees with their consent;

• introducing a new ‘in use’ notice for Product Disclosure Statements to determine when a Product Disclosure Statement is no longer current;

• improving the mechanism whereby the Australian Securities and Investments Commission (ASIC) takes a role in overseeing compliance with a financial market’s rules where the market operator has a conflict of interest; and

• allowing registered managed investment schemes to invest in unregistered managed investment schemes.

Statement of Advice exemption — no product recommendation and no remuneration
The requirement to provide a Statement of Advice when personal advice is provided that does not involve the recommendation of a product and no remuneration is received for, or in relation to, the advice will be removed. Instead, a Record of Advice will be required to be prepared by the adviser and provided to the client upon their request.

The measure does not alter the need for the advice to be appropriate or for the adviser to be appropriately trained to provide personal advice.

The amendments will commence on Royal Assent.

Threshold for requiring a Statement of Advice
A threshold will be introduced into the Statement of Advice requirements so that a full Statement of Advice will only be required if the advice given is in relation to an investment amount that is above a prescribed threshold. A Record of Advice would need to be given to the client for advice in relation to amounts less than this threshold.

An initial threshold of $15,000 is proposed.

A Statement of Advice will be required to be prepared and provided to a client if the amount to which the advice relates is $15,000 or more.  For advice relating to amounts less than $15,000, the adviser will be required to provide a Record of Advice to the client.

The Bill will limit the application of this relief in relation to superannuation advice where the advice relates to consolidation into, or supplementation of, a superannuation fund in which the person is an existing member.

The amendments will commence on Royal Assent.

Financial Services Guide exemption — general advice to the public
A Financial Services Guide will not need to be provided at a forum where 10 or more retail clients attend, whether or not it is open to any person to attend the forum.

The amendments commence from a day to be fixed by Proclamation.  If no date is fixed within 6 months from the date on which the Act receives Royal Assent, then the amendment will commence on the first day after that period.

Sophisticated investors
In Chapter 7 of the Corporations Act 2001 a mechanism will be adopted similar to provisions of Chapter 6D, which allows a financial services licensee to be satisfied that investors who satisfy a financial services licensee as to their experience may be treated as wholesale clients for the purpose of Chapter 7.

The amendments will commence on Royal Assent. The amendments apply to financial products and financial services provided on and after the day the amendments commence.

Cross‑endorsement of authorised representatives
The cross‑endorsement arrangements will be amended so that licensees are only jointly and severally responsible for the conduct of their authorised representatives where those representatives provide financial services in relation to the same sub‑class of financial product.

The amendments commence from a day to be fixed by Proclamation. If no date is fixed within 6 months from the date on which the Act receives Royal Assent, then the amendment will commence on the first day after that period. The amendments apply in relation to the conduct of a representative on or after the day on which the amendments commence.

Product activity and data collection
Amendments will replace the current mechanism for reporting the requirements of the in‑use notice with a new mechanism which will require the responsible person for a Product Disclosure Statement (PDS) to provide information in a standardised online report when:

• a financial product for which a PDS must be prepared is first recommended, issued or sold;
• a financial product for which a report previously had to be made ceases to be available to be recommended;
• there is a change in the fees and charges set out in the enhanced fee disclosure table; or
• changes are made in a supplementary or new PDS.

The requirement commences on 1 July 2008, when ASIC has established the on-line report and electronic lodgement mechanism. From 1 July 2008 to 1 January 2009, both hard copy and electronic lodgement will be available. From 1 January 2009, the notices will have to be lodged electronically.

Self‑listing and licensed market operators
Amendments will provide for ASIC to supervise listed entities which are related to the market licensee, and participants who are related to or in competition with the market licensee.

The new section 798C will apply not only to market licensees, but also to a body corporate related to the market licensee, a managed investment scheme whose responsible entity is a related body corporate of the market licensee and a trust whose trustee is a related body corporate of the market licensee, if they list on that market.

The amendments commence on Royal Assent.

Pooled superannuation trusts and product disclosure
The current exemption from licensing for dealing services provided by trustees of pooled superannuation trusts under the retail/wholesale client test will be extended to the product disclosure framework.

The trustees of superannuation funds, approved deposit funds, pooled superannuation trusts or public sector superannuation schemes with net assets of at least $10 million are no longer treated as retail clients for the purpose of the product disclosure and related provisions when acquiring an interest in a pooled superannuation trust.

The amendments commence on Royal Assent.

Registered managed investment schemes investing in unregistered managed investment schemes
The prohibition on investments by managed investments schemes in unregistered managed investment schemes will be removed.

The amendments commence on Royal Assent.

Non‑cash payment facilities
Disclosure requirements that apply to all non‑cash payment facilities that are not related to a basic deposit product will be streamlined by applying the same limited disclosure requirements to these facilities. The disclosure requirements that currently apply to non‑cash payment facilities related to basic deposit products will be maintained.

This change will be implemented by regulation.

Tax law on rights issues to be amended

Peter Dutton MP, Minister for Revenue and Assistant Treasurer, has announced proposed amendments to the income tax law to restore the long‑standing taxation treatment of rights issues.

“Shareholders issued with rights by companies seeking to raise capital will not have an income tax liability at the time of issue. Instead, the long‑standing position to treat rights issues on capital account will be maintained”, Mr Dutton said.

Some consequential amendments will be made to the capital gains tax rules to ensure that rights issued by companies are treated consistently.

“These amendments will provide certainty for taxpayers by restoring the taxation treatment of rights issues that existed before the decision of the High Court of Australia in Commissioner of Taxation v McNeil [2007] HCA 5”, Mr Dutton said.

“The bring-forward of a tax liability under McNeil’s case would impose unnecessary compliance costs on companies and their shareholders.”

The amendments will overrule ATO Class Ruling CR 2007/42 issued after the McNeil decision.

The amendments will apply from the 2001-02 income year. This will prevent any adverse application of McNeil’s case to companies and their shareholders.

The Government will consult with stakeholders on the development of legislation to implement the changes.

You know there's an election coming on when...there are a lot of new laws to digest

Commonwealth Parliament is now in recess until 7 August 2007 but it's clear that Bills had to be introduced in the last session to have a chance of being passed and implemented before the election due later this year.

Looking at the Bills List (pdf) there are Bills which implement Budget measures (eg the tax changes), government policy changes (eg the Work Choices Safety Net), government responses to Inquiries (the International Trade Integrity Bill) and some which represent the culmination of a long period of consultation and negotiation (eg the Simpler Regulatory System package, the Trade Practices Act small business protection changes). Other Bills (such as Access Card) have had to be amended and will likely wait for the next term to be re-introduced.

For businesses, absorbing the effect of all of these new laws at the same time is time consuming and distracting. Perhaps a 4 year electoral cycle would lead to fewer "last minute rushes".

ASIC v Vines penalty reduced on appeal

In Geoffrey William Vines v Australian Securities & Investments Commission [2007] NSWCA 75, the New South Wales Court of Appeal partially allowed Vines' appeal against findings that he had breached his duty to act with reasonable care and diligence on certain occasions during the course of AMP's 1998–99 takeover bid for GIO Australia.

ASIC has announced that the New South Wales Court of Appeal has ordered that Geoffrey William Vines, a former Chief Financial Officer of GIO Australia Holdings Ltd (GIO), pay a pecuniary penalty of $50,000 for his conduct during the takeover bid. This penalty replaces the order made in 2006 by Justice Austin of the Supreme Court of New South Wales that Mr Vines be disqualified from managing a corporation for three years and pay a $100,000 pecuniary penalty.

The Court of Appeal also held that Mr Vines was a fit and proper person to manage a corporation and therefore, under the law that applied at the time, it declined to disqualify him and set aside Justice Austin’s disqualification order.

Section 1317EA of the Corporations Law, which dealt with the disqualification of directors at the time of Mr Vines’ conduct, was repealed with effect from 13 March 2000 and replaced by section 206C of the Corporations Act. The difference between the two provisions is that under the old law the court could not disqualify a person they considered fit and proper to manage a corporation. Under the new law the test is broader and the court can disqualify a person if they are satisfied that the disqualification is justified.

ASIC was ordered to pay Mr Vines’ costs of the appeal.

AFS licence requirements updated

ASIC has released updated versions of Policy Statement 166 Licensing: Financial requirements [PS 166] and Pro Forma 209 Australian financial services licence conditions [PF 209].

ASIC has also withdrawn the following three licensing guides:

• Meeting the financial requirements for your AFS licence: Compliance with Policy Statement PS 166—An ASIC guide (January 2004)
• Responsible officers: Demonstrating compliance with organisational competency obligations—An ASIC guide (July 2003)
• Small business and your AFS licence: Compliance with Policy Statements 164 and 181—An ASIC guide (December 2004)

The guides are no longer needed as the key guidance they provide has been or will be incorporated into PS 166, the AFS licensing Kit (reissued in November 2005) and the planned update of Policy Statement 164 Licensing: Organisational capacities PS 164 which ASIC intends to issue by September 2007.

There are two minor changes to ASIC’s policy on financial requirements as follows:

• An amendment to the calculation of ‘surplus liquid funds’ to allow the addition of a percentage of non-current assets for certain AFS licensees who are eligible providers.
• An amendment to the standard adjustments that need to be made by AFS licenses who underwrite (or sub-underwrite) financial products that are subject to statutory exposure periods.

The changes respond to industry related queries about the application of ASIC’s financial requirements policy and some of the existing licence conditions.

The changes come into effect immediately. An AFS licensee who wishes to take advantage of the changes to PF 209 must apply for a variation to its AFS licence using ASIC form FS03, requesting that the revised versions of all of the conditions and definitions in PF 209 apply under their licence.

ACMA fines 2 companies for Spam Act breaches

In 2 separate cases, the Australian Communications and Media Authority has fined the Pitch Entertainment Group (Pitch) $11,000 and International Machinery Parts Pty Ltd (IMP Mobile) $4,400 respectively for breaches of the Spam Act.

Pitch and its directors have also entered into an enforceable undertaking that requires future compliance with the Spam Act and contains stringent compliance reporting and staff education obligations.

ACMA found that the Pitch Entertainment Group, which trades as Splash Mobile in Australia, sent over one million commercial electronic messages to mobile phones without a functional unsubscribe facility.

IMP Mobile also failed to provide a functional unsubscribe facility when sending messages to mobile phones.

High Court grants special leave to appeal in APL v Alinta

In A-G of the Commonwealth v Alinta Limited & Ors the High Court has granted special leave to appeal the Federal Court Full Court decision in APL v Alinta which limited the Takeover Panel's jurisdiction.

Managed Funds Product Rationalisation

Treasury has issued an Issues Paper to serve as the basis for consulting stakeholders about a product rationalisation mechanism in the managed funds sector. Product rationalisation refers to a mechanism for removing outdated managed funds products by transferring beneficiaries out of these products into new products with modern features.

The Paper sets out for discussion purposes a number of possible product rationalisation mechanisms.

Credit Standards in Housing Lending

In a recent speech APRA Chair John Laker set out the basis for APRA's approach to supervision of credit standards in housing lending by giving details of its comprehensive review of the debt serviceability policies of a large group of ADIs, which it followed up with a survey of all housing loan approvals by that group in September 2006. This analysis has given APRA a detailed insight into the riskiness of ADI housing loan portfolios and a solid ‘peer group’ basis to pursue any prudential concerns with individual lenders.

APRA reviewed the credit policy manuals of 47 ADIs, which account for around 80 per cent of total ADI housing loans. For banks, APRA was able to compare these policies to those from a similar study conducted by the Reserve Bank of Australia in 1998.

Phase one of APRA's debt serviceability review confirmed that the net income surplus model is now the most common debt serviceability test used by ADIs. Ninety per cent of the ADIs reviewed use this model (some in conjunction still with the previous common debt servicing ratio of 30 per cent of the share of gross income).

Under the net income surplus model, the maximum loan amount is calculated on the basis of eligible sources of income, an estimate of basic living expenses, the interest rate, and any discount or margins applied to these components. APRA found that the methodology and assumptions used, and therefore the maximum loan amounts, vary significantly across ADIs, and more so than it expected.

In phase two, APRA invited those ADIs that participated in phase one to provide data on every housing loan approved during the month of September 2006.

APRA’s general assessment is that housing lending remains a sound asset class for its regulated lenders. However, the review has confirmed that housing lending portfolios have become somewhat more risky, whether measured in terms of higher LVRs or debt servicing burdens on borrowers.

Simpler Regulatory System Bill passed

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and related legislation was passed by the Parliament on 21 June 2007.

Some parts of the package will commence on Royal Assent, others on 1 July or within 6 months.

Some parts of the package, particularly changes to streamline regulation of financial advice, require supporting regulations which will be issued in the coming weeks.  There will also be regulations to refine the financial services provisions to, among other things, allow disclosure documents to incorporate supplementary material by reference, thereby making them shorter and easier for consumers to understand.

UPDATE: Royal Assent given on 28 June 2007

Simpler Regulatory System: takeover rules changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will make amendments to the takeovers provisions in the Corporations Act.

Removal of telephone monitoring during takeover bids
The provisions of the Corporations Act that require the recording, storing, destroying, accessing and copying of the recordings of telephone conversations with retail shareholders during takeover bids are repealed.

The purpose of the subdivision was to ensure that security holders did not receive information from the takeover bidder or target that could be considered misleading.

The existing provisions have not increased the protection of security holders and impose significant costs on the parties involved.

The repeal of the telephone monitoring requirements will take effect on the day of Royal Assent.

85 per cent notices
The provisions of the Corporations Act that require the disclosure of an 85 per cent holding are repealed.

The provisions were enacted to provide holders of securities with an advanced warning that the majority holder is approaching the 90 per cent limit, at which the majority holder can compulsorily acquire their securities.

However, it is often the case that the minority are already aware of the majority holder’s position.  For listed entities, other mechanisms in the Corporations Act will mean that the information is already publicly disclosed.

The repeal of the 85 per cent notice requirement will take effect on the day of Royal Assent.

New rules for foreign insurers in Australia: Bill introduced

The Minister for Revenue and Assistant Treasurer, the Hon Peter Dutton MP has introduced the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 into Parliament.   

Under the Bill, foreign insurers providing general insurance products in Australia either directly or through the actions of another (for example, an insurance agent or broker) will be required to be authorised by the Australian Prudential Regulation Authority, and comply with Australia’s risk-focused prudential framework.

UPDATE: The Senate Economics Committee Report is due on 31 July 2007

Background

Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007

The Minister for Revenue and Assistant Treasurer, the Hon Peter Dutton has introduced the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 into Parliament.

The Bill contains a number of measures that are in keeping with the “Rethinking Regulation” Report from the Taskforce on Reducing Regulation Burdens on Business.  

The Bill includes measures to:

• streamline breach reporting;
• provide greater flexibility through exemption  powers, enforceable undertakings and discretion under prudential standards;
• simplify processes for appointing actuaries and  auditors and enhanced cooperation with professional bodies; and
• simplify the Life  Insurance Act 1995 and the Superannuation  Industry (Supervision) Act 1993.

UPDATE: The Senate Economics Committee Report is due on 31 July 2007

Access card: second exposure draft bills released

The Minister for Human Services, Senator the Hon. Chris Ellison, has released for public comment second exposure drafts of the Human Services (Enhanced Service Delivery) Bill 2007 and the Human Services (Enhanced Services Delivery) (Consequential Provisions) Bill 2007.

The period for public comment on the draft Bills closes on Tuesday 21 August 2007.

Productivity Commission Inquiry into consumer policy

The Productivity Commission expects to release its draft report on consumer policy by late July/early August 2007.

The Commission is to report on:

• ways to improve the consumer policy framework to assist and empower consumers, including disadvantaged and vulnerable consumers, to operate effectively in increasingly complex markets;
• ways to better harmonise and coordinate consumer policy across jurisdictions, including by reducing reliance on industry-specific regulation and making greater use of general consumer regulation;
• any areas of consumer regulation that are unlikely to provide net benefits and which could be revised or repealed; and
• the extent to which more effective use could be made of self-regulatory, co-regulatory, consumer education and consumer information approaches and principles-based regulation.

The Commission has completed its intial public hearings.

AUSTRAC releases indicative AML compliance report questions for consultation

The AML/CTF Rules to be made under section 47(1) of the AML/CTF Act will specify the reporting period(s) and the lodgement period within which compliance reports are required to be submitted to AUSTRAC.

Subsection 47(3) requires reports to be in the approved form and to contain any such information as required by the form.

AUSTRAC has released indicative AML compliance report questions to provide reporting entities with information as to the types of questions that will be contained in the first AML/CTF compliance report under the AML/CTF Act, regulations and Rules, and to seek feedback. The questions are indicative of the types of questions AUSTRAC may ask, though AUSTRAC has said it does not envisage that there will be major changes to the following questions for the forthcoming AML/CTF compliance report.

The AML/CTF compliance report is based on key elements of the AML/CTF Act, regulations and the Rules. The report is structured with questions grouped under section headings as follows:

1. Introduction/information
2. Correspondent Banking
3. Electronic Funds Transfer Instructions
4. Anti-money laundering and counter-terrorism financing programs
    a. AML/CTF programs Part A
    b. AML/CTF risk awareness training program
    c. Employee due diligence
    d. Compliance
    e. Independent Review
    f. AML/CTF programs Part B - Customer Identification Procedures

Simpler Regulatory System: Fundraising changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will make amendments to the fundraising provisions in the Corporations Act. There are 6 principal areas of change:

Employee unlisted share schemes disclosure
Relief will be provided from certain of the licensing and hawking restrictions of the Corporations Act for employee share schemes for unlisted companies. This relief will be subject to the condition that such employee share schemes must be accompanied by a disclosure document such as an Offer Information Statement or a prospectus. Listed entities may also take advantage of this relief if they wish, subject to the same condition.

The amendments apply to employee share schemes offered on or after the day on which the amendments commence.

Small scale offerings
The definition of sophisticated and professional investors in Chapter 6D of the Corporations Act will be amended to align with that used for wholesale investors in Chapter 7.

The maximum amount of money that may be raised using an Offer Information Statement when combined with funds previously raised will be increased to $10 million or less.

The amendments relating to small scale offerings commence on Royal Assent.

Secondary sale issues
Amendments will allow controllers to arrange sales of securities they hold without disclosure subject to the existing section 708A conditions, but subject to the requirement that the controller and the company provide a cleansing notice in order to provide up to date price sensitive information to the market.

The required period for quotation of the securities will be reduced to three months to provide such a track record and, therefore, provide some relief from the current requirement of 12 months.

The amendments relating to secondary sale issues commence on Royal Assent.

Quoted securities rights issue disclosure
Amendments will provide that rights issues for quoted securities and interests in managed investment schemes do not require the production of a prospectus or PDS. A cleansing notice will have to be provided before the rights issue offers are made, and the notice must include appropriate information on the consequences of any potential effect of the rights issue on the control of the entity.The amendments relating to rights issues commence on Royal Assent.

Prospectus and PDS advertising rules
Amendments will align the prospectus advertising provisions relating to quoted securities and advertising post lodgment of a prospectus for unquoted securities with those pertaining to financial products (other than securities).

The amendments relating to advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products commence on proclamation or six months after Royal Assent, whichever is earlier.

ASIC’s stop‑order powers will be extended to cover advertising of quoted and unquoted securities and other financial products.

Stapled securities disclosure
The application of the provisions regarding replacement prospectuses will be extended to cover combined prospectus/PDSs prepared for offers of stapled securities comprising one or more shares and one or more units in managed investment schemes.

The amendments relating to Replacement Product Disclosure Statements for stapled securities commence on Royal Assent.   

Inquiry into the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007

The Parliamentary Joint Committee on Corporations and Financial Services has released its Report on the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 (pdf).

The Committee said there was general support for the Bill and recommended the Bill be passed but noted that there was concern over details of the FSR changes, especially those relating to Statements of Advice and Product Disclosure Statements.

Simpler Regulatory System: Corporate Governance changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will make amendments to the Corporations Act to:

·      allow public companies to give small financial benefits to related parties without seeking member approval in certain circumstances;

·      allow delegation to ASIC of the function of consenting to grant a particular company name notwithstanding it is identical to another name or otherwise unacceptable; and

·      remove the requirement for companies exempted from using ‘limited’ in their name to seek ministerial approval for changes to their constitutions, and replace it with a requirement to notify ASIC of any changes.

Related party approval thresholds
The related party transactions provisions in Part 2E.1 of the Corporations Act require that public companies obtain member approval before they can give any financial benefit to a related party (such as a director, a director’s spouse, a controlling entity, or entities controlled by mutual entities), unless the benefit fits within certain exceptions.

The Bill will insert a provision into the Corporations Act to provide that member approval is not required for giving a financial benefit to a related party which is at or below a prescribed amount aggregated over a financial year.  [Schedule 1, Part 2, item 190]. This would avoid the need for member approval of what could be considered minor transactions.

It is expected that the amount initially prescribed will be $5,000.

The new provision will repeal and replace the current section 213 and absorb its effect.  The current provision allows payments at or below $2,000 to related parties who are directors or directors’ spouses to be made without member approval.  Under the new provision, member approval will not be required for giving a financial benefit to these related parties (ie directors or directors’ spouses), which is at or below the prescribed level aggregated over a financial year.

By referring to ‘amounts or values’, the provision contemplates both monetary and non-monetary financial benefits.  It is intended that non-monetary financial benefits will be valued by reference to ordinary valuation concepts.

The new section 213 will not interfere with the requirements on directors or officers to exercise their powers and discharge their duties in accordance with other provisions of the Corporations Act, including the duties in Part 2D.1 and rules under the general law.

The amendments regarding related party transactions apply to financial years commencing on or after 1 July 2007. 

Company names
The Bill will allow delegation to ASIC of certain administrative functions regarding identical or unacceptable company names, and approval of changes to certain corporate constitutions.

The amendments allowing delegation of administrative functions to ASIC will commence on 1 July 2007.

Government to pay small businesses interest on late payments by it

The Government has introduced the Late Payment of Government Debts (Interest) Bill 2007.

The objects are:
"(a) improve the payment culture of government by penalising late payments of its commercial debts to small businesses; and
(b) compensate small businesses for the impact on their cash flow of receipt of late payment of government debts."

The Government would pay interest at the same rate as is currently paid to it in relation to tax.

The definition of "small business" is the same as for "small business entity" used in the Tax Laws Amendment (Small Business) Bill 2007:an aggregated turnover for the previous year of less than $2 million.

Government to amend Trade Practices Act: small business protection

The Treasurer has announced that the Government intends to introduce the Trade Practices Legislation Amendment Bill (No. 1) 2007 (the Bill) to amend section 51AC and section 46 of the Trade Practices Act 1974 (the Act) on 20 June 2007.

The Bill will improve protection for small business from unconscionable conduct and from the misuse of market power, such as predatory pricing.

The Bill substantially implements the Government’s response to the March 2004 Senate Economics References Committee (SERC) report on The effectiveness of the Trade Practices Act 1974 in protecting small business.

Based on the discussions with small business, the Government will change its legislation, to provide that:

• for the purposes of section 46, more than one corporation can have a substantial degree of power in a market;
• a corporation can have a substantial degree of market power even though it does not substantially control a market;
• a corporation can have a substantial degree of market power in a market even though it does not have absolute freedom from constraint in that market by the conduct of its competitors or persons to or from whom the corporation supplies or acquires goods or services; and
• in regard to below-cost or predatory pricing, the Court may have regard to any conduct that consisted of supplying goods or services for a sustained period at a price that was less than the relevant cost to the corporation of supplying such goods or services, and the reasons for that conduct.

An earlier proposal to insert reference to a reasonable prospect or expectation of being able to recover losses incurred by below‑cost pricing as a factor in section 46 will not be pursued, in light of concerns that it may limit the ability of the court to find breaches of section 46 in cases of predatory pricing.

Simpler Regulatory System: Company reporting changes

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 when passed will simplify company reporting obligations.

Executive remuneration
Amendments will remove duplication in the executive remuneration disclosure requirements between the Corporations Act and accounting standards so that the remuneration disclosure requirements for individual directors and executives of listed companies will be exclusively contained in the Corporations Act.  Following on from the amendments to the Corporations Act in this Bill, the remaining remuneration disclosure requirements in the accounting standards will be incorporated into the Corporations Regulations.

The Act will adopt the standards' definition of ‘key management personnel’.

Disclosures will be made in a company’s directors’ report instead of the financial report. 

The amendments regarding executive remuneration will apply to financial years that begin on or after commencement.

Companies that are disclosing entities must disclose their policy in relation to directors and executives hedging their incentive remuneration and how the company enforces this policy.

Thresholds for financial reporting of large proprietary companies
The revenue and asset thresholds for financial reporting of large proprietary companies will be increased. The revenue and assets thresholds that determine a large proprietary company will be increased by 150 per cent from $10 million in revenue to $25 million in revenue and from $5 million in assets to $12.5 million in assets. The threshold regarding the number of employees will remain at 50 employees.

The changes to thresholds for reporting for large proprietary companies will take effect in the financial year that ends on or after commencement.

Change in office holders
The requirement for a company to notify ASIC of a change in officeholder, where the officeholder has already notified ASIC, will be removed. The changes to requirements for companies to inform ASIC when officeholders change will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Company addresses
A single process for notification of an update of all company addresses will be implemented. This will allow companies to nominate an address, separate from the registered office address, at which they prefer to receive documents from ASIC. But if they do so a company must lodge a change to its contact address in the prescribed form. This will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Voluntary deregistration
Amendments will allow deregistration of a company to proceed where an annual review fee becomes payable or is incurred after the application for deregistration is approved. This will commence on Royal Assent.

Upfront payment of annual fees for companies
Amendments will allow companies to pay a single sum to cover review fees for an extended period.

For example, instead of $212 per year for 10 years ($2,120), proprietary companies would only be required to pay a one-off fee of $1,600.

The change will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent

Electronic distribution of annual reports
The default option for receiving annual reports will be changed to be via the Internet if a company does not wish to send every shareholder a hard copy. But if a company chooses to distribute reports in this way it must comply with new section 314(1AA). Members will continue to be able to choose to receive a hard copy or an electronic copy of annual reports free of charge if they so elect.

Under section 314(1AA)(c) a company must directly notify those members who did not receive a hard copy that the reports are accessible on the web site, and specify the direct address of the web site (ie the URL of the reports). This notification can be made in hard copy, or by electronic means (for example, e-mail or fax).

The amendments regarding distribution of annual reports apply to a financial year that ends on or after commencement.

I discuss this change in detail in my June podcast.

The Simpler Regulatory System Package update

The Simpler Regulatory System Package was passed by the House of Representatives and introduced into the Senate on 14 June 2007.

The Government intends to pass the Bills this week so that certain provisions can commence on 1 July 2007.

As the Bills cover a range of topics (Financial Services Regulation, Company Reporting Obligations,  Auditor Independence,  Corporate Governance,  Fundraising,  Takeovers, and  Compliance) which I summarised here, I will do separate notes dealing with the final changes in each area.

UPDATE: Detailed notes now added on

Company reporting changes

Corporate governance

Fundraising

Takeover rules

Report to my readers

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International Trade Integrity Bill introduced

The Government's response to the AWB Cole Inquiry Report is contained in the International Trade Integrity Bill 2007.

UPDATE 26 September. Act as passed: International Trade Integrity Act 2007

The International Trade Integrity Bill amends the Charter of the United Nations Act 1945, the Customs Act 1901, the Criminal Code Act 1995 and the Income Tax Assessment Act 1997 by introducing the following offences:

Amendments to the Charter of the United Nations Act 1945 to:

·      create a new offence for people who, or corporations which, engage in conduct that contravenes a UN sanction in force in Australia with increased penalties for breaches

·      introduce strict liability for corporations which engage in conduct that contravenes a UN sanction in force in Australia, including in relation to UN counter-terrorism financing sanctions

·      create a new offence for people who, or corporations which, knowingly or recklessly provide false or misleading information in connection with the administration of UN sanctions, including in relation to the issuance of permits or authorisations

·      create a provision which invalidates any permission granted under information that is false or misleading in a material particular

·      grant agencies responsible for administering UN sanctions the required information gathering powers to determine whether UN sanctions are being complied with and improve information sharing among government agencies, and

·      require persons to retain, for five years, documentation in connection with permit applications and compliance with permit conditions.

Amendments to the Customs Act 1901 to:

·      introduce new criminal offences for importing or exporting goods sanctioned by the United Nations (UN-sanctioned goods) without valid permission, andintroduce a new criminal offence for providing information that is false or misleading in a material particular, or omits a material particular, in an application for a permission to import or export UN-sanctioned goods.

Amendments to the Criminal Code Act 1995 to:

·      ensure the defence under section 70.3 to a charge of bribing a foreign public official is only available where the advantage paid to a foreign official is expressly permitted or required by written law, regardless of the results of payment or the alleged necessity of payment, and

Amendments to the Income Tax Assessment Act 1997 to:

·      ensure that payments to foreign public officials are tax deductible only where the benefit paid is expressly required or permitted by written law, regardless of the results of payment or the alleged necessity of payment, and

·      align the definition of facilitation payment with that in the Criminal Code Act 1995.

ASIC issues enforceable undertaking templates

To supplement its enforceable undertakings guide ASIC has issued four templates to assist people drafting undertakings:

• a standard template applicable to all enforceable undertakings;
• sample terms for compliance program assessment;
• sample terms for compensation; and
• sample terms for corrective advertising on the Internet. 

Standardizing small business tax benefits

What is a "small business"? Under different laws. a small business is defined by either its number of employees, asset size or turnover volume.

The Tax Laws Amendment (Small Business) Bill 2007 which passed through the Senate on 13 June, will standardise the eligibility criteria for small business tax concessions from 1 July 2007.

Under the new legislation, small businesses will only have to apply one eligibility test relating to the size of the business (ie aggregated annual turnover of less than $2 million), to access a range of small business concessions.

These concessions are:

• CGT 15-year asset exemption
• CGT 50 per cent active asset reduction
• CGT retirement exemption
• CGT roll-over provisions
• simpler depreciation rules
• simplified trading stock rules
• immediate deductions for certain prepaid  business expenses
• choice to account for GST on a cash basis
• annual apportionment of input tax credits for  acquisitions and importations that are partly creditable
• choice to pay GST by instalments
• FBT car parking exemption
• PAYG instalments based on notional tax.

Existing eligibility thresholds for accessing CGT, FBT and  PAYG instalments concessions will be retained.

APRA continues HIH disqualifications

APRA's announcement of the  disqualification of Mr Robert Stitt QC from being or acting as a director or senior manager of a general insurer or authorised non-operating holding company, or a senior manager or agent of a foreign general insurer in Australia, as a result of his conduct as a non-executive director of HIH Insurance Limited (HIH), a member of the HIH Audit Committee from 1992 until 2001 and the Human Resources Committee from its inception in 1993 and as a director of HIH Investment Holdings Ltd., a subsidiary of HIH, continues its firm stance on enforcement as a result of the HIH collapse.

To date APRA has disqualified 26 individuals in connection with HIH, five of whom are currently subject to Administrative Appeals Tribunal appeal. A further three individuals are still subject to assessment.

Access Card: Voluntary Medical and Emergency Information

Chair of the Consumer and Privacy Taskforce, Professor Allan Fels AO, has released the Taskforce's second report (pdf), on whether Voluntary Medical and Emergency Information should be included on the customer controlled portion of the access card chip.

The Taskforce initially believed that there was considerable in principle support for the use of the Access Card as a device to enhance the access to emergency and health data which could
assist in the treatment of individuals in situations of accident and emergency.

However the submissions revealed how complex and difficult this would be to achieve in a practical sense. The critical issues revolved around the validation of data entered; keeping this data current and accessing it physically in emergency situations.

The main criticisms were :
• the use of the Access Card for the storage of medical and emergency health data is a purpose so removed from the essential rationale for having an Access Card that this functionality should not be supported
• that recommendations which preclude future uses in the medical and emergency health services area should not be supported
• insufficient attention has been paid to the additional and special privacy protections which need to be accorded to voluntary health data which is recognised as having a higher degree of sensitivity than many other classes of data
• there are numerous technical or architectural questions which still remain to be resolved before any effective system involving the storage of medical and emergency health data could be implemented. 

The Taskforce recommended that:

1. The Government should defer the possible implementation of this aspect of the access card program until such time as further consultation and consideration can be undertaken with a view to addressing the issues raised in this report;
2. At the point of registration, card applicants should be given the opportunity to register their consent to be an organ donor on the Organ Donor Register managed by Medicare Australia, and also be given the option to have their organ donor status reflected on the Access Card.

The Minister for Human Services Senator Ellison said that the Government will defer the introduction of the owner-controlled part of the chip until further consideration and consultation has taken place.

Anti-money laundering FAQ's

AUSTRAC has released information about AML/CTF compliance reports for reporting entities.

The Attorney-General has released FAQ's about the AML/CTF Act for customers.

The Australian Government has announced a $12.7 million public awareness campaign to inform the community about why Australia has introduced new AML/CTF laws and what the Government will do to support business and the community in the period in which the new laws are being implemented.

Financial services complaints

ASIC has announced improvements to its online services that will make it easier for consumers and investors to make a complaint about a licensed financial services business.

Information contained on the online register of financial service licensees will now include details of the external dispute resolution (EDR) scheme(s) each licensee belongs to.

Anyone phoning the ASIC call centre on 1300 78 08 08 will be told how to progress their complaint, or transferred directly to the appropriate EDR scheme.

APRA releases its response to Basel II submissions on advanced approaches

The Australian Prudential Regulation Authority (APRA) has released a paper that sets out its responses to submissions on its proposals to implement the advanced approaches under the new Basel II capital adequacy regime, known as the Basel II Framework.

APRA’s response paper addresses issues raised in submissions and is accompanied by three final draft prudential standards and their respective prudential practice guides that incorporate a number of amendments suggested in the consultation process. (Download here)

The final draft prudential standards cover:

• the internal ratings-based approach to credit risk [first release in July 2005];
• the advanced measurement approaches (AMA) to operational risk [second release in October 2006]; and
• the treatment of interest rate risk in the banking book [first release in March 2006].

ADIs will need to obtain APRA’s approval to use these advanced approaches. The vast majority of ADIs - banks, building societies and credit unions

The proposals form part of the Basel II capital adequacy regime for ADIs that will come into force on 1 January 2008. The full suite of Basel II prudential standards is expected to be finalised in late 2007.

Comments on the response paper, the final draft prudential standards APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk and APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book, and their respective prudential practice guides are invited by 27 July 2007.

ASX releases review of corporate governance reporting

The ASX has released its review of the corporate governance reporting in the annual reports and relevant website sections of 1,294 listed companies and 77 listed trusts - 1,371 listed entities in total - that reported with a 30 June 2006 balance date. This number represents approximately 71% of all listed entities at that date.

The latest review by the Australian Securities Exchange (ASX) of reporting against the ASX Corporate Governance Council’s Principles and Recommendations shows that listed entities have continued to improve their corporate governance reporting.

The overall reporting level for listed companies – the aggregate of adoption of recommended practices and of ‘if not, why not’ reporting – was higher in 2006 (90%) than in either of the two previous years ASX has conducted the review (2005 – 88% and 2004 – 84%).