Australian Regulatory Compliance Review

ASIC's policy on independent expert reports

ASIC has released two regulatory guides updating its policy on independent expert reports.

These are Regulatory Guide 111 [RG 111] and Regulatory Guide 112 [RG 112].

RG 111 focuses on reports prepared for transactions under Chs 5, 6 and 6A of the Corporations Act, whether the reports are required by the Corporations Act or are commissioned voluntarily. The Guide addresses the issues reports are required to consider to satisfy the Corporations Act.

RG111 also observes that : An expert report should only contain information that relates directly to the decision to be made by security holders. Including extraneous information in an expert report undermines the effectiveness of that report.

We encourage an expert to consider preparing a concise or short form expert report. The commissioning party would make a longer expert report containing additional, more technical or detailed information available on request free of charge or ensure it is accessible online.

RG 112 discusses how previous and existing relationships with commissioning and other interested parties may affect the independence of an expert  and how an expert should deal with the commissioning party and other interested parties to maintain its independence.

Austrac releases 2006-07 Annual Report

Austrac has released its 2006-07 Annual Report (pdf).

The report considers Austrac's results in 5 main areas:

• Deterring money laundering, serious crime and tax evasion
• Targeting money laundering, serious crime and tax evasion
• Advice on the effectiveness of the FTR Act
• Contribution to international efforts directed at the suppression of money laundering,major crime and tax evasion
• Privacy and security

Anti-money laundering: suspicious matter reports

Austrac has released draft AML/CTF Rules relating to information required to be included in a suspicious matter report under subsection 41(3) of the AML/CTF Act.

A public consultation period is currently open from 29 October 2007 to 9 November 2007.

AML/CTF update podcast

I enjoyed getting the opportunity recently to give a presentation on anti-money laundering at the 2007 Ultradata Client Conference. It was a good audience and I learned a lot about Ultradata's software solutions to support anti-money laundering compliance programs.

In this month's podcast I give an overview of the anti-money laundering compliance obligations which start on 12 December 2007 and look at what's involved in the first compliance report which must be lodged with AUSTRAC by 31 March 2008.

I discuss the topic in 3 parts:

• how do you develop a cost-effective compliance program
• understanding the new rules
• maintaining compliance

It runs for 11 minutes, 40 seconds.

Here's a selection of my slides

| View | Upload your own

Depositor protection

The Australian Government has been considering introducing a financial claims compensation scheme for retail depositors in a failed authorised deposit-taking institution for some time.

In the UK from 1 October 2007, should a bank, building society or credit union go into default the Financial Services Compensation Scheme  will be able to pay compensation to 100% of the first £35,000 per person.

On 11 October 2007, HM Treasury, the Financial Services Authority and the Bank of England, issued a discussion paper Banking Reform - Protecting Depositors on reforming the framework to protect depositors.

Pharmacy regulation in Australia

The Pharmaceutical Encyclopedia shows that pharmacies in Australia are mostly franchises of retail brands offered by the three major pharmaceutical wholesalers in Australia — Australian Pharmaceutical Industries (API), Sigma Company, and Symbion Health. (via australia.coop)

The Australian Community Pharmacy Authority regulates how a pharmacist can apply for approval to supply pharmaceutical benefits at particular premises. The pharmacy location rules  prescribe location-based criteria that must be satisfied in order to establish a new pharmacy or relocate an existing pharmacy.

Registration of pharmacists is regulated by the Australian Pharmacy Council.

Austrac releases final form of compliance reports

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has issued the final forms of the first compliance report which reporting entities must complete by 31 March 2008: there are 2 forms, one for financial services and one for gambling services.

Under subsection 47(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) reporting entities are required to periodically provide reports to the Australian Transaction Reports and Analysis Centre (AUSTRAC) regarding their compliance with the AML/CTF Act, regulations and AML/CTF Rules.

The report covers the period 13 December 2006 to 31 December 2007.

The compliance reports can be completed and submitted via AUSTRAC Online, an information portal which will be launched in December 2007.

Consumer Credit Code: Bill Facilities (Promissory Notes) Regulation

The UCCCMC has announced that an amendment is expected to be made soon to the Consumer Credit Code (the Code) to regulate the use of bill facilities, that is, promissory notes and bills of exchange, by non-ADI's. Consultation has been occurring since April 2006.

Once the amendment is made (possibly by the end of October 2007), the Code will apply to the use of bill facilities where the credit is provided wholly or predominantly for personal, domestic or household purposes. In Western Australia and Tasmania, this change will take effect at a slighter later date. Bill facilities were previously exempt from the Code.

This amendment will not apply to commercial bill facilities or to any bill facility (no matter what the purpose) provided by an ADI.

The application of the Code to bill facilities will be brought about by the Consumer Credit (Bill Facilities) Amendment Regulation 2007. By bringing bill facilities within the Code, consumers will benefit from key protections in the Code, including full disclosure of fees and charges, controls on the calculation of interest, access to hardship arrangements and procedural protections in enforcement situations.

UPDATE: The Consumer Credit (Bill Facilities) Amendment Regulation (No. 1) 2007 (Qld) was enacted on 30 November 2007. Read the Explanatory Memorandum for more details.

Demutualisation of building societies and financial mutuals in UK

The UK Parliament's All-Party Parliamentary Group for Building Societies and Financial Mutuals published a report in December 2004 which considered whether regulation lead to demutualisation.

It decided that the drive for new capital was the prime factor in demutualisation and not regulation.

The Group published a further report in March 2006 entitled Windfalls or Shortfalls? The true cost of Demutualisation following an Inquiry.

The Terms of Reference for the Inquiry were:
• Are former mutuals better than remaining mutuals at providing financial services?
• Is there any evidence to suggest that demutualisation has improved the performance of former societies?
• What effect has demutualisation had on the remaining mutual sector?
• How has demutualisation affected consumer choice?
• Have consumers benefited from demutualisation?
• Did the level of windfalls reflect the economic value of members’ interests?

The Inquiry concluded that, amongst other things :

• mutuals, both in the building society and life assurance sectors, performed better than their plc rivals in a variety of financial performance indicators. It was also shown that they pass these cost advantages onto consumers in terms of better rates. This was clearly backed up by any study of ‘best buy’ tables.
• the strategic direction chosen by an institution’s board, particularly one pursuing corporate growth, may push it towards the plc model. This is especially so in the life sector, where some mutuals have sought extra capital.
• There was a widespread view amongst those giving evidence to the Inquiry that members in previous demutualisations lacked a full understanding of what they were voting for. A combination of the media’s focus on ‘free’ windfalls, strong campaigning for acceptance by directors of the converting institutions, and the noisy urgings of the “carpetbaggers” led to one-sided debates.
• The Inquiry heard evidence that the impact of subsequent higher charges had, over time, outweighed the benefits of the pay-outs for many members. Others meanwhile, gained pay-outs which were disproportionately large given the level of their interests.

The report also refers to the first case of ‘re-mutualisation’ in 2005 – where former building society Bristol & West’s savings business and branch network were bought by the Britannia Building Society.

In Australia, Part 5  of Schedule 4 to the Corporations Act regulates demutualisations including disclosure of proposed demutualisations.

What is a franchise agreement?

If a contractual arrangement is a franchise agreement then the Franchising Code of Conduct (pdf) (including the obligation to provide disclosure documents) applies.

In ACCC v Kyloe Pty Ltd [2007] FCA 1522 the Federal Court rejected the ACCC's claim that the sub-distributorship agreements for the Polar Krush Ice drink business were really a franchise.

The Code defines a franchise agreement as:

... an agreement:

(a) that takes the form, in whole or part, of any of the following:

(i) a written agreement;

(ii) an oral agreement;

(iii) an implied agreement; and

(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol;

(i) owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii) specified by the franchisor or an associate of the franchisor; and

(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i) an initial capital investment fee;

(ii) a payment for goods or services;

(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

(iv) a training fee or training school fee;

but excluding:

(v) payment for goods or services at or below their wholesale price; or

(vi) repayment by the franchisee of a loan from the franchisor; or

(vii) payment for the whole sale price of goods taken on consignment; or

(viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement."

After looking at the contractual arrangements in this case, Judge Tracey decided that Clause 4(1)(b), which requires that any right conferred by a franchisor to carry on business must be granted under a system or marketing plan, had not been satisfied.

He noted that "The phrase a "system or marketing plan" is not defined in the Code. In seeking to give meaning to this concept Australian courts have had resort to American case law which deals with equivalent but not identical legislation."

Telstra v Minister for Communications: internal Telstra legal advice not privileged

Whilst it is now quite common for lawyers to be employed in both legal and management positions in companies, it must not be assumed that all advice they give has the benefit of legal professional privilege if it cannot be proved they were acting in a legal (rather than a management) capacity when they gave the advice.

In Telstra Corporation Limited v Minister for Communications, Information Technology and the Arts (No. 2) [2007] FCA 1445, Telstra sought to prevent disclosure of documents produced by in-house lawyers. It failed.

Whilst there was evidence to establish that the persons referred to as internal legal advisers were legal practitioners (ie they had practising certificates), there was no evidence to establish the role which the various legal practitioners performed within Telstra.  In particular, no evidence was advanced to disclose the measure of independence of the legal practitioners in question and their ability to provide impartial legal advice, given the roles they had to perform.

Judge Graham said:

"In my opinion an in-house lawyer will lack the requisite measure of independence if his or her advice is at risk of being compromised by virtue of the nature of his employment relationship with his employer.  On the other hand, if the personal loyalties, duties and interests of the in-house lawyer do not influence the professional legal advice which he gives, the requirement for independence will be satisfied...In the case presently before the Court, there is no evidence, as I have earlier remarked, going to the independence of the internal legal advisers involved in the communications said to have been brought into existence for the dominant purpose of providing or receiving legal advice."

Judge Graham adopted the principles In Seven Network Limited v News Limited [2005] FCA 142 at [4] when Tamberlin J said in respect of legal professional privilege:

‘4. The dominant purpose test has particular importance in relation to the position of in-house counsel because they may be in a closer relationship to the management than outside counsel and therefore more exposed to participation in commercial aspects of an enterprise. The courts recognise that being a lawyer employed by an enterprise does not of itself entail a level of independence. Each employment will depend on the way in which the position is structured and executed.  For example, some enterprises may treat the in-house adviser as concerned solely in advising and dealing with legal problems. As a matter of commercial reality, however, both internal and external legal advisers will often be involved in expressing views and acting on commercial issues.

5. The authorities recognise that in order to attract privilege the legal adviser should have an appropriate degree of independence so as to ensure that the protection of legal professional privilege is not conferred too widely. ...’

In the Seven Network Limited v News Limited case the Judge decided that News' chief general counsel was not acting in a legal capacity when he gave the relevant advice.

Labor also agrees to tax reform

As Labor has also agreed to a tax reform package if it is elected, it is now certain that whichever party is elected there will be tax changes from 1 July 2008 affecting at least those on incomes up to $180,000 (and all higher income earners if the Coalition is re-elected).

Labor has some variations on the Coalition's plan:

• a plan to reduce all the tax scales by setting the six-year goal of having only three - 15 per cent, 30 per cent and 40 per cent. Under Labor, the 30 per cent rate would apply to incomes between $37,000 and $180,000 and 40 per cent would come in after that.
• the reduction in the top tax rate for those on over $180,000 would not take effect for 3 years.

COALITION PROPOSAL (click on images to enlarge)



LABOR PROPOSAL

Demutualisation of Health Insurers

Both NIB and MBF are well advanced in their plans to demutualise and list on the ASX and the Government has confirmed its intention to sell Medicare Private in 2008.

To facilitate these changes, the Treasurer has announced that the Government intends to amend the income tax laws to provide capital gains tax (CGT) certainty for policyholders of health insurers who receive shares as part of their health insurer’s demutualisation.

These changes will ensure that policyholders, including policyholders holding a beneficial membership interest via a trust, who give up any rights they may have in their health insurer in exchange for shares will not be subject to a CGT taxing point at the time of the exchange and will provide consistency between the income tax laws and the requirements of the Private Health Insurance Act 2007.

In addition, the Government will make changes to provide relief from CGT for transactions that relate to the mechanism that allows policyholders to receive shares. 

The Government will also provide a legislative framework for issued shares to be held on trust for ‘lost’ policyholders, who, for example, are unable to receive shares because they reside overseas or have not agreed to receive their shares. Broadly, the Government intends to facilitate the issue of shares to the trustee, the transfer of shares from the trustee to policyholders and the cancellation of any remaining shares in the trust after a certain period of time without adverse or advantageous CGT consequences to either the trustee or the policyholder. It is the Government’s intention that the trustee will otherwise be subject to the existing income tax rules.

The Government proposes that post‑CGT policyholders receive a cost base for their shares that is based on their share of their health insurer’s net tangible assets and that pre‑CGT policyholders receive a market value cost base. The Government also intends to provide a similar ‘net tangible assets’ based cost base for any rights that post‑CGT policyholders surrender for a cash payment, rather than shares, as part of their health insurer’s demutualisation.

These changes will apply from 1 July 2007.

UPDATE 7 November: NIB successfully lists on ASX

UPDATE 25 December 2007: new government will not privatise Medibank Private

MBF Board recommends BUPA merger offer

Labor's position on the Access Card

According to The Australian, if elected Labor will not proceed with the Access Card.

Even if the Coalition is re-elected the Access Card's future is doubtful. (see previous post)

Data security

The calling of the election means that the Privacy (Data Security Breach Notification) Amendment Bill 2007 has lapsed.

But the issue of who is liable for protecting the personal information of customers and whether customers should be notified in the event of a security breach (previously discussed here and here) will not go away.

Last week in  California (which already has a data breach disclosure law) Governor Schwarzenegger vetoed a Bill which would have forced retailers who experience a data breach or loss to reimburse California banks for the costs of debit and credit card replacement and consumer notification.

First successful share warehousing prosecution

Section 610 of the Corporations Act contains a complicated definition of "voting power" for the purpose of the Act's takeover provisions in Chapter 6. The definition aims to prevent persons from collectively "warehousing" shares in separate entities to avoid the 20% threshhold which requires a takeover offer to be made.

ASIC have announced that Mr Stuart Adrian Corp, of Subiaco in Perth, and Mr Brian Millwood Smith, of East Perth, have been sentenced in the District Court of Western Australia on a total of 29 charges brought by ASIC related to share warehousing.

The charges, which arose from Messrs Corp and Smith’s conduct as directors of two Australian publicly-listed companies, formerly known as Hallmark Gold NL (Hallmark Gold) and Welcome Stranger Mining Company NL (Welcome Stranger), represents the first successful prosecution relating to the use of offshore entities to avoid disclosure of director’s interests.

Messrs Corp and Smith were each sentenced to three years in prison, to be released on a recognisance after serving 16 months. They had been found guilty by a jury in relation to the charges on Thursday 4 October 2007.

Messrs Corp and Smith were found to have:

• engaged in conduct concerning the undisclosed relevant interest in shares in Hallmark Gold and Welcome Stranger while they were directors of those companies;
• controlled shares through the use of offshore entities, and used those shares to vote on related party resolutions at general meetings of Hallmark Gold and/or Welcome Stranger which delivered them financial benefits; and
• provided false and misleading information to ASIC and the Australian Securities Exchange (ASX) in documents required to be lodged under the Corporations Law which should have showed that they had an interest in those shares.

Mr Smith was jailed in relation to:

• six charges of knowingly providing misleading information as to his relevant interest in shares to ASIC and the ASX;
• six charges of failing to act honestly and hereby breaching his duty as a director; and
• two charges of unlawfully permitting voting on related party resolutions at general meetings of the shareholders.

He had been found not guilty in relation to six further charges.

Mr Corp was jailed in relation to:

• seven charges of knowingly providing misleading information as to his relevant interest in shares to ASIC and the ASX;
• six charges of failing to act honestly and thereby breaching his duty as a director; and
• two charges of unlawfully permitting voting on related party resolutions at general meetings of the shareholders.

Mr Corp had been found not guilty in relation to six further charges.

ACCC v Visy preview

It's expected that Visy will accept liability today in ACCC's price fixing case against it.

There has been a lot of pre-hearing publicity (including speculation about Australia's largest ever civil penalty).

The Australian provides an overview of the case, the prospect of subsequent class actions and past recommendations that this offence should be criminalised.

UPDATE 16 October: decision reserved

UPDATE 2 November: decision announced

Financial services regulation: the UK experience

The Economist recently argued that the "light touch" of UK financial regulators had a role to play in the Northern Rock's failure to manage its risks and the subsequent run by depositors.

It also says dividing up market information and roles between the central bank and the Financial Services Authority is a structural flaw.

The Wall Street Journal looks at the difference between the US and UK supervisory systems and says that Northern Rock would not have been bailed out in the US.

This is interesting given Australia's commitment to its 3 pillars of financial services regulation (Reserve Bank, APRA, ASIC).

Coalition tax reform proposal

We've got 40 more days of electioneering, but for the record here's the details of the Coalition's $34 billion proposed restructuring of the personal income tax scales which will start from 1 July 2008 if they are re-elected.

Austrac issues guidance on designated business groups takeovers and mergers

Austrac has issued scenarios relating to designated business groups when customer identification procedures are deemed to have been carried out. The scenarios cover takeovers and mergers after 12 December 2007 and their effect on customers for AML identification purposes.

Reserve Bank updates international financial sanctions list

The Reserve Bank of Australia, following a directive from the Australian Government under the Banking (Foreign Exchange) Regulations 1959, currently administers financial sanctions against certain individuals associated with the former government of the Federal Republic of Yugoslavia and the Government of Zimbabwe.

The updated Financial Sanctions List (xl spreadsheet) now contains 82 names.

Any transactions involving the transfer of funds or payments to, by the order of, or on behalf of any person listed in the Annex are prohibited without prior approval from the Reserve Bank.

(via ozrisk)

UPDATE 13 December: The Reserve Bank has added Burma to the sanctions list (Media release)

Comonwealth election 2007

So the election has been called for 24 November 2007.

That means that Parliament is unlikely to sit before February 2008 when the unfinished business of this Parliament will be reviewed by the new Government (whichever party succeeds) and the expected many election promises will be implemented.

Impact on small business privacy obligations of anti-money laundering laws

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) amends the Privacy Act 1988 (the Privacy Act) so small businesses that will be reporting entities for the purposes of AML/CTF, will also be subject to the Privacy Act in regard to their obligations under the AML/CTF Act. This includes small businesses that may be exempt from obligations under the Privacy Act in terms of other business activities they undertake.

The Privacy Commissioner has issued a FAQ brochure (PDF) for affected small businesses and has suggested they consider applying the NPP obligations to all their business activities.

ASIC issues regulatory guides for Australian financial services (AFS) licensees

ASIC has released two regulatory guides about the general obligations of Australian financial services (AFS) licensees under s912A of the Corporations Act .

Regulatory Guide 104 Licensing: Meeting the general obligations [RG 104] and Regulatory Guide 105 Licensing: Organisational competence [RG 105] aim to:

• communicate ASIC’s policy on the general obligations of licensees and organisational competence using simpler language;
• clarify some aspects of the policy in light of ASIC’s regulatory experience; and
• consolidate and harmonise ASIC’s policy on these obligations. RG 164 and RG 130 are now superseded.

RG 104 outlines what ASIC looks for when it assesses compliance with the general obligations. It sets out ASIC’s general approach to the licensee obligations under s912A(1) and ASIC’s policy on particular s912A(1) obligations relating to compliance, risk management, representatives and resources.

RG 105 outlines what ASIC looks for when considering the organisational competence obligation of AFS licensees under s912A(1)(e). It also consolidates ASIC’s guidance on this obligation, which was previously spread across a number of publications, including Section E of RG 164, parts of [RG 130] and Responsible officers: Demonstrating compliance with organisational competency obligations—An ASIC guide (issued July 2003, withdrawn June 2007).

Reference Checking in the Financial Services Industry

ASIC and Standards Australia have launched a new handbook, Reference Checking in the Financial Services Industry (pdf), which provides employers with a reference-checking framework that can be applied to financial advisers.

The handbook is designed to encourage industry to seek and, when requested, provide reference-checking information to help identify dishonest, incompetent or unethical financial advisers.

ASIC’s website now provides links to resources for reference checking.

Governance and Performance Considerations in Superannuation

APRA has published the speech given by Ramani Venkatramani to the FINSIA - MCFS Banking and Finance Conference in Melbourne on 24 September 2007 on Governance and Performance Considerations in Superannuation.

Venkatramani asked "Could governance affect returns?" and wondered whether differing classes of trustee director spends different amounts of time on trusteeship.

He observed that the not-for-profit sector rely more on consultants they have selected and their trustees make more decisions directly than does the retail sector. He said that APRA has no philosophical view on the appropriate structure: its principal concern is to ensure that members’ interests are being served.

In addition to the above, he noted that APRA during its reviews assesses the qualitative aspects of fund governance, including:

• Whether trustees are monitoring the activities of various service providers in accordance with the Outsourcing Standard, rather than dominant service providers being allowed to operate without adequate monitoring by the trustee;

• How conflicts of interest are being identified and managed. For example, if a trust deed were to mandate the exclusive use of a related party service provider thereby creating an unacceptable conflict in discharging the trustee’s fiduciary duty, APRA would be concerned to ensure that members interests are not prejudicially affected by such a structure.

Employment screening

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 requires organisations affected by the Act to have an employee due diligence program for employees involved in the provision of designated services.

AS 4811—2006 Australian Standard Employment Screening may be a useful base for such a program.

The objective of the screening process is to reduce the risk of a potential security breach and to ensure the integrity, identity and credentials of personnel within an organization.

Employment screening, for the purpose of this Standard, is the process of verifying, with the consent of the individual, the identity, integrity and credentials of an entrusted person and should apply to any individual that is, or will be, entrusted with resources and/or assets.

Food regulation in Australia

I am generally aware of the multitude of laws and codes affecting food safety and packaging in Australia.
(for an overview see Food Legal and Food Standards Australia)

But I was surprised to recently note the existence of The Office of the Gene Technology Regulator and The   Australian Pesticides and Veterinary Medicines Authority , both of which have a role in regulating providers of our food.

National Greenhouse and Energy Reporting Act 2007

The National Greenhouse and Energy Reporting Act 2007 received assent on 28 September.

It establishes a single, national framework for reporting greenhouse gas emissions, abatement actions and energy consumption and production by corporations from 1 July 2008.

The Act lays the foundation for the Australian Emissions Trading System.

ASIC sues low-doc mortgage broker for misrepresentation

ASIC has obtained orders in the Federal Court of Australia against Canberra-based mortgage broker, Tonadale Pty Ltd (trading as ACT Mortgages) following allegations of unconscionable, misleading and deceptive conduct in relation to the arrangement of low-documentation (low-doc) loans.

ASIC commenced proceedings after investigating the conduct of Tonadale and Mr Kelvin Skeers, an employee of Tonadale, in arranging two low-doc loans for the same client in August 2004 and November 2005. At the time, the client was 20 years old, unemployed and of no fixed address.

ASIC alleges that Tonadale and Mr Skeers acted in breach of the ASIC Act by:

• arranging two low-doc loans that the borrower could not afford to repay;
• misrepresenting the borrower’s financial position to the lender in the application forms; and
• misrepresenting to the borrower what would be included in the borrower’s loan application forms.

ASIC obtained orders in the proceedings against Tonadale, to which Tonadale consented, including:

• declarations that Tonadale engaged in misleading and deceptive conduct or conduct that was likely to mislead or deceive, and unconscionable conduct when the loans were arranged;
• an order that Tonadale pay $31,831.10 in compensation to the borrower;
• orders that require Tonadale to establish compliance, education and training programs and review its internal operations; and
• an order that Tonadale pay ASIC’s costs.
  

The matter in relation to Mr Skeers is still before the Court.

APRA and ASIC release discussion paper on breach reporting by dual-regulated institutions

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have issued a discussion paper on a proposed online breach reporting system for dual-regulated institutions.

The proposed system aims to simplify the process for regulated institutions to report breaches and reduce breach reporting duplication faced by those institutions regulated by both APRA and ASIC. The superannuation industry is already using an online system to report breaches to APRA. The proposed system will:

• enable all APRA-regulated institutions - authorised deposit-taking institutions, general insurers, life insurance companies, friendly societies and superannuation licensees - to report breaches to APRA online; and
• enable those institutions regulated by both APRA and ASIC to report online breach notifications required to be lodged with both regulators through a single breach report to APRA, thereby eliminating the requirement for jointly regulated institutions to provide separate breach reports for the same incident to both regulators.

APRA and ASIC have invited interested parties to comment on the proposals by 31 October 2007.

Corporations Regulations (SImpler Regulatory System)

The Corporations Amendment Regulations 2007 (No. 12) amend the Corporations Regulations 2001 to support the provisions in the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007.

The Regulations are in 3 parts which commence as follows:
(a) on 28 September 2007 — regulations 1 to 3 and Schedule 1 which give FSR Relief for Financial Services Guides, Product Disclosure Statements and Statements of Advice;
(b) on the commencement of items 218 and 219 of Part 3 of Schedule 1 to the Act (but no later than 28 December 2007) — Schedule 2 which deals with liability of insurance licensees for authorised representatives and gives relief from providing FSG's at public events;
(c) on 1 July 2008 — Schedule 3 which deals with requirements when a change is made to fees and charges.

Austrac anti-money laundering update

Austrac has released draft AML/CTF Compliance Reports for the financial services industry and gambling services for public comment. The first reports are due by 31 March 2008.

In the first information for the "public", Austrac has also issued information for travellers including reporting physical currency and reporting bearer negotiable instruments (BNIs).

Current guidance notes are listed here.

The impact of taxation on Australian credit unions

In 1994, Australian credit unions lost their exemption from income tax on interest on loans to members. They were placed on a "level playing field" with the major banks and other lenders. What impact did the change have?

In a interesting interview (37.5 minutes free mp3 download), Professor Kent Zumwalt discusses the results of his research: the impact of taxation on credit unions' return on assets over a 10 year period and their current position in relation to other financial institutions. He also looks at other competitive factors and their implications for credit unions in the United States.

It's rare to get a long-distance review on the effects of structural change and this easy listening interview draws out some important issues for mutual organisations in particular.

Consumer policy review

The release of the Productivity Commission's  draft report on its review of consumer policy will be delayed until later in October. The reporting date of the inquiry has been extended to 28 February 2008.

Media speculation is building about whether the Productivity Commission's review of consumer policy will recommend the setting up of a national consumer protection agency which will take over state responsibilities as well as the consumer protection functions of ACCC and ASIC.

Draft ATO Self Managed Superannuation Funds Rulings

The ATO has issued 2 draft rulings relating to Self Managed Superannuation Funds (SMSF's).

SMSFR 2007/D1 discusses the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) which prohibits trustees from maintaining an SMSF for purposes other than for the provision of benefits specified by subsection 62(1). The draft ruling clarifies when the provision of such other benefits will not contravene the sole purpose test in section 62 of the SISA.

The example given of when section 62 is breached is:

"The trustee of an SMSF invests in a block of holiday apartments at a popular tourist destination. The members of the SMSF holiday in this area every year and prior to making the investment owned a separate holiday house nearby .

The trustee, when undertaking the investment, additionally negotiated for members of the SMSF to be able to stay at the apartments for free. This is not a standard feature of the investment. The members of the SMSF sell their holiday house immediately after the SMSF makes the holiday apartment investment.

The separate negotiation of the benefit, which also has the potential to materially affect the return on the SMSF's investment, demonstrates that the benefit is purposeful and not incidental. The facts given in this example reveal that the SMSF is being maintained for a purpose of providing benefits to members other than those specified by section 62. Therefore, the trustee contravenes the sole purpose test in these circumstances ."

SMSFR 2007/D2 discusses the circumstances when a trustee or investment manager of an SMSF contravenes paragraph 65(1)(b) of the Act by using the resources of the SMSF to give financial assistance (other than lending money of the SMSF) to a member of the SMSF or relative of a member of the SMSF.