Australian Regulatory Compliance Review

New Minister for Deregulation

Kevin Rudd has appointed Lindsay Tanner as Minister for Finance and Deregulation.

According to Smart Company, Tanner won't have a red tape review. He was appointed to oversee cuts to business regulation, while a senior official would enforce the cuts and restrictions. The minister will enforce a promised “one in-one out” approach under which a new rule could only be imposed after another is cut.

"Tanner expect to move immediately on simplifying the disclosure regime for financial services and the harmonisation of state and federal regulations as well as strengthening the regulatory impact statement."

Mid-Cap Corporate Governance report

The 2007 BDO Kendalls Mid-Cap Corporate Governance report highlights a deterioration in governance levels across the mid-caps sector (ie 150 “mid–sized” Australian listed companies, the 251st–400th largest based on market capitalisation at 31 December 2006).

Key highlights of the report include:

• Less than 50% of mid-cap companies (69) have an independent chairman, and only 25% have a majority of independent directors.
• A high 90% of surveyed companies had an audit committee, with more than 80% having an independent chair.
• Almost 71% of mid-caps had a separate remuneration committee, however less than 40% had a separately constituted nomination committee and more than half (56.9%) did not have a majority of independent members.
• 14.7% of companies did not have a code of conduct; 14% did not have a risk management policy, and 38.7% did not have a share trading policy.

The growth of regulation in Australia

The Institute of Public Affairs has published a backgrounder  Policy without Parliament: the growth of regulation in Australia.

This year, there will have been more legislation and regulation imposed in Australia than any other year in history. Furthermore, federal regulatory agencies have grown dramatically in the last decade. The budget and staff of the three major regulatory bodies - ACCC, ASIC and APRA - have nearly doubled over the last ten years.

Here are some key points:

From 2000-2006 Commonwealth Parliament passed 40,266 pages of Acts.

Subordinate legislation—regulation—is growing at a similar pace as legislation.

The Howard Liberal Government oversaw the largest regulatory expansion since Federation.

There are 24,000 different types of licences administered by the three levels of government.

Regulatory compliance now comprises between ten and 25 per cent of board and senior management workload.

The full cost of regulation is much greater than the visible cost of compliance.

There are approximately 60 Commonwealth regulators and national standard-setting bodies. There are a further 40 Federal ministerial councils which set and administer regulations. Although hard to estimate, Federal regulatory agencies employ over 34,000 people, with a combined yearly budget of well over $4.5 billion.

(via Trevor Cook).

Simplified Statement of Advice template

The Financial Planning Association has released a Simplified Statement Of Advice (SOA) model (pdf) which is intended to reduce the cost of advice for consumers.

APRA publishes its 2007 Annual Report

APRA has published its 2007 Annual Report.

Qantas settles US price fixing claim

As foreshadowed in Qantas' Annual report, Qantas has announced to the ASX it has entered a Plea Agreement with the US government to settle its liability in the USA resulting from illegal price fixing conduct by its Freight Division involving fuel surcharges.

Qantas has agreed to pay a fine of US$61 million.

BBC News.

UPDATE 15 January 2008: Qantas fined AU$68M (ABC News) 

Regulating financial advice: ASIC's view

In a paper (pdf) presented by ASIC Chairman Tony D'Aloisio to the Financial Planners Association Conference he outlined the role of ASIC's retail investor taskforce.

He said one of the taskforce objectives will be to address 7 specific issues with the industry:
• disclosure documents – length and complexity.
• statements of advice – whether 'one size fits all' is working.
• compensation arrangements for retail investors – are they adequate?
• lessons from Westpoint.
• remuneration arrangements and conflicts of interest.
• whether fiduciary duties apply and, if so, what that means.

The taskforce will take into account international developments (e.g. USA and UK) in examining these issues.

In relation to remuneration, he said ASIC will allow the market to 'vote with its feet' on the models investors prefer. To assist that process, ASIC will be active in applying the existing disclosure regime to its limits (as it has done in the unrated and unlisted debenture area) so that retail investors can make an informed choice and, in effect, can 'vote with their feet'. While ASIC will not seek to pick 'winner models' (as such an approach could distort the competitive dynamics between models) it will be active in applying the existing disclosure regime.

ACCC succeeds in price-fixing and resale price maintenance prosecutions

The ACCC has been successful in 2 recent prosecutions:

In Australian Competition & Consumer Commission v Australian Abalone Pty Ltd [2007] FCA 1834 penalties totalling $927,500 were imposed on individuals and companies involved in a Victorian abalone cartel.

The ACCC alleged that under the arrangement the parties would not supply a processor customer unless that processor paid a premium on top of an average 'beach' price (market price) and was a processor nominated by Australian Abalone Pty Ltd, a corporate vehicle created to market the catch by the quota holder and others.

Justice Weinberg of the Federal Court in Melbourne found, that the conduct contravened the primary boycott and price fixing provisions of the Act ( ss 45(2)(a)(i) and (ii) and 45(2)(b)(i) and (ii) of the Trade Practices Act 1974) and the Victorian Competition Code.

In ACCC v TEAC the Federal Court of Australia imposed penalties totalling $190,000 on TEAC Australia Pty Ltd and its National Sales Manager, Mr Warren Allison, for engaging in resale price maintenance in contravention of section 48 of the Trade Practices Act in relation to conduct that sought to stop an independent retailer of electronic products from advertising prices below the 'go price' specified by TEAC. (ACCC Media Release).

National Finance Broking Scheme consultation package released

The Ministerial Council on Consumer Affairs (MCCA) has released a package (pdf) (including an exposure draft Bill) proposing finance broking legislation which is consistent nationally, and which extends to protections for small business clients.

All types of broking structures will be regulated: mortgage brokers, finance brokers, single line broking and single mobile operators, as well as aggregators and franchised organisations. While brokers of credit for small businesses are covered by the framework of the regulatory scheme, there will be differences in the requirements for disclosure and the contractual relationship, to take into account differences in the way brokers and businesses transact.

It will include all credit unless the applicant is a business entity which:
· Employs more than 100 people if it is a manufacturing business; or otherwise, 20 people; or
· The credit sought is more than $2 million

The definition of broker is similar to that in the Consumer Credit Administration Act 1995 (NSW), and will include those intermediaries who are suppliers of goods and services and who negotiate or obtain credit for purchasing those goods and services.

Brokers will be required to have professional indemnity insurance with coverage set out in the regulations. Applicants for licenses will be required to have attained prescribed educational standards.

The closing date for submissions is 15 February 2008.

APRA releases revised standards on governance for ADI's and insurers

The Australian Prudential Regulation Authority (APRA) has released revised prudential standards on governance for authorised deposit-taking institutions (ADIs) (APS 510)and life insurers (including friendly societies)(LPS 510).

The amendments to the prudential standards result from recent changes to the Australian Securities Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations.

The key amendments to the governance standards are that:

• in addition to the principle of independence of directors set out in the standards, APRA has incorporated the ‘relationships affecting independent status’ in the ASX Corporate Governance Council’s Principles as circumstances that would preclude a director from being treated as independent on the Board of an ADI or life insurer. The circumstances are identical to the five “relationships affecting independent status” in the 2nd edition of the ASX Corporate Governance Council Principles. They represent a non-exhaustive list of specific circumstances that would preclude a director from being regarded as independent for the purposes of serving on the Board of an APRA-regulated institution. A director in any of these circumstances would still be able to serve on such a Board, but not as an independent; and
• a Board should give consideration to the length of service of directors as part of its Board renewal policy.

The revised standards will take effect from 1 January 2008.

The revised prudential standard on governance for general insurers (GPS 510) are a result of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007.

Queensland consults on consumer credit interest rate cap legislation

The Queensland Attorney-General and Minister for Justice, Kerry Shine has released exposure drafts of the Consumer Credit (Queensland) Amendment Bill 2008 (pdf) and the Consumer Credit (Queensland) Special Provisions Regulation 2008 (pdf).

The Bill will introduce the concept of a maximum annual percentage rate for consumer credit contracts. The Regulation prescribes a 48 per cent per annum annual percentage rate cap on consumer loans (based on interest rates, fees and charges). Credit fees or charges arising from the establishment or maintenance of a temporary credit facility by an ADI will not be included in the calculation.

There are currently no caps on interest rates in Queensland and lenders can charge high interest rates, fees and charges on loans.

The Queensland Government is seeking industry and community comment in relation to the draft bill that will amend the Consumer Credit (Queensland ) Act 1994 and accompanying regulation.

Credit providers who charge above the legislated maximum will be required to pay back any amount over the cap and will face civil penalties of up to $500,000 for breaching the Consumer Credit Code. They will also face criminal penalties of $10,000 for individuals and $50,000 for corporations.

The closing date for submissions is 15 February 2008.

ASIC issues compensation and insurance requirements for AFS licensees

ASIC has released a new regulatory guide, Regulatory Guide 126: Compensation and insurance arrangements for AFS licensees (RG 126).

RG 126 outlines ASIC’s policy for administering the new compensation and professional indemnity (PI) insurance requirements for Australian financial services (AFS) licensees who provide financial services to retail clients. These requirements are set out in regulation 7.6.02AAA of the Corporations Regulations 2001 and s912B of the Corporations Act 2001. 

The compensation and PI insurance requirements aim to reduce the risk a licensee might not have sufficient financial resources to compensate retail clients for losses they suffer as a result of a licensee breaching the law.

ASIC has adopted a two-stage approach to administering the new rules: 

1. ASIC will initially require licensees to have PI insurance based on what is commercially available in the market now, but has also set minimum standards to deliver some practical results for consumers. It will be enough for licensees to meet these minimum standards for two years after the requirements commence.

2. At the end of the two-year implementation period (1 January 2010), ASIC expects licensees to have a higher standard of PI insurance. It will work with industry to encourage the development of products or solutions that achieve this higher standard during the implementation period.

Licensees with an AFS licence that commenced before 1 January 2008 must have stage 1 insurance in place by 1 July 2008. Those with a new AFS licence commencing on or after 1 January 2008 need to meet the stage 1 compensation requirements from the date their licence commences. 

ASIC to research the balance between corporate liability and directors (individual) liability.

AICD has expressed concern on the balance between corporate liability (i.e. relying on the corporate veil) and directors (individual) liability. In response the ASIC Chair in a speech to AICD on 26 November said ASIC will research the issue:

"The concern is that able and experienced women and men are shying away from the listed environment because of higher liability risks. It is argued that even if claims are not successful, the potential of reputation damage is too much risk to accept board positions...

We recognise, however, that it may be time for a stocktake in this area of personal liability – to assess this balance between ensuring our boards take risks (so that our economy keeps growing) with protection of shareholders and creditors and consumers where individual liability may be appropriate.

Our Capital Markets taskforce will, for the Summer School in February 2008, commission a study on the current state of the law on this important issue. It will present its report at the Summer School. This will be our initial contribution on this important debate. How the debate will unfold from this will depend on the outcome of research and the debate which we hope will follow."

Rudd Labor wins Federal election: what will change for business?

Labor has won the 2007 Federal election. Kevin Rudd will be the next Prime Minister. (see ABC results).

The immediate question is what will change for business and when?

Will Parliament be re-convened before year's end?

Who are the new Ministers? What are their priorities?

Here are Labor's policies.

The immediate areas of impact for business will be:

• workplace relations
• Occupational Health & Safety
• climate change, water and energy
• tax reform
• competition policy
• communications and broadband

Which areas will the Labor "razor gang" target? The Access Card project will probably be an early casualty.

Will there be an inquiry into financial services regulatory issues? Will ASIC and APRA be merged?

The Senate result is still unknown: although Liberals lost control (from 1 July 2008), Labor will not have a majority and it is likely the minor parties (Greens, Family First, independents) will have the balance of power. This could result in some interesting negotiations over Labor changes.

UPDATE 29 November: ABC News lists the new ministers and portfolios

ASIC issues report on relief applications - June to August 2007

ASIC has released a report outlining its recent decisions on applications for relief during the period 1 June to 31 August 2007. It summarises situations where ASIC has exercised, or refused to exercise, its exemption and modification powers from the financial reporting, managed investment, takeovers, fundraising or financial services provisions of the Corporations Act 2001.

Australian Building Codes Board

The Australian Building Codes Board (ABCB) is a joint initiative of all levels of government in Australia and includes representatives from the building industry.

The ABCB's mission is to oversee issues relating to health, safety, amenity and sustainability in buildings through the creation of nationally consistent building codes, standards, regulatory requirements and regulatory systems.

Corporate integrity and culture

Ben Heineman, Jr, former General Counsel of GE, has written about the role that general counsels play in corporate affairs based on his experiences, emphasizing how they can help ensure that a business is managed to achieve both high performance and high integrity.

In Avoiding Integrity Land Mines (pdf) Heineman argues that " It is now time to shift this debate about corporate integrity from board oversight of the CEO to how the CEO and top company leaders can most effectively fuse high performance with high integrity at all levels in a challenging, fast-changing, and at times hostile world. This is a grinding, complex, day-in, day-out task that is difficult in the best of circumstances to do well."

He gives the example of when a senior leader was removed not for failing to follow key rules but for failing to create the right culture. "During my time, there were two seminal examples. Both involved acts hidden for a number of years that were clearly understood by many in the respective business units to be suspicious or wrong but had been tolerated to keep difficult customers satisfied. The first involved fraud in a Middle East procurement contract financed by U.S. government funds in the late 1980s and early 1990s. The second, early in this decade, had to do with acquiescing to an Asian customer’s request that GE falsify supplier documents included in regulatory submissions."

(via Harvard Law School Corporate Governance Blog)

ASIC Policy on training financial product advisers updated

ASIC has released an updated version of  Regulatory Guide 146: Licensing: Training of financial product advisers (RG 146). RG 146 sets out the minimum training standards for financial product advisers and explains how advisers can meet these training standards.

After a review, ASIC has decided to:

• amend RG 146 to facilitate more tailored and flexible training requirements for some products that are relatively straightforward and do not involve an investment component (Tier 2 products);
• maintain the current requirements that advisers be trained across the range of products within existing specialist knowledge categories;
• maintain the existing policy on the recognition of prior study and training;
• amend RG 146 to clarify ASIC’s capacity to deal with non-compliant courses; 
• improve the currency of the information on the ASIC Training Register by requiring course providers to periodically re-register courses; and
• clarify some aspects of ASIC’s policy and re-write it in the new regulatory guide format.

Competition for ASX

ASIC has released a consultation paper, Consultation Paper 95 Competition for market services – response to CP 86 and further consultation (CP 95) which responds to comments recived on Consultation Paper 86 Competition for market services - trading in listed securities and related data  (CP 86).

The consultation will assist ASIC in dealing with applications from AXE ECN Pty Ltd (AXE) and from Liquidnet Australia Pty Ltd (Liquidnet) for Australian market licences to operate competing venues for trading in ASX-listed securities.

The consultation period closes on 29 January 2008.

AML customer information

The Attorney-General's Department has developed a public awareness campaign to inform the Australian community about why Australia has introduced new AML/CTF laws and how these laws may affect them.

The campaign materials and resources will assist businesses affected by the new laws to communicate AML/CTF changes to their customers.

The most likely area of customer reaction will be changed customer identification procedures.

Account switching: review of processes

Account switching is changing accounts from one financial institution to another.

The Australian Payments Clearing Association (APCA) has issued a discussion paper (pdf) on whether there is a need for the introduction of measures to facilitate or enhance the ability of customers to change direct debit and credit arrangements when switching accounts.

APCA has released the submissions it has received.

AML update: education and training resources

From 12 December 2007, businesses which deliver services outlined under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (including financial services), need to have in place an anti-money laundering and counter-terrorism financing program.

To assist businesses, AUSTRAC has published an e-learning course and industry resources (including case studies for training purposes).

There are specific presentations for:

• Banking

• Financial Planners

• Gambling

• Mutual Societies

• Providers of Designated Remittance Services

• Superannuation

In addition to the new obligations, businesses are required to complete a Compliance Report.

The report covers the reporting period from 13 December 2006 to 31 December 2007 and must be submitted to AUSTRAC by 31 March 2008.

What new court discovery rules will mean for management of electronically stored information

The Federal Court of Australia is considering adopting e-discovery rules for commercial litigation based on the US's Federal Rules of Civil Procedure which already specifically allow electronic discovery. (Lawyers Weekly)

What will this mean for companies?

In Linking E-Discovery & Enterprise Security Programs:A Successful Governance Action (pdf) by Jody R. Westby, CEO of Global Cyber Risk LLC, the author argues that "Technological considerations are now front and center in litigation strategy, and discovery issues must be woven into enterprise security programs."

Some of the US FRCP requirements which could be adopted here are:

• a party must provide “a copy of, or a description by category and location of, all documents, electronically stored information, and tangible things that are in the possession, custody, and control of the party.”
• a party can request that they be able to “inspect, copy, test, or sample any designated documents or electronically stored information (including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations stored in any medium…)” or to inspect “tangible things that constitute or contain matters within the scope of” discovery.
• a court may not impose sanctions for failing to produce electronically stored information (ESI) that was lost as a result of the “routine, good-faith operation of an electronic information system.” However, the “good-faith operation” of systems requires parties to modify or suspend routine features of a system that may result in the destruction of data that is subject to preservation. A party is under a duty to preserve data that is applicable to pending or reasonably anticipated litigation.

The new Rules will also include "litigation hold" procedures to stop destruction of emails and other electronic messages. Companies will need to have technology in place to ensure that such orders can be complied with.

In summary, Westby says that from the moment litigation is filed or a person has reason to believe litigation may arise, counsel must know:
• What ESI the organization has
• What ESI is relevant
• What ESI should be preserved
• What ESI is subject to privilege or other protections (including intellectual property protections, contractual obligations, non-disclosure agreements, etc.)
• What format is the ESI ordinarily maintained in
• Where the ESI is located and how many copies exist
• What personnel have access to the ESI (within the company and third parties, such as vendors, contractors, business partners, etc.)
• What ESI is not reasonably accessible
• What ESI is expensive and burdensome to produce.

In the US the new rules have had "a significant impact on managerial policies and procedures and operational considerations. Organizationally, they require a much closer working relationship between in-house counsel, the CISO (Chief Information Security Officer), and records management personnel. Operationally, they require a linkage between records management systems and enterprise security programs."

Security of company books: not just a privacy issue

Security of company records is usually discussed in connection with privacy.

But security is actually an obligation of directors and officers under section 180 of the Corporations Act, the duty of care and diligence.

Section 1306(3) Corporations Act states that "A corporation must take all reasonable precautions ... for guarding against damage to, destruction of or falsification of or in, and for discovery of falsification of or in, any book or part of a book required by this Act to be kept or prepared by the corporation."

This makes it a duty of the directors to consider fire protection, anti-theft and other security measures of all their records, whether physical or electronic.

Whatever they decide, they need to be able to justify the decision under the business judgment rule in section 180(2).

Does your company have a records security policy?

Legal professional privilege of in-house emails

I recently noted the decision of Telstra v Minister for Communications disallowing Telstra's claim of privilege for certain communications by its in-house lawyers because it could not be shown the lawyers were acting independent of management.

What would be the situation regarding e-mails and attachments between in-house lawyers and non-legal personnel addressed to both lawyers and non-lawyers for review, comment and approval?

The US decision in  In re Vioxx Prods. Liab. Litig. is the subject of a Litigation Alert (pdf) by Hogan & Hartson (via Stephen Warne). Here's some key points:

• After the pain drug Vioxx was pulled from the market in 2004 due to concerns that it caused an increased risk of heart attacks and strokes, the drug’s manufacturer, Merck, was flooded with lawsuits.
• Merck’s claimed privilege over approximately 500,000 pages of documents, primarily e-mails and attachments between Merck in-house attorneys and non-legal personnel.
• The Court decided that e-mails “addressed to both lawyers and non-lawyers for review, comment, and approval,” and any attachments are not privileged since the primary purpose of the request is “not to obtain legal assistance since the same [advice] was being sought from all.”
• Such a communication could be considered a request for legal advice with a notification to the non-lawyer recipients of the advice sought, but the burden of establishing this is on the proponent of the privilege.
• Documents sent to an attorney for legal advice do not remain privileged if later circulated to other company personnel for non-legal purposes unless the purpose was to apprise them of the legal advice sought and received.
• Parties cannot claim an entire e-mail thread is privileged. They must prove that each thread is privileged unless the entirety of the e-mail chain is integrated into a communication made only to an attorney for legal advice.

As ediscovery becomes a routine litigation procedure in Australia, this issue will arise for consideration here.

Proposal for Anti‑Counterfeiting Trade Agreement

The Department of Foreign Affairs and Trade has issued a discussion paper to provide information on a new treaty being proposed by Japan, the EC, the US and Switzerland, provisionally called the Anti‑Counterfeiting Trade Agreement (ACTA).

The ACTA is proposed to establish a new standard of intellectual property rights enforcement to combat global counterfeiting and piracy.

DFAT welcomes submissions from individuals and groups with views on Australia entering into negotiations on ACTA. Participation in such negotiations would be without prejudice to a final decision as to whether Australia would join any future treaty.

Austrac online

Austrac has released information on a new internet-based system called AUSTRAC Online.

AUSTRAC Online is designed to assist businesses with their regulatory and reporting obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Financial Transaction Reports Act 1988 (FTR Act).

Features included in the initial release of AUSTRAC Online will:

• streamline (automate) the introduction of new businesses, known as 'reporting entities', to AUSTRAC
• provide businesses with a tailored AML/CTF compliance report based on their business type or industry sector and the designated services they provide
• allow providers of designated remittance services to register, update their registered details or request removal from the register
• provide links to e-learning and AML/CTF-related news.

This system will be available in December 2007.

Takeovers Panel updates guidance on lock-up devices

The Takeovers Panel has published a revised  version of its Guidance Note 7 on Lock-up devices.

The term "lock-up device" refers to different types of restrictive arrangements entered into between bidders and targets (or other parties) to encourage or facilitate a takeover bid.

Guidance Note 7 sets out the Panel's approach to such arrangements entered into by a target entity, including devices such as break fees, asset lock-ups, no-talk agreements and no-shop agreements. It explains the two guiding criteria, concerning competition and coercion that the Panel applies when considering whether such arrangements give rise to unacceptable circumstances.

The changes which the Panel has made include:

• adjusting the focus of the guidance note from singular devices to lock-up arrangements generally.
• guidance on agreements affecting dealings with rival bidders, including 'no due diligence' agreements and agreements to pass on information. In summary, the Panel considers that, similar to no talk provisions, such agreements require appropriate safeguards and fiduciary exceptions.
• adding references to the recent panel decisions in Magna Pacific Holdings Limited 02 [2007] ATP 03 and Queensland Cotton Holdings Limited 02 [2007] ATP 05. Accordingly, the policy reflects that the Panel would be likely to find a no-talk agreement to be anti-competitive if the form of any fiduciary exception meant that it was likely to be unavailable to target directors in practical terms.
• clarification of policy application. The revised policy clearly states that the principles will be applied to any arrangement which has the effect of fettering the actions of a target, a bidder or a substantial shareholder.

Removal of company directors: disputed notice of meeting

Disputes over the convening of company meetings and removal of directors are frequently litigated.

In Scottish & Colonial Ltd v Australian Power & Gas Co Ltd & Ors [2007]  NSWSC 1266 the New South Wales Supreme Court decided that a general meeting of shareholders of Australian Power and Gas Company Limited (APG) called by a director could not, by resolution, remove any director from office because section 203D of The Corporations Act had not been complied with.

APG is a public company listed on the Australian Stock Exchange. On 15 October 2007 Mr Bellman, a director, requisitioned a general meeting of APG to be held on 15 November 2007.  Mr Bellman was authorised to call the meeting by s 249CA of the Corporations Act 2001. He gave notice complying with s 249HA. He acted under that power without seeking a decision of the board to call a meeting. His notice of meeting set out five resolutions, the effect of which was that, if passed, all four other directors would be removed from office immediately, and that another person, who was not a current director, would be appointed a director

Scottish & Colonial Limited, a shareholder of APG, claimed an injunction restraining the challenged directors and APG from continuing to issue communications relating to the meeting of 15 November 2007 which in any way sought to influence the outcome of that meeting; an injunction restraining the challenged directors and APG from operating the information hotline referred to in a letter which they circulated on 18 October 2007 at APG's expense; an injunction restraining the challenged directors from using funds or resources of APG to influence shareholders to vote against the resolutions at the meeting proposed, and orders that the challenged directors indemnify or compensate APG for funds and resources already utilised to seek to influence shareholders to vote against the resolutions.

The principal ground alleged against the directors was contravention of their duty to exercise their powers in good faith in the best interests of APG and for a proper purpose, as set out in s 181(1) of the Act.

The section 203D issue was heard as a separate preliminary point.

Mr Bellman did not follow the procedure for removal of the directors indicated by s 203D of the Act, which includes a requirement in subs (2) that "Notice of intention to move the resolution must be given to the company at least 2 months before the meeting is to be held". He did not give two months' notice.

Justice Bryson rejected argument that a general meeting could resolve to remove directors notwithstanding non-compliance with section 203D:

"In my opinion s 203D means that if a director is to be removed the procedures required by the section must be taken. The step in s 203D(2) of giving notice must be taken, subject to the means of overcoming the time provided for by subs (2) but otherwise as prescribed. So too for the steps required by subs (3) and for according the director the entitlement conferred by subs (4). If there are conditions in a company's articles for exercise of the power, whether procedural provisions or other conditions, it is nonetheless necessary that s 203D be complied with. The power in subs 203D (1) exists despite anything in any other of the documents indicated; that is, it always exists, in any removal of a director the members always exercise it. When it is exercised the other provisions of s 203D apply and must be complied with. Whether any conditions imposed by a company’s constitution must also be complied with need not now be determined: in this case the requirements of cl 12.5 would be complied with."

iSelect gives advertising undertakings to ACCC

The Australian Competition and Consumer Commission (ACCC) has accepted court-enforceable undertakings from iSelect Health Pty Ltd in response to ACCC's concerns in relation to certain representations that iSelect made in the promotion of its health insurance  recommendation service.

iSelect receives commissions from insurance companies in respect of the policies that it arranges for consumers to purchase. 

The ACCC was concerned that iSelect made various representations which were likely to mislead consumers as to the range of insurance policies which it compared when recommending a policy. In particular, the ACCC was concerned that iSelect made representations that:

• misrepresented that it compared a significant proportion of health insurance policies available to consumers
• misrepresented the number of health insurance policies which it compared for consumers, and
• misrepresented that it compared for consumers all the health insurance covers available to them and could find the best suited policy for a consumer's needs at the lowest price.

After the ACCC raised its concerns with the company, iSelect ceased making the alleged misrepresentations and took steps to implement a trade practices compliance program.

iSelect has undertaken that:

• it will not make the representations of concern in specified circumstances where they may be misleading
• it will inform certain customers who it arranged to purchase a health insurance policy of the range of insurance policies which it compared for them, and
• it will maintain a trade practices compliance program.

Fringe Lending - Submissions on Consumer Credit Code Amendments

The UCCCMC has published the submissions it has received on its draft fringe credit provider amendments.

One of the themes of the submissions relates to the impact of the proposals on existing "mainstream" lenders, in particular the proposed changes to business purpose declarations, contract requirements and contract re-opening provisions.

UCCCMC has indicated that there will be additional opportunity for stakeholder input.  A further draft of the amendments will be prepared following full consideration of both the technical and substantive issues raised in the submissions.

Draft new code of practice for credit unions and mutual building societies

Abacus – Australian Mutuals, the association of mutual building societies and credit unions, has issued a Draft Code of Practice for all credit unions and mutual building societies that belong to Abacus and a consultation paper .

The Draft Code of Practice covers a wide range of banking and related topics, including product information, fair terms, responsible lending practices, finance brokers, equity release products, account information, customers in financial difficulties and complaint handling.

The draft Code is open for comment until Friday 7 December 2007 .

Abacus' objective is to release the final Code, subject to approval by the Abacus board, in early 2008. A transition period of 12-months from publication is envisaged.

If ASIC approval is to be sought, the Code will need to satisfy RG183.9.

ASIC to run Westpoint actions for investors

ASIC has announced it will issue a number of proceedings for the benefit of investors in the Westpoint Group seeking compensation for their failed investments.

This follows ASIC'€™s announcement that the Commission had resolved to take over the running of liquidators'€™ proceedings commenced by the liquidator of Ann Street Mezzanine Pty Ltd and York Street Mezzanine Pty Ltd and to bring claims on behalf of other mezzanine companies.

The first phase of ASIC's legal action will seek to recover damages from various directors and officers of certain companies in the Westpoint Group and entities associated with one of the directors and from a number of licensees of financial planning firms that sold Westpoint investments.

It will be alleged that directors and officers are responsible for the misapplication of funds raised by the mezzanine companies, and that commission payments received by entities associated with one director should be returned. At this stage ASIC has identified potential claims of up to $245 million.

ASIC will also allege that, in selling products with the risk and financial characteristics of Westpoint, the licensees did not comply with their obligations under the conditions of their Australian financial services licences and under the law.

ASIC will be seeking a total of approximately $63.2 million in damages from these licensees, based on the amounts which their clients invested in Westpoint products and subsequently lost when Westpoint collapsed.

UPDATE 23 December 2007: ASIC announces phase 2 actions

The effect of the rejection of a remuneration report

The Australian reports that Telstra shareholders rejected the Board's remuneration report at its AGM but that the Board intends to proceed with the proposed remuneration packages for its executives.

See Telstra Chairman's statement

Under section 300A of the Corporations Act, a listed public company's annual directors' report must contain a discussion on remuneration of directors, secretary and senior managers in a separate remuneration report.

The remuneration report must include a discussion of the relationship between the remuneration policy and the company’s performance.

If an element of the remuneration package for a director, Company Secretary or senior manager is dependent on them satisfying a performance condition, the company must disclose:

• a detailed summary of the condition
• an explanation of why the condition was chosen
• the methods used in determining whether the performance condition has been satisfied.

Companies also have to explain why the company’s securities form part of the remuneration if the securities are given without satisfaction of a performance condition.

Sections 249L(2) and 250R(2) require that at a listed company’s AGM, the members vote on an advisory (non-binding) resolution that the remuneration report be adopted.

Even though a vote to reject a remuneration report is not binding, a company should explain to its shareholders what action, if any, it intends to take in response.

The Corporations Act is silent on the consequences if a Board proceeds with its remuneration proposals despite a negative shareholder vote.

Of course the shareholders may review their position when electing directors in the future.

For listed companies, Listing Rule 10.17 provides that members must determine directors’ fees and that any increase requires members’ approval. LR 10.17.2 provides that fees paid to non-executive directors must be by fixed sum. Similarly, LR 10.17 provides that remuneration to executive directors (salary or fee) must not include a commission on, or percentage of, operating revenue.

Telstra's AGM passed a resolution to increase the aggregate fees payable to non-executive directors.

Telecommunications Industry Ombudsman Annual Report 2006/07

The Telecommunications Industry Ombudsman has issued her Annual Report for 2006/07.

The overall number of complaint issues to the TIO grew from 127,479 to 166,885, a 30.9 per cent increase on the 2005/06 year.

The big increase in complaint issues this year was driven by the internet category, which grew by 108.9 per cent. There were increases in all internet complaint issue categories including:
• an 84.5 per cent increase in Billing and Payments complaint issues.
• a doubling of complaint issues about Faults.
• a 55.3 per cent increase in complaint issues about Customer Service.

Landline complaint issues grew by 3.9 per cent and mobile complaint issues grew by 4.1 per cent.

Internet banking in Australia

APRA has released its 2007 ADI Points of Presence publication.

Unfortunately APRA does not obtain separate data on which ADI's offer internet banking despite the risks associated with it.

The publication contains a break up between "face to face" (eg branch) and “non face-to-face” customer contact (eg telephone banking) by ADI’s but it does not regard internet banking as a separate reportable service channel.

Free Speech in Australia

A media coalition (the Right to Know Coalition) has sponsored The Independent Audit of the State of Free Speech in Australia (pdf).

Putting aside potential biases about the role of the media, the 336 page report is a useful collection of research material on :

• access to information by media
• protecting whistleblowers
• freedom of information
• anti-terrorism and sedition
• restrictions on court reporting
• privacy and defamation.

Cross-sector financial institution mergers: compliance issues

KPMG’s Building Societies and Credit Unions Survey 2007 highlights strong profitability increases in the sector based on their close bond with their members.

Interestingly, KPMG note that the number of building societies declined slightly from 14 to 13 and the number of credit unions decreased from 146 to 143 in 2007. KPMG observes that "Consolidation in the sector was notable not so much for the number of deals as there were few, but for the nature of the deals completed and in progress."

The "nature of the deals" in the sector is not just credit union-credit union or building society-building society transfers but also credit union-building society and building society-regional bank transfers as evidenced by the Bank of Queensland’s "takeover" of Pioneer Permanent Building Society in November 2006 and BOQ's more recent proposed merger with Home Building Society and offer for Mackay Permanent Building Society.

These cross-sector transfers have been aided by the transfer of non-bank financial institutions to Corporations Act regulation in 2000 and the Financial Sector (Business Transfer and Group Restructure) Act 1999.

Whilst the usual takeover and scheme of arrangement provisions of the Corporations Act apply, the regulation of financial institution mergers is overlaid with compliance requirements of the Banking Act and rules imposed by APRA, ASIC, ACCC and the ATO, as well as the ASX if a party is publicly listed.

And where a merger involves demutualisation of a building society or credit union, additional Corporations Act disclosure provisions apply so that the members can assess whether the merger is in their best interests.

Updated Anti-Money Laundering Rules

The Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) have been updated.

The latest compilation of the AML/CTF Rules comprises 14 chapters.

They relate to a number of matters including:

• 'designated business group' definition
• correspondent banking
• customer identification
• AML/CTF programs
• gambling services
• AML/CTF compliance reports (reporting and lodgement periods)
• electronic funds transfer instructions (involving use of a credit card)
• 'approved third-party bill payment system' definition
• certain monetary thresholds relating to specified items in tables 1 and 3.

Links to draft rules still being consulted on can be found here.

ACCC v Visy: record price-fixing cartel penalties

The reasons for Justice Heerey's decision to accept the settlement between ACCC and Visy and impose record penalties ($36 million fine imposed on Visy for 37 contraventions under section 76(3) Trade Practices Act) are set out in his 333 paragraph judgment in Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617

Between January 2000 and October 2004 companies in the Visy Group and certain officers of those companies engaged in price fixing and market sharing with companies in the Amcor Group, contrary to s 45 of the Trade Practices Act 1974 (Cth). Visy admitted liability.  The parties entered an agreed statement of facts.

The maximum penalties applicable at the time of the contraventions in this case were, in respect of each contravention, $10 million for a corporation and $500,000 for an individual. Paragraphs 298-300 set out the ACCC's method of calculating the proposed penalty.

In making his own assessment Justice Heerey made the following comments:

(The ACCC) did not set out to prove that any particular customer of Visy suffered any particular loss. However, that is not to say that the conduct in which Visy engaged was victimless. The whole point of price fixing and market sharing is to obtain the benefit of prices greater than those which would be obtained in a competitive market. It must follow that customers pay more than they would in a competitive market, and so suffer loss. The conduct involved here was inherently likely to cause loss. The fact that no particular loss has been alleged in respect of any particular customer cannot alter that.

315 The cartel here went on for almost five years. Had it not been accidentally exposed, it would probably still be flourishing. It was run from the highest level in Visy, a very substantial company. It was carefully and deliberately concealed. It was operated by men who were fully aware of its seriously unlawful nature.

316 It is appropriate to make some allowance for the fact that the respondents have admitted liability and thus saved a great deal of public expense for a trial which could well have lasted six months or more...

319 The corporate culture of Visy in relation to its obligations under the Trade Practices Act was non-existent.  None of the most senior people hesitated for a moment before embarking on obviously unlawful conduct. There was in evidence a Visy document entitled "Trade Practices Compliance Manual" dated February 1998.  It was signed by Mr Pratt. It bears a distribution list, signed by Mr Debney, with the names of 50 or so personnel covering every State and Head Office. On the front cover it is said:

This is an important document. It is essential that it be read and understood by you.  Visy Industries requires strict compliance with its policy on the Trade Practices Act.

The document includes the stern warning that price fixing and market sharing are "strictly prohibited" and that readers of the document "must never make (such) arrangements with a competitor". Further, it is said Visy personnel

should avoid all contact with competitors or their employees other than contact approved by senior management or Visy Industries’ Legal Counsel.  All necessary contact with competitors should be conducted in formal settings.

I doubt that Westerfolds Park and the Cherry Hill Tavern could be regarded as formal settings.  The Visy Trade Practices Compliance Manual might have been written in Sanskrit for all the notice anybody took of it.

320 Parity with penalties imposed in other cases is a relevant consideration. Counsel referred to a number of other cases. I do not think it necessary to analyse these in detail. Ultimately each case turns on its own facts.  Suffice it to say that the penalty proposed is more than twice the highest previous penalty imposed by this Court.  That is reflective of the fact that this must be, by far, the most serious cartel case to come before the Court in the 30 plus years in which price fixing has been prohibited by statute.

November 2, 2007 in Trade Practices | Permalink | Comments (0) | TrackBack

ACCC v Visy decision

ABC News reports that the Federal Court has fined Visy $36million over its involvement in a price fixing cartel. (Also The Age)

Visy's former chief executive Harry Debney, who accepted responsibility for his part in the cartel, was fined $1.5 million. (Debney resigned as Visy CEO last week).

Former general manager Rod Carroll, who also accepted responsibility for the cartel, was fined $500,000.

Richard Pratt, as owner of Visy (and will bear the penalty indirectly), escaped a personal fine.

See video of decision announcement by Judge Heerey.

UPDATE: ACCC has welcomed the record penalties.

November 2, 2007 in Trade Practices | Permalink | Comments (0) | TrackBack

ASIC issues regulatory guide on unlisted, unrated debentures

ASIC has:

• released a new regulatory guide, Regulatory Guide 69 Debentures - improving disclosure for retail investors outlining 8 benchmarks (and reporting on an ‘if not, why not’ basis) to improve disclosure to retail investors in unlisted and unrated debentures; and
• released a consultation paper, Consultation Paper 94 Debenture advertising, which includes a draft regulatory guide on debenture advertising for issuers and publishers of unlisted and unrated debentures.

Regulatory Guide 69 Debentures – Improving disclosure for retail investors (RG 69).

All existing unlisted and unrated debenture issuers will be required to provide enhanced reporting to investors by 1 March 2008.

Any new issuers entering the market from 1 December 2007 will be required to disclose against the 8 benchmarks in RG 69 from that date.

ASIC has issued a Regulatory Impact Statement on RG 69.