Australia: Corporate and Financial Services Regulation Review

Last Updated: 19 May 2006
Article by Robert Tobias and Marianne Robinson


In May 2005 the Federal Government introduced Refinements to Financial Services Regulation policy proposal paper which contained 12 refinements to the Australian Financial Services Regulations. This ‘first round’ of refinements were intended to ensure that consumers were better informed to make financial decisions.

In April 2006 the ‘second round’ of refinement proposals were released. The Corporate and Financial Services Regulation Review (the Proposal) is aimed at ‘simplifying the regulatory system and reducing unnecessary or excessive red tape’. This Proposal also includes a number of amendments to the Corporations Act 2001 (the Act), primarily in the areas of company reporting and corporate governance.

Key components of ASIC’s latest Proposal for financial services Cross-endorsement of authorised representatives (ARs) for risk insurance products

Class order 05/1070 provided relief for general insurance distributors to enable the licensee to appoint people to deal with general insurance products on their behalf. The licensee remains responsible for the activities of the distributor. The issue of cross endorsement has been controversial since its introduction and has made many insurers reluctant to appoint ARs especially when other financial products are involved.

To address this concern, the Proposal will mean that an insurance company would only be jointly and severally liable for the actions of its insurance agent where the agent provides financial services in relation to the same class of insurance products, for example motor vehicle insurance.

General and personal advice

The last round of reforms allowed product issuers to give advice about their own products without this amounting to financial advice. Obtaining information about a client’s personal details also does not amount to personal advice. The Proposal examines the still confusing boundary between general and personal advice and when Statements of Advice (SOAs) are not required.

When SOAs are not required

A SOA is not required when an adviser is on a fact-finding exercise responding to client queries or expressing preliminary views, provided the fact-finding relates to the preparation of a statement of advice and that the client does not act on any representations made during the consultations.

The Proposal looks at situations where personal advice is given, but no financial product is recommended and no remuneration is received for the advice.

Incorporation by reference in disclosure documents to include standardised or general information prepared by industry

Relief has been granted to enable an advisor to incorporate by reference, information from a wider range of documents, however, the Proposal requests an expansion to include standardised or general information prepared by industry. An example of this is where information about preservation rules for a superannuation product is set by legislation and is considered ‘standard’. This information would not then need to be set out in a Product Disclosure Statement (PDS) or a SOA.

‘Bundled’ general insurance products that are predominantly directed at wholesale clients to be treated as totally wholesale

Under current legislation within the Financial Services Reform Act 2001, where general insurance products are offered to consumers they are viewed as retail clients and as such must be given a PDS at the time of the offer of the financial product.

ASIC is seeking comments on whether predominantly wholesale bundled general insurance products directed at wholesale clients can be treated as totally wholesale and if so, what protections would need to apply in order to ensure that retail clients are not prejudiced.

Exemptions from licensing and disclosure applying to foreign financial service providers being extended to offshore branches of AFSL holders

At present there are exemptions from licensing and disclosure provisions for foreign financial service providers. Clarification is being sought which would allow the same provisions to be extended to offshore branches of AFSL holders.

Generally these exemptions only extend to foreign financial service providers who service wholesale clients and are regulated by a similar regulatory authority overseas to that of ASIC. The Proposal is aimed at streamlining banking services to give a clearer jurisdictional approach to Australian branches operating overseas.

Clarification of ‘badging’ or ‘branding’ of disclosure documents

ARs must ensure that any branding of products does not create the impression that they are the issuer or seller of the product, and that any relationship between the AR and the issuer is disclosed.

ASIC wants to consider whether conditions need to be applied to any exemption from badging being considered the provision of financial product advice.

Providing consumers with the dollar disclosure information for general insurance products within a policy schedule

Currently AFSLs and their representatives must disclose the costs and benefits of financial products as amounts in dollars. PDS’s for general insurance currently include many broad descriptions of how costs and benefits are calculated because general insurers cannot determine the exact dollar costs and benefits of a general insurance product until they have assessed the consumer’s required level of coverage. The dollar disclosure requirements which are more compatible with insurance products do not fit with the underwriting of general insurance products where each policy holder’s own risks are determined in order to calculate a premium.

Comments are being sought to determine whether specific dollar disclosure requirements should be prescribed for general insurance products.

Amending the small business test to include asset and/ or turnover criteria

At present, the small business test is dependant purely on the number of employees.

Clarification is required on whether it would be more appropriate to amend the small business test to include asset and or turnover criteria. If so, ASIC seeks comments on what the appropriate thresholds would be.

Key components of the Proposal for company reporting obligations, corporate governance, auditor independence, fundraising and dealing with regulators

Concise reporting requirements

The objective of the concise report was to offer an alternative to providing shareholders with full financial statements. However, the increasing amount of material required by the concise report suggests that the purpose of the report is being undermined. The Proposal attempts to reduce the information contained in the concise report so that only summary remuneration is included, in particular by separating the remuneration report from the rest of the directors’ report.

Executive remuneration - disclosure requirements

The Proposal is aimed at generating greater consistency between the Act and Regulations and the Australian Accounting Standards (AAS) in relation to the disclosure requirements for executive and director remuneration. Currently, there are some significant differences in key definitions and requirements, thus creating uncertainty and increasing the instances of unnecessary duplication. It is intended that the proposals will retain the current level of disclosure, while aligning the related requirements of the Act and the AAS.

Thresholds for financial reporting of large proprietary companies

As the threshold for what is considered to be a ‘large’ proprietary company under the Act has not been reviewed in the last 10 years, comment is sought on whether an increased threshold is required. If the threshold is increased, the effect will be that a greater number of companies will be considered ‘small’ proprietary companies and will therefore be exempt from having to prepare financial and directors’ reports in most circumstances.

Parent entity financial statements

The Act currently requires that companies lodge parent entity financial statements in addition to the financial statements for the consolidated corporate group. The Proposal questions whether the preparation of full financial statements is necessary, given that for some users of financial statements, the information regarding the separate parent entity is irrelevant. Comments are sought on whether only summary financial information for the parent entity is sufficient, and what type of information this should include.

Related party transactions

Member approval is currently required under s208 of the Act before a public company can give any financial benefit to a related party, regardless of the monetary amount of that benefit. Comment is sought on whether the Act should be amended to allow financial benefits under a prescribed level, for example $5,000, to be provided without member approval. This would decrease the procedures required to be undertaken in what are considered to be minor transactions.

Further, the Proposal queries whether the current monetary limit of $2,000 should be in increased for member approval for the provision of a financial benefit to a spouse.

Directors’ duties for single director companies

The Proposal questions whether the same degree of regulation is required in relation to directors’ duties for single-director and closely held companies, as for large listed companies. The argument is that the interests of the directors and shareholders in single-director and closely held companies are already closely aligned and therefore members of those companies should have the ability to, by resolution, agree to opt out of some of the directors’ duties imposed by the Act. The proposals note that any such amendment would not impact on the application of contract, tort and criminal laws that currently regulate the conduct of such directors.

Extension of the business judgment rule

The Proposal seeks to implement a general business judgment rule whereby directors are excused from liability under the Act if they act:

  • in a bona fide manner;
  • within the scope of the corporation’s business;
  • reasonably and incidentally to the corporation’s business; and
  • for the corporation’s benefit.

This new rule provides protection to directors even if they have a material personal interest in the transaction, unlike the current business judgement rule. This broad protection would extend to any obligation the director or officer has under the Act.

Auditor independence

The regime established under CLERP 9 regarding auditor independence has given rise to a number of ‘anomalies and unintended consequences’. In particular following prohibitions have raised concerns in the business community:

  • the prohibition on an auditor owing an amount of more than $5,000 to an audit client; and
  • the prohibition on an audit client owing an amount to the audit firm under a loan.

The first prohibition is problematic, as it seems to catch ‘ordinary course of business’ transactions between an auditor and audit clients. Thus, the proposals seek to implement an ‘ordinary course of business’ exemption via regulation.

The issue surrounding the second prohibition is that whilst amounts owing by a bank under a cheque or savings account may not be considered to be a loan in a commercial sense, the common law interpretation of a loan includes such accounts held with a bank. The impact on auditors of banks is that all firm and audit team members’ accounts with the banks would have to be closed. The Proposal seeks the implementation of a regulation stating that cheque and savings accounts are not intended to be covered by the prohibition.

Review of the fundraising provisions to facilitate certain types of fundraisings

At present, the disclosure rules in the Act covering small-scale fundraising are arguably ‘inhibiting the creation of new businesses with venture capital’. The Proposal suggests a review of certain provisions of the Act, such as those applying to small scale offerings (708(1)) and sophisticated investors (708(8)).

Comments are sought on whether amendments are required to these and other provisions, particularly in relation to the type of offer documents required, when they must be prepared, and when certain fundraising is exempt from the disclosure requirements.

Review of secondary sale disclosure rules

Currently, section 707 of the Act requires a prospectus to be issued where asecurity was issued originally without disclosure and is on-sold within 12 months to a retail investor. CLERP 9 introduced section 708A which requires no further disclosure if investors have had the benefit of information that is comparable to information that would be available in a prospectus.

However, the practical application of these provisions is highly technical and confusing. The nature of share placements means that they are often implemented on an urgent basis, and any delay in meeting the requirements under these sections caused by uncertainty can leave participants open to both civil and criminal penalties.

Thus, comments are sought on whether the current sections 707(3) and 708A are effective, or whether amendment is require to simplify their application.

ASIC / APRA information exchange

Currently, a large number of financial institutions are required to apply for licenses from both ASIC and APRA. Both regulators require a significant amount of information to be provided for both the licensing application and subsequent compliance and ongoing reporting requirements, much of which is duplicated and must be provided separately to both regulators.

The Proposal suggests that information that is identical or similar be provided to the one regulator which is then authorised to transfer the information to the other regulator. This would reduce the amount of duplication, thus minimising the compliance costs for industry in discharging these reporting obligations. Comments are sought on the nature and extent of the information that is currently duplicated and the most efficient way for businesses to provide the information to the regulators collectively.

Expected impact

Several years of lobbying have led to this round of proposed refinements and many of the proposals examine issues which have concerned the business and financial services industries since 2002. The areas raised for discussion are significant but anomalies still exist. The restriction of many of the refinements to risk insurance products perpetuates the anomalies which exist between risk products and in particular miscellaneous risk products where product issuers, ARi s and distributors experience the same practical differences.

For many this round of consultation is critical and the closing date of 19 May, 2006 for submission is one that should not be missed.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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