- Government Moves To Simplify Financial Services Laws
- Investments By Registered Managed Investment Schemes In Unregistered Managed Investment Schemes
GOVERNMENT MOVES TO SIMPLIFY FINANCIAL SERVICES LAWS
In April 2006, the Federal Government commenced work on a program to simplify corporate and financial services laws in Australia. The program commenced with the Corporate and Financial Services Regulation Review Consultation Paper (April 2006) and the Corporate and Financial Services Regulation Review Proposals Paper (November 2006). This article summarises the progression of the changes in this area.
Draft regulations were released in March 2007. The Federal Government envisaged that the regulations would deal with minor drafting and technical amendments to the legislation. Industry was invited to comment on these draft regulations which covered issues such as:
- removal of the obligation to provide FSGs and SOAs when a financial product and/or advice is clearly rejected by a client;
- extending the current law which allows FSGs to be combined with PDSs to enable an FSG to be combined with a Prospectus;
- removal of the requirement to update FSGs and PDSs if a non material change is made, provided clients are given advice on how to obtain the updated information (Note – CO 03/237 already allowed the information in a PDS to be out of date);
- allowing superannuation funds to aggregate funds for the purpose of the "wholesale test" (provided the trustee manages at least one fund with $10 million of assets);
- allowing disclosure documents to be incorporated by reference (provided that the information incorporated by reference has previously been given to the client, ie NOT merely via a website);
- a reduction in the oral disclosure requirements for financial products with a "cooling off period"; and
- an extension of the exemption from the requirement to hold an AFSL for persons in foreign jurisdictions providing a financial service to AFS Licensees provided the AFS Licensee is acting:
- on their own behalf,
- as a trustee; or
- as a responsible entity.
Following extensive industry comment on these draft regulations, the Federal Government has indicated that a further draft of these regulations will be released in September 2007.
Corporations (Simpler Regulatory System) Act
In June 2007, the Corporations Legislation Amendment (Simpler Regulatory System) Act (the Act) was passed and received royal assent. There are nine "financial services reforms" introduced by the Act. These reforms:
- facilitate the provision of financial advice;
- extend the "public forum" exemption for Financial Services Guides (FSGs);
- incorporate the "sophisticated investor test" found in section 708(10) of the Corporations Act (previously applicable only to investments in "securities") into chapter 7 of the Corporations Act to enable Australian Financial Services Licensees (AFS Licensees) to treat clients as "wholesale" if they have the necessary experience and expertise and the client signs a written acknowledgement that they will not be given a PDS and will not be afforded other protections given to "retail" clients;
- reduce the exposure of AFS Licensees in cases of cross-endorsement of authorised representatives;
- improve "PDS in-use" notification requirements;
- enable trustees of superannuation trusts to be treated as "wholesale investors" when dealing with pooled superannuation trusts;
- extend the "self-listing rules" for market licensees as well as increase ASIC's regulatory powers of related body corporates, and competitors or market licensees; and
- remove the prohibition on registered managed investment schemes from investing in unregistered managed investment schemes.
A number of other issues were considered in the Corporate and Financial Services Regulation Review Proposals Paper (November 2006). Public consultation in a number of these areas has resulted in a lack of agreement as to how to achieve these reforms and as such the Federal Government has announced "special projects" to further consider the issues. The two major areas in which further work will be done are:
- a review of ASIC Policy State 146 (now ASIC Regulatory Guide 146 Licensing: Training of Financial Product Advisers). ASIC has indicated that a consultation paper in this area will be released in July 2007; and
- a proposal to introduce a new class of financial activity, a "sales recommendation" (to provide further clarity to the existing "financial product advice" / "factual information" categories).
INVESTMENTS BY REGISTERED MANAGED INVESTMENT SCHEMES IN UNREGISTERED MANAGED INVESTMENT SCHEMES
Responsible entities of registered managed investment schemes will now have greater choices when it comes to selecting the investments they make thanks to recent amending legislation passed by Federal Parliament in June 2007.
For some years, section 601FC(4) of the Corporations Act has prevented a registered managed investment scheme from investing in an unregistered managed investment scheme. This prohibition was originally designed to prevent a registered managed investment scheme from establishing or investing in an unregistered managed investment scheme in order to avoid the regulations. However, as a result of the nature of many of the complex structured financial products in today's financial markets, this legislation has made it difficult for the responsible entities of registered managed investment schemes in Australia to measure the suitability of investments in unregistered trusts and other structured products located both on-shore and offshore.
In recognition of the difficulties faced by responsible entities, ASIC previously issued both class order and policy statement relief in this area.
- Class Order 98/55 (CO 98/55) provided limited relief from the prohibition in section 601FC(4) of the Corporations Act including allowing responsible entities to:
- invest up to 10% of scheme assets in unregistered managed investment schemes; and
- make minority investments in certain schemes registered in offshore jurisdictions which comparable legal frameworks to Australia.
- Under Policy Statement 178 Foreign Collection Investment Schemes (PS178) ASIC could exempt a responsible entity on an individual basis from the prohibition in section 601FC(4) of the Corporations Act to enable the responsible entity to invest in foreign collective investment schemes.
In November 2006, in the Corporate and Financial Services Regulation Review Paper Proposals Paper (Proposals Paper), the Federal Government suggested reforms to section 601FC(4) of the Corporations Act to permit investment by Australian registered managed investment schemes in offshore unregistered schemes operated by unrelated parties. In making such a proposal, the Federal Government acknowledged the difficulties facing registered managed investment schemes seeking to diversify their investments in offshore trusts and other structured products.
The final reforms, released in the Corporations Legislation Amendment (Simpler Regulatory System) Act, surprised everyone by gong even further than the reforms outlined in the Proposals Paper - completely repealing section 601FC(4) of the Corporations Act.
This is welcome news for many of Australia's registered managed investment schemes who will now be permitted to invest in unregistered managed investment schemes and other structured investments, both onshore and offshore. However, many industry commentators have questioned the wisdom of this given the recent collapse of several unregistered managed investment schemes.
These commentators have raised concerns that investors in registered managed investment schemes will no longer have the comfort of knowing that the scheme in which they chose to invest will itself be permitted to invest only in other highly regulated investments.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.