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Focus: Corporate and Financial Services – June 2007

Simpler regulatory system package receives go-ahead

In brief: The Federal Government's 'Simpler Regulatory System' legislative reforms for the corporate and financial services sector are intended to provide investors with improved access to, and participation in, corporate and financial markets, while also enabling industry participants to benefit from reduced compliance costs and streamlined and more efficient regulatory processes. Consultant Derek Heath (view CV) and Senior Associate Justine Woodford summarise the legislation, which is awaiting Royal Assent.

How does it affect you?

  • The legislative provisions are broadly consistent with what was included in the earlier proposals paper (November 2006), although some new issues developed during the consultation process, most notably in relation to auditor independence requirements, have been included. There are two important exclusions:
    • the proposal to distinguish (and separately regulate) financial services advice from a 'financial product sales recommendation' has been omitted; and
    • the Government has decided not to proceed with a proposal to repeal a law that exempts some private companies from lodging audited financial accounts.
  • There will no longer be any legislative restrictions on registered managed investment schemes investing in unregistered schemes. This is a very welcome development for the industry.
  • For small-scale investors, access to affordable financial advice will be improved because of reduced costs associated with providing the advice. Some experienced retail investors will have the opportunity to access more sophisticated financial investments (subject to some conditions).
  • Some reforms will improve business efficiency by reducing compliance costs for some corporate fundraising activities (including by reducing the volume of documentation that must be provided in some cases), and by removing the need for member approvals for some transactions.
  • Streamlined regulatory requirements will benefit regulators and investors, eg the Australian Securities & Investments Commission will establish extended and improved online reporting and electronic lodgment systems. Also, relevant accounting standards requirements for executive and director remuneration will be incorporated into the Corporations Act 2001 (Cth). However, some changes will mean different – and even increased – compliance processes.

Background

In December 2006, we reported on the release by the Federal Government of the Corporate and Financial Services Regulation Review Proposals Paper (the proposals paper) (see AAR Focus: Financial Services, December 2006). As a result of feedback received, the Government released on 24 May 2007 the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 (the Simpler Regulatory Bill), together with the Corporations (Fees) Amendment Bill 2007 and the Corporations (Review Fees) Amendment Bill 2007.1

The Simpler Regulatory Bill

The Simpler Regulatory Bill will implement most of the proposals contained in the proposals paper. However:

  • the scope of some issues has been refined;
  • some issues are no longer being pursued; and
  • the Government has decided that some issues will be dealt with:
    • as separate projects outside of the current legislative proposals (as they require further consultation); or
    • through other legislation (eg the Financial Sector (Simplifying Regulation and Review) Bill 2007, in relation to breach reporting periods2.

The Government has also taken the opportunity to include some other initiatives that, in the case of the auditor independence requirements, are an extension of matters included in the proposals paper and, in other cases, are minor initiatives that are sensibly dealt with as part of the Simpler Regulatory Package (eg the proposed changes to body corporate names and constitutions of non-profit companies).

In a number of cases, the legislative provisions will be supplemented by regulations (the proposed regulations) that the Government has not released yet. Until the proposed regulations are made available, it is difficult to assess the effectiveness and workability of the affected provisions. There is no indication as to when the proposed regulations will be made.

For more information on the proposals dealt with in the Simpler Regulatory System package, refer to our table, which contains a brief description of, and commencement details for, each proposal and provides some commentary on their effectiveness and implementation (including to note where the Simpler Regulatory Bill differs from the proposals paper).

Below is a summary of the main legislative provisions. (We have marked with an asterisk where clarifying regulations are anticipated.)

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Key provisions
Financial services regulation provisions included in the Simpler Regulatory Bill
  • Financial advisers providing general (ie not personal) advice that does not involve recommending a product, and for which no remuneration is received, will not have to provide a statement of advice (SOA), although a record of advice (ROA) must be prepared.*
  • An SOA will only be required where the advice relates to an investment worth more than the threshold amount (which is expected to be set at $15,000 in the proposed regulations). However, clients must be given an ROA. This exemption for 'small investment advice' will not apply to superannuation-related products (unless the client already has an interest in the product) and other insurance and risk-related products mentioned in the proposals paper.*
  • Subject to conditions, a financial services guide will not be required at a 'public' forum (defined as where 10 or more retail clients attend).*
  • In appropriate circumstances, a financial services licensee will be able to certify that a client has sufficient experience to be treated as wholesale.
  • Insurance licensees will now be jointly and severally responsible only for the conduct of their authorised representatives where those representatives provide financial services in relation to the same sub-class of financial product (but apparently limited to general insurance).*
  • The product disclosure statement (PDS) 'in-use' notice regime has been replaced with a new standardised online reporting method that requires PDS issuers to lodge the report with the Australian Securities & Investments Commission (ASIC) within five days after a designated event (ie first giving out the PDS, the relevant product is no longer available and the fees and charges are changed in the PDS).* (This amendment starts on 1 July 2008.)
  • ASIC now has the power to supervise listed entities that are related to a licensed market operator and participants who are related to, or in competition with, a market licensee.
  • The licensing exemption for dealing services provided by trustees of pooled superannuation trusts now extends to the product disclosure rules applying to them.
  • The prohibition on investments by managed investments schemes (MISs) in unregistered schemes has been removed.

The proposed streamlining of disclosure requirements applying to all non-cash payment facilities (not just those related to basic deposit products) is to be implemented through the proposed regulations.

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The main corporate (non-financial services regulation) provisions included in the Simpler Regulatory Bill
  • Two of the thresholds for determining whether a proprietary company is 'large' (and, therefore, required to prepare and lodge an audited financial report) have increased (to $25 million in revenue and $12.5 million in assets).
  • Shareholders of public companies (and members of registered MISs and disclosing entities) will have to request a hard copy of the company's annual report, with these entities only being required to post a copy on their website for people to access. (There are some further compliance requirements imposed on the entities, including notification to shareholders/members of the change. Shareholders/members are still able to choose to receive a hard copy free of charge.)
  • Anomalies in the auditor independence framework that arose as a result of changes introduced under CLERP 9 have been addressed. These changes (together with new changes introduced into the Simpler Regulatory Bill to implement a range of measures arising from a discussion paper on auditor independence requirements released by the Government in November 2006 (refer to the attached table for further details)) are intended to reduce complexity and compliance, and improve the overall effectiveness of the auditor independence requirements. They cover, among other things, reporting requirements in relation to the auditor's independence declaration and inadvertent breaches, notification procedures regarding resolution of conflicts of interest, restrictions on employment relationships between auditors and audit clients, and the prohibition on money owed to an audited body (or a related/controlled entity).
  • The fundraising requirements have, in some cases, been simplified (including, by aligning relevant requirements in Chapters 6D and 7 of the Corporations Act):
    • a prospectus/PDS will not be required for rights issues for quoted securities and quoted financial products, although a cleansing notice (containing prescribed information) must be provided to the Australian Securities Exchange;
    • the scope of the fundraising provisions applying to 'small-scale' offerings has been widened to ensure greater consistency between the relevant requirements for securities and financial products, and also to enable more fundraisings to take advantage of less onerous disclosure obligations under an offer information statement;
    • unlisted company employee share schemes (ESSs) will generally be exempt from licensing, advertising and hawking restrictions, and subject to simpler disclosure requirements (but there are various limitations and a few traps);
    • the secondary sales disclosure provisions have been extended so that controllers are covered (without having to seek specific ASIC relief); and
    • the replacement prospectus provisions now apply to stapled securities to facilitate more consistent functioning of the disclosure provisions for these securities.*

The issues in the proposals paper dealing with the following areas have also been implemented under the Simper Regulatory Bill (largely in the manner outlined in the proposals paper):

  • streamlined/simplified notification requirements in relation to a change in officeholders and updating of company addresses*;
  • reduced compliance requirements in the procedures for returns of company particulars;
  • streamlined requirements for executive remuneration disclosure requirements (but with a new obligation to disclose board policy on 'key management personnel' hedging securities that form part of their remuneration);
  • a reduced compliance burden associated with voluntary company deregistration*;
  • enabling upfront payment of company annual fees*;
  • changes to the related party approval process (so that member approval is not required for 'minor' transactions)*;
  • removal of:
    • telephone monitoring during takeover bids; and
    • the requirement to disclose a holding of 85 per cent (or more) in a company; and
  • facilitation of electronic registration of charges over company property (and associated documents)*.

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What is not included in the Bill

The following topics that were canvassed in the proposals paper have not been included in the Simpler Regulatory Bill and will be addressed as separate projects and subject to further consultation (although no timeframe has been given):

  • the proposal to separately regulate the concepts of 'financial product advice' and 'financial product sales recommendations' – the Government will continue consulting on this issue;
  • review of the training framework (including training standards and courses, ASIC's training register etc) – ASIC is currently consulting on this and will shortly be issuing a consultation paper;
  • removal of the requirement for licensees to cite their financial services licence number in disclosure and other relevant documents, and impose a requirement only to cite their ABN and state that they hold a financial services licence – further consultation is required with the relevant regulatory/government bodies; and
  • the proposals that provisions relating to the self-acquisition of shares by companies would not apply in the context of ESSs – the Government will consult further on this issue.

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The next stage

While the Simpler Regulatory System package of Bills represents significant progress in achieving some of the Government's key objectives (particularly in the areas of reducing administrative costs and processes, and streamlining some procedures), there is still a concern that the current problems regarding lengthy and complex disclosure documents and appropriate safeguards to ensure that consumers receive quality, independent advice will not have been adequately addressed (yet again) under these latest changes. It is also disappointing that the proposed regulations, which will provide implementation details to support a number of the legislative proposals, were not released as part of the package, so that the full impact of the legislative changes could be properly considered.

The Government has not indicated when the proposed regulations will be released. Indeed, the Corporations Amendment Regulations released by the Government on 26 March 2007, which implement other aspects of the Corporate and Financial Services Regulation Review (see AAR Focus: Corporate and Financial Services, April 2007), have not been finalised by the Government. The continuing uncertainty makes it difficult for financial services industry participants to ensure they are compliant and also makes it hard for consumers to have a clear understanding of their rights. The Government should aim to resolve these outstanding related issues as soon as possible.

We will continue to keep you informed of the main developments as they unfold. 

Footnotes
  1. The Bills were passed by the House of Representatives on 14 June 2007 and by the Senate on 21 June 2007. On 19 June 2007, the Parliamentary Joint Committee on Corporations and Financial Services (which, on 9 May, had resolved to inquire into the Simpler Regulatory Bill on its introduction into the House of Representatives) recommended that the Bills be passed. In making that recommendation, the Committee noted that stakeholders had taken different views on a number of the proposed measures and had identified areas that might require further refinement (particularly in relation to product disclosure documents) (page 25 of the Committee's report). A minority report by opposition members (annexed to the main report) noted, among other things, some concerns about the lack of consumer testing carried out in relation to the proposed legislation (which could result in 'adverse, unintended consequences' in relation to some issues) and the fact that the regulations, which will contain important details relating to implementation of a number of measures included in the legislation, were not released for consideration at the same time as the Bills. (For more information on the Parliamentary Committee's terms of reference and to access the report, refer to the Parliamentary website.)
  2. The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 was introduced into the House of Representatives on 21 June 2007 and has been referred to the Senate Economics Committee for inquiry and report by 31 July 2007. (For further details on the Bill, refer to the media release (dated 21 June 2007) issued by the Minister for Revenue and Assistant Treasurer.)

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