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Focus: Corporate and Financial Services – April 2007

Corporate and financial services regulation review – draft Corporations Amendment Regulations

In brief: The long-anticipated draft Corporations Amendment Regulations were released by the Federal Government for public comment on 26 March 2007. Developed in consultation with industry and the Australian Securities & Investments Commission (ASIC), they are part of the Government's progress towards a simpler regulatory system arising out of the Corporate and Financial Services Regulation Review, which started in April 2006. Senior Associate Justine Woodford summarises the draft regulations and looks at where the review process is heading.

How does it affect you?

  • In practical terms, the proposals are a significant step towards reducing the regulatory burden on business and helping to make the system more user-friendly for consumers. However, there are still a number of issues in relation to these proposed regulations which require fine-tuning and, in a few instances, reassessment of whether some of the underlying objectives of the review process are being achieved.
  • The ability to incorporate information by reference into disclosure documents will reduce the length of those documents and allow for more meaningful and precise disclosure. For example, financial services providers will be able to refer clients to non-essential information contained in other documents or on websites, rather than including all of the details in their product disclosure documents.
  • It will no longer be necessary to provide a financial services guide or a statement of advice to a client when a product or advice is rejected by the client. (This is consistent with the current exemption applying to product disclosure statements.)
  • The dollar disclosure requirements relating to general insurance products will be modified to make them more appropriate for those products by enabling disclosure of the various costs and benefits of the insurance product to be disclosed (by providing a range, percentage or description of the costs and benefits) in the insurance policy schedule which, in effect, reflects industry practice.
  • There are some welcome changes to the application of the retail/wholesale test as it applies to small superannuation funds and employers in relation to superannuation and some insurance products. However, for some, the proposed changes may not go far enough.

Background

In April 2006, we reported on the release by the Federal Government of the Corporate and Financial Services Regulation Review Consultation Paper (the consultation paper) (see AAR Focus: Corporate and financial services reform, April 2006). As a result of feedback received on the consultation paper, the Government issued, in August 2006, a list categorising how it proposed to progress the consultation paper topics (proposed categories list) (see AAR Focus: Financial Services, August 2006).

The issues that will ultimately be implemented through legislation (ie those noted in category B of the proposed categories list) were included in a proposals paper released for public consultation by the Government on 16 November 2006 (the proposals paper) (see AAR Focus: Financial Services, December 2006).

The draft Corporations Amendment Regulations (the draft regulations) principally deal with the topics included in category A of the proposed categories list. Those topics were described in that list as dealing with minor technical changes that could be implemented through regulations. They relate mainly to financial services regulation issues.

The final category of issues (category C of the proposed categories list) are those that the Government considers require separate consultation and will be dealt with through focused projects because of the scope and complexity of the policy issues they raise. No consultation papers dealing with any of these issues have been released yet.

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The draft regulations

For the most part, the draft regulations are broadly consistent with the issues that were included in category A of the proposed categories list. However:

  • some issues have been developed further or their focus has changed slightly;
  • the Government has identified some issues that are no longer being pursued; and
  • the Government has taken the opportunity to include some new issues and to address some minor amendments and anomalies in the current Corporations Act and Regulations.

For a more detailed description and discussion of all of the proposed regulations, refer to our table, which identifies each issue, the proposed regulations, issues on which the Government is now seeking further feedback and, where applicable, our additional comments.

Below is a summary of the main proposed regulations.

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Main proposals

The key proposed regulations are as follows.

  • A statement of advice (SOA) and financial services guide (FSG) would not have to be given to a client who clearly rejects a product or financial services advice.
  • Also, in relation to FSGs, they:
    • could be combined with a disclosure document under Chapter 6D (eg a prospectus), unless the Government receives feedback that indicates that legislative change is not warranted;
    • would not have to be updated where the change relates to information that is not materially adverse, provided there is disclosure on how a client can access the updated information (and that the client can request a copy of the information free of charge); and
    • would be allowed to be standardised in relation to community-owned branches of banking licensees and individuals that are sub-authorised by authorised representatives, subject to some conditions.
  • Where a superannuation trustee administers more than one fund, the net value of the funds could be aggregated for the purpose of treating the trustee as a wholesale client in relation to financial services advice regarding a superannuation product. However, disappointingly, the trustee needs to manage at least one fund of $10 million. Similarly, employers operating businesses other than small businesses could be considered wholesale clients when provided with financial services relating to superannuation products.
  • Bundled general insurance products (that are predominantly wholesale) will be treated as totally wholesale.
  • In applicable circumstances (which have been clarified in the proposed regulations), 'badging' of a product would not be considered to be providing financial product advice. This exemption will, in practice, be quite narrow.
  • Dollar disclosure relief would be extended to a general insurance product disclosure statement (PDS).
  • Information to be included in PDSs could be 'incorporated by reference' to other information sources, such as information provided in other documents on websites. More restricted 'incorporation by reference' will be also be permitted for SOAs.
  • Secondary service providers could be relieved from their obligations to retail clients in some situations. Intermediaries will be required to accept responsibility to the retail client for the financial services provided. The whole area of 'secondary services' remains confusing and warrants overhaul rather than new exceptions.
  • Oral disclosure requirements that apply to FSGs and SOAs would be reduced for products with a cooling-off period.
  • A provider of sickness and accident insurance or a provider of life risk insurance could treat a client as wholesale where cover is part of a package with workers' compensation insurance being provided for the liability of the employer for the benefit of an employee.
  • The enhanced fee disclosure obligations would apply to investment life insurance products (as previously foreshadowed by the Government).
  • The regulations (regulation  2N.2.01) would be amended to remove the obligation on public companies to notify ASIC each year of the top 20 shareholders.

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What has changed

Two issues canvassed in the consultation paper and the proposed categories list may no longer be part of the review process.

  • The issue had been raised whether third party custodians, administrators of superannuation funds and managed investment schemes should be exempt from the FSG requirements. The commentary released by the Government indicates that the feedback provided on this issue raised doubts about whether the current law needed to be reformed to achieve this outcome.
  • Similarly, legal advice received by the Government suggested that the Government's proposals to exempt offshore branches of Australian financial services licensees were necessary as, again, the current law arguably already allows this in applicable circumstances.

The Government is now seeking feedback on whether legislative reform in relation to these issues is required.

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Consultation process and timetable

The Government has requested that feedback on the draft regulations (and the further issues raised by the Government in relation to them) be provided by 23 April. This allows less than a month for review. However, the Government is no doubt mindful of the extensive consultation that has already occurred with industry and ASIC on these issues and is hopeful of making these regulations operative as soon as possible. Further, this part of the review process deals with the more technical aspects of the corporate and financial services regulation review.

The issues identified in categories B and C are proving more difficult to resolve. In the commentary released by the Government with the draft regulations, the Government noted that, as a result of the responses to the proposals paper, the Government needed to consult further and the proposed legislation is still being developed. The focused projects (in category C) are being progressed concurrently with the proposed legislation, as foreshadowed by the Government in the proposed categories list.

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

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