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2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS LEGISLATION AMENDMENT
(SIMPLER REGULATORY SYSTEM) BILL 2007
CORPORATIONS (FEES) AMENDMENT BILL 2007
CORPORATIONS (REVIEW FEES) AMENDMENT BILL 2007
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Parliamentary Secretary to the Treasurer,
the Hon Chris Pearce MP)
Table of contents
Glossary ....................................................................................... v
General outline and financial impact ....................................................... 1
Chapter 1 Financial Services Regulation .............................................. 15
Chapter 2 Company Reporting Obligations........................................... 37
Chapter 3 Auditor Independence .......................................................... 53
Chapter 4 Corporate Governance ......................................................... 73
Chapter 5 Fundraising........................................................................... 79
Chapter 6 Takeovers........................................................................... 105
Chapter 7 Compliance ........................................................................ 109
Chapter 8 Regulation impact statement: financial services
regulation ................................................................... 113
Chapter 9 Regulation impact statement: thresholds for reporting for
large proprietary companies ...................................... 139
Chapter 10 Regulation impact statement: rights issues and employee
share schemes .......................................................... 151
Glossary
The following abbreviations and acronyms are used in this explanatory
memorandum.
Abbreviation Definition
ASIC Australian Securities and
Investments Commission
CLERP 9 Act Corporate Law Economic Reform
Program (Audit Reform and
Corporate Disclosure) Act 2004
ESS Employee Shareholder Scheme
ITAA 1936 Income Tax Assessment Act 1936
PDS Product Disclosure Statement
RIS Regulation Impact Statement
ROA Record of Advice
SOA Statement of Advice
v
General outline and financial impact
Overview
The Corporations Legislation Amendment (Simpler Regulatory System)
Bill 2007 and supporting Bills contain a range of measures to simplify and
streamline Australia's corporate and financial services laws. The package
contains amendments that will:
· implement the Australian Government's response to several
recommendations made in the Rethinking Regulation report
of the Taskforce on Reducing the Regulatory Burden on
Business, relevant to corporate and financial services
regulation;
· amend various provisions of the Corporations Act 2001
(Corporations Act) and related Acts to improve the
efficiency of corporate and financial services regulation,
based on the proposals outlined in the Corporate and
Financial Services Regulation Review Proposals Paper of
November 2006; and
· make various other minor and technical amendments to the
Corporations Act and related Acts.
The main Bill contains nearly all of the amendments. The Corporations
(Fees) Amendment Bill 2007 and the Corporations (Review Fees)
Amendment Bill 2007 are supporting Bills which contain minor
amendments regarding chargeable matters in support of some measures in
the main Bill, and a measure to introduce a facility for up-front payment
of annual review fees. Those measures are required to be in separate Bills
for constitutional reasons.
Unless indicated otherwise, references in this document to a Bill are to the
main Bill.
1
1. Financial Services Regulation
The Bill will reduce the regulatory burden on providers of financial
services, increase access to financial advice and make improvements to
other aspects of the financial services regulatory framework. The changes
include:
· removing the need for a Statements of Advice to be
provided in two circumstances: where there is no
recommendation in relation to a particular financial product
and no remuneration; and where the amount to which the
advice relates is under the prescribed threshold;
· refining the circumstances where a Financial Services Guide
is not required to be provided, particularly at seminars;
· introducing changes to the retail/wholesale client distinction
regarding sophisticated investors and in relation to
investments in pooled superannuation trusts;
· refining the cross-endorsement provisions;
· introducing a new `in use' notice for Product Disclosure
Statements;
· improving the mechanism whereby the Australian Securities
and Investments Commission (ASIC) takes a role in
overseeing compliance with a financial market's rules where
the market operator has a conflict of interest; and
· allowing registered managed investment schemes to invest
in unregistered managed investment schemes.
Date of effect: Some amendments commence on Royal Assent. Others
commence on a date to be fixed by proclamation or otherwise six months
after Royal Assent.
Proposal announced: The proposals were announced in the Corporate
and Financial Services Regulation Review Proposals Paper of November
2006 (the Proposals Paper). Their origin is in Proposals 1.2-1.4, 1.6-1.7
and 1.9-1.12 of the Proposals Paper. These proposals have been refined in
the light of comments made in response to that paper. The amendments
also reflect the Government's response to Recommendation 5.17 of the
Rethinking Regulation report of the Taskforce on Reducing the
2
Regulatory Burden on Business, released in August 2006 (the Banks
report).
Financial impact: Aside from some consequential changes to ASIC fees
that may result in a negligible financial impact, the amendments have no
financial impact.
Compliance cost impact: The amendments are expected to reduce cost
burdens for a number of financial services licensees, which are expected
to result in cost savings for their clients. An example is the potential cost
reduction for licensees of providing advice to clients with relatively small
amounts to invest, and to sophisticated investors. There are likely to be
some initial costs for product issuers in moving to the new `in use' notice
but, once the electronic mechanism is implemented, the cost of using it is
likely to be less than the cost of the current arrangements.
Summary of regulation impact statement
Regulation impact on business: Statement of Advice threshold and
product activity and data collection
Impact: The Statement of Advice threshold measure will impact financial
service providers in the provision of personal advice and consumers of
financial advice. The product activity and data collection measure will
primarily impact financial product issuers.
Main points:
Statement of advice threshold
· The problem to be addressed in the Statement of Advice
threshold measure is that consumers who wish to obtain
financial advice in relation to a relatively small investment
amount are unable to access or afford financial advice
because of the relatively high cost of providing such advice.
· The threshold proposed is linked to the point at which it
becomes commercially viable for an adviser to provide
advice, based on recovering the cost of preparing a
Statement of Advice.
· The result of the measure is expected to be increased
consumer access to affordable financial advice, without
compromising investor protection.
3
Product activity and data collection
· The problem which the product activity and data collection
measure seeks to address relates to the costs associated with
lodging product disclosure in-use notices, compared with the
regulatory benefit from ASIC receiving such notices.
· The measure included in the Bill will improve the regulatory
usefulness and efficiency of the product disclosure in-use
notice system and reduce compliance burdens on business.
2 Company Reporting Obligations
The Bill will simplify company reporting obligations to reduce
compliance costs for companies. The changes include amendments to:
· incorporate in the Corporations Act the accounting standards
requirements for executive and director remuneration
disclosure;
· increase the thresholds used to define a large proprietary
company and allow for future changes to the thresholds to
be prescribed by regulations;
· change the notification requirements, payment of annual
fees and the company deregistration procedure; and
· allow companies to make annual reports available on the
internet and only require hard copies to be sent to members
who request them.
Date of effect: The bulk of the changes will commence on Royal Assent.
Some provisions, however, have specific application provisions. These
are:
· amendments regarding executive remuneration will apply to
financial years that begin on or after commencement;
· changes to thresholds for reporting for large proprietary
companies will take effect in the financial year that ends on
or after commencement;
· changes to requirements for companies to inform ASIC
when officeholders change, to provide for a company using
a contact address and to provide for regulations allowing a
single lump sum payment of annual review fees will
commence on a date to be proclaimed, or if no date is
proclaimed, six months after Royal Assent;
· amendments regarding distribution of annual reports apply
to a financial year that ends on or after commencement.
Proposal announced: The amendments regarding reporting of executive
remuneration disclosures, thresholds for reporting of large proprietary
companies, changes to officeholders, maintenance of company addresses,
review fees associated with voluntary administration, up-front payment of
5
annual review fees and electronic distribution of annual reports are based
on proposals outlined in the Proposals Paper of November 2006. The
amendments regarding executive remuneration disclosures, electronic
distribution of annual reports and thresholds for reporting of large
proprietary companies were announced in the Government's response to
the Banks Report, released in August 2006.
Financial impact: Nil.
Compliance cost impact: The amendments are expected to reduce costs
burdens for a large proportion of Australian companies. In particular,
companies affected by the increase in thresholds for reporting by large
proprietary companies and those that wish to take advantage of the facility
to distribute annual reports electronically are likely to benefit from
significant compliance cost savings.
Summary of regulation impact statement
Regulation impact on business: thresholds for reporting by large
proprietary companies
Impact: This measure will affect large proprietary companies (that is,
large companies that are not public companies).
Main points:
· The increase to the threshold for financial reporting will
mean approximately 1,600 fewer large proprietary
companies will be required to lodge their annual reports
with ASIC.
· The main costs of the measure arise from the increased risk
of direct users of accounts losing confidence in the affected
companies due to a reduction in publicly available financial
information. As the companies concerned are not
economically significant, this is not considered to be a major
concern.
3. Auditor Independence
The Bill will make changes to the auditor independence provisions of the
Corporations Act. The changes fall into three categories:
· rectification of a number of anomalies and unintended
consequences that have been identified during the
implementation of the Corporate Law Economic Reform
Program (Audit Reform and Corporate Disclosure) Act
2004 (the CLERP 9 Act);
· incorporation into the framework of several improvements
arising out of public consultations on the comparative
review of Australia's auditor independence requirements;
and
· making a number of miscellaneous amendments designed to
improve the effectiveness of the auditor independence
requirements in the light of operational experience since the
requirements were introduced by the CLERP 9 Act.
Date of effect: The provisions commence on Royal Assent. However,
some provisions have specific application provisions:
· amendments relating to the time when an auditor's
independence declaration must be given apply to a report for
a financial year that ends on or after commencement;
· amendments which will give effect to a `covered person'
approach in relation to the auditor independence restrictions
on financial relationships will apply to an audit of the
financial report for a reporting period beginning on or after
commencement;
· the amendments which will modify the way in which the
two-year `cooling-off' period is calculated and the
amendment to the multiple former audit partner restriction
will apply to any person who ceases to be a member of an
audit firm, a director of an audit company or a professional
employee of an audit company, whether the person so ceases
before or after the day on which those amendments
commence; and
7
· the amendments which will give ASIC the power to extend
the period within which an auditor is required to resolve a
conflict of interest situation will apply in relation to
information given to ASIC on or after the day the
amendments commence.
Proposal announced: The rectification of the anomalies identified during
the implementation of the CLERP 9 Act is based on proposals appearing
in the Proposals Paper of November 2006. The amendments relating to
the multiple former audit firm partner restriction, the `cooling-off' period
for retiring audit partners and the introduction of a `covered person'
approach in relation to restrictions on financial relationships are based on
submissions received from key stakeholders during the public
consultation process on the discussion paper Australian Auditor
Independence Requirements: A Comparative Review which the
Government released in November 2006. The proposal to review the
multiple former audit firm partner restriction was also announced in the
Government's response to the Banks Report released in August 2006.
Financial impact: Nil.
Compliance cost impact: The amendments are expected to reduce
compliance costs for auditors and their clients by removing some onerous
regulatory requirements regarding auditor independence.
4. Corporate Governance
The Bill will make amendments to the Corporations Act to remove
burdensome member approval requirements in relation to small
transactions between public companies and related parties. It will also
allow delegation to ASIC of certain administrative functions regarding
identical or unacceptable company names, and approval of changes to
certain corporate constitutions. This will streamline administrative
processes for corporations.
Date of effect: The amendments regarding related party transactions
apply to financial years commencing on or after 1 July 2007. The
amendments allowing delegation of administrative functions to ASIC will
commence on 1 July 2007.
Proposal announced: The removal of member approval requirements for
certain related party transactions is based on proposals appearing in the
Proposals Paper of November 2006.
Financial impact: Nil.
Compliance cost impact: The amendments will reduce compliance costs
for the affected corporations by removing member approval requirements
and streamlining administrative processes.
9
5. Fundraising
This Bill contains six measures to amend a number of provisions in the
Corporations Act relating to fundraisings by corporate entities. The
amendments are generally intended to facilitate such fundraisings by
various means, including: abolishing unnecessary disclosure
requirements; removing inconsistencies between different parts of the
Corporations Act; or amending the time periods and amounts that can be
raised under particular provisions.
Date of effect: The date of effect varies between measures. Generally the
amendments will come into force either upon Royal Assent or at the latest
six months after Royal Assent.
Proposal announced: The measures were first canvassed in the
`Corporate and Financial Services Regulation Review' Consultation Paper
released in April 2006. The measures are based on proposals included in
the Proposals Paper released by the Parliamentary Secretary to the
Treasurer in November 2006.
Financial impact: Nil.
Compliance cost impact: Compliance costs were estimated for two of the
measures. The impact of the measure amending the disclosure provisions
applying to rights issues would constitute a significant saving compared to
the costs imposed under the current framework due to the abolishment of
the prospectus requirement. The measure relating to employee unlisted
share schemes would result in a significant saving compared to the costs
imposed under the current framework due to reduced disclosure
requirements and other regulatory relief granted under the measure.
Summary of regulation impact statement
Regulation impact on business
Impact: The measure to amend the disclosure provisions applying to
rights issues for quoted securities and interests in managed investment
schemes will affect listed entities raising funds through a rights issue. The
measure relating to employee share schemes will affect listed and unlisted
entities taking advantage of the relief provided to establish and operate an
employee share scheme.
Main points:
10
· With respect to the measure to amend the disclosure
requirements applying to rights issues, listed entities
wishing to raise funds will be able to do so through a rights
issue without providing a prospectus. The amended
provisions require the listed entity to instead provide a
notice to the market disclosing any price-sensitive
information withheld from the market (as permitted under
the Listing Rules) at the time the rights issue offers are
made. The compliance costs relating to the provision of
such a notice are much lower than those for providing a full
prospectus as currently required.
· As a result, listed entities wishing to raise funds may have
an incentive to do so through a rights issue rather than some
other means, such as a direct sale of securities or other
financial products to institutional investors. The amendment
is therefore intended to benefit mainly small shareholders,
who can participate in rights issues but not in certain other
forms of fundraisings such as institutional placements which
are currently widely used.
· With respect to the measure relating to employee share
schemes, unlisted companies offering shares to their
employees through an employee share scheme are currently
subject to a range of disclosure, licensing and other
restrictions imposed under the Corporations Act. The
measure will remove a number of such restrictions, while
still maintaining an appropriate level of investor protection
for employees considering participation in such a scheme.
· As a result, there may be more unlisted companies
establishing an employee share scheme. This outcome is in
accord with the Australian Government's policy of
encouraging the wider use of employee share schemes,
which are generally considered to provide substantial
benefits to the wider economy.
11
6. Takeovers
The Bill will repeal the provisions in the Corporations Act which relate to
telephone monitoring during takeover bids and the requirements to
provide section 665D and 665E notices (85 per cent notices). The repeal
of those requirements will remove onerous compliance burdens for
bidders and targets involved in company takeovers which are not justified
by increased levels of shareholder protection.
Date of effect: The day of Royal Assent.
Proposal announced: The removal of telephone monitoring and
85 per cent notice requirements is based on proposals outlined in the
Proposals Paper of November 2006. A review of the telephone
monitoring requirement was announced in the Government's response to
the Banks Report, released in August 2006.
Financial impact: Nil.
Compliance cost impact: The compliance cost burden for bidders and
targets will be reduced by eliminating the costs associated with the
telephone monitoring and 85 per cent notice requirements.
12
7. Compliance
The Bill will amend the Corporations Act to streamline compliance
procedures and ensure companies can access newer technologies. The
measures include simplifying returns of company particulars and
permitting electronic registration of charges.
Date of effect: The amendments permitting the electronic registration of
company charges will commence on 1 July 2007. The amendments
regarding returns of particulars will commence on a date to be fixed by
proclamation or otherwise six months after Royal Assent.
Proposal announced: The amendments are based on proposals outlined
in the Proposals Paper of November 2006.
Financial impact: Nil.
Compliance cost impact: The amendments will reduce compliance costs
for the affected corporations by limiting the circumstances in which
corporations must fill in and lodge a return of particulars, and by reducing
paperwork connected with the registration of company charges.
13
1 Chapter 1
Financial Services Regulation
Outline of chapter
1.1 The Bill amends the Corporations Act to reduce the regulatory
burden on those providing financial services to facilitate consumer
access, while maintaining investor protection.
1.2 The amendments primarily apply to those providing financial advice.
They also assist in: reducing the exposure of licensees in cases of cross-
endorsement of authorised representatives; improving the mechanism for
reporting the use of Product Disclosure Statements to ASIC; ensuring
that trustees of superannuation trusts are treated as wholesale in their
dealings with pooled superannuation trusts; and allowing registered
managed investment schemes to invest in unregistered managed
investment schemes.
1.3 In addition, they assist in maintaining the integrity of a financial
market where, for example, a company which is related to the market
operator is a participant on the market.
Context of amendments
Exemption from providing a Statement of Advice -- no product
recommendation and no remuneration
1.4 Many financial advisers provide a free initial consultation at which
general investment options may be discussed but no specific products are
recommended.
1.5 Such discussions would generally constitute the provision of
personal advice under the Corporations Act, where the exemption from
financial advice for asset allocation advice (regulation 7.1.33A of the
Corporations Regulations) cannot be relied upon.
1.6 In these situations, it is argued that the requirement to prepare a
written Statement of Advice is onerous for the adviser and of little benefit
for the client.
15
1.7 It has been submitted that the requirement to produce a Statement of
Advice under these circumstances potentially distorts the provision of
client focussed advice. For example, advisers may consider that the cost
of producing a Statement of Advice is not economic in relation to a free
initial consultation where a client has a relatively small amount of money
to invest. This may result in these consumers being unable to access
general strategic financial advice.
1.8 Where a financial adviser recommends that a person continue to hold
an existing product, such advice may also constitute personal advice even
if the client is recommended to take no action and the adviser receives no
additional remuneration.
Threshold for requiring a Statement of Advice
1.9 The Corporations Act defines the circumstances in which personal
financial advice is provided to a client. The personal financial advice
definition is triggered if a financial service provider knows a client's
objectives, financial situation or needs and considers that information in
recommending a decision in relation to a financial product or class of
products.
1.10 The definition of personal advice captures situations where a
financial services provider uses personal information and product
information to make a recommendation to a retail client. In those
circumstances, a Statement of Advice is required to be provided to the
client.
1.11 In certain situations, it may not be economic for an adviser to
produce a Statement of Advice if a client is seeking a minor piece of
advice and/or has a relatively small amount to invest. Many advisers are
choosing not to provide personal advice to such clients, with the result
that, in these circumstances, small-scale consumers may not be able to
access advice that may benefit them.
Financial Services Guide exemption -- general advice to the public
1.12 Where a licensee or authorised person provides general advice to a
client, usually that person must give the client a Financial Services Guide
(which describes the services the licensee provides, information about
remuneration and certain other matters). However, subsection 941C(4)
exempts the entity providing the general advice from supplying a
Financial Services Guide if the general advice is provided in a public
forum.
1.13 While the regulations may define what constitutes a public forum
for the purposes of subsection 941C(4), the regulation requires that it
needs to be open to the public.
1.14 This means that seminars for a subset of the public, such as the
employees of a particular business, would not be a public forum and
therefore would not be eligible for the public forum exemption.
Sophisticated investors
1.15 Subsection 761G(1) of the Corporations Act provides that a
financial product or service is provided to a client in a retail capacity
except in certain circumstances. The Corporations Act contains a number
of tests to determine whether a client is considered retail or wholesale.
1.16 For example, when dealing in financial products (other than general
insurance, superannuation and retirement savings account products), if
the individual provides evidence that they have net assets of at least $2.5
million or gross income in the last two financial years of at least
$250,000 a year, then they may be considered wholesale investors
(paragraph 761G(7)(c) and Corporations Regulation 7.1.28).
1.17 Additional disclosure protections apply to retail clients only.
1.18 Although the existing tests adequately address the circumstances of
many investors, there are some investors who are defined in the
legislation as retail investors and are unable to access wholesale status.
For reasons such as experience or professional training, these investors
may wish to be treated as wholesale investors. Such investors may
consider retail disclosure an unnecessary hindrance to activities they well
understand and would prefer to access wholesale investor status. They
may also wish to access wholesale-only products.
1.19 Subsection 708(10) of Chapter 6D of the Corporations Act already
includes a mechanism which allows a financial services licensee to be
satisfied that the investor is sufficiently experienced not to need the
disclosure provided to other (retail) persons. This status extends only to
Chapter 6D which addresses disclosure in relation to securities.
1.20 Chapter 7, which addresses financial product advice and disclosure
in relation to other financial products, does not include such a provision.
Cross-endorsement of authorised representatives of licensees
1.21 Authorised representatives may act for a number of financial
services licensees. However, each licensee must consent to the agent
17
being the authorised representative of each of the other licensees. This is
commonly referred to as cross-endorsement.
1.22 The cross-endorsement arrangements expose the endorsing
licensees to joint and several responsibility for the activities of
cross-endorsed authorised representatives that are authorised to provide
the same class of financial service (section 917C). One class of financial
service is advice in relation to general insurance.
1.23 Accordingly, two licensees may be jointly and severally responsible
for advice provided by an agent, even if the advice relates to a type of
general insurance that the agent only handles on behalf of one of the two
issuers. This means that, for example, an authorised representative of
Licensee A who only handles motor vehicle insurance could expose
Licensee A to liability in respect of, say, conduct in relation to advice on
travel insurance products offered by the authorised representative on
behalf of Licensee B.
Product activity and data collection
1.24 A Product Disclosure Statement contains key information regarding
a financial product sold to investors. For most classes of financial
product, section 1015D of the Corporations Act requires the product
issuer to lodge an `in use' notice with ASIC within five business days of
the first use of the Product Disclosure Statement. This requirement
ensures ASIC is aware of all products being promoted in the market.
1.25 ASIC received approximately 12,000 in use notices in 2004.
However, due to the current manual lodgment mechanism, the notice
does not fully serve its regulatory purpose as it does not provide adequate
means for ASIC to determine when a Product Disclosure Statement is no
longer current, for example when it is out of date and/or when a product
is withdrawn from the market.
Licensed market operators and related participants and listed bodies
1.26 Section 798C of the Corporations Act anticipates circumstances
where a market licensee may be included in the market's official list.
This would mean the market would be self-listed.
1.27 Under subsection 798C(2) the financial products of the market
licensee can be traded on the market if the licensee enters into an
arrangement with ASIC for dealing with possible conflicts of interest and
ensuring the integrity of the trading of the licensee's financial products.
1.28 The market's listing rules must provide for ASIC instead of the
licensee to make decisions and to take action in relation to the admission
of the licensee to the market's official list, the removal of the licensee
from that list and the allowing, stopping, or suspending of the trading on
the market of the licensee's financial products.
1.29 In providing for ASIC to make decisions in relation to these matters
the law addresses possible conflicts of interest which could arise in the
market licensee's oversight of itself.
1.30 The current law does not address a number of other possible
conflict situations.
1.31 At present the legislation does not address situations where a
related body corporate to the market licensee, a managed investment
scheme whose responsible entity is a related body corporate of the market
licensee or a trust whose trustee is a related body corporate of the market
licensee wishes to be listed on the market.
1.32 Further, the current legislation does not address the potential
conflicts which arise because the market licensee, a related body
corporate or a related partnership is a participant in the market. The issue
of a market licensee supervising competitor participants is also not dealt
with.
Pooled superannuation trusts and product disclosure
1.33 A pooled superannuation trust is one in which the assets of a
number of superannuation funds, approved deposit funds or other pooled
superannuation trusts are invested and managed by a professional
manager. Pooled superannuation trusts can accept deposits only from
complying superannuation funds, complying approved deposit funds, and
other pooled superannuation trusts. These are regulated entities typically
of significant substance and experience.
1.34 Under section 761G of the Corporations Act, the product disclosure
and associated retail client protections in Part 7.9 apply to all investors in
pooled superannuation trusts regardless of their nature and scale. This
means, for example, that investors in pooled superannuation trusts must
be given a Product Disclosure Statement, have the benefit of a cooling off
period and receive periodic statements even if the investor is itself a large
superannuation fund.
1.35 Other financial services provided by trustees of pooled
superannuation trusts are treated differently.
19
Registered managed investment schemes investing in unregistered
managed investment schemes
1.36 The responsible entity of a registered managed investment scheme
may only invest scheme property or keep scheme property invested in
another managed investment scheme if that other scheme is registered
under Chapter 5C of the Corporations Act (subsection 601FC(4)).
1.37 This restriction is intended to prevent a responsible entity from
establishing or investing in an unregistered managed investment scheme
to avoid the scheme property protections that apply to registered
managed investment schemes.
1.38 A managed investment scheme which operates predominantly
outside Australia, such as real estate investment trusts in the United
States, will generally not be a registered managed investment scheme.
Increasingly registered managed investment schemes seek to diversify
their investments among a range of foreign collective investment
structures or focus on overseas investments. Generally such investment
is not for the purpose of avoiding regulation and is directed to the best
interests of members. No such restriction applies to trustees of
superannuation funds.
1.39 There is already ASIC Class Order relief for some kinds of
investment in Australian-based unregistered managed investment
schemes.
Summary of new law and comparison of key features of new
law and current law
Exemption from providing a Statement of Advice -- no product
recommendation and no remuneration
1.40 The Bill will exempt financial services licensees from providing a
Statement of Advice in the circumstance where they provide personal
advice where that advice does not recommend a product and the adviser
does not receive any remuneration for providing that advice. Personal
advice that satisfies these requirements will be required to be documented
in a Record of Advice and provided to the client upon their request. The
measure does not alter the need for the advice to be appropriate or for the
adviser to be appropriately trained to provide personal advice.
New law Current law
Any personal financial advice All personal financial advice must
that does not recommend a be documented in a Statement of
product and for which the adviser Advice provided to the client.
does not receive any
remuneration will not be required
to be documented in a Statement
of Advice.
Instead of a Statement of Advice, Only further market related advice
the advice will be documented by can be documented by a Record of
a Record of Advice to be Advice which is to be provided to
provided to the client upon their the client upon their request.
request.
No change. A Record of Advice is required to
contain certain information in
relation to remuneration, interests
and associations.
Threshold for requiring a Statement of Advice
1.1 The Bill will introduce a threshold into the Statement of Advice
requirements, so that a full Statement of Advice would only be required if
the advice given is in relation to an investment amount that is above a
certain monetary threshold. An initial threshold of $15,000 is proposed.
1.2 A Statement of Advice will be required to be prepared and provided
to a client if the amount to which the advice relates is $15,000 or more.
For advice relating to amounts less than $15,000, the adviser will be
required to provide a Record of Advice to the client.
1.3 The Bill will limit the application of this relief in relation to
superannuation advice. Where advice is to consolidate into, or
supplement, a superannuation fund of which the person is an existing
member, the Statement of Advice exemption may be relied on. Similar
arrangements will apply to advice regarding retirement savings accounts.
Where this occurs, the Record of Advice must disclose the matters listed
in section 947D of the Corporations Act. These disclosures relate
primarily to charges and pecuniary interests relevant to the client. Where
the advice relates to the consolidation or supplementation of
superannuation in relation to an investment amount of $15,000 or less,
the proposal will extend to the consideration of life risk insurance
associated with the superannuation interest only.
1.4 The existing Statement of Advice arrangements that apply to general
insurance products (including in relation to sickness and accident and
consumer credit insurance) would not be altered by this proposal.
21
General insurance products (other than sickness and accident and
consumer credit insurance) have previously been granted an exemption
from the provision of a Statement of Advice. It is not proposed that the
threshold apply to advice in relation to life risk insurance products
(except those related to superannuation, as mentioned above).
1.5 The measure does not alter the need for the advice to be appropriate
or for the adviser to be appropriately trained to provide personal advice.
New law Current law
Personal advice in relation to All personal financial advice must
investments of $15,000 or less is be documented in a Statement of
to be documented by a Record of Advice.
Advice.
Records of Advice are Only further market related advice
permissible disclosure for the can be documented by a Record of
provision of both initial and Advice which is to be provided to
further advice where that advice the client upon their request.
meets the above conditions.
The Record of Advice is required The Record of Advice is required
to contain the currently required to contain certain information in
information. relation to remuneration, interests
and associations.
Personal advice in relation to All personal financial advice must
investment in superannuation of be documented in a Statement of
$15,000 or less will be Advice.
documented by a Record of
Advice where the advice relates
to consolidation into, or
supplementation of, a
superannuation fund in which the
person is an existing member.
Personal advice in relation to All personal advice which
investment in superannuation of recommends the replacement of
$15,000 or less will be required one product with another must
to contain disclosures, normally contain disclosure in relation to
contained in a Statement of charges, pecuniary interests and
Advice (as in subsection significant costs (as in subsection
947D(2)) regarding charges, 947D(2)).
pecuniary interests and
significant costs.
Financial Services Guide exemption -- general advice to the public
1.1 The amendments permit an entity which is providing general advice
not to give the client a Financial Services Guide where the general advice
is provided to the public, or a section of the public, in the manner
prescribed in the regulations.
1.2 This means that regulations can be made which do not require that
any person is permitted to attend the event at which the general advice is
given.
New law Current law
The exemptions from providing a The exemptions from providing a
Financial Services Guide will still Financial Services Guide are
be limited. However, the seminar limited. In the case of a forum, it
or forum at which the general must be a public forum.
advice is given may be open to
the public or a section of the
public (in the manner prescribed
in the regulations).
Sophisticated investors
1.1 The amendments provide for the adoption in Chapter 7 of a
mechanism which will allow an investor to be treated as a wholesale
client if they satisfy a financial services licensee that the investor is
adequately experienced to be determined a wholesale investor. The
licensee would have to document the reasons for his conclusion. The
investor would need to acknowledge the effect of being treated as a
wholesale client.
1.2 The mechanism is based on subsection 708(10) which provides such
a mechanism in Chapter 6D.
New law Current law
Investors who satisfy a financial There is no mechanism in Chapter
services licensee as to their 7 which would allow an
experience may be treated as experienced investor who did not
wholesale clients for the purpose meet any of the other tests to be
of Chapter 7. treated as a wholesale client.
Such a mechanism is, however,
included in Chapter 6D.
Cross-endorsement of authorised representatives by licensees
1.1 The amendments refine the cross-endorsement provisions so that the
joint and several responsibility of financial services licensees for the
conduct of their authorised representatives will not apply where the
authorised representative provides services in relation to different kinds
or sub-classes of financial product on behalf of each licensee (for
example in relation to motor vehicle insurance and travel insurance).
New law Current law
Licensees are not jointly and Licensees which cross-endorse an
severally responsible for the authorised representative in
23
conduct of their authorised relation to the same class of
representative where those financial product are jointly and
representatives provide financial severally responsible for the
services in relation to different conduct of the representative,
kinds or sub-classes of financial even in circumstances where the
product by each licensee. agents provide services in relation
to different sub-classes of
financial product on behalf of the
licensees.
Product activity and data collection
1.1 The Bill includes a revised approach for lodging `in use' notices with
ASIC. The approach is an on-line reporting mechanism for product
issuers to advise ASIC of matters relating to Product Disclosure
Statement distribution.
1.2 The measure will apply the following triggers for lodgement of the
Statement (as set out in subsection 1015D(2) of the Corporations Act):
when a Product Disclosure Statement (as defined for
subsection 1015D(2)) is first given to someone in a recommendation,
issue or sale situation; when a Product Disclosure Statement is no longer
available to be given in a recommendation, issue or sale situation; and
when changes are made to the fees and charges contained in the enhanced
fee disclosure table (details of the enhanced fee disclosure requirements
are in regulations 7.9.16K, 7.9.16M and 7.9.16N as well as in Schedule
10 of the Corporations Regulations).
1.3 The regulations will be amended to provide that the lodgement fee
for the `in use' notice is payable only once when the original notice is
lodged. Any subsequent lodgements of a notice about the same Product
Disclosure Statement caused by changes to the fees and charges or due to
the product no longer being available will not require the payment of
additional fees.
1.4 The requirement commences on 1 July 2008, when ASIC has
established the on-line report and electronic lodgement mechanism.
From 1 July 2008 to 1 January 2009, both hard copy and electronic
lodgement will be available. From 1 January 2009, the notices will have
to be lodged electronically.
New law Current law
The new subsection 1015D(2) Subsection 1015D(2) of the
requires the person responsible Corporations Act requires the
for the Product Disclosure person responsible for the Product
Statement to lodge a notice with Disclosure Statement to lodge a
ASIC within five business days notice with ASIC within five
of: the first use of the Product business days of the first use of
Disclosure Statement; a change to the Product Disclosure Statement.
the fees and charges set out in the Where a Product Disclosure
Product Disclosure Statement; Statement is altered after
and cessation of the use of the lodgement of the notice with
Product Disclosure Statement. ASIC, a notice relating to the
It allows the notice to be lodged Supplementary Product
electronically, commencing 1 Disclosure Statement is required
July 2008. It requires that it be to be lodged with ASIC.
lodged electronically from 1
January 2009.
Licensed market operators and related participants and listed bodies
1.1 The Bill will extend the application of the current section 798C to
the licensee and various entities which are related to the market licensee.
1.2 The Bill will also enact a new provision which will provide for ASIC
to take over from the licensee in making decisions and taking action in
relation to various participants who are related to the market licensee or
in competition with it.
New law Current law
The new section 798C will apply Section 798C provides for market
not only to market licensees, but licensees who self-list to enter into
also to a body corporate related to an arrangement with ASIC and to
the market licensee, a managed have listing rules that provide for
investment scheme whose ASIC to make certain decisions
responsible entity is a related and take certain actions.
body corporate of the market
licensee and a trust whose trustee
is a related body corporate of the
market licensee, if they list on
that market.
25
New law Current law
Section 798DA will require a No current law.
market licensee's operating rules
to provide for ASIC to make
decisions and to take action
where a participant in the market
is the market licensee, a related
body corporate of the market
licensee or a partnership where a
partner is a related entity of the
market licensee. Entities which
conduct, or are a participant in, a
business that is in competition
with a business conducted by the
market licensee or a related body
corporate of the market licensee,
will have the option of having
ASIC supervise them.
Pooled superannuation trusts and product disclosure
1.1 When an interest in a pooled superannuation trust is provided to the
trustee of a superannuation fund, an approved deposit fund, a pooled
superannuation trust or a public sector superannuation scheme that has
net assets of at least $10 million, the latter will no longer be treated as
retail clients for the purpose of the product disclosure provisions. The
protections provided by Part 7.9 of the Corporations Act, such as a
Product Disclosure Statement, will not apply.
New law Current law
The trustees of superannuation The provision of an interest in a
funds, approved deposit funds, pooled superannuation trust to the
pooled superannuation trusts or trustee of a superannuation fund,
public sector superannuation an approved deposit fund, a
schemes with net assets of at least pooled superannuation trust or a
$10 million are no longer treated public sector superannuation
as retail clients for the purpose of scheme with net assets of at least
the product disclosure and related $10 million triggers the investor
provisions when acquiring an protections of Part 7.9.
interest in a pooled
superannuation trust.
Registered managed investment schemes investing in unregistered
managed investment schemes
1.1 The amendments omit the prohibition on registered managed
investment schemes investing in unregistered managed investment
schemes.
1.2 It is not confined to schemes operating predominantly outside
Australia. It is considered appropriate to extend it to Australian
unregistered schemes in the light of the existing ASIC Class Order relief,
the duties on responsible entities of registered managed investment
schemes and ASIC's existing powers in relation to bodies which operate
such schemes.
New law Current law
Registered managed investment Registered managed investment
schemes are allowed to invest in schemes are prohibited from
unregistered managed investment investing in unregistered managed
schemes. investment schemes.
Detailed explanation of new law
Exemption from providing a Statement of Advice -- no product
recommendation and no remuneration
1.1 The providing entity does not have to provide a Statement of Advice
to the client, when providing personal advice that meets the two
following requirements (subsection 946B(7)).
1.2 The personal advice does not recommend or state an opinion in
respect of the acquisition or disposal of a specific financial product; and
the following persons do not receive any remuneration directly or any
other benefit for providing the advice:
· the providing entity;
· an employer of the providing entity;
· the authorising licensee, or any of the authorising licensees;
· an employee or director of the authorising licensee;
· an associate of any of the above.
1.3 The providing entity must record the advice in a Record of Advice
and comply with requirements regarding Records of Advice, including
the requirement to include information about remuneration or other
benefits and other interests and associations (subsections 946B(8) and
(9)). [Schedule 1, Part 1, item 118]
27
Threshold for requiring a Statement of Advice
1.4 A providing entity does not have to provide the client with a
Statement of Advice, when providing personal advice in relation to
financial investments of a threshold amount that does not exceed an
amount prescribed by regulations (section 946AA).
1.5 The exemption does not apply to advice in relation to a derivative, a
general insurance product or a life risk insurance product (except where
the advice about a superannuation product relates to a life risk insurance
product). In addition, it does not apply to a superannuation product or a
retirement savings account product unless the client already has an
interest in the product.
1.6 The amendment provides the principles for determining the total
value of the investments to which the advice relates and provides a
mechanism for determining the value in relation to particular kinds of
financial products.
1.7 Instead of providing the client with a Statement of Advice, the
providing entity must keep a record of the personal advice and comply
with all requirements that currently apply in regard to the content of
Records of Advice, including the requirement to include information
about remuneration or other benefits and other interests and associations
(as required in paragraphs 947B(2)(d) and (e) or 947C(2)(e) and (f)).
1.8 The providing entity must give the client a copy of the Record of
Advice as soon as practicable and prior to the provision of any further
financial service to the client. [Schedule 1, Part 1, item 117]
Financial Services Guide exemption general advice to the public
1.9 An entity which provides general advice to clients does not have to
give a Financial Services Guide to those clients if the general advice is
provided to the public, or a section of the public in the manner prescribed
in the regulations [Schedule 1, Part 3, item 219].
1.10 Currently, this exemption only applies to public forums.
1.11 By virtue of the regulations, the exemption is expected to apply to
sections of the public such as seminars to groups of employees, as well as
broadcasts and promotional material available to the public (to which the
current exemption applies).
Sophisticated investors
1.12 The amendment inserts a mechanism whereby a financial services
licensee can certify that a client has sufficient experience to be treated as
wholesale. [Schedule 1, Part 1, item 100, section 761GA]
1.13 The licensee needs to be satisfied on reasonable grounds that the
previous experience allows the client to assess such matters as the merits
and value of the financial product or service, and the risks associated with
holding the product. [Schedule 1, Part 1, item 100, paragraphs 761GA(a) and (d)]
1.14 The licensee must provide the client with a written statement of the
reasons for being satisfied about these matters and the client needs to sign
an acknowledgement of the consequences of being treated as wholesale.
[Schedule 1, Part 1, item 100, paragraphs 761GA(e) and (f)]
1.15 The mechanism does not apply to general insurance products,
superannuation products or retirement savings account products, or where
the product is provided for use in connection with a business. [Schedule 1,
Part 1, item 100, paragraphs 761GA(b) and (c)]
Cross-endorsement of authorised representatives
1.16 The effect of section 917C on two or more financial services
licensees cross-endorsing a particular authorised representative is refined
where the licensees have authorised the representative in relation to
different kinds or sub-classes of financial products.
1.17 The kinds of financial product to which this amendment applies
will be prescribed by regulations. [Schedule 1, Part 3, item 218]
1.18 The regulations are expected to specify the kinds or sub-classes of
general insurance to which this provision applies. If appropriate, the
regulations could extend this cross-endorsement provision beyond
general insurance.
Product activity and data collection
1.19 The person responsible for the Product Disclosure Statement must
lodge a notice with ASIC, as soon as possible or at least within 5 business
days of any of the following events:
· The Product Disclosure Statement is first given to someone
in a recommendation, issue or sale situation;
· A change is made to the fees and charges in the Product
Disclosure Statement;
29
· The financial product to which the Product Disclosure
Statement relates is no longer recommended or offered to
new clients in a recommendation, issue or sale
situation.[Schedule 1, Part 4, item 223]
1.20 The notice will be able to be lodged electronically with ASIC from
1 July 2008 and will be required to be lodged electronically from
1 January 2009. [Schedule 1, Part 5, items 224, 225 and 226]
Licensed market operators and related listed bodies
1.21 Section 798C pertaining to self-listing markets is replaced with a
new section extending its application to a wider variety of potential
conflict situations. [Schedule 1, Part 1, item 101]
1.22 The current law addresses conflicts of interest where a market
licensee is self-listed.
1.23 To ensure that adequate supervisory functions are also in place for
listed bodies which are related to the market licensee, subsection 798C(1)
provides for the market licensee, a related body corporate of the market
licensee, a managed investment scheme whose responsible entity is a
related body corporate of the market licensee or a trust whose trustee is a
related body corporate of the market licensee to be included in the
market's official list only if certain arrangements are entered into with
ASIC. [Schedule 1, Part 1, item 101]
1.24 The arrangements which either the market licensee or the listed
entity or both are required to enter into will address the potential conflict
of interest which could arise and matters required for the purpose of
ensuring the integrity of trading in the listed entity's financial products.
[Schedule 1, Part 1, item 101, subsection 798C(2)]
1.25 In addition, while the listed entity is included in the market's
official list, the listing rules of the market must provide for ASIC to make
decisions and to take action in relation to the admission to the official list,
the removal from the official list and the allowing, stopping or
suspending of trading on the market of the listed entity's financial
products. [Schedule 1, Part 1, item 101, subsection 798C(4)]
1.26 It is an offence for the listed entity or the market licensee,
whichever ASIC entered into an arrangement with, to fail to comply with
an arrangement. [Schedule 1, Part 1, item 101, subsection 798C(3)]
1.27 To ensure that the market is supervised in an adequate manner it is
necessary for ASIC to be able to exempt or modify the provisions of the
corporations legislation. The current law allows for ASIC to exempt or
modify the application of the law to a self-listing market. Items 102, 103
and 104 will allow ASIC to exempt or modify the application of the
corporations legislation with respect to the market licensee or the listed
body. [Schedule 1, Part 1, items 102, 103 and 104, paragraphs 798D(1)(a) and (b),
subsections 798D(4) and (5)]
Licensed market operators and related participants
1.28 At present the law does not address situations where a market
licensee or a body related to a market licensee may be a participant on its
own market.
1.29 In addition the current law does not address the situation where a
participant in the market is a competitor of, or a participant in a business
that is in competition with, a business conducted by the market licensee
or a body corporate related to the market licensee.
1.30 To address this issue the Bill enacts a provision to regulate who is
to supervise certain participants in the market. [Schedule 1, Part 1, item 105,
subsection 798DA]
1.31 Section 798DA will require the market licensee to amend their
market operating rules to provide for ASIC instead of the market licensee
to make decisions and take action in relation to certain participants with
regard to the admission, expulsion, suspending, disciplining of
participants and the supervision of their compliance with the market's
operating rules, the Corporations Act and the regulations. [Schedule 1,
Part 1, item 105, subsection 798DA(2)]
1.32 The section applies to the following participants in a market:
· the market licensee;
· a related body corporate of the market licensee;
· a partnership where a partner is a related entity of the market
licensee; and
· a competitor or a participant in a business which is in
competition with the market licensee or a related body
corporate of the market licensee, but only where the
participant chooses that ASIC will act in place of the market
licensee. [Schedule 1, Part 1, item 105, subsection 798DA(1)]
1.33 It is an offence for a participant to participate in the market except
in accordance with the section. [Schedule 1, Part 1, item 105, subsection
798DA(4], [Schedule 1, Part 1, item 173]
31
Pooled superannuation trusts and product disclosure
1.34 A pooled superannuation trust, approved deposit fund, a pooled
superannuation trust or a public sector superannuation scheme that has
net assets of at least $10 million and which is provided with an interest in
a pooled superannuation trust by a trustee of the trust will be treated as
wholesale. It will no longer be treated as retail in this transaction.
[Schedule 1, Part 1, item 98, paragraph 761G(6)(aa)]
1.35 The opportunity has been taken to correct the left hand margin of
paragraph 761G(6)(c). [Schedule 1, Part 1, item 99]
Registered managed investment schemes investing in unregistered
managed investment schemes
1.36 The amendment repeals subsection 601FC(4) which imposes the
duty on the responsible entity of a registered managed investment scheme
not to invest scheme property in unregistered managed investment
schemes. [Schedule 1, Part 1, item 66]
1.37 Other duties on the responsible entity (for example, to act in the
best interests of the members) are unchanged.
Application and transitional provisions
Exemption from providing a Statement of Advice -- no product
recommendation and no remuneration
1.38 The amendments will commence on Royal Assent. [Clause 2]
Threshold for requiring a Statement of Advice
1.39 The amendments will commence on Royal Assent. [Clause 2]
Financial Services Guide exemption general advice to the public
1.40 The amendments commence from a day to be fixed by
Proclamation. If no date is fixed within 6 months from the date on which
the Act receives Royal Assent, then the amendment will commence on
the first day after that period. [Clause 2]
Sophisticated investors
1.41 The amendments will commence on Royal Assent. [Clause 2]
1.42 The amendments apply to financial products and financial services
provided on and after the day the amendments commence. [Schedule 1,
Part 6, item 238]
Cross-endorsement of authorised representatives
1.43 The amendments commence from a day to be fixed by
Proclamation. If no date is fixed within 6 months from the date on which
the Act receives Royal Assent, then the amendment will commence on
the first day after that period. [Clause 2]
1.44 The amendments apply in relation to the conduct of a representative
on or after the day on which the amendments commence. [Schedule 1, Part
6, item 243]
Product activity and data collection
1.45 Amendments providing for the optional use of electronic lodgement
of in use notices will commence on 1 July 2008. Electronic lodgement
will become mandatory on 1 January 2009. [Clause 2 and Schedule 1, Part 6,
items 245 and 246]
Licensed market operators and related participants and listed bodies
1.46 The amendments commence on Royal Assent. [Clause 2]
1.47 Item 239 ensures that arrangements already in place under section
798C retain their validity. [Schedule 1, Part 6, item 239]
Pooled superannuation trusts and product disclosure
1.48 The amendments will commence on Royal Assent. [Clause 2]
1.49 The amendments apply to financial products and financial services
provided on and after the day the amendments commence. [Schedule 1,
Part 6, item 238]
Registered managed investment schemes investing in unregistered
managed investment schemes
1.50 The amendments will commence on Royal Assent. [Clause 2]
33
Consequential amendments
Exemption from providing a Statement of Advice -- no product
recommendation and no remuneration
1.51 Consequential amendments are made to subsection 940C(3) which
sets out how documents, information and statements are to be given.
[Schedule 1, Part 1, item 107]
1.52 A Record of Advice is currently used to document further market
advice. This measure extends the use of the Record of Advice to initial
advice in a particular situation. Consequential amendments omit `further
market related advice' and substitutes various terms and references to
describe the initial advice covered by the new provision as well as the
further market related advice. [Schedule 1, Part 1, items 108-115]
1.53 A consequential amendment is made to subsection 946A(3) to
acknowledge the additional situation in which a Statement of Advice is
not required. [Schedule 1, Part 1, item 116]
1.54 As a consequence of the use of a Record of Advice, amendments
are made clarifying the definition of defective disclosure statements in
relation to offence penalties and civil liability is expanded to include the
record. [Schedule 1, Part 1, items 119-126]
1.55 The maximum penalty is specified for the offence of breaching the
requirement to keep and provide a Record of Advice under the new
provisions. This new provision carries the default rate of 50 penalty
units. [Schedule 1, Part 1, item 175]
Threshold for requiring a Statement of Advice
1.56 As a consequence of the use of a Record of Advice when section
946AA is relied on, amendments are made to subsection 940C(3) which
sets out how documents, information and statements are to be given.
[Schedule 1, Part 1, item 107]
1.57 A consequential amendment is made to subsection 946A(3) to
acknowledge the additional situation in which a Statement of Advice is
not required. [Schedule 1, Part 1, item 116]
1.58 As a consequence of the use of a Record of Advice, amendments
are made clarifying the definition of defective disclosure statements in
relation to offence penalties and civil liability is expanded to include the
record. [Schedule 1, Part 1, items 119-126]
1.59 The maximum penalty is specified for the offence of breaching the
requirement to keep and provide a Record of Advice under the new
provisions. This new provision carries the default penalty of 50 penalty
units. [Schedule 1, Part 1, item 175]
Financial Services Guide exemption -- general advice to the public
1.60 As a consequence of the amendment to the circumstances in which
a provider need not provide a Financial Services Guide, subsection
941C(4A) which provides that the regulations may define what
constitutes a public forum for the purposes of subsection 941C(4) is
repealed. [Schedule 1, Part 3, items 219 and 220]
Sophisticated investors
1.61 References to the new section which provides a mechanism by
which experienced investors can be certified as wholesale clients are
included in the definition of retail client in section 761A and in
subsection 761G(1). [Schedule 1, Part 1, items 95 and 97]
Cross-endorsement of authorised representatives
1.62 A consequential amendment is made to section 917A which
describes the application of Division 6 of Part 7.6 of the Corporations
Act. [Schedule 1, Part 3, item 216]
1.63 Consequential amendments to the references to `product' in
paragraphs 917A(3)(c), (d) and (e) are also made. [Schedule 1, Part 3,
item 217]
Supporting bill
Licensed market operators and related participants
1.64 This Bill requires a market operator's operating rules to provide for
ASIC to supervise certain participants. This will impose additional
responsibilities on ASIC, resulting in additional expenditure.
1.65 The Corporations (Fees) Act 2001 will be consequentially amended
so ASIC can impose a fee for the functions conferred on it by the
operating rules of a market as required by subsection 798DA(2).
[Schedule 1, item 1, Corporations (Fees) Amendment Bill 2007]
35
2 Chapter 2
Company Reporting Obligations
Outline of chapter
2.1 This Bill contains seven refinements to the existing company
reporting obligations in the Corporations Act that are aimed at reducing
compliance costs for companies in relation to their reporting obligations:
· amendments to incorporate in the Corporations Act the
accounting standards requirements for executive and
director remuneration disclosure;
· increases in the thresholds used to define a large proprietary
company and allow for future changes to the thresholds to
be prescribed by regulations;
· amendments to the notification requirements for changes in
office holders and company addresses, payment of annual
fees and to the company deregistration procedure; and
· amendments to allow companies to make annual reports
available on the internet and only require hard copies to be
sent to members who request them.
2.2 The amendments simplify company reporting obligations to reduce
the regulatory burden on business, maintain investor protections and
reduce compliance costs.
Context of amendments
2.3 The measures in this Bill are aimed at reducing the burden of red
tape to allow Australian corporations to do business more efficiently.
2.4 Accurate and prompt information is fundamental to the operation of
an efficient market. The disclosure obligations in the Corporations Act
are an important regulatory tool providing the market with relevant
information on which interested parties can make commercial decisions.
37
2.5 However, the disclosure requirements should be framed in a way so
that they do not unnecessarily, or excessively, interfere with companies
devoting resources to productive outputs.
2.6 The refinements to the company reporting obligations will deliver a
simpler regulatory framework that reduces the regulatory burden on
business, continues to protect investors, and reduces compliance costs.
The amendments have their origins in the Rethinking Regulation report of
the Taskforce on Reducing Regulatory Burdens on Business and the
Corporate and Financial Services Regulation Review Proposals Paper of
November 2006.
Summary of new law
2.7 The Bill will make a number of refinements to the company
reporting obligations in the Corporations Act to:
· establish a disclosure framework that will allow the
accounting standards requirements for executive and
director remuneration to be incorporated into Corporations
Act. The Bill also introduces a new disclosure requirement
in relation to executives and directors hedging their
incentive remuneration and several other minor and
technical amendments to further refine the framework;
· increase the thresholds used to define a large proprietary
company. A proprietary company will be defined as being
large if it satisfies two of the following tests: revenue of
$25 million; assets of $12.5 million; and 50 employees. The
amendments also allow for future changes to the thresholds
to be prescribed by regulations.
· remove the requirement for companies to notify ASIC of the
retirement or resignation of office holders where the office
holders themselves have lodged notifications with ASIC;
· provide for ASIC to use a company's contact address where
that address is more convenient for the company;
· remove the requirement to pay an annual review fee where
the annual review date falls two months before or after the
Gazette notice that the company is to be deregistered;
· allow companies to pay their annual review fees for a period
of 10 years by way of a single lump sum payment; and
· enable companies, registered schemes and disclosing entities
to make annual reports available on a web site and provide
hard copies only to those members who elect to receive
them in that form.
Comparison of key features of new law and current law
New law Current law
Executive remuneration
The remuneration disclosure The remuneration disclosure
requirements for individual requirements for individual
directors and executives of listed directors and executives of listed
companies are exclusively companies are contained in both
contained in the Corporations the accounting standards and the
Act. Corporations Act. Listed
companies are required to comply
with both sets of requirements.
Companies that are disclosing No comparative disclosure
entities must disclose their policy requirement currently exists.
in relation to directors and
executives hedging their
incentive remuneration and how
the company enforces this policy.
Thresholds for reporting for large proprietary companies
A proprietary company will be A proprietary company is defined
defined as being large if it as being large if it satisfies two of
satisfies two of the following the following tests: revenue of
tests: revenue of $25 million; $10 million; assets of $5 million
assets of $12.5 million and 50 and 50 employees.
employees. The amendments
also allow for future changes to
the thresholds to be prescribed by
regulations.
Notifications -- change in office holders
Companies will no longer be Companies must lodge with ASIC
obliged to lodge notices of the notice of the cessation of a
cessation of company office company office holder, even
holders with ASIC where the where office holders have
office holders themselves have themselves lodged notifications
lodged notifications with ASIC. with ASIC.
39
New law Current law
Notifications -- company addresses
A company may have a contact The contact address for a
address. If a company chooses to company is not explicitly
have a contact address it must recognised in the Corporations
lodge notice of the address with Act, giving rise to issues of
ASIC in the prescribed form. transparency when ASIC uses
that address for administrative
purposes.
Simplifying voluntary deregistrations
An annual review fee will not be A company must pay its annual
payable where the review date for review fee even where an
the company falls 2 months application has been lodged to
before or after the Gazette notice deregister the company.
that the company is to be
deregistered.
Upfront payment of annual review fees for companies
A company will have the option A company must pay annual
of paying annual review fees for a review fees for each review date
period of 10 years by way of a upon which it is registered. The
single lump sum payment. company is billed annually for
review fees.
Distribution of annual reports
Companies, registered schemes Companies, registered schemes
and disclosing entities can make and disclosing entities are
their annual report available on a required to send a member a hard
web site and only send a hard copy of the annual report unless a
copy to members that request one. member does not request a hard
Alternatively, the entity can copy.
continue to distribute hard copy
reports, by default, to members.
Detailed explanation of new law
Executive remuneration
2.1 The remuneration disclosure requirements for executives and
directors of listed companies are currently contained in both the
accounting standards and the Corporations Act (and the Corporations
Regulations). There is considerable duplication between the
requirements in the accounting standards and the Corporations Act as
well as some minor inconsistencies.
2.2 The objective of the amendments is to consolidate the remuneration
disclosure requirements currently contained in the accounting standards
into the Corporations Act and Corporations Regulations. Following on
from the amendments to the Corporations Act in this Bill, the remaining
remuneration disclosure requirements in the accounting standards will be
incorporated into the Corporations Regulations. This will simplify the
requirements as companies will no longer be required to refer to both the
accounting standards and the Corporations Act to determine their
remuneration disclosure requirements.
2.3 The amendments also make other minor refinements to the
requirements to strengthen the existing framework.
2.4 The range of directors and executives whose remuneration must be
disclosed under the accounting standards is determined by whether the
individual meets the definition of `key management personnel'. The
Corporations Act requires the remuneration of all directors and the five
most highly remunerated executives from the company and the
consolidated group to be disclosed.
2.5 The amendments ensure that the range of individuals whose
remuneration must be disclosed remains the same after the accounting
standard requirements are moved into the Corporations Act. To achieve
this, the amendments require remuneration disclosures to be made for any
individual that falls within the definition of `key management personnel',
in addition to the existing directors and executives required to be
disclosed under section 300A of the Corporations Act. [Schedule 1, Part 1,
items 24 to 27, 31 and 32]
2.6 The term key management personnel for the purposes of the
Corporations Act will be defined in the accounting standards. This is to
ensure consistency between the Corporations Act and the accounting
standards. If a definition was included in the Corporations Act, the
definition would need to be amended whenever changes were made to the
accounting standards. [Schedule 1, Part 1, item 32]
2.7 One of the consequences of moving the remuneration disclosure
requirements out of the accounting standards and into the Corporations
Act is that the disclosures will be made in a company's directors' report
instead of the financial report. The amendments introduce a requirement
for a company's auditor to express an opinion on the remuneration
information that has been moved from the audited financial reports into
the directors' report. This ensures that the remuneration disclosures
continue to be subject to assurance by an external auditor. [Schedule 1,
Part 1, item 36]
41
2.8 The amendments impose a strict liability offence in relation to the
audit of the information in the directors' report. This is consistent with
the liability imposed on auditors in relation to auditing the company's
financial report. The overall scope of the auditor's exposure to criminal
liability has not changed as a result of these amendments. [Schedule 1, Part
1, item 37 and item 168]
2.9 The amendments also modify the scope of the remuneration
disclosure requirements from listed companies to disclosing entities that
are companies. This is necessary to bring the application of the
Corporations Act disclosures into line with the application of the
accounting standards disclosures. [Schedule 1, Part 1, item 33]
2.10 The amendments also make a number of minor refinements to
strengthen the disclosure framework. The amendments require
companies to disclose board policy in relation to directors and executives
hedging their incentive remuneration and the mechanism that the
company uses to enforce this policy [Schedule 1, Part 1, item 28]. This will
ensure that shareholders are informed about the company's policy on this
issue.
2.11 In addition, the amendments clarify the disclosure requirement in
section 300A(1)(e)(iv) to ensure that the policy intention of the
requirement is achieved [Schedule 1, Part 1, item 29], and remove the
requirement under subparagraph 300A(1)(e)(v) for companies to disclose
the aggregate of options granted, exercised and that have lapsed during
the year on the ground that is not being used by shareholders [Schedule 1,
Part 1, item 30].
Thresholds for reporting for large proprietary companies
2.12 Large proprietary companies are required to prepare a financial
report and a directors' report for each financial year under subsection
292(1) of the Corporations Act.
2.13 Under the current requirements (subsection 45A(3) of the
Corporations Act), a proprietary company is defined as a large
proprietary company for a financial year if it satisfies at least two of the
following tests:
· the consolidated gross operating revenue for the financial
year of the company and the entities it controls is
$10 million or more;
· the value of the consolidated gross assets for the financial
year of the company and the entities it controls is $5 million
or more; and
· the company and the entities it controls have 50 or more
employees at the end of the financial year.
2.14 These thresholds have not been reviewed since their introduction in
1995. As a result, the current monetary thresholds are set at too low a
level to determine economic significance and have led to an increasing
number of non-economically significant entities being subject to the
reporting requirements.
2.15 In order to reduce the regulatory burden on non-economically
significant proprietary companies and ensure that users still receive the
financial information of economically significant proprietary companies,
the monetary thresholds will be increased by 150 per cent. The employee
thresholds will remain unchanged at 50 employees.
2.16 Under the new arrangements, a proprietary company will be
defined as a large proprietary company for a financial year if it satisfies at
least two of the following tests:
· the consolidated operating revenue for the financial year of
the company and the entities it controls is $25 million or
more;
· the value of the consolidated gross assets for the financial
year of the company and the entities it controls is
$12.5 million or more; and
· the company and the entities it controls have 50 or more
employees at the end of the financial year.
[Schedule 1, Part 1, items 16 to 18]
2.17 A corresponding increase in the revenue and asset thresholds used
to define a small proprietary company under subsection 45A(2) will
mirror the changes in the thresholds of large proprietary companies.
[Schedule 1, Part 1, items 12 to 14]
2.18 A mechanism will also be included to regularly assess the
thresholds through the Corporations Regulations to ensure that the
thresholds continue to accurately reflect genuine economic significance
during periods of long and sustained economic growth. The amendments
will enable changes to the thresholds to be prescribed by regulation.
[Schedule 1, Part 1, items 12 to 14 and 16 to 18]
2.19 Currently, section 45A of the Corporations Act uses the term
`consolidated gross operating revenue' to guide entities when calculating
the group's total revenue to determine whether they meet the threshold
43
tests. The accounting standards no longer refer to this term.
Consequentially, this term will be replaced with `consolidated operating
revenue' to reflect changes to the accounting standards. [Schedule 1, Part 1,
items 11, 15 and 19]
Notifications -- change in office holders
2.20 The Bill will amend the Corporations Act to remove the
requirement for companies to inform ASIC when office holders have
resigned or retired where the office holders themselves have informed
ASIC. The amendment is intended to reduce the compliance burden on
companies in the sense that the current arrangements require companies
to provide ASIC with information that ASIC may already have.
2.21 Currently, section 205A of the Corporations Act allows a ceasing
office holder to notify ASIC that they no longer hold office, while section
205B requires a company to notify ASIC of any change in its office
holders. The corporate register is updated by ASIC once it receives
notification that a company office holder has resigned, regardless of
whether it is the ceasing office holder or the company itself that has
notified ASIC.
2.22 The Bill amends section 205B of the Corporations Act so that a
company is no longer obliged to notify ASIC of the cessation of an
officeholder where ASIC has already been notified by the departing
office holder under section 205A. [Schedule 1, Part 3, items 204 and 205]
2.23 The Bill will also introduce a new exception to the current offence
of a company failing to notify ASIC in section 205B of the
Corporations Act. A company will not be liable for an offence where the
departing officeholder gives ASIC a written notice of the person's
retirement or resignation as an office holder of the company under
section 205A.
2.24 This exception is aligned with the existing exception for alternate
directors currently found in subsection 205B(6). Like the existing
exemption, the evidentiary burden of proof is reversed, that is, it is placed
on the defendant (the company) and not the prosecution. The reversal
has been maintained for consistency with the current exception and to
facilitate efficient business compliance and regulatory outcomes.
[Schedule 1, Part 3, item 206]
2.25 The Bill also amends the Small Business Guide in Part 1.5 of the
Corporations Act to make reference to the new arrangements. [Schedule 1,
Part 3, items 198, 199 and 200]
Notifications -- company addresses
2.26 The Bill will amend the Corporations Act to provide for a company
notifying ASIC of a contact address. This will allow companies to
nominate an address, separate from the registered office address, at which
they prefer to receive documents from ASIC. Under existing
arrangements, ASIC allows companies to provide it with a contact
address, but that address is not recognised in the Corporations Act.
Recognition of the contact address in the Corporations Act will provide
greater transparency, as the contact address will be included on the
register maintained by ASIC. After commencement of the new
provisions, the contact address will be able to be updated on the same
form as other company details.
2.27 The Bill inserts a new subsection 146A(1) into the Corporations
Act to provide that a company may have a contact address and ASIC may
send communications and notices to the company's contact address. The
Bill also inserts a new subsection 146A(2) into the Corporations Act to
provide that a company must lodge a change to its contact address in the
prescribed form. [Schedule 1, Part 3, item 203]
2.28 The Bill also inserts a note at the end of subsection 142(1) of the
Corporations Act to alert the reader to the fact that ASIC may send
communications and notices to the company's contact address.
[Schedule 1, Part 3, items 201 and 202]
Simplifying voluntary deregistration
2.29 A person (including the company) may apply to ASIC under
section 601AA of the Corporations Act to deregister the company if,
among other things, the company has paid all fees and penalties payable
under the Corporations Act and has no outstanding liabilities.
2.30 Currently, companies that have applied for voluntary deregistration
are still subject to annual review obligations (including the requirement
to pay the annual review fee) up until the point of deregistration. This
means that annual review fees may be incurred or become payable in the
two-month period between approval of the deregistration application and
the actual deregistration of the company. Annual review fees may also
be payable in the period from application for deregistration to the time
when ASIC has given notice of the proposed deregistration.
2.31 The Bill amends section 1351 of the Corporations Act to provide
that review fees are not payable under the Corporations (Review Fees)
Act 2003 if ASIC has given notice of the proposed deregistration of the
company and the review date for that year falls two months before or
after the publication of the notice. The amendment is intended to remove
the obligation to pay annual review fees where a decision is made to
45
deregister a company in close temporal proximity to an annual review
date. [Schedule 1, Part 3, item 221]
Upfront payment of annual review fees for companies
2.32 The existing Corporations (Review Fees) Act 2003, in conjunction
with the Corporations (Review Fees) Regulations 2003, requires an
annual payment to ASIC of $212 by a proprietary company, $1000 by a
public company or a registered scheme and $40 by a special purpose
company. Transaction costs could be reduced by allowing for less
frequent payment.
2.33 The Bill amends section 1351 of the Corporations Act to provide
for a company making payment for a review date other than the current
review date. [Schedule 1, Part 3, item 221]
2.34 The amendment to the Corporations Act allows regulations to be
made under the Corporations (Review Fees) Act 2003 to provide for a
payment of annual review fees for an extended period by way of a single
lump sum payment.
Distribution of annual reports
2.35 Companies, registered schemes and disclosing entities are required
to report to members either by:
· using a web site as the default method of distributing the
reports, in accordance with subclause 314(1AA); or
· by sending hard copies as the default method of distributing
the reports, in accordance with subclause 314(1AE).
[Schedule 1, Part 1, item 38]
2.36 It is not mandatory for entities to use a web site as the default
method of distributing the reports. An entity can continue to send a hard
copy of the reports as the default method of distribution if it so chooses
[Schedule 1, Part 1, item 38].
2.37 Subclauses 314(1AA) to (1AD) apply if a company, registered
scheme or disclosing entity uses a web site as the default method of
distributing the reports.
2.38 A company, registered scheme or disclosing entity that reports in
accordance with subclause 314(1AA) must:
· send a hard copy of the reports to those members who have
made an election under paragraph 314(1AB)(a) to receive a
hard copy under subparagraph 314(1AA)(a)(i) [Schedule 1,
Part 1, item 38]. Alternatively, the entity can send an
electronic copy (such as a copy provided by e-mail or fax)
of the reports where the entity offers to send the reports as
an electronic copy and the member elects to receive an
electronic copy under paragraph 314(1AB)(c) [Schedule 1,
Part 1, item 38];
· make a copy of the reports readily accessible on a web site
under paragraph 314(1AA)(b) [Schedule 1, Part 1, item 38].
Placing a copy of the reports on a restricted area of a web
site, for example, would not satisfy this requirement; and
· under paragraph 314(1AA)(c) directly notify those members
who did not receive a hard copy that the reports are
accessible on the web site, and specify the direct address of
the web site [Schedule 1, Part 1, item 38]. The direct address
may be specified, for example, by providing the Uniform
Resource Locator (URL) of the reports. The direct address
is intended to enable the member to directly access the
reports on the web site. This notification can be made in
hard copy, or by electronic means (for example, e-mail or
fax) in accordance with subclause 314(1AD) [Schedule 1,
Part 1, item 38]. In addition, this notification could be
included with other correspondence sent to members, for
example, with the notice of the annual general meeting.
This notification must also be sent directly to the member.
A company announcement on the Australian Securities
Exchange, for example, would not satisfy this requirement.
2.39 A company, registered scheme or disclosing entity that reports in
accordance with subclause 314(1AA), must satisfy the requirements of
that subclause by the deadline set out in section 315 of the Act. A
company, registered scheme or disclosing entity that uses
subclause 314(1AA) is taken to report at the time the company, registered
scheme or disclosing entity has fully complied with the requirements of
that subclause. [Schedule 1, Part 1, item 41]
2.40 A company, registered scheme or disclosing entity that reports in
accordance with subclause 314(1AA) must directly notify each member
that:
· under paragraph 314(1AB)(a) the member has a right to
elect to receive a hard copy of the reports free of charge
[Schedule 1, Part 1, item 38];
47
· if the member does not elect to receive a hard copy, the
member may access the reports on a specified web site
under paragraph 314(1AB)(b) [Schedule 1, Part 1, item 38]; and
· under paragraph 314(1AB)(c) the member can elect to
receive the reports as a hard copy or an electronic copy
(such as e-mail or fax) -- if the entity offers its members an
additional option to receive an electronic copy of the reports
[Schedule 1, Part 1, item 38].
2.41 The notification required by subclause 314(1AB) only needs to be
sent to each member once. This one-off notification is intended to inform
members of this amendment and the effect it will have on the default
method of distributing reports. The notification is also intended to
provide entities with an opportunity to collect members' preferences for
distributing the reports.
2.42 Under subclause 314(1AC), the member's election to receive a
copy of the reports under subclause 314(1AB) is a standing election for
each subsequent financial year until the member changes his or her
election [Schedule 1, Part 1, item 38]. The standing election ensures that
members do not have to repeat their request for a hard copy each year.
The existing law continues to allow members to change their election at
any time using subsection 316(1).
2.43 The notification required by subclause 314(1AB) must be made to
all members after the Act commences [Schedule 1, Part 6, item 233(2)].
Notifications made in the past will not satisfy this requirement.
However, an exception to this requirement provides that a company,
registered scheme or disclosing entity is not required to provide the
notification under subclause 314(1AB) to those members who have
already notified the entity, under paragraph 316(1)(a), that they do not
wish to receive the reports [Schedule 1, Part 6, item 233(3)].
2.44 For an existing member, the notification required by subclause
314(1AB) can be made in hard copy, or by electronic means (for
example, e-mail or fax) in accordance with subclause 314(1AD)
[Schedule 1, Part 1, item 38]. For a new member, this notification could be
sent, for example, as part of their initial registration pack.
2.45 Subclause 314(1AE) applies if a company, registered scheme or
disclosing entity sends a hard copy of the reports as the default method of
distribution to members. This maintains the status quo by allowing
companies, registered schemes and disclosing entities to continue to
provide, by default, a hard copy of the reports to members.
Application and transitional provisions
Executive remuneration
2.46 The amendments will apply to financial years that begin on or after
the commencement of the legislation. [Schedule 1, Part 6, item 232]
Thresholds for reporting for large proprietary companies
2.47 The amendments will take effect in the financial year that ends on
or after the day on which those items commence. [Schedule 1, Part 6,
item 231]
Notifications -- change in office holders
2.48 The amendments to remove the requirement for companies to
inform ASIC when office holders have resigned or retired where the
office holders themselves have informed ASIC will commence on a date
to be proclaimed, or if no date is proclaimed, six months after Royal
Assent.
Notifications -- company addresses
2.49 The amendments to provide for a company using a contact address
will commence on a date to be proclaimed, or if no date is proclaimed,
six months after Royal Assent.
Simplifying voluntary deregistration
2.50 The amendments to remove the obligation to pay annual review
fees two months before or after ASIC giving notice of a proposed
deregistration of a company will apply to a review date that occurs on or
after the day on which that item commences. The item will commence
on a date to be proclaimed, or if no date is proclaimed, six months after
Royal Assent. [Schedule 1, Part 6, item 244]
Upfront payment of annual review fees for companies
2.51 The amendments to provide for regulations being made to allow a
single lump sum payment of annual review fees to cover an extended
period will commence on a date to be proclaimed, or if no date is
proclaimed, six months after Royal Assent.
49
Distribution of annual reports
2.52 The amendments apply to reports for a financial year that ends on
or after the day on which those items commence. [Schedule 1, Part 6, item
233(1)]
2.53 Companies, registered schemes and disclosing entities will be
required to provide the notification under subclause 314(1AB) after that
subclause commences [Schedule 1, Part 6, item 233(2)]. However, an
exception to this notification requirement exists where a member has
already notified the entity under paragraph 316(1)(a) that the member
does not wish to receive the reports [Schedule 1, Part 6, item 233(3)].
Consequential amendments
Thresholds for reporting for large proprietary companies
2.54 A number of consequential amendments will need to replace the
thresholds used to define a designated private company in the
Social Security Act 1991 and the Veterans' Entitlement Act 1986.
[Schedule 1, Part 1, items 176 to 179 and items 182 to 185]
2.55 In addition, the term consolidated gross operating revenue will be
replaced with consolidated operating revenue in the Social Security
Act 1991 and the Veterans' Entitlement Act 1986. [Schedule 1, Part 1,
items 180 and 181, and items 186 and 187]
Notifications change in office holders
2.56 Section 222AOF of the Income Tax Assessment Act 1936
(ITAA 1936) allows the Commissioner of Taxation to rely on certain
documents lodged with ASIC to indicate the address to which a penalty
notice under section 222AOE of the ITAA 1936 may be sent to a current
or former director.
2.57 Currently, the documents referred to are those lodged pursuant to
sections 205B and 345 of the Corporations Act.
2.58 As a consequence of the notification of change in office holder
amendments, companies may no longer have to lodge documents under
section 205B where the office holder has lodged a document under
section 205A.
2.59 The Bill will amend section 222AOF of the ITAA 1936 to refer to
documents lodged with ASIC under both sections 205A and 205B of the
Corporations Act. The Bill also corrects the incorrect reference to
section 345 of the Corporations Act, with the correct reference to
section 346C. [Schedule 1, Part 3, item 222]
Distribution of annual reports
2.60 The Bill repeals provisions relating to the use of electronic means to
send reports to members under subsections 314(4), (5) and (6), as the
ability to use electronic means has been incorporated into item 38 of
Schedule 1. [Schedule 1, Part 1, item 40]
2.61 Subsection 314(1A) currently establishes a strict liability offence in
relation to breaches of subsection 314(1). The Bill makes a
consequential amendment to subsection 314(1A) to provide that a breach
of subclause 314(1AB) is also a strict liability offence [Schedule 1, Part 1,
item 39]. The notification provided under subclause 314(1AB) is required
by paragraph 314(1AA)(a). The strict liability offence in subsection
314(1A) indirectly covers a breach of paragraph 314(1AA)(a), but does
not cover a breach of subclause 314(1AB). Therefore, to ensure
paragraph 314(1AA)(a) operates effectively, subclause 314(1AB) has
been amended to provide a consistent criminal liability provision
[Schedule 1, Part 1, item 169].
2.62 The Bill amends paragraph 318(2)(a) and subsection 319(1) to
replace a reference to `sent' with a reference to `provided'. [Schedule 1,
Part 1, items 42 and 43]
Supporting Bill
Upfront payment of annual review fees for companies
2.63 The Corporations (Review Fees) Amendment Bill 2007 (the
Review Fees Bill) will amend the Corporations (Review Fees) Act 2003
(the Review Fees Act) to insert a note after subsection 5(1) to alert the
reader to the fact that the Corporations (Review Fees) Regulations 2003
may prescribe a fee to be paid upfront to cover review fees for a future
year. [Schedule 1, item 1, Corporations (Review Fees) Amendment Bill 2007]
2.64 The Review Fees Bill will amend section 8 of the Review Fees Act
to provide for regulations to be made under the Review Fees Act for the
purposes of both section 1351 of the Corporations Act and for the
purposes of the Review Fees Act. [Schedule 1, item 2, Corporations (Review
Fees) Amendment Bill 2007]
51
2 Chapter 3
Auditor Independence
Outline of chapter
3.1 This chapter outlines a number of refinements to the existing auditor
independence requirements in the Corporations Act:
· amendments relating to Proposal 3.1 of the Corporate and
Financial Services Regulation Review Proposals Paper
which proposed that remedial amendments contained in the
Corporations Regulations and two ASIC class orders
relating to the auditor's independence declaration should be
included in the Corporations Act;
· improvements arising out of public consultation on the
comparative review of Australia's auditor independence
requirements; and
· a number of miscellaneous technical amendments designed
to improve the operation of the existing auditor
independence requirements.
Context of amendments
Anomalies arising from CLERP 9
3.2 The Corporate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Act 2004 (the CLERP 9 Act) established a
comprehensive regime on auditor independence, implementing
recommendations of the review on Independence of Australian Company
Auditors (the Ramsay report) and some of the relevant recommendations
of the report of the HIH Royal Commission.
3.3 The legislative framework of the auditor independence requirements
in the CLERP 9 Act includes:
· a general requirement for auditor independence;
53
· specific auditor independence requirements which contain
restrictions on an extensive range of specific employment
and financial relationships between an auditor, and other
persons connected to the auditor, and the audit client. The
Ramsay report described these specific restrictions as
involving `core circumstances which, if they exist,
necessarily mean that the auditor is not independent'; and
· a number of additional requirements relating to other auditor
independence issues, including the auditor's independence
declaration.
3.4 A number of anomalies and unintended consequences were
identified during the implementation of the CLERP 9 auditor
independence requirements which required remedial action.
3.5 Three of these issues were addressed by amendments to the
Corporations Regulations made in accordance with section 343 of the
Corporations Act. The two remaining anomalies, which related to the
auditor's independence declaration, were addressed by ASIC class orders.
3.6 In the context of the Government's consultation process to simplify
the regulatory system, it was considered that the inclusion of auditor
independence requirements in the Corporations Act, the Regulations and
in ASIC class orders had the potential to create unnecessary complexity.
Proposal 3.1 of the Corporate and Financial Services Regulation Review
Proposals Paper (November 2006) recommended that these amendments
to the Corporations Regulations and the matters dealt with in the two
ASIC class orders should be incorporated into the Corporations Act.
Improvements arising out of public consultations on the comparative
review of Australia's auditor independence requirements
3.7 The Government released a discussion paper Australian Auditor
Independence Requirements: A Comparative Review (the comparative
review) on 15 November 2006. The overall conclusion of the
comparative review is that, despite differences in terminology,
institutional arrangements and legal frameworks, there is a substantial
underlying equivalence between the Australian requirements and
international best practice standards.
3.8 When the comparative review was released, it was noted that several
of the key findings are directly relevant to the Government's commitment
to simplifying the regulatory system and reducing unnecessary or
excessive red tape. The Government indicated that there may be scope,
in line with overseas developments, to refine the existing auditor
independence requirements without changing or weakening the existing
robust regulatory framework. The Government said that it would consult
with key stakeholders to identify whether any such measures could be
included in the proposed Simpler Regulatory System Bill.
3.9 Treasury has undertaken a targeted consultation process on the
review with the key stakeholders: ASIC, the Financial Reporting
Council, the major audit firms and the professional accounting bodies.
3.10 All the stakeholders have agreed that refinements could be made in
three areas of the auditor independence requirements in the Corporations
Act:
· the multiple former audit firm partner restriction;
· the former audit partner `cooling-off' restriction; and
· the adoption of a `covered person' approach in relation to
the existing financial relationship restrictions.
Miscellaneous amendments
3.11 This group of technical amendments is designed to improve the
effectiveness of the auditor independence requirements in the light of
operational experience since the requirements were introduced by the
CLERP 9 Act in 2004.
Summary of new law
Anomalies arising from CLERP 9
3.12 The measures will ensure that remedial action taken by amendment
of the Corporations Regulations and by ASIC class orders to address
anomalies in the auditor independence requirements introduced by the
CLERP 9 Act will be incorporated in the Corporations Act.
Improvements arising out of public consultations on the comparative
review of Australia's auditor independence requirements
3.13 There are three key measures:
· the restriction applying to multiple former partners of an
audit firm or former directors of an audit company will no
longer apply to a former partner or former director who has
ceased to be a member of the firm or the audit company for
five or more years;
55
· the way in which the existing two-year `cooling off' period
applying to a former audit partner of a firm, a former
director of an audit company or a former lead or review
auditor in an audit company is calculated, will be modified;
and
· the existing specific restrictions on financial investments
applying to partners in a firm or directors in an audit
company who are not involved in an audit and not in a
position to influence the outcome of an audit will be
removed.
Miscellaneous amendments
3.14 These amendments will improve the operational efficiency of the
auditor independence requirements by addressing a number of anomalies
and minor technical issues.
Comparison of key features of new law and current law
New law Current law
The auditor independence ASIC class order grants relief
declaration will be able to be from requirement that the
given to the directors before the auditor's independence
auditor's report is signed declaration must be given to the
provided specified conditions are directors at the same time as the
satisfied. auditor's report.
An auditor will no longer be ASIC Class order grants relief
required to report inadvertent from requirement that inadvertent
breaches of the auditor breaches of the auditor
independence requirements in the independence requirements be
auditor's independence included in the independence
declaration provided the statutory declaration provided the statutory
defence applies. defence applies.
New law Current law
The ordinary course of business The Corporations Regulations
exception included in the modified the operation of the
Corporations Regulations will be auditor independence restriction in
replicated in the Corporations relation to debts owing by
Act. including an ordinary course of
business exception.
The exception relating to cheques The Corporations Regulations
and savings accounts has been modified the operation of the
replicated in the Corporations auditor independence
Act. requirements to allow members of
an audit team to hold cheque and
savings accounts on call with an
audit client bank provided this
was done in the ordinary course of
the bank's business and under
normal terms and conditions.
ASIC will be given the power in The Corporations Regulations
the Corporations Act to extend modified the operation of the
the period within which an auditor independence
auditor is required to resolve a requirements to give ASIC the
conflict of interest situation. power to extend the period within
which an auditor is required to
resolve a conflict of interest
situation.
The restriction will no longer The restriction on multiple former
apply to a former partner or audit firm partners and former
former audit company director audit company directors applies to
who has left the firm or audit all former partners and all former
company five or more years ago. audit company directors.
The two-year `cooling-off' period The two-year `cooling-off' period
will be calculated from the date is calculated from the date of
of the last audit in which the departure from the firm or audit
former partner or director company.
participated.
The restrictions on financial The specific restrictions on
investments will not apply to financial investments apply to all
partners who are not involved in partners in an audit firm.
an audit and not in a position to
influence the outcome of the
audit.
ASIC's relief powers will be ASIC has limited powers to
extended to cover members of an exempt registered company
audit firm who are not registered auditors from the auditor
company auditors, former independence provisions in the
members of an audit firm, former Corporations Act.
directors of an audit company
and former professional
employees of an audit company.
57
Detailed explanation of new law
Anomalies arising from CLERP 9
Timing of auditor's independence declaration
3.1 The CLERP 9 Act introduced a new requirement in section 307C of
the Corporations Act that an auditor provide a declaration as to whether
the auditor is aware of any contraventions of the auditor independence
requirements of the Act or of any applicable codes of professional
conduct.
3.2 Subsections 298(1) and 306(2) of the Corporations Act require the
auditor's independence declaration to be included in the directors' report.
Subsection 307C(5) requires the auditor to give the independence
declaration to the directors with the auditor's report. This means that the
auditor's report would need to be signed before the directors' report.
3.3 However, the auditing standards, which have the force of law under
the Corporations Act, require the auditor to comment in the auditor's
report on any material inconsistencies between the director's report and
the financial report, and to consider the impact of any material
misstatements of fact in the directors' report.
3.4 ASIC class order 05/83 granted relief by allowing the auditor's
independence declaration to be signed before the directors' report had
been signed and the auditor's report to be signed after the directors'
report had been signed.
3.5 The measures in the Bill will address this timing inconsistency by
amending paragraph 307C(5)(a) and inserting subsection 307C(5A).
[Schedule 1, Part 1, items 34 and 35]
3.6 Paragraph 307C(5)(a) will provide that the declaration must either be
given when the audit report is given to the directors of the company,
registered scheme or disclosing entity or must satisfy the conditions in
subsection 307C(5A).
3.7 Subsection 307C(5A) will provide that a declaration will satisfy the
conditions in this subsection if:
· the auditor's independence declaration is given to the
directors and the directors sign the report within 7 days after
the declaration is given to the directors;
· the auditor's report on the financial report is made within
7 days after the directors' report is signed; and
· the auditor's report includes a statement to the effect that
either the declaration would be in the same terms if it had
been given to the directors at the time the auditor's report
was made, or circumstances have changed since the
declaration was given to the directors, and setting out how
the declaration would differ if it had been given to the
directors at the time the auditor's report was made.
Auditor's independence declaration -- reporting of inadvertent
breaches
3.8 The CLERP 9 Act introduced a new requirement in section 307C of
the Corporations Act that an auditor provide a declaration as to whether
the auditor is aware of any contraventions of the auditor independence
requirements of the Act or of any applicable codes of professional
conduct.
3.9 The reporting obligations under subsections 307C(1) and 307C(3)
require the declaration to include inadvertent breaches of the auditor
independence requirements under subsections 324CE(2), 324CF(2) or
324CG(2) notwithstanding that the statutory defence in subsections
324CE(4), 324CF(4) or 324CG(4) applied to the defendant.
3.10 In the course of day-to-day audit practice, there would be many
examples of inadvertent breaches of the auditor independence
requirements which would be quickly addressed once the auditor became
aware of the breach.
3.11 For purposes of the specific auditor independence requirements
contained in sections 324CE, 324CF and 324CG of the Corporations Act,
the policy intention is that for purposes of the reporting obligation in
relation to an auditor's independence declaration, only contraventions
under subsections 324CE(1), 324CF(1) or 324CG(1) should be included
in the declaration because these contraventions relate to an intentional
breach of the requirements where there is both knowledge and a failure to
take reasonable steps, as soon as possible, to address the breach.
3.12 ASIC class order 05/910 exempted an auditor from making a
declaration if there are any contraventions under subsections 324CE(2),
324CF(2) or 324CG(2) of the Corporations Act provided the statutory
defence applied that is, the auditor had reasonable grounds to believe that
it had in place, at the time of the contravention, a quality control system
that provided reasonable assurance that the auditor would comply with
the auditor independence requirements.
3.13 The measures in the Bill will ensure that an auditor will not be
required to report inadvertent breaches of the auditor independence
59
requirements in the auditor's declaration where the statutory defence
would be applicable. Subsection 307C(5B) will provide that an
individual auditor or a lead auditor is not required to give a declaration in
respect of a contravention if the contravention was a contravention by a
person of subsection 324CE(2), 324CF(2) or 324CG(2) and the person
does not commit an offence because of subsection 324CE(4), 324CF(4)
or 324CG(4). [Schedule 1, Part 1, item 35]
Money owed -- debt: ordinary course of business exception
3.14 Item 15 of the table in subsection 324CH(1) of the Corporations
Act prohibits an individual auditor, an audit firm or an audit company
(and various other persons specified in the tables in subsections
324CE(5), 324CF(5) and 324CG(9) from owing an amount of more than
$5000 to:
· the audited body; or
· a related body corporate; or
· an entity that the audited body controls.
3.15 This restriction existed in the auditor independence requirements in
the Corporations Act which pre-dated the CLERP 9 Act. This restriction
was included in the CLERP 9 Act auditor independence requirements in
accordance with a recommendation in the Ramsay report.
3.16 Notwithstanding that this restriction had been included in the
corporations legislation for over 30 years, during the implementation of
the CLERP 9 auditor independence requirements, concerns were raised
by the accounting profession that this restriction was catching `ordinary
course of business' transactions between an auditor and an audit client.
An example is where an audit firm that audited an airline, would not be
able to fly with that airline unless it paid cash rather than operating an
account with the airline on normal credit terms.
3.17 The Government accepted that as a general rule, debts incurred in
the ordinary course of business and on normal terms and conditions
would not constitute a threat to auditor independence.
3.18 Regulation 2M.6.05 of the Corporations Regulations (which was
included in the Corporations Amendment Regulations 2006 (No. 4))
modified the operation of the auditor independence requirements by
inserting a new ordinary course of business exception in
paragraph 324CH(5)(b).
3.19 Paragraph 324CH(5)(b) provides that for the purposes of item 15 of
the table in subsection 324CH(1) a debt owed by the person or firm to a
body corporate or entity should be disregarded if:
· the debt is on normal terms and conditions, and arises from
the acquisition of goods or services on normal trading terms
from:
- the audited body; or
- an entity that the audited body controls; or
- a related body corporate; and
· the goods or services will be used by the person or firm:
- for the personal use of the person or firm; or
- in the ordinary course of business of the person or firm.
3.20 The ordinary course of business exception will be replicated in
subsection 324CH(5A), with some slight restructuring, to accord with the
drafting style adopted in primary legislation. [Schedule 1, Part 1, item 56]
Money owed -- deposit account
3.21 Item 16 of the table in subsection 324CH(1) of the Corporations
Act prohibits amounts owing to an audit firm (and various other persons
and entities specified in the tables in subsections 324CE(5), 324CF(5)
and 324CG(9)) by the audited body under a loan.
3.22 While amounts owing by a bank under a cheque or savings account
may not be regarded as a loan in a commercial sense, the legal
interpretation of a loan includes deposit accounts with a bank.
3.23 This presented a considerable burden for auditors of banks and
other financial institutions that offer cheque and savings account facilities
to their customers. It involves the closing of all the savings and cheque
accounts held by the audit firm and individual members of the audit team
with the bank or financial institution.
3.24 The imposition of a regulatory requirement should not be
disproportionate to the risk of potential damage or harm. In the context
of cheque and savings accounts, the potential threat to auditor
independence is perceived to be low, particularly if the cheque or savings
account facility is arranged in the ordinary course of the audit client's
61
business and made under normal lending procedures, terms and
conditions.
3.25 The Government accepted that it should clarify that amounts owing
under a deposit account that are `on call' with an audited body that is an
Australian ADI and which are provided in the ordinary course of business
of the audited body, should be disregarded for purposes of item 16 of the
table in subsection 324CH(1) of the Corporations Act.
3.26 Regulation 2M.6.05 of the Corporations Regulations (which was
included in the Corporations Amendment Regulations 2006 (No. 4))
modified the operation of the auditor independence requirements by
inserting in the Corporations Act a new paragraph 324CH(6)(b) which
provides that for the purposes of item 16 of the table in
subsection 324CH(1), a debt owed to the person or firm by the audited
body, a related body corporate or an entity that the audited body controls
should be disregarded if:
· the body, body corporate or entity is an Australian ADI; and
· the amount is in a basic deposit product (which is defined in
section 761A of the Corporations Act) provided by the body,
body corporate or entity; and
· the amount was deposited in the ordinary course of the
business of the audited body, body corporate or entity, and
on the terms and conditions that normally apply to basic
deposit products provided by the body, body corporate or
entity.
3.27 The exception relating to amounts on call will be replicated in
subsection 324CH(6A). [Schedule 1, Part 1, item 57]
3.28 A consequential drafting amendment will be made to table item 16
of subsection 324CH(1) referring to the new subsection 324CH(6A).
[Schedule 1, Part 1, item 54]
Notification procedures
3.29 The audit reforms in the CLERP 9 Act introduced notification
procedures to ensure that there was a staged procedure in place before an
auditor's appointment was terminated on the grounds of the auditor's
failure to address an auditor independence conflict of interest situation.
The staged procedure involves the following steps:
· An audit firm is required to notify ASIC within 7 days if it
becomes aware that it has a conflict of interest situation that
has not been resolved (subsection 324CF(1A) of the
Corporations Act). Similar requirements apply to an
individual auditor under subsection 324CE(1A) and to an
audit company under subsection 324CG(1A) of the
Corporations Act. No notification is required if the conflict
is resolved before the end of the 7 day period. ASIC is
required to give a copy of the notice to the audit client so
that the company is put on notice that its auditor has an
independence issue that needs to be resolved.
· Where the audited body is a public company, after the firm
has notified ASIC, the firm has a further 21 days (the
remedial period) to resolve the conflict of interest situation
(subsection 327B(2B). Similar requirements apply to an
individual auditor under subsection 327B(2A) and to an
audit company under subsection 327B(2C) of the
Corporations Act.
· An audit firm thus has a maximum period of 28 days after it
becomes aware of a conflict of interest situation to rectify
the conflict (the initial 7 day period plus the 21 day remedial
period)).
· If the conflict of interest situation is not resolved at the end
of the 21 day remedial period, the audit firm's appointment
as auditor of the particular audit client automatically
terminates (subsection 327B(2B). Similar requirements
apply to an individual auditor under subsection 327B(2A)
and an audit company under subsection 327B(2C) of the
Corporations Act.
3.30 A similar notification regime applies under the general
requirements for auditor independence in subsections 324CA(1A),
324CB(1A) and 324CC(1A).
3.31 When the CLERP 9 Act was drafted, the maximum period of
28 days was considered to give an auditor sufficient time to rectify a
conflict of interest situation. However, concerns have been raised that
complex circumstances do arise that would not be able to be resolved
with 28 days. ASIC was not given the power to extend this period.
3.32 An example where 28 days may not be sufficient to resolve a
conflict of interest situation, is where a professional member of the audit
team acquires a beneficial interest in shares of the audited body through a
deceased estate. This interest in the shares may not be able to be
disposed of until the probate in relation to the deceased estate has been
finalised, which may take months or even years.
63
3.33 The Government agreed that the Corporations Act should be
amended in order to give ASIC the power to extend the period within
which an auditor is required to resolve a conflict of interest situation
beyond the 21 day period under subsections 327(2A), 327(2B) and
327(2C).
3.34 The operation of Chapter 2M of the Act was modified by regulation
2M.6.05 of the Corporations Regulations (which was included in the
Corporations Amendment Regulations 2006 (No. 4)) by omitting from
subsections 327B(2A), (2B) and (2C) of the Act the words '21 days' and
inserting `21 days, or such longer period as ASIC allows'.
3.35 These amendments to the Corporations Regulations will be
replicated in paragraphs 327B(2A)(b), (2B)(b) and (2C)(b) of the
Corporations Act. [Schedule 1, Part 1, item 63]
3.36 Similar measures will be introduced in relation to an auditor of a
registered scheme in paragraphs 331AAA(2A)(b), (2B)(b) and (2C)(b) of
the Corporations Act. [Schedule 1, Part 1, item 64]
3.37 Consequential amendments will be made to the notes to subsections
324CA(1A), 324CB(1A), 324CC(1A), 324CE(1A), 324CF(1A) and
324CG(1A) respectively. [Schedule 1, Part 1, items 45, 46, 49 and 51]
Improvements arising out of public consultations on the comparative
review of Australia's auditor independence requirements
Multiple former audit firm partner restriction
3.38 The report of the HIH Royal Commission recommended that in
implementing the proposed CLERP 9 Act, the proposals for restrictions
on employment relationships between an auditor and the audit client
should include `a prohibition on any more than one former partner of an
audit firm, at any time, being a director of or taking a senior management
position with the client'.
3.39 The HIH recommendation was implemented as part of the CLERP
9 Act reforms in section 324CK of the Corporations Act.
3.40 In its response to the report of the Taskforce on Reducing
Regulatory Burdens on Business, Rethinking Regulation, the Government
announced that it would review the multiple audit firm partner restriction
by the end of 2006. The Treasury progressed this review through its
targeted consultation on the comparative review.
3.41 All the stakeholders agreed that the restriction in section 324CK
serves a useful purpose, however there was also agreement that some
changes should be made to address the perceived over reach of the
existing requirement. The stakeholders proposed that former partners of
an audit firm and former directors of an authorised audit firm who had
departed from the firm or audit company for five or more years should be
excluded from the restriction.
3.42 A minimum five year separation period was considered appropriate
because the longer former partners have been out of the firm, the less
likely they will be in a position to influence the current professional
members of the audit team or be so familiar with the audit approach and
testing strategy that they are able to circumvent them. A time limit is
also easy to apply and enforce.
3.43 The amendment to paragraph 324CK(c) will limit the application of
the restriction in section 324CK to a former member of an audit firm or
former director of an audit company who becomes an officer of the
audited body within a period of five years after the person ceased (or last
ceased) to be a member of the audit firm or a director of the audit
company (as the case may be). [Schedule 1, Part 1, item 62]
3.44 It is noted that where a former partner or former director, as
described in paragraph 324CK(d), is also an officer of the audited body,
the time when that former partner or former director ceased to be a
partner of the firm or director of the audit company, is irrelevant in
determining whether an offence under this section has been committed by
the person referred to in paragraph 324CK(c).
`Cooling-off' period for former audit team partners
3.45 Section 324CI of the Corporations Act imposes a mandatory period
of two years from the date of departure from the firm before a former
partner of an audit firm, or a former director of an audit company, who
was on the audit team can become an officer of the audit client. Section
324CJ imposes a similar restriction on the lead or review auditor of an
authorised audit company.
3.46 The two year `cooling-off' period is in line with overseas
requirements (although Canada only imposes a one year `cooling-off'
period). The comparative review noted, however, that the Australian
requirement, unlike the position overseas, applies regardless as to how far
back the partner's participation on the audit team took place -- the
Australian requirement would, for example, apply to a former partner
who last worked on the audit team 20 years ago. Canada, the UK and the
US place a limit on the time of participation on an audit team prior to the
partner's date of departure. All the key stakeholders agree that a similar
limit should be included in the Australian restriction.
65
3.47 Most of the stakeholders have suggested that the two year `cooling-
off' period should run from the time the person ceased to be a member of
the audit team, rather than from the time the person resigned from the
audit firm.
3.48 The amendment to paragraph 324CI(d) will ensure that the two year
separation period in relation to a former partner, or former director of an
audit company, commences from the date the auditor's report under
section 308 (annual financial report) or section 309 (half year financial
report) was made in respect of the latest audit in which that partner or
director participated. A similar amendment will be made to s. 324CJ(d)
in relation to a former lead auditor or review auditor of an audit company.
[Schedule 1, Part 1, items 60 and 61]
Introduction of a `covered person' approach to existing financial
relationship restrictions
3.49 The auditor independence regimes in Australia, Canada, the
European Commission, the UK and the US have all adopted specific
employment and financial relationship restrictions between an audit firm
and an audit client.
3.50 The comparative review, however, identified that only Australia
and the UK applied these restrictions on an `all partner' basis rather than
focusing on those persons in the audit firm with a close connection with a
particular audit that is,. the professional members of the audit team. In
the US, a person who has a close connection with an audit is referred to
as a `covered person'.
3.51 All the key stakeholders have agreed that the existing restrictions in
relation to financial investments could be limited to professional
members of the audit team rather than all the partners in the firm because
it is considered that auditor independence can best be protected by
applying the restrictions to persons in the firm who are in a position to
influence the audit and also because of the reduction in the compliance
burden for both the firm and for partners who have no connection with an
audit. An example of a financial investment restriction is the existing
prohibition on a professional member of the audit team owning a share in
the audit client. It is noted in the context of this proposal that ASIC
would always be able to use the general auditor independence obligations
in the Corporations Act to challenge situations where a partner,
unconnected to an audit, held a financial investment in the audit client
and in the circumstances of the particular case, the investment gave rise
to a perception threat to the audit firm's independence.
3.52 It is proposed to achieve a `covered person' approach in relation to
the restrictions on financial investments by:
· expanding the scope of the definition of a `professional
member of the audit team' in section 324AE of the
Corporations Act to include some additional persons who
come within the scope of the definition of `audit team' in the
Code of Ethics for Professional Accountants (APES 110);
· modifying the application of some of the existing prohibited
financial relationships as they apply to a member of the firm
and to a professional member of the audit team conducting
the audit of the audited body; and
· making a number of consequential amendments and also
addressing some anomalies that have been identified in
relation to the existing financial relationship restrictions.
3.53 The definition of a `professional member of the audit team' in
section 324AE will be amended to include:
· any person who recommends or decides what the lead
auditor is to be paid in connection with the performance of
the audit; and
· any person who provides, or takes part in providing, quality
control for the audit. [Schedule 1, Part 1, item 44]
3.54 The table in subsection 324CF(5) which applies to an audit firm
will be amended to achieve the following outcomes:
· a member of an audit firm who is not a professional member
of the audit team conducting the audit will no longer be
subject to the specific financial investment restrictions in
table items 10 to 14 of subsection 324CH(1);
· a professional member of the audit team will be made
subject to the non-loan and loan debt restrictions under
subsection 324CH(1). This addresses an anomaly in the
CLERP 9 reforms which did not apply non-loan debt
restrictions to a professional member of the audit team; and
· for consistency purposes, the non-loan and loan restrictions
applying to an immediate family member of a professional
member of the audit team conducting the audit of the
audited body will be brought into line with the
corresponding requirements applying to a professional
member of the audit team. [Schedule 1, Part 1, item 50]
67
3.55 Corresponding amendments will be made to the table in subsection
324CE(5) which applies to an individual auditor and to the table in
subsection 324CG(9) which applies to an audit company to achieve
similar outcomes applying to an audit firm. [Schedule 1, Part 1, items 48 and
52]
3.56 Table item 15 of subsection 324CH(1) will be amended in order to
remove the existing carve out for debts on non-commercial terms up to
$5000. This exemption can no longer be justified in light of the
introduction of the ordinary course of business exemption which was
introduced by regulation in mid-2006. The Government has taken the
view that there should be zero tolerance of any transaction on
non-commercial terms between an auditor and an audit client because of
the perception threat to auditor independence. [Schedule 1, Part 1, item 53]
3.57 Table item 18 of subsection 324CH(1) which applies to loan debt
restrictions will be deleted. As table item 15 of subsection 324CH(1) will
no longer contain the existing $5000 carve out, it is simpler to deal with
both non-loan and loan debt restrictions under table item 15. [Schedule 1,
Part 1, item 55]
3.58 The new subsection 324CH(5B) will replicate the ordinary
commercial loan exemption in subsection 324CH(7) (which applies to
table item 18) for purposes of the revised table item 15.
Subsection 324CH(7) will also be repealed. These are consequential
amendments as a result of the deletion of table item 18 of
subsection 324CH(1). [Schedule 1, Part 1, items 56 and 58]
3.59 Subsection 324CH(8A) will clarify that a reference to a debt or
amount owing in the section includes a reference to a debt or amount that
will (or may) be owed under an existing agreement between the entities.
The purpose of the amendment is to ensure that a debt or amount owing
under an existing agreement between two entities, such as a loan, that has
not yet crystallised as a `debt' should be covered by section 324CH. A
similar amendment has been made in relation to a liability under a
guarantee of a loan. [Schedule 1, Part 1, item 59]
Miscellaneous amendments
Drafting amendment
3.60 A drafting error in table item 2 of subsection 324CE(5) will be
addressed by deleting the word `firm' and replacing it by a reference to
`individual auditor'. [Schedule 1, Part 1, item 47]
ASIC relief powers
3.61 ASIC at present has limited powers to exempt members of audit
firms who are registered company auditors from the requirements of
Division 3 of Part 2M.4 (auditor independence) of the Corporations Act.
3.62 The auditor independence requirements of the CLERP 9 Act
inserted new obligations applying to members of firms who are not
registered company auditors, to retiring members of audit firms, to
retiring directors of an audit company and to retiring professional
employees of an audit company.
3.63 ASIC's existing relief powers will be extended to cover members of
an audit firm who are not registered company auditors, former members
of an audit firm, former directors of an audit company and former
professional employees of an audit company. Section 342AA provides
for ASIC to grant specific relief from the auditor independence
requirements to these categories of persons. Section 324AB will enable
ASIC to make class orders in relation to these persons. The criteria that
ASIC must apply in making an order under either section 342AA or
section 342AB are set out in section 342AC. These criteria are identical
to the existing criteria in section 342 which apply to ASIC's existing
relief powers. [Schedule 1, Part 1, item 65]
3.64 Subsection 342AA(5) is included to assist readers of the legislation,
as the instrument is not a legislative instrument within the meaning of
section 5 of the Legislative Instruments Act 2003. [Schedule 1, Part 1, item
65]
Audit of compliance plan
3.65 Subsection 601HG(1) requires a registered managed investment
scheme's compliance plan to be audited by a registered company auditor.
A registered company auditor must be a natural person and therefore an
authorised audit company is ineligible to be appointed as the auditor of a
compliance plan. This is inconsistent with subsection 601HG(4A) which
assumes that the compliance plan can be audited by an authorised audit
company.
3.66 This anomaly will be addressed by amending section 601HG to
make it clear that a registered company auditor, an audit firm or an
authorised audit company is eligible to be appointed as the auditor of a
compliance plan. [Schedule 1, Part 1, item 67]
Deletion of cross reference to a repealed provision
3.67 Section 990A provides that nothing in sections 990B to 990H
(dealing with the appointment of an auditor by a financial services
licensee) applies where the licensee is a body corporate to which
69
section 327 applies. Section 327 was repealed by the CLERP 9 Act. A
revised section 990A will provide that nothing in sections 990B to 990H
applies to a financial services licensee that is a public company.
[Schedule 1, Part 1, item 127]
Appointment of auditor by licensee
3.68 Section 990B will be amended to clarify that an individual person
and an authorised audit company can be appointed by a financial services
licensee to audit its financial statements. [Schedule 1, Part 1, item 128]
Auditor's right of access to records, information etc
3.69 Subsections 990I(2) and (3) provide that an auditor of a financial
services licensee may require assistance from the licensee and where the
licensee is a body corporate, from any senior manager of the licensee.
The reference to `senior manager' is in contrast to the pre-CLERP 9 Act
provisions which referred to an `executive officer'. A director and
secretary of a body corporate came within the scope of the definition of
an `executive officer' in the pre-CLERP 9 legislation. The definition of
`senior manager' expressly excludes a director or secretary of the body
corporate.
3.70 The measures in subsections 990I(2) and (3) will enable ASIC to
seek assistance from a director, secretary or senior manager of the body
corporate where the licensee is a body corporate. [Schedule 1, Part 1,
items 129 and 130]
Application and transitional provisions
Anomalies arising from CLERP 9
3.71 The amendments relating to the time when an auditor's
independence declaration must be given to the directors and the reporting
obligation in relation to inadvertent breaches in the auditor independence
declaration will apply to a report for a financial year that ends on or after
the day on which those amendments commence (the day on which the
Act receives the Royal Assent). [Schedule 1, Part 6, item 233]
Improvements arising out of public consultations on the comparative
review of Australia's auditor independence requirements
3.72 The amendments which will give effect to a `covered person'
approach in relation to the auditor independence restrictions on financial
relationships will apply to an audit of the financial report for a financial
year or an audit or review of the financial report for a half-year in a
financial year, if the financial year begins on or after the day on which
the relevant amendments commence (the day on which the Act receives
the Royal Assent). [Schedule 1, Part 6, item 234]
3.73 The amendments which will modify the way in which the two-year
`cooling-off' period is calculated under sections 324CI and 324CJ, and
the amendment to the multiple former audit partner restriction, will apply
to any person who ceases to be a member of an audit firm, a director of
an audit company or a professional employee of an audit company
whether the person so ceases before or after the day on which those
amendments commence (the day on which the Act receives the Royal
Assent). [Schedule 1, Part 6, item 235]
3.74 The amendments in sections 327B(2A), (2B) and (2C) and sections
331AAA(2A), (2B) and (2C) which will empower ASIC to extend the
period within which an auditor is required to resolve a conflict of interest
situation will apply in relation to information given to ASIC under those
provisions on or after the day the amendments commence (the day on
which the Act receives the Royal Assent). [Schedule 1, Part 6, item 236]
71
Chapter 4
Corporate Governance
Outline of chapter
4.1 The Bill contains amendments to the related party transaction
provisions in the Corporations Act and to the administration of approvals
for certain company names and constitutions.
Context of amendments
4.2 The changes outlined in this chapter contribute to the broader themes
of the Bill to facilitate a simpler corporate regulatory system that delivers
continued consumer protection, reduced compliance costs and greater
ability for companies to attract capital.
4.3 Within the corporate governance context, the related party
transaction provisions are an important check on the powers of the board
to manage the affairs of a company. However, obtaining member
approval for every related party transaction may unnecessarily put a
company to a disproportionate compliance expense where the value of
the transaction is small. The amendments in the Bill are aimed at
addressing the potential for disproportionate compliance costs to cause
corporate resources to be allocated inefficiently.
4.4 This amendment has its origins in the Corporate and Financial
Services Review Proposals Paper of November 2006.
4.5 In addition, currently ministerial approval is required for the use of
certain company names and changes to the constitutions of certain
companies. Names and constitutions are basic features of companies, and
the Bill provides for more streamlined administrative processes where
approvals or notifications are required.
Summary of new law
4.6 The Bill will make amendments to the Corporations Act to:
73
· allow public companies to give small financial benefits to
related parties without seeking member approval in certain
circumstances;
· allow delegation to ASIC of the function of consenting to
grant a particular company name notwithstanding it is
identical to another name or otherwise unacceptable; and
· remove the requirement for companies exempted from using
`limited' in their name to seek ministerial approval for
changes to their constitutions, and replace it with a
requirement to notify ASIC of any changes.
Comparison of key features of new law and current law
New law Current law
Related party approval threshold
Member approval will not be There is no general minimum
required for giving a financial level for payments to related
benefit to a related party which is parties at or below which member
at or below a minimum approval is not required.
prescribed level, aggregated over
a financial year.
Approval of identical and otherwise unacceptable company
names
The ability to consent to the use The ability to consent to the use of
of a name that is determined a name that is determined
identical or unacceptable may be identical or unacceptable requires
delegated to an officer of the ministerial approval. Currently,
Department, a member of ASIC this may be delegated to an officer
or a staff member of ASIC. of the Department.
Pre-existing licences allowing companies to omit the word
`limited' from their names
Australian companies that hold a Australian companies that hold a
pre-existing licence to exempt the pre-existing licence to exempt the
term `limited' from their names term `limited' from their names
will be required to notify ASIC of must seek the approval of the
any changes to their constitution. Minister responsible for
corporations law to make certain
changes to their constitutions.
Detailed explanation of new law
Related party approval threshold
4.1 The related party transactions provisions in Part 2E.1 of the
Corporations Act require that public companies obtain member approval
before they can give any financial benefit to a related party (such as a
director, a director's spouse, a controlling entity, or entities controlled by
mutual entities), unless the benefit fits within certain exceptions.
4.2 The policy rationale for the related party transactions provisions is to
protect shareholders' investments from being eroded by the board
approving transactions with related parties that are non-commercial or
non-arms'-length in nature. These transactions may not be in the best
interests of the company and may result in the company missing out on
commercial advantages or profits that would otherwise be gained where
the transactions are with non-related parties.
4.3 The cost for business of obtaining member approval for related party
transactions not otherwise allowed by the law can be substantial. If the
related party benefit is small, then the compliance cost may well
outweigh any governance benefits from requiring member approval.
4.4 The Bill will insert a provision into the Corporations Act to provide
that member approval is not required for giving a financial benefit to a
related party which is at or below a prescribed amount aggregated over a
financial year. [Schedule 1, Part 2, item 190]
4.5 It is expected that the amount initially prescribed will be $5,000.
4.6 The new provision will repeal and replace the current section 213
and absorb its effect. The current provision allows payments at or below
$2,000 to related parties who are directors or directors' spouses to be
made without member approval. Under the new provision, member
approval will not be required for giving a financial benefit to these related
parties (ie directors or directors' spouses), which is at or below the
prescribed level aggregated over a financial year.
4.7 By referring to `amounts or values', the provision contemplates both
monetary and non-monetary financial benefits. It is intended that
non-monetary financial benefits will be valued by reference to ordinary
valuation concepts.
4.8 In determining the total amounts of values to which the provision
applies, the provision uses a similar aggregation method to the current
section 213. That is, the amount is worked out by adding all the
amounts or values of financial benefits given to the related party in
75
the financial year from the public company or entity and the companies
and entities it controls when the financial benefit is given, and
disregarding any amounts repaid or falling under another related party
transaction exception.
4.9 The new section 213 will not interfere with the requirements on
directors or officers to exercise their powers and discharge their duties in
accordance with other provisions of the Corporations Act, including the
duties in Part 2D.1 and rules under the general law.
Approval of identical and otherwise unacceptable company names
4.10 Currently, section 147 of the Corporations Act provides that a name
is available for use by a company unless the name is identical to another
or unacceptable with reference to the rules in the
Corporations Regulations. Section 601DC provides for a similar
legislative scheme that applies to registrable Australian bodies and
foreign companies. Regulation 2B.6.01 of the Corporations Regulations
provides rules for determining whether a name is identical or
unacceptable. As there may be particular reasons for a company wishing
to use an identical or otherwise unacceptable name, the Corporations Act
allows companies use of these names if the application receives
ministerial consent.
4.11 The Minister may delegate the function of considering such an
application to an officer of the Department under subsection 1345A(1) of
the Corporations Act.
4.12 In the first instance, companies lodge these applications with ASIC,
which then refers the applications to the Treasury. Given ASIC's role as
the corporate regulator and manager of the company register, a more
efficient administrative arrangement would be for ASIC to determine
these name applications.
4.13 The Bill inserts a new subsection 1345A(1A) for the Minister, by
signed instrument, to delegate the function of determining whether a
particular company name should be granted, notwithstanding the name is
identical or otherwise unacceptable, to a member of ASIC (ie a
commissioner) or a staff member of ASIC. [Schedule 1, Part 2, item 197]
Pre-existing licences allowing companies to omit the word `limited' from
their names
4.14 A number of Australian companies hold a licence to omit the word
`limited' from their names. Such licences were generally issued by State
and Territory Attorneys-General during the period when corporate law
was a responsibility of the State and Territory Governments.
4.15 These licences generally require approval of the Minister
responsible for corporate law, or another Minister of the Commonwealth,
a State or a Territory, or an officer, instrumentality or agency of the
Commonwealth, a State or a Territory for any changes to the
constitutions of these companies.
4.16 A more efficient administrative arrangement would be for these
companies to notify ASIC of changes to their constitutions, given ASIC's
role as the corporate regulator and manager of the company register.
4.17 The Bill inserts new subsection 151(2AA) which replaces the
requirement to seek approval for any changes to the constitutions of
companies with pre-existing licences with a requirement to notify ASIC
of any changes to their constitutions. [Schedule 1, Part 2, item 188]
4.18 ASIC will have the power to revoke a company's licence if the
company fails to notify ASIC of a change to its constitution, in addition
to its current powers to revoke a licence in subsection 151(3). [Schedule 1,
Part 2, item 189]
Application and transitional provisions
Related party approval threshold
4.19 The amendment to remove the requirement for member approval of
a related party transaction at or below a prescribed level aggregated over
a financial year applies to a company's financial year that begins on or
after the 1 July 2007, which is the day the amendment commences.
[Schedule 1, Part 6, item 240]
Company names and pre-existing licences
4.20 The amendments to delegate approval of an identical or otherwise
unacceptable name and the amendments to require a company with
pre-existing licence to notify ASIC of changes to its constitution
commence on 1 July 2007.
77
Chapter 5
Fundraising
Outline of chapter
5.1 This Bill contains six measures amending a number of provisions in
the Corporations Act relating to fundraisings by corporate entities. The
amendments are generally intended to facilitate fundraising by providing
relief from unnecessary regulatory requirements such as the need, in
some circumstances, to provide a disclosure document, removing
unnecessary inconsistencies between different parts of the Corporations
Act, or relaxing certain unnecessary restrictions (for example, time
periods and amounts that can be raised under particular provisions).
Context of amendments
General background
5.2 The measures in this chapter relate to the fundraising provisions in
the Corporations Act (mainly Chapter 6D, but also some parts of
Part 7.9). Chapter 6D was inserted in the Corporations Act by the
Corporate Law Economic Reform Program Act 1999. It builds on the
previous general prospectus disclosure rules, but includes a number of
additional provisions relating to the use of new instruments such as short
form prospectuses and offer information statements, clarification of the
persons liable for contraventions of the provisions and a new definition of
sophisticated investors.
5.3 The introduction of the Government's new regime for the regulation
of financial services in Chapter 7 of the Corporations Act occurred in
2001 through the Financial Services Reform Act 2001. One of the
elements of this Act was that interests in managed investment schemes
were taken out of the Chapter 6D fundraising regime and placed under a
new disclosure regime in Part 7.9 of the Corporations Act. The Part 7.9
regime targets certain investment products marketed mainly to small
retail investors. It was considered that such products had somewhat
different disclosure requirements which justified treating them differently
from the securities subject to Chapter 6D.
79
5.4 The Chapter 6D and Part 7.9 provisions have on the whole worked
well and have supported a strong market in fundraisings since they were
introduced. According to a recent survey conducted by KPMG, total
equity fundraisings in Australia in 2005/06 amounted to A$42.5 billion,
which represents an increase of 42 per cent since 2000/01.
5.5 Over time, however, it has become apparent that there are some
shortcomings in the practical application of the provisions. Some of
these affect the smooth operation of market processes, while others are
more substantial in their effects, resulting in the skewing of market
outcomes. The measures contained in this Chapter are intended to
address a number of these shortcomings.
Rights issue disclosure for quoted securities and other financial
products
5.6 Rights issues are a method of fundraising in which existing members
in a company or managed investment scheme are given the opportunity to
purchase new shares or units in proportion to their holdings on specified
terms. The current legislation requires that rights issues must be
accompanied by a prospectus or Product Disclosure Statement. As a
result, the use of rights issues as a fundraising instrument has to some
extent been superseded by other forms of fundraising with less onerous
disclosure requirements. An example is a placement of shares to
institutional investors, which can be accomplished without a prospectus
or Product Disclosure Statement. One of the consequences of such
placements is that existing members may be disadvantaged. Members
with small holdings, for example, are generally not able to participate in
institutional placements and therefore cannot acquire shares or units at
the discount typically offered in such placements.
5.7 It is proposed to abolish the requirement to issue a prospectus or
Product Disclosure Statement for rights issues of quoted securities or
interests in managed investment schemes. The scope of the exemption is
limited to quoted securities and interests in managed investment schemes
on the grounds that the combination of an original prospectus or Product
Disclosure Statement on listing and the continuous disclosure rules
ensure the provision of an appropriate flow of information to members
which will facilitate informed decision-making in relation to a rights
issue.
Small scale offerings
5.8 This measure will facilitate small-scale fundraisings by granting
some further measure of relief from the full disclosure requirements of
the Corporations Act. The objective is to promote the creation and
expansion of new businesses through easier access to capital.
5.9 The disclosure requirements in the Corporations Act do not apply to
professional and sophisticated investors as defined in the legislation.
New businesses, especially in `sunrise' industries such as information
technology or biotechnology, often rely on such investors to provide seed
or start-up capital. The current definitions of professional and
sophisticated investors in Chapter 6D and Chapter 7 of the Corporations
Act are not entirely consistent.
5.10 The Corporations Amendment Regulations 2005 (No. 5) introduced
changes which significantly expanded the scope of the wholesale investor
category in Chapter 7 of the Corporations Act to whom the disclosure
framework specified in that chapter does not apply. These changes were
not applied to the sophisticated investor and professional investor
exemptions in Chapter 6D. There does not appear to be any justification
for this difference in the disclosure exemptions, and it is therefore
proposed to align the definitions between the two chapters.
5.11 The use of Offer Information Statements, as defined in Chapter 6D
of the Corporations Act, permits reduced disclosure requirements
compared to a full prospectus. The market to date has not made wide use
of this instrument, and it is proposed to provide further incentives to
promote the wider use of offer information statements.
Secondary sale issues
5.12 This measure intends to facilitate the operation of the provisions in
the Corporations Act relating to secondary sales of existing securities (as
opposed to sales of shares to be newly issued). It includes a number of
separate sub-measures.
5.13 Secondary sales of securities can be effected without a disclosure
document under section 708A of the Corporations Act provided that a
number of requirements set out in this section are satisfied.
5.14 Section 708A does not extend to secondary sales of securities that
were initially transferred without disclosure by a person controlling the
entity that issued the securities (a controller). Controllers therefore
typically have to obtain relief from ASIC on a case-by-case basis to allow
on-sale of those securities without disclosure. Submissions have been
made that there is no justification for not allowing controllers to benefit
from the general relief from the disclosure requirements provided in
section 708A.
5.15 A further requirement for the secondary sales exemption in
subsection 708A(5) is that the securities must have been listed for at least
12 months prior to sale. It has been proposed that this requirement is
excessively restrictive and that the required listing period could be
81
reduced while still satisfying the underlying policy rationale for the
provision.
5.16 Certain types of quoted securities are classified as `continuously
quoted securities' in the Corporations Act if they satisfy a number of
conditions. An example of such conditions is that the body issuing the
securities must be listed on a financial market. An offer of continuously
quoted securities enjoys substantial relief from the disclosure
requirements in Chapter 6D and Part 7.9 of the Corporations Act where
the securities have been quoted for at least 12 months. The reason is that
such securities have been subject to the continuous disclosure rules for a
significant period of time, during which they have had to disclose all
price-sensitive information to the market on an ongoing basis.
5.17 Submissions have been made that the 12 month period is
unnecessarily long and could be reduced without undermining the
protection offered to investors through the provision. An appropriate
period of 3 months has been suggested.
5.18 Listed entities are subject to the continuous disclosure requirements
in the Corporations Act, whereby they must release all price-sensitive
information to the market on an ongoing basis. Under the Australian
Securities Exchange Listing Rules, there are certain situations where
listed entities are allowed to withhold such information from the market.
An example would be an important transaction where the negotiations
had not been concluded yet and disclosure of information relating to the
transaction might cause it to fail.
5.19 The Corporations Act requires that before secondary sales of
securities and other financial products effected without disclosure can
proceed, such information which has been withheld in accordance with
the Listing Rules must be released to the market. The rationale for this
requirement is to ensure that investors accepting such offers for sale are
fully informed as to the state of the entity and its business. The
information is released by providing a notice to the Australian Securities
Exchange complying with certain conditions relating to content and
timing of its release. This notice is generally known as a `cleansing
notice'.
5.20 Submissions from stakeholders have pointed out that some
technical problems arise relating to the timing of the release of the
cleansing notice to the market. The current wording of the relevant
provision in the Corporations Act states that the notice must be released
on the day before trading of these securities commences. This forces
investors purchasing securities or other financial products offered to them
in a secondary sale effected without disclosure to hold them for one day
after they are transferred before they can be traded, even though existing
securities of the same entity can be traded at the same time. This in effect
requires holders of such securities to identify individually which
securities can and which cannot be traded, which is impossible given the
fungible nature of securities. Changes to the timing provisions relating to
the release of the cleansing notice are necessary to improve the working
of this part of the Corporations Act.
Employee unlisted share schemes
5.21 Employee share schemes are facilities that allow employees of a
company to participate in the ownership of their employer through the
acquisition of shares in the company. Based on the benefits employee
share schemes may bring to the wider economy the Australian
Government has a general policy of supporting the use of employee share
schemes.
5.22 The following issues may arise under the Corporations Act in
relation to the operation of an employee share scheme:
· Disclosure: Broadly speaking, unless a relevant exception
applies, companies are required to issue a prospectus for
their employee share scheme unless it involves no more than
20 employees in any 12 month period and raises no more
than $2 million.
· Licensing: Where the employee share scheme offer
document contains financial product advice about the
scheme, the licensing provisions in the Corporations Act
may require the issuer to hold an Australian Financial
Services Licence for giving that financial product advice.
Actual operation of the scheme may also require an
Australian Financial Services Licence for dealing in
securities or for providing a custodial or depository service.
· Hawking: The offer of securities or other financial products
under an employee share scheme may breach the hawking
provisions in the Corporations Act.
5.23 Class Order CO 03/184 issued by ASIC provides some relief from
these requirements for listed companies, subject to certain conditions.
The rationale for this relief is that listed companies are subject to the
continuous disclosure requirements, and therefore provide an adequate
flow of information to the market (including their employees) on an
ongoing basis.
5.24 Unlisted companies currently do not enjoy any relief from the
disclosure, licensing and hawking provisions listed above.
83
Advertising rules for offers of securities requiring a disclosure document
and for offers or issues of other financial products
5.25 There are currently differences in the requirements relating to
advertising and publicity for offers of securities requiring a prospectus,
compared to those for offers or issues of other financial products. The
requirements applying to other financial products are less restrictive and
allow product providers more freedom in designing their advertisements.
There does not appear to be any justification for the differences in the
two advertising regimes.
Stapled securities disclosure
5.26 A stapled security consists of a unit in a managed investment
scheme and a security such as a share. These two instruments cannot be
disposed of separately but are `stapled' together and must be traded as a
single unit. The two components of the stapled security are frequently an
interest in the trust holding the assets of the entity (an interest in a
managed investment scheme) and a share in the company carrying out the
asset management and/or development functions (a security). The offer
of such a stapled security must be made under a Product Disclosure
Statement (for the interest in a managed investment scheme component)
and a prospectus (for the security component).
5.27 Due to differences in the disclosure regimes for prospectuses and
Product Disclosure Statements, issues may arise in the preparation of a
combined prospectus/Product Disclosure Statement. One of these issues
is that there are no provisions allowing a Replacement Product
Disclosure Statement to be prepared, whereas Chapter 6D contains
provisions permitting lodgement of a replacement prospectus. As a
result, a replacement combined prospectus/Product Disclosure Statement
cannot be prepared if it is necessary to correct an error or omission in the
original documents. To lodge a replacement document, ASIC is required
to issue a stop order over the existing document, followed by the
lodgment of a new Product Disclosure Statement. This triggers a new
exposure period and lodgment fee.
5.28 There does not appear to be any justification for the differences
between the prospectus and Product Disclosure Statement regimes in
relation to replacement documents for stapled securities offers.
Substantial relief could be provided to the market by aligning the two
regimes in this regard.
Summary of new law
Rights issue disclosure for quoted securities and other financial
products
5.29 The first measure amends the disclosure requirements relating to
rights issues by listed entities. It provides that such rights issues may be
conducted without the provision of a prospectus or Product Disclosure
Statement. The relief is limited to rights issues of securities and interests
in managed investment schemes.
5.30 The technical amendments required to achieve the desired
exemption are relatively complex. This is mainly because rights issues
can be conceived of as consisting of two elements, a `right' to apply for
securities or interests in managed investment schemes and an offer of
securities or interests in managed investment schemes. Relief from the
disclosure requirements must be achieved separately for these two
elements.
5.31 Rights issues often occur in connection with significant transactions
which have not been fully disclosed to the market, for example because
negotiations for the transaction have not been completed. Provision is
therefore made requiring that such information be disclosed before a
rights issue can proceed. The appropriate mechanism for achieving this
is a requirement for providing a cleansing notice modelled on the
requirements of section 708A of the Corporations Act before the rights
issue offers are made.
5.32 Furthermore, in certain circumstances rights issues may potentially
lead to a shareholder or underwriter acquiring control or significantly
increasing voting power. It is vital to ensure that members are provided
with full information on the consequences of any potential effects on
control of the entity. The requirement for a cleansing notice to be
provided is therefore augmented with appropriate additional requirements
to ensure that disclosure of this information occurs.
Small scale offerings
5.33 The second measure applies the relevant provisions included in
Corporations Amendment Regulations 2005 (No. 5) to the definitions of
sophisticated and professional investors in Chapter 6D, which will
expand the number of investors able to take advantage of the relief
provided to these categories of investors.
5.34 In order to encourage the wider use of the Offer Information
Statement the maximum amount of money that may be raised using an
Offer Information Statement (when combined with other funds
85
previously raised) is increased to $10 million from $5 million. However,
it is noted that due to the reduced disclosure requirements Offer
Information Statements are not appropriate for use in listing entities on a
financial market.
Secondary sale issues
5.35 The third measure provides that controllers may arrange sales of
securities they hold without disclosure subject to the existing
section 708A conditions, but subject to the requirement that the controller
and the company provide a cleansing notice as set out in
paragraph 708A(5)(e) in order to provide up to date price sensitive
information to the market.
5.36 An entity wishing to rely on the disclosure exemption in
section 708A should have some track record of complying with its
continuous disclosure obligations. The required period for quotation of
the securities sold is therefore reduced to three months to provide such a
track record while providing some relief from the current requirement of
12 months.
5.37 A corresponding reduction is made to section 713 as a similar logic
applies in that context. This means that continuously quoted securities as
defined in the Corporations Act can benefit from reduced disclosure
requirements provided they have been quoted for a period of at least 3
months.
5.38 Similar requirements apply to financial products covered under Part
7.9 of the Corporations Act. Corresponding amendments are made to
that part of the Act reducing the quotation period to three months before
secondary sales of such financial products without disclosure can
proceed. Further amendments ensure that financial products falling under
the definition of continuously quoted securities can benefit from reduced
disclosure requirements provided they have been quoted for a period of
three months.
5.39 The problem arising in relation to the timing of the provision of the
cleansing notice is addressed by changing the wording of the relevant
provisions so that the release of the notice may occur at any time before
trading of the securities commences. This removes the need to wait for
one day before starting trading. Corresponding requirements apply to
other financial products in Part 7.9 of the Corporations Act and similar
relief is provided for such products as well.
Employee unlisted share schemes
5.40 The fourth measure provides relief from certain of the licensing and
hawking restrictions of the Corporations Act for employee share schemes
for unlisted companies. This relief is made subject to the condition that
such employee share schemes must be accompanied by a disclosure
document such as an Offer Information Statement or a prospectus. Listed
entities may also take advantage of this relief if they wish, subject to the
same condition.
5.41 It is considered that Offer Information Statements as defined in
Chapter 6D of the Corporations Act provide an appropriate level of
disclosure for employees of companies and their financial advisers
regarding the information required to make a decision as to whether to
participate in an employee share scheme.
5.42 Offer Information Statements impose a lower level of disclosure
than a full prospectus. This is due to the defined scope of the contents of
an Offer Information Statement as set out in section 715, which reduces
the requirement for legal advice and assistance in ensuring that the
contents of the document are consistent with the requirements of the law.
There is a cap on the total amount of funds that can be raised under an
Offer Information Statement, which is currently $5 million and will be
raised to $10 million under an associated measure. The Corporations Act
provides a methodology for calculating the amount of funds raised for the
purposes of this requirement. To facilitate the use of Offer Information
Statements for employee share schemes, this measure removes amounts
raised under an employee share scheme from this calculation.
5.43 The relief provided is made subject to a number of requirements
which are also applied in ASIC Class Order CO 03/184 relating to
employee share schemes for listed companies. Employee share scheme
offers satisfying these criteria are defined as eligible offers.
5.44 At this stage only employee share schemes involving the issue of
securities may use an Offer Information Statement as their disclosure
document. Employee share schemes involving a sale of securities (for
example through a wholly-owned trustee) will still have to provide a
prospectus.
5.45 The following relief from the licensing requirements for eligible
offers as defined above is provided:
· Relief for an issuer from the requirement to hold an
Australian Financial Services Licence for the provision of
general advice in connection with the offers.
87
· Relief for an issuer and its controlled entities from the
requirement to hold an Australian Financial Services
Licence for dealing in a financial product where the
operation of an employee share scheme requires the
purchase or disposal of shares which occurs:
through a person who holds an Australian Financial
Services Licence authorising the holder to deal in
financial products; or
in an overseas jurisdiction through a person who is
licensed or otherwise authorised to deal in financial
products in that jurisdiction.
· Relief for an issuer and its controlled entities from the
licensing requirement for the provision of a custodial and
depository service, including licensing relief for dealing in a
financial product in the course of providing such a custodial
and depository service.
5.46 Amendments are made providing relief from the hawking
provisions in the Corporations Act for eligible employee share schemes,
to allow companies to contact their employees and make participation
offers to them.
5.47 Contribution plans are exempted from the managed investment and
licensing provisions in the Corporations Act. A contribution plan is an
arrangement under which funds are deducted from employees' salaries,
including through salary sacrifice arrangements, and used to pay for
shares under an employee share scheme. Without the relief provided
such plans may need to be registered under the managed investments
provisions of the Corporations Act in Chapter 5C and may also attract the
licensing requirements in Chapter 7 of the same act.
Advertising rules for offers of securities requiring a disclosure document
and for offers of other financial products
5.48 The fifth measure aligns the advertising requirements for offers of
quoted securities with the advertising requirements that apply to other
financial products. Amendments are also made aligning the advertising
provisions applying to offers of unquoted securities after the lodgment of
a disclosure document with those applying to other financial products.
5.49 The provisions regarding advertising of unquoted securities prior to
the lodgment of a disclosure document remain unchanged. The strict pre-
lodgment advertising restrictions for unquoted securities were introduced
to ensure that the requirement to have balanced and complete disclosure
in the prospectus was not negated by the content of advertisements not
subject to such restrictions or requirements. These restrictions have
accordingly been considered a fundamental part of the Chapter 6D
disclosure regime.
5.50 ASIC's stop order powers are extended to allow it to intervene in
case of misleading and deceptive advertising of securities, as it is
currently able to do in the case of other financial products under
Chapter 7 of the Corporations Act.
Stapled securities disclosure
5.51 The sixth measure rectifies the issue regarding lodgment of
replacement combined prospectus/Product Disclosure Statements by
extending the application of the provisions relating to replacement
prospectuses to allow for Replacement Product Disclosure Statements for
stapled securities.
Comparison of key features of new law and current law
Measure New law Current law
Rights issue disclosure Rights issues for quoted Rights issues for quoted
securities and other securities and other
financial products are financial products are
not required to provide a required to provide a
prospectus or Product prospectus or Product
Disclosure Statement. Disclosure Statement.
Instead they are required
to provide a cleansing
notice to the market.
The notice must include
information relating to
the potential effect of
the rights issue on the
control of the entity.
89
Measure New law Current law
Small scale offerings The definitions of The definitions of
professional and professional and
sophisticated investors sophisticated investors in
in Chapter 6D are Chapter 7 are broader in
aligned with those in scope than those in
Chapter 7. Chapter 6D.
The total amount of The total amount of
money that may be money that may be raised
raised under an Offer under an Offer
Information Statement is Information Statement is
$10 million. $5 million.
Secondary sale issues Controllers of listed Controllers of listed
entities are able to take entities must provide a
advantage of the disclosure document for
disclosure relief secondary sales of
available for secondary securities or other
sales of securities and financial products, or
other financial products, obtain specific relief from
subject to the ASIC.
requirement that a Secondary sales without
cleansing notice is disclosure are possible for
provided by both the securities and other
controller and the entity financial products quoted
that issued the securities for a minimum of 12
or other financial months. The reduced
products. disclosure requirements
Secondary sales without applying to continuously
disclosure are possible quoted securities and
for securities and other other financial products
financial products are available after they
quoted for a minimum have been quoted for a
of 3 months. The minimum of 12 months.
reduced disclosure The cleansing notice
requirements applying to required for secondary
continuously quoted sales of securities and
securities and other other financial products
financial products are must be provided on the
available after they have day before the sales offers
been quoted for a are made (but not later
minimum of 3 months. than 5 days after the
securities or other
financial products were
issued).
Measure New law Current law
Secondary sale issues The cleansing notice
(continued) required for secondary
sales of securities and
other financial products
without disclosure may
be provided at any time
before the sale offers are
made (but not later than
5 days after the
securities or other
financial products were
issued).
Employee share Employee share Employee share schemes
schemes schemes and and contribution plans for
contribution plans enjoy unlisted companies do not
relief from a specified enjoy any relief from the
range of licensing and licensing and hawking
hawking requirements in requirements in the
the Corporations Act. Corporations Act.
Amounts raised under Amounts raised under an
an employee share employee share scheme
scheme are not counted are counted for the
for the calculation of the calculation of the total
total amount raised amount raised under an
under an Offer Offer Information
Information Statement. Statement.
Advertising rules The prospectus The restrictions on
advertising requirements advertising of offers of
are aligned with those securities subject to a
for Product Disclosure prospectus are more
Statements, except for prescriptive than those
advertising prior to applying to offers of other
lodgement of a financial products made
prospectus. under a Product
ASIC stop-order powers Disclosure Statement.
are extended to cover ASIC's stop-order powers
advertising of securities. do not extend to
advertising for offers of
securities.
Stapled securities Replacement Product No provision is made for a
disclosure Disclosure Statements Replacement Product
may be lodged to correct Disclosure Statement.
an error or omission in
the original statement in
the case of stapled
securities.
91
Detailed explanation of new law
Rights issue disclosure for quoted securities and other financial
products
5.1 A definition of a rights issue to which the intended relief will apply
is provided in section 9A. The definition states that it encompasses offers
of securities or of interests in a managed investment scheme of the same
class to existing holders of these products in proportion to the extent of
their holdings. The definition is worded to include assignees of the
existing holders. This ensures that certain types of rights issues where
the rights can be sold (so-called `renounceable' rights issues) fall within
the scope of the relief offered.
5.2 Offers must be made to all such holders in Australia and New
Zealand. A provision is included allowing entities conducting a rights
offer to exclude persons in specific overseas jurisdictions otherwise
entitled to participate in the issue subject to certain conditions. This is
mainly intended to avoid them having to bear the costs of complying with
the disclosure and other regulatory requirements in jurisdictions where
there are only a limited number of existing holders of securities or
interests in a scheme. In the case of renounceable rights issues, the rights
attributable to such excluded persons must be sold and the net proceeds
given to them. This provision is modelled on existing relief provided in
the Australian Securities Exchange Listing Rules. [Schedule 1, Part 1,
item 10]
5.3 Offers of securities under a rights issue are exempted from the
disclosure requirements in Chapter 6D of the Corporations Act, subject to
a number of conditions required by section 708AA. These include
requirements that the securities must not have been suspended from
trading for more than a specified maximum number of days, and that they
have not been exempted from the disclosure requirements to which they
would normally be subject.
5.4 ASIC may also make a determination disallowing the disclosure
relief, if the entity has breached any of a number of key provisions in the
Corporations Act. These include provisions such as the financial
reporting requirements in Chapter 2M, the requirement for a trust deed
and trustee in relation to an offer of debentures under Chapter 2L, as well
as key requirements in relation to the continuous disclosure provisions.
A provision is included stating that such a determination is not a
legislative instrument. This provision is declaratory of the law and solely
intended to assist readers, as these determinations are not legislative
instruments within the meaning of section 5 of the Legislative
Instruments Act 2003.
5.5 A final condition is that the entity must provide a cleansing notice to
the market within 24 hours before it makes offers of the securities under
the rights issue. Conditions apply to the content and preparation of the
cleansing notice, defining what kind of information must be disclosed
and what action must be taken if a notice is found to be defective.
Finally, a specific requirement is imposed to disclose information relating
to any potential effects the rights issue may have on the control of the
company. The majority of the conditions imposed on the relief provided
under this measure are modelled on the conditions applying to secondary
sale offers of securities that may be conducted without disclosure under
section 708A in Chapter 6D of the Corporations Act. [Schedule 1, Part 1,
item 78]
5.6 The same relief subject to the same conditions is provided for rights
issue offers of interests in a managed investment scheme under a rights
issue by section 1012DAA. ASIC may make a similar determination as
outlined above. A provision is included stating that such a determination
is not a legislative instrument. This provision is declaratory of the law
and is solely intended to assist readers, as these determinations are not
legislative instruments within the meaning of section 5 of the Legislative
Instruments Act 2003. [Schedule 1, Part 1, item 137]
5.7 The `rights' element of a rights issue is defined as the right to acquire
securities or interests in a managed investment scheme. These rights are
included in the definition of securities in Chapter 7 of the Corporations
Act by paragraph 761A(e). This ensures that the investor protection
requirements contained in that Chapter apply to certain activities in
relation to such rights. A financial adviser offering advice in relation to
the rights to a retail client would, by virtue of this provision, be subject to
the full licensing, conduct and disclosure requirements of Chapter 7.
[Schedule 1, Part 1, item 96]
5.8 The rights are exempt from the disclosure requirements in Chapter
6D by virtue of subsection 700(1). This ensures that the exemption from
the prospectus disclosure requirements which extends to the offer of
securities under a rights issue also applies to offers of the rights created
as part of the rights issue. [Schedule 1, Part 1, item 71]
Small scale offerings
5.9 This measure amends the amount specified in subsection 709(4) that
may be raised under an Offer Information Statement from $5 million to
$10 million. [Schedule 1, Part 1, item 84]
5.10 It also aligns the definition of sophisticated investor in section 708
in Chapter 6D with that in Chapter 7 by allowing the inclusion of the net
assets and gross income of a company or trust controlled by the investor
93
in the total net assets and gross income of the investor. As in Chapter 7,
the concept is expanded to include offers of securities to a company or
trust controlled by a person who satisfies the conditions for being
classified as a sophisticated investor. [Schedule 1, Part 1, items 75 and 76]
5.11 The general definition of a professional investor in
subsection 708(11) in Chapter 6D of the Corporations Act is aligned with
that used in Chapter 7 so that it states that a person who has or controls
gross assets of at least $10 million is a professional investor. [Schedule 1,
Part 1, item 77]
5.12 The opportunity has been taken to correct a grammatical error in
Note 1 to subsection 709(4). [Schedule 1, Part 1, item 85]
Secondary sale issues
5.13 Section 707 in Chapter 6D of the Corporations Act provides that
secondary sales of securities by a controller must be accompanied by a
disclosure document. The provisions allowing certain secondary sale
offers to be effected without disclosure are not applicable to controllers
(sections 708-708A).
5.14 This amendment changes section 708A to allow controllers to
benefit from the existing relief from the requirement to issue a disclosure
document for secondary sales of existing securities subject to the same
conditions. [Schedule 1, Part 1, item 79]
5.15 The existing relief from the disclosure requirements is (among
others) subject to a condition that the entity that issued the securities
provides a notice known as a cleansing notice to the market operator
disclosing certain price-sensitive information that has been withheld from
the market. Withholding of such information may be permitted under
defined circumstances by the listing rules issued by the market operator.
5.16 In the case of secondary sales conducted by controllers, a
requirement is imposed through subparagraph 708A(5)(e)(ii) that both
the controller as well as the entity that issued the securities must provide
a cleansing notice to the market operator for release to the market.
[Schedule 1, Part 1, item 83]
5.17 The same amendments are made to the relevant provisions in Part
7.9 to allow secondary sales by controllers of other financial products,
subject to the same condition that both the controller as well as the entity
that issued the financial products must provide a cleansing notice to the
market operator for release to the market. In particular, subsection
1012DA(1A) is inserted and paragraph 1012DA(5) is amended. [Schedule
1, Part 1, items 138 and 142]
5.18 The disclosure relief applying to certain secondary sales of existing
securities is subject to a requirement that the securities must have been
quoted for a period of 12 months. This period is reduced to 3 months by
the amendment of paragraph 708A(5)(a) as part of this measure. [Schedule
1, Part 1, item 80]
5.19 Corresponding relief from the disclosure requirements is also
provided for certain secondary sales of other quoted financial products
such as interests in a managed investment scheme. A similar amendment
is made to paragraph 1012DA(5)(a) reducing the required period of
quotation from 12 to 3 months. [Schedule 1, Part 1, item 139]
5.20 Offers of continuously quoted securities enjoy substantial relief
from the disclosure requirements in Chapter 6D and Part 7.9 provided the
financial products have been quoted for at least 12 months. This period
is reduced to 3 months through an appropriate amendment to the
definition of `continuously quoted securities' in section 9 of the
Corporations Act. [Schedule 1, Part 1, item 1]
5.21 The cleansing notice for secondary sales of securities can be
provided at any time before the sales offers are made, rather than on the
day before the offers are made. This is achieved by the amendment of
paragraph 708A(5)(e). [Schedule 1, Part 1, item 83]
5.22 The same amendment is made in relation to the timing of the
release of a cleansing notice for secondary sales of other financial
products. This is achieved by the amendment of
paragraph 1012DA(5)(e). [Schedule 1, Part 1, item 142]
5.23 The opportunity has been taken to make two minor corrections: to
the definition of `regulated person' in section 1011B and to
paragraph 1012A(3)(c). [Schedule 1, Part 1, items 134 and 135]
Employee unlisted share schemes
5.24 A definition of an eligible employee share scheme is inserted in
section 9 of the Corporations Act. All relief given under this measure
only applies to employee share schemes falling in this category. The
main requirements are that a disclosure document must be provided
under the scheme, that offers are restricted to employees as defined in the
Corporations Act, and that the offers are of fully paid shares and a limited
number of other types of instruments. This definition is largely modelled
on the one in ASIC's Class Order CO 03/184 which provides certain
relief for employee share schemes of listed entities. [Schedule 1, Part 1,
item 4]
95
5.25 A definition of a contribution plan is inserted in section 9. This
includes conditions which must apply to the features and operation of the
plan in order for it to qualify for the relief offered under this measure.
Important features include, for example, that the deductions made under
the plan must be authorised by the employee and may be discontinued at
any time at the election of the employee. [Schedule 1, Part 1, item 3]
5.26 Amounts raised under an eligible employee share scheme are
exempted from the calculation of the total funds raised under an Offer
Information Statement by virtue of an amendment to subsection 709(5).
[Schedule 1, Part 1, item 86]
5.27 Appropriate licensing relief is provided for the company or
controlled entity (for example a trustee) operating the scheme through an
amendment to subsection 911A(2). This includes relief for the following
activities: the provision of general advice relating to the scheme; dealing
in a financial product where the purchase or disposal of the products
occurs through a licensed broker in or outside Australia; the operation of
a custodial or depository service in connection with the scheme; and
dealing in an interest in a contribution plan. Providing dealing relief
where trading in the financial products occurs through a licensed broker
outside Australia is required to ensure that employees of multinational
companies can participate in schemes operated by the parent entity
outside Australia. [Schedule 1, Part 1, item 106]
5.28 Relief is provided from the hawking provisions in the Corporations
Act in relation to offers of securities as well as other financial products.
This relief is provided through the amendment of subsection 736(2),
section 992A and subsection 992AA(2). These provisions prevent sales
offers from being made through unsolicited meetings or telephone calls.
Applied to employee share schemes, these provisions could prevent
companies from informing their employees about their schemes and
inviting them to participate. [Schedule 1, Part 1, items 92, 131 and 132]
5.29 Contribution plans are exempted from the operation of the managed
investment scheme requirements in Chapter 5C of the Corporations Act
by virtue of an amendment to the definition of `managed investment
scheme' in section 9. The requirements of Chapter 5C would otherwise
impose extensive regulatory requirements which are not justified in the
special circumstances under which such plans operate. [Schedule 1, Part 1,
item 6]
5.30 Contribution plans are exempted from the operation of most of Part
7.9 of the Corporations Act by virtue of new section 1010BA. Part 7.9
would otherwise require a Product Disclosure Statement to be prepared.
This is unnecessary in view of the fact that the employee share scheme as
a whole is required to be covered by a disclosure document under the
conditions attached to this measure. [Schedule 1, Part 1, item 133]
Advertising rules for offers of securities requiring a disclosure document
and for offers of other financial products
5.31 The provisions relating to advertising for offers of quoted securities
under Chapter 6D prior to lodgement of the disclosure document are
amended to align with those relating to advertising for offers or issues of
other financial products in Part 7.9. This is achieved by the amendment
of paragraph 734(5)(a).
5.32 The advertisement must include a statement regarding the following
prescribed matters: the identity of the issuer of the securities and the
seller, if there is one; that a disclosure document will be made available
later, and when and where it will be available; that a person should
consider the disclosure document in deciding whether to acquire the
securities, and that anyone who wants to acquire the securities must do so
using the application form in the disclosure document. [Schedule 1, Part 3,
item 210]
5.33 Subsection 734(6) which relates to advertising of offers of quoted
and unquoted securities conducted under Chapter 6D after lodgement of
the disclosure document is amended in a similar fashion, taking account
of the fact that the document has already been lodged. Thus the
prescribed statement must say that the disclosure document is already
available, and where it can be obtained. [Schedule 1, Part 3, item 212]
5.34 The measure ensures that ASIC's stop-order powers in Chapter 6D
extend to defective advertisements for offers of quoted securities prior to
lodgement of the disclosure document as well as of quoted and unquoted
securities after lodgement of the disclosure document. This is achieved
by the amendment of section 739. [Schedule 1, Part 3, item 213]
5.35 Further provisions are included in section 739 to clarify the
meaning of `defective' in the context of ASIC's stop order power. The
term `defective' in this context includes making a misleading or
deceptive statement, omitting material that is required, or making a
statement about future matters without having reasonable grounds for
doing so. It is made clear that this is not intended to limit what may
constitute a misleading statement to these cases. [Schedule 1, Part 3,
item 215]
5.36 The opportunity is taken to correct a minor formatting error in
paragraph 734(5)(b). [Schedule 1, Part 3, item 211]
97
Stapled securities disclosure
5.37 A cross reference to a definition of a Replacement Product
Disclosure Statement is included in section 761A (the definitions section)
at the beginning of Chapter 7 of the Corporations Act. The new
definition of this term is in section 1014H. [Schedule 1, Part 1, items 94
and 146]
5.38 The measure inserts a new Subdivision DA in Division 2 of Part 7.9
of the Corporations Act containing the main provisions relating to
Replacement Product Disclosure Statements. New section 1014G
clarifies that Replacement Product Disclosure Statements may only be
issued for offers of stapled securities where a Product Disclosure
Statement has been lodged as well as a prospectus.
5.39 A Replacement Product Disclosure Statement is defined in new
section 1014H as a document replacing a Product Disclosure Statement
in order to make certain corrections or fill certain gaps in the original
Product Disclosure Statement. Particular attention is drawn to the fact
that a Replacement Product Disclosure Statement may contain changes to
important information supplied in the original Product Disclosure
Statement concerning minimum amounts that must be raised if the
financial product is to be issued or sold, or concerning plans to list the
financial products on a financial market.
5.40 A deeming provision is included in the new section 1014 stating
that a reference to a Product Disclosure Statement throughout the
Corporations Act is taken to be a reference to the Replacement Product
Disclosure Statement once the latter is lodged. This ensures that all the
relevant provisions in the Corporations Act apply appropriately to
Replacement Product Disclosure Statements, even where no specific
amendments have been made to achieve this.
5.41 A statement that the document is a Replacement Product Disclosure
Statement is required to be placed at the beginning of the document. A
requirement to identify the original Product Disclosure Statement which
is being replaced is included. Otherwise the main provisions in the
Corporations Act relating to the preparation and contents of Product
Disclosure Statements apply to Replacement Product Disclosure
Statements in the same way. These requirements are included in new
section 1014K.
5.42 The new provisions import a number of further requirements
dealing mainly with the lodgement of certain Product Disclosure
Statements with ASIC and the manner in which a Product Disclosure
Statement must be given to a person to ensure that they also apply to
Replacement Product Disclosure Statements. This is achieved by new
section 1014L. [Schedule 1, Part 1, item 146]
5.43 Under certain provisions in the Corporations Act, if a Product
Disclosure Statement states that a financial product will be tradable on a
financial market, then the product must be able to be traded, or else an
application has to be made within seven days after a certain relevant date
to a market operator to enable such trading to occur. Further, if the
product is not able to be traded at the end of three months after a certain
relevant date, the issue or transfer of such financial products is void, and
the person to whom the products were issued or transferred must be
repaid if any payment has been received.
5.44 Subsection 1016D(3) is amended to clarify that, if such a statement
is express or implied in a Replacement Product Disclosure Statement, the
relevant date is the date of the Replacement Product Disclosure
Statement, and not that of the original Product Disclosure Statement.
[Schedule 1, Part 1, item 148]
5.45 Further provisions prescribe certain actions applying to a person
making an offer of financial products under a Product Disclosure
Statement that states that the products will only be issued or sold if a
minimum number of products are applied for or a minimum amount is
raised, and where these conditions have not been fulfilled within
4 months after a certain relevant date.
5.46 Subsection 1016E(4) is amended to clarify that, if such a statement
is express or implied in the Replacement Product Disclosure Statement,
the relevant date is the date of the Replacement Product Disclosure
Statement, and not that of the original Product Disclosure Statement. In
such cases the person making the offer must either repay monies received
from any applicants, or provide a new disclosure document as prescribed
and give any applicants one month to withdraw their application and be
repaid. [Schedule 1, Part 1, item 150]
5.47 A minor formatting error in subsection 1016D(3) is corrected.
[Schedule 1, Part 1, item 147]
Application and transitional provisions
Rights issue disclosure for quoted securities and other financial
products
5.48 The amendments relating to rights issues commence on Royal
Assent. [Clause 2]
5.49 The amendments abolishing the requirement for a prospectus or
Product Disclosure Statement for a rights issue will apply to rights issues
99
offered on or after the day on which the relevant items commence.
[Schedule 1, Part 6, item 229]
Small scale offerings
5.50 The amendments relating to small scale offerings commence on
Royal Assent. [Clause 2]
5.51 The amendments apply to offers of securities made on or after the
day the amendments commence. [Schedule 1, Part 6, item 237]
Secondary sale issues
5.52 The amendments relating to secondary sale issues commence on
Royal Assent. [Clause 2]
Employee unlisted share schemes
5.53 The amendments relating to the contribution plans operated as part
of employee share schemes commence on Royal Assent. [Clause 2]
5.54 The amendments apply to employee share schemes offered on or
after the day on which the amendments commence and to contribution
plans offered on or after the day on which those amendments commence.
[Schedule 1, Part 6, item 227 and 228]
Advertising rules for offers of securities requiring a disclosure document
and for offers or issues of other financial products
5.55 The amendments relating to advertising rules for offers of securities
requiring a disclosure document and for offers or issues of other financial
products commence on proclamation or six months after Royal Assent,
whichever is earlier. [Clause 2]
5.56 The amendments apply to an advertisement or publication made
after commencement. [Schedule 1, Part 6, item 242]
Stapled securities disclosure
5.57 The amendments relating to Replacement Product Disclosure
Statements for stapled securities commence on Royal Assent. [Clause 2]
5.58 The amendments apply to any Product Disclosure Statement lodged
with ASIC at the time of commencement or thereafter. [Schedule 1, Part 6,
item 230]
Consequential amendments
Rights issue disclosure for quoted securities and other financial
products
5.59 A reference to the new definition of `rights issues' is inserted in the
general definitions section 9 at the beginning of the Corporations Act.
[Schedule 1, Part 1, item 9]
5.60 A number of references to offers of securities that may be made
without disclosure are updated to include the new section removing the
requirement for a disclosure document for a rights issue. [Schedule 1, Part
1, items 20, 21, 72, 74, 89 and 136]
5.61 ASIC has powers to exclude an offer of continuously quoted
securities (and certain other financial products) from the reduced
disclosure requirements contained in sections 713 and 1013 FA if that
body has contravened certain provisions in the Corporations Act. Failure
to comply with key provisions applying to rights issues conducted
without disclosure are included in the list of contraventions based on
which ASIC may make such a determination. [Schedule 1, Part 1, items 87,
88, 143 and 144]
5.62 Giving a cleansing notice that does not comply with the new rights
issues disclosure provisions does not constitute a contravention of section
727 or section 1021C which state that it is an offence to offer securities
or other financial products without providing appropriate disclosure as
required by Chapter 6D or Part 7.9. [Schedule 1, Part 1, items 90, 91, 152, 153
and 154]
5.63 Amendments are made clarifying that certain enforcement
provisions relating to offences, such as a failure to provide a disclosure
document or statement, or providing a defective disclosure document or
statement, apply to the new rights issue provisions, and that the defendant
bears the evidential burden in relation to these provisions. [Schedule 1, Part
1, items 151, 155 and 159]
5.64 Amendments are made ensuring that a failure to comply with the
requirements applying to the cleansing notice required for rights issues
without disclosure constitutes an offence under the relevant provisions of
the Corporations Act. [Schedule 1, Part 1, items 161, 162, 163, 164, 165 and 166]
5.65 Entities breaching the continuous disclosure requirements may be
subject to an infringement notice issued by ASIC imposing a pecuniary
penalty and requiring certain compliance action to be taken. Failure to
comply with the notice provides an opportunity for specific proceedings
to be taken against the breaching entity. In such circumstances no other
proceedings than those specified may be started against the entity. It is
101
clarified that a determination by ASIC made under the new rights issues
disclosure provisions preventing an entity from benefiting from the relief
provided may still be made, even if other proceedings may not be started.
[Schedule 1, Part 1, item 167]
5.66 The maximum penalty is specified for the offence of breaching the
requirement to correct a defective cleansing notice provided under the
new rights issues disclosure provisions. The penalty is the same as that
for a failure to do the same in relation to a secondary sale of securities
without disclosure conducted under the existing provisions in
section 708A. [Schedule 1, Part 1, items 172 and 175]
Small scale offerings
5.67 A consequential amendment is made to the table at section 705
reflecting the change in the amount that can be raised through an Offer
Information Statement. [Schedule 1, Part 1, item 73]
Secondary sale issues
5.68 Amendments are made to reflect the reduced requirement for the
securities and other financial products subject to the secondary sales
provisions to have been quoted for 3 months instead of 12 months.
[Schedule 1, Part 1, items 2, 81, 82, 140 and 141]
Employee unlisted share schemes
5.69 The definition of employee share schemes in section 9 is adapted to
reflect the possibility of schemes offering options over unissued shares as
a consequence of the definition of what constitutes an eligible employee
share scheme. [Schedule 1, Part 1, item 5]
Advertising rules for offers of securities requiring a disclosure document
and for offers of other financial products
5.70 An amendment is required to make certain conditions and powers
apply to ASIC's expanded stop order powers with respect to
advertisements for offers under Chapter 6D. These conditions relate to
ASIC's obligation to hold a hearing and its power to make interim orders
in certain circumstances. [Schedule 1, Part 3, item 214]
Stapled securities disclosure
5.71 A number of notes are inserted alerting readers to the operation of
the new provisions relating to Replacement Product Disclosure
Statements. [Schedule 1, Part 1, items 7, 93 and 145]
5.72 A reference to the definition of Replacement Product Disclosure
Statements in Chapter 7 is placed in the general definitions in section 9 in
the Corporations Act. [Schedule 1, Part 1, item 8]
5.73 A reference to the definition of a Replacement Product Disclosure
Statement in the new section 1014H is placed in the definitions section in
Chapter 7. [Schedule 1, Part 1, item 94]
5.74 The appropriate operation of the continuous disclosure
requirements in relation to information that would have to be disclosed in
a Replacement Product Disclosure Statement is ensured through an
appropriate amendment. [Schedule 1, Part 1, item 70]
5.75 An appropriate amendment ensures that certain remedies applying
in cases of a defective Product Disclosure Statement or Supplementary
Product Disclosure Statement also apply to a Replacement Product
Disclosure Statement. [Schedule 1, Part 1, item 149]
5.76 An appropriate amendment ensures that certain enforcement
provisions relating to Product Disclosure Statements and Supplementary
Product Disclosure Statements that do not satisfy some of the contents
provisions of the Corporations Act also apply to Replacement Product
Disclosure Statements. The provisions relate to requirements such as that
a Product Disclosure Statement must be dated, carries an appropriate title
as prescribed and is not combined with a Financial Services Guide except
as allowed under the Corporations Act. [Schedule 1, Part 1, items 156, 157
and 158]
103
2 Chapter 6
Takeovers
Outline of chapter
6.1 This chapter describes amendments to repeal the provisions in the
Corporations Act which relate to telephone monitoring during takeover
bids and the requirements to provide section 665D and 665E notices
(85 per cent notices).
Context of amendments
Remove telephone monitoring during takeover bids
6.2 Currently a bidder and a target in a takeover situation must record all
telephone calls they make to security holders (other than wholesale
holders) to discuss a takeover bid during the bid period.
6.3 Subdivision D, Division 5, Part 6.5 of the Corporations Act was
introduced by the Financial Services Reform Act 2001. It imposes
obligations relating to the identification, indexing, storing, destroying,
accessing and copying of the recordings.
6.4 The purpose of the subdivision was to ensure that security holders
did not receive information from the takeover bidder or target that could
be considered misleading.
6.5 The existing provisions have not increased the protection of security
holders and impose significant costs on the parties involved.
Remove section 665D and 665E notices (85 per cent notices)
6.6 Currently section 665D of the Corporations Act requires those
persons who hold 85 per cent or more of a class of securities in a
company to notify the company in writing of that fact within 14 days of
becoming aware that they are a 85 per cent holder and then remind the
company on an annual basis.
105
6.7 Section 665E requires a company that has been given a notice under
section 665D to inform its members the next time it sends its members a
notice or report under another provision of the Corporations Act.
6.8 The provisions were enacted to provide holders of securities with an
advanced warning that the majority holder is approaching the 90 per cent
limit, at which the majority holder can compulsorily acquire their
securities.
6.9 However, it is often the case that the minority are already aware of
the majority holder's position. For listed entities, other mechanisms in
the Corporations Act will mean that the information is already publicly
disclosed.
6.10 Furthermore, even if notice is given, it could be the case that a
significant time has lapsed between the majority holder providing the
information to the company and the issue of the company's next notice or
report.
6.11 These provisions have proved to be of little benefit to minority
holders but impose significant costs on majority holders and companies.
Summary of new law
6.12 The Bill will remove the requirement to monitor telephone calls
during a takeover bid. It will also remove the requirement to issue
section 665D and 665E notices.
Comparison of key features of new law and current law
New law Current law
No requirement to record A bidder and a target in a takeover
telephone calls. situation must record all telephone
calls they make to security holders
(other than wholesale holders) to
discuss a takeover bid during the
bid period.
No requirements to issue Persons who hold 85 per cent or
85 per cent notices. more of a class of securities in a
company must notify the company
and the company must inform its
members of such a notice.
Detailed explanation of new law
6.1 Subdivision D of Division 5 of Part 6.5 will be repealed. This will
remove the requirement for telephone monitoring during the takeover bid
period. [Schedule 1, Part 1, item 68]
6.2 Division 3 of Part 6A.2 of the Corporations Act will be repealed.
This will remove the requirement for holders of 85 per cent or more of a
class of securities in a company to notify the company. It will also
remove the requirement for the company to notify its members. [Schedule
1, Part 1, item 69]
Application and transitional provisions
6.3 The repeal of the telephone monitoring and 85 per cent notice
requirements will take effect on the day of Royal Assent.
Consequential amendments
6.4 The penalty provisions related to telephone monitoring (Items 201A
to 201M of Schedule 3) will be removed from the Corporations Act.
[Schedule 1, Part 1, item 170]
6.5 The penalty provisions related to section 665D and 665E notices
(Items 219 and 220 of Schedule 3) will be removed from the penalties
schedule. [Schedule 1, Part 1, item 171]
107
2 Chapter 7
Compliance
Outline of chapter
7.1 This chapter describes amendments to the Corporations Act to
streamline compliance procedures and ensure companies can access
newer technologies, by simplifying returns of company particulars and
permitting electronic registration of charges.
Context of amendments
7.2 The amendments seek to address concerns that the current
compliance framework can stymie companies from using newer
technologies and cause them to devote too many resources to
unproductive outputs.
7.3 The amendments are based on proposals appearing in the Corporate
and Financial Services Review Proposals Paper of November 2006.
Summary of new law
7.4 The Bill will make amendments to the Corporations Act to:
· limit when ASIC can issue a return of particulars to
instances where it suspects or believes the particulars on the
corporate register are not correct, and give companies
two months to respond; and
· allow ASIC to register company charges electronically.
109
Comparison of key features of new law and current law
New law Current law
Simplifying returns of company particulars
ASIC will be able to give to a ASIC may give a company or
company or responsible entity of responsible entity of a registered
a registered scheme a return of company a return of particulars if
particulars for the company or the review fee is not paid by the
scheme if ASIC suspects or due date, it suspects or believes
believes that particulars recorded particulars recorded are not
in relation to the company or correct, or if no documents have
scheme in a register maintained been lodged with ASIC for at
by ASIC are not correct. The least one year. This must be
response to a return of particulars lodged within 28 days of date of
will have to be lodged within issue.
two months of date of issue.
Electronic registration of company charges
ASIC will provide a facility that Company charges can only be
allows for the electronic registered on paper forms.
registration of company charges.
Detailed explanation of new law
Simplifying returns of company particulars
7.1 Under the current law, ASIC may give to a company or responsible
entity of a registered scheme a return of particulars for the company in
three situations: if the review fee for the company or scheme has not
been paid by the due date; if ASIC suspects or believes that particulars
recorded in a register maintained by ASIC are not correct; or if no
documents have been lodged with ASIC for at least one year.
7.2 In addition, the response to the return of particulars must be lodged
with ASIC within 28 days of the date of issue of the return.
7.3 The requirement to respond to a return of particulars for a company
or scheme can involve considerable compliance burden as the issuing of
the return of particulars cannot be anticipated by the company or scheme.
Companies and schemes also risk being penalised by late lodgment fees
if the response is not lodged within 28 days.
7.4 The compliance burden on companies could be reduced by better
targeting the circumstances in which a return of particulars may be issued
and allow for a longer period to respond. The most appropriate
circumstances for ASIC to issue a return of particulars would be it if has
reasonable grounds to suspect or believe that particulars recorded in a
register are not correct.
7.5 The Bill will repeal existing subsection 348A(1) of the Corporations
Act, substituting it with a new subsection 348A(1) that allows ASIC to
give a company or responsible entity of a registered scheme a return of
particulars for the company or scheme if ASIC suspects or believes that
particulars recorded in a registered are not correct. [Schedule 1, Part 3, item
208]
7.6 In addition, the Bill amends paragraph 348D(2)(a) of the
Corporations Act, increasing the time in which a return of particulars
must be lodged with ASIC from 28 days to two months. [Schedule 1, Part 3,
item 209]
Electronic registration of company charges
7.7 From 1 July 2007, ASIC will provide a facility that allows for the
electronic registration of charges. Currently, charges can only be lodged
with, and certified by, ASIC on paper.
7.8 The Bill will amend subsection 352(1) of the Corporations Act to
allow ASIC to approve the lodgement documents in a particular class by
electronic means. This will allow ASIC to establish a system for the
electronic registration of charges under which all documents in the class
of documents related to charges can be lodged with ASIC electronically.
[Schedule 1, Part 2, item 196]
7.9 As the timing of the registration of charges is important for issues of
priority, the Bill will amend also section 274 of the Corporations Act to
provide ASIC with the ability to apply to the Court to have the register
rectified in circumstances where the electronic system to register the
charges fails. This power would allow ASIC to have the register reflect
the order in which charges were registered notwithstanding that the
electronic system register was unavailable for a period of time.
[Schedule 1, Part 2, items 194 and 195]
7.10 In relation to charge certificates, the Bill will remove the
requirement in subsections 272(1) and 272(3) of the Corporations Act for
ASIC to issue a certificate providing details of a charge under ASIC's
common seal, that is, on paper. Removing this requirement will facilitate
ASIC issuing electronic certificates that provide details of a registered
charge. This amendment is not intended to remove the requirement for a
charge certificate, merely how it comes into existence. [Schedule 1, Part 2,
items 191 and 193]
111
7.11 In addition, to ensure consistency within the charge certificate
provisions in the Corporations Act, the Bill will amend subsection 272(3)
to replace `register' with `Register', so that the provision expressly refers
to the Australian Register of Company Charges, to avoid any doubt.
[Schedule 1, Part 2, item 192]
Application and transitional provisions
7.12 The amendments providing a facility to allow for the electronic
registration of company charges will commence on 1 July 2007.
7.13 The amendment in relation to circumstances when ASIC can issue a
return of particulars will commence on a date to be fixed by proclamation
or otherwise six months after Royal Assent, and will apply to returns of
particulars issued on or after commencement [Schedule 1, Part 6, item 241]
Consequential amendments
Electronic registration of company charges
7.14 Subparagraph 264(1)(a)(ii) of the Corporations Act contains an
incorrect cross reference to paragraph 263(1)(a) of the Corporations Act.
The Bill will correct the reference so that it refers to paragraph 263(1)(b)
in relation to a company issuing a series of debentures constituting a
charge by resolution or resolutions passed by the company. This
amendment will commence on a date to be fixed by proclamation or
otherwise six months after Royal Assent. [Schedule 1, Part 3, item 207]
Chapter 8
Regulation impact statement: financial
services regulation
Background
The Financial Services Reform Act 2001 (FSR Act)
7.1 The FSR Act, which commenced on 11 March 2002, introduced a
single licensing regime for financial sales, advice and dealings in relation
to financial products; consistent and comparable financial product
disclosure; and a single authorisation procedure for financial markets and
clearing and settlement facilities. The FSR Act provided the legislative
response to a number of recommendations of the Financial System
Inquiry, commissioned by the Australian Government in 1997.
7.2 The previous regulation of providers of financial services was
product-specific and contained in a number of different Acts and
non-legislative instruments. The FSR Act removed unnecessary
distinctions between financial products to rationalise compliance
obligations and put in place a competitively neutral regulatory system. In
addition, it aimed to give consumers a more consistent framework of
consumer protection in which to make their financial decisions.
7.3 The FSR Act replaced the existing Chapters 7 and 8 of the
Corporations Act with a new Chapter 7. Following a two-year transition
period, the changes introduced by the FSR Act took full effect on
11 March 2004.
7.4 During the transition to the new requirements, several issues were
raised by industry participants and consumer representatives in relation to
the practical operation of the legislation. Many of these issues were dealt
with through the making of Corporations Regulations and the passage of
the Financial Services Reform Amendment Act 2003.
7.5 However, following the full implementation of the legislation, and
after a reasonable period in which to judge its impact, the Australian
Government recognised that concern remained about various aspects of
the legislation. Chief among these were aspects of the disclosure
requirements.
113
Refinements to Financial Services Regulation
Refinements to financial services regulation proposals paper
7.6 In May 2005 the Parliamentary Secretary to the Treasurer, the Hon
Chris Pearce MP, released a paper titled Refinements to Financial
Services Regulation Proposals Paper. The purpose of the paper was to
raise for discussion with industry and consumer representatives a number
of suggestions for refinements to the legislation to improve its operation,
particularly by reducing compliance costs for industry participants, while
preserving the consumer protection benefits introduced by the FSR Act.
7.7 The paper complemented a report by the Financial Sector Advisory
Council which included recommendations based on the results of a
survey of industry experience with financial services regulation since its
introduction.
7.8 The intention of the financial services regulation refinements was to:
· ensure that consumers receive information that is relevant to
their needs;
· reduce the compliance burden on industry; and
· clarify the intent of the legislative and regulatory framework
that applies to the financial services industry.
7.9 Around 40 submissions were received in response to the paper. In
addition, the Australian Government held a number of consultation
meetings to further discuss the refinement proposals. By
December 2005, the refinements were completed, with 18 refinements
being implemented by amendments to Corporations Regulations and the
remaining seven proposals implemented by ASIC.
7.10 As part of the consultation on the 2005 refinements to financial
services regulation, industry provided comments on a number of residual
issues which extended beyond the scope of the proposals considered in
the Refinements to Financial Services Regulation Proposals Paper.
These residual issues were not able to be addressed as part of the
refinements project, but the feedback from industry has emphasised the
need for further refinements in outstanding areas of concern. These
issues were included for discussion in the Corporate and Financial
Services Regulation Review Consultation Paper of April 2006.
Corporate and Financial Services Regulation Review Consultation
Paper
7.11 On 7 April 2006, the Parliamentary Secretary to the Treasurer, the
Hon Chris Pearce MP, released the Corporate and Financial Services
Regulation Review Consultation Paper for a six-week consultation
period, which ended on 19 May 2006. The consultation paper sought
comments from consumer and industry representatives on ideas for
improving aspects of corporate and financial services regulation.
7.12 The release of the consultation paper coincided with the release of
the Government response to the Rethinking Regulation report of the
Taskforce on Reducing the Regulatory Burden on Business, which
recommended that the Australian Government establish a further process
to enable additional refinements to be made to the operation of the
financial services regulatory regime in outstanding areas of concern.
These outstanding areas of concern include those which were raised as
part of the 2005 refinements, as well as further representations that have
been made to Treasury and the Parliamentary Secretary to the Treasurer
by industry.
7.13 The consultation paper raised 56 topics in relation to financial
services regulation and regulation in relation to company reporting
obligations, auditor independence, corporate governance, fundraising,
takeovers, collective investments and dealing with regulators. Generally,
the paper sought comments on whether there was a need to simplify
and/or improve aspects of regulation in these areas.
7.14 Over 80 submissions were received from a range of industry and
consumer representatives, including industry organisations and individual
firms and practitioners. The Business Regulation Advisory Group met on
9 June 2006 to consider the submissions and provide views on the issues
to the Parliamentary Secretary.
7.15 On 14 August 2006, the Parliamentary Secretary announced the
intended way forward on the consultation issues, which principally
included further consultation on defined proposals. Some of the more
straightforward financial services regulation issues will be progressed
through draft regulations, which will also be released for public
consultation. The draft regulations were released for consultation on
23 March 2007.
Corporate and Financial Services Regulation Review Proposals Paper
7.16 On 16 November 2006, the Parliamentary Secretary to the
Treasurer released the Corporate and Financial Services Regulation
Review Proposals Paper to seek comments from stakeholders on
115
35 defined proposals, which take into account the comments made in
submissions on the Consultation Paper.
7.17 Over 100 submissions were received in response to the paper.
Overall, the reaction to the proposals was substantially positive, with
many submissions expressing appreciation for the Australian
Government's work to improve the effectiveness of the regulatory regime
and the consultative manner in which this has been undertaken.
7.18 This Regulation Impact Statement (RIS) considers the options
available to implement two significant proposals contained in the
Corporate and Financial Services Regulation Review Proposals Paper in
relation to the financial services regulation issues.
7.19 The financial services regulation proposals from the proposals
paper to which this RIS refers are:
Proposal 1.3 Scope of financial services advice -- threshold for
requiring a Statement of Advice
Proposal 1.9 Product activity and data collection
7.20 In some cases, these proposals share common issues, objectives,
consultation methods, implementation and review, and where possible,
these themes are addressed as a whole. However, the RIS also contains
an individual assessment of the problem, desired objectives, options,
impact assessment and recommended option for each proposal.
7.21 The options examined in Part 4 below take into account comments
from consumer and industry representatives in response to the
consultation processes outlined above, as well as feedback that has been
provided by these groups through informal liaison and from the regulator
(ASIC) with Treasury and the Parliamentary Secretary to the Treasurer.
Problem identification
7.22 The regulation of financial services is directed at market integrity
and consumer protection. The submissions received in response to the
two consultations undertaken as part of the Corporate and Financial
Services Regulation Review and representations with various other
stakeholders have raised problems with regard to the operation of
financial services regulation in practice, beyond those which were
addressed as part of the Refinements to Financial Services Regulation
project. In the area of financial advice, for example, these problems
relate to inefficiencies caused by information asymmetry, arising in part
from cost and access.
7.23 The financial services regulatory framework is founded on the
principle that consumers must take responsibility for their own
investment decisions and that, in order to do so, consumers must be given
adequate information on which to base their decisions. However, there
are some instances where the regulation of financial services inhibits the
appropriate flow of information or the provision of services.
7.24 Some industry representatives have suggested that the cost of
complying with some aspects of the financial services regulatory regime
is too onerous such that it is not economically viable for some advisers to
provide advice to clients who have a relatively small amount to invest or
are only interested in a particular type of relatively simple financial
product. Alternatively, some financial product issuers who are not
authorised to provide personal advice are unable to provide useful
information on products to clients where that advice would constitute
personal advice. Both scenarios have potential to result in a reduction in
accessibility and/or affordability of financial advice for consumers. This
RIS examines a measure to reduce the cost and increase affordability of
advice in relation to small scale investments.
7.25 Other issues with regard to the operation of financial services
regulation in practice relate to the requirements of financial product
issuers to report certain matters to the regulator, the Australian Securities
and Investments Commission (ASIC). This RIS examines a measure to
improve an aspect of reporting with regulators and improve the
usefulness of that information in regulatory activities.
7.26 Section 4 provides more specific problems and analysis on the
individual proposals.
Objectives
7.27 Broadly, the intention of refining financial services regulation is to
ensure that the framework is operating as the policy intended it to, that is,
to ensure a competitively neutral regulatory system by providing uniform
regulation, reducing administrative and compliance costs, and removing
unnecessary distinctions between products. In addition, the framework
was intended to facilitate innovation and promote business while
ensuring adequate levels of consumer protection and market integrity.1
1 Explanatory Memorandum to the Financial Services Reform Bill 2000.
117
7.28 The objective of reducing compliance costs for business without
diminishing consumer protection is consistent with the Government's
response to the recommendations by the Taskforce on Reducing the
Regulatory Burden on Business to further refine the operation of the
financial services regulatory framework.
7.29 The objective of refining other aspects of the financial services
regulatory framework is to improve the efficiency and effectiveness with
which ASIC is able to undertake its role of monitoring and enforcing
financial service providers' compliance with financial services regulation
requirements.
Identification of options, impact analysis, conclusions and
recommendations
Impact assessment methodology
7.30 Impacts are divided between three impact groups (consumers,
business and government). Typical impacts of an option on consumers
might be changes in access to a market, the level of information and
disclosure provided, or prices of goods or services. Typical impacts of an
option on business would be the changes in the costs of compliance with
a regulatory requirement. Typical impacts on government might be the
costs of administering a regulatory requirement. Some impacts, such as
changes in overall confidence in a market, may impact on more than one
impact group.
7.31 The assessment of impacts in this draft regulation statement is
based on a seven-point scale (-3 to +3). The impacts of each option are
compared with the equivalent impact of the `do nothing' option. If an
impact on the impact group would, relative to doing nothing, be
beneficial, the impact is allocated a positive rating of +1 to +3, depending
on the magnitude of the relative benefit. On the other hand, if the impact
imposes an additional cost on the impact group relative to the status quo,
the impact is allocated a negative rating of -1 to -3, depending on the
magnitude of the relative cost. If the impact is the same as that imposed
under the current situation, a zero score would be given (although usually
the impact would not be listed in such a case).
7.32 The magnitude of the rating of a particular impact associated with
an option has been assigned taking into account the overall potential
impact on the impact group. The reference point is always the status quo
(or `do nothing' option). Whether the cost or benefit is one-off or
recurring, and whether it would fall on a small or large proportion of the
impact group (in the case of business and consumers), is factored into the
rating. For example, a cost or benefit, even though large for the persons
concerned, may not result in the maximum rating (+/-3) if it is a one-off
event that only falls on a few individuals. Conversely, a small increase in
costs or benefits might be given a moderate or high rating if it would be
likely to recur or if it falls on a large proportion of the impact group. The
rating scale for individual impacts is explained in the table below.
Rating an individual impact
+3 +2 +1 0 -1 -2 -3
Large benefit/ Moderate Small benefit/ No substantial Small cost/ Moderate cost/ Large cost/
advantage benefit/ advantage change from disadvantage disadvantage disadvantage
compared to advantage compared to `do nothing' compared to `do compared to `do compared to `do
`do nothing' compared to `do nothing' nothing' nothing' nothing'
`do nothing'
7.1 The ratings for the individual impacts compared to the status quo are
then tallied to produce an overall outcome for the option. If it is positive,
it indicates that the option is likely to produce a more favourable
cost/benefit ratio than the status quo. If it is zero there would be no
overall benefit from adopting the option, and if negative the option would
provide overall a less favourable cost/benefit ratio than the `do nothing'
option. Ordinarily, options that have the highest positive score would be
the favoured courses of action.
7.2 What is classed as a `large', `moderate' or `small' cost or benefit
depends on the nature of the problem and options being considered. Of
course, the costs and benefits associated with options to address a
problem costing billions of dollars per year are likely to be of a much
greater absolute magnitude than the costs and benefits of options for
dealing with a rather modest issue that affects only a handful of persons.
However, as all the ratings are made relative to the status quo/ do nothing
option for a particular problem, the absolute value of `large' or
`moderate' or `small' is not really important. All that matters is that
within a problem assessment, the impacts of each option are given
appropriate ratings relative to the status quo and each other. If that
occurs, it will be sufficient for the methodology to yield an overall rating
that assists in assessing the relative merits of options, from a cost/benefit
perspective, to address the particular problem.
7.3 An example of the rating calculation for an option, using the
seven-point scale ratings of impacts, is in the table below. The example
is based on a purely hypothetical scenario that a new type of long-
wearing vehicle tyre is being sold and marketed, but it has become
apparent that the new tyres have a higher risk of exploding while in
motion than conventional tyres. The example is designed merely to
illustrate how the rating scale might be used to compare a proposal's
costs and benefits option to the `do nothing' option -- it is not intended
119
to be a comprehensive or realistic assessment of options to address such a
problem.
Illustrative rating for the problem of a long-wearing tyre that may fail
Option A: Do nothing
Benefits Costs
Consumers Access to a cheaper solution for Risk of tyre failure that can result in
vehicle tyres personal and property damage as a
result of collision. Damage can be
severe but cases are rare.
Industry Some compensation payments to
persons as a result of collisions
caused by the tyre
Government Advantages from a waste
management perspective
Option B: Ban on sale of the new tyre
Benefits Costs
Consumers No persons will not be affected by Lack of access by all consumers to
tyre failure and resultant damage long-wearing vehicle tyres,
(+3) increasing the cost of vehicle
maintenance (-2)
Industry No compensation payments for Transitional costs involved with
accident victims (+1) switching back all
manufacturing/marketing operations
to conventional tyres (-3)
Government Conventional tyres produce more
waste which is costly to deal with (-
1)
Sub-rating +4 -6
Overall rating -2
Option C: Industry-developed quality control standards
Benefits Costs
Consumers Much lower risk of tyre failure and
resultant damage than status quo
(+2)
Industry Significantly less compensation Developing and monitoring
payments for accident victims (+1) industry-wide quality control
standards (-2)
Government
Sub-rating +3 -2
Overall rating +1
7.1 In the above hypothetical example, Option C appears to have a better
impact for consumers and a better overall cost/benefit rating than Option
B. Although Option B appears to offer a slightly better impact for
consumers, it appears to be less effective from an overall cost/benefit
perspective than Option C.
Identification of problems, options, impact analysis, conclusions and
recommendations in relation to the Statement of Advice threshold
(Proposal 1.3)
Problem
Situation
7.2 The definition of personal advice captures situations where a
financial service provider uses personal information and product
information to make a recommendation to a retail client. The personal
advice definition is triggered if a financial service provider knows a
client's objectives, financial situation or needs and considers that
information in recommending or selling a product. In these
circumstances, a Statement of Advice (SOA) is required to be provided to
the client.
7.3 An SOA is provided by a financial adviser when they provide
personal advice to a client. The SOA sets out:
· the advice they have given;
· the information on which it is based;
· how the adviser is paid (including commissions); and
· any interests, associations or relationships that could
influence them.
Problem
7.4 There is evidence that the cost of producing an SOA is not economic
for an adviser where a client is seeking a minor piece of advice and/or has
a relatively small amount of money to invest. Many advisers are
choosing not to provide personal advice to such clients, with the result
that in these circumstances small scale consumers may not be able to
access advice that may benefit them.
7.5 Some industry participants have submitted that in some cases, the
cost of producing an SOA is not economical for an adviser where a client
is seeking a minor piece of advice and/or has a relatively small amount of
121
money to invest. Many advisers are choosing not to provide personal
advice to such clients, with the result that often they cannot access advice
that may benefit them.
7.6 For instance, industry has indicated that the cost of preparing an
SOA is approximately $2602 on average. For a financial planner to at
least recover this cost when providing personal advice to clients, they
would need to either charge the client a fee of $260, or receive a
commission of $260 from the sale of a financial product as a result of the
financial advice provided. If a financial adviser decides to charge an
up-front fee for providing advice, it is likely that a $260 fee would inhibit
many smaller-scale investors from seeking such advice.
7.7 Alternatively, if a financial adviser used a commission-based
structure for remuneration, in order to break even, they would need to
receive a commission of $260. Given that financial adviser commission
rates generally range from one to two per cent. Based on a commission
of one per cent of the amount invested, the cost of preparing the SOA
would be recovered if the investment amount to which the advice related
was $26,000. Based on a commission of two per cent of the amount
invested, the cost of preparing the SOA would be recovered if the
investment amount to which the advice related was $13,000.
7.8 Therefore, it is unlikely that a financial adviser that receives
remuneration through a commission payment structure would be willing
to provide financial advice to small scale investors where they are unable
to recover the cost of providing the SOA.
Objective
7.9 The policy objective is to encourage the provision of financial advice
by advisers and facilitate access to advice for consumers, while
maintaining important consumer protections, such as ensuring that advice
is appropriate and documented and that documentation is accessible.
7.10 Appropriate reduction of the costs of providing advice may
encourage the provision of small scale advice by advisers and improve
access to advice for consumers currently excluded from the advice
market.
2 Based on cost estimates provided by industry for producing a Statement of Advice, which
primarily consists of the time that an adviser would spend on documenting the client's
information and the advice provided.
Options
Option A: No action
7.11 Maintain the existing requirements to provide an SOA in all
situations where personal advice is provided (except where exemptions
apply).
Option B: Subjective proportionate threshold for the provision of a
Statement of Advice
7.12 Introduce a threshold which determines when an SOA is required to
be provided that is proportionate to the client's gross annual income. A
threshold of 10 per cent could be introduced, whereby an adviser would
not need to provide the client with an SOA if the investment amount to
which the advice related was lower than 10 per cent of the client's gross
annual income. Information on a client's income would generally be
obtained through consultations with the client regarding their financial
situation. For advice relating to amounts less than 10 per cent of a
client's gross annual income, an adviser would be required to keep a
Record of Advice (ROA).
7.13 For example, an investor with an average annual income of
$42,0003, an SOA would need to be prepared and provided to a client for
an investment amount greater than $4,200.
7.14 In contrast to an SOA, an ROA allows advisers to document further
advice to clients with brevity. Prior to the introduction of an ROA, all
advice was required to be documented in an SOA. The ROA sets out the
advice given to the client or brief particulars of the recommendations
made to the client including the basis on which the recommendations
were made. It also has to contain information about the consequences of
partially or wholly replacing one financial product with another, where
such advice is provided.
7.15 An ROA is currently used in the circumstance where initial advice
has been provided by the adviser in an SOA and where the client's
relevant personal circumstances have not changed significantly since the
giving of the prior advice. In these circumstances, an ROA is provided to
the client upon their request, not as a matter of course. This option
proposes allowing an ROA to be provided for initial advice (where the
threshold is met) and requiring it to be provided to the client.
3 Based on Australian Bureau of Statistics Cat. No. 6302.0, 2005-06 Annual Average Weekly
Earnings, all employees total earnings.
123
Option C: Objective dollar threshold for the provision of a Statement
of Advice
7.16 Introduce a threshold into the SOA requirements, such that a full
SOA would only be required if the advice given is in relation to an
investment amount that is above a certain monetary threshold. For
simplicity, a threshold of $15,000 is proposed which relates to a level that
should make the threshold commercially useful without inappropriately
undermining consumer protection. This would mean that an SOA would
be required to be prepared and provided to a client if the amount to which
the advice relates is $15,000 or more. For advice relating to amounts less
than $15,000, it is proposed to require the adviser to provide an ROA to
the client. The threshold will be reviewable as appropriate.
7.17 Given that superannuation holdings generally involve a significant
accumulated investment or potential accumulated investment, and advice
in relation to superannuation can have a potentially significant impact on
consumers' financial situation, it is proposed to limit the application of
this option in relation to superannuation, to the following circumstances.
Where that advice is to consolidate or supplement superannuation into an
existing fund the SOA exemption may be relied on. Where this occurs,
the ROA must contain the section 947D disclosure requirements
contained in the Corporations Act. These disclosures relate primarily to
charges and pecuniary interests relevant to the client. Where the advice
relates to the consolidation or supplementation of superannuation in
relation to an investment amount of $15,000, the proposal will extend to
the consideration of the life risk insurance where it is packaged with the
superannuation interest in order to reasonably make recommendations
regarding superannuation taking into consideration all the features of the
relevant superannuation products.
7.18 The existing SOA arrangements that apply to general insurance
products (including in relation to sickness and accident and consumer
credit insurance) would not be altered by this proposal. General
insurance products (other than sickness and accident and consumer credit
insurance) have previously been granted an exemption from the provision
of an SOA..
7.19 It is not proposed that the threshold apply to advice in relation to
life risk insurance products (other than as discussed above) and
derivatives for reasons including the following:
· The difficulty in determining how a threshold would
appropriately be applied to these products. For example, if
the threshold was to be applied to the premium, it is likely
that the threshold would always apply, and if the threshold
was to apply to the amount insured, it is not likely that the
SOA exemption would be able to be used as the amount
would always be above the threshold.
· There is potential for advice in relation to these products to
have a significant impact on a consumer's overall
investment and/or risk coverage.
· The complexity of these products which often means that
they are not easily or commonly understood.
7.20 The proposal would not alter the need for the advice to be
appropriate or for the adviser to be appropriately trained to provide
personal advice.
Impact analysis
Impact group identification
7.21 Groups that will be affected by the proposed amendments are:
· financial service providers involved in the provision of
personal advice;
· consumers of personal advice; and
· government and regulators.
Assessment of costs and benefits
Option A: No action
Benefits Costs
Consumers Consumers would receive a full SOA for The ability for small-scale investors to
advice, where they are able to access access and afford financial advice would be
advice, which may reduce the potential for limited because advisers would continue to
consumers to make inappropriate be reluctant to provide advice where it is not
investment decisions. economical to do so.
Industry Where advisers provide advice in relation to
relatively small investments, they would
continue to bear the relatively high costs of
providing personal advice to clients with
limited ability to recover costs.
Government ASIC would be able to access documented
SOAs provided to clients to monitor
compliance with the law.
125
Option B: Subjective proportionate threshold for the provision of a
Statement of Advice
Benefits Costs
Consumers Increased access to advice for consumers In many situations where advice is provided
where advisers are more willing to provide to small-scale investors that are average
advice because it is economically viable as income earners, it would still not be
a result of reduced costs. [3] economical for an adviser to prepare an
SOA for a client. Therefore, consumers
would still not be able to access advice in
some situations.
In the example of an average income of
$42,000, an adviser would be required to
provide an SOA for advice in relation to an
investment amount of $4,200. Based on a
commission of two per cent, the adviser
would only be able to recover $84, despite
incurring a cost of approximately $260 for
preparing the SOA. [-3]
A reduction in the disclosure that is provided
to consumers in an SOA where the
investment amount is less than 10 per cent
of the client's gross annual income.
Without documented advice, there is a risk
that consumers could make inappropriate
investment decisions. However, an ROA
would need to be kept by the adviser, which
the client would be able to request if they
wished. [-2]
Industry While this proposal would not reduce all There would be added complexity for
costs associated with providing advice, it advisers, and less certainty for consumers,
would reduce some costs of providing in regard to determining whether an SOA is
advice to smaller-scale investors. A lengthy required to be provided. [-2]
SOA would be costly for advisers to produce
relative to the investment amount in many
cases. This option would reduce this cost.
[2]
Costs for the adviser associated with
preparing a Record of Advice. [-1]
Government While ASIC would not be able to access The full extent of the SOA would not be
documented SOAs provided to clients to available for assessment and enforcement
monitor compliance with the law, it would be by ASIC. Compliance by ASIC will be based
able to monitor Records of Advice. [2] on monitoring of ROAs. [-1]
Sub-rating 7 -9
Overall rating -2
Option C: Objective dollar threshold for the provision of a Statement of
Advice
Benefits Costs
Consumers Increased access to advice for consumers A reduction in the disclosure that is provided
where advisers are more willing to provide to consumers in an SOA where the
advice to small-scale investors (that is, for investment amount is less than $15,000.
advice in relation to investment amounts Without documented advice, there is a risk
less than $15,000) because it is that consumers could make inappropriate
economically viable as a result of reduced investment decisions. However, a Record of
costs. [3] Advice would need to be kept by the adviser
and provided to the client. Further,
additional disclosures will be required for
advice in relation to superannuation. [-2]
Industry While this proposal would not reduce all Costs for the adviser associated with
costs associated with providing advice, it preparing a Record of Advice and the
would go a significant way towards reducing additional disclosures for superannuation. [-
the costs of providing advice to small-scale 1]
investors. A lengthy SOA would be costly
for advisers to produce relative to the
investment amount in many cases. This
option would reduce this cost. [2]
From a compliance perspective, the
threshold would be a relatively simple
indication for advisers to determine whether
a SOA is required to be provided. [2]
Government While ASIC would not be able to access The full extent of the SOA would not be
documented SOAs provided to clients to available for assessment and enforcement
monitor compliance with the law, it would be by ASIC. Compliance by ASIC will be based
able to monitor Records of Advice. [3] on monitoring of ROAs. [-1]
Sub-rating 10 -4
Overall rating 6
Business Cost Calculator
7.1 This section presents the results of the analysis of the cost impact on
business of the various options.
7.2 All options assumed the following: 3000 businesses were affected by
this proposal based on the number of licensees authorised to give
personal advice; approximately 720,000 SOAs are produced per annum;
the cost of producing an SOA is $260 (as stated earlier) and
approximately 5 per cent of those SOAs are provided for advice in
relation to investments of less than $15,000. Further it was assumed that
the variable costs in relation to this proposal related to the documentation
time of an SOA or an ROA, and that the research and preparatory times
were fixed. On this basis, it was assumed that the documentation time
(and therefore cost) for producing an ROA was approximately half that of
an SOA.
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7.3 The analysis results in the following costs for each option:
Option Cost per business Total cost
Option A $3,120 $9,360,000
Option B $2,470 $7,410,000
Option C $2,275 $6,825,000
7.1 Against the benchmark of the current regulatory requirement (Option
A) to provide an SOA in all circumstances where personal advice is
provided, Options B and C both reduced the cost of disclosure for the
provision of advice in relation to the population group (that is, advice in
relation to investments of less than $15,000). The industry wide cost of
Option B is slightly greater than that of Option C due in part to the
complexity of determining the threshold under this Option B. In
addition, Option B would open up the provision of high value advice
without SOA documentation where the client has higher gross annual
income. In conclusion, Option C resulted in the greatest cost saving, is
less complex to administer and provides consumer safeguards in relation
to the cap of the value of advice documented by an ROA and the
limitations in relation to superannuation advice.
Consultation
Summary of comments
7.2 Submissions to the Corporate and Financial Services Regulation
Review Proposals Paper outlined the following views of the proposal.
7.3 Industry was generally in support of the proposal in principle and the
aims it was seeking to achieve. A general dollar threshold was
considered a sound approach as it was easy to apply in all situations and
provided meaningful relief to advisers and therefore would contribute
significantly to expanding access to robust financial advice.
7.4 Some submissions considered that it is often the clients holding
smaller account balances who require the protection offered by an SOA.
However, currently it is these clients who are unable to access advice at
all, either because an adviser does not consider it worthwhile to provide
advice, or because the client is unable to afford the fee charged by the
adviser.
7.5 Some submissions noted that a threshold would enable advisers to
provide personal advice to clients on a more commercially-viable basis.
There were variations in what was considered to be an appropriate
threshold. Industry considered the level of the threshold to be too low
(when set at $10,000) and as such not broadly applicable or valuable,
therefore $15,000 was considered a reasonable threshold.
7.6 Further comments on the proposal were:
· The exclusion of superannuation and life risk insurance from
the threshold was considered to skew advice away from
superannuation, create operational difficulties in managing
super and non-super clients; and exacerbate the perceived
underinsurance of Australian lives;
· The application of the threshold to future or regular
contributions without a sunset period would mean the
threshold would rarely apply, as most investments to which
future or regular contributions were made would at some
point reach the threshold;
· The ongoing relevance of the threshold if it were not
appropriately indexed;
· The appropriateness of still requiring the ROA as a
disclosure option, given it still imposes burden on the
planner and therefore should be modified;
· The value of the proposal is limited if it is applied only to
initial investments, given the minimum investment
requirements attached to most products. The proposed
threshold should apply irrespective of an existing balance
the client might have.
7.7 Consumer groups argued that there was insufficient evidence to
suggest that the proposal will in fact expand the availability of personal
advice. As discussed above however, it is currently these clients who are
unable to access advice at all, and industry has indicated that they
supportive of the option which should lead to be an increase in the
provision of small scale investment advice.
7.8 In addition, consumer groups argued that there lacked evidence to
suggest that advice will be of sufficient quality to assist the consumer and
that it will not be conflicted advice associated with a product
recommendation. They considered that consumers with relatively small
amounts to invest are most vulnerable, lack investment experience and
financial literacy, and will not be given an adequate level of disclosure.
7.9 They were concerned that investment products will be sold as a
series of parcels in order to avoid the SOA. It is proposed to apply a
sunset clause to the value of the advice so that where the advice commits
129
the client to regular or future investments, the threshold will relate to the
value that the initial investment and the future amounts anticipated to be
reached in the next 12 months. Further, it is proposed to introduce an
anti-avoidance mechanism aimed at ensuring it is not possible to carve up
an investment amount into parcels less than $15,000 in order to be
providing advice on an investment less than $15,000 and therefore avoid
the requirement to produce an SOA. This mechanism will take the form
of an anti-avoidance provision that will provide for civil or criminal
action for a breach of s 946A (the requirement to give a Statement of
Advice) of the Corporations Act.
7.10 Further, consumer groups raised concerns that the removal of the
SOA for investments allowed for advice to be provided without adequate
consumer protection. They argue that a ROA is not sufficient to provide
ASIC with the ability to examine the appropriateness of that advice. It
was considered to limit the ability of internal and external dispute
resolution schemes to review and resolve problems between the
consumer and licensee.
7.11 The option includes a number of safeguards designed to address
these concerns to the extent possible such as the requirement to provide
the ROA to the client rather than upon their request. The ROA is then
available for dispute resolution purposes.
7.12 While more supportive of the proposal, the superannuation industry
groups supported the consumer views that superannuation should be
excluded from the threshold. However, the exclusion of superannuation
would to some extent create unintended outcomes such as advice skewed
away from superannuation and additional cost to business in establishing
dual mechanisms for superannuation and non-superannuation activities.
Conclusion and recommended option
7.13 The problem to be addressed is that consumers that wish to obtain
financial advice in relation to a relatively small investment amount are
unable to access or afford financial advice due to the relatively high costs
of advice.
7.14 Option A is not preferred as it would not reduce the costs associated
with preparing SOAs for advice in relation to relatively small investment
amounts.
7.15 Options B and C would reduce the costs associated with preparing
SOAs in relation to advice on relatively small investment amounts while
still ensuring that records of advice are kept.
7.16 Consultations have highlighted the difficulty in determining what
might be an appropriate threshold above which an SOA would be
required. Consideration was given to the relative significance of an
investment amount and the relative simplicity of complying with a
threshold. Option B would apply a scale of significance relative to
annual income, which may not be an appropriate measure for at least two
reasons. Firstly, this may not improve access to advice for lower income
earners as an SOA would be required to be prepared well below the
adviser's break-even point of recovering the cost of preparing the SOA.
Secondly, high income earners would not receive an SOA if the
investment amount was less than 10 per cent of their wage, even if the
amount would generally be considered to be substantial. For example, a
client with an annual income of $200,000 would not receive an SOA for
advice in relation to an investment amount of $19,000, even though this
amount might be considered to be substantial and it is likely that the
adviser would be able to at least recover the cost of preparing the SOA
through remuneration.
7.17 Option B would also introduce a movable and subjective threshold
that would be difficult for the adviser and consumer to determine, and
would be difficult for the regulator to monitor compliance.
7.18 While Option C creates a threshold of what is considered to be
`significant', it is linked to the point at which it becomes commercially
viable for an adviser provide advice, based on recovering the cost of
preparing an SOA. An objective threshold test would also be relatively
simple to comply with and administer.
7.19 Option C is the preferred option as it would reduce the costs for
advisers in providing advice for relatively small-scale investors and as a
consequence, would increase consumers' access to affordable financial
advice. Consumer protection would be maintained through the
requirement to provide an SOA for advice above the threshold and the
requirement to provide a Record of Advice below the threshold.
Product activity and data collection (Proposal 1.9)
Problem
Situation
7.20 A Product Disclosure Statement (PDS) contains key information
regarding a financial product offered to investors. For most classes of
financial product, section 1015D of the Corporations Act requires the
product issuer to lodge an `in use' notice with ASIC within five business
days of the first use of the PDS. The requirement ensures ASIC is aware
of all products being promoted in the market.
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Problem
7.21 Currently notices are provided to ASIC in hardcopy on a
downloadable form (FS53) from the ASIC website. ASIC received
approximately 12,000 such notices in 2005. Some submissions
calculated the cost to industry of lodging in-use notices. With
approximately 12,000 notices issued in 2004 each attracting a $33
lodgment fee, this equates to $396 000 for lodgment alone. While there
is a relatively small cost for lodging an `in-use' notice with ASIC, for
large businesses when multiplied across the wide range of PDSs prepared
by banks and the competitive positioning of interest rates, the cost of
lodging fresh `in-use' notices with ASIC can be significant.
7.22 Once received by ASIC, the notice has limited regulatory use
because the data does not provide any means for informing ASIC when a
PDS is out of date and/or when a product is withdrawn from the market
other than receipt of a new notice which assumes it replaces the prior
notice.
7.23 Business considers the preparation of the in-use notice to be time-
consuming and repetitive as often the change is simply a new date of
issue or new fee information. All questions, such as those relating to the
complaints mechanism, contact person and so forth, must still be
completed each time a form is lodged even when there has been no
change. The current mechanism is not sufficiently flexible to address a
range of varying circumstances as it is a one-size-fits-all document with
many items relevant only to superannuation.
7.24 Further, where the change is one relating to a change in broader
circumstances such as an interest rate change, a change in the monetary
amount of an already applicable fee or government tax or, in the case of
pensioner deeming accounts, a change in the deeming interest rate (which
can be made at any time by the responsible Minister), business is required
to revise its PDSs and lodge a new `in-use' notice to reflect these changes
for circumstances beyond their control using a mechanism that they
consider is time consuming, inefficient and potentially costly.
Objective
The policy objectives are to:
· ensure ASIC is aware of all product information that it
requires to be useful;
· minimise cost to business in providing the information; and
· enhance protection of consumers by ensuring ASIC has
regulatory oversight of all financial products able to be sold
to investors.
Options
Option A: No action
7.25 Continue with the current arrangements whereby hard copy in-use
notices are provided to ASIC.
Option B: Remove all legislative requirements to report Product
Disclosure Statements to ASIC
7.26 Option B proposes the abolition of the requirement to notify ASIC
of new Product Disclosure Statements.
Option C: Introduce on-line reporting of Product Disclosure
Statements to ASIC
7.27 Option C proposes an on-line reporting mechanism for product
issuers to advise ASIC of matters relating to PDS distribution. This
mechanism will create efficiencies for business in their lodgement of the
required information and for ASIC in their administration of that
information.
7.28 It proposes continuation of payment of a lodgment fee when the
first in use notice is lodged only. All subsequent changes to that
notification will not be charged.
7.29 The report will be required to be lodged when:
· A Statement (as defined for section 1015D(2)) is first given
to someone in a recommendation, issue or sale situation.
· A Statement is no longer given in a recommendation, issue
or sale situation.
· Changes are made to the fees and charges contained in the
enhanced fee disclosure table that must be provided in a
Statement. The enhanced fee disclosure table provides a
standard approach for superannuation and managed
investment products to disclose fees to consumers and
enable consumers to more effectively make comparisons
between products.
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7.30 The enhanced fee disclosure table was introduced as part of
Superannuation Choice on 1 July 2005. The table standardises the
description and calculation methods for fees and costs to allow for
comparability and understanding of this information in Product
Disclosure Statements.
7.31 Amongst other things, the table requires Product Disclosure
Statements for superannuation and managed investment products to
include the following components:
· A `Consumer Advisory Warning Box' which alerts
consumers to the importance of value for money and the
compounding value of fees and costs and their impact over
time on end benefits;
· A `Fees and Costs' template which is a standardised fee
table that simplifies the disclosure of fees and costs and
allow for more effective comparison across products;
· An `Additional Explanation of Fees and Costs' section
which will include additional important information about
fees and costs; and
· An `Example of Annual Fees and Costs' which will
provides an illustrative worked example of fees and costs in
a balanced investment option for a specified account balance
and level of contributions.
Impact analysis
Impact group identification
7.32 Groups that will be affected by the proposed amendments are:
· consumers
· financial product issuers; and
· government and regulators.
Assessment of costs and benefits
Option A: No action
Benefits Costs
Consumers
Industry Businesses would continue to incur costs to
provide cumbersome and inadequate
information.
Government ASIC would continue to receive in-use Out of date information provided to ASIC,
notices (and associated lodgment fees) from which could potentially hinder its regulatory
financial product issuers. performance.
Option B: Remove all legislative requirements to report Product
Disclosure Statements to ASIC
Benefits Costs
Consumers Potential for misleading PDSs, which are
not difficult for ASIC to detect. There is a
risk that consumers would be misled and
may lose their investments in defective
products. Investor protection would be
reduced as ASIC would not be aware of
current financial products in the market. [-3]
Industry No cost to business in submitting the in-use
notice. [2]
Government No administrative cost to ASIC of receiving No revenue receipt for ASIC from
in-use notices. [1] lodgement fee [-1]
Sub-rating 3 -4
Overall rating -1
Option C: Introduce on-line reporting of Product Disclosure
Statements to ASIC
Benefits Costs
Consumers Increased consumer protection arising from
ASIC's ability to monitor and act upon the
information provided in in-use notices
regarding PDSs. [3]
Industry Reduced compliance cost for business. [2] Cost to business and ASIC of provision of
dual system (paper and on-line) during the
transition period to on-line only. [-1]
Government Provision of useful, timely information to Cost to ASIC in development of on-line
ASIC for regulatory purposes. [3] notification system. [-2]
Continued collection of lodgement fee. [0]
Once in place, reduced resourcing
requirements for ASIC administration of in-
use notices. [1]
Sub-rating 9 -3
Overall rating +6
Business Cost Calculator
7.1 This section presents the results of the analysis of the cost impact on
business of the various options.
135
7.2 For all options, it was assumed that all businesses licensed by ASIC
with the authorisation to issue financial products do so. It was assumed
that the number of in use notices currently received by ASIC per annum
represented the number of new products and changes notified to ASIC
and that a small percentage of these would be withdrawn or amended
each year. Assumptions were made regarding the length of time required
to complete and submit the required form and hourly administration costs
to business.
7.3 The analysis results in the following costs for each option:
Option Cost per business Total cost
Option A $1,500 $3,600,000
Option B $0 $0
Option C $1,200 $2,880,000
7.1 Option B proposes that all legislative requirements to report PDSs to
ASIC be abolished. While this creates the lowest cost outcome, it is
considered that abolishing all reporting to ASIC imposes unnecessary
risk due to the limitations of information that would be available to
ASIC. Option C will reduce the cost to business of providing in use
notice information to ASIC through the provision of a more efficient
mechanism than is currently available. It is noted that there will be initial
cost to the Government in this option of establishing the on line
mechanism.
Consultation
7.2 Submissions received in response to the Corporate and Financial
Services Regulation Review Proposals Paper were strongly in favour of
enabling electronic lodgement of in-use notices. In addition to requiring
electronic lodgement of in-use notices, the proposal expands the triggers
for requiring notification of information in in-use notices to ASIC.
Industry was concerned that the additional triggers may impose further
red tape and cost on their operations.
7.3 The additional triggers proposed were: change of contact details
previously reported; withdrawal of a financial product; and change to fees
and charges set out in the fee disclosure table.
7.4 ASIC has advised that the critical information for regulatory
purposes is notification of:
· the date a new PDS takes effect (that is, the date it becomes
in-use);
· the date a PDS is no longer on offer (that is, the date it
becomes out of use) (industry is arguing that this can be
difficult to determine particularly in relation to life risk
insurance); and
· changes to fees and charges set out in the enhanced fee
disclosure table.
7.5 If the proposal to enable electronic lodgement of in-use notices
proceeds, industry is keen to ensure that the solution:
· is tailored to take into account the category of financial
product selected so that only those items relevant to the
product are required to be completed (rather than the current
paper notice that requires completion of the whole form
each time); and
· provides adequate security and access controls over the
portal.
7.6 These are both matters of implementation that ASIC would take into
consideration when developing the electronic solution. In addition,
industry would like the proposal to:
· reconsider the five day reporting requirement from the date
the product is first recommended and instead requires
reporting from the date the PDS is prepared; and
· address the payment of lodgement fees and apply an
appropriate fee structure given there are a greater number of
circumstances that will trigger lodgement.
7.7 Reporting periods were considered appropriate and not subject to
change. It was considered appropriate to apply fees when the first in use
notice is lodged only. All subsequent changes to that notification will not
be charged.
Conclusion and recommended option
7.8 The problem relates to the costs associated with lodging PDS in-use
notices, compared with the regulatory benefit from ASIC receiving such
notices.
7.9 Option A reflects the current regulatory arrangements which do not
address the current problem that ASIC has in being unable to efficiently
monitor the market for financial products and determine when a product
is no longer in use, which results in a growing database of PDSs that have
137
been lodged with ASIC irrespective of whether the product is still
available in the market. It is against this backdrop that the other options
were considered.
7.10 Option B would reduce the cost to both industry and the regulator
in terms of lodging PDS in-use notices and administering a notice
system, but would remove the ability for the regulator to monitor the
market for financial products.
7.11 Option C is the preferred option as it would improve the regulatory
usefulness and efficiency of the PDS in-use notice system and would
reduce compliance burdens on business.
Implementation and review
7.12 The recommended actions all require legislative amendments to the
Corporations Act.
7.13 ASIC, in its role as regulator, will provide guidance to licensees to
assist them in meeting these requirements. ASIC, through its role in
monitoring compliance and approving alternative arrangements, will
monitor the effectiveness of implementation and will advise on any
practical difficulties on an ongoing basis. Through this monitoring role,
the Government will be kept informed on any problems the proposed
regulation may cause in meeting its objectives or in possibly having
unintended consequences.
7.14 A review of the regulations will be undertaken as part of the
Government's ongoing review processes.
2 Chapter 9
Regulation impact statement: thresholds
for reporting for large proprietary
companies
Background
9.1 A proprietary company is a company incorporated under the
Corporations Act that is limited by share capital, has no more than
50 non-employee shareholders and has not raised money from the public.
Under the Corporations Act 2001, a proprietary company is large for a
financial year if it satisfies at least two of the following tests:
· the consolidated gross operating revenue for the financial
year of the company and the entities it controls is
$10 million or more;
· the value of the consolidated gross assets at the end of the
financial year of the company and the entities it controls is
$5 million or more; and
· the company and the entities it controls have 50 or more
employees at the end of the financial year.
9.2 A large proprietary company is required to prepare and lodge an
annual report with the Australian Securities and Investments Commission
(ASIC). However, there are two minor exceptions to the general
requirement for large proprietary companies to lodge annual reports.
These exemptions are applied to wholly-owned subsidiaries using an
ASIC class order and companies incorporated prior to 1995 and had their
accounted audited.
9.3 The annual report is made of up an audited financial report and a
directors' report. Once they are lodged with ASIC, they are made
available to members of the public for a prescribed fee ($17 if the report is
less than 10 pages and $33 if it is 10 pages or more). Estimates from
ASIC indicate that, on average, annual reports are accessed approximately
3 times per year. However, this figure underestimates the actual number
of people that benefit from the information contained in the annual
reports. A range of users, including credit-rating agencies and journalists,
139
directly access this material from ASIC and disseminate it further within
the community.
9.4 There are currently 5,030 large proprietary companies which lodge
annual reports with ASIC. The requirement for large proprietary
companies to lodge their financial reports was introduced in the First
Corporate Law Simplification Act 1995 to focus regulation on the
financial affairs of proprietary companies which have a significant
economic influence. Requiring these companies to lodge annual reports is
in the public interest for the following reasons:
· The collapse of an economically significant company could
have a wider impact on the community in general
particularly in regional areas. As such, the community has
an interest in the financial position of large proprietary
companies.
· Smaller trade creditors are not in a position to demand
financial information before doing business with a company.
In most cases, trade creditors spread their risk by supplying
goods or services to a large number of companies.
However, the larger a company gets, the more likely it is
that trade creditors will be supplying goods or services only
to that company.
· Employees and representative groups are not in a position to
demand financial information from a company. The ability
to access public information on the financial position of the
company ensures they have some comfort that the company
is able to guarantee their ongoing operations. It also ensures
that they are not disadvantaged in the negotiation of
employment contracts. These types of agreements are more
likely to be negotiated with large employers.
9.5 These users derive a direct benefit to the extent that they act on the
information in the annual report and an indirect benefit because they
derive confidence in the knowledge that they can access the information if
they desire it. It is arguable that all companies should be required to
prepare and lodge annual reports because companies, unlike other
business entities, have the benefit of limited liability. However, it is
considered that the costs of imposing financial reporting obligations on
small proprietary companies would outweigh the benefits given their
operations are not economically significant.
Problem identification
9.6 The issue that is being addressed is that under the current thresholds,
5,030 proprietary companies are required to prepare and lodge annual
reports. The thresholds for a large proprietary company have not been
adjusted since 1995. As a result, the current thresholds are set at too low a
level to determine economic significance. This means that financial
reporting obligations are unnecessarily being imposed on a proportion of
the proprietary companies that are currently preparing annual reports. As
outlined in the analysis of the impact of options section, it is estimated
that, on average, it costs $60,000 for a company to produce an annual
report.
Objectives
9.7 The objective is to ensure that all economically significant proprietary
companies are required to prepare and lodge annual reports.
Economically significant entities are publicly accountable because of their
size and potential to affect the community and the economy. Adjusting
the thresholds to an appropriate level will reduce the compliance cost
burden for proprietary companies that are not economically significant as
they would no longer be required to prepare and lodge audited annual
reports.
Identification of options
9.8 Outlined below are the options that have been identified for
addressing the problems identified above.
Option 1
9.9 Under this option, the monetary thresholds for the definition of a
large proprietary company would be increased to reflect changes in
inflation (as measured by movements in the gross domestic product
deflator) since they were introduced in 1995. This would mean that the
thresholds increase to:
· consolidated gross operating revenue for the financial year
of the company and the entities it controls of $13 million or
more; and
141
· consolidated gross assets at the end of the financial year of
the company and the entities it controls of $6.5 million or
more.
9.10 In addition, the employee threshold would be removed because the
revenue and asset tests provide the most relevant indicators of company
size. A proprietary company would be large if it satisfies either of the
monetary tests above.
Option 2
9.11 Under this option, the monetary thresholds for the definition of a
large proprietary company would be doubled to account for nominal
economic growth (as measured by changes in nominal gross domestic
product) since they were introduced in 1995. Adjusting the thresholds for
nominal economic growth (instead of real economic growth) means that
the increase in the thresholds will include a component for inflation as
well as economic growth. Under this option, the thresholds increase to:
· consolidated gross operating revenue for the financial year
of the company and the entities it controls of $20 million or
more; and
· consolidated gross assets at the end of the financial year of
the company and the entities it controls of $10 million or
more.
9.12 In addition, the employee threshold would be removed because the
revenue and asset tests provide the most relevant indicators of company
size. A proprietary company would be large if it satisfies either of the
monetary tests above.
Option 3
9.13 Under this option, the monetary thresholds would be increased by a
multiple of 2.5 (that is, 150 per cent). This would result in increases to the
revenue and assets thresholds of $5 million and $2.5 million respectively
in addition to adjusting the thresholds for nominal economic growth.
Under this option, the thresholds increase to:
· consolidated gross operating revenue for the financial year
of the company and the entities it controls of $25 million or
more; and
· consolidated gross assets at the end of the financial year of
the company and the entities it controls of $12.5 million or
more.
9.14 In addition, the employee threshold would be removed because the
revenue and asset tests provide the most relevant indicators of company
size. A proprietary company would be large if it satisfies either of the
monetary tests above.
Option 4
9.15 Under this option, proprietary companies would not be required to
prepare an annual report. Outlined below are the options that have been
identified for addressing the problems identified above.
Analysis of the impact of the options
9.16 These options are being evaluated against each other as well as the
status quo. The following discussion of costs and benefits of the options
is largely qualitative, with some estimates where information is available.
The draft Regulatory Impact Statement, which was released in
conjunction with the Proposals Paper, sought to gain an insight into the
costs and benefits of requiring proprietary company financial reporting.
Option 1
Benefits
9.17 Under this option, approximately 134 fewer large proprietary
companies would be required to prepare and lodge annual reports. This
means that there would be 4,896 large proprietary companies that meet the
new thresholds lodging annual reports with ASIC.
9.18 It is estimated that the average cost of preparing an annual report is
$60,000. This figure is based on the assumption that the average cost to
audit the financial report of a large proprietary company is $40,000 (this
figure would vary depending on the size and complexity of the audit) and
it costs a large proprietary company, on average, $20,000 to prepare a
financial report and directors' report (this figure attempts to take into
account that companies will already be preparing some financial
information for internal reporting and taxation purposes). The saving to
business as a result of this option would be approximately $8.0 million
per year.
Costs
9.19 Users would no longer be able to access the annual reports of 134
proprietary companies. This is a cost for direct users of the annual reports
and an indirect cost to the market as a whole as people no longer have the
confidence in knowing that annual reports are available. It will also
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disadvantage people who benefited from the information being
disseminated in the market as identified in the background section (for
example, a credit-rating agency would no longer be able make
recommendations on these companies because they will not have access to
the necessary financial information). The benefit that users would lose
because they are no longer able to access those reports is difficult to
estimate. However, it is expected that the costs will not be significant
because the 134 companies that would no longer be required to report are
not economically significant, so it is unlikely that the public would be
currently accessing their annual reports.
Option 2
Benefits
9.20 Under this option, 645 fewer large proprietary companies would be
required to lodge annual reports with ASIC. This means that there would
be 4,385 large proprietary companies that meet the new thresholds
lodging annual reports with ASIC. Using the assumptions presented
under Option 1, the benefit to business would be approximately $38.7
million per year.
Costs
9.21 Users would no longer be able to access the annual reports of 645
proprietary companies. This is a cost for direct users of the annual reports
and an indirect cost to the market as a whole as people no longer have the
confidence in knowing that annual reports are available. It will also
disadvantage people who benefited from the information being
disseminated in the market as identified in the background section (for
example, a credit-rating agency would no longer be able make
recommendations on these companies because they will not have access to
the necessary financial information). The benefit that users would lose
because they are no longer able to access those reports is difficult to
estimate. However, the costs will be greater than the costs for Option 1,
but are still unlikely to be significant because the additional 511
companies (645 less the 134 excluded as a result of Option 1) that would
no longer be required to report are also not economically significant. As
these companies are no longer considered to be economically significant,
the public is unlikely to require access to this information.
Option 3
Benefits
9.22 Under this option, 1,006 fewer large proprietary companies would
be required to lodge annual reports with ASIC. This means that there
would be 4,024 large proprietary companies that meet the new thresholds
lodging annual reports with ASIC. Using the assumptions presented
under Option 1, the benefit to business would be approximately $60.4
million per year.
Costs
9.23 Users would no longer be able to access the annual reports of 1,006
proprietary companies. This is a cost for direct users of the annual reports
and an indirect cost to the market as a whole as people no longer have the
confidence in knowing that annual reports are available. It will also
disadvantage people who benefited from the information being
disseminated in the market as identified in the background section (for
example, a credit-rating agency would no longer be able make
recommendations on these companies because they will not have access to
the necessary financial information). The benefit that users would lose
because they are no longer able to access those reports is difficult to
estimate. However, the costs will be greater than the costs for Options 1
and 2, but are still unlikely to be significant because the additional 361
companies (1006 less the 645 excluded as a result of Option 2) that would
no longer be required to report are also not economically significant. As
these companies are no longer considered to be economically significant,
the public is unlikely to require access to this information.
Option 4
Benefits
9.24 This option would result in 5,030 fewer large proprietary companies
being required to prepare and lodge annual reports. Using the
assumptions presented under Option 1, the benefit to business would be
approximately $301.8 million per year.
Costs
9.25 Under this option, all large proprietary companies would be exempt
from the requirements to prepare and lodge annual reports. On top of the
costs outlined in options 1, 2 and 3, removing the mandatory requirements
is likely to result in additional costs that could affect the wider economy
through the loss of confidence and by constraining the ability of large
proprietary companies to access capital (see analysis below). These costs
are unlikely to be relevant for options 1, 2 and 3. However, they are likely
to be substantive for large proprietary companies with revenues in excess
of $25 million.
Economy wide effects
9.26 Under the current regime, economically significant proprietary
companies are required to prepare and lodge annual reports. The reports
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provide a means to access and understand the company's economic
behaviour and bring together fragmented sources of information into a
more informed medium. The information contained in these reports can
provide valuable signals to the market, particularly about the underlying
state of the business, which could affect its on going operations or
financial viability.
9.27 Removing the mandatory requirements would restrict information
flows. The preparation of financial reports provides confidence in this
market sector by providing greater financial transparency. For example,
investors may obtain comfort in knowing the specific factors behind a
company going into administration that can be derived from the
company's annual report. This will help ensure that the collapse of one
company does not reduce confidence in the market more generally. The
effects from any market wide loss of confidence could have a significant
impact on the economy and future economic growth. For example,
investors may divert their savings into other investment forms which are
less productive, reduce liquidity and the depth of the domestic capital
markets and lead to volatility in asset prices. This may also have a flow
on effect of reducing consumption and investments.
9.28 In addition, having annual reports publicly available through ASIC
is likely to significantly lower the search costs for direct users.
Large proprietary companies -- accessing capital
9.29 Removing the obligations to prepare financial reports may limit
immediate access to alternative forms of capital and therefore restrict a
company's ability to expand. For example, in order to list on a stock
exchange, a company must provide audited accounts for the last three
financial years. The absence of statutory requirements to produce
financial reports will not in itself prevent an entity from raising capital
from a public listing as they could voluntarily start producing this material
in anticipation of any public listing. However, the advantage of the
statutory financial reporting requirement is that it enables entities to gain
more immediate access to new capital.
9.30 If entities were unable to access capital through a public listing, they
would have to rely on more traditional forms of financing facilities, such
as bank financing. Access to capital markets enables them to expand their
operations beyond that which would normally be available through bank
finance and pursue innovative ideas. Therefore, removing the
requirements to prepare financial reports could restrict access to varying
forms of capital, leading to a sub-optimal allocation of resources.
Total costs
9.31 The total cost associated with large proprietary companies not
preparing financial reports for all purposes is difficult to estimate.
However, given the wider economic effects, the potential impact on large
proprietary companies accessing capital and general user concerns, these
costs would be significantly greater than the costs under Options 1, 2, and
3. It is expected that the costs of this Option would be considerable and
outweigh the benefits.
Consultation
9.32 The Australian Government released a consultation paper Corporate
and Financial Services Regulation Review Proposals Paper on 16
November 2006, which contained initiatives to simplify the regulatory
system and reduce compliance costs on business. One of the proposals
contained in the Proposals Paper canvassed increasing the reporting
thresholds used to define a large proprietary company to ensure that only
economically significant companies prepare and lodge their financial
reports. The period for public submissions closed on 19 January 2007.
9.33 Submissions were generally supportive of large proprietary
companies preparing and lodging their financial reports with ASIC. In the
main, respondents recognised that economically significant proprietary
companies were publicly accountable with financial reporting obligations.
For example, one respondent noted that the requirement for large
proprietary companies to prepare audited financial reports significantly
enhances the governance of these entities. Most of the submissions from
respondents focussed on the monetary thresholds used to define a large
proprietary company.
9.34 Overall submissions were largely supportive of the proposed 150 per
cent increase in the revenue and asset thresholds. There was broad
acceptance that the higher monetary thresholds would ensure that only
genuine economically significant entities would be captured under the
new reporting framework.
9.35 However, some respondents raised concerns about the proposal to
remove the employee limb. They claimed that removing the employee
limb would lead to a larger number of asset-rich entities that have few
employees and limited revenue streams being required to report for the
first time. They argued that the removal of the employee limb would lead
to higher compliance and administration costs, which was inconsistent
with the Government's objective to reduce the regulatory burden on
business. A number of respondents argued that this anomaly could be
147
addressed by retaining the employee limb, that is, a return to the `two out
of three' test.
9.36 The majority of respondents observed that a mechanism for the
periodic review of the thresholds was necessary to ensure that the
thresholds continue to accurately reflect genuine economic significance
during period and long and sustained economic growth. They also noted
that this would ensure that as the economy expands, entities that are no
longer economically significant would not be captured.
Conclusion and recommended option
9.37 The Government recognises that there is a cost to proprietary
companies in preparing their financial reports. Therefore, it only seeks to
impose these reporting requirements on economically significant
proprietary companies. However, the existing size test has not kept pace
with economic growth and inflation because it has not been adjusted
since 1995. This has increased the regulatory burden on proprietary
companies as more companies exceed the threshold.
9.38 There is significant public interest in the annual reports of
proprietary companies that are economically significant. This discounts
the adoption of Option 4 as the overall costs of not requiring the
preparation of annual reports will significantly outweigh the benefits that
would flow to these companies from reducing the compliance burden. As
identified in the background section, potential users of annual reports
include trade creditors, employees, credit-rating agencies, journalists and
the wider community. In addition, requiring economically significant
proprietary companies to report promotes greater confidence in the market
place and facilitates the public listing of large proprietary companies as a
means of access alternative forms of capital. A size test provides a simple
objective test which a company can apply to determine whether it is
required to lodge an annual report.
9.39 However, submissions to the Proposals Paper raised a concern about
the removal of the employee limb. Submissions noted that the removal of
the employee limb would result in asset-rich entities with few employees
and limited revenue streams being captured whereas in the past these
entities were not required to report.
9.40 Following analysis of this issue, the Government has decided to
retain the employee limb (at 50 employees) and return to the `two out of
three' test. Unlike the monetary thresholds, the number of employees is
not influenced by economic growth or inflation. In addition, productivity
improvements have also meant that businesses can produce higher output
levels with the same level of employees than in the corresponding period
in 1995.
9.41 Under the recommended option, the new thresholds are:
· consolidated revenue for the financial year of the company
and the entities it controls of $25 million or more;
· consolidated gross assets at the end of the financial year of
the company and the entities it controls of $12.5 million or
more; and
· the company and the entities it controls (if any) have
50 employees at the end of the financial year.
9.42 A proprietary company would be large if it satisfies `two of the
three' tests above.
9.43 There would be 1,646 fewer large proprietary companies that would
be required to lodge their annual reports with ASIC under this option.
This means that there would be 3,384 large proprietary companies that
meet the new thresholds. Using the same assumptions that were presented
under Option 1, the benefit to business would be $98.9 million. The main
cost associated with this option is related to the fact that 1,646 proprietary
companies are no longer preparing and lodging their financial reports.
Similar to previous options, the costs relate to direct users losing
confidence in knowing that annual reports were no longer available or loss
of information that was previously disseminated. Given that these entities
are not considered to be economically significant, the costs are unlikely to
be significant.
9.44 There was widespread support from stakeholders, including the
three professional bodies (Institute of Chartered Accountants, CPA
Australia and the National Institute of Accountants) for the recommended
option.
Implementation and review
9.45 It is anticipated that the required legislation to enable the changes to
the reporting thresholds would form part of the Simpler Regulatory
System Bill, which is expected to be introduced in the 2007 sittings.
9.46 The Government recognises that the thresholds need to be reviewed
on a regular basis to ensure that only economically significant entities are
captured under the reporting framework. The Government has decided in
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corporate a mechanism to regularly assess the thresholds through the
Corporation Regulations.
Financial impact statement
9.47 Large proprietary companies are currently required to lodge their
financial statements with ASIC. Direct users of the reports are allowed to
access them for a prescribed fee. This fee is applied to recover ASIC's
administration costs for making the report available to the public. As a
result, implementation of the proposed thresholds will have no financial
impact on the Commonwealth.
3 Chapter 10
Regulation impact statement: rights
issues and employee share schemes
Background
10.1 The issues contained in this Regulatory Impact Statement (RIS)
relate to the fundraising provisions in the Corporations Act 2001 (the
Corporations Act). These provisions are contained in Chapter 6D
`Fundraising' of the Act.
10.2 Chapter 6D was inserted in the Corporations Act through the
Corporate Law Economic Reform Program Act 1999. It builds on the
previous general prospectus disclosure rules, but includes a number of
additional provisions relating to the use of new instruments such as short
form prospectuses and offer information statements, clarification of the
persons liable for contraventions of the provisions, a new definition of
sophisticated investors and others.
10.3 The Chapter 6D provisions have on the whole worked well and
have supported a strong market in fundraisings since they were
introduced. According to a recent survey conducted by KPMG, total
equity fundraisings in Australia in 2005/06 amounted to A$42.5 billion,
which represents an increase of 42 per cent since 2000/01. Over time,
however, it has become apparent that there are some shortcomings in the
practical application of the provisions. Some of these affect the smooth
operation of market processes, while others are more substantial in their
effects, resulting in the skewing of market outcomes in ways that may not
accord with Government policy.
10.4 The proposals examined in this RIS relate to those shortcomings
which have a more substantial distorting effect on the market.
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Problem identification
Rights Issues
10.5 Rights issues are a method of fundraising in which existing
shareholders in a listed entity are given the opportunity to purchase new
shares in proportion to their holdings at specified terms. The current
legislation requires that rights issues must be accompanied by a
prospectus (or a Product Disclosure Statement (PDS) in the case of a
listed managed investment scheme). As a result, the use of rights issues
as a fundraising instrument has, to some extent, been superseded by other
forms of fundraising with less onerous disclosure requirements. An
example is a placement of shares to large institutional investors, which
can be accomplished without a prospectus. One of the consequences of
such placements is that existing shareholders and fund members may be
disadvantaged. Small shareholders, for example, are generally not able to
participate in these placements and therefore cannot acquire shares at the
discount typically offered in such placements.
10.6 Further, rights issues often occur in circumstances where speed of
execution is an important factor. The requirement to produce a
prospectus or PDS may give rise to delays which may cause issuers
difficulties in the circumstances and may lead to some other, faster form
of fundraising being favoured, with consequences for existing
shareholders similar to those set out above.
10.7 The impact of easing disclosure requirements may be illustrated
using the placements market as an example in comparison to the rights
issue market. The ability to raise funds through a placement of shares
without full prospectus disclosure was made possible through the
Corporate Law Economic Reform Program (Audit Reform and Corporate
Disclosure) Act 2004 which inserted section 708A in Chapter 6D of the
Corporations Act. The relevant provisions formally commenced on
1 July 2004, so that any impact they had on the fundraising market would
have become apparent in the statistics for the 2004/05 financial year. The
statistics shown in the table below demonstrate a marked increase in
funds raised through placements in that and the following year. Amounts
raised through rights issues have, in contrast, stayed at a similar level in
those two years and have lagged behind funds raised through placements.
A$bn Equity raised in Australia 2001-2006
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06
Placements 7.48 13.74 7.33 7.74 8.75 11.61
Rights issues 1.95 2.58 6.86 10.10 5.7 5.66
Source: KPMG, survey of Australian capital markets 2005-06.
Employee shareholder schemes
10.1 Employee Shareholder Schemes (ESSs) are held to improve the
productivity of the economy by aligning the interests of employees with
those of their employer. The Australian Government's established policy
therefore supports the introduction of ESSs in companies, with a variety
of measures being put in place to give effect to the Government's policy.
10.2 The offer and issue of shares to employees constitute actions that
fall within the scope of the investor protection provisions of the
Corporations Act. The consequences are that under the law, companies
establishing ESSs must comply with the fundraising requirements in
Chapter 6D as well as the licensing and disclosure requirements in
Chapter 7 of that Act. In addition, the current law relating to the
self-acquisition of shares by companies creates difficulties for the
practical implementation of ESSs. The cumulative effect is to discourage
the wider establishment of ESSs, especially among unlisted companies.
10.3 Relief from the full provisions of the law is provided by the
Australian Securities and Investments Commission (ASIC) for listed
companies, based on the consideration that ongoing disclosure of all
price-sensitive information is required as a condition of maintaining a
listing. Unlisted companies, however, do not benefit from this relief.
The ultimate consequence is that employees of unlisted companies
generally have fewer opportunities to participate in the ownership of their
employers than in the case of listed companies.
Policy objective
Rights issues
10.4 The objective is to create an environment in which companies make
decisions on fundraising methods based on comparative merits and
characteristics rather than on regulatory requirements. This would be
achieved by creating a level playing field for all comparable fundraising
methods.
10.5 The solutions identified should impose the lowest possible costs on
companies wishing to raise funds, in order to encourage an active market
in fundraisings of all descriptions. It is, however, important at the same
time to ensure that investors are provided with all the information they
require to make an informed decision about whether to participate in the
fundraising or not.
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Employee share schemes
10.6 The discouragement of ESSs in unlisted companies through the
impact of the investor protection provisions of the Corporations Act does
not accord with the general policy of supporting the introduction of ESSs.
The objective is to minimise the impact of these investor protection
provisions on the formation of ESSs in unlisted companies, while
ensuring that employees who are offered a chance to participate in an
unlisted company ESSs are provided with sufficient information to make
an informed decision on whether to participate or not.
10.7 The Australian Government's policy supporting ESSs in general is
based on a number of benefits that may accrue to companies and the
wider economy through the establishment of ESSs. The Nelson Report
into employee share ownership in Australia (tabled in 2000) identified
the main benefits as follows:
· better alignment of the interests of general employees and
employers, leading to more productive enterprises;
· an increase in national savings;
· facilitation of the development of certain small and medium-
sized companies, especially in certain sunrise industries such
as information technology and biotechnology; and
· facilitation of employee buyouts and succession planning in
small businesses.
10.8 The Government's response to the Nelson Report reaffirmed its
policy approach to ESSs, which balances promoting benefits that may
accrue as a result of aligning the interests of employees and employers
and limiting opportunities for overuse. In 2004, the Government set a
target to increase the proportion of employees with shares in their
company to 11 per cent by 2009, compared to 5.9 per cent in 2004.
10.9 To further encourage the growth of ESSs in Australia, the
Government has established an Employee Share Ownership Development
Unit within the Department of Employment and Workplace Relations
(DEWR). The unit's activities include:
· providing information and raising awareness about the
potential benefits of employee share ownership through
information materials and seminars;
· assisting employers and employees with design and
implementation of schemes; and
· collecting information about the barriers to the uptake of
employee share ownership and informing developments to
overcome these barriers.
10.10 Information on the Government's policies in relation to ESSs and
specific measures to encourage their wider use is available through the
units website, which may be accessed through the DEWR website at
www.dewr.gov.au.
10.11 The Australian Government has also provided a range of tax
benefits to encourage the wider establishment of ESSs. However, the
amendments examined in this RIS do not address the tax treatment of
ESSs and do not propose any changes in this respect.
Implementation options
Rights issues
Option A: Do nothing:
· Under this option listed entities raising funds through a
rights issue would have to produce a prospectus or PDS.
Certain other forms of fundraising such as institutional
placements would not require a prospectus, as provided for
in the current law.
Option B: Require a prospectus for all fundraisings:
· Under this option all forms of fundraising would require a
prospectus or PDS, in order to ensure that all investors,
including retail investors, were able to participate in these
fundraisings. This would address the disadvantage suffered
by small members of listed entities in institutional
placements where they are not able to participate because of
the lack of adequate disclosure.
Option C: Remove the prospectus requirement for rights issues subject
to the obligation to provide certain defined information to the market:
· Under this option the requirement to issue a prospectus or
PDS for rights issues would be removed in the case of listed
entities. The scope of the exemption would be limited to
listed entities on the grounds that the combination of an
original prospectus on listing and the continuous disclosure
rules would ensure the provision of an appropriate flow of
information to members necessary for informed
decision-making.
155
· However, under certain circumstances as defined in the
Australian Securities Exchange Listing Rules price-sensitive
information may be withheld from the market. It would be
necessary to provide that such information must be disclosed
before a rights issue can proceed. This could be achieved by
requiring that a `cleansing' notice, modelled on the
provisions of section 708A of the Corporations Act, be
provided.
· Cleansing notices as required under section 708A are limited
to the provision of any information withheld from the
market under the Australian Securities Exchange Listing
Rules. They are therefore far more restricted in scope than a
prospectus or other disclosure document as defined in
Chapter 6D of the Corporations Act, and therefore impose a
much lower compliance burden on issuers.
· Under this option a new section would be inserted in the
Corporations Act dealing with the exemption of rights issues
from the disclosure requirements, including the requirement
to provide a cleansing notice. The exemption would extend
to the issuer only, since any on-sales by third parties (such
as an underwriter to the issue) could take advantage of the
existing disclosure exemption in section 708A. Such
on-sales would have to be covered by the issue of another
cleansing notice, as required under section 708A.
· Further, in certain circumstances rights issues may
potentially lead to a shareholder or underwriter acquiring
control or obtaining or significantly increasing voting power
above the 20 per cent takeover threshold. It is vital to
ensure that members are provided with full information on
the potential effects of the rights issue before they decide
whether or not to take up their rights. The contents
requirements for the cleansing notice would therefore be
worded in such a way that issuers would have to provide
information on the effects of the rights issue on the control
of the company, as well as the consequences of any potential
effects on control.
Employee share schemes
Option A: Do nothing:
· Under this option unlisted company ESSs would continue to
have to comply with the disclosure and licensing provisions
of the Corporations Act. The main requirement in this
respect is the provision of a prospectus including audited
financial statements. Certain licensing requirements would
also apply to the sponsoring company or related entities
established for the operation of the ESS. An example would
be the requirement for trustees managing the scheme on
behalf of employees to hold a licence for the provision of
custodial and depository services. Listed companies, as
mentioned above, would continue to receive relief from
most of these requirements.
Option B: Provide extensive relief for unlisted company ESSs from the
relevant provisions of the Corporations Act
· The main relief would be to remove the requirement to
provide a prospectus including audited financial statements,
and substitute a specific ESS document tailored to the needs
of employees in these situations.
· The requirements in relation to the proposed ESS document
would differ from the prospectus requirements by providing
a specific list of items to be included. The items would
mainly relate to the nature of the securities to be offered, the
working of the plan under which employees would
participate in the ESS, amounts payable by employees for
shares acquired, the tax implications for participating
employees and an explanation of how the plan would be
administered and managed. Small proprietary companies as
defined in the Corporations Act would be released from the
requirement to provide audited financial statements. In
addition a statement would have to be included that the
document was not a prospectus, and provided a lower level
of disclosure than a prospectus.
· The general disclosure test applying to a prospectus, that it
must contain all information that an investor and their
professional adviser would reasonably require to make an
informed assessment of the offer, would not apply to the
ESS disclosure document. The specific items that are
required to be included in a prospectus would not apply.
This would result in a lower level of disclosure of
information to employees, and would significantly reduce
the cost of compliance to companies in producing these
documents.
· Extensive licensing relief would also be provided, which
would free companies from the need to submit relevant
157
applications to ASIC and comply with the initial and
ongoing licensing requirements.
Option C: Provide limited relief for unlisted company ESSs from the
relevant provisions of the Corporations Act
· Under this option the licensing and disclosure requirements
would be reduced to a level that would remain consistent
with providing an adequate level of investor protection for
employees considering participating in unlisted company
ESSs. Specific proposals under this option include:
· Facilitate the use of Offer Information Statements as defined
in the Corporations Act for unlisted company ESSs. The
content requirements for prospectuses are defined on a very
high level in the Corporations Act as encompassing all the
information that an investor would reasonably require to
assess the offer made. As a consequence, substantial due
diligence by legal advisers is required to ensure compliance
with the law. The content requirements for an Offer
Information Statement, on the other hand, are expressed in
narrower terms that do not require extensive due diligence
exercises.
· Audited financial statements would continue to be required.
The reason is that reliable financial statements are held to be
essential for assessing the condition and prospects of a
company.
· Partial licensing relief would be granted where it would not
impact on the interests of employees. Certain critical
functions, such as offering advice to employees considering
participation in the scheme, would continue to require an
appropriate licence.
· Relief from the provisions of the law relating to the
prohibition of the self-acquisition of shares by a company or
related entity would be granted to facilitate the daily
operation of ESSs.
Assessment of impacts
10.12 Impacts are divided between three impact groups (consumers,
business and government). Typical impacts of an option on consumers
might be changes in access to a market, the level of information and
disclosure provided, or prices of goods or services. Typical impacts of an
option on business would be the changes in the costs of compliance with
a regulatory requirement. Typical impacts on government might be the
costs of administering a regulatory requirement. Some impacts, such as
changes in overall confidence in a market, may impact on more than one
impact group.
10.13 The assessment of impacts in this regulation statement is based on
a seven-point scale (-3 to +3). The impacts of each option are compared
with the equivalent impact of the `do nothing' option. If an impact on the
impact group would, relative to doing nothing, be beneficial, the impact
is allocated a positive rating of +1 to +3, depending on the magnitude of
the relative benefit. On the other hand, if the impact imposes an
additional cost on the impact group relative to the status quo, the impact
is allocated a negative rating of -1 to -3, depending on the magnitude of
the relative cost. If the impact is the same as that imposed under the
current situation, a zero score would be given (although usually the
impact would not be listed in such a case).
10.14 The magnitude of the rating of a particular impact associated with
an option has been assigned taking into account the overall potential
impact on the impact group. The reference point is always the status quo
(or `do nothing' option). Whether the cost or benefit is one-off or
recurring, and whether it would fall on a small or large proportion of the
impact group (in the case of business and consumers), is factored into the
rating. For example, a cost or benefit, even though large for the persons
concerned, may not result in the maximum rating (+/-3) if it is a one-off
event that only falls on a few individuals. Conversely, a small increase in
costs or benefits might be given a moderate or high rating if it would be
likely to recur or if it falls on a large proportion of the impact group. The
rating scale for individual impacts is explained in the table below.
Rating an individual impact
+3 +2 +1 0 -1 -2 -3
Large benefit/ Moderate Small benefit/ No substantial Small cost/ Moderate cost/ Large cost/
advantage benefit/ advantage change from disadvantage disadvantage disadvantage
compared to advantage compared to do nothing compared to `do compared to `do compared to `do
`do nothing' compared to `do nothing' nothing' nothing' nothing'
`do nothing'
10.1 The ratings for the individual impacts compared to the status quo
are then tallied to produce an overall outcome for the option. If it is
positive, it indicates that the option is likely to produce a more favourable
cost/benefit ratio than the status quo. If it is zero there would be no
overall benefit from adopting the option, and if negative the option would
provide overall a less favourable cost/benefit ratio than the `do nothing'
159
option. Ordinarily, options that have the highest positive score would be
the favoured courses of action.
10.2 What is classed as a `large', `moderate' or `small' cost or benefit
depends on the nature of the problem and options being considered. Of
course, the costs and benefits associated with options to address a
problem costing billions of dollars per year are likely to be of a much
greater absolute magnitude than the costs and benefits of options for
dealing with a rather modest issue that effects only a handful of persons.
However, as all the ratings are made relative to the status quo/ do nothing
option for a particular problem, the absolute value of `large' or
`moderate' or `small' is not really important. All that matters is that
within a problem assessment, the impacts of each option are given
appropriate ratings relative to the status quo and each other. If that
occurs, it will be sufficient for the methodology to yield an overall rating
that assists in assessing the relative merits of options, from a cost/benefit
perspective, to address the particular problem.
10.3 An example of the rating calculation for an option, using the
seven-point scale ratings of impacts, is in the table below. The example
is based on a purely hypothetical scenario that a new type of long-
wearing vehicle tyre is being sold and marketed, but it has become
apparent that the new tyres have a higher risk of exploding while in
motion than conventional tyres. The example is designed merely to
illustrate how the rating scale might be used to compare a proposal's
costs and benefits option to the `do nothing' option it is not intended to
be a comprehensive or realistic assessment of options to address such a
problem.
10.4 Illustrative ratings for the problem of a long-wearing tyre that may
fail are provided in the table below:
Option A: Do nothing
Benefits Costs
Consumers Access to a cheaper solution for Risk of tyre failure that can result in
vehicle tyres personal and property damage as a
result of collision. Damage can be
severe but cases are rare.
Industry Some compensation payments to
persons as a result of collisions
caused by the tyre
Government Advantages from a waste
management perspective
Option B: Ban on sale of the new tyre
Benefits Costs
Consumers No persons will not be affected by Lack of access by all consumers to
tyre failure and resultant damage long-wearing vehicle tyres,
(+3) increasing the cost of vehicle
maintenance (-2)
Industry No compensation payments for Transitional costs involved with
accident victims (+1) switching back all
manufacturing/marketing operations
to conventional tyres (-3)
Government Conventional tyres produce more
waste which is costly to deal with (-
1)
Sub-rating +4 -6
Overall rating -2
Option C: Industry-developed quality control standards
Benefits Costs
Consumers Much lower risk of tyre failure and
resultant damage than status quo
(+2)
Industry Significantly less compensation Developing and monitoring
payments for accident victims (+1) industry-wide quality control
standards (-2)
Government
Sub-rating +3 -2
Overall rating +1
10.1 In the above hypothetical example, Option C appears to have a
better impact for consumers and a better overall cost/benefit rating than
Option B. Although Option B appears to offer a slightly better impact for
consumers, it appears to be less effective from an overall cost/benefit
perspective than Option C.
161
Analysis of costs/benefits
Rights issues
10.2 The analysis of the costs and benefits of the options associated with
this measure are summarised in the tables below.
Option A: Do nothing
Benefits Costs
Consumers Retail investors would continue to
be disadvantaged as other forms of
fundraising were used by
companies to avoid the cost of
preparing a prospectus.
Industry Would avoid imposing any The regulatory system would
additional compliance costs on preserve a bias in favour of
industry as they could continue to fundraising methods that do not
raise funds through methods not require prospectus disclosure,
requiring prospectus disclosure. without a fundamental policy reason
for doing so.
Government
Option B: Require a prospectus for all fundraisings
Benefits Costs
Consumers All forms of fundraisings would be Retail investors may suffer from the
treated on an equal footing, by reduction in fundraisings that may
having to provide a prospectus. occur as a consequence of this
(+1) option. The imposition of additional
Retail investors would be able to compliance costs on fundraisings
participate in share placements that currently do not require a
(+2) prospectus would be expected to
reduce the amount of funds raised
in the Australian market. Larger
entities may, for instance, be able to
access the international capital
markets at a lower cost. This could
ultimately have a detrimental effect
on the development of the capital
markets and the financial services
industry in Australia as a whole,
with negative effects across all
sectors of the economy. (-3)
Industry Additional compliance costs would
be imposed on listed entities
through having to provide a
prospectus in cases where none is
currently required. Such costs may
be significant depending on the
amount of funds raised. Minimum
costs for a small fundraising may be
estimated at approximately
$50,000, largely in legal, accounting
and other professional services
fees, but would be much higher
where larger amounts were raised.
(-3)
Option B: Require a prospectus for all fundraisings (continued)
Benefits Costs
Government This proposal would require
increased oversight by ASIC, due to
the larger number of prospectuses
lodged by the market. ASIC vets
prospectuses for infringements of
the contents requirements, and has
the power to issue stop orders
where such infringements are
found. The increased costs would
take the form of additional
personnel and time spent on vetting
prospectuses and taking regulatory
action where necessary. (-3)
Sub-rating +3 -9
Overall rating -6
Option C: Remove the prospectus requirement for rights issues subject
to the obligation to provide certain defined information to the market
Benefits Costs
Consumers This proposal would reduce the There will not be a reduction in the
bias in favour of placements done amount of information provided to
without a prospectus, leading to an investors as all relevant information
increased use of rights issues. will have to be disclosed either
This may benefit retail investors under the continuous disclosure
who are unable to participate in requirements or through the
placements to institutional provision of the cleansing notice.
investors. Institutional placements There may however be some loss of
may still retain a cost advantage convenience to investors in
over issues to retail investors, but accessing the information in
issuers may be more inclined to comparison to the current situation,
consider other factors in deciding where all relevant information is
on the method of fundraisings, summarised in the prospectus. (-1)
such as the less volatile nature of
retail shareholders. (+3)
Industry The requirement to provide an Listed entities would have to provide
appropriate `cleansing' notice a `cleansing' notice to the market
would ensure that investors were prior to launching the rights offer.
fully informed about key This would be done through the
information relating to the rights Australian Securities Exchange's
issue, in particular where there company announcements platform,
was a potential effect on the which is a computerised system
control of the company. (+2) through which announcements by
listed entities are transmitted to the
Listed entities would no longer Australian Securities Exchange and
need to produce a prospectus for a published. The marginal cost of
rights issue. As mentioned above, providing announcements using this
the minimum cost of a prospectus system is small. The requirement to
may be estimated at about issue a cleansing notice may also
$30,000, but could be much more deter certain issuers from
where larger amounts are raised. conducting a rights issue if they are
(+2) unwilling to disclose certain
information to the market. (-1)
163
Option C: Remove the prospectus requirement for rights issues subject
to the obligation to provide certain defined information to the market
(continued)
Benefits Costs
Government ASIC would have fewer
prospectuses to review, against
which the additional costs of
monitoring the increased number
of rights issues would have to be
offset. (+1)
Sub-rating +8 -2
Overall rating +6
Employee shareholder schemes
10.1 The analysis of the costs and benefits of the options associated with
this measure are summarised in the tables below.
Option A: Do nothing
Benefits Costs
Consumers No additional compliance costs Employees of unlisted companies
would be imposed. would continue to have fewer
opportunities to participate in the
ownership of their employers.
Industry ESSs for unlisted companies would
continue to incur high compliance
costs due to the need to comply
with the relevant provisions of the
Corporations Act.
Government The law would continue to prevent
the wider spread of ESSs. This
would also limit the benefits to the
economy attributable to ESSs.
Option B: Provide extensive relief for unlisted company ESS from the
provisions of the Corporations Act
Benefits Costs
Consumers Investor protection levels would be
drastically reduced under this
option. There would be a strong
possibility that some employees
would participate in ESSs without
being provided with an appropriate
level of information about the
company and its prospects. (-3)
Industry There would be a considerable
reduction in compliance costs for
unlisted companies establishing an
ESS. Relief from the prospectus
requirement alone may reduce
costs by a minimum of $50,000 or
more. (+3)
Government The proposal would strongly Subsequent problems relating to
support the Government's policy unlisted company ESSs with
with regard to the wider use of consequent losses of benefits to
ESSs. employees would give rise to
criticism of the law and the lack of
The Government's policy is based protection for employees it
on the wider benefits associated provided. Confidence in the
with ESSs. The Nelson Report into investor protection regime would be
employee share ownership in likely to suffer as a consequence.
Australia (tabled in 2000) identified Calls for reform of the relevant
the main benefits as follows: provisions in the law would be
- better alignment of the interests of likely. (-3)
general employees and employers,
leading to more productive
enterprises;
- an increase in national savings;
- facilitation of the development of
certain small and medium-sized
companies, especially in certain
sunrise industries such as IT and
biotechnology; and
- facilitation of employee buyouts
and succession planning in small
businesses.
(+2)
Sub-rating +5 -6
Overall rating -1
165
Option C: Exempt unlisted company ESSs from certain provisions of
the Corporations Act, while maintaining an adequate level of investor
protection for employees considering participation in such schemes
Benefits Costs
Consumers Employees of unlisted companies
who were offered participation in an
ESS would be given an adequate
level of information and advice in
considering whether to participate
or not. (+3)
Industry There would be a reduction in Unlisted companies would incur a
compliance costs for unlisted certain level of compliance costs for
companies establishing an ESS, establishing an ESS. There would
particularly through the licensing also be ongoing costs where a
relief. (+2) company maintained access to the
ESS for employees on a continuing
basis. An example would be the
need to update the offer document
including the preparation of audited
accounts. Establishment and
ongoing costs would be lower than
those under Option A, but higher
than under Option B. (-2)
Government The proposal would give
appropriate effect to the
Government's policy of supporting
the widespread use of ESSs with
consequent benefits to unlisted
company productivity and the wider
economy, as described in more
detail under the previous option.
(+2)
Sub-ratings +7 -2
Overall rating +5
Business cost calculator
10.1 This section presents the results of the analysis of the cost impact
on business of the various options. In all cases it was assumed that the
status quo option would not impose additional costs on business.
10.2 For rights issues, the option to require a disclosure document for all
fundraisings including rights issues was assumed to affect 1350
fundraisings in total, based on previous year information on fundraisings
in the Australian capital markets. Assumptions were made on the
average cost of producing a prospectus, including the cost of legal advice
and the preparation of audited financial statements. The analysis results
in a per business cost of $145,000 and a total cost of $195.75 million. A
similar analysis was then performed for Option C, abolishing the
requirement for a prospectus to be provided for rights issues and
substituting instead a requirement for a cleansing notice to be released to
the market. Due to the less onerous legal requirements applying to
cleansing notices the per business cost for this option is estimated to be
approximately $14,000. This option would also only apply to rights
issues and not affect any other forms of fundraisings, resulting in a lower
total cost to industry of $10.2 million.
10.3 With respects to unlisted company ESSs, the main difficulty lies in
estimating the number of companies that could be affected by the various
options. Statistics provided by an industry association indicate that there
are a total of 42,100 unlisted companies that could be affected, of which
about 2,500 are assumed to already have an ESS based on Australian
Bureau of Statistics information. Option B would result in extensive
relief from the current disclosure and licensing requirements, and is
therefore assumed to lead to a doubling in the number of companies with
an ESS to 5,000. This results in total industry costs of $267.9 million
based on an annual cost per business of approximately $53,580 to set up
and run an ESS over 25 years. Option C, which provides limited relief
from the current requirements, the corresponding figures are $260 million
based on an annual cost per business of $69,333. Because of the more
restrictive nature of the relief provided, the number of businesses with an
ESS is assumed to grow by 50% to 3,750. The smaller number of
businesses assumed to establish an ESS under Option C results in a lower
total cost to industry. However, the annual cost per business is higher
than under Option B, reflecting the more stringent disclosure
requirements of this option.
Consultation
10.4 Preliminary consultation on these measures was undertaken as part
of the April 2006 Corporate and Financial Services Regulation Review
Consultation Paper. Comments received in response to the consultation
paper have been taken into consideration in identifying and examining
the options outlined in this RIS.
10.5 The majority of the submissions received in relation to rights issues
supported the removal of the obligation to produce a prospectus or PDS
for rights issues of listed entities. The argument generally put forward
was that listed companies are obliged to keep the market informed about
significant developments on an ongoing basis, so that there is little need
to require additional disclosure for a rights issue. One submission from a
major accounting firm proposed that rights issues involving material
acquisitions should not be allowed relief from the obligation to provide a
prospectus or PDS. One submission from an individual stakeholder
suggested extending the relief provided to cover rights issues by overseas
listed companies offered into Australia.
167
10.6 In addition to the Corporate and Financial Services Regulation
Review, the problems in relation to unlisted company ESSs were
considered by a consultation group originally established by Treasury's
Revenue Group to discuss taxation aspects of ESSs. Two sessions were
held with this group to discuss the impact of the Corporations Act
provisions on unlisted company ESSs. In addition, the group provided a
submission specifying in detail the relief requested in relation to
Corporations Act provisions. Feedback received following the
consultation paper, as well as the views expressed by the consultation
group, were taken into account in identifying and examining the options
outlined in this RIS.
10.7 The consultation group, which consists mainly of law firms,
accounting firms and specialised consultants that offer advice to
companies interested in establishing an ESS, proposed wide-ranging
relief for unlisted companies from the relevant provisions of the
Corporations Act. The submissions responding to the consultation paper
generally expressed some caution with respect to this proposal. While
acknowledging the merits of ESSs they also mentioned factors such as
the level of risk involved in unlisted companies, the difficulty of
obtaining relevant information and the comparatively low level of
financial sophistication of most employees. While there was some
support for providing relief for unlisted company ESSs, there was also
considerable concern that an appropriate level of investor protection
should be maintained.
10.8 A second round of consultation was held through the release of a
Proposals Paper in November 2006. The proposal for abolishing the
requirement for a prospectus or PDS for rights issues by listed entities
was supported by all 14 submissions which commented on this proposal.
One submission wanted to maintain the prospectus or PDS requirement
where the rights issue was conducted in connection with a material
acquisition. This suggestion is not supported since this information will
have to be disclosed under the continuous disclosure requirements in any
case. Other submissions wanted to extend the relief in a number of ways,
including raising the current limit applying to share purchase plans
($5,000). This suggestion will be brought to the attention of ASIC, as the
current relief in relation to share purchase plans was provided through an
ASIC class order.
10.9 Eleven submissions were received on the proposals relating to
ESSs. All the submissions supported the proposals, which reflected
Option C as set out above. Several submissions argued that the proposed
relief did not go far enough, and made a variety of suggestions on how
they could be extended. It is unlikely that these suggestions will be
accepted, due to the need to maintain an appropriate balance between
providing relief to industry and maintaining an adequate level of
protection for the potential participants in these schemes. A number of
technical suggestions were made to facilitate the operation of the
proposals. Due to time pressure these suggestions will not be able to be
considered for implementation at this stage, but may be considered
during further consultations with industry in the future.
10.10 Consultation on the draft legislation has been limited in scope due
to insufficient time available prior to introduction of the legislation.
Conclusion and recommended option
Rights issues
10.11 With respect to the problem relating to rights issues in comparison
to other fundraising methods with reduced disclosure requirements, the
conclusion is to recommend Option C.
10.12 Compared to Option A (the `do nothing' option), Option B
imposes heavy additional costs without contributing sufficient benefits to
justify them. These costs are quantified in the Business Cost Calculator
(BCC) analysis provided in section 5.4 and arise from requiring a
prospectus for placements, for which there is no commensurate benefit.
While the measure would achieve the stated objective in removing the
bias inherent in the regulations against rights issues, it would only do so
at an excessive cost which could have serious implications for the
development of the equity market.
10.13 Option C achieves the desired objective of removing the bias
against rights issues without imposing excessive costs on industry and
other stakeholders, as can be seen in the BCC analysis in section 5.4.
This is done by requiring an appropriate level of information to be given
to investors, allowing them to make an informed decision on the merits of
the offer, while providing for an efficient way for companies to make the
information available. In the overall impact assessment provided in
section 5.2, Option C is superior to Option B, but also provides a net
benefit compared to Option A, and is therefore the preferred option.
ESSs for unlisted companies
10.14 In relation to ESSs for unlisted companies, the conclusion is to
recommend Option C.
Please do not delete the following section break
169
2 Index
Unless otherwise indicated, items are in Schedule 1 of the
Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007.
Bill reference Paragraph number
Part 1, item 1 5.71
Part 1, items 2, 81, 82, 140 and 141 5.119
Part 1, item 3 5.76
Part 1, item 4 5.75
Part 1, item 5 5.120
Part 1, item 6 5.80
Part 1, items 7, 93 and 145 5.122
Part 1, item 8 5.123
Part 1, item 9 5.110
Part 1, item 10 5.53
Part 1, items 11, 15 and 19 2.26
Part 1, items 12 to 14 2.24
Part 1, items 12 to 14 and 16 to 18 2.25
Part 1, items 16 to 18 2.23
Part 1, items 20, 21, 72, 74, 89 and 136 5.111
Part 1, items 24 to 27, 31 and 32 2.12
Part 1, item 28 2.17
Part 1, item 29 2.18
Part 1, item 30 2.18
Part 1, item 32 2.13
Part 1, item 33 2.16
Part 1, items 34 and 35 3.19
Part 1, item 35 3.27
Part 1, item 36 2.14
Part 1, item 37 and item 168 2.15
Part 1, item 38 2.42, 2.47, 2.51
Part 1, item 38 2.45
Part 1, item 39 2.68
Part 1, item 40 2.67
171
Part 1, item 41 2.46
Part 1, items 42 and 43 2.69
Part 1, item 44 3.67
Part 1, items 45, 46, 49 and 51 3.51
Part 1, item 47 3.74
Part 1, items 48 and 52 3.69
Part 1, item 50 3.68
Part 1, item 53 3.70
Part 1, item 54 3.42
Part 1, item 55 3.71
Part 1, item 56 3.34
Part 1, items 56 and 58 3.72
Part 1, item 57 3.41
Part 1, item 59 3.73
Part 1, items 60 and 61 3.62
Part 1, item 62 3.57
Part 1, item 63 3.49
Part 1, item 64 3.50
Part 1, item 65 3.77, 3.78
Part 1, item 66 1.95
Part 1, item 67 3.80
Part 1, item 68 6.13
Part 1, item 69 6.14
Part 1, item 70 5.125
Part 1, item 71 5.59
Part 1, item 73 5.118
Part 1, items 75 and 76 5.61
Part 1, item 77 5.62
Part 1, item 78 5.56
Part 1, item 79 5.65
Part 1, item 80 5.69
Part 1, item 83 5.67, 5.72
Part 1, item 84 5.60
Part 1, item 85 5.63
Part 1, item 86 5.77
Part 1, items 87, 88, 143 and 144 5.112
Index
Part 1, items 90, 91, 152, 153 and 154 5.113
Part 1, items 92, 131 and 132 5.79
Part 1, item 94 5.124
Part 1, item 96 5.58
Part 1, item 98, paragraph 761G(6)(aa) 1.93
Part 1, item 99 1.94
Part 1, item 100, paragraphs 761GA(a) and (d) 1.72
Part 1, item 100, paragraphs 761GA(b) and (c) 1.74
Part 1, item 100, paragraphs 761GA(e) and (f) 1.73
Part 1, item 100, section 761GA 1.71
Part 1, item 101 1.80, 1.82
Part 1, item 101, subsection 798C(2) 1.83
Part 1, item 101, subsection 798C(3) 1.85
Part 1, item 101, subsection 798C(4) 1.84
Part 1, items 102, 103 and 104, paragraphs 798D(1)(a) and (b), 1.86
subsections 798D(4) and (5)
Part 1, item 105, subsection 798DA 1.89
Part 1, item 105, subsection 798DA(1) 1.91
Part 1, item 105, subsection 798DA(2) 1.90
Part 1, item 105, subsection 798DA(4 1.92
Part 1, item 106 5.78
Part 1, item 107 1.110, 1.115
Part 1, items 108-115 1.111
Part 1, item 116 1.112, 1.116
Part 1, item 117 1.67
Part 1, item 118 1.62
Part 1, items 119-126 1.113, 1.117
Part 1, item 127 3.81
Part 1, item 128 3.82
Part 1, items 129 and 130 3.84
Part 1, item 133 5.81
Part 1, items 134 and 135 5.74
Part 1, item 137 5.57
Part 1, item 139 5.70
Part 1, items 138 and 142 5.68
Part 1, item 142 5.73
173
Part 1, item 146 5.93
Part 1, item 147 5.98
Part 1, item 148 5.95
Part 1, item 149 5.126
Part 1, item 150 5.97
Part 1, items 151, 155 and 159 5.114
Part 1, items 156, 157 and 158 5.127
Part 1, items 161, 162, 163, 164, 165 and 166 5.115
Part 1, item 167 5.116
Part 1, item 169 2.68
Part 1, item 170 6.16
Part 1, item 171 6.17
Part 1, items 172 and 175 5.117
Part 1, item 173 1.92
Part 1, item 175 1.114, 1.118
Part 1, items 176 to 179 and items 182 to 185 2.61
Part 1, items 180 and 181, and items 186 and 187 2.62
Part 1, items 94 and 146 5.88
Part 1, items 95 and 97 1.120
Part 2, item 188 4.23
Part 2, item 189 4.24
Part 2, item 190 4.10
Part 2, items 191 and 193 7.14
Part 2, item 192 7.15
Part 2, items 194 and 195 7.13
Part 2, item 196 7.12
Part 2, item 197 4.19
Part 3, items 198, 199 and 200 2.32
Part 3, item 203 2.34
Part 3, item 206 2.31
Part 3, item 207 7.18
Part 3, item 208 7.9
Part 3, item 209 7.10
Part 3, item 210 5.83
Part 3, item 211 5.87
Part 3, item 212 5.84
Index
Part 3, item 213 5.85
Part 3, item 214 5.121
Part 3, item 215 5.86
Part 3, item 216 1.121
Part 3, item 217 1.122
Part 3, item 218 1.76
Part 3, item 219 1.68
Part 3, item 221 2.38, 2.40
Part 3, item 222 2.66
Part 3, items 201 and 202 2.35
Part 3, items 204 and 205 2.29
Part 3, items 219 and 220 1.119
Part 4, item 223 1.78
Part 5, items 224, 225 and 226 1.79
Part 6, item 227 and 228 5.105
Part 6, item 229 5.100
Part 6, item 230 5.109
Part 6, item 231 2.54
Part 6, item 232 2.53
Part 6, item 233 3.85
Part 6, item 233(1) 2.59
Part 6, item 233(2) 2.50, 2.60
Part 6, item 233(3) 2.50, 2.60
Part 6, item 234 3.86
Part 6, item 235 3.87
Part 6, item 236 3.88
Part 6, item 237 5.102
Part 6, item 238 1.101, 1.108
Part 6, item 239 1.106
Part 6, item 240 4.25
Part 6, item 241 7.17
Part 6, item 242 5.107
Part 6, item 243 1.103
Part 6, item 244 2.57
Part 6, items 245 and 246 1.104
Schedule 1, item 1, Corporations (Fees) Amendment Bill 2007 1.124
175
Schedule 1, item 1, Corporations (Review Fees) Amendment Bill 2007 2.70
Schedule 1, item 2, Corporations (Review Fees) Amendment Bill 2007 2.71
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