Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
Corporations Legislation Amendment (Financial Services Modernisation) Bill
2009
REVISED
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Human Services
Minister for Financial Services, Superannuation and Corporate Law
the Hon Chris Bowen MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Margin loans 9
Chapter 2 Regulation of trustee companies 35
Chapter 3 Regulation of debentures 89
Chapter 4 Technical amendment relating to jurisdiction of courts 95
Chapter 5 Regulation impact statement - Margin loans 97
Chapter 6 Regulation impact statement - Margin loans - Attachment A
115
Chapter 7 Regulation impact statement - Commonwealth regulation of
trustee companies 147
Chapter 8 Regulation impact statement - Harmonisation of the treatment
of debentures and promissory notes 189
Index 207
Glossary
The following abbreviations and acronyms are used in this
explanatory memorandum.
|Abbreviation |Definition |
|ABN |Australian business number |
|ACN |Australian company number |
|AFSL |Australian financial |
| |services licence |
|AML |Australian market licence |
|APRA |Australian Prudential |
| |Regulation Authority |
|ASIC |Australian Securities and |
| |Investments Commission |
|ASIC Act |Australian Securities and |
| |Investments Commission Act |
| |2001 |
|ASX |Australian Securities |
| |Exchange |
|Bill |Corporations Legislation |
| |Amendment (Financial |
| |Services Modernisation) |
| |Bill 2009 |
|CGT |capital gains tax |
|COAG |Council of Australian |
| |Governments |
|Corporations Act |Corporations Act 2001 |
|CS facility licence |Australian clearing and |
| |settlement facility licence|
|EDR Scheme |External Dispute Resolution|
| |Scheme |
|FSG |Financial Services Guide |
|Green Paper |The Government's Green |
| |Paper issued in June 2008 |
| |titled: Financial Services|
| |and Credit Reform: |
| |Improving, Simplifying and |
| |Standardising Financial |
| |Services and Credit Reform |
|GST |goods and services tax |
|IDR |internal dispute resolution|
|Legislative |Legislative Instruments Act|
|Instruments Act |2003 |
|LUR |loan-to-value ratio |
|Minister |Minister responsible for |
| |administering the |
| |Corporations Act determined|
| |in accordance with section |
| |19A of the Acts |
| |Interpretation Act 1901 |
|PDS |product disclosure |
| |statement |
|regulations |Corporations Regulations |
| |2001 |
|RG |(ASIC) Regulatory Guide |
|RSEs |Registrable Superannuation |
| |Entity licensees |
|SoA |Statement of Advice |
|TCA |Trustee Corporations |
| |Association of Australia |
General outline and financial impact
General background
The Council of Australian Governments (COAG) reached an in-
principle agreement on 26 March 2008 that the Australian Government
would assume responsibility for regulating mortgage credit and
advice, margin loans and trustee companies.
In June 2008, the Australian Government issued the Green Paper
Financial Services and Credit Reform: Improving, Simplifying and
Standardising Financial Services and Credit Reform. The paper
sought feedback on possible reforms to the regulation of a number
of areas in the financial services sector through the Corporations
Act 2001 (Corporations Act). These areas included margin loans,
trustee companies and debentures.
Following on from that process, the Australian Government issued an
exposure draft of a Bill setting out a number of proposed
amendments relating to margin lending, trustee companies and
debentures regulation. A substantial number of submissions were
received and appropriate changes were made to the draft legislation
following consideration of the issues raised.
The Corporations Legislation Amendment (Financial Services
Modernisation) Bill 2009 (Bill) contains proposed measures on:
. Margin lending: Margin loans are to be included as
financial products for the purposes of Chapter 7 in the
Corporations Act. Margin loans to date have been
inconsistently regulated. Inclusion in the Corporations
Act will establish an investor protection regime by
ensuring that providers of financial services in relation
to margin loans will be subject to the licensing, conduct
and disclosure requirements in Chapter 7 as well as
supervision and enforcement action by the Australian
Securities and Investments Commission (ASIC). In
addition, two key new measures are being introduced to
address specific investor protection issues arising for
margin loans:
- a new responsible lending requirement, prescribing that
margin loan lenders must make an assessment of whether a
proposed loan will be unsuitable for a client, and to
not make the loan if it is found to be unsuitable; and
- a provision regulating the notification of margin calls
to clients, especially where the loan has been arranged
through a financial planner.
. Trustee companies: A new chapter (5D) is to be inserted
into the Corporations Act to transfer regulation of
trustee companies from the States and Territories to the
Commonwealth. These changes will harmonise the regulation
of trustee companies, thereby reducing the regulatory
burden on these companies while creating a national market
for trustee services. The new chapter will also protect
consumers by establishing a national consumer protection
and disclosure regime under the Corporations Act and the
Australian Securities and Investments Commission Act 2001
(ASIC Act). The new legislation will:
- authorise certain corporations to operate as trustee
companies and require them to hold an Australian
financial services licence (AFSL);
- deem 'traditional trustee company services' to be
'financial services' for the purposes of the
Corporations Act;
- provide that ASIC will regulate trustee companies in
the provision of these traditional services;
- apply the consumer protection (licensing, conduct,
disclosure, advice and dispute resolution) provisions of
the Corporations Act and the ASIC Act, as modified;
- regulate the fees that trustee companies may charge, and
how those fees are disclosed;
- prohibit a company that is not a trustee company from
providing traditional trustee company services; and
- ensure that certain existing ASIC powers are available
to it in relation to trust property held by trustee
companies, to assist ASIC in its investigation and
enforcement role.
. Debentures regulation: Amendments are proposed to
harmonise the regulation of debentures and promissory
notes, and for the creation of a debentures trustee
register. The two proposed changes are as follows:
- a promissory note with a face value of at least $50,000
will now be included under the definition of a
debenture. This measure should assist in ensuring that
there are no further attempts to avoid the operation of
the law in relation to the issue of promissory notes;
and
- the creation of a publicly available register of
trustees for debenture holders.
. Technical amendment: It is proposed to correct an
omission in subsection 1338B(8) of the Corporations Act
relating to the jurisdiction of State and Territory courts
with respect to certain offences.
Dates of effect:
Margin loans - The amendments take effect on a day to be fixed by
Proclamation or the expiry of the period of six months beginning on
the day on which the Bill receives Royal Assent, whichever is the
earlier.
Trustee companies - The amendments take effect on a day to be fixed
by Proclamation or the expiry of the period of six months beginning
on the day on which the Bill receives Royal Assent, whichever is
the earlier.
Debentures - The amendment relating to the harmonisation of the
regulation of promissory notes takes effect on the day Royal Assent
is received. The amendments relating to the establishment of the
register of debenture trustees take effect on a day to be fixed by
Proclamation or the expiry of the period of six months beginning on
the day on which the Bill receives Royal Assent, whichever is the
earlier.
Technical amendment - The amendment takes effect on the day
Royal Assent is received.
Financial impacts:
Margin loans - The Government has provided $70.2 million over
four years to implement the decision of the COAG to transfer
responsibility for regulating consumer credit to the Commonwealth
as part of the 2008-09 Mid-year Economic and Fiscal Outlook
(MYEFO). This Bill includes measures to give effect to part of
that transfer relating to the regulation of margin loans.
The funding will support the establishment of a national licensing
regime applying to all credit providers, advisers and brokers with
ASIC as the sole regulator. It will also support the national
regulation of mortgages, margin lending, personal and business
loans, credit cards and payday lending. The funding will be
partially offset by revenue raised from fees required to be paid by
persons under the national regulatory framework, including
licensing fees, commencing from 2009-10. The revenue generated
from licensing fees will depend on the number and type of the
persons seeking registration.
Trustee companies - The financial impact is expected to be absorbed
in ASIC's current budget.
Debentures - Has no significant impact on Commonwealth expenditure
or revenue.
Technical amendment - Nil.
Compliance cost impacts:
Margin loans - Low to medium - these measures will create
additional compliance costs for margin loan lenders and advisers,
as they will be required to obtain a licence from ASIC and comply
with a range of conduct and disclosure requirements.
Trustee companies - Low to medium - while there will be compliance
costs associated with a client protection regime, for example,
requirements for reporting and dispute resolution, these would be
relatively minimal.
Debentures - These measures affect only a small number of
businesses and have a low cost impact.
Technical amendment - Nil.
Summary of regulation impact statement
Regulation impact on business
Margin loans:
Impact: This measure affects financial services providers offering
and advising on margin loans as their services become subject to a
comprehensive range of licensing, conduct and disclosure
requirements.
Main points:
. Persons providing and advising on margin loans will be
required to obtain an AFSL. They will be subject to
supervision and enforcement by ASIC.
. Such persons will become subject to the requirements
imposed on AFSL holders in Chapter 7 of the Corporations
Act. These requirements include, among other things,
obligations to put appropriate compensation and dispute
resolution arrangements in place, provide prescribed
disclosure documents to their clients and observe a range
of conduct requirements.
. Consumers are the main beneficiaries of the amendments
introduced in the Bill. They will benefit from the
requirements for AFSL holders to be properly trained and
resourced, access to free dispute resolution services,
targeted and regulated disclosure documents, the
responsible lending provisions and other protections in
the new margin loan regulatory regime.
Trustee companies:
Impact: This measure affects companies offering traditional
trustee company services, as they will be subject to a range of
licensing, conduct and disclosure requirements (however, such
companies already hold AFSLs covering other services). They will
also be subject to internal and external dispute resolution
mechanisms and compensation arrangements.
Main points:
. Trustee companies will benefit from a single licensing
regime with transparent and objective criteria. Directors
will be relieved of personal liability obligations, except
in the limited circumstances prescribed by the
Corporations Act.
. Trustee companies will be subject to a 15 per cent limit
on individual voting power and, in cases of loss of
licence, may be subject to compulsory transfer of their
assets and liabilities.
. Consumers will benefit from greater fee disclosure, a
uniform fee regulation regime and low cost dispute
resolution.
Debentures:
Impact: The impact of the harmonisation measure is expected to be
low as the number of businesses affected by the change is
understood to be relatively small.
Main points:
. It is expected that only a small number of businesses will
be affected by the change.
. The major cost will be for trustee arrangements to be
established for issues falling within the new definition,
but these costs are not expected to be high.
. Only one party responded in the consultation period, and
that party supported the change.
Technical amendment
Impact: None.
Chapter 1
Margin loans
Outline of chapter
1. Schedule 1 to the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009 (Bill) amends the Corporations
Act 2001 (Corporations Act) to set out a national regulatory regime
for margin loans. Such loans are not directly regulated and are
not subject to the state based consumer credit law.
1. The national regulatory regime for margin loans is established by
including margin loans as a financial product in Chapter 7 of the
Corporations Act. Chapter 7 regulates the provision of financial
services supplied in relation to financial products (which are
primarily of an investment nature). As margin loans are a form of
credit widely used to finance acquisitions of investment-related
financial products, Chapter 7 is considered to provide the
appropriate regulatory setting for the regulation of margin loans.
2. Chapter 7 does not fully cover all aspects of margin loans as the
regulatory regime was not originally designed for credit products.
Accordingly, a number of adjustments are necessary to ensure the
regime fits the characteristics of margin loans and that an
appropriate level of investor protection is provided.
Context of amendments
3. A margin lending facility allows an investor to borrow money to
invest in securities and other financial products against the
security of any equity contribution, usually in the form of
financial products.
4. Depending on the margin lending product and the provider,
securities and other financial products may include listed shares,
fixed interest securities and units in managed funds. In practice,
margin loans are usually only available to fund purchases of
'approved' securities that the lender regards as acceptable from a
risk and liquidity perspective. However, funds raised by way of a
margin loan could potentially be used to purchase other financial
products, goods or services.
5. Margin loan facilities are based on contractual arrangements
between the lender and the client. Primary disclosure of the terms
and conditions governing the loan occurs through the lending
agreement signed between the two parties. As this disclosure is
not currently regulated, it is not clear that investors are fully
aware of the risks associated with a margin lending product.
6. The amount an investor can borrow generally depends on the loan-to-
value ratio (LVR) offered by a lender for the securities or other
financial products. The lender may reserve the power to change the
assessed market value and LVR of a security at any time.
7. The money that the investor borrows in a margin loan is generally
secured by these underlying investments. The investor retains
legal rights over the investments.
8. However, an investor can also provide other assets, such as their
home or investment properties, as security for the loan.
9. Repayment of a margin loan may be required in the event the
investment is subject to a 'margin call'. A margin call occurs
where the market value of the investments falls below the level
agreed under the contract (margin). The borrower is then required
to take action in order to return the margin loan LVR back to the
agreed level. Lenders usually provide a 'buffer' above the LVR
rate before initiating a margin call, which may or may not form
part of the terms of the margin loan agreement.
10. When there is a margin call, the investor is required to adjust the
level of assets securing the loan to return the portfolio to the
agreed limits set under the contract. This can be done by paying
extra cash, selling some of the assets, or giving the lender
additional security.
11. A lender has recourse to the underlying security if there is a
default on the terms or conditions of the loan and retains the
right to take action against the borrower personally for such
defaults.
12. Margin lending has grown strongly in recent years, with recent
marketing of margin lending extending from high net worth
individuals who generally are experienced investors, to a wider
circle of retail investors. However, due to current market
conditions, levels of lending have started to fall.
13. Margin loans are closely related to other financial products, such
as shares or managed investments, which are already regulated under
Chapter 7.
Current legislative framework
14. Currently, margin lending facilities are not regulated as a
financial product, or subject to Australian Securities and
Investments Commission (ASIC) regulation relating to financial
services. This is because the term 'financial product' in the
relevant legislation does not cover credit products (such as margin
loans) as a result of the current referral agreement with the
States and Territories. Further, State and Territory legislation
governing consumer credit (the Uniform Consumer Credit Code)
excludes investment loans such as margin lending.
15. However, there are regulatory measures which capture aspects of the
margin lending product. This includes:
. The Australian Securities and Investments Commission
Act 2001 (ASIC Act) gives ASIC the function of monitoring
and promoting market integrity and consumer protection in
relation to financial services. For the purpose of the
ASIC Act, credit facilities (which include margin loans)
are financial products and are subject to general consumer
protection provisions of the Act, such as those relating
to misleading and deceptive conduct.
. As margin loans are supplied by a variety of providers,
including banks and stockbrokers, various industry
regulations may apply, including, for example, the Code of
Banking Practice and the ASX Market Rules.
Key risks
16. There have been serious concerns that not all margin borrowers are
aware of the extent to which margin lending contracts place the
risk of changes to market conditions on them. The possibility of
such borrowers suffering unexpected consequences is particularly
high in volatile market conditions such as those experienced since
the impact of the global recession.
Opes Prime style arrangements
17. Following the collapse of Opes Prime and serious problems at
Tricom, it was found that these entities were using arrangements
that were promoted as 'margin loans' to the consumer, and
functionally operated as such. However, they were based on
different legal arrangements that did not necessarily involve a
'loan' and were more closely related to stock or 'securities'
lending. Therefore, concerns have been raised that consumers were
misled as to the implications of these facilities.
Double gearing
18. There have been recent cases where clients who entered into margin
loan arrangements were at risk of losing their homes due to double
gearing strategies. Double gearing arises where clients borrow
funds against the equity in their homes and use them as their
equity contribution to a margin loan.
19. Through an unfortunate combination of circumstances some of these
borrowers have fallen into negative equity in relation to the value
of their security vis-à-vis their margin loan and are now having to
repay outstanding amounts on the margin loan as well as continuing
to service the loan secured against their home. Where borrowers do
not have additional sources of funds to do so, they are at risk of
losing their homes.
20. Indications are that not all of these borrowers were familiar with
the way in which a margin loan operates, including the potential
consequences of margin calls. In addition, they may also not have
been fully aware that they exposed themselves to the risk of losing
their homes when they borrowed against their home to fund the
margin loan.
Margin calls
21. Recent events have also raised concerns about whether the adviser
or lender is responsible for notifying a client of a margin call.
22. Failure to notify a client of a margin call in a timely manner can
result in significant losses, including resulting in a client going
into negative equity.
Summary of new law
23. Margin loans are given a specific definition in the
Corporations Act to ensure that all arrangements with the relevant
characteristics of a margin loan are captured under the new
national regime. Complications arise in this area because
alternative legal structures not based on an explicit loan
agreement have been used by providers such as Opes Prime and
Tricom. The definition has been framed in a manner to include
these alternative 'margin loan' type structures.
24. A 'margin lending facility' is explicitly included as a financial
product for the purposes of Chapter 7 in the Corporations Act.
This ensures that providers of financial services in relation to
margin loans will be subject to the licensing, conduct and
disclosure requirements in Chapter 7. It also subjects them to
supervision and enforcement action by the national regulator, ASIC.
25. It is noted that the definition of margin loans as a financial
product only extends to loans provided to individuals, as it is not
intended at this stage to regulate business lending. Australian
Government policy in relation to business lending will be developed
in phase two of the Commonwealth's assumption of responsibility for
the regulation of credit.
26. The investor protection regime under Chapter 7 of the Corporations
Act requires that persons providing financial services and products
must, among other things:
. have an Australian financial services licence (AFSL);
. comply with general conduct standards, including the
requirement to deal with investors efficiently, honestly
and fairly;
. have appropriate compensation arrangements in place for
losses suffered by retail clients due to breaches of the
law. This includes membership of an ASIC approved
External Dispute Resolution Scheme (EDR Scheme);
. provide appropriate disclosure to their retail clients
before and after a product is purchased, including
providing a product disclosure statement, a statement of
advice and periodic statements on an ongoing basis;
. have in place adequate arrangements for the management
of conflicts;
. ensure that they have adequate resources and are competent
to provide the services. They must also ensure that their
representatives are adequately trained and competent to
provide the services; and
. be subject to the enforcement provisions surrounding
market manipulation, false or misleading statements,
inducing investors to deal using misleading information,
and engagement in dishonest, misleading or deceptive
conduct.
27. The inclusion of margin loans within Chapter 7 will require margin
lenders and advisers to obtain an AFSL and imposes this range of
conduct and disclosure requirements on them.
28. With respect to licensing, the main financial services that are
anticipated to be covered will be issuing (largely equivalent to
lending) and the provision of advice in relation to margin loans.
Appropriate transitional arrangements are provided to ensure that
the licensing process occurs smoothly. This is particularly
important for financial advisers, as the numbers involved are large
and will require some time for ASIC to process.
29. A new responsible lending requirement that applies specifically to
margin loan lenders is imposed seeking to ensure that clients are
not given loans which they are unable to service. Lenders will be
required to assess whether a proposed loan is unsuitable for the
client, such that in the event of a margin call the client would
not be able to service the loan or would only be able to do so with
substantial hardship. If a loan is assessed as unsuitable, it must
not be provided to the client.
30. A number of key factors that need to be considered by lenders in
assessing unsuitability will be prescribed in regulations,
including in particular situations where consumers have engaged in
'double gearing'. This term refers to situations where consumers
borrow funds to finance their equity contribution for a margin
loan. In some cases borrowers may use their residential home as
security for the loan, which is considered to be a major risk
factor as consumers may lose their homes if they are unable to
service the loans.
31. A further provision regulates the notification of margin calls to
clients, especially where the loan has been arranged through a
financial planner. There have been situations where it has been
unclear whether it was the lender or the planner who was
responsible for notifying clients when a margin call occurred.
Failure to notify a client in time can result in losses for the
client. The amendments require that lenders must notify clients
when a margin call is made, unless clients explicitly agree to
notifications being provided through their planner.
Comparison of key features of new law and current law
|New law |Current law |
|A clear definition of a |No definition of a margin|
|'margin loan' is provided|loan exists. |
|to ensure that all | |
|relevant arrangements are| |
|covered. | |
|Providers of financial |No licensing requirement |
|services (mainly lending |exists. |
|and advising) in relation| |
|to margin loans are | |
|required to be licensed. | |
|This ensures that | |
|services providers are | |
|properly qualified and | |
|adequately resourced. | |
|As one of the key |No clear requirement for |
|licensing conditions |establishing compensation|
|margin loan lenders and |arrangements including |
|advisers are required to |EDR Scheme membership |
|have appropriate |exists. In some cases |
|compensation arrangements|borrowers may be able to |
|for retail clients, |benefit from the |
|including membership of |arrangements required |
|an EDR Scheme. |under Chapter 7 and |
| |industry codes such as |
| |the Code of Banking |
| |Practice. |
|Key conduct requirements |Lenders are not subject |
|apply to service |to the Chapter 7 conduct |
|providers in relation to |requirements. Lenders |
|margin loans including |such as banks are subject|
|requirements to deal with|to conduct requirements |
|clients honestly, |under industry codes such|
|efficiently and fairly; |as the Code of Banking |
|manage conflicts of |Practice. Some advisers |
|interest; have adequate |may be subject to the |
|resources and maintain |Chapter 7 requirements. |
|competency to provide the| |
|services; and others. | |
|The Chapter 7 investor |The Chapter 7 advice |
|protection regime in |regime applies where a |
|relation to advice |margin loan is included |
|applies to margin loans, |as part of an overall |
|including the requirement|investment arrangement. |
|for any advice to be |Advice in relation solely|
|appropriate to the client|to a margin loan is not |
|and for appropriate |subject to the Chapter 7 |
|disclosure through a |requirements. |
|statement of advice to be| |
|provided. | |
|Appropriate disclosure |Margin loan providers are|
|requirements apply so |not required to provide a|
|that lenders and advisers|financial services guide |
|must give retail clients |or a product disclosure |
|a financial services |statement. Advisers in |
|guide and a product |some cases may be |
|disclosure statement |required to provide a |
|providing full |financial services guide |
|information about the |and a statement of |
|lender or adviser and the|advice. |
|margin loan product. | |
|Responsible lending |No responsible lending |
|requirements are imposed |requirements apply. |
|that seek to ensure that | |
|clients do not take on | |
|loans that they cannot | |
|service. | |
|Clear arrangements in |No notification |
|relation to the |requirements apply to |
|notification of margin |margin calls. |
|calls are made to ensure | |
|that clients are made | |
|aware of margin calls in | |
|a timely manner. | |
|Transitional arrangements|No transitional |
|for the new regulation of|arrangements apply. |
|margin lending facilities| |
|are provided. | |
Detailed explanation of new law
Definition of a margin lending facility
Capture as a financial product
32. An appropriate amendment is made to the table containing an outline
of Chapter 7 to reflect the new amendments relating to margin
loans. [Schedule 1, item 1]
33. A number of key terms used in the amendments are inserted into
section 761A, which contains a number of key definitions for
Chapter 7 of the Corporations Act. [Schedule 1, items 2 to 7]
34. A margin lending facility is included in the list of specific
facilities that are financial products in paragraph 764A(1)(k) of
the Corporations Act [Schedule 1, item 10]. This will trigger a
range of obligations that apply to a financial product in Chapter 7
of the Corporations Act.
35. A margin lending facility is specifically excluded from
subparagraph 765A(1)(h)(i) of the Corporations Act, which exempts
credit facilities from the meaning of financial product [Schedule
1, item 11]. This is to make clear that a margin loan facility
does not fall in the general exclusion of credit matters in the
Corporations Act.
Meaning of issue of margin lending facility
36. The issue of a margin loan is a key concept in determining whether
a person needs to obtain an AFSL. An amendment to
subsection 761E(3) (at the end of the table) clarifies when a
margin loan has been issued to a client. A margin lending facility
is issued to a person when they enter into the legal relationship
that constitutes the margin lending facility, as the client under
the facility. [Schedule 1, item 8]
General definition - margin lending facility
37. A specific definition of a margin lending facility is considered
appropriate to ensure that other lending practices are not
inadvertently captured in the definition.
38. Section 761EA gives meaning to a range of definitions associated
with a margin lending facility. [Schedule 1, item 9]
39. A margin lending facility is [Schedule 1, item 9, subsection
761EA(1)]:
. a standard margin lending facility;
. a non-standard margin lending facility; or
. a facility declared by ASIC to be a margin lending
facility (unless the facility has been declared by ASIC
not to be a margin lending facility).
40. The definition is intended to capture, among other things:
. the basic or 'vanilla' margin loan;
. Opes Prime and Tricom style arrangements, where
appropriate. This is to ensure that products that are
functionally similar to a margin loan (and advertised as a
margin loan) are also captured;
. hybrid products that utilise the key features of a margin
loan;
. a limited or non-recourse margin loan (where the amount
the lender can recover is restricted to the mortgaged
financial product); or
. a margin loan where the assets securing the loan are more
than just the financial products purchased through the
loan, such as residential property.
41. Other forms of investment lending more generally will be addressed
separately in the Commonwealth's broader reforms to consumer
credit.
Standard margin lending facilities
42. A definition of a 'standard margin lending facility' is provided
[Schedule 1, item 9, subsection 761EA(2)]. The key elements of the
definition include:
. who is the 'provider' and who is the 'client'. It is
noted that the client must be a natural person, which
excludes all lending to corporate entities from the
definition [Schedule 1, item 9, paragraph 761EA(2)(a)];
. a requirement that the borrower must use the loan (wholly
or partly) to acquire shares or other financial products
[Schedule 1, item 9, subparagraph 761EA(2)(b)(i)] or to
refinance a margin lending facility [Schedule 1, item 9,
subparagraph 761EA(2)(b)(ii)];
. that the loan must be wholly or partly secured over shares
or other defined securities ('marketable securities').
'Marketable securities' is defined by existing section 9
of the Corporations Act [Schedule 1, item 9, paragraphs
761EA(2)(c) and (d)]; and
. that the client is subject to a 'margin call' in
circumstances where the 'current LVR' of the facility
exceeds the agreed threshold [Schedule 1, item 9,
paragraph 761EA(2)(e)].
43. The current LVR is defined as the ratio of the outstanding debt to
the security provided for the loan. [Schedule 1, item 9,
subsection 761EA(3)]
44. This means that a 'margin call' can occur where the value of the
securities underlying the loan falls below a certain critical level
due to adverse market movements or where the customer draws down
too far on the loan. The critical level may include a buffer
granted by the provider, provided it forms part of the terms of the
facility. [Schedule 1, item 9, subsection 761EA(4)]
1. : Example of a margin loan
An example is provided to assist in understanding the
definition and how a margin call operates:
. Loan amount - $85,000.
. Original value of the secured property - $125,000 (the value
of property provided by the client as security, which must
include some marketable securities, and which may (but need
not) include some or all of any financial products purchased
by the client with the loan).
. Margin call occurs if the current LVR is above 80%.
. Original current LVR = 85,000/125,000 = 68%.
. Value of the secured property falls to $100,000.
. Current LVR = 85,000/100,000 = 85%.
. Facility is in margin call on the date the current LVR
exceeds 80%.
45. Due to the way the definition is framed, certain types of
investment and other loans are excluded from its scope.
Use of the loan
46. In order for a loan to be a margin lending facility for the
purposes of Chapter 7 of the Corporations Act (and the Corporations
Agreement), the purpose and use of the loan must be investment
related in a particular manner as defined in the Bill.
47. Subparagraph 761EA(2)(b)(i) requires that the loan must be partly
or wholly used for the purchase of, or beneficial interest in,
financial products. This means that this use of the loan must form
part of the terms of the margin loan facility. [Schedule 1, item
9, subparagraph 761EA(2)(b)(i)]
Investment lending
48. General investment lending is intended to be excluded from the
definition of a margin loan facility. Other forms of investment
lending more generally will be addressed in phase two of the
Commonwealth's assumption of responsibility for the regulation of
consumer credit.
1. : Examples of excluded investment lending
. A loan secured against a residential or investment property
and used to purchase securities is an investment loan.
. Where general consumer lending (such as a personal loan or
credit card) is wholly used to purchase an investment
product (financial product). If it is partly used to
purchase an investment product, the loan is a consumer loan
and will be regulated under the consumer credit legislation.
49. Alternatively, the definition is not intended to capture margin
loans used solely for personal, domestic or household use, or (non-
investment) business purposes.
1. : Examples of excluded lending
. Where the only use of a margin loan is for the purchase of a
product or service for personal, domestic or household use,
such as the purchase of travel or a car. In this
circumstance, it is expected that either the lender does not
provide the loan, or that they provide the loan under an
Australian credit licence.
. Where the only use of a margin loan is to purchase assets
for a farming business (business purpose).
Non-standard margin lending facilities
50. The type of margin loan targeted by the definition of a 'non-
standard margin lending facility' is not based on a loan agreement,
but uses a type of securities lending agreement (with variations)
to achieve a similar economic outcome as would a standard margin
loan.
51. General 'stock' or securities lending, particularly in the
wholesale market, is not intended to be included in this
definition.
52. This type of structure was used by lenders such as Opes Prime and
Tricom and provided as a 'margin loan', 'equity finance' or
'securities finance'. The key difference, from the client's point
of view, is that in a non-standard margin loan, title to the
security provided for the loan passes out of the client's hands.
This key aspect of a non-standard margin loan is captured in the
definition.
53. Subsection 761EA(5) sets out the definition of a non-standard
margin loan [Schedule 1, item 9, subsection 761EA(5)]. The key
elements of the definition include:
. determining who the provider is and who the client is in
the context of transferred securities. It is noted that
the client must be a natural person, which excludes all
lending to corporate entities from the definition
[Schedule 1, item 9, paragraph 761EA(5)(a)];
. the client receives 'transferred property'. Transferred
property is the equivalent arrangement to the provision of
credit or cash in a standard margin lending facility. It
may sometimes be referred to as collateral for the
'transferred securities' [Schedule 1, item 9, paragraph
761EA(5)(b];
. the funds provided to the client must, as in the case of a
standard margin lending facility, be at least partly used
to acquire financial products. This is intended to ensure
that only facilities are captured which have a similar
outcome to a standard margin loan [Schedule 1, item 9,
paragraph 761EA(5)(c)]; and
. the client is subject to a margin call in circumstances
where the current LVR of the facility exceeds the agreed
threshold [Schedule 1, item 9, paragraph 761EA(5)(e)].
54. Non-standard margin loans also operate on the basis of margin
calls, which occur when the LVR exceeds an agreed threshold. The
definitions of 'margin call' [Schedule 1, item 9, subsection
761EA(7)] and 'current LVR' [Schedule 1, item 9, subsection
761EA(6)] for a non-standard margin lending facility are similar to
those for a standard margin lending facility, with some amendments
to suit the special characteristics of non-standard margin loans.
1. : Example of a non-standard margin loan
An example is provided to assist in understanding the scope
and intent of the definition:
. Value of the transferred property given by the provider to
the client = $85,000 (equivalent to the loan amount in a
standard loan).
. Value of the transferred securities transferred by the
client to the provider = $125,000 (value of the marketable
securities transferred by the client to the provider, which
may (but need not) include some or all of any marketable
securities purchased with the loan).
. Margin call occurs if the current LVR is above 80%.
. Original current LVR = 85,000/125,000 = 68%.
. Value of the transferred securities falls to $100,000.
. Current LVR = 85,000/100,000 = 85%.
. Facility is in margin call on the date the current LVR
exceeds 80%.
55. The operation of the definition of a non-standard margin lending
facility in the manner outlined in the example above is quite
different from a general 'stock' or securities lending transaction.
56. In the case of a general 'stock' or securities lending transaction,
the cash collateral (or the value of any non-cash collateral)
usually must always exceed the value of the transferred securities
(that is, the ratio must normally be in excess of 100 per cent, say
102 per cent), and margining will be required if the ratio falls
below the agreed minimum of say 102 per cent.
1. : Example of normal stock lending arrangements
An example of a general stock or securities lending
transaction is provided to assist in understanding the
difference from the transactions captured by the definition:
. Value of cash or non-cash collateral provided by securities
borrower to securities lender = $105,000.
. Value of borrowed securities = $100,000.
. Margining by the securities borrower is required if the
value of the collateral becomes less than the agreed ratio
of the value of the collateral to the value of the borrowed
securities, which say is agreed at 102%.
Scenario A
. Value of the borrowed securities rises to $125,000.
. New ratio = 105,000/125,000 = 84%.
. The securities borrower must provide extra collateral of (or
worth) at least $22,500, so that the value of the collateral
is at least $127,500, and the ratio increases to at least a
minimum of 102%.
Scenario B
. Contrast the situation if the value of the borrowed
securities falls to say $85,000.
. The new ratio = 105,000/85,000 = 123.5%.
. That would not trigger any margining requirement on the part
of the securities borrower. (On the contrary, the
securities borrower may be entitled to call for the return
of some or all of the excess collateral that it has
provided, until the new ratio falls to not less than 102%.)
ASIC may declare facilities to be margin lending facilities
57. ASIC has the power to declare that a particular kind of facility
is, or is not, a margin loan. In declaring a kind of facility as a
margin loan, ASIC must also define key features such as a 'margin
call' in the context of the facility. These powers are necessary
to deal with product innovation and the likelihood that over time
new margin loan structures will evolve that may not be captured by
the current definition, such that the relevant investor protection
provisions continue to apply. [Schedule 1, item 9, subsections
761EA(8) to (10)]
58. A declaration that a particular kind of facility is, or is not, a
margin loan under subsection 761EA(8) or (9) must be in writing and
is a legislative instrument for the purposes of the Legislative
Instruments Act 2003 (Legislative Instruments Act).
Meaning of limit of a margin lending facility
59. The meaning of the key term 'limit' is given a specific definition
in the case of standard and non-standard margin loans. For
standard margin loans, the limit means the maximum amount of credit
under the loan agreement, while for a non-standard loan it means
the maximum amount of property that may be transferred by the
provider to the client under the terms of the agreement. It is
also stipulated that ASIC must define the term if it declares that
something is a margin lending facility. [Schedule 1, item 9,
subsection 761EA(11)]
Amendment of licensing exemption
60. Paragraph 911A(2)(b) of the Corporations Act provides an exemption
for product issuers (such as a lender) from holding an Australian
Financial Services Licence (AFSL) where they have arrangements with
another AFSL holder to issue, vary or dispose of a product.
61. In the margin lending context, this exemption could be relied on by
an issuer of a margin lending facility (the lender) that badges or
'white-labels' the facility for another provider (the
intermediary).
62. The responsible lending obligation in subsection 985E(1) of the
Bill states that the provider must not issue a margin lending
facility to a retail client or increase the limit of a margin
lending facility unless the provider has, among other things, made
an assessment of unsuitability. Section 985EA clarifies that the
provider is a financial services licensee.
63. In these situations the intermediary will not be issuing the margin
lending facility but merely arranging to issue the facility. The
consequence of this is that the intermediary will not need to
satisfy the responsible lending obligations.
64. Given that the original issuer of the margin lending facility can
rely on the licensing exemption, the issuer will also not be
required to comply with the responsible lending obligation where it
has chosen to rely on the exemption.
65. This creates a regulatory 'gap' where no party is required to
comply with the responsible lending requirements intended to be
imposed on margin lenders. This poses a potential risk to
achieving the policy objective of regulating margin lending
facilities.
66. The same issue occurs in the context of the notification of a
margin call obligation, given that the drafting of this provision
is similar to that of subsection 985E(1), resulting in a similar
regulatory gap.
67. It is an important policy objective that the responsible lending
and margin call notification obligations for a margin lending
facility should fall primarily on lenders (issuers) as they are
best placed to respond to them. For example, a lender has access
to credit reporting information and makes the ultimate decision as
to whether and how much credit is advanced.
68. To address this regulatory gap, a general regulation making power
is inserted in section 911A of the Corporations Act that enables:
. a particular financial product or a particular kind of
financial product; or
. a particular financial product or a particular kind of
financial product that can be issued, varied or disposed
by a particular person or class of persons
to be removed from the scope of the licensing exemption under
paragraph 911A(2)(b) of the Corporations Act. [Schedule 1, item
11A, paragraph 911A(5A)]
69. This power will enable certain financial product providers,
including margin loan lenders, to be removed from the scope of the
licensing exemption by means of an appropriately framed regulation.
As a result, margin lenders would be subject to the responsible
lending and margin call notification requirements in the Bill.
70. The broader regulation making power provides the flexibility to
also address complex corporate structures (such as those based on
special purpose vehicles and master trusts) in the margin lending
context, and potentially other lending arrangements or products at
a later stage.
Responsible lending for margin lending facilities
71. Subdivision A, Division 4A of Schedule 1 sets in place responsible
lending requirements. The responsible lending provisions are
intended to be broadly consistent with the provisions outlined in
the National Consumer Credit Protection Bill 2009. However, there
are some differences to take into account the specific nature of a
margin loan.
72. Clarification is provided that the responsible lending requirements
contained in Subdivision A apply to a financial services licensee
issuing a margin loan or increasing the limit of an existing margin
loan to a retail client. It is further clarified that the term
'provider' used throughout these requirements designates a
financial services licensee engaging in these activities.
[Schedule 1, item 12, section 985EA]
Requirement to make assessment of unsuitability
73. Margin lenders are required, before issuing a loan or increasing
the limit of an existing loan, to make an assessment to determine
whether the loan facility is unsuitable for a 'retail client'
[Schedule 1, item 12, section 985E]. 'Retail client' is defined in
existing section 761GA of the Corporations Act. It is noted that
this requirement only applies to lenders, and not to advisers.
74. Before issuing a new margin loan or increasing the limit of an
existing loan, the lender must make an unsuitability assessment as
set out in detail in section 985F. The assessment must be made
within 90 days before the loan is issued or the limit increased, or
any other period as prescribed in regulations. The assessment must
cover the period during which the issue or limit increase occurs.
At the time the assessment is made, the person doing the assessment
should ask the consumer when it is expected that they intend to
obtain the loan or limit increase - usually by reference to a
future period rather than a precise date (for example, in the next
two weeks, or in July or August). Assessments are to be made on
that basis. The purpose of this section is to ensure that
assessments are not used if they were prepared with a view to the
loan being advanced in a different period to that in which the loan
is actually issued or limit is increased. The lender must also
have made the inquiries and verification as set out in detail in
section 985G. Failure to make an assessment as required incurs a
civil penalty. [Schedule 1, item 12, subsection 985E(1)]
75. Provisions are included that clarify that an increase in a credit
limit that occurs because of changes in the market value of the
underlying security does not require an unsuitability assessment to
be made. [Schedule 1, item 12, subsection 985E(2)]
76. A regulation-making power is included allowing other situations to
be defined in which a limit increase is considered to have occurred
or not to have occurred. Concerns have been raised during
consultation about the possibility of circumstances occurring where
a borrower breaches the agreed credit limit through actions that
are beyond the control of the loan provider. It is intended to use
this regulation-making power to address such situations before the
commencement of the new regime. The regulation-making power could
also be used to address other situations where the strict
application of the requirement to make an unsuitability assessment
may not be justified, or where it is considered necessary to apply
the requirement to circumstances that do not fall within the
current scope of the provision. [Schedule 1, item 12, subsection
985E(3)]
Unsuitability assessment
77. The unsuitability assessment must be made if the margin loan
facility is issued or the loan limit increased, and must specify
the period it covers. If no loan facility is issued, or no limit
increased, no assessment is required to be made. This is
considered to be appropriate as the misconduct that is intended to
be addressed by this provision relates to clients that are placed
into margin loans that may be unsuitable for them. If the loan is
not provided there is evidently no risk of such harm affecting the
client. [Schedule 1, item 12, section 985F]
Reasonable inquiries etc. about the retail client
78. In making an assessment, margin lenders are required to make
reasonable inquiries about the client's financial situation and
take reasonable steps to verify it [Schedule 1, item 12, paragraphs
985G(1)(a) and (b)]. This includes any inquiries or verification
steps prescribed by regulations [Schedule 1, item 12,
paragraphs 985G(1(c) and (d)], and must be made in a manner
prescribed (if prescribed by regulations) [Schedule 1, item 12,
subsection 985G(2)].
79. The purpose for undertaking reasonable inquiries about the client's
financial situation is to obtain an understanding of the client's
ability to meet all the repayments, fees, charges and transaction
costs of complying with a possible margin call. The general
position is that clients should be able to meet their contractual
obligations from income and available liquid assets, rather than
from long-term savings or from equity in a fixed asset such as a
residential home. The returns that are potentially available from
the portfolio financed by the loan may be taken into account in a
reasonable manner, but should not constitute the sole or main
source of funds available to meet a margin call and service the
margin loan.
80. As a general rule, reasonable inquiries about the consumer's
financial situation should be expected to include determining the
amount and source of the consumer's gross and disposable incomes,
the reliability of the income and the availability of assets, in
particular liquid assets, to meet demands for additional payments
such as a margin call. The detailed nature of these inquiries may
differ depending on the borrower and their circumstances.
81. Regulations will be made to prescribe specific matters that lenders
must take into account, which are intended to include important
considerations such as whether clients have taken out a second loan
to finance their equity contribution for the margin loan, and
whether they have used their homes to secure this second loan.
This creates a scenario known as 'double gearing' which may in some
situations lead to the risk of clients losing their homes, if they
are unable to service their loans following a margin call.
82. It is therefore important for lenders to have assessed the
potential impact of such factors on a client's position before
deciding to provide a margin loan. Particular attention should be
paid to the risk of a client losing their residential home as a
consequence of being unable to service or repay the margin loan.
83. In undertaking the assessment lenders are required to take into
account information about the client's financial situation and
other matters required by the regulations that they either already
possess, or which would be known to them if they made reasonable
inquiries and took reasonable steps to verify it. Where lenders
are unable to access information, for example because of rules
quarantining information within business units, this would clearly
fall outside the scope of the reasonable inquiries expected to be
made.
84. This provision also requires lenders to take reasonable steps to
verify the information they have obtained. This is intended to
mean that lenders must make such efforts to verify the information
provided by the client as they would undertake in the normal course
of their business. Conducting a credit check is, for instance,
considered to be an action undertaken by lenders in the normal
course of their business.
85. As the responsible lending provisions impose new requirements on
margin lenders, current business practice for margin lending may
not in all circumstances be sufficient to satisfy the need to take
reasonable steps to verify information. In such situations,
reference may have to be made to practices applied in other credit
areas.
86. It is noted that there will be matters that will not be able to be
known to the credit provider. This may arise where the consumer
simply does not disclose the matter, despite the credit provider's
inquiry, and where there was no reasonable way of verifying the
information provided.
87. ASIC will also provide guidance where appropriate to set out
further detail about reasonable inquiries and the verification
process in particular circumstances.
Reliance on information provided in a statement of advice
88. In making reasonable inquiries, lenders may rely on information
provided in a statement of advice for the client, where the
statement of advice recommends the margin lending facility, and it
was prepared no more than 90 days before the day on which the
margin lending facility is proposed to be entered into. In these
circumstances, the provider is not required to verify such
information. [Schedule 1, item 12, subsection 985G(3)]
89. This reliance provision is intended to minimise the regulatory
burden on lenders and the impost on consumers, where the same
information has already been provided to an adviser.
90. It is, however, noted that lenders cannot solely rely on the
information provided in a Statement of Advice (SoA) where that
information does not satisfy the benchmark of having to make
reasonable inquiries about the client's financial situation. In
those circumstances lenders would have to make inquiries to obtain
additional information in order to comply with the benchmark.
91. It is envisaged that margin lenders could make arrangements for
information relevant to a margin loan to be excerpted from an SoA
and presented to them in a particular format. Lenders will have to
obtain appropriate confirmation that any information excerpted in
this way forms part of an SoA, including the date of the SoA.
When margin lending facility must be assessed as unsuitable
92. Guidance is provided as to when a margin loan must be assessed as
unsuitable [Schedule 1, item 12, section 985H]. Clarification is
provided that lenders may reject loan applications for reasons
other than those mentioned in the legislation [Schedule 1, item 12,
subsection 985H(1)].
93. A loan is unsuitable where a client who receives a margin call
would not be able to comply with their financial obligations around
a margin call, or would only be able to do so while suffering
substantial hardship [Schedule 1, item 12, paragraph 985H(2)(a)].
A power is provided to prescribe specific situations where a loan
must be assessed as unsuitable. It is intended to prescribe a
number of such situations, subject to further consultation and
consideration, before the regime commences [Schedule 1, item 12,
paragraph 985H(2)(b)].
94. The assessment is to be based on the facts as they have been
obtained by the provider or are otherwise available to the provider
at the time of making the assessment. There is no requirement for
providers to make assumptions about potential future developments.
95. In making the assessment, lenders must take into account
information concerning the client's financial situation, as well as
other matters prescribed by regulations. It must also be
information which the lender has reason to believe was true, or
would have had reason to believe that the information was true, if
it had made the inquiries or verification required. Information
that does not satisfy these requirements must not be taken into
account. [Schedule 1, item 12, subsection 985H(3)]
96. The assessment conducted by the lender must specifically address
the ability of the client to cope with the potential consequences
of a margin call, in particular the possibility of having to deal
with negative equity situations. An important factor in the
assessment is the time allowed to the client to meet the margin
call. Where clients are allowed only a short period within which
the margin call must be met, the importance of the client having
sufficient liquid assets to cope with such situations is enhanced.
It is not intended that the potential sell-down of part or all of
the portfolio to adjust the LVR to the required level should imply
substantial hardship.
Giving the retail client the assessment
97. Clients may request the lender to provide them with a written copy
of the assessment, but only if the request is made within seven
years after the loan is issued or the loan limit increased.
[Schedule 1, item 12, section 985J]
98. Failure to give the client a copy of the assessment is an offence
(50 penalty units) and incurs a civil penalty. [Schedule 1, item
12, subsection 985J(1)]
99. Lenders do not have to give the client the written assessment if
the loan is not issued or the credit limit not increased.
[Schedule 1, item 12, subsection 985J(1), note 3]
100. Appropriate time limits for providing the assessment are imposed.
If the request is made before the loan is issued or the limit
increased, then the copy must be provided before the agreement is
finalised. If the request is made after the arrangements are
finalised, the copy must be provided within seven business days if
the request is made within two years after the loan is issued or
the limit increased. Requests made later than that must be
addressed within 21 business days. Failure to comply with these
requirements is an offence (50 penalty units) and also incurs a
civil penalty. [Schedule 1, item 12, subsection 985H(2)]
101. The provider must give a copy of the assessment in a manner
(if any) prescribed by regulations. [Schedule 1, item 12,
subsection 985J(3)]
102. This assessment must be given to the client without charge. It is
an offence (50 penalty units) and incurs a civil penalty to make a
client pay for the assessment. [Schedule 1, item 12, subsection
985J(4)]
103. Subsections 985J(1), (2) and (4) are offences of strict liability,
because it is considered that these offences should attract
criminal sanctions where there is no 'fault' but for the failure to
provide the assessment as required by the law. This is based on
the relatively low penalty amount and the need to include a
deterrent for breaches of these provisions. [Schedule 1, item 12,
subsection 985J(5)]
Unsuitable margin lending facilities
104. Lenders must not provide a new loan or increase in the limit of an
existing loan where the loan or increase is unsuitable for the
client [Schedule 1, item 12, section 985K]. Failure to comply with
this requirement attracts a civil penalty and is also a criminal
offence carrying a maximum penalty of 100 penalty units, two years
imprisonment or both [Schedule 1, item 12, subsection 985K(1)].
Providing a client with an unsuitable margin loan is the main
'harm' these provisions are intended to address.
105. The same unsuitability definitions and other requirements apply as
described above in relation to sections 985E and 985H. These
amendments specify when a facility is unsuitable, what information
the provider must base the assessment on, and exempt a particular
situation from the definition of an increase in the limit of a
facility. [Schedule 1, item 12, subsections 985K(2) to (6)]
106. A regulation-making power is provided allowing particular
situations to be prescribed in which a margin lending facility is
not taken to be unsuitable. [Schedule 1, item 12, subsection
985K(4)]
Notification of margin calls
Issuer must notify client of margin call
107. Subdivision B, Division 4A sets in place a requirement that the
lender must make reasonable efforts to notify the client when a
margin call occurs. [Schedule 1, item 12, subsection 985M(1)]
108. Lenders are allowed to make use of a buffer before issuing margin
calls to borrowers, as this is a useful practice for accommodating
short-term fluctuations in market values. As mentioned above, this
requires the buffer to be part of the terms of the facility.
When issuer must notify client's agent, and agent must notify
client, of margin call
109. A lender may notify a financial adviser, instead of the client,
based on contractual arrangements agreed to by the relevant
parties.
110. If there is an agreement between the lender, the client, and a
financial adviser ('the agent') that 'the agent' will act on behalf
of the client, then [Schedule 1, item 12, subsection 985M(2)]:
. the lender must make reasonable efforts to notify the
agent; and
. the agent must make reasonable efforts to notify the
client.
111. Failure to comply with the notification requirements, under both
subsections 985M(1) and (2), incurs a civil penalty.
When and how notification must be given
112. The notification of a margin call must be given at a time
determined by ASIC. If ASIC has not prescribed a time, then the
notification must be provided as soon as practicable. [Schedule 1,
item 12, subsection 985M(3)]
113. The notification must be given in a manner agreed between the
parties, or, if there is no such agreement, in a manner determined
by ASIC. If ASIC has not prescribed a manner, then the
notification should be provided in any reasonable manner that would
satisfy the objective of ensuring that the client receives the
notification in a timely fashion. [Schedule 1, item 12, subsection
985M(4)]
114. 'Reasonable manner' is considered to include electronic means such
as the telephone, facsimile, SMS and email. Notification through a
client's individual account which is accessed by means of the
client logging on through the lender's website alone is generally
not considered to be a 'reasonable manner', unless the client is
simultaneously alerted through other means that an important notice
has been placed in their account.
115. ASIC can determine the time and manner in which notification is to
occur. This determination by ASIC must be in writing and is a
legislative instrument for the purposes of the Legislative
Instruments Act. [Schedule 1, item 12, subsections 985M(5) and
(6)]
Margin lending facility not to be conditional on notification
arrangements
116. Making arrangements to notify the agent in the event of a margin
call should not be a condition of entering into a margin lending
facility. Such a contravention attracts a civil penalty.
[Schedule 1, item 12, section 985L]
General amendments
117. Amendments are made ensuring that the provisions in section 1016A
of the Corporations Act relating to the use of application forms
and in section 1017D in relation to the provision of periodic
statements apply to margin loans. [Schedule 1, items 13 and 14]
118. Amendments are made applying the civil penalty provisions in
section 1317E of the Corporations Act as described in various parts
of this explanatory memorandum to the Bill. [Schedule 1, item 15]
119. The penalties for breaching the responsible lending requirements
are inserted in the list of penalties for offences in Schedule 3 to
the Corporations Act. [Schedule 1, item 16]
Application and transitional provisions
120. Division 1 of Part 10.12 of the Corporations Act contains the
transitional arrangements for the amendments in the Bill relating
to margin loans.
121. A number of key definitions are specified in relation to the
transitional arrangements for the national margin lending regime.
[Schedule 5, Division 1, section 1487]
122. The Corporations Act will apply to issuing and advising by margin
lenders and financial advisers in relation to margin loans twelve
months after the legislation comes into force. This period will
give potential licensees time to prepare for the new regime by
adapting their systems and processes, training staff and in other
necessary ways. It is noted that issuance and advice are only
captured insofar as they relate to margin loans issued after
commencement of the Bill. [Schedule 5, Division 1, section 1488]
123. Applications to ASIC for obtaining a licence are not to be made
until one month after the legislation comes into force. This
period is designed to provide ASIC with time to prepare for
receiving and processing applications. [Schedule 5, Division 1,
subsection 1489(1)]
124. The transitional arrangements enable persons to apply for AFSLs and
ASIC to issue or vary licences thereafter until the Chapter 7
regime including the new amendments comes into force 12 months
after commencement of the legislation. Any AFSL, or variation of
an AFSL, granted by ASIC does not take effect until 12 months after
commencement. [Schedule 5, Division 1, subsections 1489(1) to (3)]
125. During the period from 6 to 12 months after commencement, lending
and advising in relation to margin loans may only be done by
persons who have applied to ASIC for a licence or a variation to an
existing licence allowing them to provide these services. ASIC is
also given the power to reject a licence application during this
period if it considers the application to be unsuitable. This
power is required as such applicants could otherwise provide the
services until the new regime comes into force 12 months after
commencement. [Schedule 5, Division 1, section 1490]
126. It is not anticipated that the Bill (or instruments made under it)
effects any acquisition of property other than on just terms
contrary to paragraph 51(xxxi) of the Constitution. A relevant
clause is included out of an abundance of caution to ensure that an
acquisition contrary to paragraph 51(xxxi) cannot take place. In
any circumstance where an acquisition contrary to paragraph
51(xxxi) is effected, the relevant law or instrument does not
apply. This clause overrides section 1350 of the Corporations Act
which contains provisions relating to the payment of compensation
due to the acquisition of property otherwise than on just terms.
[Schedule 5, Division 1, section 1491]
127. Regulations may be made prescribing matters of a transitional,
application or saving nature relating to the legislation. This
power is considered necessary to deal with unexpected or minor
transitional matters arising after the legislation is passed.
[Schedule 5, Division 1, section 1492]
Chapter 2
Regulation of trustee companies
Outline of chapter
128. Schedule 2 to the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009 (Bill) inserts Chapter 5D
(Licensed trustee companies) into the Corporations Act 2001
(Corporations Act). Chapter 5D implements the transfer of trustee
company regulation from the States and Territories to the
Commonwealth.
129. Chapter 5D creates a national licensing regime for trustee
companies, thereby reducing the regulatory burden on those
companies and creating a national market for trustee services, thus
delivering competition benefits to the industry. Chapter 5D also
protects consumers by establishing a national consumer protection
and disclosure regime under the Corporations Act and the Australian
Securities and Investments Commission Act 2001 (ASIC Act).
130. Schedule 2 also makes amendments to the ASIC Act. The most
important of these amendments ensure that ASIC's investigation and
enforcement powers are available to it in relation to trust
property held by trustee companies.
Context of amendments
131. In July 2008, the Council of Australian Governments (COAG) agreed
that the Commonwealth would assume responsibility for the
regulation of trustee companies. In October 2008, COAG agreed that
legislation giving effect to Commonwealth regulation of trustee
companies would be introduced in the first half of 2009.
132. The private trustee company industry is relatively small with ten
licensed private trustee companies. The majority of these trustee
companies are licensed and operate in multiple jurisdictions.
There are also eight public trust offices.
133. Trustee companies have been regulated at an entity level under
State and Territory regulatory regimes. The State and Territory
laws allow private trustee companies to enter the market for
personal trustee and estate administration work (for example,
acting as an executor or administrator of a deceased estate),
thereby removing the limitation that these duties could only be
undertaken by natural persons. In addition, State and Territory
laws facilitate the establishment of long term and perpetual
trusts, such as charitable trusts.
134. As the majority of trustee companies operate in multiple
jurisdictions, the need to obtain a licence in each individual
State and Territory, combined with the lack of consistency in
licensing requirements, creates barriers to entry and restricts
competition in the marketplace.
135. It is important to note that the Schedule regulates the provision
of the so-called 'traditional trustee company services' of trustee
companies. These services are listed in section 601RAC. Where
trustee companies provide other services, such as acting as a
superannuation trustee, acting as a Responsible Entity for managed
funds, providing a custodial or depository service, or acting as a
trustee for debenture holders, they must comply with Commonwealth
legislation, such as the Superannuation Industry (Supervision) Act
1993 and the Corporations Act.
136. In order to offer funds management services, all of the private
trustee companies hold an Australian financial services licence
(AFSL). As a result, they are familiar with regulation by the
Australian Securities and Investments Commission (ASIC) and the
requirements of an AFSL.
137. Broadly, the policy intent is that the Commonwealth will have
exclusive responsibility for 'entity level' regulation of trustee
companies' traditional services, including licensing those
companies and regulating the fees they can charge for those
traditional services. At the same time, State and Territory
legislation, and the rules of common law and equity, will continue
to govern the functions and powers of trustee companies. Also, it
is intended to preserve rules which apply generally to persons such
as trustees, executors, administrators and guardians (including
trustee companies when they perform those roles).
138. In the place of the differing State and Territory regimes, Schedule
2 creates a single licensing and reporting regime administered by a
single regulator (ASIC). Trustee companies which provide
'traditional trustee company services' will be required to hold an
AFSL covering the provision of those services. Further, trustee
companies will be subject to the disclosure, conduct, advice and
dispute resolution arrangements under the Corporations Act, as
modified where necessary by regulations made under the Corporations
Regulations 2001 (regulations).
139. Also, this legislation introduces a single regime for the
disclosure and regulation of fees charged by trustee companies.
Most jurisdictions have set caps on the level of fees, but these
are not uniform. Two jurisdictions (Western Australia and the
Australian Capital Territory) do not cap fees.
140. Concerns have also been expressed about the need for more cost
effective and timely alternative dispute resolution mechanisms for
beneficiaries to enhance the protection available for trust assets.
Currently, in the absence of internal dispute resolution services
voluntarily provided by the trustee company, the Supreme Court is
the only avenue of recourse for beneficiaries with concerns about
the management of the trust or estate.
141. In order to make the regime effective, it is necessary to extend
ASIC's investigation and enforcement powers. ASIC has existing
powers under the ASIC Act that can be used in relation to financial
services and/ or financial products. A trustee company may provide
services (which are deemed to be financial services under the
legislation) that do not relate to a financial product. In those
circumstances, ASIC is unable to use the powers that only apply in
relation to financial products in regulating trustee companies.
Accordingly, the legislation ensures that ASIC can use certain of
its existing powers in relation to trustee companies.
142. The legislative power to make this Commonwealth law is primarily
derived from section 51(xx) of the Constitution, which empowers the
Commonwealth to make laws with respect to 'foreign corporations,
and trading or financial corporations formed within the limits of
the Commonwealth'. The Commonwealth is relying on its legislative
powers, rather than seeking a referral of power from the States.
Summary of new law
143. The legislation sets out:
. when trustee companies are regulated by Chapter 5D,
including key concepts such as licensed trustee company,
client of a trustee company and traditional trustee
company services, and services that are regulated (Part
5D.1);
. the effect of the Bill on the jurisdiction of courts and
the continuing operation of State and Territory laws (Part
5D.2, Division 1);
. the powers and obligations of licensed trustee companies,
in relation to the provision of accounts and the
establishment and operation of common funds (Part 5D.2,
Divisions 2 and 3);
. the regulation of fees charged by licensed trustee
companies (including fee disclosure) (Part 5D.3);
. the duties of officers and employees of licensed trustee
companies (Part 5D.4);
. a 15 per cent voting power limit on control of licensed
trustee companies (Part 5D.5);
. the consequences of cancelling a licensed trustee
company's AFSL (Part 5D.6); and
. exemptions and modifications by ASIC, and by regulations
(Part 5D.7).
144. The legislation also clarifies ASIC's powers by allowing it to
obtain information about trust property outside of a formal
investigation under Part 3, Divisions 1 and 2 of the ASIC Act, and
by amending certain information gathering powers under Part 3 of
the ASIC Act. Further, the amendments allow ASIC to make certain
orders in relation to trust property in certain circumstances. An
anomaly in the ASIC Act relating to unconscionable conduct in
business transactions is also corrected.
Comparison of key features of new law and current law
|New law |Current law |
|Traditional trustee |No equivalent. |
|company services are | |
|deemed to be financial | |
|services for the purposes| |
|of Chapter 7 of the | |
|Corporations Act. | |
|Trustee companies that |Trustee companies must be|
|are listed in the |authorised by State or |
|regulations and that |Territory legislation in |
|offer one or more |each jurisdiction where |
|traditional trustee |they operate. |
|company services must | |
|hold an AFSL covering the| |
|provision of those | |
|services. | |
|A licensed trustee |The State and Territory |
|company is subject in all|Supreme Courts exercise |
|respects to the same |jurisdiction over trustee|
|control and general |companies, along with |
|jurisdiction of courts in|other persons who act as |
|the same way as any other|trustees, executors, |
|person who performs |guardians etc. |
|traditional trustee | |
|company functions. Under| |
|subsection 58AA(1) of the| |
|Corporations Act, court | |
|means any court. | |
|The Schedule specifies |The power to require the |
|circumstances in which: |provision of accounts, or|
|a licensed trustee |to conduct an audit, of a|
|company is not required |particular estate is a |
|to file accounts relating|matter of State law. |
|to an estate, however it | |
|may be required to | |
|provide an account in | |
|relation to an estate; | |
|and | |
|the Court may order an | |
|audit of an estate, and | |
|requirements to make | |
|documents available. | |
|The functions, powers, |No equivalent. |
|liabilities and | |
|obligations, and the | |
|privileges and | |
|immunities, of licensed | |
|trustee companies by this| |
|Part, are in addition to | |
|any functions and powers | |
|under any other law. | |
|This provision is | |
|intended to permit the | |
|concurrent operation of | |
|State and Territory laws | |
|that confer powers on | |
|trustees, executors, | |
|guardians etc. | |
|Trustee companies are |Some jurisdictions permit|
|permitted to operate |the creation of common |
|common funds. A common |funds, and some allow |
|fund is a fund that |such common funds to |
|contains money from two |include external money. |
|or more estates. A |Common funds that contain|
|common fund can only be |external money must |
|established and operated |comply with Chapter 5C of|
|if it contains at least |the Corporations Act. |
|some estate money. If | |
|this condition is | |
|satisfied, the common | |
|fund may also include | |
|other money. | |
|If investments in common | |
|funds are offered to the | |
|public, trustee companies| |
|must also comply with the| |
|managed investment scheme| |
|provisions in Chapter 5C | |
|of the Corporations Act. | |
| | |
|There are certain other | |
|administrative | |
|requirements for common | |
|funds. Estate money | |
|cannot be pooled into a | |
|common fund if it would | |
|be contrary to an express| |
|provision. | |
|A licensed trustee |Some jurisdictions have |
|company must ensure that |similar specific fee |
|an up-to-date schedule of|disclosure provisions. |
|its fees that are | |
|generally charged for its| |
|traditional trustee | |
|company services is | |
|published on the | |
|company's website and is | |
|available free of charge | |
|at the trustee company's | |
|offices during usual | |
|opening hours. | |
|A licensed trustee |No equivalent. |
|company (or authorised | |
|representative) is | |
|required to provide a | |
|financial services guide | |
|(FSG) to its client at | |
|the time when the client | |
|is seeking to acquire a | |
|service (for example, | |
|drafting a will). | |
|In relation to charitable|Many jurisdictions impose|
|trusts, there is |caps on the fees that |
|'grandfathering' of fees |trustee companies may |
|charged to existing |charge. However, Western|
|clients, and 'capping' of|Australia and the |
|fees charged to new |Australian Capital |
|clients. |Territory do not impose |
|In relation to new trusts|fee caps. |
|and estates (other than | |
|charitable trusts), there| |
|is deregulation, subject | |
|to a requirement that the| |
|company's fee schedule be| |
|disclosed on the Internet| |
|and a requirement that | |
|trustee companies charge | |
|no more than the fees | |
|specified in their | |
|published fee schedule | |
|immediately before the | |
|trustee company started | |
|to provide the service. | |
|If a licensed trustee |No equivalent. |
|company continues to | |
|provide traditional | |
|trustee company services | |
|to a client and the fees | |
|that it will charge | |
|change, the company must | |
|notify the client within | |
|21 days of the change in | |
|fees taking effect. | |
|Subject to Part 5D.3, a |Where not explicit, the |
|licensed trustee company |power to charge fees may |
|may charge fees for the |be inherent in State and |
|provision of traditional |Territory legislation. |
|trustee company services.| |
|Part 5D.3 does not |Some jurisdictions allow |
|prevent agreements |the parties to negotiate |
|between the parties as to|different fees (however, |
|the fees that are |certain persons, such as |
|charged, either in |those under a disability,|
|addition to, or instead |may not have this right |
|of the fees, that are |in some jurisdictions). |
|permitted by the Part. | |
|If the Court believes |Some jurisdictions allow |
|that the fees charged by |the Supreme Court to |
|a licensed trustee |review fees and reduce |
|company are excessive in |them if they are |
|respect of an estate, the|excessive. |
|Court may review the fees| |
|and may, having reviewed | |
|the fees, reduce them. | |
|Officers and employees of|In some jurisdictions, |
|a licensed trustee |persons such as directors|
|company owe duties of |are subject to personal |
|loyalty and good faith; |liability for defaults of|
|and duties of care, skill|the trustee company. |
|and diligence. | |
|The voting power of any |Many State and Territory |
|one person (and two or |laws include ownership |
|more persons under an |restrictions (set at 10, |
|arrangement) in a trustee|15 or 20 per cent) for |
|company is restricted to |trustee companies. |
|15 per cent, unless the | |
|Minister approves a | |
|higher shareholding. | |
|There is a transitional | |
|provision exempting | |
|existing trustee | |
|companies. | |
|Where a trustee company |Transfers of trustee |
|has its AFSL cancelled, |company business are |
|ASIC may make a |normally effected by |
|compulsory transfer |special State |
|determination |legislation. |
|transferring estate | |
|assets and liabilities | |
|from the former licensee | |
|to another licensed | |
|trustee company. | |
|A person who has suffered|No equivalent. |
|loss or damage because of| |
|the conduct of a licensed| |
|trustee company that | |
|contravenes Chapter 5D | |
|may take proceedings | |
|against the trustee | |
|company to recover the | |
|loss or damage. There is| |
|a limitation period of | |
|six years on bringing | |
|actions. | |
|ASIC has the power to |No equivalent. |
|make exemptions or | |
|modifications to Chapter | |
|5D. There is also a | |
|power to make exemptions | |
|or modifications to | |
|Chapter 5D by | |
|regulations. | |
|A provision of new |No equivalent. |
|Chapter 5D only binds the| |
|Crown in a particular | |
|capacity in circumstances| |
|(if any) specified in the| |
|regulations. | |
|Division 2 of Part 7.8 |No equivalent. |
|makes provision for | |
|dealing with clients' | |
|money. The Schedule | |
|provides that Division 2 | |
|does not regulate | |
|clients' money paid for | |
|the provision of | |
|traditional trustee | |
|company services provided| |
|by the trustee company. | |
|Amendments are made to |No equivalent. |
|ensure that the ASIC Act | |
|contains similar powers | |
|and functions, in | |
|relation to licensed | |
|trustee companies and | |
|traditional trustee | |
|company services, to | |
|those that are being | |
|inserted into the | |
|Corporations Act. | |
|A trustee company that is|No equivalent. |
|listed in the regulations| |
|under section 601RAB, and| |
|that already holds an | |
|AFSL at that time, is | |
|taken to be authorised | |
|under its AFSL to provide| |
|traditional trustee | |
|company services for a | |
|period of six months | |
|starting on the date of | |
|commencement of the | |
|regulations providing the| |
|list of trustee | |
|companies. | |
|The provisions regarding |No equivalent. |
|the disclosure to clients| |
|of changed fees also do | |
|not apply for six months | |
|following commencement. | |
|However, this does not | |
|extend to the requirement| |
|that the trustee company | |
|must disclose its current| |
|schedule of fees on its | |
|website maintained by or | |
|on behalf of the company.| |
|The requirements in Part | |
|7.7 of the Corporations | |
|Act do not apply during | |
|this period. Part 7.7 | |
|contains provisions | |
|relating to the FSG and | |
|statements of advice. At| |
|the end of the 6 month | |
|period, a trustee company| |
|can only provide | |
|traditional trustee | |
|company services if it | |
|has obtained an AFSL. | |
|ASIC's existing |In some instances, the |
|information gathering |exercise of ASIC's |
|powers under sections 40,|information gathering |
|41 and 43 of the ASIC Act|powers under sections 40,|
|are amended or |41 and 43 are limited to |
|replicated, as |financial products. |
|appropriate, so that they| |
|are available to ASIC in | |
|relation to trust | |
|property held by a | |
|trustee company. | |
|ASIC is able to use its |In some instances, ASIC's|
|powers where there is |powers under sections 71 |
|non-compliance with its |and 73 are limited to |
|investigation and |financial products. |
|information-gathering | |
|powers in Part 3 of the | |
|ASIC Act. Existing | |
|sections 71 and 73 of the| |
|ASIC Act are amended or | |
|replicated, as needed, to| |
|apply to trust property | |
|held by a trustee | |
|company. | |
|In relation to |Subsection 12CC(1) of the|
|unconscionable conduct in|ASIC Act is based on a |
|business transactions, |prohibition of |
|subsection 12CC(5) of the|unconscionable conduct in|
|ASIC Act includes a |relation to financial |
|reference to financial |services. However, |
|services, in addition to |subsection 12CC(5), which|
|the existing reference to|relates to what a court |
|a financial product. |may consider in |
| |determining whether |
| |subsection 12CC(1) is |
| |contravened, does not |
| |refer to financial |
| |services. |
Detailed explanation of new law
145. These provisions bring trustee companies (when they perform
traditional trustee company services) into the consumer protection
regime for financial services set out in Chapter 7 of the
Corporations Act and in the ASIC Act. This means that, subject to
modifications, trustee companies must comply with the licensing,
conduct, disclosure, advice dispute resolution and compensation
requirements of Chapter 7.
Jurisdictional scope
146. Chapter 5C is subject to the general territorial application of the
Corporations Act - that is, it applies 'in this jurisdiction'
(subsection 5(3)). Following the definition of this jurisdiction
in subsection 5(1), Chapter 5C applies throughout mainland
Australia.
Part 5D.1 - Preliminary
Key concepts and definitions
Regulation of trustee companies
147. The regulation of trustee companies under Chapter 5D applies to a
'licensed trustee company'.
148. A trustee company is a company:
. that is a constitutional corporation [Schedule 2, item 9,
paragraph 601RAB(1)(a)]; and
. that is prescribed by the regulations as a trustee company
for the purposes of the Act [Schedule 2, item 9,
paragraph 601RAB(1)(b)].
149. Companies may (for example) be prescribed:
. by setting out a list of companies in the regulations
[Schedule 2, item 9, paragraph 601RAB(2(a)]; or
. by providing a mechanism in the regulation for the
determination of a list of companies [Schedule 2, item 9,
paragraph 601RAB(2)(b)].
1.
For example, the regulations could specify that a
corporation that is authorised to apply for a grant of
probate or letters of administration, of the estate of a
deceased person, must be listed.
150. A licensed trustee company is a trustee company that holds an AFSL
covering the provision of 'traditional trustee company services'.
[Schedule 2, item 9, section 601RAA]
151. As traditional trustee company services are financial services for
the purpose of Chapter 7 (see proposed subsection 766A(1A) at
Schedule 2, item 19), a trustee company will be required to hold an
AFSL to provide those services.
Services covered by this chapter
152. The regulation of licensed trustee companies only applies to
traditional trustee company services. Traditional trustee company
services fall into two categories:
. preparing certain documents (such as a will or trust
instrument), applying for certain authorisations (such as
probate), and establishing and operating a common fund
[Schedule 2, item 9, subsection 601RAC(1)]; and
. estate management functions, which involve acting in
certain formal roles, such as a trustee, executor,
attorney, guardian or receiver [Schedule 2, item 9,
subsection 601RAC(2)].
153. The overall effect is that a trustee company must be listed as a
trustee company, and must hold an AFSL granted by ASIC, with that
AFSL covering the provision of 'traditional trustee company
services'.
154. The Chapter applies to all trustee companies that are listed in the
Schedule and that hold an AFSL covering the provision of
traditional trustee company services. This is subject to the
provision that public trust offices are only covered by the Chapter
if they (and the relevant State/Territory) explicitly opt to be
covered.
Services that are not covered by this chapter
155. Trustee companies provide a wide range of services, including
services that are not covered by the definition of 'traditional
trustee company services'. To ensure there is no overlap and such
services are not covered by Chapter 5C, the Chapter does not apply
to:
. operating a registered scheme (under Chapter 5C);
. providing a custodial or depository service (within the
meaning of section 766E);
. acting as trustee for debenture holders under Chapter 2L;
. acting as a receiver or other controller of property of a
corporation under Part 5.2;
. acting as trustee of a superannuation fund, an approved
deposit fund or a pooled superannuation trust (within the
meaning of the Superannuation Industry (Supervision)
Act 1993); or
. acting in any other capacity prescribed by the
regulations.
[Schedule 2, item 9, subsection 601RAC(3]
Meaning of 'client'
156. A client of a trustee company is a person to whom, within the
meaning of Chapter 7 of the Corporations Act, a financial service
(that is, a traditional trustee company service) is provided by
the trustee company. Regulations made for the purpose of
subsection 766A(1B) may define who is a client of a trustee
company. [Schedule 2, item 9, section 601RAA and subsection
601RAB(3)]
Meaning of 'court' and 'Court'
157. These terms are defined in existing section 58AA of the
Corporations Act. While court means any court, Court relevantly
includes the Federal Court and the Supreme Court of a State or
Territory. It is envisaged that the State and Territory Supreme
Courts would continue to exercise their traditional functions,
albeit (where such functions are covered by the Schedule) as an
exercise of Federal jurisdiction by a State court.
Meaning of 'person with a proper interest'
158. The concept of a person with a proper interest, in relation to an
estate, is defined in section 601RAD as including a number of
persons and entities, both generally and in the case of charitable
trusts, other trusts and deceased estates. [Schedule 2, item 9,
section 601RAD]
Other key definitions
159. Fees are defined broadly to include fees in the nature of
remuneration (including commissions), to ensure the definition
accords with other references to fees in the Corporations Act (for
example, in paragraph 942B(2)(e)). [Schedule 2, item 9, section
601RAA]
160. A law means a law of the Commonwealth or of a State or Territory,
and includes a rule of common law or equity. This definition
mainly affects breach notification requirements. [Schedule 2, item
9, section 601RAA]
161. The term publish picks up any references in regulations to
publishing requirements. [Schedule 2, item 9, section 601RAA]
162. A will includes a codicil and other testamentary writing.
[Schedule 2, item 9, section 601RAA]
163. The term estate is not defined in the legislation, but takes its
meaning from section 22 of the Acts Interpretation Act 1901 as
including 'any estate or interest charge right title claim demand
lien or incumbrance at law or in equity'.
Interaction between trustee company provisions and State and
Territory laws
164. A major objective of this reform is to ensure that, as far as
possible, trustee companies are not subjected to multiple or
overlapping regulatory regimes.
165. Section 601RAE sets out the areas of law in which the trustee
company provisions (as defined in subsection (1)) are intended to
operate exclusively. They are laws that:
. authorise or license companies to provide traditional
trustee company services generally (as opposed to laws
that authorise or license companies to provide a
particular traditional trustee company service);
. regulate the fees that may be charged by companies for the
provision of traditional trustee company services, and
laws that require the disclosure of such fees;
. deal with the provision of accounts by companies in
relation to traditional trustee company services that they
provide;
. deal with the duties of officers or employees of companies
that provide traditional trustee company services;
. regulate the voting power that people may hold in
companies that provide traditional trustee company
services, or that otherwise impose restrictions on the
ownership or control of companies that provide traditional
trustee company services;
. deal with what happens to assets and liabilities held by
a company, in connection with the provision by the
company of traditional trustee company services, if the
company ceases to be licensed or authorised to provide
such services. (This does not apply to laws referred to
in section 601WBC, that is, complementary State and
Territory legislation to give effect to transfers of
estate assets and liabilities.)
[Schedule 2, item 9, subsection 601RAE(2)]
166. The section explicitly notes that the Commonwealth provisions are
not intended to exclude State or Territory laws that require a
company, or its staff, to have particular qualifications or
experience. The section also explicitly states that complementary
State or Territory statutes giving effect to compulsory transfer
determinations under Part 5D.6 are not excluded. [Schedule 2, item
9, subsection 601RAE(3)]
167. There is a specific regulation-making power to provide that the
trustee company provisions are, or are not, intended to exclude
prescribed State or Territory laws. [Schedule 2, item 9,
subsection 601RAE(4)]
168. Part 1.1A, which ordinarily sets out the relationship between the
Corporations Act and State and Territory legislation, does not
apply in relation to the trustee company provisions. [Schedule 2,
item 9, subsection 601RAE(6)]
Part 5D.2 - Powers etc. of licensed trustee companies
169. Part 5D.2 broadly deals with two matters. Firstly, it deals with
the effect of Schedule 2 on the jurisdiction of courts and the
continuing operation of State and Territory laws [Schedule 2, item
9, Part 5D.2, Division 1]. Secondly, it sets out the powers and
obligations of licensed trustee companies in relation to the
provision of accounts and the establishment and operation of common
funds. [Schedule 2, item 9, Part 5D.2, Divisions 2 and 3]
170. In the past, only natural persons were able to provide personal
trustee and estate administration services. While this obstacle
has been removed by State and Territory laws, it should also be
noted that, under subsection 124(1) of the Corporations Act, a
company has the legal capacity and powers of an individual both in
and outside this jurisdiction.
Division 1 - General provisions
171. Part 5D.2 does not affect the inherent power or jurisdiction of
courts to supervise the performance of traditional trustee company
functions. A licensed trustee company is subject in all respects
to the same control and general jurisdiction of courts in the same
way as any other person who performs traditional trustee company
functions. Under subsection 58AA(1) of the Corporations Act, court
means any court. [Schedule 2, item 9, section 601SAA]
172. In addition to the powers, functions, liabilities and obligations,
and such privileges and immunities, which a licensed trustee
company has under these provisions, the company also has such other
powers etc. as are prescribed by the regulations. [Schedule 2,
item 9, section 601SAB]
173. The functions, powers, liabilities and obligations, and the
privileges and immunities, conferred or imposed, on licensed
trustee companies by this Part are in addition to, any functions
and powers, under any other law (law is defined in section 601RA to
mean Commonwealth, State or Territory laws or a rule of common law
or equity). This provision is intended to permit the concurrent
operation of State and Territory laws that confer powers on
trustees, executors, guardians etc. [Schedule 2, item 9, section
601SAC]
Division 2 - Accounts
174. These provisions specify circumstances in which:
. a licensed trustee company is not required to file
accounts relating to an estate, or may be required to
provide an account in relation to an estate; and
. the Court may order an audit of an estate, and
requirements to make documents available.
Licensed trustee company not required to file accounts
175. A licensed trustee company, when acting alone in relation to any
estate of a deceased person, is not required to file, or file and
pass, accounts relating to the estate unless ordered to do so by
the Court. While Court is defined in subsection 58AA(1), it is
envisaged that the State and Territory Supreme Courts would
continue to exercise this role. A licensed trustee company acting
jointly with another person also does not have to file, or file
and pass, account relating to the estate unless the other person
intends to charge fees for its role, or so ordered by the Court.
[Schedule 2, item 9, section 601SBA]
Licensed trustee company may be required to provide account in
relation to estate
176. To ensure that persons with a proper interest in the estate (as
defined in section 601RAD) are able to access relevant information
about the management of the estate, licensed trustee companies need
to account to those persons on request.
177. On application by a person with a proper interest in an estate
that is being administered or managed by the licensed trustee
company, the company must provide that person with an account of:
. the assets and liabilities of the estate;
. the trustee company's administration or management of the
estate;
. any investment made from the estate;
. any distribution made from the estate; and
. any other expenditure (including fees and commissions)
from the estate.
[Schedule 2, item 9, subsection 601SBB(1)]
178. Failure to provide the account is an offence. The maximum penalty
is 50 penalty units. ('Penalty unit' is defined in
subsection 4AA(1) of the Crimes Act 1914.) A penalty has been
imposed because it is essential that a person with a proper
interest is provided with the information contained in properly
prepared accounts, so that the person may make an informed
assessment about the management of the estate. [Schedule 2, item
28, item 173A in the table]
179. If a company has provided an account, and a further account is
requested within three months, the company need not provide a
further account until that period of three months has expired. A
defendant trustee company bears an evidential burden in relation
to whether an account has been provided within the three month
period, as this is a matter within the knowledge of the company.
[Schedule 2, item 9, subsection 601SBB(2)]
180. The company may charge a reasonable fee for providing the account
under this section. [Schedule 2, item 9, subsection 601SBB(3)]
181. If the company fails to account, the Court may, on application by
the person, make any order that the Court considers appropriate,
including an order requiring the preparation and delivery of
proper accounts. [Schedule 2, item 9, subsection 601SBB(4)]
Court may order audit
182. This provision enables the Court, on any application under section
601SBB, to order an examination of the accounts of the trustee
company relating to the estate by the person named in the order.
[Schedule 2, item 9, subsection 601SBC(1)]
183. On the making of an order, the trustee company must provide the
person with:
. a list of all the accounts kept by the company relating to
the estate; and
. at all reasonable times, all books (as defined in section
9 of the Corporations Act) in the company's possession
relating to the estate; and
. all necessary information and all other necessary
facilities for enabling the person to make the
examination.
[Schedule 2, item 9, subsection 601SBC(2)]
184. Failure to comply with subsection 601SBC(2) is an offence. The
maximum penalty is 50 penalty units. A penalty has been imposed
because it is essential that a trustee company comply with a court
ordered audit. [Schedule 2, item 28, item 173B in the table]
Division 3 - Common funds
185. Division 3 of Part 5D.2 overcomes the rules of trust law that
would otherwise prevent the pooling of trust money with other
money, or the pooling of money from two or more trusts.
186. Trustee companies are permitted to operate common funds to enable
the efficient pooling and investment of moneys from different
estates. A common fund is a fund that contains money from two or
more estates. [Schedule 2, item 9, subsections 601SCA(1) and (2)]
187. A common fund can only be established and operated if it contains
at least some estate money. If this condition is satisfied, the
common fund may also include other money. [Schedule 2, item 9,
subsections 601SCA(1) and (3)]
188. If investments in common funds are offered to the public, trustee
companies must also comply with the managed investment scheme
provisions in Chapter 5C of the Corporations Act. These
provisions require managed investment schemes to be managed by a
responsible entity, which must be a public corporation and hold a
dealer's licence. Each scheme must have a constitution, a
compliance plan and a registered prospectus.
Obligations relating to common funds
189. If a licensed trustee company creates more than one common fund,
each common fund must be allocated an appropriate distinguishing
number. Failure to do so is an offence, to ensure that persons
with a proper interest in an estate can ascertain in which common
fund the funds of the estate have been placed. The maximum
penalty is 50 penalty units. [Schedule 2, item 9, subsection
601SCB(1); item 28, item 173C in the table]
190. The trustee company must keep, for each common fund, accounts
showing at all times the current amount for the time being at
credit in the fund on the account of each estate. Failure to do so
is an offence, to ensure that persons with a proper interest in an
estate can ascertain how much money stands to the credit of the
estate at any time. The maximum penalty is 50 penalty units.
[Schedule 2, item 9, subsection 601SCB(2); item 28, item 173D in
the table]
191. Estate money cannot be pooled into a common fund if it would be
contrary to an express provision of the conditions under which the
estate money is held. Failure to comply is an offence, to ensure
that the wishes of the person who created the estate are respected.
The maximum penalty is 60 penalty units or imprisonment for 12
months, or both. [Schedule 2, item 9, subsection 601SCB(3)]; item
28, item 173E in the table]
Regulations relating to establishment or operation of common funds
192. The regulations may include provisions relating to the
establishment or operation of common funds. The reason for this
broad power is to (for example) enable standards to be set.
[Schedule 2, item 9, section 601SCC]
193. Regulations made under section 601SCC may alter the effect of
section 601SCA, for example, the regulations may limit the
circumstances in which other money may be pooled together with
estate money. [Schedule 2, item 9, subsection 601SCA(4)]
Part 5D.3 - Regulation of fees charged by licensed trustee companies
194. Part 5D.3 of the Schedule regulates the disclosure of fees, and the
level of fees, that licensed trustee companies are able to charge
their clients for traditional trustee company services.
195. The regulation of fees only applies to 'traditional trustee company
services'. 'Traditional trustee company services' are defined in
section 601RAC. This means that the regulation of fees that occurs
under this Part does not apply to fees for any other service that a
trustee company may provide, such as acting as a superannuation
trustee or being the responsible entity of a managed fund.
196. The general approach to the regulation of fees includes:
. disclosure of fees for all work that may be performed
(fees include remuneration/commissions);
. deregulation of the fees charged to new trusts and estates
(other than charitable trusts), subject to a requirement
that the company's fee schedule be disclosed on the
Internet and a requirement that trustee companies charge
no more than the fees specified in their published fee
schedule immediately before the trustee company started to
provide the service;
. in relation to charitable trusts:
- 'grandfathering' of fees charged to existing clients
('grandfathering' means that those existing clients will
continue to pay the same fees as they did before the new
legislation); and
- capping of fees charged to new clients.
. The Government is committed to a review of the fee
arrangements in relation to charitable trusts after two
years of operation.
Division 1 - Disclosure of fees charged to estates and trusts
197. Division 1 of Part 5D.3 deals with the disclosure of fees.
Disclosure of fees to the public
198. A licensed trustee company must ensure that an up-to-date schedule
of its fees that are generally charged for its services (only
traditional trustee company services) is:
. published on a website maintained by or on behalf of the
company; and
. is available free of charge at the trustee company's
offices during usual opening hours.
[Schedule 2, item 9, section 601TAA]
199. This measure supports the public disclosure of fees which may
assist in enhancing transparency of fees and competition among
trustee companies. It also provides a measure by which fees are
fixed for the duration of the service under section 601TCA. For
these reasons, failure to comply is an offence, and the maximum
penalty is 60 penalty units or imprisonment for 12 months, or both.
[Schedule 2, item 28, item 173F in the table]
Provision of Financial Services Guide
200. As part of the requirement for a trustee company to hold an AFSL,
licensed trustee companies (and its authorised representatives)
must comply with the obligations that attach to the AFSL, including
certain disclosure obligations contained in Part 7.7 of the
Corporations Act, as modified by regulation, as appropriate.
(Under the transitional provisions, this provision does not apply
until six months after commencement.) [Schedule 1, item 14,
subsection 766A(1A) and (1B)]
201. The Schedule amends section 761G to provide that traditional
trustee company services are provided to a person as a retail
client, subject to a regulation making power primarily designed to
deal with unintended consequences and/or obligations that are not
relevant to traditional trustee company services. [Schedule 2,
items 15 and 16, subsection 761G(6A)]
202. Among other obligations, this will mean that a licensed trustee
company (or authorised representative) is required to provide a
financial services guide (FSG) to its client at the time when the
client is seeking to acquire a service (for example, the drafting
of a will). This means the client will receive information about
the fees in the nature of remuneration (including commissions) that
the trustee company charges for traditional trustee company
services, as well as other information about the trustee company as
set out in subsections 942B(2) and 942C(2). Under section 941D,
this disclosure must occur as soon as practicable after it becomes
apparent to the trustee company that they will, or are likely, to
provide services to the client.
Disclosure to clients of changed fees
203. If a licensed trustee company continues to provide traditional
trustee company services to a client and the fees that it will
charge change, the company must, within 21 days of the change in
fees taking effect, notify the client of the change. The company
may:
. send the client a copy of the changed fee, if the client
has made an election under paragraph 601TAB(2) [Schedule
2, item 9, paragraph 601TAB(1)(a)]; or
. in any other case - directly notify the client, in
writing, that the changed fees are available on a website
maintained by or on behalf of the company [Schedule 2,
item 9, paragraph 601TAB(1)(b)].
204. Failure to comply with subsection 601TAB(1) is an offence, to
ensure trustee companies provide updated fee schedules to their
clients who are affected. The maximum penalty is 60 penalty units
or imprisonment for 12 months, or both. [Schedule 2, item 28, item
173G in the table]
205. If a client has elected to receive a copy of changes to fees (which
is free of charge) they can elect to receive an electronic copy.
In any other case, the client must be provided with a hard copy.
[Schedule 2, item 9, paragraphs 601TAB(2)(a) and (b)]
206. If the client is under a legal disability, a copy of the changed
fees, or a notice regarding changed fees, must be provided to the
client's agent ('agent' is sufficiently broad to encompass a
person's legal representative), and a request referred to in
paragraph 601TAB(1)(a) or (2)(a) may be made by the agent.
Division 2 - General arrangements about charging fees
207. Division 2 of Part 5D.3 clarifies some matters in relation to
arrangements for fees charged to trusts and estates.
Power to charge fees
208. This section makes it clear that, notwithstanding any impediment at
common law (or in a statute), a licensed trustee company may charge
fees for the provision of traditional trustee company services.
The power to charge fees is subject to Part 5D.3. [Schedule 2,
item 9, subsection 601TBA(1)]
209. The section also makes clear that if a provision of Part 5D.3
limits the fees that a trustee company may charge, the trustee
company must not charge fees in excess of that limit. Failure to
comply with this section is an offence. The maximum penalty is 60
penalty units or imprisonment for 12 months, or both. A penalty
has been imposed to ensure that trustee companies adhere to the fee
limits. Also, excess fees may be recovered in a civil action under
section 601XAA. [Schedule 2, item 9, subsection 601TBA(2); item
28, item 173H in the table and section 601XAA]
210. As Division 4 and 5 of this Part place some limits on fees that may
be charged, the Schedule clarifies that this Part does not prevent
agreements between the parties as to the fees that are charged,
either in addition to, or instead of the fees, that are permitted
by this Part. This can be a result of:
. any fees that a testator, in his or her will, has directed
to be paid [Schedule 2, item 9, subsection 601TBB(1)]; or
. any fees that are agreed between the trustee company and a
person or persons who have authority to deal with the
trustee company on matters relating to the provision of
the service (such persons may be prescribed by regulation)
[Schedule 2, item 9, subsection 601TBB(2)].
211. The legislation clarifies that the Part does not prevent a licensed
trustee company from charging a fee permitted by subsection
601SBB(3) for the provision of an account in relation to an estate.
[Schedule 2, item 9, section 601TBC]
212. The legislation also clarifies that the Part does not prevent the
reimbursement of all disbursements properly made by the trustee
company in the provision of traditional trustee company services.
[Schedule 2, item 9, section 601TBD].
213. Finally, where a licensed trustee company provides estate
management services, fees charged for the provision of this service
must be paid out of the capital or income of the relevant estate.
This provision provides flexibility for the licensed trustee
company to draw fees from capital or income of the estate, as
appropriate. [Schedule 2, item 9, subsection 601TBE(2)]
214. This flexibility does not apply to:
. a management fee (under section 601TDD), which can only
come out of income of the relevant estate. This
management fee only applies to new charitable trusts; and
. a common fund administration fee (under section 601TDE or
601TDI), which can only come out of the income received by
the common fund. This common fund administration fee only
applies to new charitable trusts.
[Schedule 2, item 9, paragraphs 601TBE(3)(a) and (b)]
Division 3 - Fees charged to trusts and estates (other than for
being trustee or manager of a charitable trust)
215. Division 3 of Part 5D.3 deals with fees charged, other than for
charitable trusts.
216. A licensed trustee company must not charge fees in excess of its
schedule of fees most recently published on its website (required
by section 601TAA) before the trustee company started to provide
the service. This means that a client cannot be charged more than
the fees set out in the schedule of fees for the duration of the
service. [Schedule 2, item 9, section 601TCA]
217. This fixed fee schedule for the duration of the service provides
some certainty to consumers about the level of fees.
218. Trustee companies are able to change the schedule of fees as
appropriate, reflecting the changing costs of the services, but
once the service commences the fees are locked in at the last
published schedule of fees.
219. As set out earlier, the parties are able to negotiate, either
higher or lower fees, than the amount set in the most recent
published schedule of fees.
220. The fee arrangements (under section 601TCA) do not apply to:
. the provision of any service that started before
commencement of this section; or
. the service is being the trustee or manager of a
charitable trust. Fees for charitable trusts are
regulated by Division 4.
Division 4 - Fees for being trustee or manager of a charitable
trust
221. Division 4 of Part 5D.3 deals with fees in relation to licensed
trustee companies providing the service of being the trustee or
manager of a charitable trust when the provision of the service
started on or after the commencement of section 601TDA. [Schedule
2, section 601TDA]
222. Different fee arrangements apply to services provided to new
charitable trusts (these being services provided after this section
commences), and existing charitable trusts (for services already
being provided).
223. The Government will review the fees arrangements for both existing
and new charitable trusts after the provisions have been in
operation for two years.
224. The Schedule does not define a 'charitable trust'. The meaning of
charitable trust is derived from case law.
Subdivision A - Fees for new charitable trusts
225. Subdivision A deals with fee arrangements for new charitable
trusts.
226. If a licensed trustee company provides traditional trustee company
services, being service as the trustee or manager of a charitable
trust and that service started on or after the commencement of this
section, then, the trustee company must only charge,
. either:
- a capital commission and an income commission, as
provided under section 601TDC (option 1); or
- a management fee as provided under section 601TDD
(option 2) [Schedule 2, item 9, paragraph 601TDB(1)(a)];
and
. if applicable, common fund administration fees under
section 601TDE [Schedule 2, item 9, paragraph
601TDB(1)(b)]; and
. if applicable, fees permitted by section 601TDF in respect
of the preparation of returns etc [Schedule 2, item 9,
paragraph 601TDB(1)(c)].
227. This provision mirrors the arrangements set out in Part IV of the
Trustee Companies Act 1984 (Victoria).
228. As previously outlined, this fee structure does not affect the
ability of the charitable trust and the trustee company to
negotiate different fee arrangements.
Option 1: Capital and income commission
229. The first option is that a trustee company may charge a capital
commission and an income commission. [Schedule 2, item 9, section
601TDC]
230. The capital commission charged must not exceed 5.5 per cent (goods
and services tax (GST) inclusive) of the gross value of the trust
assets. 'Gross value of the trust assets' is undefined. The
capital commission can only be charged once during the period the
trustee company is trustee or manager of the trust. [Schedule 2,
item 9, subsections 601TDC(1) and (2)]
231. The regulations may make provision relating to the capital
commission, which may include (but are not limited to):
. the calculation of the commission or the gross value of
trust assets;
. when, during the period referred to in subsection (2), the
commission may be charged.
[Schedule 2, item 9, subsection 601TDC(3)]
232. In addition to the capital commission, the trustee company may
charge an annual income commission not exceeding 6.6 per cent
(goods and services tax (GST) inclusive) of the income received on
trust assets. [Schedule 2, item 9, subsection 601TDC(4)]
233. The regulations may make provision relating to the income
commission, which may include (but are not limited to):
. the calculation of the commission or of the income
received on the trust assets;
. when, during the year, the commission may be charged; and
. apportionment of the amount of the commission for part-
years.
[Schedule 2, item 9, subsection 601TDC(5)]
Option 2: Annual management fee
234. The second option is that, instead of a capital commission
and income commission, a trustee company may charge an annual
management fee. The annual management fee must not exceed
1.056 per cent (GST inclusive) of the gross value of the trust
assets. (It is understood that the 1.056 per cent figure is based
on a monthly figure of 0.08 per cent plus GST.) [Schedule 2, item
9, subsection 601TDD(1)]
235. The regulations may make provision relating to the management fee,
including (but not limited to):
. the calculation of the management fee or of the gross
value of the trust assets; and
. when, during a year, the management fee may be charged;
and
. apportionments of the amount of the management fee for
part-years.
[Schedule 2, item 9, subsection 601TDD(2)]
Common funds
236. If trust assets are included in a common fund operated by the
trustee company, the trustee company may charge an annual common
fund administration fee not exceeding 1.1 per cent of the gross
value of the trust's assets in the fund. [Schedule 2, item 9,
subsection 601TDE(1)]
237. The regulations may make provisions relating to common fund
administration including (but not limited to):
. the calculation of the common fund administration fee or
gross value of the trust assets in the fund; and
. when, during a year, the common fund administration fee
may be charged; and
. the apportionment of the common fund administration fee
for part-years.
[Schedule 2, item 9, subsection 601TDE(2)]
Additional amounts for preparation of returns etc.
238. The trustee company may charge a reasonable fee for work involved
in the preparation and lodging of returns for the purpose of, or in
connection with, assessments of any duties or taxes (other than
probate, death, succession or estate duties) related to the trust
estate. [Schedule 2, item 9, section 601TDF]
Subdivision B - Existing client charitable trusts
239. Subdivision B of Division 4 deals with fee arrangements for
existing client charitable trusts. [Schedule 2, item 9, section
601TDG]
240. The Schedule 'grandfathers' fees in relation to existing charitable
trust clients. 'Grandfathering' generally means that, when rules
change, current participants remain unaffected and the new rules
only apply to new participants. 'Grandfathering' will apply where
the trustee company provides a traditional trustee company service,
being a service as the trustee or manager of a charitable trust and
that service started before the commencement of this section.
241. In those circumstances, the general rule is that the trustee
company must not charge fees in excess of fees that it could have
charged in relation to the trust immediately before the
commencement of this section. [Schedule 2, item 9, section 601TDH]
242. However, if any of the trust assets are included in a common fund,
the trustee company may charge an annual administration fee not
exceeding 1.1 per cent of the gross value of the charitable trust's
assets in the fund. This provision enables trustee companies to
charge the additional fee at the estate level, rather than at the
common fund level. The regulations may make provision for matters
relating to the common fund administration fee. [Schedule 2, item
9, section 601TDI]
243. Further, the trustee company may charge a reasonable fee for work
involved in the preparation and lodging of returns for the purpose
of, or in connection with, assessments of any duties or taxes
(other than probate, death, succession or estate duties) related to
the trust estate. [Schedule 2, item 9, section 601TDJ]
Division 5 - Miscellaneous
244. Division 5 deals with miscellaneous matters, including powers of
the court regarding excessive fees and directors' fees payable to
an officer of a trustee company who acts as director of (another)
corporation for purposes connected with the administration or
management of an estate.
Power of the Court with respect to excessive fees
245. If the Court is of the opinion that the fees charged by a licensed
trustee company are excessive in respect of an estate, the Court
may review the fees and may, having reviewed the fees, reduce them.
[Schedule 2, item 9, subsection 601TEA(1)]
246. The Court may not review fees:
. that are charged as permitted by section 601TBB (that is,
fees set by a testator, or agreed between the trustee
company and persons with authority to negotiate; or
. that relate to a charitable trust and are charged in
accordance with Subdivision A of Division 4, given that
these fees are fixed by law.
[Schedule 2, item 9, subsection 601TEA(2)]
247. When the Court is considering whether fees are excessive, the Court
may consider any or all of the matters set out in
subsection 601TEA(3). Those matters include: the extent to which
work performed by the company was reasonably necessary; the period
during which the work was, or is likely to be, performed; the
complexity (or otherwise) or the work performed, or likely to be
performed, by the company; and the extent to which the trustee
company was, or is likely to be, required to deal with
extraordinary matters. The Court may also consider any other
relevant matter. [Schedule 2, item 9, subsection 601TEA(3)]
248. The Court may exercise its powers either on its own motion or on
application of a person with a proper interest in the estate (as
defined in section 601RAD). [Schedule 2, item 9,
subsection 601TEA(4)]
249. If the Court reduces the fees by more than 10 per cent, the company
must, unless the Court in special circumstances otherwise orders,
pay the costs of the review. Subject to this proviso, all
questions of costs of the review are in the discretion of the
Court. [Schedule 2, item 9, subsections 601TEA(5) and (6)]
Directors' fees otherwise payable to an officer of a trustee
company
250. This provision is intended to apply where an estate being
administered or managed by a trustee company has a shareholding or
other interest in a corporation, and an officer of the trustee
company acts as a director of that corporation for the purposes of
administering the estate. [Schedule 2, item 9, subsection
601TEB(1)]
251. In such circumstances, the trustee company is entitled to the
directors' fees payable to the officer. To clarify matters,
neither the officer nor the estate is entitled to such fees.
[Schedule 2, item 9, subsections 601TEB(2) and (3)]
Part 5D.4 - Duties of officers and employees of licensed trustee companies
252. Part 5D.4 sets out the duties of officers and employees of licensed
trustee companies.
253. It is the intention of the legislation that State and Territory
laws providing for personal liability of directors of trustee
companies are to be repealed. In their place, the rules provided
by this Schedule, and other Corporations Act provisions, such as
section 197, will govern directors and officers' duties and
liabilities.
Duties of officers
254. An officer of a licensed trustee company has duties imposed under
section 601UAA. (These duties are in addition to duties owed under
other provisions of the Corporations Act, such as section 197.) In
the main, the duties can be classified as:
. duties of loyalty and good faith; and
. duties of care, skill and diligence.
[Schedule 2, item 9, section 601UAA]
Duties of loyalty and good faith
255. The positive duty of loyalty of an officer of a trustee company is
to act honestly. [Schedule 2, item 9, paragraph 601UAA(1)(a)]
256. The negative aspects of the duty of loyalty require the officers of
trustee companies to avoid the following conflicts of interest:
. not to make use of information to gain an improper
advantage for the officer or another person or cause
detriment to the clients of the trustee company; and
. not to make improper use of their position to gain
directly or indirectly an advantage for themselves, or for
any other person, or cause detriment to the clients of the
trustee company.
[Schedule 2, item 9, paragraphs 601UAA(1)(c) and (d)]
Duties of care, skill and diligence
257. An officer of a licensed trustee company must:
. exercise the degree of care and diligence that a
reasonable person would expect if they were in the
officer's position [Schedule 2, item 9, paragraph
601UAA(1)(b)]; and
. take all steps to ensure the trustee company complies with
the Corporations Act and its AFSL [Schedule 2, item 9,
paragraph 601UAA(1)(e)].
258. There are both civil and criminal penalties for a contravention of
the duties under subsection 601UAA(1). The intention of the dual
regime is to give primacy to the civil penalty regime and retain
criminal penalties for serious breaches of the Act.
. Civil penalties apply for a contravention, or involvement
in a contravention, of subsection 601UAA(1). This is
reflected in subsection 1317E(1), as amended [Schedule 2,
item 9, subsections 601UAA(1); item 27, paragraph
1317E(1)(jaaa)].
. Also it is an offence to intentionally or recklessly
contravene (or be involved in a contravention of)
subsection 601UAA(1). The maximum penalty is 300 penalty
units or imprisonment for five years, or both [Schedule 2,
item 9, subsections 601UAA(1) and (2); item 28, item 173J
in the table].
259. The duties of an officer of a trustee company under
subsection 601UAA(1) override any conflicting duties the officer
has under Part 2D.1 of the Corporations Act (duties of officers and
employees), but is subject any conflicting duties the officer has
under Part 5C.2 (duties of officers and employees of responsible
entities of managed investment schemes). [Schedule 2, item 9,
subsection 601UAA(3)]
260. A reference to a client in this section is a reference to the
clients, when viewed as a group (client is defined in subsection
601RAB(3)). [Schedule 2, item 9, subsection 601UAA(4)]
Duties of employees
261. The Schedule imposes a negative duty on employees of trustee
companies to avoid conflicts of interest. An employee must not:
. make use of information to gain an improper advantage for
the employee or another person or cause detriment to the
clients of the trustee company; or
. make improper use of their position to gain directly or
indirectly an advantage for themselves, or for any other
person, or cause detriment to the clients of the trustee
company.
[Schedule 2, item 9, subsection 601UAB(1)]
262. There are both civil and criminal penalties for a contravention of
the duties under subsection 601UAB(1). As with subsection
601UAA(1), the intention of the dual regime is to give primacy to
the civil penalty regime and retain criminal penalties for serious
breaches of the Act.
. Civil penalties apply for a contravention, or involvement
in a contravention of subsection 601UAB(1). This is
reflected in subsection 1317E(1), as amended [Schedule 2,
item 9, subsection 601UAB(2); item 27, paragraph
1317E(1)(jaab)].
. Also, it is an offence to intentionally or recklessly
contravene (or be involved in a contravention of)
subsection 601UAB(1). The maximum penalty is 300 penalty
units or imprisonment for five years, or both [Schedule 2,
item 9, subsection 601UAB(1); item 28, item 173K in the
table].
263. The duties of an employee of a trustee company under
subsection 601UAB(1) override any conflicting duty the employee has
under Part 2D.1 of the Corporations Act (this relates to duties of
officers and employees) but is subject any conflicting duties the
employee has under Part 5C.2 (duties of officers and employees of
responsible entities of managed investment schemes). [Schedule 2,
item 9, subsection 601UAB(3)]
264. A reference to a client in this section is a reference to the
clients, when viewed as a group (client is defined in subsection
601RAB(3)). [Schedule 2, item 9, subsection 601UAB(4)]
Part 5D.5 - Limit on control of licensed trustee companies
265. Many State and Territory laws include ownership restrictions for
trustee companies. The Schedule also places ownership restrictions
on trustee companies. These limitations are intended to maintain a
broad spread of ownership and minimise the possibility that a
single shareholder could obtain control.
266. Part 5D.5 provides for:
. a prohibition on acquisitions which result in an
'unacceptable control situation'. This has the effect of
restricting voting power of any one person (and two or
more persons under an arrangement) in a trustee company to
15 per cent, unless the Minister approves a higher
shareholding under Division 2 [Schedule 2, item 9, section
601VAA and Division 2 of Part 5D.5];
. procedures for the Minister to approve a higher
shareholding than 15 per cent [Schedule 2, item 9,
Division 2 of Part 5D.5];
. provisions empowering the Court to make a remedial order
or issue an injunction where there is an unacceptable
control situation [Schedule 2, item 9, sections 601VAC and
601VAD], so long as an order under section 601VAC does not
offend paragraph 51(xxxi) of the Constitution relating to
unjust acquisition of property [Schedule 2, item 9,
section 601VCA]; and
. an anti-avoidance provision [Schedule 2, item 9, section
601VCC].
267. The 15 per cent limitation is comparable to the limitation for
'financial sector companies' under the Financial Sector
(Shareholdings) Act 1998. Further, the limitation aligns with
Division 1 of Part 7.4 of the Corporations Act on bodies corporate
and their holding companies, who hold an Australian market licence
or Australian clearing and settlement facility licence.
Unacceptable control situation - the 15 per cent limitation
268. An unacceptable control situation exists if a person's voting power
in relation to a licensed trustee company exceeds 15 per cent, or
exceeds the set percentage in force under Division 2 in relation to
that trustee company. [Schedule 2, item 9, section 601VAA]
269. It is an offence for a person (or two or more persons) to acquire
shares in a body corporate, where the acquisition has the result
that:
. an unacceptable control situation comes into existence in
relation to the trustee company; or
. if an unacceptable control situation already exists in
relation to the trustee company - there is an increase in
the voting power of the person in the trustee company.
[Schedule 2, item 9, section 601VAB]
270. Contravention of section 601VAB is an offence, in order to
emphasise the seriousness of a breach of the shareholding limit.
The maximum penalty is 120 penalty units or imprisonment for two
years, or both. [Schedule 2, item 28, item 173L in the table]
Division 2 - Approval to exceed 15 per cent limitation
271. Division 2 empowers the Minister to approve applications to hold
more than 15 per cent of the voting power of a licensed trustee
company if the Minister is satisfied that it would be in the
interests of the licensed trustee company and its clients. This
power to increase the 15 per cent ownership limitation is included
so that, for example, the range of ownership options in the future
is not fettered. For example many trustee companies are wholly-
owned subsidiaries of other companies.
272. The provisions cover the following:
. lodging an application with ASIC to exceed the 15 per cent
limitation [Schedule 2, item 9, section 601VBA];
. the Minister granting or refusing such an application
[Schedule 2, item 9, section 601VBB] and revoking an
approval [Schedule 2, item 9, section 601VBF];
. the duration of the approval [Schedule 2, item 9, section
601VBC];
. conditions of approval [Schedule 2, item 9, section
601VBD];
. varying the percentage approved [Schedule 2, item 9,
section 601VBE];
. seeking further information about an application [Schedule
2, item 9, section 601VBG]; and
. seeking the views of the licensed trustee company and its
clients [Schedule 2, item 9, section 601VBH].
273. When the Minister is considering the interests of clients, it is a
reference to the interests of the clients, when viewed as a group.
[Schedule 2, item 9, section 601VCB]
274. The Minister is required to make a decision within 30 days after
receiving such an application. However, the Minister may, before
the end of 30 days, extend the period in which the decision must be
made to 60 days. [Schedule 2, item 9, subsections 601VBI(1) and
(2)]
275. Time does not run while a request for further information is
outstanding (see subsection 601VBG(1)). [Schedule 2, item 9,
subsection 601VBI(4]
276. However, if the Minister fails to make a decision within the time
limit, he or she is taken to have granted what was applied for
[Schedule 2, item 9, subsection 601VBI(3)], unless an unacceptable
control situation exists [Schedule 2, item 9, subsection
601VBI(5)].
277. If a person holds approval under section 601VBB, they must notify
ASIC, in writing, if they become aware they have breached a
condition to which the approval is subject. [Schedule 2, item 9,
subsection 601VBD(8)]
. Failure to do so is an offence. The maximum penalty is
60 penalty units or imprisonment for 12 months, or both
[Schedule 2, item 28, item 173M in the table].
. Also, the Minister may revoke an approval if the Minister
is satisfied that there has been such a contravention of a
condition of approval [Schedule 2, item 9, paragraph
601VBF(1)(c)].
Powers of the Court relating to unacceptable control situations
Court orders
278. The Court has the power to make orders, as it considers
appropriate, for the purposes of remedying an unacceptable control
situation. [Schedule 2, item 9, subsection 601VAC(1)]
279. The Court's orders may include (but are not limited to), an order:
. directing the disposal of shares;
. restraining the exercise of any rights attached to shares;
. prohibiting or deferring payment of sums due to a person
in respect of shares held by the person;
. that any exercise of rights attached to shares be
disregarded;
. directing any person to do or refrain from doing a
specified act, for the purposes of compliance with other
orders made; or
. containing ancillary or consequential provisions as the
court thinks just.
[Schedule 2, item 9, subsection 601VAC(3)]
280. The Court may only make an order, on application, by specified
parties which are:
. the Minister;
. ASIC;
. the trustee company;
. a person who has voting power in the trustee company; or
. a client of the trustee company.
[Schedule 2, item 9, subsection 601VAC(2)]
281. The court may rescind, vary or discharge an order, or suspend the
operation of an order. [Schedule 2, item 9, subsection 601VAC(6)]
Injunctions
282. There is a general provision with respect to injunctions in section
1324. The Schedule provides that, if any conduct amounts or would
amount to a contravention of Part 5D.5, a trustee company is a
person whose interests may be affected, and who thus may apply to
the court for an injunction. The class of persons 'whose interests
are affected' is not limited by subsection (1). [Schedule 2, item
9, subsections 601VAD(1) and (2)]
283. The Minister has the same powers as ASIC to apply for an injunction
if the conduct of a trustee company amounts to a contravention of
this Part. [Schedule 2, item 9, subsection 601VAD(3)]
284. The power to grant remedial orders in section 601VAC and the
general injunction power in section 1324 do not, by implication,
limit each other. [Schedule 2, item 9, subsection 601VAD(4)]
Other matters
Acquisition of property
285. The court must not make a remedial order under section 601VAC if
the order would result in the acquisition of property from a person
otherwise than on just terms. The court must also not make such an
order whereby the order would be invalid because of
paragraph 51(xxxi) of the Constitution. Acquisition of property
has the same meaning as in paragraph 51(xxxi) of the Constitution,
and just terms has the same meaning as in paragraph 51(xxxi) of the
Constitution. [Schedule 2, item 9, section 601VCA]
Anti-avoidance
286. Section 601VCC outlines the circumstances when the Minister may
give the controller a written direction to cease having voting
power. A person subject to a written direction must comply with
the direction. [Schedule 2, item 9, subsections 601VCC(1) and (2)]
287. The section is directed at situations in which a person or persons
enter into, begin to carry out or carry out a scheme, for the sole
or dominant purpose of avoiding the application of Division 1 of
Part 5D.5, and as a result of the scheme, a person (the controller)
increases the controller's voting power in a licensed trustee
company. 'Scheme' is not defined. [Schedule 2, item 9, subsection
601VCC(1)]
288. Failure to comply with a direction is an offence, to prevent
avoidance of the application of Division 1 dealing with
unacceptable control situations. The maximum penalty is 120
penalty units or imprisonment for two years, or both. [Schedule 2,
item 9, subsection 601VCC(2)]
289. Subsection (3) states that a direction under subsection (1) is not
a legislative instrument. This provision is included to assist
readers, as the instrument is not a legislative instrument within
the meaning of section 5 of the Legislative Instruments Act 2003
(Legislative Instruments Act) on general principles. [Schedule 2,
item 9, subsection 601VCC(3)]
290. For the purposes of this section, increase voting power includes
increasing it from a starting point of nil. [Schedule 2, item 9,
subsection 601VCC(4)]
Part 5D.6 - Consequences of cancellation of Australian financial services
licence
291. Because a trustee company requires an AFSL to provide traditional
trustee company services, if ASIC cancels its AFSL, the company can
no longer provide the services, potentially leaving clients without
an entity to manage or administer estates in which they have an
interest. (This is subject to section 915H, which provides that
when ASIC suspends or cancels an AFSL, ASIC may specify that the
licence continues in effect for the purposes of specified
provisions of the Corporations Act in relation to specified
matters, a specified period, or both.)
292. Part 5D.6 deals with this situation by providing for the transfer
of estate assets and liabilities from the former licensed trustee
company to another licensed trustee company, if certain conditions
are satisfied.
293. Broadly, there is a two-stage process in which:
. ASIC makes a compulsory transfer determination, if
specified conditions are satisfied. This means there is
to be a transfer of estate assets and liabilities to a new
licensed trustee company (the receiving company);
. Second, ASIC issues a certificate of transfer, to effect
the transfer of estate assets and liabilities to the
receiving company, if specified conditions are satisfied.
Key definitions for the Part
294. Subsection 601WAA(1) defines several key terms for the purposes of
this Part dealing with the consequences of cancellation of an AFSL.
. asset includes, in general terms, any legal or equitable
estate or interest in real or personal property, whether
present or future, vested or contingent, tangible or
intangible. It also covers any chose in action; any
right, interest or claim of any kind; and any capital
gains tax (CGT) asset [Schedule 2, item 9,
subsection 601WAA(1)];
. cancel in relation to a licence means the cancellation of
a licence under Part 7.6 or a variation of the licence so
that it ceases to cover traditional trustee company
services [Schedule 2, item 9, subsection 601WAA(1)];
. estate assets and liabilities means assets (including
assets in common funds) and liabilities:
- of an estate, in relation to which the trustee company
(before its licence was cancelled) was performing estate
management functions; and
- that, immediately before the cancellation, were vested
in the trustee company because it was performing those
functions, or were otherwise assets and liabilities of
the trustee company because of its performance of those
functions [Schedule 2, item 9, subsection 601WAA(1)];
. liability includes a duty or obligation of any kind,
whether arising under an instrument or otherwise, and
whether actual, contingent or prospective [Schedule 2,
item 9, subsection 601WAA(1)].
295. The subsection also defines authorised ASIC officer, interest and
licence.
296. ASIC may, in writing, authorise a person (who is a member of ASIC
or its staff) to perform or exercise functions of powers under this
Part. [Schedule 2, item 9, subsection 601WAA(2) and definition of
authorised ASIC officer in section 601WAA]
Compulsory transfer determinations
297. If ASIC cancels the licence of a trustee company, ASIC may, in
writing, make a determination (which is a compulsory transfer
determination) that there is to be a transfer of the estate assets
and liabilities from the transferring company to another licensed
trustee company (the receiving company).
298. ASIC can only make a compulsory transfer determination if:
. either:
- the Minister has consented to the transfer; or
- the Minister's consent is not required [Schedule 2, item
9, paragraph 601WBA(2)(a)]; and
. ASIC is satisfied that:
- the transfer is in the interests of the clients of the
transferring company (when viewed as a group) and
clients of the receiving company (when viewed as a
group). (Client is defined in subsection 601RAB(3) to
only include a client being provided with traditional
trustee company services) [Schedule 2, item 9,
paragraph 601WBA(2)(a)]. (The Minister or ASIC may seek
the views of the licensed trustee company and its
clients, as part of the possible exercise of their
powers.) [Schedule 2, item 9, section 601WCH];
. the board of the receiving company has consented to the
transfer. This consent is in force until it is withdraw
by the board with the agreement of ASIC. ASIC may agree
to allow the board to withdraw its consent, such as where
circumstances have arisen since consent was given or
taking into account other relevant matters [Schedule 2,
item 9, section 601WBB];
. State and Territory legislation (that satisfies section
601WBA) to facilitate the transfer has been enacted in the
State or Territory [Schedule 2, item 9, paragraph
601WBA(2(b)(iv) and section 601WBC].
299. The determination must include particulars of the transfer,
including the names of the transferring and receiving company and
the extent of transfer of the estate assets and liabilities. The
determination must also include a statement of reasons why the
determination has been made. [Schedule 2, item 9, subsections
601WBA(3) and (4)]
300. Subsection (5) states that the determination is not a legislative
instrument. This provision is included to assist readers, as the
instrument is not a legislative instrument within the meaning of
section 5 of the Legislative Instruments Act on general principles.
[Schedule 2, item 9, subsection 601WBA(5)]
Minister's power to decide that consent not required
301. Under section 601WBD, the Minister's consent is not required if the
Minister has determined in writing that his or her consent is not
required in relation to the transfer or a class of transfers. The
regulations may prescribe criteria to be taken into account by the
Minister in deciding whether to make a determination. [Schedule 2,
item 9, subsections 601WBD(1) and (2)]
302. Subsections (3) and (4) clarify when a determination is, or is not,
a legislative instrument. These provisions are included to assist
readers, as a single transfer determination is not a legislative
instrument within the meaning of section 5 of the Legislative
Instruments Act on general principles. [Schedule 2, item 9,
subsections 601WBD(3) and (4)]
Determinations may impose conditions
303. The determination may impose conditions on the receiving or
transferring company, either or both, before or after the
certificate of transfer has been issued. [Schedule 2, item 9,
subsection 601WBE(1)]
304. ASIC may vary or revoke determinations if it considers it
appropriate. The transferring or receiving company may also apply
to ASIC for variation or revocation for conditions imposed under
paragraph 601WBE(1)(b), that is, after the certificate of transfer
has been issued. ASIC must notify the relevant company of its
action or decision in writing. [Schedule 2, item 9, subsections
601WBE(2) and (3)]
305. It is an offence for the transferring or receiving company not to
comply with conditions imposed by ASIC, to ensure compliance with
this provision. The maximum penalty is 50 penalty units.
[Schedule 2, item 9, subsection 601WBE(5); item 28, item 173P in
the table]
306. Subsection 601WBE(6) specifies that a transferring company or a
receiving company does not commit an offence against the
Corporations Act merely because the company is complying with a
condition imposed by ASIC. A defendant bears the evidential proof
in relation to the defence under subsection 601WBE(6), as these are
matters squarely within the knowledge of the defendant. [Schedule
2, item 9, subsection 601WBE(6)]
Notice of determination
307. ASIC must give a copy of the determination to the transferring and
receiving company. [Schedule 2, item 9, section 601WBF]
Certificate of transfer
308. If ASIC has made a compulsory transfer determination, and ASIC
considers that the transfer should go ahead and consent of the
board under subparagraph 601WBA(2)(b)(iii) has not been withdrawn,
ASIC must issue, in writing, a certificate (known as a certificate
of transfer) that the transfer is to take effect. [Schedule 2,
item 9, subsection 601WBG(1)]
309. The certificate of transfer must include the names of the
transferring and receiving company, the details of the extent of
transfer of estate assets and liabilities, and when the certificate
is to come into force [Schedule 2, item 9, subsection 601WBG(2)].
The certificate comes into effect in accordance with the statement
in the certificate [Schedule 2, item 9, subsection 601WBG(4)].
310. The certificate may include provisions specifying, or specifying a
mechanism for determining, other things that are to happen, or that
are taken to be the case, in relation to the assets and liabilities
subject to the transfer. [Schedule 2, item 9, subsection
601WBG(3)]
311. Subsection (5) clarifies that the certificate is not a legislative
instrument. This provision is included to assist readers, as the
instrument is not a legislative instrument within the meaning of
section 5 of the Legislative Instruments Act on general principles.
[Schedule 2, item 9, subsection 601WBG(5)]
Notice of certificate
312. ASIC must give a copy of the certificate of transfer to the
transferring and receiving company, and must publish notice of the
issue of the certificate (publish means in accordance with the
regulations: see section 601RAA). [Schedule 2, item 9, section
601WBH]
Time and effect of compulsory transfer
313. The effect of a certificate coming into force is that the receiving
company becomes the successor in law of the transferring company
in relation to the estate assets and liabilities, to the extent of
the transfer. If the certificate includes provisions of a kind
specified in subsection 601WBG(3) (that is, provisions that specify
other things that are to happen, or that are taken to be the case),
those things are taken to happen, or to be the case. [Schedule 2,
item 9, section 601WBI]
Substitution of trustee company
314. Further, the receiving company is substituted for any appointment
or nomination (for example as trustee, executor or administrator)
of the transferring company in relation to estate assets and
liabilities. [Schedule 2, item 9, section 601WBJ]
Liabilities for breach of trust and other matters
315. This Part does not apply to or affect liabilities of the
transferring company for:
. any breach of trust;
. any other misfeasance or nonfeasance; or
. any exercise of, or failure to exercise, any discretion.
[Schedule 2, item 9, subsection 601WBK(1)]
316. This Part does not affect any rights of the transferring company,
or of an officer or employee of the transferring company, to
indemnity in respect of such liabilities. [Schedule 2, item 9,
subsection 601WBK(2)]
Other matters related to transfer of estate assets and liabilities
317. Division 3 deals with various other matters in relation to the
transfer of estate assets and liabilities, including:
. an authorised ASIC officer may certify that a specified
asset or liability becomes an asset or liability of the
receiving body [Schedule 2, item 9, section 601WCA];
. enabling certificates in relation to land, interests in
land and other assets to be dealt with, and given effect
to, in certain circumstances [Schedule 2, item 9, sections
601WCB and 601WCC];
. documents purporting to be a certificate under this
Division is taken to be such a certificate, unless the
contrary is established [Schedule 2, item 9, section
601WCD];
. from when a certificate of transfer comes into force, a
reference to a transferring company in relation to assets
and liabilities transferred under this Part, is taken to
be a reference to the receiving company [Schedule 2, item
9, section 601WCE];
. the transferring company must promptly account to the
receiving company for any income or other distribution
received if the income or distribution arises from assets
transferred under this Part - consistent with other
provisions in the Corporations Act, failure to comply is
an offence [Schedule 2, item 9, section 601WCF; item 28,
item 173Q in the table];
. the transferring company must, at the request of the
receiving company, give the receiving company access to
all of the books in its possession that relate to assets
or liabilities transferred under this Part. Books is
defined in existing section 9 of the Corporations Act.
Consistently with other provisions in the Corporations
Act, failure to comply is an offence [Schedule 2, item 9,
section 601WCG; item 28, item 173R in the table]; and
. for the purpose of deciding whether to exercise powers
under this Part, the Minister or ASIC may seek the views
of a trustee company or its clients [Schedule 2, item 9,
section 601WCH].
Miscellaneous
318. Division 4 of Part 5D.6 deals with miscellaneous provisions.
319. Section 601WDA includes the obligation of the transferring company
to notify persons of the cancellation of its licence and the
transfer of estate assets and liabilities to the receiving company.
This is to ensure that, as far as possible, persons affected by
the cessation of the trustee company's business have notice of it.
320. The trustee company (when its licence is cancelled) must, as soon
as practicable, take all reasonable steps to contact the following
persons, and advise them of the cancellation of the licence:
. all persons who have executed and lodged, such as wills,
that have not yet come into effect, but will potentially
lead to estate assets and liabilities being held by the
trustee company;
. all persons who have appointed the trustee company as
trustee or to some other capacity.
[Schedule 2, item 9, subsection 601WDA(1)]
321. The trustee company must also publish notice of the cancellation of
the licence. [Schedule 2, item 9, paragraph 601WDA(1)(b)]
322. Further, if a certificate of transfer comes into force, the trustee
company must, as soon as practicable, take all reasonable steps to
contact the persons referred to above and advise them of the
transfer of estate assets and liabilities to the receiving company.
[Schedule 2, item 9, subsection 601WDA(2)]
323. Failure to comply with subsections 601WDA(1) and (2) is an offence,
to ensure that the obligation to notify interested persons is
upheld. The maximum penalty is 120 penalty units or imprisonment
for two years, or both.
Part 5D.7 - Effect of contraventions
Civil liability of licensed trustee company
324. Section 601XAA provides that a person who has suffered loss or
damage because of the conduct of a licensed trustee company that
contravenes Chapter 5D may take proceedings against the trustee
company to recover the loss or damage. There is a limitation
period of six years on bringing actions. [Schedule 2, item 9,
subsections 601XAA(1) and 601XAA(3)]
325. Subsection (2) clarifies that charging a person an excess fee
(which is paid by the person) gives rise to a loss that is
recoverable under subsection (1). [Schedule 2, item 9, subsection
601XAA(2)]
326. The section does not affect any liability under other provisions of
the Corporations Act or other laws. [Schedule 2, item 9,
subsection 601XAA(4)]
Part 5D.8 - Exemptions and modifications
327. It is considered appropriate to include exemption and modification
powers, for example, to reflect subsequent changes in the charging
and disclosure of fees, or changes in State and Territory laws and
procedures concerning administration of estates and the powers of
courts.
ASIC exemption and modification power
328. ASIC has the power to make exemptions or modifications to Chapter
5D. This is considered necessary to ensure the provisions can
apply with appropriate flexibility (for example, ASIC can issue
class order relief where necessary). ASIC may:
. exempt a person or class of persons, or an estate or class
of estates, from all or specified provisions of this
chapter; or
. declare that this chapter applies to a person or class of
persons, or an estate or class of estates, as if specified
provisions were omitted, modified or varied as specified
in the declaration.
[Schedule 2, item 9, subsection 601YAA(1)]
329. An exemption may apply unconditionally or subject to specified
conditions. A person must comply with a condition specified in the
exemption and the Court may order a person to comply. Only ASIC
may apply to the Court for such an order. [Schedule 2, item 9,
subsection 601YAA(2)]
330. An exemption or declaration is a legislative instrument if it is
expressed to apply to a class of persons or a class of estates
[Schedule 2, item 9, subsection 601YAA(3)]. If this does not
apply, ASIC must publish notice of the exemption or declaration in
the Gazette. The exemption or determination is not a legislative
instrument. The statement at the end of subsection (4) is included
to assist readers, as a single person exemption or declaration is
not a legislative instrument within the meaning of section 5 of the
Legislative Instruments Act on general principles [Schedule 2,
item 9, subsections 601YAA(4)].
331. The provisions contain a requirement that ASIC must notify a person
in writing about a declaration or make it available on the Internet
before such a declaration can result in the person having any
additional criminal liability. Generally, exemptions are not
subject to the same notice requirements, as contraventions of
exemptions do not give rise to any additional criminal liability.
These provisions will ensure that people cannot potentially be
subject to criminal liability for failing to comply with
requirements about which they could not have been aware.
[Schedule 2, item 9, subsection 601YAA(5)]
332. Subsection (6) defines the meaning of provisions of this chapter
for the purposes of section 601YAA. [Schedule 2, item 9,
subsection 601YAA(6)]
Exemptions and modifications by regulations
333. The regulations may also:
. exempt a person or class of persons from all or specified
provisions of this chapter; or
. declare that this chapter applies to a person or class of
persons as if specified provisions were omitted, modified
or varied as specified in the declaration.
[Schedule 2, item 9, subsection 601YAB(1)]
334. These powers are considered necessary as there may be certain
situations that may give rise to a need to modify a provision of
new Chapter 5D, or to exempt a person from a provision of Chapter
5D. For example, it may be appropriate to exempt persons from, or
modify the effect of, the fee charging provisions. Also, it may be
desirable to modify the duties of officers and employees of
licensed trustee companies.
335. Subsection (2) defines the meaning of provisions of this chapter
for the purposes of section 601YAB. [Schedule 2, item 9,
subsection 601YAB(2)]
Regulating traditional trustee company services as financial services under
Chapter 7 of the Corporations Act
336. Amendments are made to Chapter 7 to regulate traditional trustee
company services under Chapter 7, as appropriate. In particular,
the licensing and general conduct obligations will apply to trustee
companies. Certain disclosure obligations may also apply, notably
the obligation to provide retail clients of trustee companies with
a Financial Services Guide. The detailed application of these
rules will be set out in regulations.
Traditional trustee company services are generally provided to
retail clients
337. An amendment is made to the definition of a retail client in
existing section 761G to provide that traditional trustee company
services are always provided to persons as retail clients, unless
the regulations otherwise provide. Many obligations in Chapter 7
only apply where a product or service is provided to a retail
client, for example, an FSG must only be supplied where a financial
service is provided to a retail client. Regulations enable this
provision to be modified as appropriate. [Schedule 2, items 15 and
16, subsection 761G(6A)]
338. This provision provides flexibility to make special provisions
about whether a client of a trustee company is a retail or
wholesale client. This then determines for example who should
receive the disclosure prescribed by Chapter 7. Classification as
a retail or wholesale client determines whether certain obligations
under Chapter 7 apply or not. For example, provision of a
Financial Services Guide is dependent on the client being a retail
client: section 941A.
339. A related amendment is also made to subsections 761G(7) and 761GA
to provide that a person is not considered to be a wholesale client
in specified circumstances. [Schedule 2, items 17 and 18,
subsection 761G(7) and section 761GA]
Traditional trustee company services provided by trustee companies
are financial services
340. Amendments to existing subsection 766A(1) provide that the
provision of a traditional trustee company service by a trustee
company is taken to be the provision of a financial service. This
means the trustee company will need an AFSL to provide traditional
trustee company services, as a person who carries on a financial
services business must be licensed to provide that service.
[Schedule 2, item 19, subsection 766A(1A)]
341. The regulations may, in relation to a traditional trustee company
service of a particular class, prescribe the person or persons to
whom a service of that class is taken to be provided. [Schedule 2,
item 19, subsection 766A(1B)]
342. A further change is made to existing subsection 911A(4) to ensure
that persons who provide traditional trustee company services are
not exempt from the need to hold an AFSL due to subsection 991A(2)
(which provides a list of persons that are exempt from the
requirement to obtain an AFSL). [Schedule 2, item 20, subsection
911A(4)]
343. Subsection 915B(3) gives ASIC powers to suspend or cancel an AFSL
of a body corporate if certain things happen. An amendment is made
to the effect that ASIC may cancel or suspend the AFSL of a trustee
company if its clients have suffered or are likely to suffer losses
because the company has breached the Corporations Act or the
financial services law as defined. This gives ASIC powers to
proceed against a licensed trustee company engaging in
inappropriate conduct where it considers that the conduct is of a
sufficiently serious nature to warrant such proceedings. [Schedule
2, item 24, paragraph 915B(3)(ca)]
344. Amendments are made to section 912D to ensure that an AFSL
providing traditional trustee company services must notify ASIC of
breaches or likely breaches, relating to non-compliance with
financial services law, which for this purpose includes a breach of
Commonwealth, State or Territory legislation, or a rule of common
law or equity. [Schedule 2, items 21 to 23, subparagraphs
912D(1)(a)(iii) and 912D(1)(a)(iv)]
345. Amendments are made to the definition of financial services law in
existing section 761A, so that it includes new Chapter 5D and also
includes any rule of common law or equity covering conduct by an
AFSL relating to traditional trustee company services. [Schedule
2, items 10 and 11, section 761A and paragraph 761A(e)]
Other amendments
Application of Chapter 5D to the Crown
346. Section 5A deals with the application of the Corporations Act to
the Crown. Schedule 2 amends subsection 5A(4) to provide that a
provision of new Chapter 5D only binds the Crown in a particular
capacity in circumstances (if any) specified in the regulations.
"Crown" includes the Crown in right of the Commonwealth, a State,
or the Northern Territory or the Australian Capital Territory.
This is to ensure that, for example, a public trust office of a
State or Territory could be covered by Chapter 5D (if the relevant
State or Territory agreed). [Schedule 2, item 4, subsection 5A(4)]
Court order required before trustee company can be voluntarily
wound up if estates remain unadministered
347. Schedule 2 amends section 490 of the Corporations Act to provide
that, if a trustee company wishes to be voluntarily wound up, and
any estates under its control remain unadministered, the company
must obtain a court order. A person with a proper interest in the
estate is entitled to be heard in any proceedings for leave to
voluntarily wind up the company. This provision does not extend to
voluntary administration. [Schedule 2, items 3 and 4, subsection
490(1), paragraph 490(1)(c) and subsection 490(2)]
Dealing with clients' money
348. Division 2 of Part 7.8 makes provision for dealing with clients'
money. Amendments to subsection 981A(2) provide that Division 2
does not regulate clients' money paid for the provision of
traditional trustee company services provided by the trustee
company. This means that the rules of Chapter 5D, and any
preserved rules under State or Territory law, will apply to
clients' money. [Schedule 2, item 25, paragraph 981A(2)(ca)]
Civil and criminal penalties
349. Subsection 1311(1A) of the Corporations Act states that the general
penalty provisions of the Act only apply to a provision if a
penalty is set out in Schedule 3 to the Act for that provision.
Schedule 2, item 26 adds Chapter 5D to that list. [Schedule 2,
item 26, paragraph 1311(1A)(daa)]
350. Subsection 1317E(1) of the Corporations Act lists a number of
provisions in respect of which, if the Court is satisfied that a
person has contravened the provision, it must make a declaration of
(civil) contravention. Schedule 2, item 23 adds the duties of
officers and employees of trustee companies to that list.
[Schedule 2, item 27, paragraph 1317(1)(jaaa) and (jab)]
Extension of ASIC enforcement powers to trust property held by a trustee
company
351. Amendments are made to the ASIC Act to ensure that certain ASIC
powers that apply to financial products can also apply to the
traditional trustee company services offered by licensed trustee
companies. This is achieved by replicating or amending those ASIC
powers so that they can be used in relation to trust property held
by a trustee company.
Definition of trust property
352. The amendments insert a definition of 'trust property' in the
general interpretation provisions in subsection 5(1) of the ASIC
Act. [Schedule 2, item 2A, subsection 5(1)] Trust property means
property that is or was held by the trustee company as trustee.
353. ASIC may only use its powers to gather information or make orders
in relation to trust property.
Requirements to disclose information
354. Existing section 40 of the ASIC Act allows ASIC to exercise its
power under section 41 in certain circumstances. One of the limbs
of paragraph 40(c)(ii)) is that it only applies to alleged or
suspected contraventions of Commonwealth or State/Territory laws
that involves fraud and dishonesty and relates to a body corporate
or financial products. Trustee companies may provide services that
do not relate to financial products. The amendment allows ASIC to
exercise its powers in relation to alleged or suspected
contraventions of Commonwealth or State/Territory laws by trustee
companies that involves fraud and dishonesty and that relates to
trust property. [Schedule 2, item 3D, paragraph 40(c)(iii)]
355. Existing section 41 of the ASIC Act allows it to gather certain
information from a person who carries on a financial services
business about the acquisition and disposal of financial products.
It is designed to assist ASIC in determining the details of people
involved in a financial product transaction.
356. The amendment inserts section 42 which allows ASIC to gather
information from a trustee company about the acquisition and
disposal of trust property. [Schedule 2, item 3E, section 42]
While sections 41 and 42 contain similar powers, section 42 is
tailored to focus on the information required in relation to trust
property.
357. Under subsection 42(1), ASIC may require a trustee company to
disclose to it, in relation to the acquisition or disposal of trust
property by a trustee company:
. the name of:
- the person from or through whom the trust property was
acquired;
- the person to or through whom the trust property was
disposed; and
. whether the acquisition or disposal was effected on the
instructions of another person, and the nature of any such
instructions;
. the name of the beneficiaries of the trust. [Schedule 2,
item 3E, subsection 42(1)]
358. Consistent with existing subsection 41(5), information only needs
to be disclosed to the extent that it is known to the person
required to make the disclosure. A defendant bears the evidential
burden in relation to this matter, as these matters are peculiarly
within their knowledge. [Schedule 2, item 3E, subsection 42(2)]
359. Consistent with existing subsection 41(6), failure to disclose
under subsection 42(1) is an offence of strict liability, which
carries a maximum penalty of 50 penalty units or imprisonment for
12 months, or both. [Schedule 2, item 3E, subsection 42(3)] A
strict liability offence is appropriate as it enhances the
effectiveness of the regulatory regime dealing with ASIC's
enforcement powers and recognises the public interest in ASIC being
able to conduct preliminary inquiries in relation to these matters.
360. Existing section 43 of the ASIC Act relates to certain powers of
ASIC in relation to financial products, and allows ASIC to obtain
information from certain persons. Existing paragraph 43(1)(d)
applies to possible contraventions of Commonwealth or
State/Territory laws that involves fraud and dishonesty and relates
to financial products issued by a body corporate. Trustee
companies may provide services that do not relate to financial
products. The amendment allows ASIC to exercise its powers in
relation to possible contraventions by a trustee company of
Commonwealth or State/Territory laws that involves fraud and
dishonesty and relates to trust property. [Schedule 2, item 3F,
section 44]
361. While sections 43 and 44 contain similar powers, section 44 is
tailored to focus on the information required in relation to trust
property.
362. Under subsection 44(2), ASIC may require a director, secretary or
senior manager of the trustee company to disclose to it,
information of which they are aware and that may have affected an
acquisition or disposal of trust property by the trustee company
[Schedule 2, item 3F, subsection 44(2)].
363. Under subsection 44(3), if ASIC believes on reasonable grounds that
a person can give information relating to:
. an acquisition or disposal of trust property by the
trustee company;
. the financial position of the trustee company; and
. an audit of, or a report of an auditor about, accounts or
records of the trustee company,
then ASIC may require the person to disclose to it the information
the person has about those particular matters. [Schedule 2, item
3F, section 44]
364. Consistent with existing subsection 43(3A), failure to disclose the
information required under subsection 44(1) is an offence of strict
liability, which carries a maximum penalty of 50 penalty units or
imprisonment for 12 months, or both. [Schedule 2, item 3E,
subsection 42(3)] Strict liability offences are appropriate as
they enhance the effectiveness of the regulatory regime dealing
with ASIC's enforcement powers and recognise the public interest in
ASIC being able to conduct preliminary inquiries in relation to
these matters.
365. The information gathering powers under sections 42 and 44 generally
allow ASIC to obtain underlying facts about the acquisition and
disposal of trust property, in the absence of a more formal ASIC
investigation.
Orders by ASIC
366. ASIC may make certain orders in response to non-compliance with its
investigation and information-gathering powers under Division 8 of
Part 3. However, the authority to exercise these powers in
existing paragraph 71(b) only applies to information relating to
financial products. Trustee companies may provide services that do
not relate to financial products. The amendment allows ASIC to use
its powers under Division 8 if information needs to be found about
the acquisition or disposal of trust property but a person has
failed to comply with a requirement under Part 3. [Schedule 2,
item 3H]
367. While sections 73 and 73(1)(A) contain similar powers, paragraph 1A
is tailored to focus on the orders required in relation to trust
property.
368. If paragraph 71(c) applies, ASIC may make various orders, which
are:
. an order restraining a specified person from disposing of
any interest in specified trust property;
. an order restraining a specified person from acquiring any
interest in specified trust property;
. an order directing a body corporate not to pay, except in
course of winding up, a sum due from the body corporate in
respect of specified trust property;
. an order directing a body corporate not to register the
transfer or transmission of specified trust property.
[Schedule 2, item 3J, subsection 73(1A)]
Unconscionable conduct in business transactions
369. A minor amendment is also made to correct an anomaly in the ASIC
Act. Subsection 12CC(1) applies in relation to financial services.
Subsection 12CC(5), which relates to what a court may consider in
determining whether subsection 12CC(1) is contravened, only refers
to financial products. The term financial services is added to
subsection 12CC(5), in addition to the existing reference to a
financial product. [Schedule 2, item 3A, subsection 12CC(5)]
Consequential amendments of Corporations Act and other Acts
Corporations Act amendments
370. Consequential changes are made to insert definitions of licensed
trustee company, traditional trustee company services and trustee
company in existing section 761A (existing definitions for Chapter
7). These definitions have the same meaning as set out in Chapter
5D. [Schedule 2, items 12 to 14, section 761A]
371. Chapter 2L of the Corporations Act regulates debentures. Section
283AC sets out the entities, including trustee companies (paragraph
(1)(b)), that can be appointed as trustees of debenture issues.
The Schedule amends paragraph 1(b) to update the definition of
'licensed trustee company' for the purposes of this provision.
[Schedule 2, item 6, paragraph 283AC(1)(aa)]
372. The general penalty provisions (section 1311) are amended to ensure
that subsection 1311(1), the 'default' offence provision of the
Corporations Act, only applies to a provision in Chapter 5D if a
penalty is set out in Schedule 3 to the Corporations Act.
[Schedule 2, item 26, paragraph 1311(1A)(daa)]
373. Section 1317E of Part 9.4 (Civil consequences of contravening civil
penalty provisions) is amended to provide that if a court is
satisfied that either of subsection 601UAA(2) or 601UAB(2) (duties
of officers or employees of licensed trustee companies) is
contravened, the Court must make a declaration of contravention.
[Schedule 2, item 27, paragraphs 1317E(1)(jaaa) and (jaab)]
ASIC Act amendments
374. Amendments are made to ensure that the ASIC Act contains similar
powers and functions, in relation to licensed trustee companies and
traditional trustee company services, to those that are being
inserted into the Corporations Act (in new Chapter 5D and Chapter
7). These amendments are being included in Part 3 of the ASIC Act.
375. Accordingly, the general interpretation provision of the ASIC Act,
subsection 5(1), is amended to include definitions of traditional
trustee company services and trustee company. The definitions have
the same meaning as those being inserted into Chapter 5D of the
Corporations Act. [Schedule 2, items 1 and 2, subsection5(1)]
376. Other minor consequential changes are made to give effect to the
amendments [items 3B, 3C, 3G, 3K].
377. Also, the meaning of financial service in section 12BAB is amended
to ensure that it includes the provision by a trustee company of a
traditional trustee company service. The regulations may, in
relation to a traditional trustee company service of a particular
class, prescribe the person or persons to whom a service of that
class is taken to be provided or supplied. [Schedule 2, item 3,
subsections 12BAB(1A) and (1B)]
Commencement and transitional provisions
378. Schedule 2 to the proposed Schedule dealing with trustee companies
commences on a single day to be fixed by proclamation. However, if
any of the provisions do not commence within six months from the
day the Bill receives Royal Assent, they commence on the first day
after the end of that period. [Schedule 2, item 2, item 3 in the
table]
379. The delay in commencement, but for no longer than six months,
allows the States and Territory Governments to amend their laws, so
they are consistent with the Commonwealth regime.
380. Schedule 5, the transitional provisions, commences on Royal Assent.
However, the operation of the transitional provisions is tied to
the commencement of Schedule 2.
381. Transitional provisions are made to ensure that existing trustee
companies are able to continue providing their services to clients
before they are issued with an AFSL authorising them to provide
traditional trustee company services. Without these provisions,
these services would have to be interrupted when the new
Commonwealth legislation took effect, and could only be resumed
once the AFSL was issued.
382. To enable the transitional provisions to operate, Division 2 of
Schedule 5 creates definitions of 'amending Schedule',
'commencement' and 'modify'. [Schedule 2, section 1493]
Transitional provisions relating to limit on control of trustee companies
383. Substantively, in relation to Part 5D.5 (limit on control of
trustee companies) the transitional provisions provide relief for
existing authorised trustee companies where a person's voting power
already exceeds 15 per cent. The provision, in effect, permits the
person to retain their pre-commencement percentage. Where a person
subsequently exceeds their pre-commencement percentage, the normal
rules of Part 5D.5 apply. There are special rules where a person's
percentage is subsequently reduced. [Schedule 2, section 1494]
Transitional provisions relating to the amendments of Chapter 7
384. A trustee company that is listed in the regulations under
section 601RAB, and that, at that time, already holds an AFSL, is
taken to be authorised under its AFSL to provide traditional
trustee company services for a period of six months starting on the
date of commencement of the regulations providing the list of
trustee companies. [Schedule 2, paragraph 1495(2)(a)]
385. The provisions regarding the disclosure to clients of changed fees
(see section 601TAB) also do not apply during this period.
However, this does not extend to the requirement that the trustee
company must disclose its current schedule of fees on a website
maintained by or on behalf of the company (section 601TAA).
[Schedule 2, paragraph 1495(2)(b)]
386. It is also provided that the requirements in Part 7.7 of the
Corporations Act do not apply during this period. Part 7.7
contains provisions relating to the FSG and statements of advice.
At the end of the six month period, a trustee company can only
provide traditional trustee company services if it has obtained an
AFSL. [Schedule 2, paragraph 1495(2)(c)]
387. To avoid doubt, ASIC powers under Part 7.6 (licensing of financial
service providers) are not limited in relation to the company's
AFSL. [Schedule 2, subsection 1495(3)]
1.
For example, during the six month period, ASIC may impose or
vary licence conditions in relation to the deemed licence.
General power for regulations to deal with transitional matters
388. There is a regulation power to deal with transitional matters and
it may for those purposes modify this Bill. This is designed to
ensure that there is a smooth transition from State and Territory
regulation to Commonwealth regulation. [Schedule 2, section 1496]
Chapter 3
Regulation of debentures
Outline of chapter
389. Schedule 3, item 1 to the Corporations Legislation Amendment
(Financial Services Modernisation) Bill 2009 (Bill) amends the
Corporations Act 2001 (Corporations Act) so that promissory notes
valued at $50,000 or over come under the same regulatory regime as
debentures.
390. Schedule 3, item 2 to the Bill amends the Corporations Act to
require the establishment of a publicly available register of
debenture trustees.
391. The key measures relating to the register are that:
. the Australian Securities and Investments Commission
(ASIC) is required to establish and maintain a register
relating to trustees for debenture holders;
. borrowers are obliged to provide information for the
purposes of the register and would be guilty of an offence
for failure to do so; and
. persons have the right to inspect the register and make
copies, or extract parts of the information, for which a
fee may apply.
Context of amendments
392. In June 2008 the Government released the Green Paper Financial
Services and Credit Reform: Improving, Simplifying and
Standardising Financial Services and Credit Regulation which
canvassed a number of possible reforms in the financial services
sector, including in relation to debentures regulation.
393. The Corporations Act, principally Chapter 2L, sets out the
regulatory environment for the issue of debentures. Debentures are
debt instruments used by the issuer (or borrower) to raise funds
from investors in return for the payment of interest. Debenture
issues are governed by a trust deed and a requirement for the
appointment of a trustee, who undertakes a range of investor
protection functions on behalf of debenture holders.
394. Following a number of corporate collapses, in particular, the
Westpoint group, the Government undertook a review of the
debentures regulatory regime, with the aim of improving protection
for retail investors.
395. Particular concerns were raised about unlisted debentures, as they
pose a greater risk to retail investors in that they do not have a
ready market, nor the same level of public scrutiny of the ongoing
performance of the issuer as is available for listed debentures.
396. To assist investors in better understanding the nature and risks of
investing in debentures, ASIC has issued guidelines aimed at
improving disclosure requirements for borrowers and others involved
in the issue of unlisted and unrated debentures (Regulatory Guides
(RG) 69 and 156). The guidelines address some of the key risk
areas for consumers.
397. One of the main issues arising from the Westpoint case is the
inconsistent regulation of promissory notes and debentures.
Promissory notes are a form of debenture whereby borrowers raise
funds from investors and promise repayment at a future point in
time. However, within the promissory note regulatory regime,
different regulation applies depending on the value of the note:
. if the promissory note is valued at less than $50,000, it
is regulated as a debenture;
. if it has a face value of at least $50,000, the note is
regulated as a financial product.
398. This inconsistency produced the uncertainty in the Westpoint case.
Westpoint tried to avoid the operation of the law relating to
debentures by issuing promissory notes with face values of at least
$50,000. Because of the uncertainty regarding their regulatory
treatment at that time, court action by ASIC was necessary to
confirm that the promissory notes on issue were subject to the
operation of the Corporations Act - in this case, it was determined
that the issue took the form of an interest in a managed investment
scheme.
399. Investors in Westpoint and other companies which also issued
debentures, such as the Fincorp group and Australian Capital
Reserve Limited, lost considerable amounts of money. While there
are a range of reasons for these losses apart from the regulatory
regime, the amendments provide improved clarity and consistency in
the law.
400. The amendments also provide for the establishment of a register of
debenture trustees.
401. Under the Corporations Act, the issue or offer of debentures
requires that the body which makes the offer or issue (the
borrower) must, inter alia, enter into a trust deed and appoint a
trustee.
402. The role of the trustee is to provide a level of investor
protection for debenture holders. Only certain entities are
permitted to undertake this role, as set out in Chapter 2L of the
Corporations Act. Trustees' duties include those set out in the
Corporations Act, as well as those in ASIC's guidelines on
debentures (RG 69 and 156). The guidelines emphasise the need for
trustees to actively monitor the financial position and performance
of the debenture issuer.
403. The amendments enhance transparency by providing for public access
to the list of trustees, who are required under law to represent
the interests of investors and undertake important responsibilities
on their behalf.
Summary of new law
404. Under the amendment to the definition of debentures in the
Corporations Act, promissory notes valued at $50,000 and over fall
under the definition of 'debenture' and are therefore subject to
the same regulatory regime as debentures.
405. This Bill also amends the Corporations Act to require ASIC to
establish a publicly available register relating to trustees for
debenture holders and to maintain it. Regulations may prescribe
the way in which the register must be established or maintained and
the information ASIC must include in the register. The amendments
also require borrowers to provide ASIC with relevant information in
relation to the trustee, including for the purposes of establishing
and maintaining the register.
Comparison of key features of new law and current law
|New law |Current law |
|Promissory notes valued |Promissory notes valued |
|at $50,000 or over are |at $50,000 or over are |
|regulated as debentures, |generally either |
|principally under |regulated as a financial |
|Chapter 2L of the |product under Chapter 7 |
|Corporations Act, |of the Corporations Act, |
|requiring the issue of a |or, as was the case with |
|trust deed, the |Westpoint, as an interest|
|appointment of a trustee |in a managed investment |
|and the issue of a |scheme under Chapter 5C |
|prospectus. |of the Corporations Act. |
|As with other debenture | |
|issues, disclosure, | |
|advice, dealing and | |
|licensing are regulated | |
|under Chapters 6D and 7 | |
|of the Corporations Act. | |
|The second amendment |There is no current |
|requires ASIC to |requirement for a |
|establish and maintain a |register of trustees for |
|register of trustees for |debenture holders. |
|debenture holders. |Borrowers are currently |
|The provisions require |required to lodge with |
|borrowers to lodge with |ASIC within 14 days of |
|ASIC, within 14 days and |appointment, in the |
|in the prescribed form, a|prescribed form, a notice|
|notice providing the name|providing the name of the|
|of the trustee and any |trustee and are subject |
|other information in |to an offence provision |
|relation to the trustee |(section 283BI) for |
|or the debentures that is|failure to comply. |
|prescribed by the | |
|regulations. Any changes| |
|to that information also | |
|need to be lodged within | |
|14 days. | |
|The information must be | |
|provided in the | |
|prescribed form. | |
|The same offence | |
|provision applies as for | |
|current requirements | |
|under section 283BI. | |
|Persons may inspect the | |
|register, including | |
|making copies or taking | |
|extracts. The | |
|regulations may prescribe| |
|any fees payable for | |
|these purposes. | |
Detailed explanation of new law
Definition of debenture
406. Section 9 of the Corporations Act defines a 'debenture' and
specifies exclusions. The amendment removes the exemption that a
debenture does not include 'an undertaking to pay money under a
promissory note that has a face value of at least $50,000'.
[Schedule 3, item 1, section 9, paragraph (d), of definition of
debenture]
407. With the removal of paragraph (d), all promissory notes, regardless
of value, are treated as debentures. As such, promissory notes
valued at $50,000 or over issued after commencement are subject to
the same regulatory requirements as debentures including, inter
alia, the issue of a trust deed, the appointment of a trustee and
the issue of a prospectus.
408. The amendment removes the inconsistency between the regulation of
promissory notes and debentures and avoids further uncertainty in
the operation of the law.
Duty to notify ASIC of information related to the trustee
409. Under current law, the Corporations Act requires debenture issuers
or borrowers to undertake a number of duties, including notifying
ASIC of the name of the trustee within 14 days of appointment.
Failure to comply is an offence under section 283BI of the
Corporations Act. Under this requirement, borrowers lodge the
required information through the prescribed form (known as Form
722).
410. Under the amendments, borrowers of new issues will be required to
provide ASIC, for the purposes of the register and in the
prescribed form, the name of the trustee, as well as any other
information related to the trustee or the debentures, as prescribed
by the regulations. It is expected that ASIC will utilise an
amended version of the existing Form 722 for this purpose.
[Schedule 3, item 2, section 283BC]
411. The information must be provided to ASIC within 14 days of the
appointment of the trustee, or within the same period following any
changes to the information, as applicable. Failure to provide the
information is subject to the existing offence provision (section
283BI), which may lead to a 25 unit penalty (equivalent to $2,750)
or imprisonment, or both.
Register relating to trustees for debenture holders
412. Under new section 283BCA, ASIC is required to establish and
maintain a register relating to trustees for debentures holders.
Details of the information to be included in the register are to be
set out in the regulations. This provides flexibility to amend the
requirements or obtain other information, if required, in the
future. [Schedule 3, item 3, section 283BCA]
413. The required information is expected to be:
. name and address of the borrowing company;
. name and address of the trustee;
. name of the trust to which it has been appointed;
. the trustee's Australian company number or Australian
Business Number; and
. date of the trust deed.
414. The amendments also provide scope for the regulations to prescribe
the way in which the register must be established and maintained.
It is expected that ASIC will manage this process as part of its
regulatory activities and without unnecessary prescription.
415. The amendments also provide for the register to be available for
inspection, to be copied, or extracts taken from it. Inspection of
the register may incur a fee (as prescribed under the regulations).
As with other registers, it is expected that online access would
be free, although charges may apply to attend in person.
Application and transitional provisions
416. The amendment relating to promissory notes commences on Royal
Assent and applies to promissory notes issued after commencement.
Earlier issues are subject to the appropriate law at the time of
issue. [Schedule 5, section 1498]
417. The register provisions commence on Proclamation to provide time
for ASIC to establish the necessary processes and systems to create
the register. The amendments apply to trustees appointed on or
after commencement. [Schedule 5, section 1498]
Chapter 4
Technical amendment relating to jurisdiction of courts
Outline of chapter
418. Schedule 4 to the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009 amends the Corporations Act 2001
(Corporations Act) to correct a technical error in Chapter 9,
subsection 1338B(8).
Context of amendments
419. Chapter 9, Part 9.6A, Division 2 of the Corporations Act deals with
the jurisdiction of courts in relation to criminal matters.
Subsection 1338B provides that State and Territory courts have
equivalent jurisdiction with respect to certain offences. The
amendment corrects an omission in paragraph (8) to include a court
of 'the Capital Territory'.
Summary of new law
420. The amendment corrects an omission so that the courts of all
Australian States and Territories are included within the
provision.
Comparison of key features of new law and current law
|New law |Current law |
|Includes a reference to a|Reference to the Capital |
|court of the Capital |Territory is omitted. |
|Territory to ensure that | |
|all Australian States and| |
|Territories are included | |
|correctly in the | |
|provision. | |
Detailed explanation of new law
421. Schedule 4, item 1 is a technical amendment only and inserts a
reference to a court of the Capital Territory, which had been
incorrectly omitted. [Schedule 4, item 1, subsection 1338B(8)]
Application and transitional provisions
422. The amendment commences on the day on which this Bill receives
Royal Assent.
Chapter 5
Regulation impact statement - Margin loans
Commonwealth regulation of margin loans - regulation impact statement
Part 1 - Introduction
423. Council of Australian Governments (COAG) reached an in principle
agreement on 26 March 2008 that the Australian Government would
assume responsibility for regulating mortgage credit and mortgage
advice, including non-deposit taking institutions and mortgage
brokers, as well as margin loans. On 3 July 2008, COAG agreed that
the Australian Government would also assume responsibility for
regulating all other consumer credit products and requested the
COAG Business Regulation and Competition Working Group report back
at the 2 October meeting with a detailed implementation plan for
other credit.
424. Against that backdrop, in September 2008 the Australian Government
decided to:
. first, enact the Uniform Consumer Credit Code (UCCC) of
the States and Territories and, where relevant, proposed
amendments to the UCCC, as Commonwealth legislation;
- the new national framework would be administered by the
Australian Securities and Investments Commission (ASIC),
which would be given enhanced enforcement powers;
. secondly, to extend the scope of the current regulatory
framework so that the new national consumer credit
framework would:
- include consumer lending for investment properties;
- regulate the provision of margin loans;
- require all providers of consumer credit and credit-
related brokering services and advice to be members of
an external dispute resolution body;
- provide for a licensing regime requiring all providers
of consumer credit and credit-related brokering services
and advice to obtain a licence from ASIC;
- require licensees to observe a number of general conduct
requirements, including responsible lending practices;
- regulate the provision of credit for small businesses;
and
- introduce specific conduct obligations, where warranted,
for particular credit activities or products.
425. On 2 October 2008, COAG agreed to an implementation plan for the
regulation of consumer credit. COAG agreed to a phased approach to
reform, beginning with the transfer of responsibility key credit
regulation, including the Uniform Consumer Credit Code as phase
one. COAG also agreed to an implementation plan for phase two, the
regulation of remaining areas of consumer credit, including payday
lending (for example, pawnbrokers), credit cards, store credit,
investment and small business lending, and personal loans, so that
the reform package is completed in the first half of 2010.
426. A regulation impact statement (RIS) was prepared and considered in
the context of consideration of the decisions by the Australian
Government in September 2008. A copy of that RIS is at Chapter 6.
The September 2008 RIS includes background information, including
the market and regulatory environment for consumer credit and
margin lending, and consultation processes that had been carried
out to that date. It also includes a diagram of the two-phased
approach to implementation (see Chapter 6), that was endorsed by
COAG.
427. This RIS should be read in conjunction with the margin loan
sections of the September 2008 RIS. It focuses on analysis of key
measures in the Bill that substantively change the regulatory
framework.
Part 2 - Consultation
Green Paper on Financial Services and Credit Reform
428. On 3 June 2008, the Government released the Green Paper on
Financial Services and Credit Reform: Improving, Simplifying and
Standardising Financial Services and Credit Regulation.
429. The Green Paper discussed the regulation of mortgages, mortgage
brokers and margin loans, and proposed options for the Commonwealth
taking over regulation in this area. With respect to other
consumer credit products such as credit cards, personal loans and
micro loans, the Green Paper asked for submissions on whether these
products should also be regulated solely by the Commonwealth or
whether there is a role for the States and Territories in this
area.
430. Some 150 submissions were received in response to the Green Paper,
and an overwhelming majority supported the Commonwealth assuming
responsibility for the regulation of all consumer credit.
. From the industry's perspective, this support was driven
by the reduction in compliance burden that would be
achieved by reducing the number of different regulatory
regimes they are required to operate under.
. From the consumer advocates' perspective, this support was
driven by the better protections and efficiencies a
consistent national regime offers.
Margin loans
431. Some 20 submissions in relation to margin loans were received in
response to the Green Paper.
432. There was general support for the inclusion of margin loans as a
financial product in Chapter 7 of the Corporations Act 2001
(Corporations Act) (Grant Thornton, Australasian Compliance
Institute, Financial Planning Association, Australian Financial
Counselling & Credit Reform Association Incorporated, Australian
Institute of Credit Management).
433. It was noted that introducing a new specific regime (as opposed to
extending Chapter 7) would be costly for both government and
participants, would add further regulation to a system that already
suffers from inefficient regulatory overlap and increase the risk
of future inconsistency (Macquarie Bank, National Australia Bank,
Australasian Compliance Institute, ANZ).
434. Some submissions called for further research and analysis before
any action was taken and cautioned against a 'knee jerk' reaction
to recent failures such as Opes Prime and Lift Capital, which
involved products not sold by the majority of the industry
(Australian Bankers Association, Securities and Derivatives
Industry Association, Investment and Financial Services Association
Ltd).
435. Subsequent to public consultation through the Green Paper, the
Industry and Consumer Consultation Group assisted in developing the
details of the regulatory regime. Further details of the
Consultation Group's deliberations in relation to margin loans are
noted below in the 'margin loans' section. The membership of the
consultative group was expanded in relation to the margin loans
discussion to include margin loan expertise.
436. It is noted that separate consultations with the same group are
being held to develop a special product disclosure document for
margin loans. On the Government's side, these discussions are
being led by the Financial Services Working Group (the Working
Group), which is a body composed of representatives from the
Australian Treasury, the Department of Finance and Deregulation and
ASIC. The Working Group was established in February 2008 and is
tasked with simplifying and shortening disclosure documentation in
financial services.
Part 3 - Regulation impact assessment
Impact assessment methodology
437. Impacts can be 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.
438. 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.
439. 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.
1. : Rating an individual impact
|+3 |+2 |+1 |0 |-1 |-2 |-3 |
|Large |Moderat|Small |No |Small |Moderate |Large |
|benefit|e |benefit|substan|cost/ |cost/ |cost/ |
|/ |benefit|/ |tial |disadvant|disadvant|disadvant|
|advanta|/ |advanta|change |age |age |age |
|ge |advanta|ge |from |compared |compared |compared |
|compare|ge |compare|'do |to 'do |to 'do |to 'do |
|d to |compare|d to |nothing|nothing' |nothing' |nothing' |
|'do |d to |'do |' | | | |
|nothing|'do |nothing| | | | |
|' |nothing|' | | | | |
| |' | | | | | |
440. 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
441. 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.
442. 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 style of 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.
Illustrative rating for the problem of a long-wearing tyre that may fail
Option A: Do nothing
1.
| |Benefits |Costs |
|Consumers|Access to a |Risk of tyre |
| |cheaper solution |failure that |
| |for vehicle |can result in |
| |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. |
|Governmen|Advantages for | |
|t |waste management | |
| |perspective. | |
Option B: Ban on sale of the new tyre
2.
| |Benefits |Costs |
|Consumers|No persons will|Lack of access by|
| |be affected by |consumers to |
| |tyre failure |long-wearing |
| |and resultant |vehicle tyres, |
| |damage. (+3) |increasing the |
| | |cost of vehicle |
| | |maintenance. |
| | |(-2) |
|Industry |No compensation|Transitional |
| |payments for |costs involved |
| |accident |with switching |
| |victims. (+1) |back all |
| | |manufacturing/mar|
| | |keting operations|
| | |to conventional |
| | |tyres. (-3) |
|Governmen| |Conventional |
|t | |tyres produce |
| | |more waste which |
| | |is costly to deal|
| | |with. (-1) |
|Sub-ratin|+4 |-6 |
|g | | |
|Overall |-2 |
|rating | |
Option C: Industry-developed quality control standards
3.
| |Benefits |Costs |
|Consumers|Much lower risk | |
| |of tyre failure | |
| |and resultant | |
| |damage than | |
| |status quo. (+2)| |
|Industry |Significantly |Developing and|
| |less compensation|monitoring |
| |payments for |industry-wide |
| |accident victims.|quality |
| |(+1) |control |
| | |standards. |
| | |(-2) |
|Governmen| | |
|t | | |
|Sub-ratin|+3 |-2 |
|g | | |
|Overall |+1 |
|rating | |
443. 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.
Margin lending
Problem identification
444. There have been concerns that some margin borrowers are not aware
of the extent to which margin lending contracts place the risk of
changes to market conditions on them. The possibility of such
borrowers suffering unexpected consequences is particularly high in
volatile market conditions such as those experienced in the recent
global financial crisis.
445. For example, some clients of the collapsed financial planning firm
Storm Financial who had entered into margin loan arrangements
borrowed funds against the equity in their homes and used them as a
contribution to a margin loan. Some of these borrowers have fallen
into negative equity in relation to their margin loans, and are now
having to repay outstanding amounts on the margin loans as well as
continuing to service the loan secured against their home. Where
borrowers do not have additional sources of funds to do so, they
are at risk of defaulting on their home mortgages and losing their
homes.
446. Indications are that not all of these borrowers adequately
understood the way that margin loans operate, including the
potential consequences of margin calls. In addition, they may also
not have been aware that they exposed themselves to the risk of
losing their homes when they borrowed to fund the margin loan.
447. The Storm case illustrates the risks that can be attached to margin
loans, and the fact that retail borrowers may not be fully aware of
them when entering the arrangements.
448. Those factors were key considerations in the decisions of the
Australian Government and COAG in 2008 to introduce a regulatory
framework for margin lending. The issue being addressed in this
RIS is the form of the new regulatory framework.
Objectives
449. The key objectives of a regulatory framework for margin lending are
to achieve an outcome that: retail investors who enter into such
arrangements are fully aware of the associated risks, and do not
enter margin loans due to irresponsible conduct by lenders and/or
inappropriate advice by financial advisers.
Options
Status quo
450. Currently margin loans are not treated as a specific product for
regulatory purposes. Aspects of margin loan arrangements may fall
under a variety of regulatory regimes, including the Corporations
Act and the Code of Banking Practice. Other areas remain
unregulated, such as the disclosure of key risk and other
information to borrowers.
451. Margin loans will not be covered by the new consumer credit
legislation in phase one, as that system does not cover investment
loans (other than loans for investments in residential properties).
Option A: Include margin loans as a financial product under the
Corporations Act and apply Chapter 7 with some modifications
452. Under Option A, margin loans would be defined as a financial
product in Chapter 7 of the Corporations Act. As a consequence,
financial services providers offering margin loans as one of their
products would become subject to a comprehensive range of
licensing, conduct and disclosure requirements. Providers and
intermediaries would be covered by rules regarding external dispute
resolution and compensation arrangements. The regulator would be
ASIC.
453. Most of the participants (as lenders or providers) engaging in the
margin lending market would already be familiar with the Chapter 7
obligations as they also supply and deal in other financial
products that are covered by the Chapter 7 framework. That
requires participants to:
. have an Australian financial services licence (AFSL);
. comply with general conduct standards, including the
requirement to deal with investors efficiently, honestly
and fairly;
. have appropriate compensation arrangements in place for
losses suffered by retail clients due to breaches of the
law;
. be members of an ASIC approved External Dispute Resolution
(EDR) Scheme;
. provide disclosure to their clients before and after a
product is purchased, including providing a Product
Disclosure Statement (PDS), a Statement of Advice and
periodic statements on an ongoing basis;
. have in place adequate arrangements for the management of
conflicts;
. ensure that they (and their employees) have adequate
resources and are competent to provide the services; and
. be subject to the enforcement provisions surrounding
market manipulation, false or misleading statements,
inducing investors to deal using misleading information,
and engagement in dishonest, misleading or deceptive
conduct.
454. Some modifications to Chapter 7 would be needed to adapt it to a
margin loan context. In particular, there would be tailored
obligations regarding the notification of margin calls, and the
requirements would be expanded to cover a 'responsible lending'
component (see Part 3.5 for details of the responsible lending
requirements).
Option B: Incorporate margin loans in the new Commonwealth credit
legislation
455. Under Option B, margin loans would be covered under the new
Commonwealth credit legislation. This legislation will incorporate
the current uniform State legislation covering consumer credit, the
Uniform Consumer Credit Code (UCCC).
456. Under that regime, providers of credit for margin loans, and
persons who suggest such facilities or assist consumers to enter
them, would be subject to the following key obligations:
. Persons who engage in credit activities would, initially,
have to be registered with ASIC, and subsequently hold an
Australian credit licence.
. Entry standards for registration and licensing would be
imposed which enable ASIC to refuse an application where
the person does not meet those standards.
. Registered persons and licensees would be required to meet
ongoing standards of conduct while they engage in credit
activities. Specific requirements would apply to both
lenders and persons providing advice and assistance to
consumers in relation to obtaining credit. Licensees
would be subject to responsible lending requirements,
under which an assessment must be made whether a proposed
credit facility is unsuitable for a client.
. Registered persons and licensees would have to be members
of external dispute resolution schemes and have
appropriate compensation arrangements in place.
. ASIC would have the power to suspend or cancel a licence
or registration, or to ban an individual from engaging in
credit activities.
Impact analysis
457. The groups affected by the new regime for margin loans would be
consumers of credit; industry participants including lenders and
advisers; and the Government/ASIC.
458. It is estimated that there are between 1,000 to 2,000 financial
planners active in margin loans, and many of them would not
otherwise need to comply with the credit framework (though they
would already be covered by Chapter 7 with respect to their other
business lines). The number of lenders is much smaller, and is
estimated not to exceed 15. Most lenders are authorised deposit-
taking instructions which are already in possession of an AFSL for
other parts of their business.
459. The main benefits of the two options are similar, and consist
mainly of significantly improved consumer protection arrangements.
Consumers will be the main beneficiaries under either option, as
the licensing requirements will ensure that they will be dealing
with lenders and other services providers that are properly trained
and resourced. The new responsible lending requirements also
operate under both options, and will mean that consumers are less
likely to be given a margin loan which they cannot service. A very
important benefit will be the requirement under both options for
licensees to be members of external dispute resolution schemes, as
access to the schemes will provide consumers with fast and free
resolution of disputes and compensation claims where losses have
been incurred.
460. Benefits to industry and government are of a lesser nature, but
would also be similar under either option. For government, the
improved consumer protection levels available under both options
will in particular reduce the incidence of consumers requiring
government assistance due to the provision of loans they cannot
afford.
461. The main difference between the two options lies on the costs side.
Most of the margin loan services providers are already holders of
AFSL with respect to the other services they provide. This is in
particular true for financial planners, which constitute the clear
majority of services providers with respect to margin loans. These
entities are therefore already familiar with the Chapter 7 regime,
and have already established systems and processes that are
tailored to that regime. The new credit regime, while in some
aspects similar to the Chapter 7 requirements, also has some areas
where significant differences occur. This is true in particular
for the requirements relating to the provision of advice, which
constitutes the main activity of financial planners. Option B
would therefore require licensees to become familiar with a new
regulatory regime, and to establish new systems and processes in
parallel to what they have already put in place in order to comply
with the Chapter 7 regime. Costs associated with Option B are
therefore considered to be higher for industry than for Option A.
1. : Status quo
| |Benefits |Costs |
|Consumers| |Unacceptably |
| | |high incidence|
| | |of consumers |
| | |entering |
| | |margin loan |
| | |arrangements |
| | |without a |
| | |proper |
| | |understanding |
| | |of the risk of|
| | |loss, and/or |
| | |actual losses |
| | |for such |
| | |consumers. |
|Industry |Limited |Risk that |
| |compliance costs |publicity |
| |for industry. |around |
| | |hardship cases|
| | |leads to loss |
| | |of market |
| | |confidence in |
| | |margin loan |
| | |products. |
|Governmen| |Provision of |
|t | |financial |
| | |assistance for|
| | |consumers |
| | |facing |
| | |hardship as a |
| | |result of |
| | |margin loan |
| | |losses who |
| | |would |
| | |otherwise not |
| | |have required |
| | |it. |
Option A
2.
| |Benefits |Costs |
|Consumers|Significantly |Costs of |
| |reduced risk of |margin loan |
| |losses to |products may |
| |consumers due to |increase as |
| |properly |industry |
| |resourced and |passes on |
| |competent lenders|higher |
| |and advisers; |compliance |
| |protection |costs. |
| |against |(-1) |
| |irresponsible | |
| |lending | |
| |practices; and | |
| |comprehensive | |
| |disclosure of | |
| |significant risks| |
| |and other key | |
| |information. | |
| |(+3) | |
| |Availability of | |
| |suitable remedies| |
| |where losses do | |
| |occur, including | |
| |appropriate | |
| |compensation for | |
| |losses, and | |
| |access to free | |
| |and efficient | |
| |dispute | |
| |resolution | |
| |systems to rule | |
| |on complaints and| |
| |compensation | |
| |demands. (+1) | |
|Industry |Increased market |Developing and|
| |confidence and |monitoring |
| |reputation of |industry-wide |
| |margin loan |quality |
| |products. (+1) |control |
| | |standards. |
| | |(-2) |
|Governmen|Reduced incidence|Transitional |
|t |of hardship cases|and ongoing |
| |requiring |costs of |
| |government |monitoring and|
| |assistance. (+1)|enforcement. |
| | |(-1) |
|Sub-ratin|+6 |-4 |
|g | | |
|Overall |+2 |
|rating | |
Option B
3.
| |Benefits |Costs |
|Consumers|Significantly |Costs of |
| |reduced risk of |margin loan |
| |losses to |products may |
| |consumers due to |increase as |
| |properly |industry |
| |resourced and |passes on |
| |competent lenders|higher |
| |and advisers; |compliance |
| |protection |costs. |
| |against |(-1) |
| |irresponsible | |
| |lending | |
| |practices; and | |
| |comprehensive | |
| |disclosure of | |
| |significant risks| |
| |and other key | |
| |information. | |
| |(+3) | |
| |Availability of | |
| |suitable remedies| |
| |where losses do | |
| |occur, including | |
| |appropriate | |
| |compensation for | |
| |losses, and | |
| |access to free | |
| |and efficient | |
| |dispute | |
| |resolution | |
| |systems to rule | |
| |on complaints and| |
| |compensation | |
| |demands. (+1) | |
|Industry |Increased market |Transitional |
| |confidence and |and ongoing |
| |reputation of |compliance |
| |margin loan |costs |
| |products. (+1) |including |
| | |licensing, |
| | |training and |
| | |disclosure |
| | |regarding |
| | |margin |
| | |lending. |
| | |Higher costs |
| | |than Option A |
| | |because |
| | |participants |
| | |that are |
| | |already |
| | |covered by |
| | |Chapter 7, but|
| | |would not |
| | |otherwise be |
| | |covered by the|
| | |credit |
| | |regulatory |
| | |framework |
| | |would need to |
| | |comply with |
| | |the credit |
| | |regulation |
| | |requirements |
| | |in relation to|
| | |margin lending|
| | |products. |
| | |(-3) |
|Governmen|Reduced incidence|Transitional |
|t |of hardship cases|and going |
| |requiring |costs of |
| |government |monitoring and|
| |assistance. (+1)|enforcement. |
| | |(-1) |
|Sub-ratin|+6 |-5 |
|g | | |
|Overall |+1 |
|rating | |
Consultation
462. The issue of how margin loans should be regulated was discussed
with the Industry and Consumer Consultative Group, as noted in the
general consultation section above. Members of the group include:
. government and the ASIC;
. key industry associations representing lenders and
financial planners;
. key lenders, including both banks and brokers; and
. representatives of the main EDR Schemes.
463. The first meeting of the group to discuss margin loans was held on
20 January 2009 and a number of further meetings were also held.
464. Main issues discussed at the meetings include:
. whether the regulatory regime in Chapter 7 of the
Corporations Act is suitable for margin loans, and if not
what amendments are necessary to eliminate gaps and
shortcomings;
. what the appropriate definition of a margin loan should
be;
. what responsible lending requirements are appropriate in
the context of margin loans; and
. what the appropriate transitional arrangements should be,
especially for licensing matters.
465. One of the main concerns raised by stakeholders was the need to
limit the regulatory burden placed on business, and in particular
to avoid unnecessary duplication of requirements for businesses
already subject to licensing and regulation under the Corporations
Act.
466. In the consultation meetings a range of issues were raised for
Government to consider. The main issues include:
. Developing an appropriate definition of a margin loan in
order to ensure that a level playing field applies to all
types of margin loans in the market. The key concern was
to capture products offered by providers such as Opes
Prime which are based on stock lending agreements rather
than loan agreements. Additional members of the
consultation group with specialised expertise in this area
were recruited in order to ensure that an appropriate
definition is provided.
. Drafting responsible lending requirements that meet
Government's policy objectives while minimising the
regulatory burden on industry. This issue is being
addressed in a variety of ways. While the obligation to
assess the possible unsuitability of a margin loan is made
clear, certainty on how to conduct the assessment is being
provided to industry by listing a number of key matters
that must be considered. Consideration is also being
given to allowing lenders to rely on information or a
recommendation provided by a licensed financial planner.
Further guidance will also be provided in the explanatory
material attached to the legislation, and ASIC may issue
further guidance where appropriate.
. Including transitional arrangements that give sufficient
time to industry and ASIC for making adequate
preparations, in particular for meeting the new licensing
requirements, while addressing the Government's objective
of a speedy introduction of the new regulatory regime.
The draft legislation proposes a preparatory period during
which lenders and services providers can prepare for
submitting their licensing applications, and an additional
period during which reduced regulatory requirements will
apply in order to give industry time to meet all the
requirements of the full Chapter 7 regime. ASIC is also
considering ways of facilitating the licensing process, in
particular in relation to meeting the training and
competency requirements.
467. Taking account of this concern has been one of the key drivers in
developing analysing the options relating to the regulatory
treatment of margin loans.
Conclusion and recommended option
468. Options A and B would both provide overall benefits over the status
quo, most of the benefits being in favour of consumers.
469. The main difference between Option A and B lies in the costs it
imposes on business. Financial planners involved in margin loans
would become subject to regulation under both Chapter 7 and credit
regulation under Option B.
470. The recommended option is Option A, under which margin loans would
be regulated by including them as a financial product in Chapter 7
of the Corporations Act with some adjustments to the legislation to
take account of their special characteristics.
Part 4 Implementation and review
471. The recommended options would be implemented primarily through the
introduction of the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009. Associated regulations would
also be required.
472. There will be an opportunity to refine the margin loan regime
established in phase one of the general credit project in the
course of developing phase two, which is proposed to include
investment credit.
473. The new margin loan regime would, like the regulatory framework for
regulation of corporate regulation and financial services, be the
subject of ongoing monitoring and review by the Australian
Government.
Chapter 6
Regulation impact statement - Margin loans - Attachment A
Executive summary
474. This is the regulation impact statement (RIS) referred to in
paragraph 5.5 of Chapter 5. This RIS discusses:
. The development and implementation of a national regulatory
framework for consumer credit (including margin loans) to be
undertaken in two stages. The key components of the
proposed framework seek to establish consumer protection
across all consumer credit products and services. The
framework is proposed to be developed by enacting relevant
State and Territory based consumer credit regulations as
Commonwealth statute; and consolidating and enhancing the
framework as necessary to reduce the regulatory burden on
business and strengthen protection in specific areas.
. Consultation on aspects of the proposed framework including
the need for any enhancements (as outlined in the high level
implementation plan and discussed herein) and its
implementation.
Background
Consumer credit
475. Consumer credit is credit given by shops, banks and other financial
institutions to consumers so that they can buy goods and services
for personal, household or domestic purposes. Consumer credit
encompasses for example, credit cards, payday loans and personal
loans as well as mortgages.
476. The provision of consumer credit is a significant industry in
Australia. As of June 2008, total consumer credit on issue,
including securitisations, was $1,113.4 billion. Of this, housing
credit on issue stood at $957.8 billion and other personal credit
on issue was $155.6 billion. The largest sector of consumer credit
is residential mortgages, which are estimated to account for over
86 per cent of all consumer loans.[1]
477. Industry participants include providers (also known as lenders and
issuers) and brokers/advisers who act as intermediaries between
providers and consumers. Providers are increasingly relying on
brokers to originate loans - in 2003 25 per cent of home loans were
originated by mortgage brokers, this rose to 37 per cent in
2007.[2]
478. The States and Territories currently regulate the provision of
consumer credit by any provider through the Uniform Consumer Credit
Code (UCCC).
479. While the provision of consumer credit is currently excluded from
being a financial product under Chapter 7 of the Corporations
Act 2001 (Corporations Act), Australian Securities and Investments
Commission (ASIC) does regulate some consumer protection aspects of
consumer credit. Specifically, the Australian Securities and
Investments Commission Act 2001 (ASIC Act) prohibits conduct that
is misleading or deceptive, or is likely to mislead or deceive, in
relation to the provision of credit products and services.
480. The Council of Australian Governments (COAG) reached an in-
principle agreement on 26 March 2008 that the Australian Government
would assume responsibility for regulating mortgage credit and
mortgage advice, including non-deposit taking institutions and
mortgage brokers, as well as margin loans. Subsequently, on 3 July
2008, COAG agreed that the Australian Government would also assume
responsibility for regulating all other consumer credit products
and requested the Business Regulation and Competition Working Group
report back at the 2 October meeting with a detailed implementation
plan for other credit.
Current regulation of consumer credit
481. The UCCC's scope is limited to the provision of consumer credit for
personal, household or domestic purposes. As such consumer credit
sought for investment purposes and credit-related advice is not
regulated.
482. The main provisions contained in the UCCC include the following:
. provisions relating to the credit contract, including the
form and content of the contract, how information about
the contract is disclosed to the consumer, and how the
contract may be changed;
. special provisions relating to circumstances where
consumers are affected by hardship, including powers of a
court to intervene in such circumstances;
. provisions relating to the enforcement of credit
contracts, in particular what steps creditors must
undertake before they can enforce a contract against a
defaulting debtor;
. extensive provisions relating to civil penalties for
breaches of the UCCC;
. special provisions regarding related sales and insurance
contracts, as well as consumer leases; and
. provisions relating to the advertising of credit,
including requirements for including a comparison rate.
History of the Uniform Consumer Credit Code
483. In 1993, the States and Territories agreed that consumer credit
laws should be nationally uniform. They entered a Uniform Credit
Laws Agreement (the Uniformity Agreement) under which the UCCC was
developed. The UCCC is template legislation, substantially uniform
in all Australian States and Territories. It was enacted in
Queensland by the Consumer Credit (Queensland) Act 1994 pursuant to
the Uniformity Agreement, and in the other States and Territories
through various arrangements.
484. Under the Uniformity Agreement, amending the consumer credit
legislation requires approval by two thirds of the members of the
Ministerial Council for Uniform Credit Laws (the Council), which is
a subcommittee of the Ministerial Council on Consumer Affairs
(MCCA). Membership of the Council consists of the State and
Territory Ministers responsible for consumer credit laws. Changes
to the Uniformity Agreement itself require the unanimous approval
by the Council.
485. The Australian Government is not a member to the Uniformity
Agreement and does not have a formal vote in matters relating to
the UCCC. It is however invited to comment on all matters relating
to the UCCC considered by the Council.
Outstanding UCCC projects
486. To address gaps in the UCCC and changes in the credit environment,
MCCA has already decided to implement some specific amendments to
the UCCC. These amendments are expected to be introduced prior to
the Commonwealth assuming responsibility and therefore reflected in
the UCCC which will be transferred over at that time. These are:
. 'Instalment' lending - amendments will ensure that vendor
finance contracts for the purchase of land, 'conditional
sale agreements' and 'tiny terms contracts' are brought
within the scope of the Code.
. Default notices - to improve the enforcement process for
both lenders and borrowers by giving consumers clearer and
more relevant and understandable information when they
default.
. Amendments to address 'fringe' lending practices - to
address avoidance practices, increase the reviewability of
credit fees and charges, improve regulator access to
remedies, prohibit 'blackmail' securities and require
lenders to supply basic direct debit information.
. Reform of Mandatory Comparison Rates - to reform and
streamline the operation of mandatory comparison rates
(MCR) by responding to the independent review.
487. MCCA is also undertaking a number of projects in relation to the
UCCC, which are in varying stages of development. These projects
will be passed to the Commonwealth when it assumes responsibility
and will be considered in the context of the national approach to
the regulatory framework:
. Reverse mortgages and other equity release products - to
improve consumer outcomes in relation to equity release
products.
. Pre-contractual disclosure - to provide consumers with
simple, accessible, relevant, concise and comprehensible
pre-contract information.
. Universal membership of External Dispute Resolution (EDR)
Schemes - to explore the feasibility of requiring all
credit providers to belong to an approved EDR Scheme.
. Credit card responsible lending - to explore options to
address credit card over-indebtedness.
Additional State and Territory specific regulation
488. By agreement among the States and Territories certain areas are
exempted from the uniformity requirements applying to the UCCC.
Additionally, some jurisdictions have moved unilaterally to address
specific concerns. Accordingly, there are a number of differing
requirements which are intended to augment the operation of the
UCCC in the States or Territories in which they have application.
For example:
. Victoria, New South Wales, Western Australia and the
Australian Capital Territory have some limited broker
specific regulation. The Western Australian legislation
requires all finance brokers to be licensed and members
of an EDR Scheme.
. New South Wales, Australian Capital Territory, Victoria
and Queensland have legislation which limits the rate of
interest and fees which can be charged on consumer credit
products. South Australia expects to pass similar
legislation by the end of 2008.
. Victoria has passed legislation which is to commence in
March 2009 which will subject credit contracts to the
unfair contact terms provisions in the Fair Trading Act.
Victoria has also passed legislation due to take effect
in March 2009 which requires all credit providers to be
members of an EDR Scheme. In addition, Victoria is
examining the requirement for enhanced registration of
credit providers.
. South Australia is expected to pass legislation by the
end of 2008 which will allow credit disputes to be
heard in lower courts.
. Tasmania is expected to introduce a Bill into Parliament
shortly that will restrict the advertising of high cost
credit products.
. The Australian Capital Territory has legislation which
imposes responsible lending requirements on credit cards
providers.
Draft New South Wales National Finance Brokers Package
489. In addition to the UCCC and specific regulation mentioned above,
the States and Territories have also agreed to national reforms
aimed at regulating the finance broking industry, as recommended in
the relevant decision-making RIS, subject to consultation on a
draft Bill.
490. To this end, in November 2007, the New South Wales Government
released the draft National Finance Brokers Package for public
consultation on behalf of all jurisdictions.
491. The draft Finance Brokers Bill proposes to license all brokers to
ensure that only reputable, skilled brokers transact with
consumers and small businesses to obtain credit that suits their
purposes and that they can afford. Applicants would be required
to:
. pass probity checks;
. maintain mandatory membership of an approved EDR Scheme;
. attain prescribed educational qualifications or skills
(not below a Certificate IV); and
. obtain mandatory professional indemnity insurance.
492. In addition, the draft Bill imposes a requirement that brokers
confirm a person's capacity to repay before applying for credit;
disclose certain information and have a reasonable basis for any
recommendation. Further, brokers would not be able to charge a
fee before credit was obtained.
493. Over 100 submissions were received and consultations conducted by
New South Wales have revealed broad support for the draft Bill.
However some concerns remain in relation to a few specific
provisions, namely the capacity to repay, stay of enforcements and
professional indemnity requirements.
494. In light of the COAG decisions it has been agreed that the
Commonwealth will take over the project, and conduct further
consultation on the remaining concerns. In accordance with the
conditional approval given to the project by the Office of Best
Practice Regulation, an updated assessment of the regulatory impact
of the proposed regime will be undertaken once the details are
established.
Margin loans
495. Margin lending describes an arrangement under which investors
borrow money to buy financial products (such as listed shares,
fixed interest securities and units in managed funds). The
underlying financial products are then used to secure the loan for
those products. The amount the investor can borrow depends in the
loan-to-valuation ratio (LVR) offered by a lender of each stock.
496. As with most other loans, investors must pay interest on the amount
borrowed under a margin loan, however regular repayments are not
generally required. Instead, repayments are only required when the
investment is subject to a 'margin call'. This occurs where the
market value of the investment falls below the level agreed under
the contract. A margin call requires the investor to take
appropriate action to return the LVR to the agreed limits stated
under the contract. This can be done by paying extra cash, selling
some of the assets or giving the lender additional security. The
lender is under no obligation to contact the investor when a margin
call is made. The responsibility falls on the investor to take
appropriate action in accordance with the timeframes, potentially
less than 24 hours, as prescribed in the margin loan agreement.
497. There has been a rapid growth in the value of margin loans with the
total value increasing from under $5 billion in June 1999 to over
$37 billion in December 2007. More recently the total value of
margin loans has dropped back to around $32 billion in response to
the recent market turbulence. Consistent with the growth over the
past nine years, the number of clients taking out margin loans has
increased from 87,000 in 2000 to 202,000 in 2008.
Current regulation of margin loans
498. Margin loan facilities are based on complex contractual
arrangements between the lender and the client. Primary disclosure
of the terms and conditions governing the loan occurs through the
lending agreement signed between the two parties.
499. Margin loans consist of a credit component and an investment
component. Where the investment aspect involves a financial
product such as shares, Australian Government regulation in the
form of Chapter 7 of the Corporations Act applies.
500. In addition, where the investment aspect involves a listed share,
Australian Securities Exchange (ASX) Listing Rules might apply.
The Listing Rules set standards of behaviour for listed entities
and include ASX's continuous disclosure requirements.
501. Misleading and deceptive conduct in relation to margin lending is
regulated under the ASIC Act. Under this legislation ASIC can, for
instance, take action against misleading advertising or misleading
statements made by financial advisers in relation to the provision
of margin loans.
502. The credit component of the margin loan transaction is currently
largely unregulated. Margin loans are not regulated by the States
and Territories under the UCCC, as credit provided for investment
purposes is excluded.
503. The Corporations Act excludes all credit under the agreement with
the States and Territories. However, where a margin loan is
provided through a financial planner as part of an overall
financial plan, ASIC considers that the Corporations Act applies to
all the elements of the plan, including the margin loan facility as
it is considered to be an investment vehicle.
504. As margin loans are supplied by a variety of providers, including
banks, various industry standards, such as the Australian Bankers'
Association Code of Banking Practice, may apply.
505. The Code of Banking Practice, which applies to personal and small
business bank customers, sets out the banking industry's key
commitments and obligations to customers on standards of practice,
disclosure and principles of conduct for their banking services.
This Code is not legislation; however, banks that adopt this Code
are contractually bound by their obligations under this Code.
506. If the provider of a margin loan has adopted the Code of Banking
Practise there is an obligation on the bank to exercise care and
skill in determining a customer's ability to repay the loan. Under
this Code members are required to provide both an internal and EDR
Scheme for customer disputes.
507. However, margin loans are increasingly being provided by non-
deposit taking institutions. Clients of these lenders do not
benefit from the protection of the Code of Banking Practice.
Financial Services Reform - Chapter 7 of the Corporations Act
508. The Financial Services Reform Act 2001 (FSR) put in place a
regulatory framework for the provision of a wide range of
investment and risk management style financial products and advice
related to those products, including securities, derivatives,
general and life insurance, superannuation, deposit accounts and
non-cash payments. This regime was incorporated as Chapter 7 of
the Corporations Act.
509. The regulatory framework introduced under Chapter 7 sought to
promote confident and informed decision making by consumers of
financial products and services while facilitating efficiency,
flexibility and innovation in the provision of those products and
services; fairness, honesty and professionalism by those who
provide financial services; fair, orderly and transparent markets
for financial products; and the reduction of systemic risk and the
provision of fair and effective services by clearing and settlement
facilities.
510. The FSR regime provides for:
. All financial services providers are licensed and subject
to uniform obligations and requirements by ASIC in the
provision of the services for which they are licensed.
. All providers of financial services (including issuing,
broking and advice) are uniformly regulated in the
provision of the regulated financial products (noting
tailoring of provisions for specific products and
circumstances).
. Minimum standards such as training, disclosure,
considerations in giving financial product advice, and
general conduct are required of licensees in their
dealings with retail clients:
- there are tiered training requirements, dependent on the
level of advice and type of product being provided;
- membership of an EDR Scheme is compulsory;
- providers are required to conduct their services
efficiently, honestly and fairly;
- there must be a reasonable basis on which providers base
their advice; and
- disclosure of information to retail clients in relation
to the provider's financial services business (in a
Financial Services Guide), financial services advice (in
a Statement of Advice) and financial services products
(in a PDS) is required.
. All providers must have adequate compensation arrangements
(generally professional indemnity insurance).
511. The Government has tasked the Financial Services Working Group to
reform financial services disclosure documents in order to
introduce simple, standard and readable documents which are more
easily understood by consumers and allow for greater ease of
product comparability.[3] Once implemented, these reforms may
reduce compliance burden involved in complying with FSR and
therefore produce cost savings.
Problem identification
Consumer credit
512. The inter-jurisdictional processes for changing the UCCC have led
to prolonged delays in implementing necessary reforms leading in
some cases to their effective abandonment. Amending the UCCC is a
slow and arduous process requiring agreement among all
jurisdictions. The protracted time frames for developing national
finance broker regulation and for closing off some identified
loopholes in the UCCC such as those related to the regulation of
fringe lenders, are cases in point. Such delays have compromised
the capacity of the regulatory regime to respond to market
developments and the effectiveness of protections for those
acquiring credit products and services, particularly in a market
where products and practices are evolving rapidly.
513. The introduction of various State and Territory specific
regulations has resulted in inconsistent consumer protection and
has added red tape and unnecessary compliance costs on service
providers. While the UCCC notionally provides for consistent
administration and enforcement of a consumer protection code
nationally, jurisdictions have unilaterally imposed additional
requirements separate from the UCCC. Consequently, protections
available to consumers acquiring credit are not uniform across
jurisdictions and have resulted in providers who operate nationally
or in multiple jurisdictions incurring additional compliance costs
arising from the need to vary their business practices. Where this
occurs, complexity and additional costs are imposed on consumers
and businesses.
514. There is evidence that some consumers who access credit through
brokers are not achieving appropriate outcomes. The concerns with
the lack of regulation of brokers are well documented in the RIS
prepared for the National Finance Broking Regulation. For example,
the number and range of credit products currently offered by
providers are too numerous and too complex to allow the majority of
consumers to make fully informed decisions. As a result many
consumers are turning to brokers. However, the use of a broker may
not produce the best outcome, and could lead to considerable
detriment, for the consumer. This is because consumers are often
dependent on the broker's skill and expertise and therefore
vulnerable to exploitation. Unfortunately, it appears some brokers
may provide inappropriate advice and this occurs for a variety of
reasons, including a lack of skill, remuneration based incentives
and unscrupulousness.
515. There is evidence that some consumers are experiencing financial
difficulties caused by over-indebtedness. There are a number of
causes of this, for example, some consumers do not appreciate the
implications of obtaining credit, and/or have an unrealistic
appreciation of their capacity to repay. In addition, some
providers' assessment practices maximise the amount of credit able
to be granted but which cannot be repaid by the consumer without
substantial hardship. The concern with the lack of a requirement
on participants to establish a consumer's capacity to repay are
well documented (albeit in a limited context) in the RIS on
responsible lending practices in relation to consumer credit cards.
516. Consumers' access to dispute resolution mechanisms other than the
Courts is limited under the UCCC as participants are not required
to be members of an EDR Scheme. Therefore consumers who are unable
to resolve a dispute directly with a provider who is not
voluntarily a member does not have access to dispute resolution
services outside of the court process. Court processes are often
complex, time consuming and costly and therefore not a particularly
viable solution.
517. Currently consumers have only limited protections when obtaining
credit for investment or small business purposes. The UCCC does
not regulate credit provided for investment purposes, nor credit
provided to small businesses. That means, for example, the
mortgage over a person's home is regulated under the UCCC but the
same person's mortgage over another home, for investment purposes,
is not. That person is not necessarily any more knowledgeable when
entering into that contact, and may have used their primary
residence as security, but does not have access to the protections
offered by the UCCC. Furthermore, a loan to small business may
also be used indirectly to fund personal consumption or be secured
by personal assets, particularly in the case of an unincorporated
operator, but is not afforded protections under the UCCC. The FSR
regime only regulates investment in financial products
(for example, shares but not real property) and related advice -
not the credit used to obtain it.
518. There is evidence that some consumers are poorly informed about the
key features and risks of certain credit products. The UCCC
contains a number of provisions regulating disclosure, mainly pre-
contractual which focuses on the contractual obligations rather
than the features and risks of the actual product. As such, it
appears that the existing disclosure requirements may not be
sufficient to prevent confusion and financial loss.
519. The penalty provisions in the UCCC are largely limited to civil
remedies for breaches of the legislation. There is no provision
for a regulator to intervene through administrative action. In
addition, the regulator does not have standing in court. This
means the regulator cannot deal with minor breaches of the
legislation in a manner commensurate with their impacts or take
action on behalf of consumers as a general population.
Margin loans
520. With the strong performance of the ASX over the recent years, the
instance of margin calls has been very low. However, with the
stock market moving into a time of more uncertain growth, there has
been some concern surrounding retail clients' understanding of how
their margin loan product operates. Recent market volatility has
been alarming for small investors, particularly those who have only
experienced positive markets previously. This has highlighted the
current absence of consumer protection regulation concerning margin
loans, particularly in relation to retail investors.
521. There are serious concerns that consumers are not necessarily aware
of the extent to which margin lending contracts place the risk of
changes to market conditions on them. In particular, some
contracts allow the lender to unilaterally withdraw the facility or
withdraw a particular company's stock from their acceptable list of
equities over which margin lending is accepted, thereby forcing
full repayment.
522. Furthermore, it is not clear that investors fully understand how
the LVR ratio works and that the loan provider is able to change
this in a very short period of time.
523. There are also serious concerns that marketing material, separate
from the contract itself, highlighting 'bull market' gains make
margin loans seem much simpler than they in fact are and do not
fully disclose the downside risks.
Policy objectives
524. To give effect to the COAG decisions of 26 March and 3 July 2008,
in that the Australian Government will assume responsibility for
the regulation of consumer credit and margin loans.
525. To provide a comprehensive, nationally consistent consumer credit
regime, by addressing conflicts or gaps in the existing consumer
credit regime where there is evidence that consumers are suffering
loss and other detriment or an unnecessary compliance burden is
being placed on business.
526. To determine the most appropriate way to handle margin loans to
ensure people who invest through them are aware of the associated
risks.
527. To reduce the regulatory burden on business, better protect the
interests of consumers and ensure the regulatory regime contributes
to ensuring the Australian economy is modern and strong.
Implementation options
Implementation scope
528. The terms of the COAG agreement are quite broad and allow the
Commonwealth to determine the precise scope and mechanism for
implementing the national regulation of consumer credit and margin
loans. Although the Commonwealth has not previously regulated
consumer credit the States and Territories, as well as industry
participants and consumer groups, have substantial knowledge of the
issues involved and will be used to inform the development of the
national regime.
529. A primary weakness of the existing UCCC is its inability to respond
to market developments in a timely manner because of the co-
operative amendment process. This will be overcome when enacted as
Commonwealth law, in part because, where possible, it will be
drafted on a principles basis so that it does not necessarily need
to be amended to regulate new products and behaviours. In
addition, a national regime will provide consumers and participants
with consistency by reducing duplication and inconsistent
obligations.
530. Despite those inherent improvements, given the concerns identified
above it would seem that simply enacting the UCCC as Commonwealth
law will not be sufficient to comprehensively regulate consumer
credit in a way which achieves the Government's objectives. Some
potential enhancements which could be made have been identified
below. Their necessity, and the impacts their introduction would
have, will be evaluated on the basis of views solicited through
further consultations.
Potential enhancements to the regulation of consumer credit under
the national regime
The scope of the regime may need to be framed so as to capture
additional transactions and services.
531. The UCCC only regulates the provision of consumer credit. That is,
the UCCC does not regulate the provision of credit-related advice,
and excludes credit provided to consumers for investment purposes
and loans made to small businesses. This means that some
transactions undertaken by consumers are outside of the protections
offered by the UCCC.
532. However, the draft Finance Brokers Bill has been specifically
crafted to regulate the provision of advice by brokers/advisors in
all jurisdictions in relation to all consumer and small business
credit.
533. The absence of a comprehensive approach for regulating credit
advice is widely acknowledged as a key deficiency of the current
regime. Changes in the credit environment and the increased
availability of a range of products being offered by a range of
lenders have seen consumers rely more heavily on finance
brokers/advisors when considering their lending options, yet there
is no regulation of these transactions. That is, the UCCC only
regulates the actual lending portion of the transaction and not the
advice. There is no regulatory requirement that advice is
appropriate for the consumer and there is evidence that in its
absence consumers have suffered detriment.
534. Consumer borrowing for investment purposes is not regulated by the
UCCC. Individual investors are often not sophisticated and
consider investing in real property to be a lower risk activity
than other investments. Such investment is often long term and
involves large sums of debt. Past increases in property prices and
average household incomes have promoted consumer confidence which
has led to increased borrowing to fund investment. However recent
downturns in property and financial markets have left some
investors with reduced levels of equity and liquidity. These
investment credit contracts are not subject to regulatory oversight
and protection. By comparison, the FSR regime regulates investment
in financial products, and advice in relation to it.
535. Similarly, small business operators are not necessarily
sophisticated investors. Small businesses may not have sufficient
resources to obtain detailed advice, negotiate favourable contract
terms or engage in costly and complex legal arrangements to resolve
disputes. The extension of protections under the national credit
regime to small businesses is similar to the scope of the FSR
regime for financial products.
536. In contrast to the UCCC, Chapter 7 of the Corporations Act
regulates the provision of financial services products (such as
shares but not real property) and advice related to those products
provided to all retail clients.
537. The need to extend the scope of the legislation to other
transactions and services has not yet been determined and will be
the subject of consultation.
All industry participants may need to be licensed
538. The UCCC does not contain a licensing regime. However, in
recognition of the need for, and benefits of, licensing the States
and Territories have agreed to license the brokers/advisers of all
consumer and small business credit in all jurisdictions, as
proposed in the draft Finance Brokers Bill.
539. A licensing regime generally restricts entry to those people who
are appropriately skilled and of good character. Licensing is a
mechanism by which obligations can be imposed on participants.
In addition, it provides for more effective and efficient
enforcement. It allows the population to be known to the
regulator, who can then ensure that required standards are met and
impose penalties for non-compliance. Experience suggests that, in
the absence of a licensing regime, unscrupulous or unskilled people
can operate in the market for some time before being identified.
Once identified there is often no mechanism to resolve disputes
outside of the courts.
540. There is wide ranging community and industry support for the
introduction of a comprehensive licensing regime (for example,
Finance Sector Union, Credit Ombudsman Service, Finance Brokers
Association Australia, Mortgage & Finance Association Australia).
541. In addition, the Productivity Commission recommended a licensing
system for finance brokers, and a licensing or registration system
for credit providers (with both requiring participation in an
approved EDR Scheme). Chapter 7 requires all financial service
providers be licensed.
542. Should a licensing requirement be included in the national regime,
it may be inappropriate to only license brokers/advisors (as
proposed in the draft Finance Brokers Bill) and not providers as
well, given they can also interact directly with consumers.
However the obligations imposed may vary depending on the role of
the participant.
Industry participants may need to provide additional disclosure to
consumers.
543. The UCCC already requires certain disclosure, mainly pre-
contractual. However this has not been adequate to properly inform
consumers of all the risks associated with specific credit
products, such as reverse mortgages.
544. Without all relevant information, consumers are not able to make
well reasoned decisions. Making inappropriate decisions can lead
to financial stress.
545. In recognition that some people may not understand the risks
involved with reverse mortgages the States and Territories are
currently considering the need for specific disclosure. A
consultation RIS is being prepared by the States on this matter.
546. In addition, the States and Territories have commissioned research
into pre-contractual disclosure to ensure it is simple, accessible,
relevant, concise and comprehensible.
547. Further, the proposed amendments to address 'fringe' lending
practices include requiring additional disclosure in relation to
direct debit authorities and clarifying disclosure requirements for
annual percentage rates.
548. The need to impose any additional disclosure requirements, such as
ongoing or product specific disclosure requirements, will be
considered in the second phase.
The expected conduct and behaviour of industry participants in
relation to their dealings with consumers may need to be regulated.
549. The UCCC contains some conduct requirements. However, numerous
submissions to various consultations papers have suggested these
provisions are not sufficient. There is evidence that practices
such as 'equity stripping', 'churning', the provision of
inappropriate advice, the provision of credit to consumers who can
not afford to repay it and the charging of excessive fees have
occurred, to the detriment of consumers.
550. The consumer is in a position where they are dependent on the
broker's skill and expertise and therefore vulnerable to
exploitation. It is in the industry's interest that consumers
value the services which are available. One way to achieve
consumer confidence is to ensure market participants behave in an
appropriate manner.
551. The application of general conduct requirements is a principled (as
opposed to prescriptive) method of addressing concerns which may
otherwise be manifested as specific obligations and products
features.
552. The concept of requiring responsible lending practices was
consistently raised by consumer advocacy groups (such as Care Inc
Financial Counselling & Consumer Law Centre ACT, Consumer Credit
Legal Centre NSW, ACTU and the Financial Sector Union) in responses
to the Green Paper.
553. The draft Finance Brokers Bill proposes to address this issue in
part by imposing a requirement that the consumer's capacity to
repay be considered before any credit product is recommended (a RIS
was prepared). The draft Finance Brokers Bill also requires that
the advisor/broker has a reasonable basis for recommending a
particular credit product.
554. In addition, the States and Territories are considering imposing
additional conduct requirements, in the form of responsible lending
provisions, on credit card providers to address concerns with over-
indebtedness. A consultation RIS was prepared.
555. Chapter 7 of the Corporation Act requires providers conduct their
services efficiently, honestly and fairly.
556. If additional conduct requirements were to be introduced it is
envisaged that they would oblige participants to observe a number
of general conduct requirements such as those imposed by Chapter 7.
In addition, credit-specific requirements, such as establishing a
person's capacity to repay and banning specific predatory lending
practices, could be imposed. The need for any additional conduct
requirements, and the specifics of the obligations they would
impose if adopted, have not yet been determined and will be the
subject of consultation.
Industry participants may need to provide access to appropriate
dispute resolution services.
557. Under the UCCC membership to EDR Schemes is voluntary. Tribunals
have been established to deal with complaints related to consumer
credit. Western Australia, and more recently Victoria, are the
only jurisdictions to have introduces legislation which requires
brokers/advisors to be members of an external dispute resolution
scheme.
558. The importance of mandating access to an EDR Scheme is that they
provide consumers who are unable to resolve a dispute directly with
their provider with a free, fair and independent dispute resolution
mechanism. The alternative is often the complex, time consuming
and costly court process which is not particularly viable.
559. In the absence of a legislative requirement several industry
associations, such as the Mortgage & Finance Association of
Australia and the Australian Bankers' Association Code of Banking
Practice, require their members be members of EDR Schemes.
560. The draft Finance Brokers Bill proposes to mandate membership of
approved EDR Schemes for all brokers. Chapter 7 mandates
membership of an ASIC approved EDR Scheme.
561. In recognition of the value of access to EDR Schemes, the States
and Territories had commenced examining the feasibility of
requiring all credit providers to belong to an approved EDR Scheme.
However, this work was postponed following the COAG decisions.
562. The need to impose a requirement to provide access to dispute
resolution services has not yet been determined and will be the
subject of consultation. If such a requirement were to be
introduced it is envisaged that access to EDR Schemes would be free
to consumers and similar to the schemes which operate for the
purposes of Chapter 7 of the Corporations Act.
The regime will need to be enforced by a national regulator, namely
ASIC, in a way which minimises avoidance of the requirements.
563. The UCCC is enforced by each State and Territories' Fair Trading
Office. The UCCC contains a range of civil penalties. The
regulators lack the ability to intervene quickly and to act
unilaterally in instigating court proceedings against persons
acting inappropriately or failing to meet required standards.
564. The amendments to address 'fringe' lending practices proposed by
the States and Territories recommend giving government consumer
agencies standing in court proceedings.
565. Moving to a single national regulator is consistent with having a
national scheme. ASIC is the logical choice, given its experience
in enforcing the Corporations Act and its existing infrastructure
and relationships with financial services providers. This
conclusion is supported by the fact that ASIC was repeatedly
identified as the appropriate regulator in submissions to the Green
Paper and by the Productivity Commission in its report of May 2008.
566. The alternative national regulator, the Australian Competition and
Consumer Commission, has little experience in the regulation and
licensing of financial services or credit, nor the established
relationships with those providers. Further, it would be expected
that the incremental cost of extending ASIC's oversight to credit
would be less than that required to extend the Australian
Competition and Consumer Commission functions to credit regulation.
567. The States and Territories have indicated they do not want a
continuing enforcement role once the Commonwealth assumes
responsibility for credit. However they reserve the right to
enforce generic consumer protection laws where applicable.
568. The need for any enhancement to ASIC's enforcement powers (such as
the ability to impose administrative and criminal penalties, have
standing in court cases and the ability to ban industry
participants), have not yet been determined and will be the subject
of consultation.
Proposed regulation of margin loans under Chapter 7 of the
Corporations Act
569. The proposed regulation of margin loans under Chapter 7 is included
in phase one of the proposed implementation plan.
570. The Simplifying and Standardising Financial Services and Credit
Regulation Green Paper proposed three options for margin loans:
1) maintain the status quo; 2) include margin loans as a financial
product under the Corporations Act and apply the Chapter 7 regime;
and 3) develop a separate regulatory regime for margin loans.
571. A number of submissions were received however, whether margin loans
need to be regulated, and if so the appropriateness of Chapter 7 to
do so, has not yet been determined and will be subject to further
consultation.
Implementation mechanisms
572. Due to constitutional limitations, the preferred approach to any
regulation of credit would be to amend the Corporations Act. There
are two options for the implementation of Commonwealth regulation
of consumer credit.
Option A
573. Extend Chapter 7 of the Corporations Act to regulate the provision
of all consumer credit products and related advice including
consumer mortgages for investment purposes, and loans to small
businesses, as a financial product.
Option B
574. Enact the UCCC (including outstanding projects) to the extent
possible and the relevant provisions of the draft National Finance
Brokers Bill, supplemented with additional licensing, conduct and
disclosure provisions as required to comprehensively regulate the
provision of consumer credit and related advice, including consumer
mortgages for investment purposes, and loans to small businesses as
a new chapter of the Corporations Act.
Assessment of impacts
Impact group identification
575. The groups affected by the amendments are consumers of credit;
industry participants including providers and brokers/advisers; and
the Government and ASIC.
Assessment of costs and benefits
Option A: Extend Chapter 7 of the Corporations Act to include all
consumer credit products.
1.
| |Benefits |Costs |
|Consumers|The licensing |There may be additional |
| |requirements will ensure |financial cost to |
| |that all advice will be |consumers as businesses |
| |provided by people with |pass on increased costs. |
| |relevant training. In |These costs are expected |
| |addition, the disclosure |to be high as Chapter 7 |
| |requirements will ensure |will require different |
| |that all personal credit |processes/systems to |
| |advice will be |those currently used. |
| |appropriate to the |Some consumers may not be|
| |consumer having regard to|able to obtain credit |
| |their personal |because a more rigorous |
| |circumstances. This may |assessment of their |
| |reduce the potential for |financial circumstances |
| |consumers to make |(that is, capacity to |
| |inappropriate financing |repay) would determine |
| |decisions or obtain |they were not eligible. |
| |inappropriate credit. |However this is the |
| |Mandated access to ASIC |appropriate outcome. |
| |approved EDR Schemes in | |
| |the event of disputes is | |
| |quicker, cheaper and | |
| |easier than having to | |
| |rely on court processes. | |
|Industry |Some credit providers |Implementation costs will|
| |(that is, ADIs and |be higher than for Option|
| |financial services |B as complying with |
| |advisors) already hold a |Chapter 7 will require |
| |licence under Chapter 7. |different |
| |The additional regulatory|processes/systems to |
| |burden on those |those currently used. |
| |participants will not be |Additional compliance |
| |high. |requirements (licensing, |
| | |disclosure, conduct) |
| | |would apply, especially |
| | |to those who are not |
| | |already licensed under |
| | |Chapter 7. |
| | |The current Chapter 7 |
| | |requirements are |
| | |considered onerous and |
| | |are not tailored to |
| | |credit |
| | |providers/products. |
|Governmen|ASIC has knowledge of |There may be more |
|t |Chapter 7 and already has|resistance from industry |
| |mechanisms in place to |than under Option B as |
| |licence providers and |Chapter 7 imposes |
| |enforce conduct |different requirements to|
| |requirements. |those currently mandated |
| |ASIC would be able to |for credit. |
| |access documented advice |ASIC will need to license|
| |provided to clients to |and monitor a larger |
| |monitor compliance with |population than they do |
| |the law. |currently and therefore |
| | |will require additional |
| | |funding. |
| | |Chapter 7 would still |
| | |need refinement as the |
| | |risk profile of credit |
| | |products requires a |
| | |different regulatory |
| | |treatment from financial |
| | |products for investments.|
Option B: Enact relevant provisions of the UCCC and the draft Finance
Brokers Bill, supplemented as required, as Commonwealth law
2.
| |Benefits |Costs |
|Consumers |Generally consistent with |There may be |
| |existing consumer credit |additional financial |
| |regime, that is consumers |cost to consumers as |
| |of credit for personal use |businesses pass on |
| |are already aware of |increased costs. |
| |requirements and |However increased |
| |protections under UCCC. |costs are expected to |
| |All advice will be provided|be lower than under |
| |by people with relevant |Option A because |
| |training. In addition, all|businesses already |
| |personal credit advice will|comply with UCCC. |
| |be appropriate to the |Some consumers may not|
| |consumer having regard to |be able to obtain |
| |their personal |credit because a more |
| |circumstances, which may |rigorous assessment of|
| |reduce the potential for |their financial |
| |consumers to make |circumstances (that |
| |inappropriate financing |is, capacity to repay)|
| |decisions or obtain |would determine they |
| |inappropriate credit. |were not eligible. |
| |Mandated access to ASIC |However this is the |
| |approved EDR Schemes in the|appropriate outcome. |
| |event of disputes is | |
| |quicker, cheaper and easier| |
| |than having to rely on | |
| |court processes. | |
|Industry |Generally consistent with |Increased regulatory |
| |existing consumer credit |burden on businesses |
| |regime, that is providers |offering margin loans |
| |of consumer credit are |and other financial |
| |already aware of |products as they will |
| |obligations under UCCC. |have to comply with |
| |Implementation costs will |two regimes |
| |be lower than under Option | |
| |A as businesses already | |
| |have processes/systems for | |
| |UCCC. | |
|Government|The transition to the new |ASIC will need to |
| |regime by both consumers |develop knowledge of |
| |and industry will be easier|UCCC. |
| |and cheaper than Option A | |
| |and therefore more readily | |
| |adopted given the existing | |
| |understand and acceptance | |
| |of the UCCC. | |
| |The fundamentals of UCCC | |
| |are strong and appropriate | |
| |for the regulation of | |
| |credit. | |
Preferred approach - Option B
576. Despite its gaps, the UCCC provides a well developed foundation for
the regulation of consumer credit, which is well known by industry
and consumers. Moving the UCCC under Commonwealth control resolves
many of its weaknesses. Further the UCCC framework can be enhanced
with additional licensing, conduct and disclosure provisions, drawn
from the draft Finance Brokers Bill and supplemented as required,
to provide for the comprehensive regulation of consumer credit.
577. Chapter 7 of the Corporations Act does not contain the necessary
credit specific provisions, such as dealing with defaults,
repossession and hardship requirements. In addition, its
licensing, conduct and disclosure frameworks are specifically
designed for the regulation of financial services that are not
necessarily appropriate or applicable to credit products given the
different risks involved. This is consistent with the views
expressed by the financial sector in response to the Green Paper.
However, Chapter 7 may provide a basis from which to produce the
additional regulation necessary to supplement the UCCC and draft
Finance Brokers Bill.
Business cost calculator
Consumer credit
578. Until the details of the proposed national regime (including the
licensing, conduct and disclosure requirements) are decided it is
difficult to estimate the cost of compliance to business. It is
expected that there will be an initial cost to businesses in
transitioning to the new system, such as obtaining their licence.
In addition, it is expected that there will be on-going costs
involved in disclosure, compliance, training and membership of an
EDR Scheme.
579. Consultations to date have suggested that implementation costs
would be minimised if the Commonwealth adopted the UCCC with
minimal changes (for example, Legal Aid NSW & QLD and Australian
Finance Conference). The proposed regime will be subject to
further consultation in order to achieve a design which minimises
compliance costs while delivering enhanced protections to
consumers.
580. It should be noted that these costs are offset in part by savings
from no longer having to comply with multiple State and Territory
based regulation, which is often duplicated or inconsistent. In
addition, a national regime of consumer credit regulation will
allow, over time, for streamlining and consolidation.
Margin loans
581. Until the details of the regulation, if any, for margin loans are
decided it is difficult to estimate the cost of compliance to
business. Consultations noted that introducing a new regime, as
opposed to extending Chapter 7, would be more costly for both
businesses and government.
582. Traditionally, margin loans have been sold through AFS licensees.
Although the provision of margin loans, or advice in relation to
them, are not currently subject to the obligations imposed by
Chapter 7 the extension of those requirements would not be expected
have a large impact for existing AFS licensees.
583. If margin loans were to be regulated under Chapter 7, it is
expected that the majority of the cost will be borne by those
industry participants who are not already AFS licensees, and that
some of those costs would be passed on to consumers.
584. If margin loans were to be regulated, Option 3 would appear to
result in the creation of a separate regime for margin loans that
would unnecessarily mirror Chapter 7, creating regulatory overlap
for businesses offering margin loans and other financial products.
This would create inefficiencies for businesses that would be
required to obtain separate licences for different products and
develop disclosure documents for those products under different
regimes.
Staging
585. The national regime could be implemented as either a single step or
a staged process.
586. Under a single step process a national regulatory regime could be
introduced only after all of the work had been done to refine the
existing regime, undertake the necessary consultation and approval
processes, and draft the entire package of legislation. This would
delay the implementation of any reform for several years, during
which time the current problems with the regulatory regime would
remain unaddressed.
587. Alternatively, a national regulatory regime could be introduced in
stages. This would involve the early introduction of Commonwealth
law addressing the most urgent problems (such as mortgage credit
and advice, margin loans and other matters), followed by the later
introduction of additional features, after further consideration.
588. The first phase would include the enactment of the UCCC, relatively
unchanged, as Commonwealth law which ensures continuity and
certainty for both business and consumers. As industry currently
complies with the UCCC there would be minimal operational
difference in transferring existing legislation to the
Commonwealth. It is expected that several of the currently
outstanding projects will have already been enacted as amendments
to the UCCC by this time.
589. Depending on the outcomes of consultation, the key changes from the
existing regime introduced in phase one would be:
. the extension of the regime to consumer mortgages for real
property;
. the licensing of all industry participants, which could be
based on the provisions in the draft Finance Brokers Bill;
. compulsory membership in an EDR Scheme; and
. the introduction of general conduct provisions, including
the requirement that a person's capacity to repay be
considered when determining eligibility for credit.
590. ASIC would also assume responsibility from the State and Territory
Fair Trading Offices for regulating consumer credit in phase one.
This would enable ASIC to commence producing educational material
and licensing industry participants, giving industry time to
transition into the new scheme. In addition, it would immediately
reduce duplication or inconsistency in regulatory burden inherent
in complying with multiple State and Territory jurisdictions.
591. The second phase would focus on determining the need for specific
conduct, disclosure and product requirements and the extension of
the scope of the law to cover remaining investment loans and loans
to small businesses.
592. Managing the single stage implementation of such a large reform is
considered to be more difficult than a staged process. These
difficulties were demonstrated during the introduction of the FSR
regime in 2001. Industry participants and the regulator were
overwhelmed by the quantum of changes and the compressed timeline
in which they were required to comply with the new regime.
593. The inbuilt delay in implementing the reform as a single package is
undesirable, given the pressing concerns with certain aspects of
consumer credit. Further, should any aspect of a single package be
delayed the entire project would be delayed. In contrast, a staged
process ensures that important and non-controversial aspects can
proceed urgently.
594. In response to the Green Paper several submissions noted that,
should the Commonwealth take over the regulation of all consumer
credit, a staged implementation would be advisable (for
example, Financial Services Ombudsman, Financial Planning
Association).
Consultation
Consumer credit
Green Paper on Financial Services and Credit Reform
595. On 3 June 2008, the Government released the Green Paper on
Financial Services and Credit Reform: Improving, Simplifying and
Standardising Financial Services and Credit Regulation.
596. The Green Paper discussed the regulation of mortgages, mortgage
brokers and margin loans, and proposed options for the Commonwealth
taking over regulation in this area. With respect to other
consumer credit products such as credit cards, personal loans and
micro loans, the Green Paper asked for submissions on whether these
products should also be regulated solely by the Commonwealth or
whether there is a role for the States and Territories in this
area.
597. Some 150 submissions were received in response to the Green Paper,
and an overwhelming majority supported the Commonwealth assuming
responsibility for the regulation of all consumer credit.
. From the industry's perspective, this support was driven
by the reduction in compliance burden that would be
achieved by reducing the number of different regulatory
regimes they are required to operate under.
. From the consumer advocates' perspective, this support was
driven by the better protections and efficiencies a
consistent nation wide regime offers.
598. Most submissions supported the enactment of the UCCC, including the
outstanding projects, as Commonwealth legislation and identified
ASIC as the appropriate regulator.
. Licensing (with compulsory membership of EDR Schemes) and
disclosure requirements were seen as key features. In
addition, several submissions highlighted the need for the
concept of responsible lending, and consideration of
capacity to repay requirements.
. A common view was that putting lenders and brokers into
the FSR regime was inappropriate as selling and/or
providing credit was fundamentally different to providing
and/or advising on investments (Mortgage & Finance
Association Australia; Gadens lawyers; ABA).
. Of the few submissions that suggested Chapter 7 of the
Corporations Act would be appropriate, most commented that
the existing requirements would require modification to
apply appropriately to credit products and providers (AXA
Asia Pacific).
. Several submissions supported, or understood the need for,
staged implementation (Financial Services Ombudsman,
Financial Planning Association).
. It was suggested that the implementation costs would be
minimised if the Commonwealth adopted the UCCC with
minimal changes (Legal Aid NSW and QLD and Australian
Finance Conference).
Other consultations, reviews and regulation impact statements
599. The Government has established an implementation taskforce
consisting of officials from the Commonwealth Treasury, ASIC and
the States and Territories in order to progress the COAG decisions
in relation to consumer credit.
600. The New South Wales Government has undertaken extensive
consultation on the draft NSW National Finance Brokers Package.
These consultations have identified consensus on a majority of
provisions. The Commonwealth Treasury will undertake further
consultation on the disputed provisions. (A decision-making RIS
was given conditional clearance by the Office of Best Practice
Regulation in 2006.)
601. The New South Wales Government released a consultation RIS on
responsible lending practices in relation to consumer credit cards
on 22 August 2008. Submissions are due by 3 October.
602. A decision making RIS for fringe credit providers was approved by
the Office of Best Practice Regulation in 2006.
603. An inquiry in 2007 into home lending practices and procedures by
the House of Representatives Standing Committee on Economics,
Finance and Public Administration recognised the importance of
consistently regulating non-bank lenders and mortgage brokers by
recommending that the Commonwealth take over the regulation of
credit including the regulation of mortgages. The Committee
suggested that credit be included in the definition of a financial
product for the purposes of the Corporations Act.
604. The Productivity Commission released its final report on
Australia's Consumer Policy Framework (including regulation of
consumer credit) on 8 May 2008. It recommended that the
Commonwealth take over the regulation of credit and develop generic
consumer law.
605. KPMG Consulting undertook consultation and released a report NCP
Review of the Consumer Credit Code in December 2000, which has been
the catalyst for the proposed amendments to the default notices and
vendor terms provisions.
Margin loans
606. Some 20 submissions in relation to margin loans were received in
response to the Green Paper.
607. There was general support for the inclusion of margin loans as a
financial product in Chapter 7 of the Corporations Act (Grant
Thornton, Australasian Compliance Institute, Financial Planning
Association, Australian Financial Counselling & Credit Reform
Association Incorporated, Australian Institute of Credit
Management).
608. It was noted that introducing a new specific regime (as opposed to
extending Chapter 7) would be costly for both government and
participants, would add further regulation to a system that already
suffers from inefficient regulatory overlap and increase the risk
of future inconsistency (Macquarie Bank, National Australia Bank,
Australasian Compliance Institute, ANZ).
609. Some submissions called for further research and analysis before
any action was taken and cautioned against a 'knee jerk' reaction
to recent failures such as Opes Prime and Lift Capital, which
involved products not sold by the majority of the industry
(Australian Bankers Association, Securities and Derivatives
Industry Association, Investment and Financial Services Association
Ltd).
Recommended option and conclusion
610. Cabinet is asked to agree to the two-staged implementation plan as
described below, subject to the outcomes of a detailed consultation
process.
Implementation Plan
[pic]
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611. The recommended approach achieves synergies with existing regimes
(UCCC and FSR) thus reducing the regulatory burden as much as
possible while at the same time achieving the Government's
objectives.
Implementation and review
612. The phased approach proposed for development and implementation of
the consumer credit regulatory framework (as described in the
diagram above) will be subject to detailed consultation with
relevant stakeholders. Consultation will be undertaken on the
planned implementation process and throughout the development of
draft legislation and could include:
. officials from State and Territory Governments and ASIC;
. a special group of key industry experts and consumer
advocates; and
. wider community consultation on draft legislation and
specific areas such as the draft Finance Brokers Bill.
613. In addition, this RIS will be updated to assess the impacts and
analyse the costs and benefits of the proposed preferred design of
the various features.
Chapter 7
Regulation impact statement - Commonwealth regulation of trustee companies
Problem
Background
Existing meaning of 'trustee company'
614. Prior to the passage of Commonwealth legislation to authorise
trustee companies, a trustee company could be defined as a company
which:
. is registered under the Corporations Act 2001
(Corporations Act);
. is authorised under one or more of the State and Territory
Trustee Companies Acts; and
. undertakes two broad types of work:
- personal trustee and deceased estate administration work
('traditional activities');
- broader financial services, such as funds management and
acting as responsible entities of managed investment
schemes.
The first of these areas of work is the focus of this regulation
impact statement (RIS).
Overview of trustee companies industry
615. In the past, only a natural person could undertake the duties of a
personal trustee in the sense of executor or administrator under a
will (known as acting as a 'personal trustee'), owing to the
fiduciary responsibilities of trustees for the trust assets and
their personal liability in the event of any default. Moreover, it
was generally not possible to establish a long term trust, such as
a charitable trust.
616. To rectify this situation, the States and Territories passed
legislation permitting private trustee companies to enter the
market for personal trustee and estate administration work. At
about the same time, the States and Territories also legislated to
facilitate the establishment of long term and perpetual trusts,
such as charitable trusts. They also created government-controlled
Public Trustees ('public trust offices').
617. A trustee company that is authorised under one of the
State/Territory Acts is typically regulated if it undertakes one or
more of the following activities:
(a) Applies for probate, and/or acts as an executor or as
administrator, of a deceased estate
618. Probate is a certificate granted by the Probate Division of the
Supreme Court in each State and Territory that the will of a
deceased person has been proved as valid and registered and that
authority to administer the deceased estate has been granted to the
executor providing or propounding the will.
619. An executor/administrator is the person nominated by a deceased
person in their will to administer their estate upon their death.
Trustee companies are able to act as executor of a deceased's
estate when the time comes or arrange for the transfer of
responsibilities, where an individual is nominated in a will as the
estate executor and does not wish to take on the legal
responsibilities entailed.
620. Non-authorised corporations are excluded from the market for the
provision of trustee and executor services.
(b) Acts as trustee of a trust estate
621. Trusts can be set up for many purposes. For example, a settlor or
testator can transfer property to a trustee to be held in trust for
one or more beneficiaries. This can be useful, particularly when
the beneficiaries are minors or unable to handle their own
finances. Another example is the charitable trust or foundation,
which may be established to help relieve poverty or advance
educational, medical or religious purposes.
(c) Operates a common fund
622. Under the general law, trustees cannot mix the funds from two or
more trusts. The State and Territory Acts override this
restriction by allowing trustee companies to invest funds from more
than one trust in a 'common fund', to enable the efficient pooling
and investment of moneys from estates and trusts. In most States,
external moneys may be accepted for investment into common funds -
in such cases, the trustee companies must comply with the managed
investment scheme provisions of the Corporations Act.
(d) Acts under a power of attorney
623. Under a power of attorney, a trustee company has authority to act
for a person in relation to that person's legal or financial
affairs.
(e) Other functions
624. Trustee companies also exercise other functions under State and
Territory legislation. For example, a trustee company can act as a
guardian for a minor or a disabled person. A guardian has legal
custody of another person and his or her property when that person
is unable to manage his or her own affairs.
625. Solicitors, accountants, financial advisers and Public Trustees are
now the main competitors of private trustee companies in the market
for 'traditional' services.
Broader financial services
626. Trustee companies have since expanded their activities into most
areas of wealth creation, management and transfer. They now offer
a range of financial services, including as the administrator for
superannuation funds, as trustee for debenture and note issues and
as the Responsible Entity for managed funds.
Market characteristics
627. The trustee company industry is relatively small with approximately
ten licensed private trustee companies. The majority of these
trustee companies are licensed and have operations in multiple
jurisdictions. Some of the smaller markets and jurisdictions only
have one licensed private trustee company providing these services.
In some of the larger markets, such as New South Wales, Victoria
and Queensland, there are seven to eight licensed trustee companies
operating.
628. With the exception of one licensed trustee company - Plan B
Trustees Limited (Plan B), based in Western Australia - all of the
trustee companies and public trust offices are members of a single
industry body, the Trustee Corporations Association of Australia
(TCA).
629. According to TCA data for 2007, private trustee companies
(excluding Plan B) have approximately $510 billion of assets under
management. In aggregate, Public Trustees account for
approximately $13 billion of the assets under management and a
large proportion of these assets are under management in personal
trusts. TCA member trustee companies and State Trustees Ltd manage
approximately $20 billion of assets in personal trusts.
630. The bulk of trustee companies business is in the field of
investment products. TCA member trustee companies and State
Trustees Ltd have approximately $21 billion in assets under
management in superannuation funds and $403 billion of assets under
management in corporate activities, such as managed funds,
securitisation programs and debenture and note issues[4]. Based on
these figures, in aggregate, personal trust business represents
approximately 4 per cent of TCA member trustee companies'
business[5]. The industry generally refers to this part of their
business as 'traditional activities'.
Current regulation of trustee companies
631. Trustee companies are currently required to be licensed and
regulated under separate legislation in each State and Territory[6]
in which they operate. Corporations are unable to operate in a
jurisdiction until the respective piece of legislation has been
amended to include their business name as a trustee company under
the relevant Act.
632. Commonwealth legislation will replace State and Territory
legislation which:
. authorise or license companies to provide traditional
trustee company services generally (as opposed to laws
that authorise or license companies to provide a
particular traditional trustee company service);
. regulate the fees that may be charged by companies for the
provision of traditional trustee company services, and the
disclosure of those fees;
. deal with the provision of accounts by companies in
relation to traditional trustee company services that they
provide;
. deal with the duties of officers or employees of companies
that provide traditional trustee company services, in
their capacity as officers or employees of those
companies;
. regulate the voting power that people may hold in
companies that provide traditional trustee company
services, or that otherwise impose restrictions on the
ownership or control of companies that provide traditional
trustee company services;
. deal with what happens to assets and liabilities held by a
company, in connection with the provision by the company
of traditional trustee company services, if the company
ceases to be licensed or authorised to provide such
services. (There is an exception for complementary State
and Territory laws that are needed to give effect to
compulsory transfer determinations.)
633. The broader law relating to the obligations on trusts and trustees
in each State and Territory[7] will not be part of the proposed
changes; however, those Acts may require amendment where necessary.
Other current regulation of trustee companies (outside of scope)
634. Where trustee companies engage in other activities, such as acting
as a superannuation trustee, acting as a Responsible Entity for
managed funds, providing a custodial or depository service, or
acting as a trustee for debenture holders, they must comply with
Commonwealth legislation, including the Superannuation Industry
(Supervision) Act 1993, the Managed Investments Act 1998 and the
Corporations Act 2001 (Corporations Act). These Acts regulate the
activity being undertaken rather than the entity.
635. In order to undertake funds management activities, all of the
private trustee companies hold Australian financial services
licences (AFSLs). As a result, they are familiar with Australian
Securities and Investments Commission (ASIC) regulation and the
requirements of an AFSL. Equally, those trustee companies that act
as superannuation trustees are Registrable Superannuation Entity
licensees (RSEs) are familiar with Australian Prudential Regulation
Authority (APRA) regulation - however, four[8] trustee companies
are not RSE licensees.
636. In addition to being subject to the respective trustee companies'
legislation, trustee companies are subject to other State and
Territory legislation when undertaking 'traditional activities'.
For example, each State and Territory has a Trustee Act as well as
legislation regarding wills, administration and probate. These
legislative instruments, and associated common law, regulate
particular activities and, as such, solicitors, accountants,
financial advisers and trustee companies are subject to the
requirements therein alike in providing such services.
637. Public trustees are subject to separate public trustee legislation
in each of the jurisdictions rather than the legislation for
private trustee companies. Except for State Trustees Ltd, which is
a corporate entity owned by the Victorian Government, most of the
Public Trustees are directly responsible to a State or Territory
Government Department, such as the Department of the Attorney
General or the Department of Justice, in the jurisdiction in which
they operate. Since the Public Trustees are owned and operated by
the respective State and Territory Governments, they do not have
cross-border operations and nor do they have concerns about the
compliance costs associated with seeking to operate nationally.
That said, public trust offices that satisfy the criteria for
licensing may opt to be bound by the legislation.
Regulatory need
638. The relevant State and Territory Trustee companies Acts amount to
around 300 pages. This in itself is a significant burden.
Moreover, the state Acts, as well as the common law relating to
trusts, act to restrict competitive pressure and market discipline
in the estate administration and trust management industry,
particularly after the will or trust comes into effect. This
market imperfection is the result of the trustee being appointed by
someone other than the person(s) for whose benefit the assets will
be managed by the trustee and the inability of the beneficiary to
switch trustees, short of applying to the Supreme Court in cases of
fraudulent conduct or administrative incompetence.
639. The beneficiary often has no contact with the trustee company prior
to the will or trust coming into effect and after it does become
operational, the beneficiary is generally unable to affect a change
of the trustee company. While the main duty of a trustee is to
administer the estate in accordance with the terms of the will or
trust, regardless of the wishes of the beneficiary, once the will
or trust comes into effect, it is the beneficiary that is
ultimately interested in the proper and effective management of the
estate. It is the beneficiary that bears the loss in the event of
the mismanagement of the estate.
640. The Supreme Court is the only avenue of recourse for beneficiaries
with concerns regarding the management of the trust or estate. In
situations where the beneficiary has concerns relating to gross
mismanagement or fraud, the Supreme Court can order that the trust
assets be transferred to another trustee company. Court action is
very costly and time consuming. Beneficiaries do not have access
to alternative and more cost effective and timely dispute
mechanisms.
641. Beneficiaries are exposed to significant costs/losses in the event
that assets held on trust are inadequately managed by the trustee
company. This concern is exacerbated by the ability of trustee
companies to pool trust assets in common funds. Consumers are
unlikely to be able to access the information on which to make
informed decisions on how to manage this risk on their own. This
applies to consumers when selecting a trustee company and it is
also relevant to beneficiaries who have a legitimate interest in
mitigating the risk of inadequate management of the assets held on
trust for their benefit.
642. Generally, trustee companies consider testators/settlors to be
their primary clients and only regard beneficiaries as (at best)
'secondary' clients. As a result, beneficiaries often are unable
to access information on the terms agreed to by the
testator/settlor. The inability of beneficiaries to readily switch
trustees means that they cannot easily act on information about the
management of the trust or estate. Beneficiaries should have
access to sufficient information to be able to monitor the
performance of the assets under management and the trustee company
more generally. At a minimum, beneficiaries, or persons with a
proper interest in the estate acting on their behalf, should be
able to assess the performance of the trustee company in relation
to the terms set out in the trust deed and to detect fraud or
serious instances of administrative incompetence.
643. It is more difficult to ascertain the quality and service that will
be provided by a trustee company rather than an individual because
the personnel may change over time and it is unlikely to be clear
which individuals will be performing the service or their level of
expertise. This makes the procedures and risk management practices
of the corporation itself important.
644. Trustee companies (private or public) are the only providers of
estate management and personal trust services that can offer these
services in perpetuity and, as such, may be viewed by individuals
as having special expertise and reliability in undertaking personal
trust and estate activity.
645. Government intervention or measures in addition to those directed
at promoting competition are necessary to ensure adequate client
protection for 'vulnerable' beneficiaries, such as the disabled,
mentally impaired, elderly and minors, who may not have the
capacity to adequately monitor their trustee's performance even if
they were provided with the information to do so.
646. The prevalence of estate mismanagement and the extent of any
resulting loss are currently not able to be quantified accurately
due to the difficulty and expense of beneficiaries making a
complaint. However, the concept of alternative dispute resolution
is accepted by the majority of industry submissions on the Green
Paper on Financial Services and Credit Reform (July 2008):
. The TCA's submission stated that trustee companies are
subject to a relatively low number of legitimate customer
complaints, and that many complaints prove to be simply
disputes between beneficiaries. Nonetheless the
submission put forward a model for an appropriate external
dispute resolution scheme (which would preserve the right
to take a matter to the relevant Supreme Court).
. Sandhurst Trustees' submission assumed the creation of a
dispute resolution process, arguing that the trustee
company needs to protect its reputation (including the
right to take a matter to court) and should have the right
to raise a matter directly with the dispute resolution
body.
. ANZ Trustees' and Equity Trustees Limited's submissions
supported alternative dispute resolution.
. Tasmanian Perpetual Trustees Limited (TPTL) submitted that
there is no evidence of any systemic problems concerning
the manner in which their traditional trustee business is
being managed. However, TPTL has in place a form of
internal dispute resolution, and it submits that any
dispute which could not be resolved internally be required
to be submitted to alternative dispute resolution.
. Perpetual Limited submitted that the dispute resolution
process should mirror the current Corporations Act regime.
. Suncorp-Metway Ltd said: 'We agree that a more cost
effective and timely External Dispute Resolution (EDR)
mechanism for beneficiaries is necessary for personal
trust assets. However, we would encourage this industry
leveraging the existing EDR models under the newly
converged Financial Ombudsman Schemes (FOS) rather than
creating a new model.'
. Trust Company Limited said: 'there is no better dispute
resolution system than that offered by the Supreme
Courts.'
. Plan B agreed that consideration needs to be given to a
suitable dispute resolution mechanism, which they believe
should apply to all providers of trustee services.
647. Set out below is a table showing the number of complaints about
members received by the TCA over the period 1995 to 2008. The
figures cover matters that were deemed to be more than
clarification of a trustee's role, such as a client unhappy with
the trustee's service in terms of choice of investments, time taken
to finalise administration of a deceased estate, or fees charged.
Table 1.1: Complaints received by TCA Secretariat
|Year |Number |Year |Number |
|1995 |4 |2002 |8 |
|1996 |14 |2003 |8 |
|1997 |4 |2004 |6 |
|1998 |7 |2005 |2 |
|1999 |10 |2006 |1 |
|2000 |7 |2007 |3 |
|2001 |7 |2008 |4 |
This does not include complaints that may have been made directly
to a member of the relevant Attorney-General's Department/Consumer
Affairs Office, or the subject of an approach to the relevant
Supreme Court.
648. Notwithstanding the seemingly low number of complaints,
'traditional' trustee services are often provided to the most
vulnerable of people (who in many cases would have difficulty
asserting their rights), so it is conceivable that problems could
be under-reported. Also, internal and external dispute resolution
mechanisms are a common feature of financial products and services
regulation under the Corporations Act.
649. The other main source of market failure in the financial system
that normally warrants regulatory intervention is systemic risk.
In relation to the management of trust and estate assets by trustee
companies, as trustee companies are not part of the payments system
and do not generally provide capital guaranteed funds or hold trust
assets on their balance sheets, the level of systemic risk is very
low. It is extremely unlikely that the failure of a trustee
company would have any significant flow-on or contagion effects on
the rest of the financial system or to the real economy more
broadly.
650. The incidence of the failure of trustee companies is quite low.
Since the early 1980s, only Trustees and Executors Agency Co Ltd
(1983), and Burns Philip Trustee Company Ltd and its subsidiaries
(1990-94) have been placed in liquidation.
651. One of the main outcomes of the Financial System Inquiry (Wallis
Inquiry), which reported to the then Government in March 1997, was
the broad acceptance of the importance of balancing financial
safety regulation against efficiency and the importance of the
level of intensity of financial regulation being in proportion to
the risk of failure.
Current regulatory problem
652. Over the last decade, trustee companies have made a number of
representations to all levels of government in relation to
addressing the regulatory burden associated with the
inconsistencies and duplicate licensing and reporting requirements
in the State and Territory based regulatory framework. The
variation in regulatory obligations imposed by the State and
Territory governments can be seen in Table 1.1.
653. The Council of Australian Governments (COAG) agreed in July 2008,
that the Commonwealth will assume responsibility for regulation of
trustee companies. The scope of this RIS is to consider the
options for a Commonwealth regulatory framework at an entity level.
As noted previously, it is not within the scope of this RIS to
consider other State, Territory or Commonwealth laws that apply to
the various activities undertaken by trustee companies. The RIS
considers the appropriate form and intensity of regulation required
to achieve the objectives.
654. Business compliance costs and barriers to market entry are
considered higher under the State and Territory based legislation
than what is necessary to address the market failures. Overly
prescriptive regulation on certain aspects of trustee companies
operations in the State and Territory legislation were designed to
address some of the market failures and to protect vulnerable
consumers. These regulations cover: the ownership of trustee
companies; fees (in most states there are fee caps); common funds;
capital requirements; professional indemnity insurance; and
directors' personal liability. The level and type of these
restrictions varies between States and Territories. In some
instances the law imposes quite restrictive rules, particularly in
relation to prescribing fees and common fund operations. The
current level of regulatory burden is not appropriately matched to
the level of risk involved.
655. A key issue identified is that the current State and Territory
licensing requirements restrict trustee companies from operating
across borders. The need to obtain a licence in each individual
State and Territory combined with the lack of transparency and
consistency in licensing requirements creates barriers to entry and
restricts competition in the marketplace. In addition, the State
and Territory based licensing requirements create cost burdens for
corporations that operate in more than one jurisdiction. These
costs not only include the initial costs associated with obtaining
licences in each jurisdiction that they wish to operate in, but
also the ongoing compliance costs of meeting differing
requirements, including reporting requirements, in different
jurisdictions.
656. The current legislation is relatively antiquated and not consistent
with other more modern financial sector regulation that was
implemented on the basis of the Wallis Inquiry. The State and
Territory based regulatory requirements are not nationally
consistent and have a high level of prescription, which creates
compliance and efficiency costs. Additionally, unlike licensing
decisions made under Commonwealth licensing systems, the licensing
arrangements for trustee companies involve political decision
making rather than objective criteria. Additionally, in most
jurisdictions the licensing decisions are not subject to
administrative review. One industry participant has made a number
of representations in relation to concerns about the restrictive
nature and lack of transparency in the licensing process.
657. There are also concerns about the need for a more cost effective
and timely alternative dispute resolution mechanism for
beneficiaries to enhance the protections available for the trust
assets.
658. There is some concern about the adequacy of current supervisory
arrangements for trustee companies given the limited resourcing and
expertise available for supervision in the individual
jurisdictions. This is largely the result of a combination of
factors, such as the small number of trustee companies in some the
jurisdictions[9] and the States and Territories referral of power
for prudential regulation and client and investor protection to the
Commonwealth in 1999. A single supervisor is expected to exploit
economies of scale, reduce duplication, and over time, build up a
greater level of expertise. This would increase the effectiveness
and efficiency of supervision of trustee companies.
Objectives of Government action
659. Six objectives have been identified for a Commonwealth regulatory
framework to address the problems identified earlier. Options for
reform will be evaluated against these objectives in the next
section. The objectives are:
. Objective 1 - Enable approved corporations to operate as
trustee companies and license them under Chapter 7 of the
Corporations Act;
. Objective 2 - Ensure effective management and safeguarding
of trust assets;
. Objective 3 - Ensure appropriate disclosure to clients
about the type of services and products being offered by
the trustee company;
. Objective 4 - Provide for lower cost dispute resolution,
to enable beneficiaries to address issues of
underperformance or incompetence and/or replace an
underperforming trustee in a cost effective way, in cases
where alternative dispute resolution is a viable
alternative to the courts;
. Objective 5 - Modernise the regulation of trustee
companies and have any regulation apply on a national
basis in accordance with Recommendation 90 of the Wallis
Review and the Government's policy regarding reducing
regulatory burden more broadly; and
. Objective 6 - Facilitate a competitive national market for
trustee companies through:
- reducing barriers to competition and competitive
neutrality issues;
- reducing business compliance costs and improve
efficiency of operations; and
- promoting efficient pricing of services provided by
trustee companies.
Options that may achieve objectives(s)
660. Three options have been identified which would address the
objectives of a Commonwealth regulatory framework:
. Option 1: Status quo - no additional Commonwealth
regulation;
. Option 2: Consumer protection and disclosure regulation
with supervision by ASIC; and
. Option 3: Prudential regulation with supervision by APRA.
661. Under each option, consideration is given to whether that option
addresses the identified market failures and meets the above
objectives.
662. In examining the options, it was considered important to take
account of the rationale for how financial services are regulated
to ensure that the level and type of regulation recommended not
only addresses the market failures identified, but is balanced
against efficiency considerations and is consistent with the
broader approach to financial sector regulation in Australia.
Option 1: Status quo
663. Trustee companies will remain able to act as trustees, executors
and administrators under State and Territory laws, with powers and
duties similar to those of natural persons.
664. Trustee companies will not be under any regulatory obligation to
disclose information about the potential performance of any
investment of funds under the trust. However, this type of
disclosure may occur through the discussions between the testator
and trustee company at the time of creation of the trust
instrument.
665. This option would fail to deliver on the COAG commitment and would
not assist beneficiaries to address issues of underperformance or
incompetence and/or replace an underperforming trustee in a cost
effective way. Beneficiaries will retain the ability to remove
trustees where there is gross mismanagement or fraud in relation to
trust assets. There will be no provision for lower cost dispute
resolution to enable beneficiaries to address issues of
underperformance or incompetence and/or replace an underperforming
trustee in a cost effective way.
666. This option will retain the stratified State and Territory based
regulatory system and will fail to address the current regulatory
burden faced by trustee companies wishing to operate across more
than one jurisdiction. Business will continue to report to each
State and Territory body in which it operates, as well as ASIC
under the corporation's AFSL obligations and APRA if the
corporation is an RSE licensee. It will also retain regulation
that is unnecessarily burdensome on a potential new entrant for
addressing the market failures and risks identified.
667. Potential new entrants will only be allowed entry into the market
if they can gain acceptance from the relevant minister in each
jurisdiction. Trustee companies are only able to undertake
traditional activities in a State or Territory where the name of
that corporation has been added to the relevant trustee company
act. The relevant jurisdiction may provide guidelines which the
Government will use to determine the application for entry; however
where these guidelines are available they may be highly subjective
and open to political considerations. These barriers to entry will
remain high.
668. This option will not address Objective 6, as it will not provide
for a reduction in business compliance costs and will not improve
the efficiency of the market operators. The fees and charges caps
will continue to apply in most jurisdictions, as will: personal
director's liability; restrictions on ownership; requirements on a
certain number of directors to reside within the jurisdiction; and
opening hours will continue to be regulated in the Northern
Territory. Furthermore, it will fail to address Objective 4 as it
will not allow for easier removal of trustees in cases of poor
trustee performance. It will therefore fail to facilitate a more
competitive market.
Option 2: Consumer protection and disclosure regulation with supervision
by ASIC
669. In the Commonwealth regulatory framework, consumer protection and
disclosure regulation is implemented by the ASIC. Consumer
protection and disclosure regulation implemented by ASIC is aimed
at protecting the interests of consumers of a wide range of
financial services and products. It seeks to ensure that the
activities of financial service providers are subject to scrutiny
and accountability to the regulator for the purpose of consumer
protection.
670. Under this option, the States and Territories would repeal their
Trustee Companies Acts. The Commonwealth has the power to
regulate trustee companies at an entity level, for the purposes of
licensing and ongoing supervision, under various powers, including
section 51 (xx), of the Constitution. Under this option, there are
two different approaches that could be taken to regulate trustee
companies under the Corporations Act. The Corporations Act could
be amended to provide for:
. A stand alone chapter for entity level regulation of trustee
companies and a licensing mechanism; or
. A separate chapter for entity level regulation of trustee
companies with the licensing mechanism linked to the AFSL
regime and the integration of the provision of estate
administration and personal trustee management services by
trustee companies into the financial services regime
(Chapter 7 of the Corporations Act). This would involve
defining the provision of these services as the provision of
a financial service.
671. Under both options, a chapter conceptually similar to Chapter 5C
(Managed investment schemes) could be added to the Corporations Act
for the entity level regulation for trustee companies. This
chapter could be included as 'Chapter 5D Trustee Companies'.
672. Some of the means that would be used in a client protection regime
in order to address Objective 2 of ensuring effective management
and safeguarding of trust assets are:
. the requirement that a trustee company be a public company
or a wholly owned subsidiary of a public company;
. the requirement that the corporation holds an AFSL that
covers the provision of traditional trustee company
services - ASIC monitors applications for licences,
enforces licence conditions and varies, suspends or
cancels licences;
. provisions that allow trustee companies to pool the money
from different estates in common funds. These provisions
will also allow external investment into the common funds,
but where there is external investment the trustee company
will have to comply with Chapter 5C of the Corporations
Act. The provisions on common funds will set out a number
of general rules for the operation of common funds;
. provisions setting out restrictions to the fees and
charges that can be charged by trustee companies in
relation to the provision of personal trust and estate
administration services. The provisions on fees may also
include requirements relating to whether the fees can be
taken from capital or income, or a combination of the two;
. in relation to charitable trusts, 'grandfathering' of fees
charged to existing clients, and capping of fees charged
to new clients, with a review of these arrangements after
two years;
. deregulation of the fees charged to all other trusts and
estates, subject to a requirement that the company's fee
schedule be disclosed on the Internet and a requirement
that corporations charge no more than the fees specified
in their published fee schedule at the time they begin
administration;
. appropriate disclosure obligations, including provision
for electronic disclosure;
. a 15 per cent limit on any one person (and associates)
holding voting shares in a trustee company, combined with
a compulsory divestment regime to deal with breaches, and
a provision allowing Ministerial consent for share
acquisitions in trustee companies above the threshold;
. alignment of directors' and employees' liability with the
Corporations Act;
. requirements for adequate financial resources;
. requirements for a specified level of professional
indemnity insurance to support compensation arrangements
for the clients of trustee companies;
. winding up provisions;
. reporting obligations;
. enforcement powers and ability to revoke the licence;
. internal and external dispute resolution provisions, and
. repeal of overlapping/inconsistent State/Territory laws.
673. The 'traditional' operations of trustee companies are likely to be
new ground for ASIC. Although some pre-existing expertise will be
relevant, significant effort would be required in terms of both
developing the regulator's expertise and the standards that they
would administer.
674. The client protection regime discussed above would directly address
Objective 2 as it would ensure there are protection arrangements in
place aimed at reducing the risk of inadequate management by the
trustee company. It will address Objective 3 through ensuring
there is adequate disclosure of information by the trustee company
to the testator/settlor (and beneficiary where appropriate) in
order to understand the service being offered by the corporation.
675. Unlike a prudential regime, a client protection regime is directly
focused on the protection of assets held on trust for the
beneficiary and hence more directly addresses the market failures
identified. Because it is not specifically focused on the
corporate health of the entity itself (except to the extent that it
impacts on the management of off-balance sheet trust assets) it
does not specifically seek to prevent the failure of the trustee
company itself. In the event of a failure of a trustee company,
common law, trust law and the relevant State or Territory Supreme
Court would provide for the protection of trust assets and the
mechanism for the transfer of the trust assets to another trustee.
676. In relation to Objective 4, it is proposed that clients would have
access to an alternative dispute resolution mechanism. This could
be an existing scheme such as the Financial Ombudsman Service or
alternatively, a new industry-funded alternative dispute resolution
body could be established.
677. This option would also provide for the authorisation of trustee
companies (Objective 1), as well as being consistent with the
Wallis recommendation referred to in Objective 5.
678. In relation to Objective 5, it is clear that any form of
Commonwealth legislation would create a national market by creating
a single approval and supervisory regime and eliminate unnecessary
compliance costs and barriers to competition caused by duplication
or inconsistencies in the State and Territory based requirements.
Option 3: Prudential regulation with supervision by the Australian
Prudential Regulation Authority
679. In the Commonwealth regulatory framework, prudential regulation is
implemented by APRA. Prudential regulation is generally aimed at
protecting the prudential health of systemically important
financial institutions, primarily for the maintenance of system
stability. Prudential regulation is applied to a narrow range of
financial institutions, whereas consumer protection regulation is
aimed at protecting the interest of consumers in relation to the
activities of financial service providers. Prudential regulation
is a significant intervention into a market and implies a
regulatory intensity significantly greater than that under the
status quo or of client protection regulation.
680. Under this option, the Commonwealth would implement legislation
along the lines of a 'trustee companies prudential supervision act'
to provide for licensing arrangements and ongoing prudential
supervision by APRA. The Commonwealth would also need to amend
legislation for the purpose of levying trustee companies to fund
the cost of supervision. The levy would be based on the asset
pools managed by trustee companies, similar to the way in which
levies are applied to other prudentially regulated entities.
681. Under a prudential regime, it would be the role of APRA to put in
place appropriate prudential standards under the legislative
framework. APRA's standards would likely cover the following:
. fit and proper requirements for directors and senior
management;
. risk management systems;
. outsourcing;
. adequacy of resources; and
. capital requirements - net tangible assets.
682. It is worth noting that the development of a prudential regime for
trustee companies would take significant time and resources to set
up since there has not previously been prudential oversight of
trustee companies (at either the State or Commonwealth levels of
government) and APRA does not have experience in the non-financial
operations of trustee companies.
683. A prudential regulatory regime would aim to address Objective 2 by
providing for third party oversight (for example, auditor
oversight) of the management processes of trustee companies. A
prudential regime would not focus on empowering clients to enforce
their rights in the same way that a client protection regime would.
APRA would not be involved in the day-to-day interactions of
trustee companies and their clients and would not undertake the
role of dealing with consumer complaints.
684. Prudential regulation provides for intense oversight of the risk
management systems and policies of the regulated entities.
Standards under a prudential regime are generally more prescriptive
and intrusive. This oversight is more intense than in a client
protection regime as it is directed at the health of the entity
itself, as distinct from directly focusing on the entity's capacity
and resources to effectively manage trust assets for beneficiaries.
Similarly, licensing requirements of a prudential regime may be
more intense than under a client protection regime.
685. A key objective outlined for the regulation of trustee companies is
that there are adequate protection arrangements in place regarding
the quality of management of trust estates administered by trustee
companies in order to protect the interests and assets of
beneficiaries. While prudential supervision would provide for
relatively intense scrutiny of trustee companies, given its focus,
it may not provide as many protections for beneficiaries and
testators in relation to Objective 2 compared to a regime focused
on client protection.
686. Commonwealth legislation could authorise trustee companies as per
Objective 1. As noted above in relation to Objective 5, any form
of Commonwealth legislation would create a national market and
eliminate the unnecessary compliance costs and barriers to
competition caused by duplication or inconsistencies in State and
Territory based requirements.
687. This option would address Objective 6, however in a less
satisfactory manner than Option 2 as the compliance costs, barriers
to competition and the competitive neutrality issues associated
with prudential regulation would be significantly greater than for
a client protection regime. These costs are primarily associated
with the increased regulatory intensity of a prudential regime. In
addition, trustee companies would also be expected to cover the
costs associated with the role of the prudential regulator itself,
which would be passed on to industry through levies. Such costs
would include a significant start-up cost for developing the
prudential standards and significant ongoing costs. Likewise,
given there would continue to be licensing requirements, which are
likely to be more difficult to satisfy than under a client
protection regime, there would be some barriers to competition.
However, improvements in the licensing processes compared to the
existing systems, including improved transparency, are expected to
provide reductions in other barriers to competition.
688. The significant costs identified would need to be weighed against
the benefits, which as already noted, may not match the benefits
desired as effectively as a client protection regime. It should
also be noted that as lawyers and other individuals who offer
personal trust services are not subject to prudential oversight,
the imposition of significant compliance costs would have
implications for competitive neutrality. It has also been noted
that most of trustee companies' business is now in the field of
funds management rather than 'traditional activities'. Since there
is no prudential oversight of other Responsible Entities for
managed funds, there would also be a significant competitive
neutrality issues if trustee companies were prudentially regulated
at an entity level.
689. In regard to Objective 4, it has been noted that the Commonwealth
prudential regulator does not handle disputes or have experience in
dealing with client protection issues. The dispute handling
procedures proposed under Option 2 above (the use of an existing
complaints scheme to hear all complaints or a new industry-funded
body) could be put in place separate from the prudential regime.
690. In relation to Objective 5, Commonwealth prudential legislation
could provide for a modern, uniform national regime, in accordance
with the Wallis Inquiry recommendation, which would remove some of
the current administrative burdens. However, a prudential regime
may create other unnecessary burdens on business, which would not
be consistent with best practice regulation in relation to
minimising the regulatory burden.
Table 1.2: Comparison of current State and Territory regulatory
obligations and Commonwealth proposals
|Regulatory| |States |States |Consumer |Prudentia|
|Obligation| |that |that do |Protectio|l |
|s | |implement|not |n |regulatio|
| | | |implement|Proposal |n |
| | | | | |proposal |
|Enabling |Ability |All | |Yes |Yes |
|provisions|to act as| | | | |
| |trustee, | | | | |
| |receiver,| | | | |
| |attorney,| | | | |
| |manager | | | | |
| |or | | | | |
| |guardian | | | | |
| |of a | | | | |
| |trust | | | | |
| |Ability |All | |Yes |Yes |
| |to | | | | |
| |exercise | | | | |
| |stipulate| | | | |
| |d powers | | | | |
| |in | | | | |
| |relation | | | | |
| |to trust | | | | |
| |property | | | | |
| |Ability |All | |Yes |Yes |
| |to act as| | | | |
| |executor | | | | |
| |and apply| | | | |
| |for and | | | | |
| |obtain | | | | |
| |probate | | | | |
| |of a will| | | | |
|Restrictio|Ownership|NSW; NT; |ACT; SA |No |No |
|ns on |restricti|TAS; VIC;| | | |
|ownership |ons |WA; QLD -| | | |
|of trustee| |different| | | |
|companies | |requireme| | | |
| | |nts for | | | |
| | |each | | | |
| | |corporati| | | |
| | |on | | | |
| |Number of|NSW; NT |ACT; SA; |No |Yes - |
| |directors| |WA; VIC; | |highly |
| |required | |QLD | |prescript|
| |to live | | | |ive |
| |in | | | | |
| |jurisdict| | | | |
| |ion/ | | | | |
| |Australia| | | | |
| |Competenc|Queenslan|ACT; NSW;|Yes - |Yes - |
| |e of |d - |NT; SA; |ongoing |'fit and |
| |Director |present |TAS; VIC;|competenc|proper |
| | |in |WA |y |test', |
| | |licensing| |requireme|highly |
| | |guideline| |nts |prescript|
| | |s | | |ive and |
| | | | | |highly |
| | | | | |stringent|
|Caps for | |NSW; NT; |ACT; WA |No |No |
|each | |QLD; SA; | | | |
|different | |TAS; VIC | | | |
|fee and | | | | | |
|commission| | | | | |
|Common |When |ACT; NSW;|QLD; SA; |Possible |No |
|funds |payment |NT; WA |TAS; VIC | | |
| |of income| | | | |
| |may be | | | | |
| |made | | | | |
| |Cap of |ACT; NSW;|NT |No |No |
| |fee on |QLD; SA; | | | |
| |capital |TAS; VIC;| | | |
| |sums |WA | | | |
| |invested | | | | |
| |in fund | | | | |
| |Disclosur|SA |ACT; NSW;|Yes - |No |
| |e | |NT; QLD; |more | |
| | | |TAS; VIC;|comprehen| |
| | | |WA |sive and | |
| | | | |appropria| |
| | | | |te | |
|Capital | |ACT; NSW;|SA; TAS; |Yes |Yes |
|requiremen| |NT; QLD; |WA | |$5 |
|ts | |VIC - | | |million |
| | |'reserve | | |NTA, |
| | |fund' | | |on-site |
| | | | | |enforceme|
| | | | | |nt by |
| | | | | |APRA |
| |Varying |NSW; QLD;|ACT; NT |No |No |
| |capital | |(with | | |
| |obligatio| |Ministeri| | |
| |ns for | |al | | |
| |different| |power); | | |
| |trustee | |VIC (a | | |
| |companies| |prescribe| | |
| | | |d | | |
| | | |percentag| | |
| | | |e of | | |
| | | |trust | | |
| | | |funds | | |
| | | |under | | |
| | | |managemen| | |
| | | |t) | | |
|Profession| |NSW; QLD |ACT; NT; |Yes |Yes |
|al | | |SA; TAS; | | |
|indemnity | | |VIC; WA | | |
|insurance | | | | | |
|Directors | |All | |No |No |
|personal | | | | | |
|liability | | | | | |
|Licensing |Set |NSW; QLD;|NT; TAS |Yes |Yes |
|guidelines|guideline|SA; VIC; | | | |
|for entry |s[10] |WA | | | |
|into the | | | | | |
|market | | | | | |
| |Approval |NSW; VIC |QLD; SA; |No |No |
| |process | |WA | | |
| |provides | | | | |
| |for | | | | |
| |matters | | | | |
| |outside | | | | |
| |the | | | | |
| |guideline| | | | |
| |s | | | | |
|Administra| | |All |Yes - to |Yes |
|tive | | | |the | |
|review | | | |Administr| |
|available | | | |ative | |
| | | | |Appeals | |
| | | | |Tribunal | |
|Alternativ| | |All |Yes |No |
|e to court| | | | | |
|for | | | | | |
|dispute | | | | | |
|resolution| | | | | |
|Reporting |Quarterly|ACT; VIC | | | |
|requiremen| | | | | |
|ts | | | | | |
| |Biannuall|NSW; SA; | |Yes - | |
| |y |WA | |Chapter | |
| | | | |2M | |
| | | | |obligatio| |
| | | | |ns will | |
| | | | |apply | |
| |Annually |QLD | | |Yes |
| |Time to |TAS | | | |
| |time | | | | |
|Appropriat| | |All - |Yes |No |
|e | | |common | | |
|disclosure| | |law | | |
| | | |obligatio| | |
| | | |ns | | |
|Broad | |NSW; QLD;|NT; WA |No |No |
|ministeria| |ACT | | | |
|l | |SA, TAS &| | | |
|discretion| |VIC (re: | | | |
| | |informati| | | |
| | |on) | | | |
|Winding up|Restraine|ACT; NSW;|NT; SA |Yes |Yes |
|of company|d by |QLD; TAS;| | | |
|or |Supreme |VIC; WA | | | |
|disposal |Court | | | | |
|of shares | | | | | |
|Regulated | |NT |ACT; NSW;|No |No |
|hours of | | |QLD; SA; | | |
|opening | | |TAS; VIC;| | |
| | | |WA | | |
|No | |NT |ACT; NSW;|No |No |
|advertisin| | |QLD; SA; | | |
|g of | | |TAS; VIC;| | |
|ability to| | |WA | | |
|act as | | | | | |
|executor | | | | | |
|or | | | | | |
|administra| | | | | |
|tor | | | | | |
Impact analysis
691. When considering the form of regulation that should be introduced
by the Commonwealth, it is important to consider the compliance
costs and implications for competitive neutrality.
692. The change from State and Territory regulation to Commonwealth
regulation will affect the private trustee companies that are
currently licensed to operate in each State and Territory and State
Trustees Limited, the Victorian public trustee (11 trustee
companies in total). Other groups that may be affected are
settlors/testators and beneficiaries, including charities which are
recipients for charitable trusts, and 'vulnerable' beneficiaries
including the disabled, minors, family beneficiaries and mentally
impaired people. Competitors to trustee companies in the
traditional business activities (public trustees, lawyers,
accounting firms etc) also have the potential to be affected by
these changes. State and Territory governments and the
Commonwealth regulator, either ASIC or APRA, will also be affected
by these changes.
693. The new compliance costs of either option needs to be compared
against the compliance costs trustee companies currently face under
Option I. In October 2007, ANZ Trustees Limited provided
compliance cost data to the Commonwealth Attorney-General's
Department. Under the existing State and Territory legislation,
ANZ Trustees' compliance costs are $1,749,000 per annum. They
estimated that approximately 20 per cent of the compliance costs
could be attributed to the differences in legislation and
duplication of reporting requirements. Therefore the move to
Commonwealth regulation has the potential to save trustee companies
approximately 20 per cent in compliance costs.
Option 1: Status quo
694. The adoption of this option will obviously have the least impact on
the market for estate administration and trust management. As this
option will not achieve a national licensing scheme, there will be
no improvements in the licensing processes.
695. The costs for Option 1 can be broken into three main elements:
. start up/ transitional costs;
. ongoing compliance costs; and
. ongoing supervision costs.
Start up/transitional costs
696. The retention of the State and Territory entity level regulation of
trustee companies will have no transitional cost implications for
the market participants. Trustee companies have developed their
business models with the current regulatory framework in mind, and
will be able to continue to function under this option.
697. New market entrants in any jurisdiction will continue to face high
start up costs due to the subjective nature of the stated
authorisation guidelines (if any) which take into account political
considerations. The lack of transparency around this process
ensures high costs to potential entrants who are unable to
effectively determine if they may be licensed or not.
698. Each separate State and Territory government will retain the power,
and commensurate cost liability, for the licensing of new market
entrants. The South Australian Office of Consumer and Business
Affairs have quantified the cost for the licensing process for each
new application for entry at between $7,000 and $10,000.
Ongoing compliance costs
699. Trustee companies that maintain a market presence in more than one
jurisdiction/market will continue to face high compliance costs
attributable to the differences in legislation and duplication of
reporting requirements. As stated above, ANZ Trustees have
estimated that approximately 20 per cent of its $1.749 million
compliance costs could be attributed to these differences.
Ongoing supervision costs
700. Each separate State and Territory will continue to incur negligible
costs for the regulation of these corporations. Ongoing regulatory
oversight by the States and Territories consists of the review of
the submitted quarterly, biannual or annual reports. The cost of
this has been quantified as one policy officer working on these
issues for one day per annum. This task has been outsourced by the
New South Wales government to a consultant with the cost charged
back to the trustee company. The Western Australian government
charges a fee to the trustee companies in its jurisdiction that
cover any cost of supervision.
Benefits for trustee companies
701. This option will have no transitional costs for market participants
in contrast to the alternative options. Trustee companies will
retain their current level of market power in each separate market,
as the high barriers to entry will remain. Current market
participants will continue to be subject to a low level of ongoing
regulatory scrutiny.
702. Affected parties will retain the option of action against a trustee
company where there is fraud or gross mismanagement of trust
assets. However, affected parties will remain devoid of
alternatives to the Supreme Court where the trustee is performing
poorly, though not fraudulently.
Benefits for consumers
703. In jurisdictions other than Western Australia and the Australian
Capital Territory, the fees able to be charged by trustee companies
will continue to be capped. This will provide a default position
that will provide a level of certainty to consumers at risk of
being more severely overcharged for these services. However, it
should be noted that consumers in all jurisdictions are able to
negotiate for either higher or lower fees than the capped amount.
The default benefit that a fee cap provides to consumers is
expected to be of less value than the deregulated approach, with
increased national competition, proposed under Option 2.
704. Trustee companies will continue to be required to provide a low
level of disclosure to settlors/testators as provided for by the
common law. This disclosure will not be as effective or beneficial
to settlors/testators as that proposed under Option 2.
Option 2: Consumer protection model administered by ASIC
705. This is the Government's preferred option. It would provide that
the traditional functions of trustee companies (administering
charitable and other trusts, obtaining probate, acting as the
executor of a deceased estate or under power of attorney) are
deemed to be financial services for the purposes of the
Corporations Act. It is intended that both settlors/testators and
beneficiaries would be 'retail clients' of trustee companies for
the purposes of section 761G of the Corporations Act.
706. It would also provide that authorised trustee companies are:
. required to be an Australian registered public company or
a wholly owned subsidiary of a public company;
. regulated by ASIC;
. required to hold an AFSL with an appropriate authorisation
to carry out 'traditional' trustee companies services;
. subject to the consumer protection, licensing and conduct
requirements of the Corporations Act and the ASIC Act;
. to the extent appropriate, subject to the disclosure
requirements of the Corporations Act;
. (unlike under the State/Territory model) required to have
suitable internal and external dispute resolution
arrangements;
. in relation to charitable trusts, subject to fee
regulation, in the form of 'grandfathering' of fees
charged to existing clients, and capping of fees charged
to new clients, with a review of these arrangements after
two years;
. in relation to non-charitable trusts and estates, subject
to deregulation of the fees they can charge, subject to a
requirement that the company's fee schedule be disclosed
on the Internet and that corporations charge no more than
the fees specified in their published fee schedule at the
time they begin administration of the trust/estate;
. subject to director and employee liability arrangements
that are consistent with the obligations in place for
other corporations under the Corporations Act;
. subject to a $5 million capital adequacy requirement;
. subject to a cap of 15 per cent on the shareholding of any
single shareholder and associates, together with a
divestment regime and a Ministerial discretion to consent
to share acquisitions above the cap (for example, for
wholly owned subsidiaries); and
. permitted to hold common funds, which are able to continue
to attract external investment.
707. While there will be compliance costs associated with a client
protection regime, for example reporting requirements and
requirements for financial resources, these would be considered to
be relatively minimal, especially when compared to those associated
with a prudential regime (see Option 3). Likewise, given there
would still be authorisation/licensing requirements, some
restrictions to entry and barriers to competition would remain.
However, the creation of a national licensing scheme and the other
improvements in the licensing processes, including objective
criteria and improved transparency, is expected to minimise such
costs.
708. The costs for Option 2 can be broken into three main elements:
. start up/ transitional costs;
. ongoing compliance costs; and
. ongoing supervision costs.
Start up/transitional costs
709. Under Option 2, trustee companies will have to either apply to ASIC
for a trustee company licence or apply to ASIC for a modification
of their AFSL. The current cost to modify AFSL conditions is $230
for an online application and $270 for a paper application. The
cost of a separate trustee company licence is likely to be similar
to the cost of an AFSL. The current cost to apply for a corporate
AFSL is $270 for an online application or $540 for a paper
application[11]. Therefore, it is estimated that the total maximum
cost for applications for trustee company licence would be
approximately 11*$540 = $5,940.
710. Current market participants will be required to apply for an
alteration to their current AFSL to include the ability to act as
an authorised trustee company. Trustee companies may incur
implicit costs in order to comply with the ASIC licensing
conditions, such as meeting adequate financial resources and
professional indemnity insurance requirements. While the exact
costs cannot be quantified, it is expected that the costs will not
be significant as most trustee companies already meet most of these
requirements as part of their compliance with AFSL requirements and
complying with APRA requirements to act as a superannuation
trustee.
711. New entrants may incur significant costs to gain an AFSL, however
this cost is expected to be lower than the entry cost under
Option 1 as the licensing requirements are certain; are not subject
to the same political considerations; and will provide national
access.
712. The Commonwealth Government will incur the cost of ASIC developing
and implementing the new trustee company licence. As noted
previously, the non-financial operations of trustee companies are
new ground for ASIC. This means that although some pre-existing
expertise will be relevant, significant effort would be required to
develop the regulator's expertise in this area. This implies that
there would be significant set-up costs and time taken for
implementing this regime. ASIC has provided an estimate of $2.2
million across the first four years of new Commonwealth regulation.
Ongoing compliance costs
713. Trustee companies will incur significant costs to comply with the
reporting requirements and to maintain their compliance frameworks.
However, trustee companies currently incur significant costs to
comply with the State and Territory regimes. The Commonwealth
regime will streamline most of the trustee companies' reporting and
compliance requirements, thereby reducing the overall regulatory
burden and compliance cost of trustee companies that operate in
more than one jurisdiction. However, the consumer protection
regime is likely to be more intense than that currently applying to
trustee companies under the State and Territory regimes. So
overall there is likely to be minimal net change to trustee
companies' compliance costs from the status quo.
714. Trustee companies will be required to have appropriate internal
dispute resolution mechanisms and to be a member of an ASIC
approved external dispute resolution (EDR) Scheme. The EDR Scheme
will either be a new scheme set up specifically for the
'traditional activities', or will be an existing scheme that can
extend its coverage to include the 'traditional activities'. The
scheme will be industry funded, with the costs likely to be covered
by membership fees.
715. It is difficult to estimate the exact cost of the scheme, as this
will depend on the number of complaints received. Membership fees
for the former Financial Industry Complaints Service (FICS), now
the Investments, Life Insurance and Superannuation division of the
Financial Ombudsman Service can be used as a guide. In
October 2007, Public Trustee NSW advised the Commonwealth Attorney-
General's department its annual cost of membership to FICS was
$5,735. Therefore, it is estimated that the total maximum cost for
EDR Scheme for trustee companies would be approximately 11*$5,735 =
$63,085 per year.
716. Trustee companies will be required to submit an annual audited
financial statement to ASIC. As part of this process, the licensee
must lodge an auditor's report with ASIC demonstrating that they
continue to meet their obligations under their AFSL.
Ongoing supervision costs
717. The Commonwealth Government will incur ongoing costs for ASIC to
supervise trustee companies. ASIC has provided an estimate for
their ongoing supervision costs of $1 million per annum.
718. ASIC will have the power to conduct surveillance visits on trustee
companies to ensure that the corporation continues to fulfil its
obligations under the AFSL.
Benefits for trustee companies
719. Trustee companies will benefit from streamlined reporting
requirements and only answering to one supervisor for 'traditional
activities'. The national regulatory requirements will reduce the
complexity of each trustee companies' compliance monitoring
arrangements and make compliance training easier and less complex.
This will reduce the trustee companies' risk of a compliance
breach. Trustee companies that are not currently licensed in each
State and Territory will benefit from a national licensing scheme,
which will allow them to potential grow their operations.
720. Industry claim they will be disadvantaged by the consumer
protection requirements, as their main competitors will not have to
comply with them. However, trustee companies already comply with
the complex State and Territory requirements and the AFSL
requirements. The trustee company licence requirements will not be
significantly different from the AFSL requirements and will be more
streamlined than the status quo. In addition, the consumer
protection measures will be a selling point to new clients as their
competitors do not offer these additional protections.
721. Directors of trustee companies will not be subject to personal
liability where they satisfy the relevant provisions of the
Corporations Act. In particular:
. Under Chapter 2M, subsection 180(1), a director or other
officer of a company must exercise their powers and
discharge their duties with the degree of care and
diligence that a reasonable person would exercise, taking
into account the particular circumstances of the
corporation and the office and responsibilities of the
officer.
. Under subsection 180(2), the so-called statutory 'business
judgment' rule, a director or other officer of a
corporation who makes a business judgment is taken to meet
the requirements of the statutory duty of care and
diligence in subsection 180(1), and the equivalent duties
at common law and in equity, in respect of the judgment if
they satisfy certain criteria.
. Under section 197, a person who is a director of a company
when it incurs a liability while acting, or purporting to
act, as a trustee, is liable to discharge the whole or
part of the liability if the company:
- has not, and cannot, discharge the liability or that
part of it; and
- is not entitled to be fully indemnified against the
liability out of trust assets solely because of one or
more specified circumstances.
. In addition, the duties of officers and employees of
registered schemes (see sections 601FD and 601FE) should
be extended to apply to officers and employees of trustee
companies to ensure appropriate fiduciary duties are owed.
722. This will bring the obligations on these directors in line with
other parts of their businesses.
723. Consistent with the application of the AFS licensing regime, there
should be a direct obligation on trustee companies to have adequate
compensation arrangements.
Benefits for consumers
724. The creation of a national market is likely to increase competition
in the 'traditional services' market. Consumers will benefit from
this through improved service, possible reduction in price, and
possibly new products. Consumers will also benefit from enhanced
consumer protection, which include disclosure requirements and an
external dispute resolution scheme. This will enable beneficiaries
to better monitor how the trust assets are managed and give
beneficiaries an avenue to have their complaints addressed that is
not available to them under the status quo. This option will
attempt to overcome some of the current common law barriers to
competition by assisting consumers to better overcome the
information asymmetry present in the status quo and allow for
easier movement of estates among trustee companies.
725. In contrast to the status quo, the introduction of an ASIC
licensing regime to these entities will minimise the risk of
ineffective management of trust assets as trustee companies will be
required to ensure that each corporation can:
. demonstrate organisational competence (competence of
responsible managers) to provide trustee services;
. ensure representatives of these corporations are competent
and adequately trained to provide those services; and
. ensure that the business has adequate technological and
human resources in place to comply with their legal
obligations.
These measures will also address the risk to the consumer of being
unable to determine what the quality of personnel may be at the
point of the execution of the estate.
726. In respect of the grandfathering of the fees charged to charitable
trusts that are existing clients, it is expected that this will
benefit the trusts because they will not have to deal with sudden
increases in fees resulting from the new regime. While there may
be some detriment to the corporations because they may be unable to
change their fees to reflect their costs, the grandfathering will
be reviewed after two years. In respect of the capping of the fees
charged to charitable trusts that are new clients, again this
should benefit the clients as their fees will be similar to the mid
range charged in the States and Territories, while equally any
detriment to the corporations will be a factor in the review to
take place after two years.
727. In respect of the deregulation of fees charged to all other trusts
and estates, trustee companies may be more likely to take on trusts
that previously would have been completely unprofitable due to fee
caps. It is expected that this will lead to increased competition,
but also better service as corporations are able to price fee
structures in a manner that provides an incentive for increased
performance. Any detriment to clients will be mitigated by the
requirement that fees cannot be any higher than those set out in
the published fee schedule at the time the estate is committed for
administration.
728. It is considered that, on balance, the 15 per cent limit on any one
person (and associates) holding voting shares in a trustee company
will benefit clients and not lead to any greater burden on trustee
companies. The disadvantages of ownership limits are that they can
lead to companies being unduly restricted in raising further
capital, and they can also have the effect of insulating management
from normal competitive pressures. The benefit of ownership
restrictions is that they ensure a broad spread of shareholdings,
protecting the corporation from the adverse circumstances of major
shareholders. The legislative restrictions on the acquisition of
voting shares in trustee companies which apply in some
jurisdictions are shown below in Table 1.3. There is no trustee
company at present which would breach the 15 per cent maximum
equity holding.
Table 1.3: Ownership restrictions
|New South Wales |10 per cent |
|Tasmania |10 per cent |
|Western Australia |10 per cent |
|Queensland |15 per cent |
|Victoria |20 per cent |
729. The 15 per cent limit aligns with a similar requirement for
'financial sector companies' under the Financial Sector
(Shareholdings) Act 1998 (which includes any authorised deposit-
taking institution as defined in the Banking Act 1959, or a holding
company of such a company). It also aligns with a 15 per cent
limit under Division 1 of Part 7.4 of the Corporations Act on
bodies corporate, together with their holding companies, that hold
an Australian market licence or an Australian clearing and
settlement licence, and that is considered to be of national
significance to Australia. Such a body is known as a 'widely held
market body'. The most important example is the Australian
Securities Exchange (ASX).
730. Generally, Ministerial consent is required for share acquisitions
in trustee companies above the threshold limit. However, consent
is frequently given, and many trustee companies are subsidiaries of
other financial institutions, without apparent detriment to
personal trust work.
731. The compulsory divestment regime to deal with breaches is expected
to be required infrequently, and will require some resources to
administer on the part of ASIC.
732. It is expected that the increased consumer protection measures,
disclosure requirements and access to EDR will have an indirect,
but positive impact on families.
Option 3: Prudential regulation administered by APRA
733. While a prudential regulatory regime would create a national market
and eliminate the unnecessary compliance costs and barriers to
competition resulting from the State and Territory based regimes,
the compliance costs and the competitive neutrality issues
associated with prudential regulation would be significantly
greater than for a consumer protection and disclosure regime.
734. Prudential regulation of trustee companies raises significant
competitive neutrality issues because the main competitors of
trustee companies in the personal trust and estate administration
market, such as public trustees, lawyers, and accountants, are not
subject to prudential regulation. Prudential regulation of trustee
companies at entity level would also have competitive neutrality
implications in relation to their main competitors in the funds
management business and their other main corporate activities,
which are not subject to prudential regulation.
735. The costs for Option 3 can also be broken into three elements:
. start up/transitional costs;
. ongoing compliance costs; and
. ongoing supervision costs.
Start up/transitional costs
736. Under Option 3, trustee companies would have to apply to APRA for a
trustee company licence. As discussed previously, this licence is
likely to be based on the Superannuation trustee scheme and is
likely to have similar costs. The current APRA licensing fee is
$68,200. Therefore, it is estimated that the total maximum cost
for applications for a trustee company licence would be
approximately 11*$68,200 = $750,200.
737. There would be various other implicit costs for trustee companies
to comply with the prudential standards as specified by APRA. It
is envisioned that the prudential standards would be similar to
those applying to superannuation trustees. These include risk
management, adequacy of resources, capital adequacy requirements,
governance, and fit and proper criteria. While the exact costs
cannot be quantified, it is expected that the costs will not be
significant for trustee companies that are already RSE licensees.
Seven trustee companies currently hold RSE licenses; however for
trustee companies that do not hold RSE licenses, there could be
significant costs to meet the prudential standards.
738. At a future date APRA may introduce other prudential standards
affecting the operations of trustee companies. Additional
prudential standards would be subject to a new RIS process.
Prudential standards made by APRA are legislative instruments and
are therefore subject to parliamentary scrutiny.
739. As noted previously, the non-financial operations of trustee
companies would be new ground for APRA. This means that although
some pre-existing expertise will be relevant, significant effort
would be required to develop the regulator's expertise in this
area. This implies that there would be significant set-up costs
and time taken for implementing this regime. APRA estimates that
it would cost approximately $750,000 to develop and implement the
new trustee company licence regime. This cost would be borne by
industry and collected through the annual levy process in the first
year of APRA supervision.
Ongoing compliance costs
740. Trustee companies would incur significant costs to comply with the
reporting requirements and to maintain their compliance framework.
However, trustee companies currently incur significant costs to
comply with the State and Territory regimes. The Commonwealth
regime would streamline most of the trustee companies reporting and
compliance requirements, thereby reducing the overall regulatory
burden and compliance costs of trustee companies that operate in
more than one jurisdiction.
741. However, the prudential regulation would be significantly more
intense than the status quo. Overall there is likely to be a net
increase in trustee companies' compliance costs from the status
quo. This is because the prudential regulation regime of trustee
companies would be based on the prudential standards applying to
superannuation trustees. These standards are more onerous in
relation to the financial affairs and management of the corporation
than the status quo. For example, persons of responsibility in
trustee companies, such as directors, senior management and
accountants, do not have to satisfy 'fit and proper' requirements
under the status quo, except when applying for a licence in
Queensland. Trustee companies also do not have to comply with
external risk management standards or are required to have detailed
risk management strategies under the status quo. Both 'fit and
proper' and risk management requirements would be part of the
prudential standards that trustee companies would have to satisfy
when applying for a licence and on an ongoing basis under
prudential supervision by APRA.
742. Ongoing prudential supervision would also be more intense on
trustee companies than the current supervision by States and
Territories. Prudential supervision would involve regular on-site
inspections by APRA, supported by investigation and enforcement
powers, while the status quo does not.
Ongoing supervision costs
743. There would be ongoing costs for APRA to supervise trustee
companies and administrate the licensing scheme. APRA estimates
their ongoing costs in relation to trustee companies would be
between $1 million and $1.5 million per year. APRA costs would be
met by the trustee companies through industry levies. The levies
could be calculated and collected using the same mechanism
currently used for other financial sector levies.
Benefits for trustee companies
744. Similar to Option 2, trustee companies would benefit from
streamlined reporting requirements and only answering to one
supervisor for 'traditional activities'. However, prudential
regulation and supervision is likely to be more intense than the
current regulation and supervision trustee companies comply with.
This is likely to offset any benefit trustee companies receive from
national, streamlined regulation. Therefore, Option 3 is likely
to increase the overall regulatory burden on trustee companies.
745. Trustee companies that are not currently licensed in each State and
Territory would benefit from a national licensing scheme, which
would allow them to potentially grow their operations without
increased regulatory cost. However, given the intense prudential
standards attached to the licensing under APRA, some trustee
companies that are currently State/Territory licensed may not be
granted/retain their licence under this option.
746. Given the prudential standards would establish more detailed
requirements than the status quo, including in relation to matters
that are not currently subject to regulation by most states and
Territories, there is no guarantee that all the trustee companies
would be able to comply with these standards. Before granting/
renewing trustee company licenses, APRA would have to undertake a
thorough assessment of each trustee company's operations and the
fitness and propriety of their responsible persons to ensure the
corporations meet all the prudential standards.
Benefits for consumers
747. The creation of a national market is likely to increase competition
in the 'traditional services' market. Consumers will benefit from
this through improved service, possible reduction in price, and
possibly new products.
748. In contrast to Option 2, this option would not address the problem
of ineffective management and safeguarding of trust assets. This
option would also fail to assist consumers to gain greater
disclosure of the products and services that a trustee company may
be providing. However, consumers can be more confident that the
business in which they are contracting as trustee would remain
viable as an entity. Consumers under this option would also gain
from an increased regulatory focus on risk management systems.
Consultation
749. The main consultation document for the Commonwealth regulation of
trustee companies is the Financial Services and Credit Reform Green
Paper, which was released on 3 June 2008. Over 15 written
submissions were received in response to the Green Paper in
relation to the Commonwealth regulation of trustee companies. A
list of the entities that provided those submissions is as follows:
. ANZ Trustees Limited;
. Australasian Compliance Institute;
. Australian Wealth Management Limited;
. Australian Shareholders' Association;
. Corporate Super Association;
. Equity Trustees Limited;
. Financial Planning Association of Australia;
. Grant Thornton Australia Limited;
. Investment and Financial Services Association;
. National Australia Bank Group;
. Perpetual Limited;
. Philanthropy Australia Inc;
. Plan B Group Holdings Limited;
. Sandhurst Trustees Limited;
. Suncorp-Metway Limited;
. Tasmanian Perpetual Trustees Limited;
. Trust Company Limited;
. Trustee Corporations Association of Australia; and
. Westpac Banking Corporation.
750. Treasury has also undertaken face-to-face consultation with
industry and other key stakeholders, including State and Territory
Government officials, Philanthropy Australia and other stakeholders
from the charitable trust sector. Treasury has also consulted with
both ASIC and APRA in relation to their potential role.
751. The consultation process has revealed strong support from all
stakeholders for the implementation of Commonwealth regulation of
trustee companies. The face-to-face consultations, with both
industry and the stakeholders in the charitable trust sector, and
the large majority of written submissions have provided strong
support for consumer protection and disclosure regulation with
supervision by ASIC.
752. One of the biggest issues raised in consultation relates to the
management fees and commissions that trustee companies are able to
charge in relation to trust and estate management. All State and
Territory legislation, except Western Australia and the Australian
Capital Territory, prescribe fee caps and some restrict the source
of income that the fee can be taken from. The Western
Australia/Australian Capital Territory legislation model is a
deregulation of fees, whereby trustee companies set a maximum fee
through publishing a schedule of fees. Trustee companies are then
able to change the schedule of fees as often as they like and can
negotiate different fees with individual consumers. Once the trust
arrangements commence the fees are locked in at the last published
schedule of fees, unless otherwise specified in the trust deed.
753. Industry is very supportive of the Commonwealth regulation adopting
this model (which will apply to all non-charitable trusts and
estates). Industry claims that the current level of fees they are
allowed to charge is unprofitable for the management of smaller
trusts. Industry argues that in order to provide better service
and more disclosure and transparency, they need to be able to
charge adequately for their services.
754. Stakeholders from the charitable trust sector can see the potential
benefits of a deregulation of fees for new clients. However, they
are concerned that if fee caps are removed, trustee companies will
take advantage of charitable trusts' inability to exercise market
discipline and charge exorbitant fees on trusts that are already
under management. Some charitable trusts currently under trustee
company management do not have any fees prescribed in the trust
deeds, so the trustee company can charge the maximum fee allowable
under the existing legislation. Any increase in fees means less
money is available for distribution to charity. Treasury is
cognisant of the potential impact of removing fee caps and will
seek to provide protection to trusts already under management
through transitional arrangements.
755. Another significant issue raised in consultation was the issue of
who are clients of trustee companies. Trustee companies have two
types of clients:
. primary clients are testators or settlors, who appoint the
trustee company and put in place the terms and conditions
of the will or trust; and
. secondary clients are beneficiaries, who receive
distributions when the trust arrangements commence.
756. Trustee companies raised concerns about disclosure and dispute
resolution schemes applying to both client groups. They argue that
the provision of relevant information to persons with a proper
interest has always been a core duty of trustee companies under
common law and does not need to be included in commonwealth
regulation.
757. In some cases, the State and Territory Supreme Courts will have
appointed a trustee company to manage the affairs of an individual
when that individual does not have capacity to manage their own
affairs, such as with minors or individuals with disabilities. In
these cases, there is no primary client and the secondary client is
often incapable of monitoring a trustee company's performance and
management, even if they were provided with adequate information to
do so. To cover these types of case, Treasury proposes to extend
the consumer protection requirements to cover 'persons with a
proper interest in the estate'. Industry request that, in order to
protect against frivolous or mischievous requests for information,
a reasonably tight definition of 'persons with a proper interest in
the estate' is adopted in regards to who is entitled to obtain
information on individual estates and trust under administration/
management.
758. Although industry was supportive for an external dispute resolution
scheme to apply to their 'traditional activities' clients, they
raised concerns about the scope of coverage and outcomes that could
be achieved. Many trustee companies expressed the view that the
decision to remove a trustee should remain with the Supreme Court.
Conclusion and recommended option
759. The Government considers that, on balance, the benefits of Option
2, consumer protection and disclosure regulation of trustee
companies with supervision by ASIC, exceed the expected costs of
implementation. The Government considers Option 2 preferable to
the alternative Option 3, prudential regulation with supervision by
APRA, because:
. Option 2 addresses the main problem areas, whereas
Option 3 would provide an unnecessary level of regulation
(because the trustee companies hold the trust assets off
balance sheet); and
. the initial and ongoing costs would be less.
760. The manner in which Option 2 satisfies the objectives stated above
can be briefly summarised as follows.
Objective 1
761. Enable approved corporations to operate as trustee companies and
licence them under Chapter 7 of the Corporations Act.
Achieved by
762. Amending the Corporations Act (and the ASIC Act) to provide that:
certain activities typically undertaken by trustee companies, such
as acting as the executor/administrator of deceased estates,
administering charitable trusts and foundations, managing common
funds, and acting as a manager or guardian, are deemed to be
'financial services'; and trustee companies which hold an AFSL are
authorised to provide such services, and must comply with the
obligations of financial services licensees and any conditions
imposed by ASIC. This option is optimal as it involves taking the
best features of the State/Territory regimes and applying them in
one single consumer protection law.
Objective 2
763. Ensure effective management and safeguarding of trust assets.
Achieved by
764. Amending the Corporations Act (and the ASIC Act) to ensure that
trust property is clearly identified and held separately from
property of the trustee company; enforcing the general obligations
of AFSL holders, such as the requirements regarding adequate
resources, competence and training, and any conditions imposed by
ASIC; and preserving any relevant trust law and equitable remedies
under State and Territory laws. This option is preferred to Option
3, as it provides the appropriate level of protection for trust
assets.
Objective 3
765. Ensure appropriate disclosure to clients about the type of services
and products being offered by the trustee company.
Achieved by
766. Ensuring that the trustee companies are subject to the relevant
disclosure provisions of the Corporations Act, such as the
Financial Services Guide (FSG), Statement of Advice and periodic
statements provisions, and permitting electronic disclosure, so
that settlors/testators and beneficiaries are informed both
initially and periodically about the performance of trustee
companies and trust assets.
Objective 4
767. Provide for lower cost dispute resolution, to enable beneficiaries
to address issues of underperformance or incompetence and/or
replace an underperforming trustee in a cost effective way, in
cases where alternative dispute resolution is a viable alternative
to the courts.
Achieved by
768. Requiring trustee companies to have appropriate internal and
external (non-judicial) dispute resolution mechanisms for
settlors/executors and beneficiaries, so that the need to approach
a court is minimised.
Objective 5
769. Modernise the regulation of trustee companies and have any
regulation apply on a national basis in accordance with
Recommendation 90 of the Wallis Review and the Government's policy
regarding reducing regulatory burden more broadly.
Achieved by
770. Replacing the current State and territory laws, with their
overlapping and inconsistent rules, with uniform national
legislation under the Corporations Act, and ensuring that the
national law is up-to-date, for example in relation to directors'
and officers' liability.
Objective 6
771. Facilitate a competitive national market for trustee companies.
Achieved by
772. Introducing a single national law for trustee companies under the
Corporations Act and a single national regulator. This is expected
to create a national market in which there are reduced barriers to
competition (for example, the ability of beneficiaries to protect
their interest in the estate by switching trustees) and fewer
competitive neutrality issues (while noting that most public
trustees will fall outside the new regime) and also reduced
business compliance costs and improves efficiency of operations.
It is also expected that the new approach to fees will promote
efficient pricing of services provided by trustee companies.
Implementation and review
773. The first phase of the project will be accomplished by:
. drafting appropriate provisions for inclusion in the
Corporations Act;
. asking ASIC to amend its applicable guidance (or produce new
guidance) to accompany the legislation.
774. In the second phase, ASIC will devote appropriate resources to
regulating trustee companies, including licensing, developing
guidance and monitoring compliance.
775. The Government wishes to review the fee regime for charitable
trusts and foundations for both existing and new clients after two
years.
776. Further, it is expected that this option will be reviewed in its
entirety under the Government's five-yearly review requirements.
It is not proposed to include either a sunset clause or an
automatic review clause.
777. The indicators against which success of the regime could be
measured against include the extent to which:
. the current overlapping/conflicting regulatory framework
is replaced by a single, consistent set of rules that
reduces business compliance costs and improves efficiency
of operations, consistent with adequate regulation;
. trust assets are appropriately managed and protected;
. effective disclosure is made to clients
(settlors/testators and beneficiaries) both initially and
on an ongoing basis about the performance of trustee
companies and trust assets;
. clients can access lower cost, quicker dispute resolution,
to enable them to address issues of underperformance or
incompetence and/or replace an underperforming trustee in
a cost effective way;
. fees and charges reflect efficient pricing of services
provided by trustee companies, while providing protection
in particular to charitable trusts, deceased estates and
disadvantaged persons; and
. internal and EDR mechanisms deal with complaints from
clients.
Chapter 8
Regulation impact statement - Harmonisation of the treatment of debentures
and promissory notes
Introduction
778. Over the past two to three years, there have been a number of high
profile collapses of property development companies, starting with
Westpoint and followed by Fincorp, ACR and Bridgecorp.
779. Consumers were able to invest in these property development
companies by acquiring a debenture or promissory note issued by the
company. In broad terms a debenture or a promissory note is a debt
instrument.
780. The collapses have had significant impact with some investors
losing considerable amounts of money. Total losses are estimated
at around $900 million, invested by around 20,000 investors across
Australia (although some of those funds will be recovered,
particularly in the case of Fincorp and ACR).
781. There have been a range of reasons put forward to explain the
collapses, other than the regulatory framework. These include poor
corporate decision making; poor management; inappropriate use of
funds; land banking, inexperienced personnel; high ongoing running
costs; inappropriate or bad advice from financial advisers driven
by higher than normal commissions; and, investors seeking higher
than normal returns but not understanding the inherent high risk
and unsecured nature of their investment.
782. Nevertheless, as a result of these corporate collapses there has
been considerable discussion about the regulatory framework
governing debentures and promissory notes and whether changes are
appropriate.
783. In particular, these questions arise from the uncertainty about the
Westpoint group's issue of promissory notes where clarification of
whether they were regulated products was only achieved through the
courts following a long and costly process. The uncertainty arose
because of the belief by the issuing parties, Westpoint that the
promissory notes they issued, which were valued at over $50,000,
were not regulated by the Corporations Act 2001 (Corporations Act).
784. While the subsequent court decision made it clear that the
promissory notes in question were interests in managed investment
schemes and therefore were subject to regulation under the
Corporations Act, it also highlighted the framework in relation to
promissory notes is not sufficiently robust and doubts about its
applications still exist.
785. Promissory notes valued at less than $50,000 are currently
regulated as debentures. However, an inconsistency arises between
the treatment of promissory notes valued at over $50,000 and
debentures over that threshold. Given that debentures and
promissory notes are broadly the same kind of financial product,
this inconsistency provides a level of complexity and uncertainty
in the marketplace resulting in ongoing suggestions that a
regulatory gap exists.
786. The exclusion of promissory notes with a face value of more than
$50,000 from the definition of debenture dates back to 1981. The
original purpose of introducing the $50,000 threshold appears to
have been to delineate between sophisticated investors and the
investing public needing greater protection (similar to the
retail/wholesale delineation today), but not impede normal banking
and commercial dealings where that protection is not needed. Also
at that time, industry participants were opposed to a definition of
debentures which included negotiable instruments such as bills of
exchange and promissory notes. The main reasons appear to be
administrative issues and the imposition of stamp duty if the
instrument was classed as a debenture.
787. Some 27 years later this exclusion level is out of date,
particularly when compared to the $500,000 threshold which
currently applies before an investor can be called sophisticated.
788. Further, there are circumstances where an issue of a promissory
note valued at over $50,000 can escape the operation of the
Corporations Act altogether:
. if a promissory note valued at over $50,000 is not issued
as an interest in a managed investment scheme and does not
fit within the definition of a financial product (so it
would then be regulated under Chapter 7 of the
Corporations Act), it would not be defined as a financial
product. To be defined as a financial product, the
promissory note would need to generate a return to the
investor and the investor would not have day-to-day
control over their investment;
- this anomaly also needs to be addressed.
789. Indeed, there is the possibility that promissory note issuers are
already structuring their arrangements to avoid the operations of
the Corporations Act.
1. : Case study - Westpoint
Westpoint was a privately owned property development company
located in Perth, Western Australia. Westpoint was active
in several capital cities across Australia, including
Melbourne and Sydney. Westpoint collapsed in early 2006
after insolvency proceedings were instigated by Australian
Securities and Investments Commission (ASIC) in
November 2005.
The difficulties experienced by Westpoint relate to a number
of projects for which part of the funding was raised through
the issue of promissory notes valued at more than $50,000 to
retail investors. This so-called mezzanine financing
promised high yields of up to 12 per cent per annum, but was
secured only by second mortgages over the properties under
development. Investors in these notes therefore ranked
behind senior debt holders when the projects were wound up.
Promissory notes are regulated as debentures if they have a
face value of less than $50,000. The Westpoint notes were
issued with a face value of over $50,000 for the purpose of
trying to avoid the disclosure and other requirements in
law. ASIC took Westpoint to court to clarify the regulatory
status of the promissory note. After appeal, in June 2006,
the court confirmed that the promissory notes on issue were
interests in a managed investment scheme and therefore
subject to the disclosure and other requirements under the
Corporations Act.
It has been estimated that some 3,000 to 4,000 investors
lost approximately $300 million through the promissory note
issues. The majority of Westpoint's companies are now in
liquidation. Various legal actions continue against the
directors of the company as well as related parties.
Currently 19 licensed financial planners and three
unlicensed financial planners have been banned for various
periods from holding an Australian financial services
licence (AFSL).
Had it been clearer in law that promissory notes valued at
more than $50,000 were caught under the Corporations Act and
therefore subject to the disclosure requirements, then the
extended and expensive court case would not have been
required and investors' funds may have been better
protected.
790. The Westpoint problem identified a shortfall in the regulatory
system - both in terms of the inconsistency in the thresholds
relating to how financial products are regulated ($50,000 versus
$500,000) and uncertainty and inconsistency of the regulatory
approach between debentures and promissory notes depending on their
value.
791. While ASIC has now issued additional guidelines for debenture
issuers and trustees which require additional disclosure, this does
not address the inconsistency in the treatment of both products,
nor do the guidelines apply to promissory notes.
792. Further, the Parliamentary Joint Committee in its oversight report
on ASIC published in March 2007 recommended that an amendment to
the disclosure requirements in the Corporations Act to the $50,000
threshold applying to promissory notes be sought.
793. ASIC also supports the Government's intention to review the
regulation of debentures and promissory notes.
Current arrangements
Regulation of debentures
794. Debentures are regulated under the Corporations Act (Chapter 2L).
Debentures are debt instruments used by the issuer or borrower to
raise funds from investors in return for the payment of interest.
795. The features of the regulatory regime include the following:
. Debenture issues are required to be governed by a trust
deed and must have a trustee. The trustee is required to
undertake certain specified actions intended to safeguard
the interests of debenture holders. It is also specified
who can act as a trustee.
. The trust deed must provide certain rights on behalf of
debenture holders and trustees must act in the interests
of debenture holders as defined under the Corporations
Act.
. The duties of the borrowers are defined, including the
requirement to conduct their business in a proper and
efficient manner and to provide certain reports with
specified contents to the trustee and to ASIC.
. Different naming rules apply to debentures under the
Corporations Act depending on the nature of the debenture
being issued, that is, whether it is a 'mortgage
debenture', 'debenture', 'unsecured note' or 'unsecured
deposit note'. The rules generally reflect the type of
security available over the debenture.
. Debentures are issued as a source of finance for a range
of business activities, including debt capital funding,
mortgage lending for residential or commercial property,
participation in and ownership of commercial and
residential real estate, or to facilitate membership of
clubs, groups or franchise operations.
. Debenture issues can be listed or unlisted and can be
secured or unsecured.
Unlisted issues of debentures
796. It has been identified that unlisted and unrated debentures pose an
increased risk for retail investors. In particular, investors do
not have the benefit of the market to provide:
. a readily available value for the debenture;
. public scrutiny of the ongoing performance of the issuer
either through market forces or via listing rules, as
would be the case if the issue were in the public domain;
and
. an easy market for the sale of their interests,
particularly where investors may have lost confidence in
their investment.
797. Risks to investors further increase where the funds provided
through the issue are on lent, often through other companies in the
group for property development purposes as there is considerable
uncertainty about returns until such time as the developments are
completed and sold. ASIC has issued revised guidelines to
immediately address these risks for consumers - see below.
Regulation of promissory notes
798. Promissory notes are used to raise funds, such as those issued in
the Westpoint case.
799. The formal characteristics of promissory notes are covered by the
Bills of Exchange Act 1909. However, the investor protection
regime, including disclosure, licensing and conduct rules, is
contained within the Corporations Act.
800. Promissory notes are regulated in the Corporations Act either as
debentures or as financial products depending on their value:
Less than $50,000 = debenture
. Promissory notes under $50,000 are regulated as debentures
(Chapter 2L):
- debenture issues are governed by a trust deed and
trustee (Chapter 2L) and must be accompanied by a
prospectus (Chapter 6D);
- issuers and/or financial advisers must also meet
relevant disclosure, conduct and licensing requirements
(Chapter 7).
$50,000 or over = financial product
. Promissory notes valued at $50,000 or over are excluded from
the definition of debentures (s9) and are regulated as a
financial product (Chapter 7):
- promissory note issuers must therefore provide a Product
Disclosure Statement (PDS) (Part 7.9 in Chapter 7).
. Sometimes promissory notes are issued in the form of an
interest in a Managed Investment Scheme:
- as such, the Managed Investment Scheme must be
registered and have a licensed responsible entity in
place; and
- each Managed Investment Scheme must provide a PDS
(Chapter 7).
(a) Westpoint mezzanine/promissory note issues were
characterised as Managed Investment Schemes by
the Western Australian Supreme Court.
. Some promissory notes may not satisfy the definition of
either a debenture or a financial product;
- however, most promissory notes are likely to fall under
one of these two categories.
801. The current regime is summarised in the Table below.
1. : Summary of the current regulatory framework for promissory notes
|Promissory |Under |Over $50,000 but < $500,000* |
|note face |$50,000 | |
|value | | |
| | |Financial Product |Non-Financi|
| | | |al Product |
| | |Managed |Non MIS| |
| | |Investment | | |
| | |Scheme (MIS) | | |
|Disclosure |Chapter |Part 7.9 |Not |
| |6D | |regulated |
|Advice, |Chapter |Chapter 7 |Not |
|dealing and|7 | |regulated |
|licensing | | | |
|Other |Chapter |Chapter 5C |Not |Not |
|aspects |2L | |applica|regulated |
| | | |ble | |
*Note: >$500,000 - investor is not considered to be a retail investor.
ASIC's work
802. In analysing some of the reasons for the various property
development company collapses, since early 2007, ASIC has
prioritised the area of unlisted and unrated debentures as a high
risk sector. To date, ASIC has released two sets of guidelines
addressing the two areas of immediate concern, to improve
disclosure in relation to the unlisted unrated debentures market
and setting out guidelines on the way these products are
advertised.
. The guidelines set out specific measures to provide better
quality information to retail investors about the risks of
such investments.
803. ASIC also established a Retail Investor Task Force to undertake
research into the retail investment sector, focusing on improving
retail investor education generally to assist retail investors
better understand their investment options and the risks they may
incur.
804. ASIC has now issued a Guide for investors in unlisted debentures to
assist them in making better informed decisions about this type of
product and the risks involved. The work of the Retail Investor
Task Force also informed the strategic restructure of ASIC which
has established a structure it feels is better placed to undertake
its regulatory role, including a specific team to deal with retail
investors and consumers.
805. However, again, these guidelines do not address the area of
promissory notes valued at over $50,000.
Systemic risks with collapses in this sector
806. Even after the fallout from the collapses which attracted
significant media attention, studies suggest that retail investors
still have a high degree of confidence in their own ability to make
appropriate investment decisions. Westpoint promissory notes were
issued without any disclosure documents and with the promise of
high returns, leaving investors to make decisions without the level
of disclosure that applies to other financial products - however
investors were happy to make the decision to invest regardless at
that time.
807. However, following the collapse of Westpoint and other companies,
investors have been quick to complain to the Government and ASIC
about their losses.
808. Low investor confidence can lead to a general loss of confidence in
the high yield finance sector and potentially may result in
investors withdrawing funds from companies active in the sector.
In a worst case scenario this could lead to further collapses
through a snowball effect. This happened in New Zealand where over
20 finance companies have collapsed, leading to a general loss of
liquidity in the sector.
809. The current financial crisis has compounded this impact on investor
confidence.
810. Collapses can therefore have systemic implications, impacting:
. individual savings, leading to increased reliance on
Government pensions, with a corresponding Budget impact;
. general confidence levels in debenture issues, which may
lead to viable companies collapsing due to liquidity
shortfalls, as has happened in New Zealand; and
. the financing of fundamentally viable projects, which may
not be able to proceed with potential wider consequences
for employment and economic growth.
811. It is therefore important to ensure the investor protection regime
is sound and robust and that retail investors investing in these
products are provided with sufficient resources to make informed
decisions.
812. Any action also needs to be balanced against the risk of increasing
costs for business.
Objectives of Government action
813. The Government aims to provide a robust system where investors are
provided with appropriate protective mechanisms. Where perceived
or real regulatory gaps exist, it is appropriate for the Government
to undertake a review.
814. Eliminating uncertainty about the regulation of promissory notes in
the marketplace would be the main current objective.
815. Given the $50,000 cut-off level dates back to 1981, it is timely to
reconsider whether this threshold is still appropriate. This is
particularly so given that a person who invests $500,000 or more
for a financial product is considered to be a sophisticated
investor and the same protections therefore do not apply.
Consultation
816. In this context, in June 2008, the Government issued the Financial
Services and Credit Reform Green Paper. The Green Paper addressed
six issues in the financial services sector for possible reform,
including the debentures sector. The Green Paper was made
available on the Treasury website and a media release was issued.
817. Four potential changes to the regulation of the debentures sector
were proposed in the paper, relating to:
. harmonisation of the regulation of promissory notes;
. licensing of debenture issuers;
. licensing of trustees; and
. review of trustee duties.
818. However, subsequent to the issue of the Green Paper, it was agreed
that while the harmonisation issue should be addressed now,
consideration of the three remaining reforms be deferred until the
conclusion of ASIC's debenture review project. This will allow the
considerable work already commenced by ASIC to improve the consumer
protection framework in this area to be thoroughly assessed before
any further changes, which may not prove necessary, are
implemented.
819. ASIC's review will look into the effectiveness of its recently
revised (2007) guidelines on improved disclosure and advertising of
unlisted, unrated debentures. Once completed a further assessment
of the remaining three items will be undertaken.
Submissions
820. Twenty submissions were received in relation to the debentures
chapter in the Green Paper. Fourteen out of the 20 submissions
received were in favour of the harmonisation proposal. The general
feeling was that this option was a positive step as the regime
needed to be more consistent to ensure better investor protection.
821. Of the remaining submissions, some did not comment specifically on
the harmonisation option, and only one party, a law firm, set out
any concerns. They argued that increasing the regulation of
promissory notes regardless of their value was inconsistent with
the rest of the Corporations Act which makes a distinction between
the nature of the offering and the level of risk. For this reason,
it considered the change was discriminatory without sufficient
basis.
822. Further targeted consultation will be undertaken in relation to the
harmonisation proposal, to establish whether a change to the
regulation is appropriate and to assess the level of any impact.
Options
Option 1 - No change
823. This option would leave the current regulatory framework in place,
thereby retaining the threshold levels between a debenture and a
promissory note valued at over $50,000.
Option 2 - Harmonise the regulation of debentures and promissory
notes
824. Regulate promissory notes valued at over $50,000 in the same way as
debentures. This would be achieved by removing the exclusion of
promissory notes from the definition of debentures in section 9 of
the Corporations Act.
Option 3 - Self regulation
825. Issuers of promissory notes valued at over $50,000 would be
required to manage their own actions in regard to the issue of
promissory notes and apply in the relevant regulatory framework
that issue including appropriate disclosure.
Impact analysis
Impact group identification
826. The groups affected by the amendments are investors/consumers, the
promissory notes industry and issuers of promissory notes, the
Government and ASIC.
Assumptions
827. In assessing the impact of the options, the following assumptions
have been used based on some research undertaken by ASIC and
submissions received from the earlier Green Paper consultation
process.
. The estimated total value of debentures currently on issue
in Australia is around $25 billion, down from $34 billion
at June 2006.
. The number of issuers is estimated to be 146, compared
with 154 previously at June 2006.
. The numbers of investors holding interests in promissory
notes or who intend to acquire interests in promissory
notes valued at more than $50,000 is likely to be lower
again.
. The majority of investors had invested between $20,000 and
$499,999 (representing 49 per cent of those surveyed).
The higher end is more likely to reflect investment
property ownership.
. In the case of the Westpoint collapse, over 3,000
investors were affected.
. Our understanding is that there are only a limited number
of promissory note issuers.
. There appear to be more investors in promissory notes in
the over $500,000 sector, but these would be classed as
wholesale investors and any changes would not impact on
this sector.
. In the then Financial Literacy Foundation's 2007 survey of
7,500 people, approximately 46 per cent said they had
investments other than property. However this survey did
not differentiate between retail and wholesale investors.
The survey group also comprised around 550 participants
who were under 18 years of age.
. According to ASIC's annual report for 2006-07, the number
of licensed financial advisers were 4,625. However, it is
unlikely that the proposed change would have any impact on
advisers. In the assessment below, financial advisers are
included under the category of 'industry'.
. Costs can take many forms including: setting up trustee
arrangements, including a trust deed and trustee, court
costs, or in the form of lower confidence in the
marketplace.
828. Further consultations on the options will better determine the
overall impact and associated costs and benefits.
Assessment of costs and benefits
|OPTION 1: NO CHANGE |
|Impact Group: |Costs |Benefits |
|Retail Investors/|Medium-high |None |
| |Keeping the status | |
|Consumers |quo would increase | |
| |the risk of investors| |
| |again being caught up| |
| |in a Westpoint style | |
| |collapse. | |
|Issuers/ |Low |Low |
|Industry |The continued |They would not be |
| |uncertainty about the|required to change |
| |regulatory framework |their approach. |
| |for promissory notes | |
| |may reduce retail | |
| |investor confidence | |
| |in the marketplace. | |
|Government/ |Medium |Low/None |
|ASIC |Both the Government | |
| |and ASIC may be | |
| |criticised if other | |
| |issues arise in this | |
| |sector for not taking| |
| |action. | |
| |The ongoing legal | |
| |action in relation to| |
| |Westpoint and other | |
| |collapses is | |
| |highlighting the | |
| |ongoing issues. | |
|OPTION 2: HARMONISATION |
|Impact Group: |Costs |Benefits |
|Retail |Low |High |
|Investors/ |There may be a small |Investors may |
|Consumers |flow on to consumers of|benefit from |
| |any extra costs |protection because |
| |incurred by the |the options would |
| |industry or issuers in |require promissory |
| |setting up and |notes over $50,000 |
| |operating trustee |now to be regulated|
| |arrangements when |as debentures. As |
| |issuing promissory |such, trustee |
| |notes. |arrangements would |
| | |be put in place, |
| | |which many see as |
| | |providing a more |
| | |robust protection |
| | |mechanism for |
| | |investors. |
| | |There will be no |
| | |risk of another |
| | |situation where a |
| | |company issuing |
| | |promissory note |
| | |attempts to |
| | |circumvent the law |
| | |based on the value |
| | |of the promissory |
| | |note. |
|Issuers/Industry|Low |Low - Medium |
| |The numbers of issuers |This change will |
| |of promissory notes |provide regulatory |
| |valued at less than |certainty about how|
| |$500,000 are believed |the promissory |
| |to be relatively low. |notes are |
| |Nevertheless, |regulated. |
| |establishing trustee |Establishing a |
| |arrangements for the |trustee arrangement|
| |issue of promissory |could be viewed as |
| |notes will incur some |providing better |
| |increased costs which |protection for |
| |are not expected to be |investors and |
| |onerous. |therefore may lead |
| |Further consultation |to more investment |
| |will hopefully |in these products. |
| |ascertain if any | |
| |operators will be | |
| |adversely affected. | |
| |Costs here may be more | |
| |expensive or not, | |
| |depending on the nature| |
| |of the business. | |
| |Certainly those who | |
| |invest in shares seem | |
| |to have a better | |
| |understanding that they| |
| |may lose their | |
| |investment and managed | |
| |funds benefit from | |
| |other protections for | |
| |retail clients such as | |
| |the need to appoint a | |
| |responsible entity to | |
| |hold a licence. Funds | |
| |can also be raised | |
| |through the wholesale | |
| |market which has fewer | |
| |rules because the | |
| |clients are considered | |
| |more sophisticated than| |
| |retail clients. | |
|OPTION 2: HARMONISATION |
|Impact Group: |Costs |Benefits |
|Government/ |Low |Medium |
|ASIC |ASIC's costs may |Certainty about the|
| |increase marginally due|manner in which |
| |to the requirement to |promissory notes |
| |monitor trustee |are regulated |
| |arrangements. |should result in |
| | |more confidence in |
| | |financial markets |
| | |and increased |
| | |participation by |
| | |investors. |
|OPTION 3: HARMONISATION |
|Impact Group: |Costs |Benefits |
|Retail Investors/|Medium - High |Low - None |
| |Investors' confidence | |
|Consumers |in the industry to | |
| |look after them | |
| |particularly given the| |
| |Westpoint collapse | |
| |would not be high. | |
| |There are risks that | |
| |some of the less | |
| |scrupulous operators | |
| |would take advantage | |
| |of investors' | |
| |ignorance and lack of | |
| |black law legislation.| |
|Issuers/ |Low - Medium |Medium |
|Industry |With no legislative |Issuers would not |
| |backing, investor |be required to |
| |confidence in the |comply with any |
| |products and issuers |different |
| |may reduce confidence |regulatory |
| |and investors may be |requirements. |
| |more reluctant to take|However, they would|
| |risks. |need to comply with|
| | |new codes of |
| | |conduct and |
| | |practices and the |
| | |impact would depend|
| | |on how those new |
| | |practices were |
| | |operated and |
| | |enforced. |
|Government/ |Medium - High |Medium |
|ASIC |The Government would |Less monitoring and|
| |continue to be |compliance work may|
| |criticised for not |be required by |
| |addressing the |government as the |
| |situation through the |industry would be |
| |regulatory framework. |expected to do most|
| | |of it itself. |
Conclusion and recommended option
829. Promissory notes valued at over $50,000 are currently regulated
differently to debentures for reasons that are no longer relevant.
The original reasons for creating the discrepancy in 1981 appear to
have come about because at that time industry participants and
stakeholders opposed the broad definition of debentures including
negotiable instruments such as bills of exchange and promissory
notes. This appears to relate to administrative issues and the
imposition of stamp duty if the instrument was classed as a
debenture. Those concerns appear less relevant now.
830. Additionally, the $50,000 threshold has remained unchanged since
1980 and is out of date compared to the current thresholds
differentiating between retail and sophisticated investors.
831. The current arrangement creates an inconsistent approach between
the regulation of debentures and a promissory note valued at more
than $50,000. This inconsistency does not appear to be warranted
any longer.
832. Indeed, 14 of the 20 submissions from the Financial Services and
Credit Reform Green Paper issued in June this year on debentures
supported this option. Only one submission was against the
proposed change, and its further views will be sought as part of
the next round of targeted consultations.
833. Allowing the industry to address the problem itself (Option 3) is
less likely to satisfy industry and investors in particular that
they will be protected. Nor does this option meet the objective of
providing clarity in the regulation of promissory notes.
Discussion of options
834. Option 1 offers no real solution to the problems existing in the
current regime, particularly the uncertainty that exists and the
threshold anomaly.
835. Option 2 is the option put forward by the Government in its Green
Paper released in June 2008. Implementation of this option will
mean those promissory notes governed under the Corporations Act
currently valued at greater than $50,000 would be regulated as
debentures. This approach is seen to address the perceived
regulatory gap and inconsistent regulatory framework between
promissory notes and debentures.
836. Consequently, new issuers of promissory notes valued at more than
$50,000 will have to meet the requirements of Chapters 2L and 6D -
requiring the establishment of trustee arrangements and the issue
of a prospectus.
. This change will affect the issue of promissory notes to
retail clients only and will provide a clearer framework
to which issuers must adhere.
837. From our understanding of the market, the majority of promissory
notes (commonly termed commercial paper) on issue are valued at
over $500,000. We also understand that the majority of issuers are
the major banks. Any increased costs as a result of the proposed
change would therefore be expected to be low relative to their
overall operations.
838. The greatest impact from this change is likely to be felt by
issuers of promissory notes in the range of $50,000 to $500,000.
Issuers in this range (who may or may not already be licensed
depending on their business operations) will be required to
establish trustee arrangements for the issue of promissory notes
and comply with the prospectus disclosure requirements. It is
noted that most of these issuers are currently subject to other
disclosure requirements, depending on the nature of the promissory
note issue, including the obligation to provide a Product
Disclosure Statement. While the Product Disclosure Statement
requirements differ from those applying to prospectuses, they
result in a similar level of information being provided to retail
investors.
839. While affected entities may object to any changes being imposed on
them in complying with the new disclosure and trustee arrangements,
that number is expected to be relatively low and the costs not
onerous. Further targeted consultation will provide information in
this regard.
840. Option 2 offers a sensible approach to address an inconsistent
legislative framework where many feel a regulatory gap exists.
841. Option 3, self-regulation by the industry, may go some way to
protecting investors provided that industry participants issue
promissory notes as a regulated financial product and do not
attempt to fight the system again as Westpoint did. However it
does not provide a complete answer.
842. Through Option 2, issuers of promissory notes would be regulated
like any other debenture issuer. This framework would also provide
a consistent approach.
843. Currently, when a promissory note is issued valued at over $50,000,
it may even be regulated as a financial product under Chapter 7
more as an interest in managed investment scheme. Yet a promissory
note valued at less than $50,000 would be regulated under the
framework for debentures. This provides a level of complexity in
the issue of promissory notes. It makes sense therefore to include
promissory notes valued at over $50,000 in the same regime as
debentures.
844. Under the debentures regime, all promissory notes issuers would
therefore be required to establish trustee arrangements, including
setting up a trust deed and appointing a trustee. Amongst a range
of duties, the trustee is required to protect the interests of
debenture holders including to actively monitor the financial
position and performance of the issuer. This role has been further
enhanced by the recently released ASIC guidelines for debenture
issues.
845. Trustees are also required to look after the interests of debenture
holders by exercising reasonable diligence in monitoring the
issuer's ability to repay the debentures - this is not required
under the current framework for promissory notes. Issuers are
required to report regularly to the trustee and the trustees are
also required to ascertain whether the issuer has committed any
breach under the trust deed of Corporations Act and this includes
general obligations to carry on their business in a proper and
efficient manner.
846. Additionally, ASIC has also issued a separate guide for retail
investors interested in investing in debentures and this provides
an additional level of additional information for investors to make
appropriate decisions about their investments.
Conclusion
847. The inconsistency in the regulation of debentures and promissory
notes has raised a number of questions about whether this
discrepancy could be exploited again. The proposed harmonisation
option would create more consistency in the regulation of both
while also providing an opportunity to remove the anachronistic
$50,000 threshold.
848. Therefore, the preferred way forward is to remove the exclusion of
promissory notes valued at over $50,000 from the definition of a
debenture, resulting in debentures and promissory notes being
consistently regulated as debentures under the Corporations Act.
Implementation and review
849. Further targeted consultation will confirm whether this option is
appropriate and identify any potential unexpected consequences,
particularly within the commercial market.
850. Targeted consultation will involve a six week consultation period.
Those consulted will be based on the submissions on this subject
received from the Green Paper.
851. It is proposed that any proposed changes will be added to another
Bill due to be tabled in the winter sittings next year.
852. It is likely that no transitional period will be required as
issuers will be well aware of the changes before final
implementation and the impact would not be sufficient to warrant a
transition phase. This would also be subject to further review
following final submissions.
853. Any future review will be undertaken as deemed necessary and
subject to the long-term effects on the marketplace and the
regulator's advice.
854. Ongoing enforcement and monitoring would be undertaken by the
financial services regulator, ASIC.
855. Index
Schedule 1: Margin loans
|Bill reference |Paragraph |
| |number |
|Item 1 |1.33 |
|Items 2 to 7 |1.34 |
|Item 8 |1.37 |
|Item 9 |1.39 |
|Item 9, subsection 761EA(1) |1.40 |
|Item 9, subsection 761EA(2) |1.43 |
|Item 9, paragraph 761EA(2)(a) |1.43 |
|Item 9, subparagraph 761EA(2)(b)(i) |1.43 |
|Item 9, subparagraph 761EA(2)(b)(ii) |1.43 |
|Item 9, paragraphs 761EA(2)(c) and (d) |1.43 |
|Item 9, paragraph 761EA(2)(e) |1.43 |
|Item 9, subsection 761EA(3) |1.44 |
|Item 9, subsection 761EA(4) |1.45 |
|Item 9, subparagraph 761EA(2)(b)(i) |1.48 |
|Item 9, subsection 761EA(5) |1.54 |
|Item 9, paragraph 761EA(5)(a) |1.54 |
|Item 9, paragraph 761EA(5)(b |1.54 |
|Item 9, paragraph 761EA(5)(c) |1.54 |
|Item 9, paragraph 761EA(5)(e) |1.54 |
|Item 9, subsection 761EA(7) |1.55 |
|Item 9, subsection 761EA(6) |1.55 |
|Item 9, subsections 761EA(8) to (10) |1.58 |
|Item 9, subsection 761EA(11) |1.60 |
|Item 10 |1.35 |
|Item 11 |1.36 |
|Item 12, section 985E |1.62 |
|Item 12, subsection 985E(1) |1.63 |
|Item 12, subsection 985E(2) |1.64 |
|Item 12, subsection 985E(3) |1.65 |
|Item 12, section 985F |1.66 |
|Item 12, paragraphs 985G(1)(a) and (b) |1.67 |
|Item 12, paragraphs 985G(1(c) and (d) |1.67 |
|Item 12, subsection 985G(2) |1.67 |
|Item 12, subsection 985G(3) |1.77 |
|Item 12, section 985H |1.81 |
|Item 12, subsection 985H(1) |1.81 |
|Item 12, paragraph 985H(2)(a) |1.82 |
|Item 12, paragraph 985H(2)(b) |1.82 |
|Item 12, subsection 985H(3) |1.84 |
|Item 12, section 985J |1.86 |
|Item 12, subsection 985J(1) |1.87 |
|Item 12, subsection 985J(1), note 3 |1.88 |
|Item 12, subsection 985H(2) |1.89 |
|Item 12, subsection 985J(3) |1.90 |
|Item 12, subsection 985J(4) |1.91 |
|Item 12, subsection 985J(5) |1.92 |
|Item 12, section 985K |1.93 |
|Item 12, subsection 985K(1) |1.93 |
|Item 12, subsections 985K(2) to (6) |1.94 |
|Item 12, subsection 985K(4) |1.95 |
|Item 12, subsection 985M(1) |1.96 |
|Item 12, subsection 985M(2) |1.99 |
|Item 12, subsection 985M(3) |1.101 |
|Item 12, subsection 985M(4) |1.102 |
|Item 12, subsections 985M(5) and (6) |1.104 |
|Item 12, section 985L |1.105 |
|Items 13 and 14 |1.106 |
|Item 14, subsection 766A(1A) and (1B) |2.70 |
|Item 15 |1.107 |
|Item 16 |1.108 |
Schedule 2: Regulation of trustee companies
|Bill reference |Paragraph |
| |number |
|Items 1 and 2, subsection 12BA(1) |2.226 |
|Item 2, item 3 in the table |2.228 |
|Item 3, subsections 12BAB(1A) and (1B) |2.227 |
|Items 3 and 4, subsection 490(1), paragraph |2.217 |
|490(1)(c) and subsection 490(2) | |
|Item 4, subsection 5A(4) |2.216 |
|Item 6, paragraph 283AC(1)(aa) |2.222 |
|Item 9, subsection 601RAC(3 |2.25 |
|Item 9, section 601RAA and subsection |2.26 |
|601RAB(3) | |
|Item 9, section 601RAD |2.28 |
|Item 9, section 601RAA |2.30 |
|Item 9, subsection 601RAE(2) |2.35 |
|Item 9, subsection 601RAE(3) |2.36 |
|Item 9, subsection 601RAE(4) |2.37 |
|Item 9, subsection 601RAE(6) |2.38 |
|Item 9, Part 5D.2, Division 1 |2.39 |
|Item 9, Part 5D.2, Divisions 2 and 3 |2.39 |
|Item 9, section 601SAA |2.41 |
|Item 9, section 601SAB |2.42 |
|Item 9, section 601SAC |2.43 |
|Item 9, section 601SBA |2.45 |
|Item 9, subsection 601SBB(1) |2.47 |
|Item 9, subsection 601SBB(2) |2.49 |
|Item 9, subsection 601SBB(3) |2.50 |
|Item 9, subsection 601SBB(4) |2.51 |
|Item 9, subsection 601SBC(1) |2.52 |
|Item 9, subsection 601SBC(2) |2.53 |
|Item 9, subsections 601SCA(1) and (2) |2.56 |
|Item 9, subsections 601SCA(1) and (3) |2.57 |
|Item 9, subsection 601SCB(1); item 28, |2.59 |
|item 173C in the table | |
|Item 9, subsection 601SCB(2); item 28, item |2.60 |
|173D in the table | |
|Item 9, subsection 601SCB(3) |2.61 |
|Item 9, section 601SCC |2.62 |
|Item 9, subsection 601SCA(4) |2.63 |
|Item 9, section 601TAA |2.68 |
|Item 9, paragraph 601RAB(1)(a) |2.18 |
|Item 9, paragraph 601TAB(1)(a) |2.73 |
|Item 9, paragraph 601TAB(1)(b) |2.73 |
|Item 9, paragraphs 601TAB(2)(a) and (b) |2.75 |
|Item 9, subsection 601TBA(1) |2.78 |
|Item 9, subsection 601TBA(2); item 28, item |2.79 |
|173H in the table and section 601XAA | |
|Item 9, subsection 601TBB(1) |2.80 |
|Item 9, subsection 601TBB(2) |2.80 |
|Item 9, section 601TBC |2.81 |
|Item 9, section 601TBD |2.82 |
|Item 9, subsection 601TBE(2) |2.83 |
|Item 9, paragraphs 601TBE(3)(a) and (b) |2.84 |
|Item 9, section 601TCA |2.86 |
|Item 9, paragraph 601TDB(1)(a) |2.96 |
|Item 9, paragraph 601TDB(1)(b) |2.96 |
|Item 9, paragraph 601TDB(1)(c) |2.96 |
|Item 9, section 601TDC |2.99 |
|Item 9, subsections 601TDC(1) and (2) |2.100 |
|Item 9, subsection 601TDC(3) |2.101 |
|Item 9, subsection 601TDC(4) |2.102 |
|Item 9, subsection 601TDC(5) |2.103 |
|Item 9, subsection 601TDD(1) |2.104 |
|Item 9, subsection 601TDD(2) |2.105 |
|Item 9, subsection 601TDE(1) |2.106 |
|Item 9, subsection 601TDE(2) |2.107 |
|Item 9, section 601TDF |2.108 |
|Item 9, section 601TDG |2.109 |
|Item 9, section 601TDH |2.111 |
|Item 9, section 601TDI |2.112 |
|Item 9, section 601TDJ |2.113 |
|Item 9, subsection 601TEA(1) |2.115 |
|Item 9, subsection 601TEA(2) |2.116 |
|Item 9, subsection 601TEA(3) |2.117 |
|Item 9, subsection 601TEA(4) |2.118 |
|Item 9, subsections 601TEA(5) and (6) |2.119 |
|Item 9, subsection 601TEB(1) |2.120 |
|Item 9, subsections 601TEB(2) and (3) |2.121 |
|Item 9, section 601UAA |2.124 |
|Item 9, paragraph 601UAA(1)(a) |2.125 |
|Item 9, paragraphs 601UAA(1)(c) and (d) |2.126 |
|Item 9, paragraph 601UAA(1)(b) |2.127 |
|Item 9, paragraph 601UAA(1)(e) |2.127 |
|Item 9, subsections 601UAA(1); item 27, |2.128 |
|paragraph 1317E(1)(jaaa) | |
|Item 9, subsections 601UAA(1) and (2); item |2.128 |
|28, item 173J in the table | |
|Item 9, subsection 601UAA(3) |2.129 |
|Item 9, subsection 601UAA(4) |2.130 |
|Item 9, subsection 601UAB(1) |2.131 |
|Item 9, subsection 601UAB(2); item 27, |2.132 |
|paragraph 1317E(1)(jaab) | |
|Item 9, subsection 601UAB(1); item 28, item |2.132 |
|173K in the table | |
|Item 9, subsection 601UAB(3) |2.133 |
|Item 9, subsection 601UAB(4) |2.134 |
|Item 9, section 601VAA and Division 2 of |2.136 |
|Part 5D.5 | |
|Item 9, Division 2 of Part 5D.5 |2.136 |
|Item 9, sections 601VAC and 601VAD |2.136 |
|Item 9, section 601VCA |2.136, 2.155 |
|Item 9, section 601VCC |2.136 |
|Item 9, section 601VAA |2.138 |
|Item 9, section 601VAB |2.139 |
|Item 9, section 601VBA |2.142 |
|Item 9, section 601VBB |2.142 |
|Item 9, section 601VBF |2.142 |
|Item 9, section 601VBC |2.142 |
|Item 9, section 601VBD |2.142 |
|Item 9, section 601VBE |2.142 |
|Item 9, section 601VBG |2.142 |
|Item 9, section 601VBH |2.142 |
|Item 9, section 601VCB |2.143 |
|Item 9, subsections 601VBI(1) and (2) |2.144 |
|Item 9, subsection 601VBI(4 |2.145 |
|Item 9, subsection 601VBI(3) |2.146 |
|Item 9, subsection 601VBI(5) |2.146 |
|Item 9, subsection 601VBD(8) |2.147 |
|Item 9, paragraph 601VBF(1)(c) |2.147 |
|Item 9, subsection 601VAC(1) |2.148 |
|Item 9, subsection 601VAC(3) |2.149 |
|Item 9, subsection 601VAC(2) |2.150 |
|Item 9, subsection 601VAC(6) |2.151 |
|Item 9, subsections 601VAD(1) and (2) |2.152 |
|Item 9, subsection 601VAD(3) |2.153 |
|Item 9, subsection 601VAD(4) |2.154 |
|Item 9, subsections 601VCC(1) and (2) |2.156 |
|Item 9, subsection 601VCC(1) |2.157 |
|Item 9, subsection 601VCC(2) |2.158 |
|Item 9, subsection 601VCC(3) |2.159 |
|Item 9, subsection 601VCC(4) |2.160 |
|Item 9, subsection 601WAA(1) |2.164 |
|Item 9, subsection 601WAA(1) |2.164 |
|Item 9, subsection 601WAA(2) and definition |2.166 |
|of authorised ASIC officer in section 601WAA| |
|Item 9, paragraph 601WBA(2)(a) |2.168 |
|Item 9, paragraph 601WBA(2)(a) |2.168 |
|Item 9, section 601WCH |2.168 |
|Item 9, section 601WBB |2.168 |
|Item 9, paragraph 601WBA(2(b)(iv) and |2.168 |
|section 601WBC | |
|Item 9, subsections 601WBA(3) and (4) |2.169 |
|Item 9, subsection 601WBA(5) |2.170 |
|Item 9, subsections 601WBD(1) and (2) |2.171 |
|Item 9, subsections 601WBD(3) and (4) |2.172 |
|Item 9, subsection 601WBE(1) |2.173 |
|Item 9, subsections 601WBE(2) and (3) |2.174 |
|Item 9, subsection 601WBE(5); item 28, item |2.175 |
|173P in the table | |
|Item 9, subsection 601WBE(6) |2.176 |
|Item 9, section 601WBF |2.177 |
|Item 9, subsection 601WBG(1) |2.178 |
|Item 9, subsection 601WBG(2) |2.179 |
|Item 9, subsection 601WBG(4) |2.179 |
|Item 9, subsection 601WBG(3) |2.180 |
|Item 9, subsection 601WBG(5) |2.181 |
|Item 9, section 601WBH |2.182 |
|Item 9, section 601WBI |2.183 |
|Item 9, section 601WBJ |2.184 |
|Item 9, subsection 601WBK(1) |2.185 |
|Item 9, subsection 601WBK(2) |2.186 |
|Item 9, section 601WCA |2.187 |
|Item 9, sections 601WCB and 601WCC |2.187 |
|Item 9, section 601WCD |2.187 |
|Item 9, section 601WCE |2.187 |
|Item 9, section 601WCF; item 28, item 173Q |2.187 |
|in the table | |
|Item 9, section 601WCG; item 28, item 173R |2.187 |
|in the table | |
|Item 9, section 601WCH |2.187 |
|Item 9, subsection 601WDA(1) |2.190 |
|Item 9, paragraph 601WDA(1)(b) |2.191 |
|Item 9, subsection 601WDA(2) |2.192 |
|Item 9, subsections 601XAA(1) and 601XAA(3) |2.194 |
|Item 9, subsection 601XAA(2) |2.195 |
|Item 9, subsection 601XAA(4) |2.196 |
|Item 9, subsection 601YAA(1) |2.198 |
|Item 9, subsection 601YAA(2) |2.199 |
|Item 9, subsection 601YAA(3) |2.200 |
|Item 9, subsections 601YAA(4) |2.200 |
|Item 9, subsection 601YAA(5) |2.201 |
|Item 9, subsection 601YAA(6) |2.202 |
|Item 9, subsection 601YAB(1) |2.203 |
|Item 9, subsection 601YAB(2) |2.205 |
|Item 9, paragraph 601RAB(1)(b) |2.18 |
|Item 9, paragraph 601RAB(2(a) |2.19 |
|Item 9, paragraph 601RAB(2)(b) |2.19 |
|Item 9, section 601RAA |2.20, 2.29, |
| |2.31, 2.32 |
|Item 9, subsection 601RAC(1) |2.22 |
|Item 9, subsection 601RAC(2) |2.22 |
|Items 10 and 11, section 761A and paragraph |2.215 |
|761A(e) | |
|Items 12 to 14, section 761A |2.221 |
|Items 15 and 16, subsection 761G(6A) |2.71, 2.207 |
|Items 17 and 18, subsection 761G(7) and |2.209 |
|section 761GA | |
|Item 19, subsection 766A(1A) |2.210 |
|Item 19, subsection 766A(1B) |2.211 |
|Item 20, subsection 911A(4) |2.212 |
|Items 21 to 23, subparagraphs |2.214 |
|912D(1)(a)(iii) and 912D(1)(a)(iv) | |
|Item 24, paragraph 915B(3)(ca) |2.213 |
|Item 25, paragraph 981A(2)(ca) |2.218 |
|Item 26, paragraph 1311(1A)(daa) |2.223 |
|Item 26, paragraph 1311(1A)(daa) |2.219 |
|Item 27, paragraphs 1317E(1)(jaaa) and |2.224 |
|(jaab) | |
|Item 27, paragraph 1317(1)(jaaa) and (jab) |2.220 |
|Item 28, item 173B in the table |2.54 |
|Item 28, item 173F in the table |2.69 |
|Item 28, item 173A in the table |2.48 |
|Item 28, item 173M in the table |2.147 |
|Item 28, item 173L in the table |2.140 |
|Item 28, item 173G in the table |2.74 |
|Section 601TDA |2.91 |
|Section 1493 |2.232 |
|Section 1494 |2.233 |
|Paragraph 1495(2)(a) |2.234 |
|Paragraph 1495(2)(b) |2.235 |
|Paragraph 1495(2)(c) |2.236 |
|Subsection 1495(3) |2.237 |
|Section 1496 |2.238 |
Schedule 3: Regulation of debentures
|Bill reference |Paragraph |
| |number |
|Item 1, section 9, paragraph (d), of |3.18 |
|definition of debenture | |
|Item 2, section 283BC |3.22 |
|Item 3, section 283BCA |3.24 |
Schedule 4: Technical amendment relating to jurisdiction of courts
|Bill reference |Paragraph |
| |number |
|Item 1, subsection 1338B(8) |4.4 |
Schedule 5: Application and transitional provisions
|Bill reference |Paragraph |
| |number |
|Division 1, subsections 1489(1) to (3) |1.113 |
|Division 1, section 1490 |1.114 |
|Division 1, section 1491 |1.115 |
|Division 1, section 1492 |1.116 |
|Division 1, section 1487 |1.110 |
|Division 1, section 1488 |1.111 |
|Division 1, subsection 1489(1) |1.112 |
|Section 1498 |3.28, 3.29 |
Do not remove section break.
-----------------------
[1]
[2] Australian Mortgage Industry - Volume 7, Fujitsu and JPMorgan,
March 2008.
[3] Complexity to be Tackled in Financial Services Working Group to
Start Immediately, Joint press release by Ministers Sherry and Tanner, 5
February 2008.
[4] This data was provided by the TCA. It covers TCA member trustee
companies and State
Trustees Ltd.
[5] This figure includes State Trustees Ltd.
[6] Trustee Companies Act 1947 (ACT); Trustee Companies Act 1964 (NSW);
Companies (Trustee and Personal Representatives) Act 1981 (NT); Trustee
Companies Act 1968 (QLD); Trustee Companies Act 1988 (SA); Trustee
Companies Act 1953 (TAS); Trustee Companies Act 1984 (VIC); and Trustee
Companies Act 1987 (WA)
[7] Trustee Act 1925 (ACT); Trustee Act 1925 (NSW); Trustee Act 1979
(NT); Trusts Act 1973 (QLD); Trustee Act 1936 (SA); Trustee Act 1898
(TAS); Trustee Act 1958 (VIC); Trustees Act 1962 (WA)
[8] ANZ Trustees; Elders Trustees Ltd; National Australia Trustees;
State Trustees Limited
[9] There are two jurisdictions with over seven operators, three
jurisdictions with between five and six operators, the Australian Capital
Territory has one operator, with three other operators conducting
business in the Territory without a permanent office, Tasmania has only
one operator and the Northern Territory has only one operator conducting
business in the Territory without a permanent office.
[10] The ACT did not respond to the question.
[11] Information Sheet 30, Fees for commonly lodged documents, ASIC, 6
August 2008.
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