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CORPORATIONS AMENDMENT REGULATIONS 2003 (NO. 10) 2003 NO. 368
Statutory Rules 2003 No 368
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2003 (No. 10)
Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
The Financial Services Reform Act 2001 (FSRA) commenced on 11 March 2002. It amended the Act to introduce a uniform licensing, conduct and disclosure regime for financial service providers. Under the FSRA, a two-year transition period was established to allow time for existing industry participants to enter the new regime.
The purpose of the Regulations is to support the reforms to the regulation of the financial services industry which were implemented in the FSRA and associated legislation. The Regulations facilitate transition to the new licensing, conduct and disclosure arrangements and promote certainty, clarifying, where necessary, various provisions under the FSRA.
The Regulations include amendments that:
• improve the operation of the disclosure regime, including providing practical relief from the Financial Services Guide requirements when advertising though the mass media;
• specify a number of things that are not financial products; and
• provide conditional exemptions from the FSRA licensing regime.
Details of the Regulations are set out in the Attachment.
Regulations 1 to 3 and Schedule 1 commence on gazettal and Schedule 2 commences on 11 March 2004. To address varying degrees of necessity for transitional arrangements, the deferred commencement of Schedule 2 allows sufficient time for industry to address any systems or administrative changes required to effect the operation of the new arrangements.
DETAILS OF THE CORPORATIONS AMENDMENT REGULATIONS 2003 (NO. 10)
Regulation 1 provides that the name of the Regulations is the Corporations Amendment Regulations 2003 (No. 10).
Regulation 2 provides that regulations 1 to 3 and Schedule 1 commence on gazettal and Schedule 2 commences on 11 March 2004.
Regulation 3 provides that Schedule 1 and Schedule 2 of the Regulations would amend the Corporations Regulations 2001 (the Principal Regulations).
Schedule 1- Amendments commencing on gazettal
Item 1 Definitions of medical indemnity insurance product and medical practitioner - substituted subregulation 1.0.02(1)
As part of the Australian Government's announced medical indemnity package, the Principal Regulations were amended on 12 June 2003 to ensure the application of the Financial Services Reform Act 2001 (the FSR Act) to contracts of medical indemnity insurance. In particular, the regulations ensure that retail client disclosure rules apply to such products, where the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (the Act) apply if the product is purchased by certain health care professionals prescribed by the regulations namely medical practitioners and registered health professionals. The regulations, which commenced on 1 July 2003, apply from the earlier of the date an Australian financial services licence (AFSL) is obtained and 11 March 2004.
It has since become apparent that the scope of the Principal Regulations is potentially slightly misaligned with the Act in two respects. Firstly, the application and definition of `medical practitioner' in the current regulations do not account for the fact that some arrangements affecting certain medical practitioners are currently carved out of the Act as a result of separate regulations made under paragraph 8(2)(e) of the Act. Secondly, the definition of `medical indemnity insurance product' does not countenance that certain arrangements that would constitute `providing medical indemnity cover' under section 5 of the Act are excluded from the Act, again under regulations made under paragraph 8(2)(e) of the Act.
The net effect is that providers of certain types of medical indemnity arrangements that are prescribed in regulations under the Act, could yet be subject to the requirements that the Act imposes on those who provide general insurance products to retail clients.
Item 1 of the Regulations would overcome the potential misalignment. It replaces the current definition of `medical indemnity insurance product' at subregulation 1.0.02(1) with a new definition. The new definition ensures that the relevant FSR Act requirements must be fulfilled only in respect of arrangements that are not excluded from the application of the Act, where those arrangements are provided to the prescribed health care professionals.
Item 2 Specific things that are not financial products - Credit Facility - new subparagraphs 7.1.06(1)(a)(iv), (v) and (vi)
The amendment clarifies the scope of the credit facility exemption by including a `predominant purpose' test. It ensures that products that provide both credit and deposit facilities (for example, a credit card facility into which deposits may be made) under a single financial product are included in the credit facility exemption, provided they satisfy the test.
Section 765A of the Act lists specific things that are not financial products for the purposes of Chapter 7. This includes, at subparagraph 765A(1)(h), any credit facility as defined by the regulations. Regulation 7.1.06 defines "credit facility" and in doing so, specifically excludes any deposit-taking facility made available by an Authorised Deposit-Taking Institution (7.1.06(1)(a)(iv)).
The aim of regulation 7.1.06(1)(a)(iv) was to ensure that the "credit facility" exception could not be used to exclude a facility on the basis of an argument that it is in essence a credit facility where the relevant bank is the borrower. For example, a deposit with a bank might be viewed as a credit facility because the bank incurs a deferred debt to the borrower.
This presents a problem for products that provide both credit and deposit facilities under a single financial product. Such products maybe regarded as a "financial product mentioned in paragraph 764A (1)(i) of the Act" and hence would be excluded in total from the benefit of the "credit facility" exemption.
The amendment addresses this problem by introducing a "whole or predominant purpose" test. That is, where a product provides both credit and deposit facilities within a single financial product, the test will determine whether or not the product falls within the credit facility exemption. However, the amendment would only provide relief in relation to an offering that constitutes a single financial product where the whole or predominant purpose of which is the provision of credit. It would not, for example, apply in relation to an offering involving two separate (albeit possibly linked) financial products, one of which is a credit facility.
Item 3 Specific things that are not financial products - Credit Facility - substituted paragraph 7.1.06(1)(f)
The amendment ensures that the limitations applying to unsecured credit also apply to secured credit. That is, a mortgage falls within the credit facility definition provided it is not, for example, a facility for making a financial investment.
The amendment results in both secured and unsecured credit (see Item 2) being subject to the operation of proposed paragraph 7.1.06(1)(a). The amendment also removes the words "provision of as they limit the application of the exemption to the provider of a mortgage, that is, the borrower over whose asset a mortgage is placed.
Item 4 Arrangements for certain financial products that are not credit facilities - amendment to subregulation 7.1.06A(1)
The amendments to subregulation 7.1.06A(1) are consequential to the amendments to regulation 7.1.06.
The amended subregulation provides that for any financial product which is excluded from the credit facility exemption due to the application of subparagraphs 7.1.06(1)(a)(iv), (v) or (vi) and the new 7.1.06(1)(f)(ii), (iii) or (iv) (and is therefore still a financial product):
a. The debtor rather than the credit provider is taken to be the issuer;
b. dealing (eg. issuing) by the credit provider is not the provision of a financial service; and
c. advising the borrower is also not the provision of a financial service.
Item 5 Specific things that are not financial products: electronic funds transfers - new regulation 7.1.07G
The regulation provides an exemption from the FSR regime for electronic funds transfer facilities such as telegraphic transfers and international money transfers provided by ADIs and remittance dealers.
New regulation 7.1.07G provides a specific exemption from the FSR regime for facilities whereby the issuer, on the instruction of the client, makes money available to a person nominated by the client. The exemption is limited to ADIs and to operators of payment systems. "Payment system" is defined under the Payments Systems (Regulation) Act 1998 to mean "a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system". The exemption is expected to be available to recognised remittance dealers supported by a single back-office network but not for example, to informal remittance dealers. Such informal remittance dealers, which may depend on a series of agency or other relationships to affect a transaction, represent a greater risk to consumers.
The exemption only covers facilities that are of a "one-off' nature. It does not cover standing arrangements to make multiple transfers of funds. Furthermore, the exemption only applies to facilities which are short-term in nature. Specifically, the exemption requires the issuer to do all that is reasonably required to be done to complete the transaction within 2 business days, subject to any constraints imposed by law.
Item 6 Aggregation of amounts for the `retail-wholesale' test - new regulation 7.1.17B
This regulation is designed to improve the practical operation of the `price-value' test by allowing the aggregation of amounts from connected entities. Under subsection 761 G(7), one of the tests for determining if an investor is to be treated as a `wholesale' client is whether the particular service involves an investment of more than $500,000.
A practical issue arises if a person makes an overall investment of $500,000 at the same time but through different entities for accounting, legal, tax or other purposes. Even though the same person invests $500,000 overall, these investments individually do not meet the required threshold for being treated as a wholesale client.
For the purpose of determining whether the price or value of the financial service exceeds the threshold for a wholesale client, the regulation allows the aggregation of related transactions at or around the same time.
Item 7 Once wholesale, always wholesale - substituted paragraph 7.1.27(1)(a)
The amendment modifies an existing regulation. It provides practical relief to custodial and depository providers to ensure they do not need to continually verify a client's `wholesale' status. Regulation 7.1.27 allows a holder of a financial product to be treated as a wholesale client for the life of holding a product if when it was acquired they satisfied the definition of being a wholesale client. This removes the need for the licensee to continually monitor that client's current status as wholesale or otherwise.
If a product issuer continues to be able to treat the client as `wholesale', even though the value of the product falls below $500,000 at a particular point in time, then persons offering associated financial services to the issued product should also have access to the same treatment. An example is a custodian related to the issuer that provides custody services to the client. The regulation results in the custodian not being required to issue a Financial Services Guide to the client (but would still need to be licensed or authorised to provide the custodial service).
However, this relief is limited in line with the intent of the original provision. Where a person receives a financial service such as advice in relation to the product from someone other than the product issuer or custodian, they may be a retail client for that advice if the value of the product is below $500,000 at the time the advice is provided.
Item 8 Circumstances in which a person is taken not to provide a financial service - amendment to paragraph 7.1.29(3)(e)
Regulation 7.1.29 specifies certain activities that do not constitute a financial service, including advice on transferring financial products. It is currently limited to `related body corporates'. The amendment makes a technical adjustment to ensure the relief from licensing for advice in relation to the transfer of a financial product is not unduly limited and is available where there is a broader connection between the parties.
The amendment replaces the limitation `related bodies corporate' with `associates' which would for example, allow relief in circumstances such as when a person transfers shares into their own private company or to their family trust.
Item 9 General advice - substituted paragraph 7.1.33B(1)(b)
Regulation 7.1.33B deems the licensed distributor of a financial product, rather than the product issuer, to be the provider of `general advice' under the FSR Act. The amendment recognises that a licensed product issuer is the provider of the general advice, not the licensee distributor.
The existing regulation is intended to avoid a product issuer having to be licensed merely to provide information through a distributor licensee. This is because while the product issuer may prepare information that constitutes general advice, that advice is provided to the consumer through a licensed person who distributes the product. This relief is not required when the product issuer is itself licensed to give general advice.
This amendment should not reduce disclosure, as the product issuer would be authorised to provide the advice and would need to disclose information in documents such as the Financial Services Guide concerning relationships with its product distributors.
Item 10 School Banking - new regulation 7.1.33F
Regulation 7.1.33F provides that a person is taken not to provide a financial service in relation to a `school banking product' where that person is either employed by a school or acting on behalf of a school (for example a parent who works on a voluntary basis). The regulation applies only in relation to general advice and only if the person does not receive any financial benefit for providing the service.
The circumstances relevant to school banking are those in which an ADI distributes information and application forms for its school banking deposit accounts through a school. Specifically, the role that teachers and parents or volunteers may play in the distribution of this information. In the absence of a specific exemption, such persons could be considered to be providing a financial service as a representative of a bank.
• For these purposes school banking product means a product that does not charge any regular account keeping fee and is offered for issue to pupils of a school.
School banking products are relatively simple products with no entry or exit fees. They are often distributed by banks with the assistance of school staff, parents and volunteers. The role of such people is generally limited to distribution of printed information and application forms and some general information about the benefits of saving and banking money. The amendment exempts such persons from the FSR regime, provided they receive no financial benefit for the service.
Banks that provide school banking products through schools generally offer commission payments and/or other benefits to the school as part of the arrangement. These payments can for example, be calculated on the basis of the number of accounts issued through the school. Under the regulation, the Product Disclosure Statement for the product would be expected to disclose such payments or other benefits that schools or their associates may receive in connection with the issue of a school banking product.
Items 11 and 12 Lawyers and FSR - new regulations 7.1.35A and 7.1.40(g)
The amendment supports existing provisions of the Act to exclude a limited range of activities conducted by lawyers in their ordinary course of duties.
Under subsection 766B(5), advice given by a lawyer does not constitute financial product advice if provided in their ordinary course of duty as a lawyer. However, lawyers providing ordinary services to their clients may go beyond financial product advice and given the wide definition of financial services under the FSR Act, may in fact amount to arranging or dealing. Examples include:
• holding monies on trust (custodial and depository services);
• negotiating a share transfer (arranging); and
• organising an insurance cover note after the conveyance of a property (dealing).
Having regard to Parliament's intention to exclude lawyers from the regime in relation to financial product advice, the regulations extend the exemption to financial services ancillary to the provision of advice. The regulation provides only limited relief that is in line with existing State and Territory regulation of lawyers and contains conditions existing in subsection 766B(5).
Items 13 and 15 New paragraph 7.6.01(1)(na) and ew subregulation 7.6.01(7)
The regulations provide that a licensing exemption is available for overseas financial service providers (OSP) where their Australian clients only receive certain financial services through an Australian financial services licensee, under the following conditions:
• that the OSP only provides advice, market making and/or custodial or depository services to a wholesale client;
• the OSP is a related body corporate of a licensee in this jurisdiction or a party to a `business joint venture' with an Australian financial services licensee in this jurisdiction (the Australian licensee). Business joint venture is defined under new subregulation 7.6.01(7);
• the licence of the Australian licensee must cover the provision of the services that the OSP wishes to provide in this jurisdiction;
• the Australian licensee arranges for the OSP to provide the services in this jurisdiction; and
• the licence of the Australian licensee is subject to a condition that requires it to assume responsibility for the conduct of the OSP in the provision of the financial services.
The above conditions ensure, amongst other things, that the regulation of services provided by the OSP through the Australian licensee, would, as closely as possible, align with the regulation of services provided directly by a licensee. In particular, the requirement that the Australian licensee assume responsibility for the provision of the financial services ensures a point of liability for Australian investors and the regulator, ASIC. Consequently, it would be in the clear interest of any Australian licensee that agrees to participate in such an arrangement, to ensure that the OSP's services would meet FSR Act requirements (to control its liability in relation to action by an investor or ASIC).
The exemption would only be available if ASIC imposed the relevant licensing condition. That is, ASIC would need to make a positive decision as to whether the Australian licensee could in fact discharge its responsibilities including assuming responsibility for the conduct of the OSP.
Item 14 Need for an Australian financial services licence (AFSL): general - new paragraph 7.6.01(1)(pa)
This new paragraph provides an AFSL exemption for financial services provided to wholesale clients by bodies established or constituted under a law of the Commonwealth or of a State or Territory that is required under a law to carry on any business of insurance or to undertake liability under a contract of insurance. In addition to this prerequisite, the body must also be regulated for the provision of insurance under a law of the Commonwealth or a State or a Territory.
Examples where this exemption may apply includes Victorian statutory schemes which provide compulsory third party, worker's compensation and professional indemnity insurance. The bodies that provide these types of insurance in Victoria are the sole, compulsory insurers in their fields and are exempt under the Insurance Act 1973 (Cth) from the Australian Prudential Regulation Authority's requirements. Each of these bodies are subject to regulatory oversight in accordance with the Financial Management Act 1994 (Vic) and any binding directions set down by the Victorian Minister for Finance. Further, they may be subject to audit by the Victorian Auditor-General. In these examples, it would serve no purpose to duplicate the regulatory requirements applicable to non-retail statutory insurance providers.
Item 16 Exemption from providing a FSG - substituted subparagraph 7.7.02(4)(d)(i)
Subregulation 7.7.02(4) is a limited exemption from providing a Financial Services Guide (FSG).
The amendment to subregulation 7.7.02(4) ensures this relief is not unintentionally restricted. A FSG does not need to be given during a telephone call where the general advice relates to financial products already held by the client. In that case, it is likely a person already has the information contained in the FSG. As a providing entity must be licensed to provide general advice, the amendment makes it clear that all `providing entities' giving general advice can use the regulation (including the product issuer and a body corporate of the product issuer).
Item 17 Advertising disclosure - new subregulation 7.7.02(5A)
This new regulation recognises limited circumstances where relief is provided from both the Financial Services Guide (FSG) and disclosures normally required in place of a FSG.
The content of advertising may constitute `general advice' as defined under section 766B. Such advertising would not require a FSG when it falls within the `public forum' exemption under subsection 941C(5) and Regulation 7.7.02(2). In these circumstances in place of a FSG, the advertisement must include a range of disclosures under:
• section 941C(5) - identity, relationships and remuneration;
• section 949A - general advice warning; and
• section 1018A - advertising disclosure.
In the context of advertising delivered through a medium such as radio, providing this information presents practical difficulties and expense.
Under paragraph 941C(8) of the Act, regulations may specify circumstances where a FSG does not need to be provided. Proposed regulation 7.7.02(5A) recognises that in certain circumstances, the disclosures in place of a FSG also do need not be provided. Given the policy objective of ensuring appropriate information is available when a person receives a financial service, including general advice, this relief from both the FSG and the disclosure of information in lieu of a FSG only applies in limited circumstances:
• where there are significant practical problems in providing the information through mediums such as a radio advertisement; and
• where the general advice is not directed at a particular person but instead is directed at the world at large through the media (as defined in regulation 7.6.01(1)(o)) or on billboards; and
• where not receiving the FSG or disclosures does not significantly reduce consumer protection.
The regulation draws a distinction between the circumstances in regulation 7.7.02(5A) and other examples of a public forum, such as flyers, brochures or seminars. In these cases, the particular advertising medium could be designed to accommodate the required disclosures or can be specifically targeted at individual retail clients.
The principal disclosure will be provided under section 1018A of the Act, which is a long-standing disclosure standard that was carried through from the prospectus regime. The other disclosure required is to advise that the person should consider if this product is appropriate for them. Given this provision is provided through regulation, there is capacity to adjust the conditions of the relief in line with practical experience.
This exemption works alongside existing public forum and other FSG exemptions and relief from the General Advice Warning under the Financial Services Reform Amendment Bill 2003.
Item 18 Verbal Product Disclosure Statements - new regulations 7.9.80C & D
The amendments provide further flexibility for industry to tailor matters to suit client needs. The Regulations provide the ability for a client to `opt-out' of receiving varying amounts of information subject to varying requirements depending on whether it is a recommendation or issue situation.
In recommendation situations the Regulation enables clients to select what information they consider appropriate at the time, after being advised of the types of information available. The information required to be provided at that time is to be determined by the client, which would allow them to request that the giving of information cease even though they may have initially requested it. This ability would apply to all the information required by paragraphs 1012G(3)(a)(ii) and (iii), including the information referred to under paragraphs 1013D(1)(c), (d), (g) and (i).
The opt-out mechanism is supplemented through additional conduct restrictions and specific disclosures, such as preventing clients from being pressured not to receive information and ensuring the client is aware of further disclosures (that is, the Product Disclosure Statement) that will follow. Further, the client would not be permitted to be locked into acquiring the product where they have not been fully informed (this is also consistent with requirements under section 992A of the Act).
Issue situations are to be treated in a similar manner, with the exception that regulated persons is required to disclose information regarding costs, fees and charges and the operation of the applicable cooling-off regime.
Item 19 General requirements for financial disclosure - Division 5AA
By inserting a divisional heading, the amendment permits the exemptions under regulation 7.9.61 to apply to all financial products as originally intended.
Regulation 7.9.61 modifies the application of Part 7.9 in its application to the obligation to give information about financial products as set out in Part 14 of Schedule 10A. Part 14 of Schedule 10A provides an exemption from compliance with sections 1017B, C, D & DA of the Act in circumstances where giving a person an ongoing disclosure document could not reasonably be expected to be satisfied (eg, because the relevant issuer does not have an accurate address for the holder and has taken reasonable steps to locate the holder but has been unable to do so).
Items 20 to 25 Payment split notices - amendments to paragraphs 7.9.88(1)(e) and (f), 7.9.89(1)(f), 7.9.93(2), (2)(a) and 7.9.93(2)(b)
The amendments to regulations 7.9.88, 7.9.89 and 7.9.93 address certain inconsistencies and anomalies in relation to the current provisions in the Principal Regulations dealing with payment split notices (related to provisions of the Family Law Amendment (Superannuation) Act 2001), namely:
• an apparent inconsistency between Superannuation Industry (Supervision) (SIS) regulation 2.36C and Corporations regulation 7.9.88, in that the SIS regulation has been amended and a requirement that certain information about preservation has been repealed. Corresponding amendments would now be made to paragraphs 7.9.88(1)(f) and 7.9.89(1)(f); and
• Corporations regulation 7.9.93(2)(b):
- (which had effect from 11 March 2002 because it is made under s1017DA of the Act which commenced operation on that day) requires information to be provided with a Product Disclosure Statement. However, product issuers have the benefit of the FSR Act transition period and may not yet have issued a PDS;
- refers to information to be provided under s1017DA (which relates to information required to be provided under regulations) but requires the information to be given at the time the payment split notice is given suggesting that this is a once only requirement rather than ongoing annual report type disclosure. However, at present it is not clear what reporting period applies; and
- refers to information to be provided under s1017DA and "Subdivisions 5.4 to 5.7" of the Corporations regulations, however subdivision 5.4 relates to information to be provided under s1017D and s1017C.
The amendments also address minor drafting errors in 7.9.88(1)(e) and 7.9.93(2).
Item 26 Technical amendment - substituted paragraph 10.2.79(c)
The amendment of subregulation 10.2.79(c) rectifies a referencing error.
Item 27 Documents equivalent to Product Disclosure Statements (PDS) - amendment to paragraphs 10.2.202(1)(a), (b), (c) and (d)
The amendments clarify that regulation 10.202 is effective in relation to situations to which PDS requirements do not yet apply. Where PDS requirements do not yet apply, the regulation affects the reference to `Product Disclosure Statement' in paragraph 949(2)(c) of the Act to instead refer to an earlier disclosure document appropriate to the product or remove the requirement where there is no earlier document.
Item 28 Friendly societies - amended subregulation 12.7.06(1)
The technical amendment ensures that financial products are not unintentionally removed from regulation by any disclosure regime.
Regulation 12.7.06 deals with the transition of financial products offered by Friendly Societies regulated under Schedule 4 of the Corporations Act to the provisions of the FSR Act. It ensures that once the FSR Act provisions apply, the Schedule 4 provisions no longer apply.
Regulation 12.7.06(1)(b) refers to `specified products' to ensure this regulation only applies to Friendly Society products that are subject to the Schedule 4 disclosure provisions. However, a Friendly Society may have multiple products regulated under Schedule 4 and may only nominate one of those products to opt into the FSR regime at a particular point in time. Therefore, there is potential for the other products that have not yet opted into the FSR disclosure regime to be unregulated, as regulation 12.7.06(2) ceases to apply Schedule 4 for the entire body, not merely in relation to certain products.
The minor amendment ensures that Schedule 4 ceases to apply only in relation to those products for which a body has opted into FSR. This avoids a regulatory duplication and also ensures that all financial products are in fact regulated either by Schedule 4 or the FSR Act.
Schedule 2 - Amendment commencing on 11 March 2004
Item 1 Number of issuers in a single Product Disclosure Statement - regulation 7.9.07J
The regulation clarifies that there can be only a single issuer of a Product Disclosure Statement (PDS). The regulation commences at the end of the FSR transition period on 11 March 2004.
Under section 1013A `the issuer of the financial product must prepare a PDS'. While ordinary legal interpretation provides that the single can be read in the plural, it is not free from doubt that a single PDS can be provided by more than one issuer of a financial product. In particular the provisions of Part 7.9 do not unambiguously support there being more than one issuer of a single PDS. Apart from this there is the potential for consumer confusion if more than one issuer is responsible for the issue of a single PDS.
The regulation clarifies the operation of section 1013A such that a PD S can only be provided by a single issuer. Nevertheless, ASIC has modification powers which enable it to provide relief to allow multi-issuer PDSs in certain circumstances. To avoid unnecessary disruption in relation to existing or forthcoming PDSs, the regulation does not commence operation until 11 March 2004. This allows industry time to plan for the release of future PDSs and ASIC to consider new and existing applications for relief.