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CORPORATIONS AMENDMENT REGULATIONS 2003 (NO. 1) 2003 NO. 31EXPLANATORY STATEMENT
Statutory Rules 2003 No. 31
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2003 (No. 1)
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) introduced a uniform licensing regime for financial service providers. Under the streamlined licensing procedures of the FSRA, persons are able to apply for a license under the FSRA regime without having to demonstrate that they satisfy the whole range of licensing requirements set out in the legislation, in circumstances where they have met equivalent requirements under a licensing or authorisation process they were subject to prior to the commencement of the FSRA.
The purpose of the Regulations is to widen the categories that will allow people to take advantage of the streamlined licensing procedures under the FSRA regime, prohibit unsolicited offers (hawking) of financial products on certain public holidays to reduce inconvenience to consumers and correct and/or clarify various provisions made under the FSRA.
The Regulations would support the reforms to the regulation of the financial services industry, which were included in the FSRA and associated legislation, by clarifying and/or correcting various perceived deficiencies in the operation of the FSRA.
Details of the Regulations are set out in the Attachment.
The Regulations commence upon Gazettal.
Schedule 1 - Amendments commencing on Gazettal
1. Definition of warrant - Amendment of regulation 1.0.02
The previous definition of a 'warrant' did not include warrants over an interest in a managed investment scheme where the warrant confers on the warrant holder a legal or equitable interest in the underlying managed investment scheme interest (commonly referred to as an instalment warrant).
Section 92 of the old Corporations Act included instalment warrants over interests in managed investment schemes in the definition and thus subjected them to disclosure requirements. As such, regulation 1.0.02 has been amended so that these warrants are captured under the new disclosure regime.
2. Amendment of regulation 5C.11.05A
Regulation 5C.11.05A is amended to provide that subsection 601ED(2) of the Act is to be read as if the words "and Division 2 of Part 7.9 applied to the interests at that time" were added to the end. This is to overcome uncertainties about the interpretation of subsection 601ED(2). In the absence of this amendment to regulation 5C.11.05A, it is arguable that subsection 601ED(2) could be interpreted as allowing a managed investment scheme to avoid registration (because the giving of a Product Disclosure Statement was not required) on the basis that the interests in the scheme were issued prior to Division 2 of Part 7.9 coming into effect.
3. Inserted after regulation 7.1.06A
This amendment is a renumbering of existing regulations so that similar provisions are co-located. The old regulation 7.1.05 is now regulation 7.1.06B and the old 7.1.08 is now regulation 7.1.07B.
4. Renumbering of regulation 7.1.08
This regulation has been renumbered as regulation 7.1.07B.
5. Specific things that are not financial products: insurance under an overseas student health insurance contract - Regulation 7.1.07C
Health insurance provided as part of a health insurance business is excluded from the Act under section 765A(1). The exemption in the Act relies upon the definition in the National Health Act 1953. However, insurance under an overseas student health insurance contract is excluded from the National Health Act 1953 definition and therefore is a financial product.
The regulation extends the exemption from the Act to these products. This is due to overseas student heath insurance contract being similar to 'health insurance' excluded from the Act. Further, all operators in this market must be an approved health benefits organisation, which provides an alternate basis of regulation.
Specific things that are not financial products: funeral expenses policy - Regulation 7.1.07D
This regulation exempts a funeral expenses policy from the definition of financial product under the Act.
Funeral benefits are excluded from the operation of the Act under section 765A(1). The definition of funeral benefit in section 761 of the Act is based on the definition used in section 11(3)(e) Life Insurance Act 1995 (LIA). However, the Act did not include the second limb of the LIA definition, which related to the payment of money for the purpose of a funeral.
This regulation extends the exemption from the Act to cover this second limb - the payment of money solely for the purpose of financing a person's funeral. The rationale for relief is that a funeral expense policy, where provided for the sole purpose of paying in the future for a funeral, does not warrant regulation by the licensing and disclosure provisions of the Corporations Act.
Unlike in the LIA, funeral benefits provided by any issuer (including life companies) are be excluded from regulation by the FSR Act. This is in line with the purposive approach of the FSR Act, where the activity of providing a funeral expense policy is exempt from the Act. It does not depend on which entity provides the service.
Despite this regulation, these products may be subject to regulation under other Commonwealth or State provisions, such as the ASIC Act 2001 and NSW's Funeral Funds Act 1979.
Meaning of financial product advice: exempt document or statement - Substituted regulation 7.1.08
Subregulation 7.1.08(3) extends the number of documents considered to be an exempt document and therefore not considered to be financial product advice under section 766B(9) of the Act.
The requirement that a document is 'required by, and prepared as a result of a requirement under an Australian law' recognises that in providing financial services, a person may be required to prepare documents under legislation outside of Chapter 7 of the Act. This would include documents not only literally required under legislation but also documents required as a result of legislative provisions. For example, entities are not literally compelled to prepare a prospectus. However, the requirement to prepare a prospectus arises from their decision to raise funds in a certain manner.
In order to provide clarity as to which documents are able to use this exemption, ASIC will specify in the gazette exempt documents under this provision.
This provision applies to a range of legislative documentation, including but not limited to:
• documents required under the Act's fundraising and takeover provisions;
• annual reports under Chapter 2M of the Act;
• documents required by and prepared in accordance with the operating rules of a licensed market (such as section 674); and
• documents required under the Superannuation Industry (Supervision) Act 1993.
General advertising and promotional material would not be treated as exempt documents. Only those documents specifically contemplated and regulated by legislation are to be treated as exempt documents.
Former subregulation 7.1.08A(3)
The previous 7.1.08A(3), which specified that certain pre-FSR disclosure documents could be considered as exempt documents, has been moved to the transitional provisions in Part 10.2.
Other amendments to 7.1.08
The remainder of the amendments to this regulation are merely a consolidation and renumbering of the existing provisions to improve clarity.
6, 7, 8, 9, 10, 11 and 12. Bundled Insurance Contracts - Regulations 7.1.11 to 7.1.17
Bundled risk insurance products may provide varying forms of cover for a number of risks within a single contract of insurance. If these forms of cover were provided on an individual basis in separate contracts some might be considered, when provided to an individual or small business, as general insurance products provided to a person as a retail client and others as the provision to a person as a wholesale client.
The amendments to Regulations 7.1.11 to 7.1.17 allow for product providers to differentiate between the different insurance covers in the satisfaction of disclosure obligations under the Corporations Act. For example, it is expected that these measures would permit providers of bundled insurance products to provide Product Disclosure Statements only in relation to insurance covers that they would have been required to if the insurance cover was provided in a separate contract of insurance. The previous requirements imposed an obligation to provide a PDS in relation to all of the insurance covers contained within the contract.
The regulations allow for disclosure obligations similar to those applying in relation to the provision of PDS's in relation to superannuation fund sub-plans.
The regulations should reduce the potential for additional administrative costs and unnecessary disclosure to the consumer.
13. Clarification of public forum - Substituted subregulation 7.7.02(2)
The provision is designed to clarify the intent behind the definition of public forum under section 941C(4A) of the Act. Under section 941C(4) of the Act, the providing entity does not have to give a client a Financial Services Guide if general advice is provided in a public forum.
The display of 'flyers and other promotional material displayed in a public place', were an example of an event or broadcast constituting a public forum under regulation 7.7.02. However, flyers did not seem to fit within the definition of event or broadcast given in the previous regulation. The regulation has been modified to expressly provide that the display of flyers in a public place, such as a billboard or poster on public display, falls under the definition of public forum and is within the exemption. It is also considered that advertising in a mass circulated publication, such as a daily metropolitan newspaper is another example.
The term 'otherwise available' ensures material such as brochures or flyers that can be taken away by customers may also use this exemption.
The term 'place accessible to the public' signifies the exemption is available when material is located in places such as bank branches, where the public may enter but is not a place of public assembly.
Examples of public forum
Additional examples have also been included to indicate when a 'public forum' exists, such as a website. Without limiting the term 'public forum', a public forum that meets the requirements of subregulation 7.7.02(2) will usually exist when access to information is:
• unrestricted; and
• available to the public at large (such as through the Internet or mass media)
If no Financial Services Guide is provided, certain information must be provided to retail clients under section 941C(5) and any provision of general advice must comply with section 949A.
14. Clarification of 'event' - Subregulation 7.7.02(3)(d)
The definition of 'event' contained in the previous subregulation 7.7.02(4) was restricted to 'insurance products'. It was not intended that the definition would apply to the whole of regulation 7.7.02.
The definition of event has been incorporated into subregulation 7.7.02(3). This subregulation provides that a Financial Services Guide does not have to be given to a client:
• when a person (person 1) makes a telephone inquiry in relation to the rental of a vehicle from another person (person 2) and;
• as a result of that inquiry, it becomes apparent to person 2 that an insurance product will be, or is likely to be, issued to person 1.
In such a situation, person 2 must make arrangements for a document that is the equivalent of a Financial Services Guide to be given to person 1 not later than the start of the commencement of the process in relation to which the insurance product was entered into.
15. Exemptions for the provision of a Financial Services Guide when an entity provides general advice - Subregulation 7.7.02(4)
This regulation provides relief from the obligation to provide a Financial Service Guide under section 941C(8) of the Act.
Under the terms of this regulation, a providing entity may give general advice without providing a full Financial Services Guide. Instead, material that contains general advice only needs to incorporate specified information from either section 942B or 942C, such as identification of the providing entity. This provision will be able to be used when communicating (for example, conducting marketing activities) with both existing and prospective clients.
This provision is available to persons who can provide general advice and who are:
• a product issuer;
• a product distributor; or
• a related body corporate of the product issuer.
The latter group acknowledges that one entity may issue the advertising material, which may provide general advice on products issued by other entities in the group. It would not be intended that this arrangement would require the provision of a full Financial Services Guide.
If the advice is provided to retail clients, licensees must give the general advice warning as provided under section 949A.
16. Dealings involving employees of financial service licensees - risk insurance products - Regulation 7.8.20A
Regulation 7.8.20A provides an exception to the prohibition in subsection 991F(1) of the Act on financial services licensees and their employees jointly acquiring financial products. The exception will allow joint acquisition of risk insurance products by licensees and their employees.
17. Allowable hours for the hawking of financial products - Amendment of Regulation 7.8.22
Section 992A of the Act prohibits the issue or sale of financial products to persons by means of unsolicited personal contact, except for certain circumstances including hours prescribed in regulations which allow for such activities.
Regulation 7.8.22 prescribes the allowable times for the hawking of financial regulations.
During debate on a motion to disallow, in part Regulation 7.8.22, it was agreed in the Senate that the Government would publicly consult on extending the prohibition on the hawking of financial products to additional public holidays. Further to that consultative process, the amendments to Regulation 7.8.22 will extend the current exclusions from allowable hawking times from Christmas Day, Good Friday and any Sunday to include the following dates:
• New Year's Day;
• Australia Day;
• Easter Monday;
• Anzac Day; and
• 26 December (Boxing Day).
The prohibition on hawking for 26 December is intended to apply in all States and Territories, including South Australia where Boxing Day is not a declared holiday.
18. Bundled Insurance Contracts - Regulation 7.9.07D
Regulation 7.9.07D relates to bundled contracts of insurance and is intended to address potential practical difficulties associated with the provision of multiple PDS's in relation to various forms of insurance cover contained within a single contract of insurance.
The amendment clarifies that a regulated person needs to provide a PDS only in relation to those forms of insurance cover (as specified under subsection 761G(5)) within a bundled contract that they are offering for sale or issue to which they reasonably believe a client wishes to acquire. The regulated person would be required to provide a PDS before the client could acquire the particular insurance cover.
The regulation should reduce the potential for additional administrative costs and unnecessary disclosure to the consumer.
19. Option to provide a new Product Disclosure Statement - Regulation 7.9.13A
Should a potential client seek to purchase a financial product and the disclosure conditions are not met or the Product Disclosure Statement is defective, section 1016E sets out the choices available to the responsible person making the offer of that financial product.
If the financial product provider wishes to continue with the sale, that provider has the option to update the PDS through the provision of a supplementary PDS to the client, and make available additional cooling off provisions.
The purpose of this regulation is to make available to the responsible person, the option to provide the potential client with a new updated PDS, in place of a supplementary PDS.
The regulation also ensures that the responsible person is required to bring to the attention of the potential client why the supplementary PDS (or replacement PDS) has been issued and where it corrects a deficiency or changes an old PDS.
20. Cheques - Substituted regulation 7.9.61C
This is a renumbering provision with no change to the wording of the regulation as the existing regulation 7.9.08B and 7.9.61C both inserted a section 1017E(1A).
21. Non-cash payment facilities linked to basic deposit products and credit facilities - Amendment of regulation 7.9.62
Under section 1017F, confirmation of transactions is required in relation to certain transactions involving a financial product. ASIC has been dealing with a number of operational requests that raise the issue of the actual and intended operation of section 1017F for non-cash payments linked to basic deposit products and credit facilities. In particular, the issue of whether a non-cash payment facility linked to a facility being a basic deposit product or a credit facility is properly characterised as one or two financial products.
The amendment is intended to provide clarity by providing specific exemptions from the confirmation of transactions requirement for transactions involving a non-cash payment facility linked to either a basic deposit product or credit facility.
22. Amendment of subregulation 7.9.65(1)
The amendment makes a minor correction.
23. Cooling-off - Partial application and managed investment schemes - Amendment of regulation 7.9.65
The amendment of regulation 7.9.65 is intended to address uncertainty related to the application of the cooling-off provisions to acquisition of interests in managed investment schemes. The amendments clarify that for managed investment products the cooling-off provisions apply in relation to all of the interests acquired by way of a transaction rather than in relation to each 'unit' acquired.
24. Streamlined licensing procedure for certain regulated principals - Regulation 10.2.35A and Amendment of Regulation 10.2.36
Regulation 10.2.35A expands the range of persons able to take advantage of streamlined licensing under section 1433 of the Act. Details of the changes are discussed below under the amendment to subregulation 10.2.38(2).
Existing regulation 10.2.63 is slightly modified.
25. Amendment of subregulation 10.2.37(1)
Subregulation 10.2.37(1) is amended to provide more flexibility as to the timing of lodgement with ASIC of a request to vary the conditions on a licence, made in connection with a streamlined licence application.
26. Amendment of subregulation 10.2.38(1)
The amendment makes a minor correction.
27. Amendment of subregulation 10.2.38(2)
Subregulation 10.2.38(2) is amended by adding items 13 to 15 to the table in the subregulation to include further categories of persons as regulated principals for the purposes of section 1430 of the Act. Those persons mentioned in items 14 and 15 of the table will be able to take advantage of streamlined licensing under section 1433 of the Act (see new regulation 10.2.35A). Essentially, the new categories cover:
• Item 13 of the table: Persons who were insurance brokers registered under the Insurance (Agents and Brokers) Act 1984, whose registration has expired due to subsection 21(3) of that Act, but who have applied for renewal of that registration within 8 weeks of its expiry - this item gives legislative force to an ASIC declaration dated 28 June 2002 made under subsection 1437(2) of the Act;
• Item 14 of the table: Persons who hold a licence or authorisation issued by the Australian Prudential Regulation Authority (APRA) and who conducted activities prior to the FSR commencement which, if carried on after the FSR commencement, would need to be covered by an Australian financial services licence - this includes ADIs, registered general insurers and life insurers, and approved trustees of superannuation funds. These persons will be eligible to make a streamlined licence application, including in respect of activities lawfully carried on that may not be regulated under the APRA licence or authorisation; and
• Item 15 of the table: Persons who carry on activities, part of which were subject to licensing by ASIC, or registration under the Insurance (Agents and Brokers) Act 1984, prior to the FSR commencement, but who also carry on other activities not previously subject to ASIC licensing or registration under the Insurance (Agents and Brokers) Act 1984, but which will require licensing after the FSR commencement. These persons will be eligible to make a streamlined licence application in respect of all their activities lawfully carried on which require a licence after the FSR commencement.
28. Obligation to cite licence number in documents - Substituted regulation 10.2.44A
This regulation expands the current exemption from placing an Australian Financial Services Licence (AFSL) number on documents issued before the licence has been granted. This exemption applies to an expanded range of documents, such as Product Disclosure Statements, Prospectuses, Key Features Statements and Advisory Services Guides.
Section 912F is a strict liability offence that requires a person's licence number to be placed on all documents. There are situations where a person becomes licensed under the FSR regime but has pre-existing disclosure documents on issue, especially if that person has not opted into the disclosure regime. Examples include the Key Features Statement, an Advisory Services Guide where an entity transitions in stages and prospectuses.
It would be an unintended consequence to have all pre-licensing documents withdrawn and replaced just because a person has subsequently become licensed and has pre-licensing documents on issue that does not contain their AFSL number.
29. Exempt documents during FSR transition - Regulation 10.2.87A
This subregulation was previously listed as subregulation 7.1.08A(3). This regulation specified certain pre-FSR disclosure documents as exempt documents. Exempt documents are not considered to be financial product advice under section 766B(9) of the Act. It was intended that these documents could be used during the transitional period until the relevant product issuers 'opt-in' to the FSR regime.
However, the effectiveness of this transitional provision was limited to the exemption contained in FSR terms such as 'personal advice' and 'general advice'. This meant that even though these documents may have met the requirements under existing legislation, they may have contained FSR advice and may not have been able to use this transitional relief. Therefore, it is proposed that restrictions on 'advice' be removed from the exemption. However, relief for these documents as exempt documents will only be available until the earlier of opting into the FSR regime or the end of FSR transition.
30. Amendment of Schedule 10A, clause 1.1
The amendment makes a minor correction.
31. Amendment of Schedule 10D, Item 8
Schedule 10D of the Regulations is amended, and has the effect of narrowing the class of persons who are excluded from lodging streamlined licensing applications under section 1433 of the Act. Prior to this amendment, any body corporate (person 1) related to a body corporate that was externally administered (person 2) was unable to streamline. This exclusion only applies where person 2 is either the parent of person 1, or person 2 has previously held a licence or authorisation granted by ASIC or the Australian Prudential Regulation Authority or their predecessors.