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CORPORATIONS AMENDMENT REGULATIONS 2003 (NO. 8) 2003 NO. 282
Statutory Rules 2003 No. 282
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2003 (No. 8)
Section 1364 of the Corporations Act 2001 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.
Amongst other things, the FSRA requires the disclosure of relevant information in the form of a product disclosure statement (PDS), before a person purchases a financial product. In addition financial investment product holders are to receive ongoing information regarding their product in the form of periodic statements. Both statements are intended to promote informed investment decisions and understanding of financial products.
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 will facilitate transition to the new licensing, conduct and disclosure arrangements and promote certainty, clarifying, where necessary, various provisions under the FSRA.
The Regulations make amendments that:
• close a potential loophole which may have allowed for the circumvention of point-of-sale disclosure obligations;
• remove impractical point-of-sale disclosure obligations related to declined offers of financial products and situations where clients are uncontactable;
• address practical concerns regarding the disclosure of amounts paid within periodic statements for investment financial products;
• ensure that a prospective member of a self-managed superannuation fund receives information necessary to make an informed investment decision through the timely provision of a PDS;
• aid consumer comprehension by requiring disclosure in dollar terms in the first instance and where practicable in a range of disclosure documents; and
• enhance the disclosure of superannuation benefits within periodic statements.
Details of the Regulations are set out in the Attachment.
Regulations 1 to 3 and Schedule 1 commences on gazettal, Schedule 2 commences on 11 March 2004 and Regulation 4 and Schedule 3 commences on 1 July 2004. To address varying degrees of necessity for transitional arrangements, the deferred commencement of Schedules 2 and 3 allow sufficient time for industry to address any systems or administrative changes required to effect the operation of the new arrangements.
CORPORATIONS ACT AMENDMENT REGULATION
Regulation 1 provides that the name of the Regulations is the Corporations Amendment Regulations 2003 (No. 8).
Regulation 2 provides that regulations 1 to 3 and Schedule 1 commence on gazettal, Schedule 2 commences on 11 March 2004 and Regulation 4 and Schedule 3 commence on 1 July 2004.
Regulation 3 provides that Schedules 1 and 3 amend the Corporations Regulations 2001 and Schedule 2 amends the Corporations Regulations 2001 as amended by the Corporations Amendment Regulations 2003 (No. 7).
Regulation 4 provides that the amendments made by Schedule 3 only apply in relation to Statements of Advice, Product Disclosure Statements and periodic statements prepared on or after 1 July 2004.
Item 1 Specific things that are not financial products - rights of the holder of a debenture and money orders - regulations 7.1.07E&F
Rights of the holder of a debenture
Regulation 7.1.07E specifies that a facility which consists of the rights of the holder of a debenture against a trustee under a trust deed entered into under the debenture provisions of the current legislation, or under equivalent provisions of the former Corporations Act (the Act), is not a financial product.
Australia Post Money Orders
Regulation 7.1.07F provides a specific exemption from the Financial Services Reform Act 2001 (FSRA) regime for Australia Post money orders on the basis that these money orders are provided by the national postal authority, that is, Australia Post which is a substantial and wholly government owned entity.
Item 2 Advice about the existence of a custodial or depository service - regulation 7.1.33E
Advice about a custodial or depository service
Regulation 7.1.33E provides that a person is taken not to provide a financial service where advice is provided that relates to the existence of a custodial or depository service, but does not relate to financial products that may be held as part of that service.
It is arguable that statements given by the provider of a custodial or depository service, for example, to attract clients to use those services, may constitute the provision of financial product advice. The reasoning behind this is as follows - the holding of financial products by a custodian may give rise to the issue of a financial product to the client, being an equitable interest in the financial products held on the client's behalf - in particular, equitable interests in a share, debenture or interest in a registered scheme. Thus, advice concerning the services offered by the custodian may come within the definition of financial product advice, as far as it concerns those equitable interests.
The regulation provides that advice of this nature does not constitute the provision of a financial service (ie. it does not constitute financial product advice). However, the regulation does not exempt advice that relates to financial products held as part of the custodial or depository service, as opposed to advice about the service itself.
A note to the new regulation explains that paragraph (c) of the regulation is intended to apply only to equitable rights or interests in shares or debentures of a body that are defined as financial products under paragraph (c) of the definition of "security" in section 761A, or equitable rights or interests in an interest in a registered scheme that are defined to be financial products under subparagraph 764A(1)(b)(ii) of the Act.
Item 3 Conduct that does not constitute dealing in a financial product - substituted regulation 7.1.34
This item substitutes existing regulation 7.1.34 with a new regulation to provide an exemption from dealing in a financial product for certain conduct relating to financial products that are subject to a mortgage. The new regulation combines the existing paragraphs (a) and (b) of regulation 7.1.34 into a new paragraph (a) and adds a new paragraph (b) applying to situations where financial products are disposed of, or transferred to the mortgagor, whether at the direction of the mortgagor, or by the mortgagee fulfilling its obligations under the mortgage (eg. where the mortgage is discharged and the financial products are 'redeemed').
A mortgagee exercising powers of sale under a mortgage is provided as an example of a situation in which paragraph (a) applies.
Item 4 Need for Australian financial services licence - Exemption for certain non-cash payment facilities - paragraphs 7.6.01(1)(lb) and (lc)
Limited use facilities
New paragraph 7.6.01(lb) provides an exemption from licensing for the provision of a non-cash payment facility which may only be used to make payments to the issuer of the product or a related body corporate. This would cover, for example, the issue of a store voucher by a department store which may be used in that store or other stores within the same corporate group.
The range of persons to whom payments can be made under the facility will depend on the terms of the facility and how it is able to be used in practice (eg, to whom is it generally understood payments can be made under the facility).
Australia Post bill payment facilities
Regulation 7.6.01(lc) provides an exemption from licensing for the bill presentment and payment processing facilities of Australia Post known as POSTbillpay and billmanager. Australia Post, which is a substantial and wholly government owned entity, provides the bill presentment and payment processing facilities pursuant to Agency Agreements entered into between Australia Post and each billing entity.
While these amendments provide exemptions from licensing in regard to the services outlined in the new paragraphs, the disclosure obligations under part 7.9 would continue to apply as would the general consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (ASIC Act).
Item 5 and 6 Need for an Australian financial services licence (AFSL): general - paragraphs 7.6.01(1)(w)
This paragraph provides an exemption to the Export Finance and Insurance Corporation (EFIC), established by the EFIC Act 1991, from the requirement to hold an Australian financial services license for the provision of wholesale financial services.
The exemption acknowledges the unique nature of EFIC with respect to its own legislative regulatory framework under the EFIC Act 1991, and its resulting exemption from the authorisation, reporting and prudential regulation requirements of the Insurance Act 1973. It should be noted that the exemption only relates to services provided to wholesale clients.
Item 7 Australian financial services licence - requirements for a foreign entity to appoint a local agent - regulations 7.6.03A and 7.6.03B
Part 5B.2 Division 2 of the Act provides a registration regime for foreign bodies corporate carrying on business in Australia. It provides for, amongst other things, appointment of a local agent, which is able to accept effective service of court documents, and is liable for any penalty imposed under the Act on the foreign body corporate.
Most (if not all) Australian financial services licensees which are foreign bodies corporate, will need to register with the Australian Securities and Investments Commission (ASIC) under Part 5B.2 Division 2 of the Act. Other foreign entities (eg natural persons, trusts and partnerships) do not have a similar obligation.
This local agent requirement provides consumers and ASIC with important practical assistance in enforcing the Act and contractual rights in relation to foreign bodies corporate.
Regulation 7.6.03A requires foreign entities, that do not need to register with ASIC under Part 5B.2 Division 2, to appoint a local agent before applying for an AFSL. The local agent must be a natural person or a company, a resident in this jurisdiction and authorised to accept, on the foreign entity's behalf, service of process and notices. Evidence of the appointment is to be provided to ASIC with the application for the AFSL.
Regulation 7.6.03B requires all foreign entities (that are not foreign companies) to continue to have a local agent as a condition to holding an AFSL. Foreign entities are also obliged to notify ASIC of any changes to their local agent or changes to the contact details of the appointed local agent.
Regulation 7.6.03B also ensures that ASIC may treat a document as being served on the foreign entity by providing that document to the local agent of the entity.
Items 8 & 10 Make available - subregulations 7.7.01(2) and 7.9.02A(1)
The obligation for a person to provide disclosure documents, such as the Product Disclosure Statement (PDS), is a positive obligation that was not intended to be reduced or removed through the operation of the 'make available' provisions. The make available provisions are to allow for alternate means of distribution of disclosure documents and are not to place the onus on the client to obtain the information. As stated in the explanatory memorandum to the Financial Services Reform Bill 2001 (with reference to section 940C of the Act):
"...to be effective disclosure, the client must actually receive the prescribed disclosure documents, information or statements".
The amendments ensure that the operation of the 'make available' provisions are not circumvented, in particular for situations related to the time critical issue provision of disclosure documents under the Act.
Item 9 Dealings involving employees of licensees - subregulation 7.8.21(4)
Subsection 991F(3) of the Act requires that employees of a licensee who wish to acquire, on their own behalf, financial products traded on a licensed market in which the licensee/employer is a participant, must have their employer act as agent in the acquisition. This applies whether or not the employee's duties relate to the employer's involvement in the trading of financial products on that licensed market.
New subregulation 7.8.21(4) provides that subsection 991F(3) will not apply to a person whose employment is not directly connected with the licensee's business of dealing in financial products on the licensed market on which the financial products sought to be acquired by the employee are traded.
Persons whose employment is directly connected with a licensee's business of dealing in financial products on a licensed market would include persons employed as dealers/traders on the market, employees in the 'back office' (eg. settling and recording trades) and employees with management responsibility for the licensee's activities on that licensed market. The requirements of subsection 991F(3) will continue to apply to such employees.
Items 11 & 12 Product Disclosure Statements - declined offers for financial products - regulations 7.9.07D & 7.9.07E
The amendments address a practical issue of a product issuer's obligation to satisfy disclosure obligations in the event an offer of a general insurance product is declined in the course of the contact in which the offer was made. A typical example is a telephone sales situation where a consumer is offered a financial product but immediately declines the offer and ceases the phone call. In such situations, it is self-evident that the consumer has no interest in acquiring the product. The amendments remove the obligation on a regulated person to provide a PDS in such circumstances.
Item 12 Product Disclosure Statements - delayed provision and uncontactable product holders - regulation 7.9.07F
The amendment removes the obligation for a responsible person to provide a PDS (at a later time) where it could not reasonably be expected to be satisfied. Where a responsible person does not have an address for a product holder, or is reasonably satisfied that the address is incorrect, and has taken reasonable steps to locate the product holder they will not be required to provide a PDS.
These measures are consistent with exemptions from ongoing disclosure obligations under regulation 7.9.69 and Part 14 of Schedule 10A.
Item 13 Money held in trust for a superannuation product or Retirement Savings Account (RSA) product - regulation 7.9.08C
Subsection 1017E(2A) of the Act provides that money received by a product provider for a financial product before the product is issued is taken to be held in trust by the product provider for the benefit of the person who paid the money. Subsection 1017E(2C) states that the regulations may provide that subsection (2A) does not apply in specified circumstances, or provide for matters relating to the taking of money to be held in trust.
In situations involving superannuation or RSA products the person paying money to a product provider may not necessarily be the person who is entitled to the money. For example, an employer may make contributions to a superannuation fund for the benefit of employees. In these cases, it is appropriate that the product provider should hold the money in trust for the person who is entitled to the money, rather than the person who paid it.
Regulation 7.9.08C therefore provides that, in the case of a superannuation product or RSA product, the money to which section 1017E relates is taken to be held in trust by the product provider for the benefit of the person who is entitled to the money.
Item 14 & Schedule 3, Item 9 Periodic statements - disclosure of amounts paid - regulation 7.9.75
Item 14 of Schedule 1 omits subregulation 7.9.75(1), which relates to the disclosure of transactions not previously confirmed, due to the ambiguity of its operation. The ambiguity relates to what transactions were required to be disclosed and whether the provision required the itemisation of transactions within a periodic statement.
Similarly, the requirement to disclose the times at which amounts were paid directly by a product holder under existing paragraph 7.9.75(2)(a) have been removed by subregulation 7.9.75(1)(a) to enable further regulations to be developed which will be more effective and certain in their operation.
Item 14 also amends the existing requirement to provide a statement about the relevant dispute resolution mechanisms. The amended disclosure will inform the product holder that such a mechanism exists and how to access further information.
ASIC has to date provided class order relief in relation to the disclosure of amounts paid from common funds within periodic statements. This relief allows for the provision of an alternate statement, which is in the same terms as the amendments in subparagraph 7.9.75(1)(b)(ii) where it is not reasonably practicable to disclose a proportion. Subregulation 7.9.75(2) under Item 14, Schedule 1 provides transitional relief consistent with the ASIC class order through until commencement of the Schedule 3 items amending the regulation. The amendments recognise that the ability for product providers to disclose an estimate at the individual level may require significant administrative and system changes, particularly for financial products with bundled fee structures, including closed products or existing products based on older systems.
Subregulations 7.9.75(1) and (2) contained in item 9 of Schedule 3 replace requirements currently referred to in subregulation 7.9.75(2).
The requirement to disclose amounts paid by a product holder during a period is retained (see paragraph 7.9.75(1)(a)) but is clarified by the inclusion of subregulation 7.9.75(2) to be consistent with definitions of amounts payable contained in section 1013D of the Act. The intention of this requirement is for product holders to be given specific information about the fees that they are directly or indirectly bearing, to the extent that those fees impact their investment.
The requirement to disclose amounts paid in respect of a financial product from a common fund is retained but has been amended to address practical concerns with the operation of the provision.
The requirement to disclose amounts paid from a common fund under the existing paragraph 7.9.75(2)(b) has been interpreted by some industry members as requiring disclosure of the total amount applicable to a common fund rather than an amount related to a product holder's interest. The amendments contained in paragraph 7.9.75(1)(b) require the disclosure of common fund amounts in a form that can be related to the product holder.
The ability to disclose a proportion rather than an actual amount is consistent with nature of pooled investment products. In particular the amendments are not prescriptive as to the methodology by which this disclosure occurs. This will allow flexibility for industry to determine a reasonable methodology consistent with the intention of the regulation. Further, if it is possible to attribute an actual amount to the product holder, the regulation does not prevent this disclosure. The amendments recognise that the ability for product providers to disclose an estimate at the individual level may require significant administrative and system changes, particularly for older existing financial products. In circumstances where it is not reasonably practicable to provide an estimate where amounts are paid from a common fund, an issuer must still disclose if such amounts have been deducted, and indicate that they affect returns on a product holder's investment. This disclosure statement is consistent with current transitional relief afforded by ASIC Class Order and the operation of proposed subregulation 7.9.75(2) within Schedule 1.
Subregulations 7.9.75(3), (4) and (5) explicitly require items that can be disclosed as amounts under the FSRA to be displayed in dollar terms, in the first instance. If it is not reasonably practicable to provide the amount in dollar terms the regulations require the disclosure of items in percentage terms. Again if presentation as a percentage is not reasonably practicable, then a description (as appropriate) of how the item is determined must be provided. However, to account for the nature of periodic statements where an item is unable to be described in dollar terms or as a percentage, product holders are directed to other channels for obtaining background information on request in order to avoid unduly complicating the periodic statement.
The inclusion of 'reasonably practicable' criterion provides a means to address any practical difficulties in the application of these disclosure obligations. This may include consideration of a regulated person's ability to determine and disclose amounts due to administrative, systems or resource concerns. The extent of such concerns may vary depending on the nature and age of a financial product.
It is anticipated that generally industry's capacity to disclose information in dollar terms will increase over time as systems are developed and products evolve. Consequently, the disclosure of amounts in dollar terms is expected to become more widespread over time.
To allow sufficient time for transition, the Schedule 3 amendments will only apply in relation to documents prepared on or after 1 July 2004. The operation 'reasonably practicable' criterion will provide the flexibility to address any remaining transitional aspects thereafter.
In addition, there will be a requirement to advise a product holder that they may access further information and indicate the nature of the material that is available on request.
Item 15 Short selling of certain warrants - regulation 7.9.80B
Prior to the FSRA, short selling of all warrants was prohibited as they were classified under section 92 as 'securities'. The new definition of 'security' means that some warrants no longer fall under the definition but, instead, fall under the definition of 'derivative' in section 761D (that is, a sale where the product is not currently owned by the seller).
Section 1020B currently prohibits short selling of warrants that are securities and warrants over registered managed investment schemes (which come within the definition of 'managed investment product' in section 761A). Proposed regulation 7.9.80B will prescribe warrants that are derivatives, and warrants over unregistered managed investment schemes, as financial products that cannot be short sold. This will ensure that short selling of all warrants continues to be prohibited.
Item 16 Transitional relief for warrants - paragraph 10.2.51(c)
To prevent avoidance of the obligation to provide a PDS, section 1012C of the Act introduces resale restriction for financial products (including warrants) that were not issued pursuant to a PDS. That is, if the issuer or purchaser has the intent that the product be resold within 12 months, a PDS must be issued.
Transitional regulation 10.2.51 (c) removes financial products (except for securities and managed investments) from the application of section 1012C, where those products were issued before the end of the transitional period. That is, the issue of a PDS is not required prior to these products being resold/transferred, where the products were issued before 11 March 2004, unless that product issuer has opted into the FSRA regime.
Warrants, by definition, can be a derivative, security or managed investment. Therefore, warrants that are derivatives receive the transitional relief provided by regulation 10.2.51(c), however warrants that are securities and managed investments do not.
Section 1012C(6) will prevent the reselling of warrants that are securities and warrants that are managed investments under an offering circular, after 11 March 2004. Alternatively, section 1012C(6) would force issuers of security and managed investment warrants to issue a PDS, before' they have opted into the FSRA regime, if the warrant is to be resold after 11 March 2004.
Security warrants are currently exempted from the on-selling provisions of Chapter 6D (which section 1012C serves to replicate) due to ASIC class order 00/1068.
As re-sale restrictions are essentially a new regime for warrants, and as derivative warrants receive the benefit of the transition period, it is appropriate that all warrants issued before 11 March 2004 receive transitional relief from the need to issue a PDS.
Section 1012C(6) will apply to all warrants issued after 11 March 2004.
Items 1 and 2 Product Disclosure Statements - self-managed superannuation funds - subparagraph 7.9.04(1)(a)(iv)
The amendment to regulation 7.9.04 requires the provision of a PDS to a prospective member/trustee of an existing self-managed superannuation fund (SMSF) to enable them to make an informed investment decision. Provision of a PDS prior to a person becoming a SMSF member is consistent with the intent of the FSRA disclosure regime, which is to ensure that consumers are provided with the information they require at or before the time that they make an investment decision.
Where a person has not previously received, or does not have access to the necessary information, the provision of a PDS prior to the acquisition of an interest in a SMSF provides an effective avenue for disclosure. This may facilitate disclosure of the trustee obligations placed on SMSF members under the operation of the Superannuation Industry (Supervision) Act 1993 (SIS Act). In particular, prospective members (other than a member under a legal disability) need to consider material matters affecting them in their role as trustee, such as the terms of the trust instrument governing the SMSF, before giving consent to their appointment under section 118 of the SIS Act.
The amendment brings forward the timing of the provision of a PDS rather than necessarily the obligation to provide a PDS. The delay in commencement of the amendment to 11 March 2004 is sufficient to allow for any SMSF currently subject to a 3-month period for the later provision of a PDS.
Items 1 to 4 Disclosure of dollar amounts - regulations 7.7.11; 7.7.12, 7.7.13, & 7.9.15A
The regulations clarify existing disclosure obligations under the FSRA, where parties are required to provide 'information about' particular items, to ensure that clients are provided with information in the most readily comprehensible form.
The amendments require the disclosure of the amounts paid in terms of the disclosure of amounts on a similar basis to that referred to for subregulations 7.9.75(3), (4) and (5).
The regulations explicitly require items that can be disclosed as amounts under the FSRA to be displayed in dollar terms, in the first instance. If it is not reasonably practicable to provide the amount in dollar terms the regulations require the disclosure to be provided in percentage terms. If presentation as a percentage is not reasonably practicable, then a description (as appropriate) of how the item is determined must be provided. Worked examples - an existing requirement under regulations 7.7.11 and 7.7.12 - provided in conjunction with disclosure of items as percentages or via other descriptions, if appropriate, may also aid an investors' comprehension.
The amendments also provide for consistency in terminology across provisions of the Corporations Regulations and are not intended to reduce the effect of any existing requirements to disclose items in dollar terms. For example, the disclosure requirements for Statements of Advice (SoA) in relation to remuneration, commissions and other benefits provided in regulations 7.7.11 and 7.7.12 is maintained.
The regulations do not impede financial services and product providers from disclosing items in terms of one or more forms, if relevant, subject to the 'clear, concise and effective' requirement and prohibitions on false, misleading or deceptive statements.
To allow sufficient time for transition to these amended requirements will only apply in relation to disclosure documents prepared on or after 1 July 2004. The 'reasonably practicable' criterion referred to above will address any remaining transitional aspects thereafter.
Items 5 to 8 Periodic statements - superannuation products - amendments to regulations 7.9.19,7.9.19A&7.9.20
The amendments to regulations 7.9.19 and 7.9.20, and the introduction of regulation 7.9.19A will enhance the existing requirement to disclose information about the amount of a 'withdrawal benefit' or other significant benefits. (A withdrawal benefit is the amount a fund would provide to a member for the voluntary cessation of their interest in the superannuation fund at the end of a period).
The amendments would require further disclosure of the nature of any withdrawal or significant benefits, including informing the product holder:
• that the withdrawal benefit is an indicative estimate that may vary from the actual benefit provided; and
• how to access further information.
Presentation for the disclosure amounts will also apply, as outlined above in relation to amendments to regulation 7.9.75.
To allow sufficient time for transition to these amended requirements, the new disclosure requirements will only apply in relation to documents relating to reporting periods commencing on or after 1 July 2004. This has required consequential amendments to retain the operation of the existing provisions (ie, regulation 7.9.19 and paragraph 7.9.20(1)(k)) during the interim.
REGULATION IMPACT STATEMENT
CLARIFYING DISCLOSURE OF AMOUNTS - PROPOSED CORPORATIONS REGULATIONS 7.7.11, 7.7.12, 7.7.13, 7.9.15A AND 7.9.75
The Financial Services Reform Act 2001 (FSR Act), which commenced on 11 March 2002, introduced a uniform disclosure and licensing regime to the financial services industry. The FSR Act is intended to provide a broad regulatory disclosure regime that promotes an informed consumer market place.
The FSR Act requires a range of disclosure documents, including Statements of Advice, Product Disclosure Statements and periodic statements to include details of benefits, fees and charges, and other payments - information necessary for retail investors to make informed investment decisions and understand their holdings of financial products.
Various provisions of, and regulations under, the FSR Act require parties to present 'information about' the above mentioned items within disclosure documents. The lack of clarity in this requirement may potentially result in details of these items being provided in a form that may be considered sub-optimal from a consumer comprehension viewpoint.
To enhance consumer comprehension of financial services and products under the FSR Act disclosure regime, through clarification of existing disclosure requirements to provide 'information about' certain items.
The following options have been considered:
a) Do nothing
This option would leave the existing 'information about' requirements to industry to interpret and implement the FSR Act's requirements.
b) Guidance from Australian Securities and Investments Commission (ASIC)
The ASIC could provide guidance requiring industry to disclose items in dollar terms (in the first instance) or alternate forms in given circumstances under the existing requirements of the Act, through ASIC publications such as Policy Statements and Frequently asked questions.
c) Amend Corporations Regulations
Regulations could be made under the provisions of the Act to require industry to disclose items in dollar terms (in the first instance) or other alternate forms, as appropriate, therein prescribing the Government's expectations for what constitutes meaningful disclosure .
d) Alternate form of prescription
Parties could be required to provide information only in a single form (for example, dollar amounts) or alternate forms, in the first instance, under options (b) or (c).
The financial services and product disclosure regimes under the FSR Act affect a broad range of businesses within the financial services sector and their associated consumers. The financial services sector includes:
• depository corporations (such as banks, building societies and credit co-operatives);
• insurance companies and pension funds (that is, life insurance, general insurance, superannuation funds); and
• other financial corporations, including financial intermediaries (such as financial unit trusts and investment companies) and financial auxiliaries (such as financial advisers).
a) Do nothing
This option would leave the requirements up to industry to best see how they interpret and implement the FSR Act's requirements. This approach would be consistent with the intent of the FSR Act to provide a flexible disclosure framework that would not stifle innovation.
However, this option leaves open the potential for parties not to provide the most straightforward and effective information in the first instance due to the ambiguity of the 'information about' requirement. This option may result in inconsistent application between providers of similar financial products and services, as it may allow for a reduced comparability of information between financial products.
Further, to leave the existing requirements in place would be inconsistent with other requirements with the FSR Act and Regulations that already require the disclosure of 'amounts'.
Consumers may require additional financial services (at a cost) to fully comprehend and compare the information provided to make an informed investment decision. Otherwise a consumer may make a choice which is inappropriate to their needs, which would represent an inefficient allocation of financial resources.
b) Guidance from ASIC
This option would express the regulator's interpretation of the Act on what is considered the most readily comprehensible form of disclosure. This would be more flexible in operation than legislative instruments, however policy guidance is not binding or enforceable in a court of law.
This option may impose costs on industry participants who followed ASIC's guidance through any associated system changes, to the extent the financial services or product provider did not already provide disclosure in the most readily comprehensible form. Any costs would be limited as disclosure provisions affect only the form in which certain information is to be provided rather than the requirement to disclose the information.
c) Amend Corporations Regulations
The option to amend the Corporations Regulations clearly sets out the Government's disclosure requirements to ensure consumers receive effective disclosure. By putting these requirements into law, there is also greater certainty and provides ASIC with a firmer basis on which to provide guidance and enforce the provisions through reliance on the regulations, instead of relying on its interpretation of the policy position.
The regulations explicitly require items that can be disclosed as amounts under the FSRA to be displayed in dollar terms in the first instance. If it is not 'reasonably practicable' to provide the amount in dollar terms then items should be disclosed in percentage terms. If presentation as a percentage is not reasonably practicable, then a description (as appropriate) of how the item is determined must be provided. Worked examples (where appropriate) may aid consumer comprehension in relation to presentation of percentages and other descriptive forms.
The above mentioned concept of 'reasonably practicable' is intended to provide an avenue to address any practical concerns in the application of these disclosure obligations. This flexibility includes consideration of a party's ability to determine and disclose amounts due to administrative, systems or resource concerns. The extent of these concerns would be expected to vary depending on the nature and age of a financial product. However, it is anticipated that such restrictions will decline over time. Consequently, parties not initially disclosing amounts in dollar terms for particular products might be expected to become increasingly able to do so over time.
The proposed regulations do not impede financial services and product providers from disclosing items in terms of one or more forms, if relevant.
This measure will clearly define how business is expected to comply with the provisions in the Act and therefore may impose additional burdens on providers of financial services, if amendments are required to existing documents and systems.
Corporations Regulations 7.7.11 and 7.7.12 already provide for the disclosure of dollar amounts in the first instance. The proposed amendments to those regulations are to ensure a consistency in terminology across provisions within the FSR Act.
As for Option (b), the disclosure provisions affect only the form in which certain information is to be provided rather than the disclosure of the information itself. Accordingly, the impact will primarily affect parties which have chosen not to disclose items in dollar figures (or even potentially as a percentage) when such a form of disclosure was a practical alternative available to the regulated person.
In addition, the 'reasonably practicable' constraint involves consideration of a regulated person's ability to provide the information for existing products. The requirements would not necessarily impose a requirement for business to immediately effect system changes for existing products. However, as systems evolve over time .it would be expected that there would be greater (if not a total) incidence of disclosure in dollar terms for all items.
The potential burden associated with any amendments to existing industry systems has been further moderated through the delayed commencement of the provisions and exclusion for documents prepared prior to commencement.
d) Alternate form of prescription
Instead of the presentation requirements referred to under Option (c), parties could be required to provide information only in relation to single form (for example, dollar amounts) or based on a different sequencing.
Allowing only one form of presentation of information may not be conducive to effective presentation of information. The FSR Act affects a large variety of information, which does not lend itself to representation in a single form and, at worst, may result in information being provided in a manner that is misleading.
Submissions received throughout the development of the FSR Act and Regulations from a broad range of industry and consumer groups suggest that consumers have a better understanding of fixed amounts (such as dollars) than other forms of presentation such as percentages and other descriptive methods. Accordingly, the presentation of amounts other than as described under Option (c) is not considered appropriate.
This option would hold similar costs to those described for either of Options (b) and (c).
Draft amendment regulations related to the disclosure of dollar amounts were released for public consultation on the Treasury website on two occasions, 12 March 2003 and 27 August 2003. The Ministerial Council for Corporations has on both occasions been provided with copies of the proposed amendments.
The Association of Superannuation Funds of Australia (ASFA) support the proposed introduction of dollar-based disclosure as proposed in the draft regulations. ASFA noted that consumer testing they had undertaken has found consumers better understand dollar-based disclosure as compared to percentages.
Conclusion and recommended option
Option (c) is recommended. The amending of the Corporations Regulations is considered an effective and appropriate means of addressing concerns related to the potential ambiguity of disclosure requirements under the FSR Act. The stipulated sequence allows flexibility for the disclosure of information to be provided in an appropriate form, while ensuring that the disclosure of items occurs in a manner that is understood to be most readily comprehended by investors.
Other forms of prescription have been considered, however various consumer and industry groups indicate that dollar based amounts are more effective for consumer comprehension. Inclusion of these changes within the regulatory amendments is appropriate given that the issue has arisen due to the operation of legislative requirements.
Implementation & review
To allow sufficient time for transition, and in addition to the operation of the 'reasonably practicable' criterion for disclosure, it is proposed that these requirements will only apply in relation to disclosure documents prepared on or after 1 July 2004.
The regulation provides clarity on the operation of provisions existing in the FSR Act, accordingly no specific review of the regulation is intended.
DISCLOSING INFORMATION ON SUPERANNUATION BENEFITS - AMENDED CORPORATIONS REGULATIONS 7.9.19,7.9.19A & 7.9.20
The Financial Services Reform Act 2001 (FSR Act), which commenced on 11 March 2002, introduced a uniform disclosure and licensing regime to the financial services industry.
Periodic statements for financial products that contain an investment component (such as superannuation and managed funds) provide holders of financial products with regular information on details, such as, a summary of transactions during the period and the termination of the investment at the end of the period. This information is the only regular information received by the holder of the financial product and is vital to keeping the holder informed of the position of the investment.
Under Corporations Regulations 7.9.19 and 7.9.20, periodic statements for superannuation fund members are specifically required to inform members of the amount of a 'withdrawal benefit' and details of other significant benefits for their interest. Such information is necessary for a superannuation fund member making a decision whether or not to retain their interest in the fund. However, superannuation funds are not specifically required by existing Corporations Regulations to disclose material that would aid a member's comprehension of the nature and composition of such benefits.
The FSR Act is intended to provide a broad regulatory disclosure regime to promote better informed consumers and hence a more competitive market place.
To enhance existing disclosure obligations within periodic statements relating to the superannuation fund benefits. In particular, through disclosure of what withdrawal benefits and any other significant benefits comprise (rather than just stipulating an amount).
a) Do nothing
Under this option, regulations 7.9.19 and 7.9.20 would be maintained as they already require some disclosure of the amount of withdrawal benefits and other significant termination benefits.
b) Guidance from Australian Securities and Investments Commission (ASIC)
This option would involve ASIC providing greater guidance on the operation of the existing regulations through ASIC publications such as Policy Statements and Frequently Asked Questions.
c) Amend Corporations Regulations
Corporations regulations 7.9.19 and 7.9.20 provide the existing requirements to disclose information about the amount of termination benefits from the holding of superannuation and retirement savings account products. The termination benefits include such items as 'withdrawal benefits' - being the amount a fund would provide to a member for the voluntary cessation of their interest in the superannuation fund at the end of a period - or disability benefits.
Those regulations could be amended to reflect the Government's expectation of what constitutes relevant information and ensure that it is disclosed in a manner that is meaningful and which promotes consumer understanding.
Consistent with the Government's general approach to the regulation of self-managed superannuation funds (SMSF), SMSF will not be subject to the proposed increase in specification of periodic statement reporting requirements. Corporations regulations 7.9.19 and 7.9.20 currently exclude SMSF.
Accordingly, those sectors of the superannuation industry potentially affected by any proposed greater specification of periodic statement reporting requirements, would incorporate approximately 2472 superannuation funds with assets of approximately $415 billion and 24.7 million accounts1.
a) Do nothing
The Government has determined that the current information requirements prescribed by Corporations regulations 7.9.19 and 7.9.20 are not optimal, as they do not provide sufficient information to investors. Accordingly, the option not to alter the current regulations 7.9.19 and 7.9.20 would not be considered consistent with the requirements of subsection 1017D(4) of the Act which requires the provision of information that is reasonably believed for the holder of the product to understand their investment.
This option would incur nil costs to industry, however consumers may require additional financial services (potentially at a cost) in order to fully understand the nature of any superannuation benefits.
b) Guidance from ASIC
This option would be more flexible in operation than other legislative instruments, however policy guidance is not binding or enforceable in a court of law.
The proposed specification of additional information may require system changes and modification of periodic statement templates by industry participants who followed ASIC's guidance to supply the required information.
c) Amend Corporations Regulations
The proposed regulations reflect the Government's expectation that the relevant information is disclosed in a manner that is meaningful and which promotes consumer understanding. By putting these requirements into law, there is also greater certainty and provides ASIC with a firmer basis on which to provide guidance and enforce the provisions through reliance on the regulations.
Proposed amendments to regulations 7.9.19A and 7.9.20 are intended to enhance the existing requirement to disclose information about the amount of termination benefits from the holding of superannuation and retirement savings account products. In particular, they require:
• an indication of the amount of any fees and charges payable that would be associated with estimated termination benefits at the end of the reporting period; and
• informing the product holder that the amount of benefits described is a notional amount and may be subject to change; and
• the advising of the product holder of the availability of further information.
The regulation amendments proposed increase consumer protection in relation to the superannuation industry, through clarifying what is believed to be necessary for a product holder to understand their investment. There is general support for the principle of providing members with information on fees and penalties upon exiting a fund. This information will assist in the quality of member decision-making.
It is intended that clarifying the disclosure requirements for costs associated with leaving a superannuation fund will present holders with a more accurate indication of their account and provide an easier comparison if they wish to consider changing fends. In addition, the inclusion of further descriptive statements will ensure that product holders have a better understanding of the nature of the amounts presented in the periodic statement.
Requiring the presentation of this information is consistent with the purpose of periodic statements which is to provide investors with regular information to enable them to understand their investment and its performance.
As per Option (b), this proposal may affect industry system requirements and existing statement templates.
However, information regarding applicable fees and charges may already be calculated in determining a figure for any end benefits. Further, the disclosure of those components is subject to a reasonably practicable criterion, which may permit alternate arrangements to access information where a regulated person is not able to supply the necessary details.
Draft regulations were released for public consultation on the Treasury website on two occasions, 12 March 2003 and 27 August 2003. The Ministerial Council for Corporations has been provided with draft copies of the regulations.
The draft of 12 March 2003 was widely criticised by industry in relation to their ability to implement and the vagueness of its operation.
In contrast, the August draft has not been subject to such criticism by industry bodies. Further, the Association of Superannuation Funds of Australia (ASFA) support providing superannuation fund members with information that will assist the quality of decision making. In particular, ASFA indicated that superannuation fund members should be alerted to the impact of exit and withdrawal fees on received benefits through the periodic statement.
Conclusion and recommended option
The preferred option is option c), amend the Corporations Regulations to provide for increased disclosure, which will result in more effective information being provided in relation to the impact of fees and charges when a person leaves a fund and the nature of disclosed termination values. The provision of the information within a periodic statement is considered to be timely to any possible decision to dispose of an interest.
It is considered that the current regulations do not provide sufficient clarity as to the content required within a periodic statement for the requirements in the Act pertaining to a product holder's knowledge of their investment to be satisfied.
Implementation & review
To allow sufficient time for transition to these amended requirements, it is proposed that these requirements apply in relation to periodic statements related to reporting periods commencing on or after 1 July 2004.
The amending regulations enhance the operation of provisions existing in the FSR Act, accordingly, no specific review of the regulations is intended.
1 Australian Prudential Regulation Authority, Superannuation Market Statistics, December 2002