Commonwealth Numbered Regulations - Explanatory Statements

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Select Legislative Instrument 2007 No. 197

Issued by the authority of the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulations 2007 (No. 6)

Subsection 1364(1) 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 regulations for the carrying out or giving effect to the Act.

The purpose of the Regulations is to prescribe requirements for financial services licensees to put arrangements in place for compensating retail clients. These requirements reduce the risk that claims from retail clients arising from breaches of the financial services provisions of the Act cannot be met. The Act imposes the requirement for compensation arrangements on financial services licensees (subsection 912B(1)). The arrangement must satisfy the requirements under the Regulation or be approved by the Australian Securities and Investments Commission (ASIC). The Act also provides that regulations may set out matters to which ASIC must have regard when approving any such arrangement (subsections 912(3) and (4)). Section 912B was introduced by the Financial Services Reform Act 2001, which amended the Corporations Act significantly. Section 912B’s operation, was, however, deferred. It commences on 1 July 2007, that is, at the same time as the Regulation.

Paragraphs 942B(2)(k) and 942C(2)(m) of the Act provide that regulations may prescribe that supplementary information be included in the Financial Services Guide of financial services licensees and their authorised representatives.

The Regulations amend the Corporations Regulations 2001 (the Principal Regulations) to provide for:

                compensation arrangements that financial services licensee must hold under subsection 912B(1), being adequate professional indemnity insurance cover;

                factors used to determine whether the cover is adequate;

                a requirement that financial service licensees and authorised representatives nominate the kind of arrangements they have in their Financial Services Guide;

                factors regarding adequacy that ASIC must have regard to before approving alternative compensation arrangements;

                some exemptions from the compensation arrangement requirements; and

                transitional arrangements, including for the release of security bonds currently held by ASIC.

Further details on the Regulations are set out in the Attachment.

The Act specifies no conditions that need to be satisfied before the power to make the Regulations may be exercised.

These regulations were exposed for public comment in November 2006 and to targeted bodies for a short period in June 2007 for final comments.

The Regulations are legislative instruments for the purposes of the Legislative Instruments Act 2003.

The Regulations commence on 1 July 2007 to coincide with the commencement of section 912B of the Principal Act.



Details of the Corporations Amendment Regulations 2007 (No. 6)

Regulation 1 — Name of Regulations

This regulation provides that the name of the Regulations is the Corporations Amendment Regulations 2007 (No. 6).

Regulation 2 — Commencement

This regulation provides that the Regulations commence on 1 July 2007.

Regulation 3 — Amendment of Corporations Regulations 2001

This regulation provides that Schedule 1 of the Regulations amends the Corporations Regulations 2001 (the Principal Regulations).

Schedule 1

Item [1] – After regulation 7.6.02

Item [1] inserts a new regulation 7.6.02AAA in the Principal Regulations.

Subregulation 7.6.02AAA(1)

Subregulation 7.6.02AAA(1) provides that, unless a financial licensee is an exempt licensee under subregulation 7.6.02AAA(3), then they need to hold professional indemnity insurance to comply with paragraph 912B(1)(a) of the Act. The professional indemnity insurance has to comply with the adequacy requirement in paragraphs 7.6.02AAA(1)(a) and (b).

Subregulation 7.6.02AAA(1) provides that the cover obtained must be adequate, having regard to a number of factors. There are two limbs to the adequacy test. The first limb is the potential liability of the licensee that might realistically arise out of the licensee’s membership of an external dispute resolution body. The second limb contains other considerations relating to the licensee’s business.

In relation to the first limb, this provision requires regard to be had to the amount of cover reasonably estimated to be required– that is a reasonable and realistic assessment of liability that a licensee might be subject to as a result of membership of one or more external dispute resolution schemes. Most external dispute resolution schemes have a monetary cap on the liability in relation to any particular claim. Paragraph 7.6.02AAA(1)(a) requires regard to be had to both the monetary cap, if that applies, in relation to relevant schemes, and the volume and level of claims to achieve a reasonable estimate of potential liability that the licensee could be expected to face.

The second limb, expressed in paragraph 7.6.02AAA(1)(b), requires regard to be had to a range of key aspects of the licensees business, such as volume, clients, kind of business and number of representatives. The factors in the second limb could inform consideration of the expectation of the number of claims under the first limb. They are also independently relevant because, even though most claims faced by a licensee relating to a breach of the financial services provisions of the Act would be expected to be brought through an external dispute resolution scheme, some may also be brought through the courts. This may occur if, for example, a retail client has a claim that exceeds the monetary cap on claims under an external dispute resolution scheme. The extent to which potential claims outside the external dispute resolution framework need to be considered would depend on the nature and scope of the licensee’s business.

Subregulation 7.6.02AAA(2)

Subregulation 7.6.02AAA(2) is made under paragraph 912B(3)(c) of the Act. It provides that, before ASIC approves an alternative compensation arrangement to professional indemnity cover under paragraph 912B(2)(b), ASIC must have regard to the same factors to determine adequacy that are set out in paragraphs 7.6.02AAA(1)(a) and (b). These are in addition to the factors ASIC is required to consider under paragraphs 912B(3)(a) and (b) of the Act.

Subregulation 7.6.02AAA(3)

Subregulation 7.6.02AAA(3) provides for exemptions from the requirements of the regulation for the two categories of exempt licensees:

                general insurance companies, life insurance companies and authorised deposit-taking institutions that are regulated by the Australian Prudential Regulation Authority (APRA); and

                a licensee that is related to one of these APRA-regulated entities and the entity has guaranteed the obligations of the licensee in a form approved in writing by ASIC.

The set of APRA regulated bodies listed in the first dot point are subject to strict capital adequacy requirements. They have been selected because of the capital adequacy requirements, rather than because they are regulated by APRA.

The concept of ‘a related body corporate’ in section 50 of the Act may assist with determining whether a licensee is ‘related’ to an APRA-supervised entity for the purposes of paragraph 7.6.02AAA(3)(b).

Security bonds held by ASIC

ASIC holds security bonds lodged under previous requirements by security dealers. The bonds are in the form of guarantees or cash. In general terms, these Regulations provide that those bonds can be discharged or returned by ASIC.

Subregulation 7.6.02AAA(4)

Subregulation 7.6.02AAA(4) provides that a security bond held by ASIC as a result of the operation of regulation 7.6.02AA (as modified by any instrument made by ASIC under paragraph 926A(2)(c)) may be discharged or returned by ASIC in certain circumstances. The intention is that the security bonds generally remain in place until licensees either satisfy the requirement that they have adequate compensation arrangements in place or where they are exempt licensees. This will ensure that there is no time gap between the holding of any security bond and having other appropriate compensation arrangement in place. The provision allows for licensees to "certify" in a form approved by ASIC, that they meet the requirements of Section 912B, by holding either adequate professional indemnity insurance or having ASIC approved alternative arrangements. Where a licensee does not transition, the licensee may still have their security bond released.

Paragraphs 7.6.02AAA(4)(c) and (d) treat separately two categories of licensees:

                general insurance companies, life insurance companies and authorised deposit-taking institutions that are regulated by the Australian Prudential Regulation Authority (APRA); and

                a licensee that can certify, in a form approved by ASIC, that it holds a guarantee provided by one of these APRA-regulated entities, that together with other financial resources provides sufficient resources to cover claims to which the security bond may have applied.

Subregulation 7.6.02AAA(5)

Subregulation 7.6.02AAA(5) provides transitional periods for financial services licensees to meet the requirements of subregulations 7.6.02AAA(1), (2) and (3).

Two time periods apply:

(a) licensees whose licence commences before 1 January 2008 - have until 1 July 2008 to comply with the new arrangements;

(b) licensees whose licence commences on or after 1 January 2008 - have until the date of commencement of their licence to comply.

Licensees are encouraged to comply, where possible, prior to these dates.

Item [2] – Subregulation 7.6.02AA (2)

Item [2] inserts a substitute subregulation 7.6.02AA(2) and new subregulations 7.6.02AA(3) and (4) in the Principal Regulations.

Subregulation 7.6.02AA(1) provides a modified version of section 912B to continue the requirements for professional indemnity insurance for insurance brokers and security bonds for security dealers. These requirements existed prior to the commencement of the Financial Services Reform Act 2001.

Subregulation 7.6.02AA(2)

Subregulation 7.6.02AA(2) provides that subregulation 7.6.02AA(1) only operates where a licensee has not complied with the new requirement to hold adequate compensation arrangements, and until such time as they do so.

Subregulation 7.6.02AA(3)

Subregulation 7.6.02AA(3) provides that the operation of subregulations 7.6.02AA(1) and (2) do not remove the requirement for a licensee to hold adequate compensation arrangements under subsection 912B(1) of the Act in its unmodified form.

Subregulation 7.6.02AA(4)

Subregulation 7.6.02AA(4) provides for the release by ASIC, at its discretion, of the security bonds lodged by licensees under earlier legislation (as modified by ASIC), or the old Corporations Act, where the licensee has appropriate and adequate compensation arrangements in place or is an exempt licensee under regulation 7.6.02AAA. Additionally, this provision sets out the mechanism by which ASIC will provide information on the release of the security bonds.

The mechanism provides the following steps:

                ASIC advertises on both its website and in national daily newspapers, about the release of the security bonds directing interested parties to the ASIC website where details about the bonds and making claims can be found.

                If no valid claim has been made 3 months after publication of the advertisement, ASIC may release the bond.

This avenue is likely to be adopted where licensees do not use subregulation 7.6.02AAA(4).

Item [3] – After regulation 7.7.03

Item [3] inserts a new subregulation 7.7.03A in the Principal Regulations.

Subregulation 7.7.03A(1)

Subregulation 7.7.03A(1) provides that licensees must include a statement in their Financial Services Guide about the kind of compensation arrangement they have in place that satisfies section 912B .

It is expected that the statement will be in general terms - for example, it may refer to professional indemnity insurance without necessarily providing details of the cover.

To provide clarity, exempt and related licensees may also wish to provide appropriate disclosure.

Subregulation 7.7.03A(2)

This subregulation provides that subregulation 7.7.03A(1) takes effect from when licensees satisfy the requirements of subregulations 7.6.02AAA(1), (2) and (3).

Item [4] – After regulation 7.7.06A

Item [4] inserts a new subregulation 7.7.06B in the Principal Regulations.

These regulations require authorised representatives to meet the same requirements as licensees as noted in item [3] above.

Item [5] – Regulation 10.2.44

Item [5] omits regulation 10.2.44 which provided transitional arrangements relating to section 912B between 2002 and 2004.

Item [6] – Regulation 10.2.45

Item [6] omits regulation 10.2.45 which provided transitional arrangements relating to security bonds between 2002 and 2004

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