Corporations Act « Australian Regulatory Compliance Review from Langes+ Lawyers

May 21, 2013

ASIC reviews charitable investment fundraisers

ASIC has released Consultation Paper 207 Charitable investment fundraisers (CP 207) proposing reforms for charities (including religious charitable development funds (RCDFs)) that raise investment funds.

The proposals do not affect fundraising by charities in the form of donations.

The Consultation Paper proposes to either:

remove existing exemptions available to charities that raise investment funds under Regulatory Guide 87 Charities (RG 87) from 28 June 2014 (Option A), or
retain existing exemptions on the basis that they are only available to organisations that satisfy both existing and new conditions to the exemptions (Option B).

ASIC is proposing that in order to fundraise charities must hold 75% of their assets in assets that directly relate to their charitable purpose; and where the fund is offered to retail clients:

have an Australian financial services licence, and
meet minimum capital and liquidity requirements.

ASIC has chosen 28 June 2014 for Option A because it aligns with the date that APRA proposes in its discussion paper issued 19 April 2013 as the date from which amendments to current exemptions under the Banking Act for RCDFs would become effective.Background

The exemptions in Option B would only be of assistance to a debenture issuer if it obtained any exemption required from the Banking Act. APRA has proposed for discussion that from 28 June 2014 it will no longer give an exemption for RCDFs, a number of which are also charitable investment fundraisers, where the RCDF accepts retail investments.

ASIC proposes to roll over relief that is currently available to schools for school enrolment deposits without amending the terms of the relief.

If Option B is adopted the amendments to the existing exemptions will be phased in over several years and be subject to a transition period.

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Posted 21st May 2013 by David Jacobson in Charities, Corporations Act, Funds

May 13, 2013

Appointing new financial services representatives

ASIC has warned financial services licensees to ensure their recruitment processes detects representatives who have previously worked for a business ASIC has taken action against.

Under ASIC’s Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104) licensees must:

ensure migrating representatives are competent and adequately trained. It is important that they are effectively screened and their background checked,
have adequate supervisory arrangements in place to identify and address deficiencies quickly, and
have adequate financial, technological and human resources to supervise and monitor new representatives, especially in cases of business growth.

The Future of Financial Advice reforms strengthens ASIC’s licensing and banning powers in relation to all licensees by giving ASIC powers to:

refuse to issue or to cancel/suspend a licence where the licensee is likely to contravene their obligations instead of needing to establish that they will contravene or have contravened their obligations;
ban individuals from providing financial services if they are likely to contravene a financial services law; and
ban individuals from providing financial services if they are not of good fame and character or not adequately trained or competent to provide financial service.

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Posted 13th May 2013 by David Jacobson in Corporations Act, Financial Services

May 2, 2013

ASIC review of capital guaranteed products

ASIC has released Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products (REP 340) which contains a health check of the Australian market for unlisted retail structured products promoted as having capital protection or a capital guarantee.

The report found retail investors often have a poor understanding of these complex investments because of the way that some of these products are labelled, with confusing or potentially misleading messages about the level of risk investors are exposed to.

The use of terms such as ‘qualified’, ‘limited’, ‘conditional’ or ‘contingent’ in conjunction with the phrase ‘capital protected’ or ‘capital guaranteed’ may not be sufficient to avoid the phrase as a whole being likely to mislead or deceive consumers about the risk to their capital, particularly where, if certain conditions are met, the whole of the capital will be at risk.

Despite being labelled or described with terms such as ‘capital protected’ and ‘conditional capital protected’, some products have knock-in clauses and performance hurdles that may lead to investor losses. The report highlights concerns around:

the accuracy and balance of advertising for these products
the labelling and description of reverse convertible products as offering ‘conditional capital protection’ or ‘conditional protection’. The value of these investments is usually linked to the worst performing reference share, meaning investors could lose some or all of their money, and
certain ‘internally geared’ structured products that are described as entailing a compulsory capital protected loan, where all of the investor’s outlay is at risk of loss if reference assets don’t perform. Where the investment exposure is ‘notional’, there may also be risks for investors who claim tax deductions on their payments.

If significant issues in the market persist, ASIC will consider appropriate regulatory options, particularly in relation to the description of medium-risk and high-risk financial products using terms such as ‘capital protected’.

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Posted 2nd May 2013 by David Jacobson in Consumer Law, Corporations Act, Financial Services

April 29, 2013

Government responds to Trio and St.John reports on investor losses

The Minister for Financial Services and Superannuation has released the Government’s response to the report by the Parliamentary Joint Committee on Corporations and Financial Services on the collapse of Trio Capital (the Trio Report) as well as the report by Mr Richard St. John on Compensation arrangements for consumers of financial services.

The Government accepts the majority of the reports’ recommendations including legislative changes to strengthen the professional indemnity insurance requirements of providers of financial services that deal with retail consumers, changes to improve the communication of risks to investors and to ensure the adequacy of regulatory processes and consultation papers by Treasury on powers to support ASIC in its enforcement role and to improve the governance arrangements of managed investment schemes.

The Government will consult on whether ASIC should have more powers when an AFSL holder changes ownership.

The implementation of the Government’s response will be coordinated by a Superannuation Regulators Working Group, comprised of representatives from Treasury, APRA, ASIC and the ATO.

An industry-funded last resort scheme to compensate consumers impacted by a financial collapse was not recommended by Mr St. John, who noted that at this stage such a scheme would be inappropriate and possibly counterproductive. The Government accepts this recommendation. It will warn SMSF trustees that they do not have the same access to compensation as APRA-regulated funds in the event of theft or fraud.

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Posted 29th April 2013 by David Jacobson in Corporations Act, Financial Services, Superannuation

April 22, 2013

Regulation of financial businesses

The Australian Prudential Regulation Authority (APRA) has released a consultation package on proposed changes to exemption orders under the Banking Act 1959 and revised Section 66 guidelines.

Registered Financial Corporations and religious charitable development funds are currently exempt from the need to be authorised as deposit-taking institutions (ADIs).

Registered Financial Corporations

APRA is proposing requirements aimed at reducing the likelihood that an investor, and particularly a retail investor, in an RFC would confuse a debenture with an ADI deposit or other deposit-like product.

APRA proposes to restrict the use of certain terms by RFCs, including the words ‘deposit’ and ‘at-call’, and to require all debenture offerings to have a minimum maturity of 31 days.

APRA proposes that these new requirements would take effect from 1 July 2013.

APRA proposes that RFCs not allow retail investors to redeem their funds at-call. Rather, retail debenture offerings would be required to have a minimum initial maturity period of 31 days, so that for all practical purposes investments with RFCs are not able to be used for transactional banking activities. An investor would not be able to redeem, and an RFC would not be able to repay, any funds for 31 days from the date they are invested.

APRA proposes that an RFC would be required upon maturity of a debenture to either repay an investor’s funds via cash, cheque or direct credit to an account at an ADI, or to roll the investment into another debenture with a term of at least 31 days if the investor has requested that its investment be rolled over.

APRA proposes to not allow RFCs to provide certain transaction facilities, including Automatic Teller Machine (ATM) access to an account with the RFC, BPAY, Electronic Funds Transfer at Point of Sale (EFTPOS) and cheque account facilities.

Any funds raised from 1 July 2013 would need to comply with the proposed requirements. However, existing retail debenture issues would be allowed a transition period of up to three years in which to become compliant with the proposed requirements. Existing debenture issues would be required to comply with the proposed requirements at the earlier of their next rollover date or 30 June 2016.

Religious charitable development funds

APRA proposes to require RCDFs which offer products to retail investors to become either an ADI or an RFC or operate a managed investment scheme. APRA proposes to withdraw the current exemption order for RCDFs that offer retail products from 28 June 2014.

However, RCDFs that do not take funds from retail investors may continue to receive a Banking Act exemption from 28 June 2014, with five-year reviews thereafter.Conditions will include not offering BPAY facilities. RCDFs are already prevented from offering ATM, EFTPOS and cheque account facilities.

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Posted 22nd April 2013 by David Jacobson in Corporations Act, Financial Services

ASIC reviews quality of SMSF advice

ASIC has released Report 337 SMSFs: Improving the quality of advice given to investors (REP 337).

The report summarises the findings from ASIC’s Self-managed superannuation fund (SMSF) taskforce’s review of the quality of advice given to SMSFs by financial planners and accountants.

ASIC conducted a review of over 100 investor files relating to the establishment of an SMSF that were provided by financial planners and accountants. The files targeted were considered to be in higher risk categories through, for example, having lower balances or less diversified investments.

While most advice provided was rated as adequate ASIC found issues in the following areas:

advice was not sufficiently tailored to the needs of the investor
replacement product disclosure was absent or inadequate
insurance recommendations were absent or inadequate
an inappropriate single asset class was provided to investors
suitable alternatives to an SMSF were not considered, and
there was inadequate consideration of the investor’s long-term retirement planning objectives.

ASIC’s report contains a number of practical tips advisors can use to improve the quality of SMSF advice.

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Posted 22nd April 2013 by David Jacobson in Corporations Act, Superannuation

April 10, 2013

ASIC argues the benefits of co-operation

ASIC has released Information Sheet 172 Cooperating with ASIC (INFO 172) explaining the benefits of co-operating with ASIC investigations and the factors ASIC takes into account when assessing co-operation.

ASIC says that co-operating with it may benefit a person or company in many ways including the type of enforcement action it pursues and whether ASIC will give credit for cooperation in proceedings it commences.

There is no doubt a good working relationship between businesses and ASIC is of benefit to both sides. Although ASIC has a significant budget it does not have unlimited resources.

Co-operation and communication with ASIC can be difficult in a national or international business involving multiple groups where they may not be a single point of contact for all regulatory issues.

Who is responsible for ASIC requests for information or unscheduled visits?

Businesses need to develop a policy on these issues as part of their compliance framework.

Of course businesses may have a valid different interpretation of the law from ASIC. But often those disputes can be resolved on a practical co-operative basis without waiving important rights.

INFO 172 follows releases on ASIC’s information gathering powers (refer 11-194AD), public comment and enforceable undertakings (refer 12-29MR), surveillance work (refer 12-224MR), and claims of legal professional privilege (refer 12-314MR).

ASIC’s enforcement report for the period 1 July 2012 to 31 December 2012 summarises ASIC’s actions against a range of gatekeepers in the Australian financial system, such as credit licensees, insurance representatives, financial advisers, auditors and directors. ASIC focuses on four key attributes of gatekeepers: competence, diligence, honesty and independence.

During the period, 44 of the 88 enforcement outcomes in the market integrity, corporate governance and financial services areas involved cooperation between the person concerned and ASIC.

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Posted 10th April 2013 by David Jacobson in Compliance, Corporations Act, Risk Management

March 22, 2013

Risk management of responsible entities

ASIC has released Consultation Paper 204 Risk management systems of responsible entities (CP 204) containing proposed regulatory guidance on risk management practices for responsible entities in the managed funds sector that are Australian financial services (AFS) licensees that are not regulated by the Australian Prudential Regulation Authority (APRA).

Subject to the passage of the Superannuation Legislation Amendment (Service Providers and other Governance Measures) Bill 2012, the proposed requirements would also apply to APRA-regulated registrable superannuation entity licensees (RSEs) that manage non-superannuation registered managed investment schemes (dual-regulated entities).

The proposals deal with:

ensuring risk management systems comprise processes to identify, assess and treat risks
ensuring these processes are suitable for individual business objectives and operations
ensuring that risk management systems address all material risks, including strategic, governance, operational, investment and liquidity risks, and
reviewing risk management systems regularly, and no less than annually, for appropriateness, effectiveness and relevance to individual businesses.

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Posted 22nd March 2013 by David Jacobson in Compliance, Corporations Act, Investments, Risk Management, Superannuation

Regulation of superannuation forecasts

ASIC has released Consultation Paper 203 Age pension estimates in superannuation forecasts: Updates to RG 229 (CP 203) proposing reforms to assist superannuation fund trustees in providing retirement estimates.

CP 203 proposes reforms which:

allow super funds to include the age pension as part of a retirement estimate
clarify that super funds may rely on the prescribed assumptions about contributions and earnings in calculating a member’s retirement estimate. ASIC does not expect the super fund to make specific inquiries to determine whether the member’s individual circumstances match the prescribed assumptions.

Superannuation fund trustees providing retirement estimates (which may be personal advice) have been granted class order relief in [CO 11/1227] Relief for providers of retirement estimates from the licensing, conduct and disclosure requirements for general and personal advice in the Corporations Act 2001. CP 203 contains proposed amendments to that Class Order.

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Posted 22nd March 2013 by David Jacobson in Corporations Act, Financial Services, Superannuation

Restricted terms: financial planner and financial adviser

The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 will, if passed, amend the Corporations Act to define the terms ‘financial planner’ and ‘financial adviser’ and to restrict the use of these terms and terms of like import.

The change will take effect from the later of 1 July 2013 or the day after the Act receives the Royal Assent.

Use of the terms ‘financial adviser’, ‘financial planner’ and terms of like import is restricted to those persons able to provide personal advice on designated financial products.

This means that relevant Licence holders authorised to provide personal advice, for example stockbrokers, will be able to use the restricted terms.

Persons who do not hold Licences will not be able to use the restricted terms. For example, property spruikers who use the restricted terms will commit an offence attracting a penalty of 10 penalty units per day if an individual, and 50 penalty units per day if a corporation. (A penalty unit equals $170).

The requirement to hold a Licence does not apply where the person is subject to an exemption (outlined in subsection 911A(2) of the Corporations Act).

‘Financial product advice’ is defined in subsection 766B(1) of the Corporations Act as a recommendation or statement of opinion intended to influence a decision in relation to a financial product or class of products. ‘Personal advice’ is defined in subsection 766B(3) of the Corporations Act as financial product advice directed to a person in circumstances where the adviser has considered the person’s objectives, financial situation and needs.

Persons authorised only to provide general advice will not be able to call themselves ‘financial advisers’ or ‘financial planners’. Similarly, persons not authorised to provide any form of financial product advice will not be able to call themselves ‘financial planners’ or ‘financial advisers’.

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Posted 22nd March 2013 by David Jacobson in Corporations Act, Financial Services, Future of Financial Advice Reforms