ASIC released Regulatory Guide 212 Client money relating to dealing in OTC derivatives in July 2010 to provide an overview of the client money provisions contained in Part 7.8 of the Corporations Act 2001 specifically in relation to derivatives.

RG 212 generally reiterates the current law in detailing what money is appropriately considered client money, and how it is to be protected, used and withdrawn. Further, the RG addresses disclosure and consideration of counterparty (credit) risk and how the money is to be dealt with in the event of a licensee’s insolvency.

On-line disclosure

ASIC have recently released Regulatory Guide 221 in regard to on-line financial disclosures, to assist licensees who provide disclosure documents to clients via email and the internet. This is supported by Class Order 10/1219 which provides express relief to licensees in delivering PDS, FSGs and SoAs to clients via an email containing a hyperlink to the disclosure provided the client agrees.

OTC derivatives disclosure to retail clients

ASIC have recently released Consultation Paper 146 which contains a number of proposals regarding disclosure about OTC derivatives to retail investors. Nine key benchmarks are proposed concerning client suitability, opening collateral, counterparty risk, client money, halted/suspended underlying assets, margin calls and fees/charges. The proposals are currently open to comment, and will be implemented in June 2011.

Facilitating Debt Raising

In May 2010 ASIC released Regulatory Guide 213 to assist listed entities and those involved in offers of quoted corporate bonds and convertible notes. The RG details conditional relief provided by ASIC in respect of enabling vanilla bonds to be offered under a vanilla bonds prospectus or a two-part prospectus, and the requirement for a ‘cleansing note’ containing prospectus-style disclosures (instead of a prospectus) where convertible notes, issued to institutional investors result in the issue of quoted securities issued upon conversion, being onsold to retail investors.

ASIC assumption of ASX market supervision role

As of 1 August 2010, and pursuant to the Financial Market Supervision Act 2009 (amending the Corporations Act 2001 with the insertion of Part 7.2A), ASIC has assumed the market supervision role previously performed by the ASX. ASIC has released a new Regulatory Guide (RG 214) outlining its approach to supervision of its Market Integrity Rules for the ASX and ASX 24 Markets (previously SFE). The ASIC Market Integrity Rules operate alongside the revised ASX Operating Rules and ASX 24 Operating Rules. Australian market licensees will continue to be responsible for the operation of their markets and for monitoring and enforcing compliance with their market’s operating rules and listing rules.
Pursuant to RG 214.25-26, ASIC has assumed responsibility for supervision and for any alleged breach of the market integrity rules and also require any breach to be notified to them in accordance with current breach reporting requirements under s 912D.
The new Market Integrity Rules regulate on-market trading by regulating the activities or conduct of licensed markets, persons in relation to licensed markets (s795B(1) of the Corporations Act 2001) and persons in relation to financial products traded on licensed markets.
In creating the market integrity rules, ASIC has largely adopted the substance of the existing obligations applicable to ASX and ASX 24 market participants, specifically those in relation to market integrity. ASIC has made minor adaptations to the relevant ASX Market Rules and SFE Operating Rules adopted for the purpose of creating the Market Integrity Rules. ASIC distinguishes between the responsibility for rules retained by market operators and the responsibility for rules transferred to ASIC determining that:
• Existing operation/mechanical style rules are the responsibility of the market operator
• Admission of participants is the responsibility of the market operator
• Rules relating to market integrity are the responsibility of ASIC
• Rules that assist the real-time monitoring of trading for protecting market conduct are the responsibility of ASIC
• Rules relating to the general participant conduct are the responsibility of ASIC

Responsible Entity financial requirements

ASIC have recently released Consultation Paper 140 which proposes three key amendments to the current conditions that AFS licensees who are Responsible Entities must meet, including:
- Restrictions on guarantees or indemnities to related parties
- A required 12-month cash flow projection; and
- Alterations to the provisions of the net tangible assets (NTA) requirement, including the capital and liquidity provisions. The proposed NTA requirement will be the greater of (i) $150,000 (ii) 0.5% of the average value of scheme property (capped at $5 million) or (iii) 10% of its average gross revenue; or 10% of its average gross revenue (minimum $500,000)

Where the average gross revenue of a Responsible Entity falls below the specified minimum value of scheme property, a minimum percentage (between 1 and 2%) should be used in the calculation of required NTA.

ASIC has also proposed that Responsible Entities be required to have adequate liquid assets to meet sudden and unexpected cash requirements, should they arise. A responsible Entity will need to have at least 50% of their NTA in cash or cash equivalents with a minimum of $150,000 and the balance in liquid assets (money on deposit with a bank which can be withdrawn immediately, or within 6 months on a fixed term deposit; bank bill with maturity less than 6 months, an asset which can reasonably be expected to be realized for market value within 6 months and is free from encumbrances/set-off)

ASIC are proposing these amendments be implemented as of 1st July 2011 for new Responsible Entities, and a transition period apply to existing Responsible Entities of either 12 months or 24 months to 1st July 2012/2013.

Simple PDSs

New regulations (in the Corporations Amendment (No.5) Regulations 2010 have been passed prescribing the form and content or product disclosure statements (PDSs) for simple managed investment schemes (MISs), superannuation funds and standard margin lending facilities.

Further guidance is provided by ASIC Information Sheet 133
A simple MIS is one which meets one of the following criteria:

- Invests at least 80% of its assets in money in a bank account where it is available for withdrawal immediately during business hours or within three months, if on fixed term deposit; or
- Under one or more arrangements by which the Responsible Entity can reasonably expect to realize the investment within 10 days at market value.
MISs which are property, mortgage or agricultural schemes or platforms are excluded, as are listed MISs.

For those meeting the criteria, the PDS will be mandated to be a maximum of 8 pages in length, for superfunds and MISs, and 4 pages for margin lending facilities. There will be prescribed section headings, enabling easier comparisons, and key content information. Additional information can be incorporated by reference.
The requirements commence on 1 January 2011 for standard margin lending facilities, and 22 June 2011 for superannuation products and simple MISs.

Future of financial advice reforms

A number of reforms to the way financial advice is dispensed by the financial planning sector are planned in response to the Parliamentary Joint Committee on Corporations and Financial Services Report on the Inquiry into financial products and services in Australia. Most of the reforms will commence on the 1st July 2012, with the remainder to be phased in as it is deemed appropriate/necessary.

The new amendments will include:
- A prospective ban on conflicted remuneration structures ie all commissions and volume based payments relating to the distribution of retail investment products, and a restriction on percentage based fees to un-geared products or investment amounts (where consent by the client).
- The introduction of a statutory fiduciary duty to ensure licensees take reasonable steps to act in the best interests of their clients.
- The introduction of flexible options for advisers to utilize in charging clients (eg flat fee, hourly rate, fixed annual fee, % of funds under management)
- Strengthening of ASIC’s powers
- Removal of exemption for accountants who advise on self managed superannuation funds

Paid parental leave

Paid Parental Leave legislation passed the senate recently and will commence on the 1st of January 2011. These requirements are additional to existing unpaid leave arrangements in the Fair Work Act 2009. The scheme introduces government funded paid parental leave and aligns with the continuing rights of employees in respect to employment and parental leave under the National Employment Standards of the Fair Work Act 2009.

The Parental Leave scheme provides birth mothers or initial primary carers with the right to government funded paid parental leave. Division 5 of the Fair Work Act outlines the obligation for employers to grant employees unpaid parental leave. Both the scheme and the Act not only recognise birth mothers, but parents by adoption, same sex couples and fathers or partners who are primary carers.
Employees seeking government paid paternity leave must apply to the Family Assistance Office for approval and satisfy the Paid Parental Leave Work Test. Employees earning less than $150,000 p.a., who have worked at least 330 hours in the past 13 months and who have had a break of no more than 8 weeks between working days are eligible to receive payments of $569.90 per week for up to 18 weeks.

The Act grants parents the right to have up to 12 months of unpaid leave and the right to request a further period up, to 12 months, of unpaid leave. The right to 12 months unpaid leave is to be shared by both parents who, upon the birth or adoption of their child, can take this leave simultaneously or consecutively. The Act also grants employees the right to request flexible working arrangements until the child commences schooling. Importantly, it also ensures employment by requiring employers to fulfill a parent’s right to return to their job after parental leave.

While the Paid Parental Leave scheme commences on the 1st of January 2011, an employer’s compliance with the scheme will be voluntary until the 30th of June 2011. This is in contrast with the obligations under the Fair Work Act 2009 and compliance with the National Employment Standards that are currently enforceable by law.
Employees are also obliged under the National Employment Standards in the Fair Work Act 2009 to grant unpaid parental leave for any period requested up to 12 months and additionally, ensure that the employee retains the right to return to their job. Under these standards employers must also provide either safe job transfers or paid no safe job leave to pregnant women or new mothers.

Unfair Contracts

Under the new Australian Consumer Law, a prohibition regarding unfair consumer contract terms has been introduced into the Trade Practices Act (with relevant sections mirrored in the ASIC Act 2001 for financial services providers). The provisions commenced in July 2010, whereby unfair contract terms contained in a standard form contract shall be void where they are unfair. Affected contracts are those for the supply of goods or services to an individual whose acquisition of the goods or services is wholly/predominantly for personal, domestic or household use/consumption. Contracts in existence prior to that date will not be affected unless they are varied or renewed after 1 July 2010.

A term of a consumer contract is unfair if:
• It would cause a significant imbalance in the parties rights and obligations and
• It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The legislation details a non-exhaustive list of examples of terms which may be unfair, including:

(a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;

(c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;

(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;

(e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;

(f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;

(g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

(h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;

(i) a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;

(j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;

(k) a term that limits, or has the effect of limiting, one party’s right to sue another party;

(l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;

(m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract.

(n) a term prescribed by regulations (although no regulations have been prescribed).

A term will not be considered “unfair” if it defines the main subject matter of the contract or sets out the upfront price payable (disclosed prior to the contract) or is a term otherwise expressly required or permitted by law. Constitutions of companies and managed investment schemes etc are excluded.