Under a new bill, the Corporations Amendment (Financial Services
Modernisation) Bill 2009, the provision of margin lending services
(and advice in relation thereto), will be regulated by ASIC as
a financial product/service.
ASIC have recently released two policy proposals in this regard,
namely Consultation Paper 108 which focuses on training of advisers,
and Consultation Paper 109 which details proposed financial requirements
to be satisfied in respect of the provision of such services
going forward.
A further Consultation Paper 112 has now been issued regarding
dispute resolution requirements. Paragraph 92 of the draft Regulatory
Guide notes that margin lenders will be required to comply with
responsible lending criteria, namely assessment of suitability
of the margin loan for the investor; and notification of margin
calls to the investor.
All current margin loan providers or AFS Licensees will need
to apply for a variation of their existing AFSL within six months
of the enactment of the relevant legislation, if they wish to
provide a margin lending facility, or advice in relation thereto.
ASIC will allow a transition period of 12 months to enable advisers
to comply with the prescribed training requirements. For providers
of margin lending facilities (as opposed to those who merely
advise on such), there will be an NTA and ASLF requirement imposed
to ensure ongoing demonstration of financial substance, such
requirements depending on whether the facility is 'standard'
or 'non-standard'. A margin lending PDS will also be required,
with guidance on the content of this document to be provided
later in the year.
Australian Credit Licence
Please note that a new licensing regime is proposed, and
will be administered by ASIC, with respect to credit providers.
ASIC are currently engaged in a consultation process to determine
the parameters and requirements of the proposed National Consumer
Credit regime, including the proposed enactment of the National
Credit Bill in the coming months.
A series of consultation papers and regulatory guides, and
a new credit licensing kit will be released during the remainder
of this year. Essentially the new legislation will require
that anyone who engages in certain credit activities, or provides
credit services (ie provides credit assistance or act as an
intermediary) in relation to such activities, will need to
register with ASIC between 1 November and 31 December 2009.
Such credit activities are set out in section 6 of the new
Bill, and are proposed to encompass credit contracts, consumer
leases, mortgages, guarantees, and other prescribed activities.
If you are the beneficiary of such contract ie the credit
provider, mortgagor, lessor, or beneficiary of the guarantee,
(whether initiating or later upon assignment), you must be
licensed. Section 7 notes that the provision of credit services
entails providing assistance (advising/suggesting someone
apply for credit) or acting as an intermediary.
Such registered persons will have six months (1 January-31
July 2010) to lodge an application with ASIC for an Australian
Credit Licence (ACL). This is the transitioning period for
current providers who register in November/December 2009.
New entrants will need to apply for, and obtain, an ACL from
1 January 2010 before commencing business. There will be a
streamlined (easier) process for ADIs regulated by APRA, and
for finance brokers registered in WA (who are therefore considered
to have met more stringent requirements already in the provision
of their credit services). Key duties for credit licensees
will be similar to those currently applicable for AFS Licensees
ie operate efficiently, honestly and fairly, properly manage
conflicts of interest, comply with the laws and supervise
representatives, maintain adequate resources and risk management,
have adequate dispute resolution and compensation arrangements
(likely to be $2m minimum PI insurance requirement) etc, and
also to comply with prescribed 'responsible lending' conduct
and duties.
Consultation Paper 111 details the compensation and financial
resource arrangements to be imposed on credit licensees, whilst
Consultation Paper 110 outlines guidance regarding compliance
with general conduct obligations to be imposed. The latter
paper is supported by the draft ASIC Regulatory Guide 104.
Consultation Paper 112 sets out the dispute resolution requirements
for credit providers and margin lenders. Applicants for an
ACL will need to become members of an external dispute resolution
scheme (such as FOS or the Credit Ombudsman Service Ltd) and
implement internal dispute resolution procedures, akin to
those currently imposed on AFS licensees. Unlike the current
AFSL regime, it appears to be proposed that representatives
of a credit licensee (directly involved in undertaking authorized
credit activities) will individually have to be members of
an external dispute resolution scheme. This is to enable consumers
to have recourse directly to the individual where they have
acted outside the scope of their authority, or where the licensee
is insolvent.
The draft Regulatory Guide notes that credit providers will
be obligated to make reasonable enquiries about a person's
needs, objectives and financial circumstances before providing
a loan or credit contract, and assess whether it is unsuitable
for a person to enter into a loan, have a credit limit increased
or even remain in a credit contract.
Credit licensees will also need to implement procedures to
properly assist and deal with financial hardship applications
and situations.
Consultation Paper 113 sets out the draft training competencies
which will be required for credit licensee representatives.
Persons involved in providing credit will have to meet 'fit
and proper' criteria. Apart from satisfying police, insolvency
checks and obtaining references (as per current AFSL responsible
manager requirements), this essentially means that relevant
officers (who provide the authorised credit activities in
the licensee) will have to hold a credit industry qualification
at a minimum Certificate IV level or a relevant higher level
qualification (eg diploma in financial services or degree
in finance) AND have had at least two years "problem-free" experience
(ie no regulator-involved action/compliance issues).
For those involved in providing mortgage broking services,
key people will need to hold a Certificate IV in Financial
Services (Finance/Mortgage Broking). It is proposed that key
people should then undertake 20 hours of annual continuing
education to maintain skills and competency in this area,
covering product and industry developments, and including
compliance/regulatory training.
During the transition period of initial licensing, the educational
qualifications will not be required (until 2013) for key persons
at the time of application, provided they can demonstrate
5 out of the last 7 years relevant experience.
The key people for credit licensing purposes will be named
on the ACL pursuant to a 'notification condition' which will
operate similar to the current Key Person condition on AFSLs
ie if that person leaves the organization, ASIC will have
to be notified and a suitable replacement appointed.
There will be a carve-out from the education and ongoing
training requirements re mortgage brokers, for those who hold
tier 1 RG 146 qualifications and only provide incidental mortgage
broking advice eg financial planners who only engage in credit
activities in a limited way.
Treatment of client monies in relation to OTC
derivatives
A new ASIC Consultation paper 114 has been released by ASIC
this month, regarding treatment of client money in relation
to over-the-counter (OTC) derivatives. The paper sets out
a number of proposals including a draft Regulatory Guide on
the subject, addressing ASIC's concerns about disclosure to
clients regarding money paid to/held by licensees in relation
to OTC derivative transactions, namely the counterparty (credit)
risk such clients are taking in respect of licensees.
ASIC are concerned that client money obtained and held by
licensees as margin payments or free equity, be applied and
deposited in accordance with the Corporations Act requirements
regarding segregated accounts, and that the risks that a licensee
may apply such monies to offset other liabilities and hence
be unable to repay clients, be properly disclosed to, and
better understood by, their clients.
The draft Regulatory Guide attempts to categorise what is
and isn't client money, and what can be included in a client
money account. Please note that client monies do not technically
include licensee remuneration, reimbursement, payment for
products etc. Client monies must be placed into a client money
account with an Australian ADI, approved foreign bank or CMT
generally. Client money accounts should generally be operated
as trust accounts, unless subject to margin calls from clearing
facilities etc.
The draft Regulatory Guide outlines circumstances where monies
can be deposited into, or withdrawn from, client money accounts.
Permitted withdrawals include payments for products, brokerage
and other agreed charges, money to which the licensee is properly
entitled, and other legally mandated or instructed payments.
For dealings in derivatives, licensees may use client monies
to meet margins, guarantees, settlements or adjustments etc.
Despite the position that client segregated accounts are
essentially subject to a statutory trust, clients remain exposed
to a degree of counterparty (credit) risk with respect to
the potential failure/insolvency of the licensee of another
of the licensee's clients, causing a shortfall and inability
to honour payment obligations. Accordingly ASIC consider that
clients need to properly assess this risk before placing monies
with licensees to trade derivatives. To this end, ASIC will
expect that (i) clients be advised of licensee's policy regarding
use of client monies (ii) licensees should include clear and
prominent disclosures in their PDS regarding the nature of
counterparty risk for client monies used for derivatives ie
that monies in the client account are co-mingled with other
client monies and that such monies may be used to satisfy
obligations arising from dealings on behalf of other clients
of the licensee, hence exposing a client to the risk that
there may be a deficit in the account and that the licensee
may become insolvent or otherwise unable to pay the deficiency
(iii) licensees should advise clients to minimise the risk
by keeping the minimum client money with a licensee to reduce
their potential exposure.
ASIC also note that there should be clear and prominent disclosure
in the PDS where the licensee is retaining interest earned
on monies in client accounts.
ASIC are considering whether further financial information
about the licensee should be included in the PDS so that a
potential client can adequately assess the licensee's solvency.
ASIC also propose that, going forward, auditor reports will
also have to contain a statement regarding the licensee's
compliance with the client money provisions (see draft paragraph
56 & 57).
Feedback on the proposals is sought by ASIC by 18 September
2009.
Updating of Accounting Certificates for Wholesale
Clients
This applies where you provide products or services to a
wholesale client under section 761G(7) of the Corporations
Act. Reliance on section 761G(7) requires that the product
or service is not provided for use in connection with a business
and that you have obtained an accountant's certificate in
relation to that person's assets or income for the last 2
financial years in accordance with the amounts specified in
the regulations (currently assets of $2.5 million or income
of $250,000).
It is necessary where ongoing services are provided to clients
on this basis to regularly check that you have on file a valid
accountant's certificate and that a new accountant's certificate
is obtained every 2 years.
You are able to rely on the face of the certificate unless
you have actual knowledge that the certificate is incorrect.
There is no need for you to inquire behind the certificate
if you are satisfied the certificate:
is issued by a person who is a qualified accountant.
A qualified accountant is a person who belongs to:
the specified professional bodies (Institute
of Chartered Accountants in Australia (CA, ACA, FCA); CPA
Australia (CA ,FCA) or National Institute of Accountants in
Australia (PNA, FPNA, MINA, FINA); or
an eligible foreign professional body, has at
least 3 years practical experience and provides certificate
to someone resident in the same country as them (not Australia);
and
states that the person to whom the offer is
made has a gross income of $250,000 or more in each of the
preceding two years (before the certificate was issued) or
net assets of at least $2.5million.
Proposed prohibition on unfair contract terms
in standard-form contracts
Unfair contract terms are those that cause a significant
imbalance in the parties' rights and obligations arising under
a contract and are not reasonably necessary to protect the
legitimate business interests of the supplier. The legislative
model which has been proposed will apply to standard form,
non-negotiated contracts. The Treasury paper provides examples
of types of terms that may be problematic as they are likely
to cause client detriment including:
- clauses that permit the supplier to unilaterally vary
the terms of the contract;
- clauses that prevent the consumer from cancelling a contract;
- clauses that exclude liability for harm resulting from
the supplier's or its agents' actions;
- clauses that let only the supplier decide whether to renew
or not to renew the contract;
- clauses that penalise only the consumer for breaches of
the terms of the contract;
- clauses that permit the supplier to change the price of
the goods or services contracted for without allowing the
consumer to terminate the contract;
- clauses that permit the supplier to unilaterally determine
whether a breach of the contract has occurred or to interpret
the contract's meaning;
- clauses purporting to limit the consumer's right to take
legal action against the supplier;
- clauses limiting the evidence that the consumer is permitted
to use in legal proceedings based on the contract;
- clauses imposing the evidential burden on the consumer
in legal proceedings;
- clauses that require consumers who breach a contract term
or terminate early to pay penalties, in the form of specific
additional payments, additional interest or indemnity legal
costs, which do not reflect the suppliers' reasonable costs;
and
- clauses that deem something as a fact or that something
will be a fact, such as an acknowledgment that certain information
has been provided to the consumer prior to the agreement
being made, regardless of whether or not it was.
The onus will be on the provider to prove the contract is
not a standard form contract and the remedies (not limited
to financial detriment) will be available where the claimant
can show detriment or a substantial likelihood of detriment.
The Australian Consumer Law will also ban certain contract
terms which are considered to be unfair in all circumstances
and the use of these terms would expose the provider to enforcement
action. Some of the terms suggested by the Treasury paper
are:
- deny the existence or effect of oral representations
- require the consumer to agree, for instance, that no representations
have been made that are not in the written contract
- state that the written document contains the entire agreement
of the parties
- the consumer acknowledging that he or she has understood
the contract
- conclusive evidence terms
- requiring the consumer to pay more than the provider's
reasonable enforcement costs reasonably incurred
- mandating arbitration of disputes or otherwise inhibiting
access to courts or tribunals.
There will also be new remedies in the proposed new consumer
law including substantiation notices (requiring a provider
to give to a regulator a basis for representations it makes),
public warning ("naming and shaming") and infringement notices.
At the National level it is proposed that ASIC will have
primary responsibility for the enforcement of consumer laws
relating to financial services.
Once implemented this new legislation will require review
and amendment (where necessary) of all standard form contracts.
ASIC guidance re securities lending/substantial
holdings
Last month, ASIC released Consultation Paper 107 regarding
disclosure of substantial holdings arising from securities
lending or prime broking. The paper is seeking to improve
disclosure of substantial holdings in practice and makes it
clear that securities lending transactions and prime broking
arrangements need to be taken into account in calculating
a substantial holding. A substantial holding notice must be
lodged when your relevant interests, together with the relevant
interests of your associates, increase to 5 per cent or more
of a listed entity or that interest changes by 1 per cent
or more. A notice must also be lodged when your interest drops
below 5 per cent again. The Paper makes it clear that these
obligations also apply to parties which lend or borrow securities.
ASIC proposes that prime brokers may also need to provide
a notice where they are entitled to borrow securities from
their clients as part of the prime broking arrangement.
RG 126 insurance arrangements
For financial services licencees who provide services to
retail clients, the initial implementation period regarding
insurance arrangements is drawing to a close. RG 126 details
the introduction of the requirement for such licensees to
hold professional indemnity (PI) insurance which has been
in place since last year, and outlines the higher standard
to be complied with from 1 January 2010. Notably, from 1 January
2010 applicable licensees will need to hold PI insurance cover
with an 'authorised insurer' ie an insurer authorised by APRA,
or operating under an exemption. Carve outs for the requirements
are limited to licensees with operating revenue or gross assets
of at least $200m, or with at least 500 employees.
Licensees who do not meet this 'large entity' criteria will
need to now review and ensure their current policy is held
with an authorised insurer (ie not a foreign insurer), and
that it will meet the adequacy criteria set out in RG 126.
While much of this will be determined by the licensee assessing
what is appropriate for the size and nature of their business,
minimum requirements include (i) minimum coverage of $2m for
a claim, with an aggregate limit above $2m depending on licensee's
revenue (ii) coverage for loss or damage suffered by retail
clients due to breaches of chapter 7 of the Corporations Act
and fraud/dishonesty by directors or representatives, with
no exclusions for misrepresentation etc (iii) acts and products
outside approved list; and (iv) run-off cover for at least
1 year.
Fair Work Act
On 1 July 2009 the Fair Work Act commenced, replacing the
Workplace Relations Act, and introducing new unfair dismissal
laws which took effect immediately. The National Employment
Standards (NES) and Modern Awards come into effect on 1 January
2010, at which point the Australian Industrial Relations Commission
will be superseded by Fair Work Australia. The Fair Work Act
must be read in conjunction with the Fair Work (Transitional
Provisions and Consequential Amendments) Act 2009 by employers
transitioning from Work Choices to Fair Work.
From 1 July 2009, employees must lodge a claim for unfair
dismissal within 14 days of their dismissal. To be eligible
for such a claim, the employee must have been employed for
a minimum of 12 months (or 6 months if employed by a small
business ie one with less than 15 employees), and be covered
by a Modern Award or enterprise agreement or earn less than
the high income threshold. There remains exclusions for employees
who are employed for a specific task/period or demoted without
significant reduction in duties or remuneration.
The small business exemption can be utilised by one that
employs less than the equivalent of 15 full time employees,
until 1 January 2011, at which point a straight head count
of 15 will be used thereafter.
The Act does not distinguish between probation and qualifying
periods ie it is simply 12 months of employment for small
businesses and 6 months for others. The Act permits dismissals
which are genuine redundancies ie the employee's job must
be no longer required to be performed by anyone because of
changes in the operational requirements of the business. Further,
if reasonable in the circumstances, the employer must have
tried to redeploy the employee. The primary remedy for an
unfair dismissal claim will be reinstatement, or where reinstatement
is inappropriate, compensation.
Further provisions in the new Act involve transfers of business,
the new bargaining framework, 'good faith bargaining' and
enterprise agreement negotiation requirements, as well as
modern awards post January 2010.
Significant changes among the NES will be amendments to parental
leave entitlements (allowing parents to request leave for
up to 24 months); an entitlement for parents of young or disabled
children to request flexible working arrangements; and an
obligation upon employers with 15 or more employees to
pay redundancy benefits in accordance with a statutory scale.
Employers who increased the rate of pay in return for employees
agreeing in a pre-reform workplace agreement to relinquish
some entitlements that now are in the NES (e.g. some or all
of 10 days' sick leave or 20 days' annual leave) will from
1 January 2010 have to provide both the NES benefit and, where
applicable, the modern award higher pay, unless the agreement
benefit is considered at least as beneficial as the NES entitlement.
Modern awards will not cover employees who earn more than
a certain income, expected to be $100,000 a year (pro rata
for part-time employees).
Abolition of transfer duty on marketable securities
and non-land business assets and mortgage duty
The NSW Treasurer, The Hon. Eric Roozendaal MLC, announced
changes to taxes, duties and benefits as part of the 2008
Mini-Budget.
Duty on unquoted marketable securities was to be abolished
from 1 January 2009, however due to the Budget, it is now
to be scheduled for abolition on 1 July 2012.
Mortgage duty on business loans only (noting mortgage duty
on residential loans and loans to acquire residential investment
properties has already been abolished) was to be abolished
on 1 July 2009 but will now be abolished from 1 July 2012.
Transfer duty on business assets other than land was to be
abolished on 1 January 2011 but this has now been deferred
to 1 July 2012.