What's New?

 

This webpage provides a very brief snapshot of some recent legal and regulatory developments impacting the financial services industry. This is provided as general information only, and cannot be relied upon as legal advice (or used as a substitute for legal advice). Block Legal & Compliance accept no responsibility for the accuracy or currency of the information included herein.

Professional Indemnity Insurance

 

From 1 July 2008, financial services licensees who provide financial services to retail clients are required to have professional indemnity (PI) insurance in place and disclose in their Financial Services Guide a summary of that insurance. The new requirements were introduced by regulation 7.6.02AAA (under the Corporations Amendment Regulations 2007 (no 6) on 28 June 2007.

Section 912B of the Corporations Act 2001 requires Australian financial services licensees to have in place arrangements to ensure that retail clients, who suffer loss due to a breach of a licensee's obligations, are appropriately compensated.

On 28 March, 2008 ASIC released Regulatory Guide 126 which sets out sets out how ASIC will administer the compensation requirements. Parts C and D of RG 126 set out what ASIC considers is adequate PI insurance cover.

ASIC have recently issued a questionnaire to all relevant licensees requiring them to provide information regarding the PI insurance details they currently have in place.

False and misleading rumours

 

During March 2008 ASIC made announcements in relation to the deliberate spreading of false or misleading information about listed securities. ASIC's inquiries now extend to making formal requests for information from a number of market participants about trading in certain securities.

ASIC's inquiries are related to conduct which could involve spreading of false or misleading rumours or predatory trading that could amount to market manipulation or insider trading. The concern is that this is being done to artificially provoke sales of securities and to reduce their market price. Conduct of this type can be a criminal offence.

Section 1041E of the Corporations Act states that a person must not make a statement or disseminate information if (relevantly):

•  it is false in a material particular or is materially misleading; and

•  is likely to induce persons to dispose of or acquire financial products or to have the effect of reducing the price for securities; and

•  if the person does not care whether the statement or information is true or false, or knows or ought reasonably to have known it is false or misleading.

If a person spreads a false rumour without properly investigating its truth then the person risks breaching this section. ASIC will investigate the conduct of persons who spread false information or rumours if they cannot substantiate that they did concern themselves as to the truth or falsity of the rumour.

Section 1041E is part of a suite of provisions in the Corporations Act which prohibit market manipulation (s.1041A), false trading (s.1041B) and market rigging (s.1041C). There is also a provision that prohibits inducing a person to deal in a financial product using false or misleading information (s.1041F).

Financial market participants must not engage in dishonest conduct in relation to a financial product or service (s.1041G) when carrying out a financial services business. Dishonest is defined by reference to the standards of ordinary people.

ASIC believes that these provisions, together with the laws prohibiting trading in securities by persons who have confidential price sensitive information (whether or not the information is sourced from an “insider') are sufficient to ensure fair market trading practices.

ASIC & ASX warnings re stock lending and short selling obligations

 

ASIC and the ASX have both issued statements recently to clarify and reinforce existing obligations in relation to share lending and short selling.

Via IR 08-03, ASIC are reminding market participants who engage in stock lending or borrowing to carefully examine their obligations to lodge substantial shareholding notices, and the potential impact of the takeover provisions. Those who borrow shares are considered to acquire a relevant interest in the securities where they hold a presently exercisable and unconditional right to vest those securities.

 

The ASX have also issued a media release reiterating that they must be informed of all short sales (naked or otherwise) by market participants.

ASX corporate governance

 

The ASX Corporate Governance Council have released revised Corporate Governance Principles and Recommendations which apply to disclosure in Annual Reports by all ASX-listed entities, which include small and medium sized companies, trusts and externally managed listed entities. The Revised Principles and Recommendations will apply to entities with a 30 June financial year end, to the report for the year ending 30 June 2009 and for those with a 31 December financial year, to the report for the year ending 31 December 2008.

Those Annual Reports will need to comply with the Revised Principles and including the guidance in relation to the independence of directors; disclosure of the process of performance measurement for the board and senior executives; disclosure and detail in relation to corporate codes of conduct; detail on shareholder communication strategies and inclusion of a summary of policies for managing material business risks. The Revised Principles confirm that the “if not, why not” structure for reporting is effective and that a proper explanation from departure from any recommendation is a valid alternative.

Shorter PDSs and SOAs

 

The Corporations Amendment Regulations 2007 (No.10) (Cth) commenced on 25 August, 2007. These regulations allow a Product Disclosure Statement (PDS) or a Statement of Advice (SOA) to be reduced in length by incorporating information by reference, provided certain conditions are met.

Instead of including the information in full within the SOA or PDS itself, it is now possible to provide a reference to a location or another document where that information can be found. For a PDS that information must be in a publicly available document which needs to be referred to in the PDS in sufficient detail so that it can be identified and located and must state that a copy of the information will be provided on request at no charge. Some core information, notably key features, key risks, fee disclosure, details of issuer, dispute resolution system and cooling off cannot be incorporated by reference into a PDS.

For the SOA the incorporated document or relevant part must be supplied to the client (unless it was given to the client previously) and the warning in relation to incomplete or inaccurate information and the information in relation to charges and benefits cannot be incorporated by reference.

Any document incorporated by reference in either a PDS or SOA must be retained for seven years.

SOAs – small investments or no recommendations

 

The Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 commenced on 28 June 2007, and relaxes some of the requirements on licensees in relation to the provision of Statements of Advice.

 

In the following situations a Statement of Advice will not be required, but a Record of Advice will need to be provided to the client:

 

• Personal advice but no recommendation and no remuneration received in connection with that advice;
• Personal advice provided in relation to investment in a product (which is not a derivative, general insurance or life insurance product) where the total investment is below a fixed dollar value specified by regulation (initially $15,000);
• Personal advice in relation to a superannuation or RSA product where the client already has an interest in the product (i.e. is a member) and the investment is below a fixed dollar value specified by regulation (initially $15,000).

 

You will need a carefully worded Record of Advice to ensure you meet the relevant conditions.

Changes to wholesale client definition

 

The Act inserts a new provision, section 761GA to follow section 761G on the meaning of retail client and wholesale client. The new section adds an additional category if a financial services licensee is satisfied on reasonable grounds that the client (who would otherwise be a retail client), has sufficient experience to enable them to assess the relevant product.

 

In order to rely on this new section the following conditions apply:

 

• The provider of the financial service or product must be a financial services licensee;
• The product cannot be  a general insurance product , a superannuation product or an RSA product;
• The product or service is not provided for use in connection with a business;
• The licensee must be satisfied on reasonable grounds that the prospective client has previous experience in using financial services and investing in financial products that allows the client to assess the merits of, the value of and the risks associated with holding the product or service, their own information needs and the adequacy of information provided to them by the licensee and the product issuer;
• The licensee must provide to the prospective client a statement setting out the licensee's reasons for being satisfied about these matters; and
• Each client will need to sign a written acknowledgement that the licensee has not provided them with a PDS, any other document which would be required if they were a retail client (e.g. an FSG) and that the licensee does not have any other obligations to them under Chapter 7 of the Corporations Act that relate to retail clients.

 

A financial services licensee will need to approach the use of this new section with care and diligence particularly in relation to the assessment that they have undertaken in relation to the client and their reasons for being satisfied that they have the requisite experience. An assessment must be undertaken by the licensee itself, it is not possible to rely on an assessment undertaken by another licensee.

Professional / Sophisticated investors

 

The Act also aligns the definitions of professional and sophisticated investors in Chapter 6D (fundraising) with those in Chapter 7.

 

For sophisticated investors, section 708(8) provides that a disclosure document will not be required where an offer is made to a company or trust which is controlled by a person in respect of which an accountant's certificate has been obtained 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).

 

In determining a person's assets or income, new subsection 708(9A) provides that the net assets or gross income of a company or trust controlled by that person may be included.

 

For professional investors section 708(11) has been amended so that a disclosure document will not be required where an offer is made to a person who has or controls gross assets of at least $10 million (including any assets held by an associate or under a trust that the person manages).

NSW Mortgage duty

 

Currently Victoria, Tasmania, ACT and NT have no mortgage duty.

• Queensland and Western Australia abolished mortgage duty on 1 July 2008.
• In New South Wales, mortgage Duty in respect of investment housing was abolished from 1 July 2008, followed by the complete abolition of mortgage duty from 1 July 2009 (brought forward from 1 January 2011). NSW Mortgage Duty for the purposes of owner occupied housing was previously abolished.
• South Australia reduced the rate of mortgage duty from 1 July 2008 to 15 cents per $100 and will abolish the duty on 1 July 2009.

On-line disclosure

for financial services

 

ASIC released a Consultation Paper in April 2008 proposing to facilitate disclosure of financial services information through email and the internet as part of measures to improve access to such information.

ASIC is proposing relief to enable providers to give their financial services disclosures by (i) notifying clients via email that the relevant information is available from a website and with instructions on where the information can be found; or (ii) sending clients an email with a hyperlink to the relevant information.

ASIC is also proposing relief to enable trustees of superannuation entities to use a website as the default method of delivering annual superannuation information (other than personal disclosures, such as periodic statements of a member's holding). The proposed relief will mean that annual superannuation information is treated in much the same way as company annual reports.

Disclosure by unlisted mortgage and property schemes

 

In July 2008, ASIC released consultation papers and draft regulatory guides aimed at improving disclosure to retail investors by unlisted mortgage schemes and unlisted property schemes.

ASIC is encouraging responsible entities to communicate the enhanced disclosure information to investors in the most effective way possible and using existing effective investor communication channels (e.g. by the scheme's website and regular reports).

ASIC has also included draft guidance for advertising of these products and their expectations of compliance plans, compliance committees and compliance plan auditors.

In formulating its proposed disclosure approach, ASIC has identified and profiled more than 200 unlisted mortgage funds, and proposes a benchmark-based disclosure model for unlisted mortgage schemes. The eight benchmarks differ from the ones introduced for debentures to reflect the different risk profile of unlisted mortgage schemes and the different legal structures and rights associated with that type of investment.

It is proposed that issuers disclose against the benchmarks on the ‘if not, why not' approach. ASIC is proposing that responsible entities for existing mortgage schemes report against benchmarks to existing investors by 31 October 2008. From this date, new fundraising documents for new and existing mortgage schemes will need to comply with the ‘if not, why not' benchmarks.

ASIC also analysed about 300 unlisted property schemes in formulating its enhanced approach to disclosure. The new proposals centre on eight disclosure principles which are designed to give issuers guidance on key areas that need to be prominently disclosed to existing and potential retail investors.

ASIC does not currently propose to extend the ‘if not, why not' approach to unlisted property schemes. ASIC is proposing that responsible entities for existing unlisted retail property schemes provide updated disclosure to existing investors applying in the new disclosure principle by 31 October 2008. From this date, responsible entities of all unlisted retail property schemes will need to apply the disclosure principles to PDSs and ongoing disclosures.

Financial Services & Credit Reform

 

The Federal Treasury has recently issued a Green Paper entitled "Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Regulation" which sets out some reform options for the financial services sector and federal regulation of certain aspects.

Currently the States and Territories regulate consumer credit products and lending (through the Uniform Consumer Credit Code (UCCC)) and, in some jurisdictions, consumer credit providers through different licensing regimes. Mortgage brokers are not regulated by all states, and not regulated consistently amongst those that do.

A Productivity Commission report recommended the transfer of responsibility for regulating all consumer credit to the federal government, for regulation by ASIC. It was recommended that ASIC regulate/administer all credit products (and all intermediary services), a national licensing system for finance brokers and credit providers, and a re-enactment of the UCCC as commonwealth legislation. Treasury has now tabled the relevant proposals in the Green Paper.

Now the Federal Treasury has put out its proposals as to how this will be achieved in the said Green Paper, which appears to favour the appointment of ASIC as regulator, and the incorporation of credit as a financial product, attracting the same licensing and disclosure requirements as current financial products. There are of course transitional issues, and duplication/inconsistency issues between the Corporations Act and the UCCC legislation to be addressed.

The Green Paper also addresses the regulation of margin lending and (all) promissory notes along similar lines.

PDS notifications to ASIC

 

A notice must be provided to ASIC within 5 business days of:

 

•  the date on which a PDS is first given to someone (FS88);

•  a change being made to fees and charges set out in the PDS (FS89); or

•  the financial product to which the PDS relates ceases to be  offered to new clients (FS90).

 

From 1 January, 2009 this notice will be required to be lodged electronically.

External dispute resolution

 

AFS licensees authorised to provide financial services to retail clients are required to be members of an external dispute resolution service.

From 1 July, 2008 the Financial Industry Complaints Service (FICS) merged with the Banking and Financial Services Ombudsman and the Insurance Ombudsman Service to become the Financial Ombudsman Service (FOS).

This change affects PDSs and FSGs issued by AFS licensees prior to 1 July, 2008. FICS applied to ASIC for relief and ASIC responded on 19 June 2008 with a no action position which is as follows:

ASIC will take no action against members of FICS for breaches of sections 941E and 1012J of the Corporations Act, the requirements to keep the information in PDSs and FSGs up to date, in circumstances where:

•  the PDS or FSG is printed prior to 1 July 2008;

•  the member has become a member of FOS; and

•  the member has not included information about FOS in the relevant PDS or FSG.

The conditions in which ASIC will take “no action” are that:

•  the PDS or FSG was up to date at the time it was printed;

•  the member must provide details of FOS to a consumer who requests the information or makes a complaint. The information may be provided in writing, orally or via a website; and

•  for complaints that are unresolved after having been through a member's internal dispute resolution procedure, the member must inform the complainant that they have a right to pursue their complaint with FOS and provide details of how to access FOS.

However, please note that this no action position:

•  only applies to printed documents and does not apply to documents which are not printed or set out on a website (other than in a printed form);

•  only applies until the next reprint of the PDS or FSG or until 30 September 2009 (whichever is first).

If you returned your membership form by 31 July, 2008 you do not need to notify ASIC of your FOS membership. However, if you did not do so, you will need to notify ASIC yourself.

Anti-Money Laundering update

 

There is as yet no information available as to the timing of the next compliance report which will need to be lodged with AUSTRAC by all reporting entities under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The first compliance report (which related to the reporting period from 13 December 2006 – 31 December 2007) had to be lodged by 31 March 2008.

 

It is thought that compliance reporting will be undertaken by AUSTRAC on an annual basis so it appears likely that the next report will be due in 2009 (3 months after the reporting period) and will relate to the period from 1 January 2008-31 December 2008.

 

The new AML/CTF Rules in relation to ongoing customer due diligence commence on 12 December 2008. As a consequence they need to be addressed in Part A of all AML/CTF programs by 12 December, 2008.

 

The new Rules which relate to ongoing customer due diligence are contained in chapter 15 which sets out three main components of ongoing customer due diligence set out below:

 

•  KYC information

The AML/CTF Rules for ongoing customer due diligence, require a reporting entity to determine:

•  whether any further KYC information should be collected about customers. This must be done by putting in place appropriate risk-based systems and controls (see AUSTRAC's guidance note Risk management and AML/CTF programs) .

•  whether and in what circumstances KYC information about its customers should be updated or verified.

 

Examples where a reporting entity may be required to collect, update or verify KYC information are:

•  a transaction of significance (for example: in amount, size or volume) takes place

•  a material change in the way the account is operated.

 

A ‘material' change is one of significance or consequence, relevant to how the account has been operated previously by the customer.

 

•  Transaction monitoring program

Part A of an AML/CTF program must include a transaction monitoring program must include appropriate risk-based systems and controls in order to monitor customer transactions.

 

The purpose of the transaction monitoring program is to identify any apparently suspicious transaction, having regard to ML/TF risk, within the terms of the suspicious matter reporting provisions (section 41).

 

The AML/CTF Rules require the transaction monitoring program to have regard to complex, unusual large transactions and all unusual patterns of transactions, where there is no apparent economic or lawful purpose.

 

Examples of such transactions or patterns of transactions include:

•  significant transactions (in terms of amount and/or volume) relative to a relationship

•  transactions that exceed certain transaction or amount limits

•  very high account turnover inconsistent with the size of the balance

•  transactions outside the regular pattern of an account's activity.

 

Reporting entities should examine as far as possible the circumstances, background and purpose of such transactions and document any findings as part of their transaction monitoring program.

 

•  Enhanced customer due diligence program

Part A of an AML/CTF program must include an enhanced customer due diligence program relating to all types of customers, which is applied when:

•  the reporting entity determines under its risk-based systems and controls that there is high ML/TF risk, or

•  a suspicion has arisen under the suspicious matter reporting provisions (section 41).

 

The enhanced customer due diligence program must include appropriate risk-based systems and controls. This includes a reporting entity giving consideration to the following factors which may apply in cases that require enhanced customer due diligence, being whether:

•  further information should be sought from the customer or third party sources regarding the customer's KYC information, or whether the customer's ongoing business with the reporting entity should be clarified;

•  more detailed analysis of the customer's KYC information should be made, including whether that information should be verified or re-verified in accordance with the reporting entity's customer identification program;

•  analysis should be made of the customer's transactions in the past and whether they should be analysed in the future; or

•  any suspicious matters have arisen that should lead to a suspicious matter report being lodged in accordance with section 41.

 

It is particularly important to remember that you must not tip off the customer if you do have a suspicion (or an obligation to report to AUSTRAC) and this should be reflected in the way you approach that customer for updated or additional information.

 

 

Procedures for reporting suspicious matters must be in place by 12 December 2008.

 

Suspicious matters include a suspicion on reasonable grounds that:

•  the customer is not the person they claim to be;

•  an agent of a customer is not the person they claim to be;

•  information provided may be relevant to an investigation or prosecution relating to evasion of tax, an offence or related to proceeds of crime;

•  the actions may relate to the preparation for financing of terrorism or money laundering or may be relevant to an investigation or prosecution of a financing of terrorism or money laundering offence

 

Suspicious matters may involve the following:

•  Activities outside the customer's business or profile

•  Activities that make little or no business sense

•  Inability of the customer to provide appropriate identification or explanation.

•  Cash-intensive transactions

•  Activities involving multiple countries or offshore jurisdiction.

 

The obligation to report arises when the reporting entity suspects on reasonable grounds that:

• the person (or an agent of that person) who receives, or will receive, the designated service is not who they claim to be; or
• information re the provision, or the  prospective provision, of the designated service may be:
  • connected to a breach of a tax law;
  • connected to a Commonwealth or state offence;
  • of assistance to a Proceeds of Crime Act 2002 (Cth) investigation; or
• the provision or the prospective provision of the designated service may be;
  • preparatory to a money laundering or terrorism financing offence; or
  • relevant to an investigation into a money laundering or terrorism financing offence.

 

The Act requires matters where the designated service is preparatory to the commission of, or relevant to, an investigation into a terrorism financing offence to be reported within 24 hours. For the other matters noted above the report must be given 3 business days after the formation of the relevant suspicion by the responsible entity.

 

Chapter 18of the Rules (which commence on 12 December 2008) sets out the content of suspicious matter reports.

 

Procedures for reporting threshold transactions must be in place by 12 December 2008.

 

A threshold transaction is defined as a transaction involving the transfer of physical currency (coin and printed money) or money in the form of e-currency of not less than $10,000, and must be reported under section 43(2) of the Act within 10 business days of after the day on which the transaction took place.

 

Chapter 19 of the Rules (which commence on 12 December 2008) sets out the content of threshold transaction reports.

 

Reports for international funds transfer instructions (which are defined in items 1 and 2 in section 46) and international funds transfer instructions under a designated remittance arrangement (which are defined in items 3 and 4 in section 46) are required pursuant to section 45 to be submitted to AUSTRAC within 10 business days after the day on which the instruction was sent or received.

 

Chapters 16 and 17 of the Rules set out the content of these reports.