Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)4 Summary of key amendments proposed by the FSR Bill
4.1 A more efficient and flexible regime for financial markets and products will be achieved through an integrated regulatory framework for financial products. This will provide consistent regulation of functionally similar markets and products.
4.2 The new framework will apply to a range of existing financial products including:
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- securities;
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- derivatives;
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- superannuation and retirement savings accounts;
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- general and life insurance;
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- deposit accounts;
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- means of payment services such as smart cards and e-cash; and
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- foreign exchange transactions other than pure money changing business.
4.3 Flexibility in the regulatory framework to accommodate new and innovative products will be provided through:
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- a broad functional definition of financial product which will capture products without the need for legislative amendment; and
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- the ability to exempt products via regulation or an ASIC exemption power.
4.4 The key elements of the regime applying to generally to this range of financial products are as follows.
Licensing of Financial Markets
4.5 A licence will be needed to operate a financial market:
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- where financial products are regularly traded; and
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- where transactions involve multiple buyers and sellers.
4.6 The criteria to be satisfied to obtain a licence to conduct a financial market will be broadly expressed and flexible enough to accommodate different market structures. The market operator must have:
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- adequate arrangements for the supervision of the market;
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- sufficient resources to conduct the market and provide for supervisory functions;
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- adequate rules or procedures for the operation of the market, relating to, among other things, access to market facilities, participants' conduct and procedures for dealing with complaints; and
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- in the case of markets on which the transactions of retail clients are effected, compensation arrangements for the benefit of those participants.
4.7 The legislation will set out the ongoing obligations which will be imposed on a market operator to ensure that the objectives of market regulation are satisfied on a continuing basis.
4.8 A market operator will be required to obtain a licence from the Minister to operate a financial market.
4.9 Stock and futures exchanges approved at the commencement of the new provisions will be deemed to be licensed as financial markets.
Licensing of Clearing and Settlement Facilities
4.10 A licence to operate a clearing and settlement facility will be required.
4.11 To obtain a licence to operate a clearing and settlement facility, the operator of the facility must have:
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- adequate arrangements for the supervision of the facility;
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- sufficient resources to conduct the facility and provide for supervisory functions; and
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- adequate rules or procedures for the operation of the facility.
4.12 The legislation will impose ongoing obligations on the operator of the clearing and settlement facility to ensure that the objectives of their regulation are satisfied on a continuing basis.
4.13 The Minister will be empowered to license clearing and settlement facilities.
4.14 The legislative framework of the regime regulating clearing and settlement facilities largely mirrors that applying to financial markets, but the obligations imposed by that framework differ, reflecting the different services and risks provided by markets and clearing and settlement facilities.
4.15 Securities and futures clearing and settlement facilities approved under the proposed Corporations Act at the commencement of the new provisions will be deemed to be licensed under the new regime.
Limits on involvement with licensees
4.16 There will be a 15 per cent limitation on voting power in prescribed market licensees and clearing and settlement facility licensees (or their holding companies). The Minister, if satisfied that it is in the national interest, may approve a holding in excess of 15 per cent.
4.17 In addition, persons involved in all market licensees and clearing and settlement facility licensees will be subject to a fit and proper person test administered by ASIC.
Compensation Arrangements for markets
4.18 Compensation arrangements protect participants against loss caused in defined circumstances during the execution of a market transaction.
4.19 Compensation arrangements are seen as critical to the confidence of retail participants.
4.20 Markets on which retail participants trade through financial service providers will be required to have compensation arrangements, at least in relation to fraud and negligence.
4.21 Financial markets will be entitled to call for contributions by participants for the compensation arrangements.
4.22 Criteria for the expenditure of (excess) funds in development accounts will be included in the regulations.
4.23 The National Guarantee Fund (NGF) will continue to be regulated separately, although the detailed provisions governing the requirements for claiming and procedure in relation to claims will be moved into the regulations.
Licensing of Financial Service Providers
4.24 A single licensing regime will be introduced for all persons carrying on a financial services business. This will replace licensing requirements currently applying to securities dealers, investment advisers, futures advisers and brokers, general and life insurance brokers, and foreign exchange dealers.
4.25 Financial services involve advising on, dealing in, or making a market in financial products; selling ones own financial product; operating a managed investment scheme; or providing a custodial or depository service.
4.26 A number of criteria will have to be satisfied in order to obtain a financial service providers licence including:
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- adequate financial resources for the performance of the proposed activities;
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- competence, skills and experience to provide the relevant services; and
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- adequate systems for training and supervision of representatives.
4.27 Conditions will be imposed on a financial service providers licence to ensure that the licence criteria are satisfied on a continuing basis.
4.28 A licence will be required where services are provided to either wholesale or retail clients. Additional obligations will be placed on licensees who offer services to retail clients, such as a requirement to have arrangements for compensating clients for losses suffered.
4.29 Licences may cover all financial services in relation to all financial products or a subset of services and products.
4.30 Licensees may authorise natural persons or corporate representatives to act on their behalf.
4.31 Authorised representatives will be able to act for more than one licensee with the written consent of each licensee (cross endorsement).
Financial Service Provider Conduct and Disclosure
4.32 Minimum standards of conduct will apply to financial service providers when dealing with clients including:
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- providing retail clients with a Financial Services Guide;
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- know your client requirements in relation to retail clients;
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- disclosure of conflicts of interests to retail clients; and
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- separation of funds held on a clients behalf, and reporting and accounting requirements.
4.33 A prohibition on unconscionable conduct in the provision of financial services will apply.
Financial Product Disclosure
4.34 The FSR Bill provides for disclosure throughout the life of a financial product from point of sale disclosure through the giving of a Product Disclosure Statement, confirmation of transactions, ongoing disclosure and periodic reporting requirements.
4.35 In relation to point of sale disclosure, a directed disclosure approach is taken with a list of topics under which information, if relevant to a particular financial product, must be included in the Product Disclosure Statement. This is supplemented by a requirement to include any other material information actually known to the product issuer.
4.36 The FSR Bill also provides for a number of other obligations in relation to the issue of financial products including handling money from applicants for financial products, alternative dispute resolution mechanisms for product issuers, requirements for advertising in relation to financial products and cooling-off periods for certain financial products.
Misconduct
4.37 A general prohibition on misleading and deceptive conduct will apply to dealings in financial products and provision of financial services. The provisions in the proposed Corporations Act and other applicable legislation will be harmonised to provide a single regime with respect to conduct in relation to financial products.
4.38 The penalty regime in relation to market misconduct will be amended to ensure that it efficiently promotes market integrity and investor confidence. Breaches of the market misconduct provisions will attract civil pecuniary penalties.
Transfer of Securities
4.39 The new arrangements will facilitate competition between clearing and settlement facilities.
4.40 The provisions of the proposed Corporations Act which facilitate the electronic transfer of the legal title to securities will not be limited to the SCH. Other suitably qualified clearing and settlement facilities which are prescribed will be entitled to transfer legal title to a range of financial products.