Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)9 Limits on involvement with licensees
9.1 This Part contains two Divisions which separately address:
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- limits on voting power in prescribed licensees (or their holding companies) (Division 1);
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- the need for individuals involved in all market and clearing and settlement facility licensees to be fit and proper (Division 2).
9.2 In brief, these provisions differ from the current regulatory scheme in the following respects:
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- by applying a voting power limitation to a wider class of licence-holders than the current 5 per cent shareholding limitation which applies only to the ASX; and
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- by including a new 'fit and proper person' test, in line with international developments in the regulation of exchanges and clearing and settlement facilities.
Rationale
9.3 Structural changes to the ownership and organisation of exchanges (especially those resulting from demutualisation) have indicated new issues for their regulation.
9.4 The most significant issue in this regard is to ensure the maintenance of the integrity of the market operated by the relevant exchange. That integrity may come under pressure for a number of reasons, not the least of which is the danger (real or perceived) that the operation of the market may be compromised to suit the vested interests of large shareholders or senior managers.
Division 1 - Limit on control of certain licensees
9.5 In the light of these considerations, the Government decided to retain a shareholding limitation and to extend its application to operators of financial markets and clearing and settlement facilities which are of national significance (see proposed section 850A).
9.6 The licensees of such markets and clearing and settlement facilities, or their holding companies will be prescribed. This structure has been adopted, despite the use of the concept voting power, so that the controlling entity (for example, where a licensee is a 100 per cent wholly-owned subsidiary) is prescribed. The provisions do not prejudge which company in a group will hold the relevant licence.
9.7 The ownership limitations (and the legislative scheme embodied in Division 1) are comparable to those included in the Financial Sector (Shareholding) Act 1998 .
9.8 Guidelines will be issued indicating the matters which will be taken into account in assessing whether or not a market or clearing and settlement facility is considered to be of national significance.
9.9 The guidelines contain the following:
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- the significance to the national economy of the functions performed by the financial market or clearing and settlement facility;
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- the size and importance of the financial market or clearing and settlement facility both within the Australian financial services industry and relative to other operations providing a similar service or function;
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- the degree of, or potential for, competition between the financial market or clearing and settlement facility and other already prescribed financial markets or clearing and settlement facilities.
9.10 The limit of 15 per cent voting power (proposed section 850B, and section 610) in prescribed entities is an increase from the current 5 per cent limit on holdings in the ASX (see Division 2 of Part 7.1A).
9.11 The 5 per cent limit is considered unduly restrictive in raising further capital. In addition, the higher level will not inhibit the entering into of alliances between markets (which may involve equity participation) in the same way as the 5 per cent limitation. Low shareholding limits also have the effect of insulating management from the normal pressures that come with having a free market for ownership and control.
9.12 Subdivisions A and C of Division 1 therefore include:
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- a prohibition on acquisitions which result in an unacceptable control situation (see proposed sections 850B and 850C);
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- an anti-avoidance provision (proposed section 852B);
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- provisions empowering the Court to make orders where there is an unacceptable control situation (proposed sections 850D and 850E), so long as the order does not offend paragraph 51(xxxi) of the Constitution (proposed section 852A).
Approval to exceed 15 per cent voting power
9.13 Division 1 also includes provisions which will empower the Minister to approve applications to hold more than 15 per cent of the voting power of a prescribed entity if he or she is satisfied that it is in the national interest (see proposed sections 851A-851H). This power to increase the 15 per cent ownership limitation is included so that, for example, the range of partnership options in the future is not fettered. The proposed provisions cover the following:
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- making an application to exceed the 15 per cent limitation (proposed section 851A);
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- granting or refusing such an application (proposed section 851B) and revoking an approval (proposed section 851F);
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- the duration of the approval (proposed section 851C);
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- conditions on an approval (proposed section 851D);
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- varying the percentage approved (proposed section 851E); and
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- seeking further information about an application (proposed section 851G).
9.14 The Minister is required to make a decision within 30 days after receiving such an application (proposed subsection 851H(1)).
9.15 Time does not run while a request for further information (proposed section 851G) is outstanding (proposed subsection 851H(4)) and the period in which the decision must be made may be extended to 60 days (proposed subsection 851H(2)).
9.16 However, if the Minister fails to make a decision within the time limit, he or she is taken to have granted what was applied for (proposed subsection 851H(3)), unless an unacceptable control situation exists (proposed subsection 851H(5)).
9.17 In connection with the breach of a condition on an approval, it should be noted that:
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- a failure to inform ASIC of a breach of a condition is an offence (proposed subsection 851D(8)); and
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- the contravention of a condition will empower the Minister to revoke the approval (see proposed paragraph 851F(1)(c)).
Relationship with initial requirements for a licence and ongoing obligations
9.18 The Minister is required to be satisfied that no unacceptable control situation will result when an application for a licence under Part 7.2 or 7.3 is under consideration (proposed paragraphs 795B(1)(g), 795B(2)(e), 824B(1)(e) and 824B(2)(e)).
9.19 The licensee is also required to take all reasonable steps to ensure that an unacceptable control situation does not exist (proposed paragraphs 792A(h) and 821A(1)(g)).
Relationship with the Foreign Acquisitions and Takeovers Act 1975
9.20 The requirements of Division 1 of Part 7.4 operate independently of the requirements of the Foreign Acquisitions and Takeovers Act 1975 .
Division 2 - Individuals who are not fit and proper are disqualified
9.21 The fit and proper person test included in the FSR Bill is designed to ensure that only appropriate people are associated with the management, ownership and control of all financial markets and clearing and settlement facilities which are the subject of Australian licences.
9.22 The test will operate as an initial probity check for the ASIC to apply and is comparable to those applied in a number of overseas jurisdictions in this context. In particular, the fit and proper person test will allow consideration of issues of propriety by assessing integrity and suitability in the light of, for example, criminal records, civil suits, sanctions applied by regulators or questionable practices.
9.23 The test will apply whether or not the operator of the market or clearing and settlement facility has been prescribed for the purposes of Division 1 of proposed Part 7.4.
9.24 It does not address professional competence - this issue is considered under proposed paragraphs 792A(1)(d) and 821A(1)(d) in the course of considering an application for a licence and as an ongoing obligation.
Who is involved in the operator of a financial market or clearing and settlement facility?
9.25 In brief, the provisions apply to directors, executive officers and secretaries of the licensee and its holding company, and those with over 15 per cent voting power (see the description of who is involved in an operator and therefore subject to the test in proposed section 853B).
9.26 There are three tests to determine whether a person is disqualified (proposed section 853A):
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- two tests are objective:
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- disqualification from managing a corporation under section 206B;
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- section 206B refers to insolvent persons and persons who have been convicted of certain offences - for example, for serious fraud or on indictment in connection with the promotion, formation or management of a company;
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- being on ASIC's Register under section 1274AA;
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- the Register under section 1274AA contains the names of persons whom a Court (and in certain situations, ASIC) has ordered not to manage a corporation.
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- the third limb empowers ASIC to declare that an individual is disqualified after a hearing and report (the procedure required is described in proposed sections 853C-E).
Relationship with initial requirements for a licence and ongoing obligations
9.27 These matters are also addressed in the context of the application for a licence (see proposed paragraphs 795B(1)(h), 795B(2)(f), 824B(1)(f) and 824B(2)(f)), and subsections 795B(4) and 824B(4)).
9.28 Division 2 also imposes obligations on disqualified individuals not to become involved in a market or clearing and settlement facility licensee and to cease to be so involved (proposed section 853F).
9.29 Comparable obligations are imposed on the licensee by proposed paragraphs 792A(i) and 821A(h).
9.30 To assist the licensee, ASIC is required to inform the licensee if it becomes aware that an individual involved in it is disqualified (proposed section 853G).
Record-keeping and information
9.31 Division 3 of proposed Part 7.4 empowers the making of regulations requiring that records relevant to Part 7.4 requirements be kept and information provided (proposed section 854A).